Archive for March 2013

David Howden on the Euro

David Howden is interviewed on the GoldMoney show with Andy Duncan.

“Howden thinks that the Euro will hold together in the short term, but he is rather pessimistic on the long term outlook of the common currency. One at a time countries which were formerly regarded as “stable” are being dragged into the debt hole. Though he assesses the problems in the United States to be even greater than Europe’s, he points out that whenever Euro fears start to creep up the US is benefiting due to the depth of its Treasury market.”

America’s Great Depression Quotes of the Week: Bank Failures and Real Monetary Reform

The Road Not Taken in 1933 and its Modern Consequences

           The crisis in Cyprus is awakening some to the true nature of fractional reserve banking as evidenced by  headlines such as this (from the Drudge Report March 28, 2013) ‘THEY HAVE STOLEN OUR MONEY’… . Compared to responses to previous crises and applications of too big to fail, at least this response has moved away from tax payer financed bailouts of bank creditors. See for example: 1. In today’s Wall Street Journal Luskin and Roche Kelly, “Regime Change Comes to Euro Policy who argue, “The banking crisis in Cyprus prompted an overdue financial reckoning that, with luck, will spell the end of ‘too big to fail.’; and 2. From yesterday’s WSJ “Shocked About Cyprus”, with its subtitle, “How dare a European bank rescue not hit taxpayers.”

            This should be a great time to re-awaken the public again to the true risks of money substitutes and fiduciary media and begin a focus of meaningful banking reform as a beginning of true recovery and sustainable prosperity.

            Rothbard (AGD, 21) provides an strong argument for the bebefical aspects of bank failures:

Banks should no more be exempt from paying their obligations than is any other business. Any interference with their comeuppance via bank runs will establish banks as a specially privileged group, not obligated to pay their debts, and will lead to later inflations, credit expansions, and depressions. And if, as we contend, banks are inherently bankrupt and “runs” simply reveal that bankruptcy, it is beneficial for the economy for the banking system to be reformed, once and for all, by a thorough purge of the fractional-reserve banking system. Such a purge would bring home forcefully to the public the dangers of fractional-reserve banking, and, more than any academic theorizing, insure against such banking evils in the future.

And later in the same work, Rothbard commenting on the bank panic-bank holidays of late 1932 and early 1933 (AGD 329) provides a template for handling a bank failure in line with protecting property rights and the rule of law in a way that could ultimately end the boom-bust cycle:

The laissez-faire method would have permitted the banks of the nation to close—as they probably would have done without governmental intervention. The bankrupt banks could then have been transferred to the ownership of their depositors, who would have taken charge of the invested, frozen assets of the banks. There would have been a vast, but rapid, deflation, with the money supply falling to virtually 100 percent of the nation’s gold stock. The depositors would have been “forced savers” in the existing bank assets (loans and investments). This cleansing surgical operation would have ended, once and for all, the inherently bankrupt fractional-reserve system, would have henceforth grounded loans and investments on people’s voluntary savings rather than artificially extended credit, and would have brought the country to a truly sound and hard monetary base. The threat of inflation and depression would have been permanently ended, and the stage fully set for recovery from the existing crisis. But such a policy would have been dismissed as “impractical” and radical, at the very juncture when the nation set itself firmly down the “practical” and radical road to inflation, socialism, and perpetuation of the depression for almost a decade.

The Cyprus Deal and the Unraveling of Fractional-Reserve Banking

The “Cyprus deal” as it has been widely referred to in the media may mark the next to last act in the the slow motion collapse of fractional-reserve banking that began with the implosion of the savings-and-loan industry in the U.S. in the late 1980s. This trend continued with the currency crises in Russia, Mexico, East Asia and Argentina in the 1990s in which fractional-reserve banking played a decisive role. The unraveling of fractional-reserve banking became visible even to the average depositor during the financial meltdown of 2008 that ignited bank runs on some of the largest and most venerable financial institutions in the world. The final collapse was only averted by the multi-trillion dollar bailout of U.S. and foreign banks by the Federal Reserve.

