Run for Your Money
by Max Raskin What should we make of bank runs? Though it is unfortunate so many people have to suffer because of monetary instability, long lines of panicking savers scrambling to withdraw their money should be an encouraging sign that the public might pick up on the giant Ponzi scheme that is fractional reserve banking. Even though, in all likelihood, the government will overwhelm those indicting the system, as Mises said, you cannot have too much of a correct theory. In understanding the recent run on England’s third largest mortgage lender, Northern Rock, the inherent fraudulence and theft at the core of that country’s – as well as our own – monetary system is revealed. For the past few years, England’s central bank, the Bank of England, has been creating artificially low interest rates; this trend could have not, economically, lasted for long. The market has a natural interest rate that represents the economy’s overall time preference. A high interest rate shows a more present-orientated market, whereas low interest rates indicate that people are comfortable saving. When the government distorts this indicator by creating low interest rates, businessmen think they can profitably make more investments than people are willing to provide savings for. When interest rates began to rise – to their highest level in nine years – the poor investments brought on by easy credit were revealed. As the London Interbank Offered Rate rose to 6.7975%, higher even than the Bank of England’s rate, it should have been obvious that sub-prime mortgages were exactly that – unwise decisions that would not have been made without the artificial socializing of risk.
Let’s contrast what should have happened to Northern Rock, with what did happen. If the British government were one that protected property rights by forcing banks to pay their debtors or else shut down, then this problem would not exist. Fractional reserve banking rests on the delusion that if the banks can fool enough people into thinking that they can withdraw their money at any given time, then they can expand credit and make all sorts of unwise investments. The minute the public gets wind of the bank’s insolvency, as with the latest crisis, they rush to demand their money. On the free market, fractional reserve banking is no more of a problem than fractional reserve car dealerships. If a car dealer sells two deeds to the same car it is clearly fraud. Yet somehow the banks are not burdened with the inconvenient job of repaying their depositors. Unlike the central bank, the car dealer cannot print more cars. Not surprisingly, when the government gets involved, fraud runs rampant. Instead of allowing the bank to close down and be replaced by a more efficient one, the Bank of England bailed out Northern Rock. Chancellor of the Exchequer, Alistair Darling said that the Bank would ensure the deposits of Northern Rock customers because of, "the importance I place on maintaining a stable banking system." In its role as lender of last resort, the Bank of England would certainly be capable of ensuring those deposits – it’s as easy as just printing more money. On September 19th, the Bank injected 10 billion pounds into the British economy and essentially allowed the whole scheme to continue. Where did they get this money? Certainly they couldn’t have raised taxes overnight. And they didn’t borrow it. Instead, they did as all governments do – they inflated. Though the mechanism by which this occurred, namely through the buying and selling of securities, is complex, money was essentially created out of thin air. This is nothing more than legal counterfeiting. If the creation of money dilutes the value of existing money, then this was certainly theft on a massive scale. And who is it to benefit? Certainly not the average man. Instead, as with the U.S. economy, when the Bank of England injects "liquidity" into the money markets, they are generally helping some of the richest in society by essentially giving them not only a subsidy, but also a way to beat out inflation. When Bernanke lowers the interest rate half a percentage point, Wall Street goes bananas. Although with the Associated Press quoting Murray Rothbard there’s no need to fall into despair. September 28, 2007 Max Raskin [send him mail] goes to high school in New Jersey. He was a summer researcher at the Mises Institute in 2007. Copyright © 2007 LewRockwell.com |
