[ExI] Monopolies in banking

[Dan]

--- On Tue, 6/30/09, Rafal Smigrodzki <rafal.smigrodzki at gmail.com> wrote:
> On Wed, Jun 24, 2009 at 9:17 AM, <dan_ust at yahoo.com> wrote:
>> How long is that?  Even now, with fiat currencies --
>> that, theoretically, have no upper limit on the amount of
>> inflating -- people accept them.  I'm sure, e.g., Bernanke
>> and his predecessors are paid in dollars.
> 
> ### Let's say, 10 years. You get paid a 1/1000000th share
> of GNP ten
> years after you start running the Non-Fed. Or maybe 1/100
> 000th share
> of the difference between today's GNP and the GNP of 2019.
> That takes
> care of the temporal aspect of inflation, and directs your
> attention to long-term growth.

I reckon you and I could keep fiddling with the numbers here.  There is one other problem, however, what if this monetary czar fails?  What happens then?  With competing free market banks, if they fail, they lose money -- in the extreme case, the bank goes under possibly tarnishing the reputation of the bank's management for good.  If the monetary czar under your scheme faces no serious penalties, then you can see she would have an incentive to gamble -- on the off chance that she wins big during his ten years.

Also, think about cental bankers now.  If Greenspan had been given ten years to run things, that would've set him in 1997 (he started in 1987, no?) for 1/1000000th share of GNP.  During that time it's arguable that he did lots of things that were bad for the economy.  

Also, GNP might not be the best measure of wealth.  I'd be deeply suspcious of any measure that counts government spending as a net positive addition (this is why, e.g., the US's GNP went up severely during WW2 and fell in 1946, making it look like the economy had collapsed when, in fact, 1946 was a great year -- though government spending went over a waterfall) to wealth, but GNP not only does that, it also is, like GDP, insensitive to capital consumption.

This might seem a nitpick, but if your central banker merely has to hit a certain target to make her numbers, then she has an incentive to merely hit that target and only do so when required.  Granted, I doubt she (or real world central bankers) are looking to tank the economy a day after she's paid, but the incentive is there to merely grow that number -- and not necessarily to have a healthy, prosperous economy.*  Also, this comes down to how to measure economic health and prosperity.  These are not easy matters.  In a free market in this area, no doubt, the problem would not go away, though people in free markets tend to be able to do these things better because there's a strong incentive to come up with meaningful measures and change measures when they don't work AND a lot of the calculational (Mises) and informational (Hayek) problems are resolved or at least ameliorated.

>> I agree about 'knee-jerk support of "democracy",' but
>> the problem with modern central banks is NOT democratic
>> control -- as in the voters selecting the head of central
>> banks or the legislators selecting ditto.  The problem is
>> they are a monopoly -- no matter if they were controlled by
>> the voters (whatever that means; at best, it would mean a
>> majority of the voters, which would likely still be a
>> minority of the people in any real world country today), by
>> the legislature, by the executive, or were actually
>> independent.
> 
> ### Yes, I agree, being a monopoly is the biggest problem,
> but a
> monopolist rewarded for long-term growth is less bad than a
> monopolist
> controlled by an elected official looking for short term
> political
> advantage.
> 
> Please do remember that I am not advocating this solution
> as the best
> one you can have but rather as something less bad than what
> we have today.

In this context, a big problem with the US central bank is it is secretive, so there's no check on its power.  Were it forced to report to the Congress and to be audited by an independent auditor, things might be marginally better.

However, the chief problem is monopoly; the solution is to get rid of the monopoly.  Until that happens, other changes seem, to me, like rearranging the deck chairs on the Titanic after it hit the iceberg.

Regards,

Dan

*  I can just hear the refrain now from some here: but private banks would face the same problem.  Yes, they would, but as long as the market was open to entry, anyone who adopted a live fast, die young strategy would invite competition from those saw this as a problem.  Also, without legal tender laws, it'd be relatively easy to switch to different monies rather than be faced with hoping agaisnt hope that the central banker always makes the best decisions.