Sunday, April 3, 2011

Should the Government Regulate the Financial Markets?

A summary of a debate between Walter Block and Richard Squire. The video can be found here

The modern banking system is based on fractional reserves which is government sanctioned fraud. It is therefore anti-capitalist.

Richard Squire:

1. Creditors of banks are not as vigilant as creditors of other agencies so a bank-run on one bank means a bank run on all banks.

2. Private credit rating agencies do not have the incentives.

3. Insider trading: Block argues that insider trading is arbitrary, no real victim, unenforceable, and stops information from being reflected in prices. But regardless, inside traders will create volatility in the market to make money.

4. Block will argue that corporations could ban insider trading in their charters. But there is no empirical support for this.

Walter Block:

1. Government is immoral because it forces people to pay taxes and it won’t allow you to secede. If it won’t allow you to secede then you’re a slave. Government is inefficient because it can’t go bankrupt. FEMA wouldn’t allow any help to come in. They killed 1500 people. Are they still in business? Yes. So we shouldn’t have a government at all because its immoral and inefficient. If the government shouldn’t exist at all then they shouldn’t intervene in anything.

2. Financial markets are too important for the government to intervene in them. If we really should have government intervention, let it be in the production of paper clips and rubber bands. One half of every trade is money so financial industry is very important. The Fed is a Soviet central planning board. A gold standard would mitigate volatility. The reason we have bank runs is fractional reserve banking. Fiat money, legal tender and FDIC are all bad.

3. Yes, FDIC prevents bank runs by creating money galore but this will cause hyperinflation.

4. There is no market failure if there is no market to begin with. So the solution is to remove the government intervention that created the problem in the first place.

5. If the fact that ordinary individuals are not sophisticated enough to regulate banks themselves is the reason we should have government intervention in the financial markets then we should have government intervention in all areas of the economy as well since we are not sophisticated in most things which are not related to our hobby or occupation.

6. The volatility of the stock market before and after the inception of the Fed is very different. The Fed causes the instability.

7. ABCT – Fed misallocates resources by lowering interest rates. The debate is monetary or fiscal intervention. Fiscal Keynesianism versus monetary Keynesianism.

8. Insider Trading: Michael Milkin: He is the private solution to market volatility. The CEO high salaries were possible by giving lower dividends to shareholders so the stock price plummeted. Michael bought shares and kicked out the CEOs. But the government put him in jail.

9. Market rating agencies: Government influenced the credit rating agencies.

Richard Squire:

1. ‘Road to Serfdom’ theory is not empirically founded. Europe has a lot of political freedom even while being increasingly interventionist.

2. Empirical evidence trumps your reduction ad absurdum.

3. Fractional Reserve Banking existed before fiat money. It is the government that limits FRB by requiring minimum reserves. FRB is what private banks naturally want to do.

4. Takeover artists like Milkin are going to be banned by corporate charters.

5. There are a lot of takeover artists who were not jailed.

Walter Block:

1. Reduction ad absurdum is good because it challenges the premises.

2. He called me an ideologue but aren’t we all ideologues since we study ideas.

3. The government looks good when you only look at one-half institution. Anything that the government does cannot be justified because its based on coercion.

4. If you jail one takeover artist then that sends a signal to other takeover artists.

5. FRB implies bank run because its instantaneous debts are greater than its instantaneous assets. It’s only got 100 bucks and has a 190 outstanding so it ought to be allowed to be bankrupt but the government is protecting it.


Why haven’t we had free market anarchism if it’s so good?

Block: Countries with more economic freedom are richer. Libertarians are a small minority because humans are not hardwired for implicit cooperation. We do not fear bathtubs but we fear snakes even if bathtubs have killed more people than snakes. This is an example of sociobiology. Another example is that people who stood in line wanting to benefit from price gouging during Katrina cheered when the police arrested the price gouger.

The winner of this debate is....

No comments:

Post a Comment