The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
The Forum - On Line Opinion's article discussion area



Syndicate
RSS/XML


RSS 2.0

Main Articles General

Sign In      Register

The Forum > Article Comments > Contingent loans to reduce taxation and greenhouse gas emissions > Comments

Contingent loans to reduce taxation and greenhouse gas emissions : Comments

By Kevin Cox, published 2/2/2009

'Contingent Loans' (similar to HECS loans) is an idea whose time has come and should be broadened to more sectors of the economy.

  1. Pages:
  2. 1
  3. Page 2
  4. 3
  5. All
This is just a repeat of the rationale underlying the sub-prime bubble. It is more Keynesian ‘bread from stones’ cargo cult.

It does matter from an economic standpoint whom we lend the money to. The new fake money causes malinvestment in the sector where it enters the economy. That’s why the sub-prime bubble appeared in the housing sector. The new money makes investments appear profitable which, absent the new money and its inflation, would be seen to be loss-making. Capital and labour then flow in, inflating a bubble. But eventually reality kicks in. The market must wash out, must liquidate the malinvestments caused by inflation, and re-allocate the capital to productive, ie profitable purposes, in the process causing unemployment. We get the recession, based on government manipulation of the money supply, based on Keynesian errors.

The reason we have fractional reserve banking is not because it is reasonable or beneficial, it is because - ‘who shall guard the guards?’ – we have no way of stopping government from abusing its power over the supply of money, deceiving and defrauding the population, and playing Santa Claus.

The root cause of the entire problem is
a) government’s protection of fractional reserve banking from the ordinary market disciplines of loss and bankruptcy, in exchange for a cut of the loot,
and
b) Keynesian voodoo that we can get something for nothing by taking from A and giving to B, or by paying people to dig holes and fill them in again.

The equitable and practical solution is to abolish government’s self-interested, inflationary and abusive control of the money supply, not to extend it to new and more efficient methods of jiggery-pokery.


To understand why Keynes was wrong, see:
http://www.lewrockwell.com/rozeff259.html
and
http://mises.org/story/2492
Posted by Peter Hume, Tuesday, 3 February 2009 9:41:08 PM
Find out more about this user Recommend this comment for deletion Return to top of page Return to Forum Main Page Copy comment URL to clipboard
Peter,

You make the statement

Your proposal is in effect that government can issue fake money on condition that it spends it to ‘benefit’ the public.

That is not what I am saying.

I am saying the government can issue zero interest contingent loans to people where the loans must be spent to the best advantage of the individual within a market place where the goods and services have an objective of reducing the amount of ghg emissions.

You say

"It is the control of the credit markets that has caused the entire bubble and economic crisis. "

I say - like George Soros - it is the internal operation of credit markets that has caused the entire bubble and economic crisis.

I say - like Minsky - that when you link money to credit you get Financial Instability.

The problem is that the way we create money today MUST result in unstable and hence inefficient markets.

I sometimes wonder why free market proponents are the ones that most attack the ideas in this article? I believe in the efficacy of free markets. What I am describing is a way to make markets work the way they should work. I am against regulation of market places because if a market needs regulating then is unstable market and almost impossible to stabilise through regulation.

Regulations to control unstable markets often fail because they cannot react quickly enough or the timing is wrong. We must build markets that are efficient. Because people can buy and sell things in a free and open market then that does not guarantee efficiency. Inefficient markets are everywhere and the inefficiency is normally caused by positive feedback mechanisms in the market itself - not from the vain attempts at control.

The stock market is an example of an unstable, unpredictable, chaotic market. This is caused by positive feedback between prices and demand. The more the price goes up the higher the demand and the less the supply. The more the price goes down the lower the demand and the greater the supply. This must lead to instability.
Posted by Fickle Pickle, Wednesday, 4 February 2009 12:33:18 AM
Find out more about this user Visit this user's webpage Recommend this comment for deletion Return to top of page Return to Forum Main Page Copy comment URL to clipboard
“I am saying the government can issue zero interest contingent loans…”

Are not the loans zero interest specifically because they are loans of money substitutes not backed by money in specie, in other words, fiduciary media, in other words, the fraction that is *not* held in reserve in FRB?

“it is the internal operation of credit markets that has caused the entire bubble and economic crisis.”

That is the issue. The Austrian school’s theory of money and credit is that government’s manipulation of the money supply, fiat money, easy money and FRB, are the original cause the following bubble and bust, and all the other market ructions we see are strictly secondary phenomena. I understand the theories that the problem is caused by the internal operation of the credit markets. May I ask, have you read and do you understand the Austrian theory of Ludwig von Mises, Friedrich Hayek and Murray Rothbard?

“I say - like Minsky - that when you link money to credit you get Financial Instability.”

Let’s say gold were money, and that all loans were backed 100% by gold. Don’t you agree that we would not then have such financial instability as we have now?

