Thursday, May 22, 2008

Stuff I Just Don't Understand

All the recent economic news has gotten me thinking about topics and issues I'm pretty much in the dark on. And not to sound arrogant, but if I'm in the dark about this stuff, then I'd be willing to be a vast, vast majority of the American people are as well. I'm talking about money and finance.

The thing is, I think basic economic concepts of supply and demand are very easy to grasp- so to is the concept of cost-benefit analysis, an idea just about everyone should be familiar with. But when we get into the money supply, and lending rates, and just what it is that goes on on Wall Street, I don't think I'm the only one that feels a bit hazy.

I've been reading a number of books lately that deal with finance and investment and the like, several of which are from a very liberal, very egalitarian point of view. I have some trouble following the arguments- and I have trouble coming up with "libertarian" counter arguments because of all the nebulousness about the topic in the first place.

From a purely libertarian philosophical point of view, I question the relationship between government and finance. I question the need for the fed and I question the need for the government to control the money supply. That's my libertarian gut reaction, but I'd be hard pressed to give any concrete reasons why those feelings actually would make any practical sense. I know from reading that the great economist Milton Friedman believed that the Great Depression was exasperated and prolonged by the mismanagement of the federal reserve. But would we be better off without the Fed in the first place? That seems to be the general thrust of the argument of Ron Paul and his supporters, who urge returning to the gold standard.

What I don't know about finance and monetary policy I can certainly make up for with my knowledge of history. Today, the power and influence of Wall Street is protested by certain anti-capitalist liberals and certain anti-government libertarians. The big libertarian dogs (Reason, Cato, ect.) never seem to have much to say. And all I'm left with is the thought that this is a debate which has raged for centuries- for anyone who watched HBO's very excellent John Adams mini-series, this seems to be the debate that was fought between Alexander Hamilton and Thomas Jefferson- Hamilton wanting a strong national bank and federal involvement in finance, while Jefferson was more concerned with limiting federal power.

But even though the Federalists lost political power early on, Hamilton seems to have won the debate in the long run- there were several national banks throughout the nation's early years and eventually, the federal reserve was created in the early years of the 20th century. Certainly today the worlds of government and finance are so intermingled that even mainstream libertarian groups tend to say little on the subject. I want to ask whether or not this system is any good, but I think like most people, I struggle with the question because I don't really understand the system in the first place.

What do I know for sure- it seems to me that when the financial industry suffers, the nation as a whole suffers. That was the great depression and to a much lesser extent that seems to be the case today. It also seems to me that money- and the availability of money is what makes the economy thrive and makes us all the richer. After all, how would the economy grow without investment dollars to start new businesses and to build small businesses into larger ones.

I'd gladly take any recommendations anyone has on monetary policy or finance, but for now, as much as I can try and sort things out here, I still feel more than a bit in the dark. Which is okay- it's important to understand our intellectual shortcomings- I just wonder how easy it would be to fill this gap and whether or not the knowledge I'm missing is important to my libertarian world view.


Anonymous b.rose said...

"And not to sound arrogant, but if I'm in the dark about this stuff, then I'd be willing to be a vast, vast majority of the American people are as well. I'm talking about money and finance."

I think you can add the that the vast majority of politicians are in the dark about it. McCain was upfront about it in saying that economics wasn't his strong suit and he gets blasted for it by Obama and the like. But reality is economics rarely is politicians strong suits and that includes the current dems for sure.

I'm just starting out as a stock research analyst and despite my econ background I can't give you a strong for/against the Fed argument. There are people far smarter than us that oppose the fed and people far smarter than us that are for the fed, so what can we possibly add to the argument.

I think you did hit on an important point when you said "It also seems to me that money- and the availability of money is what makes the economy thrive and makes us all the richer. After all, how would the economy grow without investment dollars to start new businesses and to build small businesses into larger ones." I think the Fed's #1 contribution is to keep money available to those who can use it productively in times where the economy is becoming more and more risk averse; times like right now. They absolutely have kept money available for people who have created wealth/jobs in excess of what they would have been able to w/ out the Fed's cuts.

I'd like to ask someone who is against the fed if they believe we'd have been better off in the past 6 months w/ out the fed. With credit tightening and liquidity evaporating among our banks is it far fetched to assume we'd already be in a recession with out them stepping in to make money more available? Consensus among financial experts is that the feds actions staved off a recession. Certainly if they didn't step in to rescue bear stearns we'd be in much worse shape right now (i'm pretty well-informed on what exactly happened there and what would have happened w/ out a bailout if you'd like me to expand). But, of course that is only the benefits of the fed. R.Paul would argue that the costs: inflation etc outweigh that.