Even more than the unprecedented financial crisis of 2008, however, recent events in Cyprus may have struck the mortal blow to fractional-reserve banking. For fractional reserve banking can only exist for as long as the depositors have complete confidence that regardless of the financial woes that befall the bank entrusted with their “deposits,” they will always be able to withdraw them on demand at par in currency, the ultimate cash of any banking system. Ever since World War Two governmental deposit insurance, backed up by the money-creating powers of the central bank, was seen as the unshakable guarantee that warranted such confidence. In effect, fractional-reserve banking was perceived as 100-percent banking by depositors, who acted as if their money was always “in the bank” thanks to the ability of central banks to conjure up money out of thin air (or in cyberspace). Perversely the various crises involving fractional-reserve banking that struck time and again since the late 1980s only reinforced this belief among depositors, because troubled banks and thrift institutions were always bailed out with alacrity–especially the largest and least stable. Thus arose the “too-big-to-fail doctrine.” Under this doctrine, uninsured bank depositors and bondholders were generally made whole when large banks failed, because it was widely understood that the confidence in the entire banking system was a frail and evanescent thing that would break and completely dissipate as a result of the failure of even a single large institution.

Getting back to the Cyprus deal, admittedly it is hardly ideal from a free-market point of view. The solution in accord with free markets would not involve restricting deposit withdrawals, imposing fascistic capital controls on domestic residents and foreign investors, and dragooning taxpayers in the rest of the Eurozone into contributing to the bailout to the tune of 10 billion euros. Nonetheless, the deal does convey a salutary message to bank depositors and creditors the world over. It does so by forcing previously untouchable senior bondholders and uninsured depositors in the Cypriot banks to bear part of the cost of the bailout. The bondholders of the two largest banks will be wiped out and it is reported that large depositors (i.e. those holding uninsured accounts exceeding 100,000 euros) at the Laiki Bank may also be completely wiped out, losing up to 4.2 billion euros, while large depositors at the Bank of Cyprus will lose between 30 and 60 percent of their deposits. Small depositors in both banks, who hold insured accounts of up to 100,000 euros, would retain the full value of their deposits.

The happy result will be that depositors, both insured and uninsured, in Europe and throughout the world will become much more cautious or even suspicious in dealing with fractional-reserve banks. They will be poised to grab their money and run at the slightest sign or rumor of instability. This will induce banks to radically alter the sources of the funds they raise to finance loans and investments, moving away from deposit and toward equity and bond financing. As was reported yesterday, this is already expected by many analysts:

One potential spillover from yesterday’s agreement is the knock-on effects for bank funding, analysts said. Banks typically fund themselves with some combination of deposits, equity, senior and subordinate notes and covered bonds, which are backed by a pool of high-quality assets that stay on the lender’s balance sheet.

The consequences of the Cyprus bailout could be that banks will be more likely to use contingent convertible bonds — known as CoCos — to raise money as their ability to encumber assets by issuing covered bonds reaches regulatory limits, said Chris Bowie at Ignis Asset Management Ltd. in London.

“We’d expect to see some deposit flight and a shift in funding towards a combination of covered bonds, real equity and quasi-equity,” said Bowie, who is head of credit portfolio management at Ignis, which oversees about $110 billion.

If this indeed occurs it will be a significant move toward a free-market financial system in which the radical mismatching of the maturities of assets and liabilities in the case of demand deposits is eliminated once and for all. A few more banking crises in the Eurozone– especially one in which insured depositors are made to participate in the so-called “bail-in”–will likely cause the faith in government deposit insurance to completely evaporate and with it confidence in fractional-reserve banking system. There may then naturally arise on the market a system in which equity, bonds, and genuine time deposits that cannot be redeemed before maturity become the exclusive sources of finance for bank loans and investments. Demand deposits, whether checkable or not, would be segregated in actual deposit banks which maintain 100 percent reserves and provide a range of payments systems from ATMs to debit cards. While this conjecture may we overly optimistic, we are certainly a good deal closer to such an outcome today than we were before the “Cyprus deal” was struck. Of course we would be closer still if there were no bailout and the full brunt of the bank failures were borne solely by the creditors and depositors of the failed banks rather than partly by taxpayers. The latter solution would have completely and definitively exposed the true nature of fractional-reserve banking for all to see.