And don’t you agree that the source of the financial instability is fractional reserve banking, and specifically, the fact that banks can issue loans, unbacked by money, and then when there’s a run on the bank, the government bails them out with public money? Surely that is the origin of the mischief? You yourself seem to be pointing in that direction by identifying the ‘new money’ ie the amount lent over and above the amount redeemable in money on demand, as the source of the problem. Therefore it’s not the link of money to credit per se that is the problem, it’s FRB that is not subject to the market disciplines of loss and bankruptcy?
Posted by Wing Ah Ling, Wednesday, 4 February 2009 10:06:27 PM
Find out more about this user Recommend this comment for deletion Return to top of page Return to Forum Main Page Copy comment URL to clipboard
Thank you Wing ah Ling for your comments. You put the traditional arguments well. The Austrians, and you, would be correct if markets were efficient in the sense of seeking a stable state. The problem is most don't. Cooper's "Origin of the Financial Crises" explains it well for financial systems. Chaos theory explains it for dynamic evolving systems and Maxwell explains it for mechanical systems.

Where the Austrians go wrong is their belief that the financial stability hypothesis is correct. They assume financial systems are stable because any market will seek stability. If this is so and they observe that markets are not stable then what has gone wrong? They observe governments trying to regulate markets to stop the instability. They then draw the conclusion that the regulation is causing the instability.

If we take away the financial stability hypothesis and replace it with the financial instability hypothesis - financial systems are unstable because of their internal construction with positive feedback mechanisms - then the Austrian argument does not follow.

If markets are unstable then we can make them stable by regulations or by removing their internal positive feedback mechanisms. We can experiment with the later by building an "Energy Rewards" market whose purpose is to both create new money and to reduce ghg and see what happens.

Rudds stimulus package is using an unstable mechanism to create the money by the banks generating the money then loaning it to the government and so increasing the amount of credit. This will make make the problem worse as this feeds the positive feedback loop. Create money, pay interest, create more money to pay the interest. If they created the money through zero interest contingent loans then it would increase money without increasing loans on which we pay interest
Posted by Fickle Pickle, Thursday, 5 February 2009 3:03:58 AM
Find out more about this user Visit this user's webpage Recommend this comment for deletion Return to top of page Return to Forum Main Page Copy comment URL to clipboard
Fickle Pickle

I have found the Austrian theory has enormous explaining power. I have never seen it refuted, only either ignored or misrepresented.

What you call the financial stability hypothesis: that markets are efficient in the sense of seeking a stable state, is not part of, and is not a correct representation of Austrian economic theory. Therefore it has not been refuted by anything you have said. I can only assume you must have gleaned it from second-hand sources.

I will try to show why the Austrian explanation should be preferred and I invite you to have an open and inquiring mind on the issues. Austrian theory also has a devastating critique of economic theory - theory of purposive human action - that is based on models taken from physics and engineering.

But first so’s I can understand where you’re coming from, could you please answer these questions for me:
1. What is the definition of a ‘stable’ as opposed to a not stable market?
2. What are the defining characteristics of an efficient as opposed to non-efficient market?
3. The money – the real wealth – that government throws at a given problem must come from somewhere. How do you know that the total cost of the money taken is not greater than the benefit of the intervention in any given case?
4. If gold were money, and if all loans were backed 100% by gold, in what sense would that be a system of money linked to credit that was unstable and therefore inefficient?

Here is an excellent, interesting, non-jargon explanation of the Austrian theory in a podcast nutshell:
http://www.lewrockwell.com/podcast/index.php?p=episode&name=2008-08-11_017_austrian_theory_of_the_business_cycle.mp3

I hope you will enjoy it
Posted by Wing Ah Ling, Thursday, 5 February 2009 8:36:30 PM
Find out more about this user Recommend this comment for deletion Return to top of page Return to Forum Main Page Copy comment URL to clipboard
1. What is the definition of a ‘stable’ as opposed to a not stable market?

A stable state in any system where the value of state variables oscillate around fixed values in the absence of external influences. An unstable system is one where a small variation in a state variable causes large changes in later states in the absence of external influences. The so called "butterfly effect". A stable system is predictable. An unstable system is unpredictable. Planetary motion is predictable, weather patterns are unpredictable.

2. What are the defining characteristics of an efficient as opposed to non-efficient market?

A stable market is efficient because it is predictable. An unstable market can never be efficient because it is unpredictable. Market players in an unpredictable market are playing roulette not finding the best value.

3. The money – the real wealth – that government throws at a given problem must come from somewhere. How do you know that the total cost of the money taken is not greater than the benefit of the intervention in any given case?

The real wealth comes from the future return on investment of the productive assets built with the money "printed" by the government. If we create money and invest it in renewable energy infrastructure we get our money back many times over. Choose carefully the markets used to create money.

4. If gold were money, and if all loans were backed 100% by gold, in what sense would that be a system of money linked to credit that was unstable and therefore inefficient?

I did not say this will stop the debt market from being unstable. I said we would keep the money market stable. The approach is to try to isolate unstable markets from stable markets and to worry about one at a time.

The Austrians correctly describe positive feedback. Getting rid of central banks does not solve the money creation problem. That is why I have come up with a system to create money by creating a covering asset before the money can earn interest.
Posted by Fickle Pickle, Friday, 6 February 2009 5:27:44 AM
Find out more about this user Visit this user's webpage Recommend this comment for deletion Return to top of page Return to Forum Main Page Copy comment URL to clipboard
  1. Pages:
  2. 1
  3. Page 2
  4. 3
  5. All

About Us :: Search :: Discuss :: Feedback :: Legals :: Privacy