So like you said, the availability of money is vital for a healthy economy. The efficient allocation of that money is also vital obviously (and those anti-capitalists who believe wall-street is the root of all evils need to realize that efficient allocation of capital, which is what all those suits in NY do, IS A VITAL AND VALUABLE SERVICE). they certainly allocate funds better than the govt does. when the government subsidizes ethanol, which was an awful idea...when that fails what happens to the congressman who voted on this??? nothing! when we buy stock in a company that we think can do some good things and they lose money.

Last point. We generally accept government influence as a bad thing because they simply aren't as good at what they do as private businesses. But maybe, just maybe the people at the Fed are good enough at what they do to actually positively influence our economy. Maybe it's good we actually have people capable and qualified in the government making decisions rather than just clowns.

Really, who the fuck knows though. All I know is that I'm more comfortable with bernanke influencing our economy than chris dodd and barack obama.

12:21 PM  
Blogger lonely libertarian said...

Ahhhh, so that's what you do!

Here's what I wonder- given the fact that we actually have a national monetary system, it makes sense to me such a system needs to be regulated and monitored. I know I've heard more extreme libertarian arguments that we don't need the dollar, that in the absence of a national currency, banks would issue their own individual currencies.

Maybe that's a good idea in theory, but I wonder if that's an idea that wouldn't hold up in the realm of international trade- Given that other countries have national currencies and given the need of investors to rely on the stability of the dollar, I wonder if our monetary system is basically a necessary evil (so to speak) given the world we live in.

In essence I suppose what I'm wondering if we need our monetary system- a national currency and a federal reserve to manage that currency- is what we need simply because that's just the way the world is.

I remember I was at a Radio 104 Modern Rock the Earth Day in Bushnell Park back in college when some friends and I ran into my roommate and my roommate's father. One of my friends was wearing some Rage Against the Machine-esque "take down Wall Street" sticker. My roommate's father looked at the sticker and asked, "why do you wanna burn down Wall Street, that's where all our money comes from." My friend had no answer.

I'm not going to say the system is perfect, nor do I think the government needs to be in the business of bailing out failed investors- but as a whole, I'd have trouble saying that the system doesn't work. After all, that is where our money comes from.

5:07 PM  
Anonymous B.ROSE said...

The idea of no dollar and banks issuing their own currencies is insane.

Imagine if you have all your money in Bear Stearns accounts; I know they're an investment bank, not commercial, but it doesn't matter. And you hear a rumor that they could be on the verge of bankruptcy...and not only is your money in Bear accounts, but that money is backed by Bear want to talk about a run on a bank, omg. Bear was actually not on the verge at all, but a rumor started and people withdrew their money and at the same time their business partners all stopped doing business with them and demanded any debt be repaid ASAP. All of a sudden Bear has its cash assets pulled and is stuck with just its illiquid assets which it must try to firesale to pay their debt that is being demanded. A rumor turned a healthy bank into a bankrupt bank in 48 hours (not actually bankrupt, but the liquidity of their assets was not sufficient to quickly pay off their debt).

Bank backed currencies is insane. The bigger, stronger and sturdier the backer of currency is the better.

And I won't even get into international trade, mostly because I don't know enough, but I know it would be a mess and I also know that the fact that people have confidence in our currency adds value to it.

Tough topic. This is why CEO's, hank paulson and bernanke get paid big bucks.

10:06 AM  
Anonymous b.rose said...

Another example of how this would hurt us is how bonds work.

Don't know how much familiarity you have with bonds, but the US gov is the #1 rated bond source in the world. You get buy bond from the US, it will be paid upon maturity. Different businesses have different levels of perceived reliability. The less reliable the higher the yield, the more reliable, the lower the yield. You required 15% returns from some shoddy business because you can't be sure you'll be reimbursed, but only 4% from the US gov because you know you'll get paid.

So now think of that in trade terms. If I'm trading euros for dollars i require 1.5 dollars per euro, but now if I'm trading euros for a currency that i can't be 100% sure will retain value I'm gonna demand more of that currency per euro.

the system would destroy purchasing power via trade, unless my thinking is off. i've never heard of the idea before, so maybe i'm way off.

10:14 AM  
Blogger McMc said...

I am clueless when it comes to economics, as brose could tell you from our time in highschool AP Econ. However, I must say, that story about Bear Stearns sounded an awful lot like "It's A Wonderful Life", and I think we know time that movie took place in.

1:38 PM  

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