AERC in the Classroom

Robert Wenzel reports, regarding his Hazlitt Memorial Lecture at AERC:

“Associate Professor Andrei Znamenski, who teaches history at the University of Memphis and received his undergraduate degree from  St. Petersburg Herzen Pedagogical University, Russia, emails:”

 Thanks much again for the great talk, which I hope all folks in Russian studies listen to. As you correctly mentioned, the mainstream view (especially in academia among the left-liberals) is that it was not so much systemic failures of socialism that killed the S Union but the Ronald Reagan arms race. Yes, here both neocons and libs share the same view with some variations. The popular neo-con argument that it was Reagan who exhausted and destroyed the S Union is widely also used today by the “red-brown” circles in Russia (the proponents of socialism in Russian today normally speak with a strong nationalism accent; hence, the nickname “red-browns”) to nostalgically dream about the glorious S Union: “if it had not been for Reagan, the glorious union would have still existed”

This semester I am teaching a course on S Union, What I am planning to do is to give the students (35 people) the video of your talk and have them critically reassess it relative to what they will find in a textbook that I am currently using. Thanks much again. Your talk arrived just in time: we are still doing the Brezhnev (stagnation) period, but in a week we are going to deal with the causes for the collapse of the Soviet Union, and that is when I am going to bring up your talk.

Mainstream Economics

This new paper from Economic Inquiry provides a new meaning to Harry Truman’s famous desire for a one-armed economist:

ATTEMA, A. E., BROUWER, W. B.F. and VAN EXEL, J. (2013), YOUR RIGHT ARM FOR A PUBLICATION IN AER?. Economic Inquiry. doi: 10.1111/ecin.12013


The time tradeoff (TTO) method is popular in medical decision making for valuing health states. We use it to elicit economists’ preferences for publishing in top economic journals and for living without limbs. The economists value journal publications highly and have a clear preference among them,, with the American Economic Review (AER) the most preferred. Their responses imply they would sacrifice more than half a thumb for an AER publication. These TTO results are consistent with ranking and willingness to pay results, and indicate that journal preferences are not entirely determined by impact factors or by expectations of a salary increase following a publication in a prestigious journal. (JEL A10, B41, I10)

The Most Important Question about Human History

According to Gary North, it is: why did economic growth compound, starting in the 1800s? There is no definitive answer yet. But North thinks Deirdre McCloskey is on the right track by looking to the 17th century Dutch for the root cause.

The Lou Church Memorial Lecture, sponsored by the Lou Church Foundation, presented at the Austrian Economics Research Conference. Recorded 21 March 2013 at the Ludwig von Mises Institute. Includes an introduction by Joseph T. Salerno.

The Best Two #AERC Tweets

One from someone who watched talks from the Austrian Economics Research Conference online (click to enlarge):

Screen Shot 2013-03-25 at 11.06.56 AM
And one from an attendee:
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Rothbard on the Six Stages of the Libertarian Movement (VIDEO)

From the description:

In this video from the first Libertarian International World Libertarian Convention in 1982 in Zurich, Switzerland, Rothbard gives a lecture on what he identified as the six stages of building an independent libertarian (or any philosophical) movement in a region. Rothbard identifies possible growing pains associated with the growing popularity of libertarianism but ultimately concludes that such risks are necessary because “Libertarians, it seems to me, are not content with contemplating justice, contemplating truth, goodness and beauty, we’re not playing intellectual games — we mean to change the world. We want to put this thing into reality.”

Raico on Wenzel’s AERC Talk

The great historian of classical liberalism Ralph Raico wrote to Robert Wenzel:

I’ve just listened to your talk on the history of the Soviet Union. It is magnificent! The amount of scholarship is overwhelming. You did a truly great job.

This is that AERC talk, which was the Henry Hazlitt Memorial Lecture, sponsored by James M. Rodney, delivered on Thursday March, 21, 2013 at the Mises Institute:

Mark Thornton’s Ideal Alternative Career

Mises Institute Senior Fellow Mark Thornton interviewed by Joseph Dietrich in the Washington Times Communities.

Dietrich: “If you weren’t doing what you are now (as a career), what might you likely be doing instead?”

Thornton: “I would be rich, retired, and attending Mises Institute events.”

What to Watch this Weekend

AERC lectures on the Mises YouTube channel. Available so far: Robert Wenzel on the collapse of the Soviet Union and Gary North on “How Come We’re So Rich?”

AERC Lectures Broadcasting Now!

Authors Forum with Hoppe, Thornton, DiLorezno, and more!

