[ExI] Monopolies in banking/was Re: Bank of England

dan_ust at yahoo.com dan_ust at yahoo.com
Mon Jun 22 18:01:50 UTC 2009

--- On Fri, 6/19/09, Rafal Smigrodzki <rafal.smigrodzki at gmail.com> wrote:
> On Fri, Jun 19, 2009 at 10:05 AM, Dan<dan_ust at yahoo.com> wrote:
>> --- On Thu, 6/18/09, Rafal Smigrodzki <rafal.smigrodzki at gmail.com>
>> wrote:
>>> On Thu, Jun 18, 2009 at 6:46 PM, Stefano Vaj<stefano.vaj at gmail.com>
>>> wrote:
>>>> Critics say they are private entities mostly
>>>> tied with
>>>> the financial
>>>> system (in fact, even legislators have more
>>>> power on
>>>> them than
>>>> governments). Additionally, the Central
>>>> European Bank
>>>> does not really
>>>> have any "government" to deal with.
>>>> For sure, their "independence" in western
>>>> countries
>>>> means that no
>>>> democratic control whatsoever on their
>>>> functioning
>>>> exists.
>>> ### That's their one saving grace. Democratic
>>> control is evil.
>> I'm not so sure it'd necessarily be worse than the
>> current system -- where, generally, the government (in the
>> US, the president) appoints the board of the central bank or
>> approves appointments but the bank kind of runs itself with
>> little or no oversight.  In the US example, the FRB, IIRC,
>> has no independent auditors and its members always come from
>> the financial elite or from academics groomed for the role.
>>  Would things be much worse were there, say, Congressional
>> oversight and the GAO (or, better, some non-government
>> auditor -- one unconnected with the FRB or the banking
>> industry) had to look into the FRB accounts?  At worst, I
>> think, the FRB's politicization would not be so much worse
>> as clearly obvious.
> ### Recently my mind became tainted by reading Mencius
> Moldbug, and
> the idea that a sovereign decision maker is at times better
> than a committee seems to have taken hold.

It really depends on feedback loops and how they work.  A market system, for instance, is a collection of individuals who together, usually, make some pretty good decisions -- often that, beforehand, an individual decision-maker might not be able to outperform.  But why can't this be replicated with, say, democratic systems or other forms of collective decision-making?  The problem seems to me to be the exit option: in markets, people can exit from relationship.  For example, you don't like the products or services some individual or firm is providing, you can find another providing, provide your own, or do without.  With these choices, you're removing your support -- and this creates some feedback to the person or firm as well as a strong incentive to correct (and even try to foresee) problems.  Further, it also creatives opportunities for others to enter that market in competition with that person or firm.  (This goes also for success: a
 person or firm will likely make for others trying to replicate or outdo that success.)

Democratic and similar systems have the problem in that they usually lack an exit option.  Participants do have a voice -- a say in how things are run -- but they typically can't exit the sytem or can only do so at very high costs, ones that are so high that few leave over minor problems.  (Hence democratic systems usually follow a pattern of stasis and reform or stasis and revolution as it takes time to build a coalition for change.)

There are ways, I believe, to mitigate some of this.  James Surowiecki, in his _The Wisdom of Crowds_, goes over ways to make for better collective decision-making.  (Strangely, he doesn't cite Hayek, though what Surowiecki is going over seems a lot like Hayek's work on spontaneous orders.  I raised the issue on Hayek-l a number of years ago, but no one took the bait..)

> Say, we had a central bank whose
> owner is rewarded according to long-term economic
> performance of the
> economy (weighted to favor averaged growth, with the
> actual
> remuneration dependent on decades of GDP measurements).

The problem would be: how to do that in a way that mostly (since nothing is perfect) works.  I think there is no clear measure here that would work.  GDP would mean that most inflation and heavy government spending would look like great performance.  So, if the central banker merely inflated and lent lots of the government (e.g., bought up government debt), she or he might look like she's improving the economy and be rewarded accordingly.

Add to this, a person with this monopoly power -- and a good question is why should anyone or any group have this power in the first place rather than how to make it work -- would have a strong incentive to, as Bill put it, "game the system" -- along with the means of successfully doing so.  (The incentive is always there, but some systems allow it more chances at success than others and some might it harder to detect and correct than others.)

> The owner is
> free to choose his successors and collaborators. He is even
> free to
> relinquish his monopoly on the issue of currency. He (or
> she) can run
> the presses, or elect to reinstate the gold standard - but
> always
> knowing that his retirement package will depend on the
> outcome of his
> decisions alone. Wouldn't that be better than a
> "democratic" overseer,
> bent on extracting the greatest amount of political
> advantage in the
> shortest amount of time, as needed to assure re-election?

This sounds like applying Hans-Hermann Hoppe's views on democracy and monarchy to central banking.  For the benefit of others:  Hoppe believes that markets anarchism would be the best, but in deciding between democracy and monarchy, he thinks monarchy would be the better of those two because it's privately owned government as opposed to publicly owned government.  In his view, private owners would have an incentive to maintain and improve their capital -- in other words, the country -- because they own it and can pass it on (to heirs or their chosen successors) just like any other owned property.  They can also reap the profits from capital improvement.

Democratic leaders -- and Hoppe's use of democracy would include just about any form of statism that's not monarchical, so perhaps he's being a little loose in his categorizations here -- can't do this for the most part.  They're elected and usually only have a short term to benefit from this.  Thus, they're more like renters or caretakers.  They have an incentive to use up capital for immediate gains and to shift costs to their successors.

How would this apply to central banking, though?  It's not really likely today that a government would invest such independence in a central bank -- independence to the point of the bank being the sole authority in financial matters.  Also, the only way for a central banker to really collect on long term growth -- were that even possible -- would be to have the government enforce the central bank's monopoly and other practices, including, perhaps, taxing for the bank's benefit even when that might harm the government.  (Remember a lot of government policies are really, truly bad for the economy in the long-term.  Things like bailing out big players, regulating trade, prohibiting certain types of trades (e.g., short selling financials, mergers, etc.), and the like are all harmful in the long run, though they often do garner votes or campaign funds.)
> Clearly, a free market in banking is likely to be the best
> solution,
> just as it is in all other human endeavors. A monopoly
> controlled by a
> sovereign not dependent on the approval of the masses would
> be
> inferior but still better than a democratically controlled
> system.

Again, the problem is you won't get that.  Such a sovereign is unlikely to come about or come about in a way that's beneficial -- just as a coercive monopoly in any other field is unlikely to be beneficial to any but the monopolist and its buddies.  I doubt any mechanism to discipline the monopolist here would work -- certainly not as good as not having a monopoly by allowing free entry into the money and banking market.




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