Streaming live video by Ustream

Watch These AERC Lectures Live, Starting Tomorrow

The 2013 Austrian Economics Research Conference starts tomorrow. The following lectures will be broadcast live. You can watch them either on our Ustream channel page or through the embedded feed on the home page.

We’ll also be live-tweeting these lectures. Follow us on Twitter @mises. We’ll be using the hashtag #AERC.

All times Central Time.

Thursday, March 21

11:15 a.m. – 12:15 p.m. The Henry Hazlitt Memorial Lecture sponsored by James M. Rodney
Robert Wenzel, “An Examination of Key Factors in the Collapse of the Soviet Union”

1:30 -1:50 p.m.  Tribute to William H. Peterson, 1921-2012
Joseph Salerno, Mises Institute and Pace University
Lew Rockwell, Mises Institute
Tom DiLorenzo, Loyola University Maryland
Robert Luddy, CaptiveAire

5:30 – 6:30 p.m.  The Lou Church Memorial Lecture sponsored by the Lou Church Foundation
Gary North, “How Come We’re So Rich?”

Friday, March 22

1:30 – 2:30 p.m.  The F.A. Hayek Memorial Lecture sponsored by Toby Baxendale
Nikolay Gertchev, European Commission Brussels “From Monetary Nationalism to Monetary Imperialism: Fractional-Reserve Banking and the Inter-Government Cooperation”

4:30 – 5:30 p.m.  The Murray N. Rothbard Memorial Lecture sponsored by Helio Beltrao
Brendan Brown Mitsubishi UFJ Securities “The Global Curse of the Federal Reserve: How Its Monetary Virus Stimulates Destructive Waves of Irrational Exuberance and Depression”

Saturday, March 23

1:30 – 2:30 p.m.  The Ludwig von Mises Memorial Lecture sponsored by Dr. Don Printz
Dominick Armentano “Myths of Anti-trust: Speak Truth to Power”

What Do These Publications Have in Common?

“On the Inherent Instability of Apple Computer Products” by Bill Gates.

“On the Inherent Instability of Microsoft Computer Products” by Steve Jobs.

“On the Inherent Instability of Ford Automobiles” by co-authors from Chrysler, General Motors, and Toyota.

“On the Inherent Instability of Chrysler, General Motors, and Toyota Automobiles” by the Ford Motor Company.

On the Inherent Instability of Private Money” by Daniel Sanches, Federal Reserve Bank of Philadelphia (No relation to the Mises Institute’s Danny Sanchez).

Human Action: Austrian Sociology, Lecture 2 Slides

Enrollment is still open.

A Pivotal Bus Ride

In July 1940, when Ludwig and Margit von Mises made their way by bus from Switzerland across German-occupied France [Note: Mises was Jewish], the bus driver had to proceed very carefully and make many detours via back roads to avoid German checkpoints. If you would like to play with a fascinating exercise in counterfactual history, imagine how history would have gone had the Germans arrested Mises and his wife, placed them in indefinite detention, and perhaps ended up killing them in some horrible concentration camp.

Among the many ways in which history would have been different: no works of Rothbard, Kirzner, and Reisman as we have known them; probably no resurgence of the Austrian school of economics as we have seen it during the past forty years or so; no Mises Institute in Auburn or others elsewhere in the world. For many of us, without the great English-language treatise Human Action (1949 and later editions), careers would have taken very different forms and trajectories. In ways too numerous to imagine, the world would have been different — and worse — had Mises not made his way safely across France and Spain to Lisbon, and hence by ship to New York. Perhaps never in history did so much turn on a bus driver’s skills and courage.

America’s Great Depression Quote of the Week: Cycles and Fluctuations

This week’s quote(s) highlights why an explanation of a general boom-bust pattern of economic must be a monetary theory of the trade cycle. The first key is to clearly distinguish between fluctuations, which are a normal and indispensable part of the market process, and cycles, which are extra-market; the result of interventions into the market order. Hayek makes similar observations if Monetary Theory of the Trade Cycle and refers to explanations of fluctuations as opposed to true cycles, which rely on external shocks as essentially a non-economic explanation of observed changes in business conditions. The real business cycle research thus actually attempts to explain fluctuations, not cycles. One way to interpret their results is that the research provides some historical evidence that much of what appears to be the ebb and flows of economic activity is actually market adjustments to shocks. However, much is left unexplained (30%?). That which is left unexplained is the boom and bust of the cycle, best understood through the lens of ABCT.

All quotes are from AGD (Scholar’s edition, 4-9).

Cycles and Fluctuations: Error and the Role of the Entrepreneur

 It is important, first, to distinguish between business cycles and ordinary business fluctuations. We live necessarily in a society of continual and unending change, change that can never be precisely charted in advance. People try to forecast and anticipate changes as best they can, but such forecasting can never be reduced to an exact science. Entrepreneurs are in the business of forecasting changes on the market, both for conditions of demand and of supply.

The more successful ones make profits pari passus with their accuracy of judgment, while the unsuccessful forecasters fall by the wayside. As a result, the successful entrepreneurs on the free market will be the ones most adept at anticipating future business conditions.

Stabilizing fluctuations would be irrational.

 It is, therefore, absurd to expect every business activity to be “stabilized” as if these changes were not taking place. To stabilize and “iron out” these fluctuations would, in effect, eradicate any rational productive activity.

We may, therefore, expect specific business fluctuations all the time. There is no need for any special “cycle theory” to account for them. They are simply the results of changes in economic data and are fully explained by economic theory.

There is thus a necessary role for monetary shocks. Only monetary shocks can create the cluster of errors and thus the cycle; boom, crisis and depression.

In considering general movements in business, then, it is immediately evident that such movements must be transmitted through the general medium of exchange—money. Money forges the connecting link between all economic activities.

It is not legitimate to reply that sudden changes in the data are responsible. It is, after all, the business of entrepreneurs to forecast future changes, some of which are sudden.

In the purely free and unhampered market, there will be no cluster of errors, since trained entrepreneurs will not all make errors at the same time. The “boom-bust” cycle is generated by monetary intervention in the market, specifically bank credit expansion to business.

Taking the ‘Blinder’s off Monetary Easing

Mark Thornton and Mises in today’s Wall Street Journal in “Letters to Editor” responses to Alan Blinder’s Easing Angst About Fed Easing which originally appeared March 13 in the print edition. A15.

Mark’s commentary (2nd letter in the link above):

Prof. Blinder aptly explores the dangers of the Fed’s easy-money policy but claims it has succeeded in its mandate to keep price inflation low. I object.

Gasoline and food prices have risen. Commodity prices have risen. The Producer Price Index is at an all-time high. Farmland prices have risen to all-time highs. Gold prices are up $1,000 per ounce since the crisis began. Stocks and bonds are at all-time highs. Manhattan real estate and contemporary art prices are at all-time highs. These are all “prices.” Plus, we are exporting inflation around the globe. None of this is good news for Joe Mainstreet and is worrisome for the future.

For more by Mark on inflation see: “Where is the inflation?

From the first letter by Mike Smith of Sugar Land, Texas

Alan Blinder’s op-ed “Easing the Angst About Fed Easing” (March 13) brings to mind Ludwig von Mises’s observation: “Credit expansion (easy money) is governments’ foremost tool in their struggle against the market economy . . . it is the magic wand designed to expropriate the capitalists . . . to lower the rate of interest or to abolish it altogether, to finance lavish government spending . . . and to make everybody prosperous” (“Human Action,” 1966).

Smith concludes:

At some point, we must ask ourselves how many years of 0% rates we must endure before the Federal Open Market Committee stops “plugging away” and allows the unhampered market work its magic.


Happy St. Patrick’s Day

Many of you maybe celebrating St. Patrick’s Day with a cool glass of Ireland’s iconic beer: Guinness. Guinness is different from other beers because it is dark and creamy. It also has less alcohol. I did not know until very recently that the darkness and flavor come from the ingredient roasted barley. Most beers use malted barley which involves soaking the barley. By using roasted barley instead of malted barley, Guinness was not only given a rather unique flavor and texture, it also avoided the excise or tax on malt. It went on to become one of the world’s best selling beers.


“Austrian Economists” Tweeted to 6.3 Million People

Someone who uses Twitter under the handle @Numba1TSwiftFan and goes by TaylorSwiftForeva is a fan of both Taylor Swift and Austrian economics. When big time celebrity blogger Perez Hilton tweeted “Taylor Swift keeps winning,” TSF responded, “Couldn’t agree more!She is being vindicated just like the Austrian economists.” Perez “retweeted” the response, putting it in the feeds of 6.3 million Twitter users. (Thanks to James Miller.)