Is life so dear, or peace so sweet, as
to be purchased at the price of
chains and slavery?

An explanation of the financial crisis for everyone:

Linda is the proprietor of a bar in Cork. In order to increase sales, she decides to allow her loyal customers – most of whom are unemployed alcoholics – to drink now but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).

Word gets around and as a result increasing numbers of customers (still mostly unemployed alcoholics) flood into Linda’s bar. Taking advantage of her customers’ freedom from immediate payment constraints, Linda increases her prices for wine and beer, the most popular drinks. Her sales volumes and profits increase massively.

… read on: You’re having a laugh ….. seriously?: The Credit Crunch Explained.

Three themes appear often in explanations of the crisis:

1. That bankers were greedy and irresponsible; that they made bad business decisions and sold bad products.
2. That regulation was insufficient or inadequate.
3. That too much money was loaned.

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(This post is a precis of Huerta de Soto’s Money, Bank Credit and Economic Cycles pp650-653, presenting an argument which was famously expounded by von Mises in Socialism.

Among the young idealists who were attracted to socialism after the Great War, who came through these arguments expressed in full to understand that they “had been looking for improvement in the wrong direction”, was F A Hayek, Author of The Road to Serfdom, Nobel Prize winner and proponent of the denationalization of money.)

To attempt to coordinate society through coercion is an intellectual error: it is impossible for an institution to obtain the information needed to establish social coordination by decree. There are four reasons:

• It is impossible to obtain, store and process the vast amount of practical information in the minds of different people.
• Most of the necessary information is subjective, practical, tacit and non-verbal: it cannot be transmitted.
• Information which people have not yet discovered or created and which arises from the market process cannot be transmitted.
• Coercion — that is, regulation — prevents the discovery or creation of the necessary information.

These are the arguments developed at length by von Mises in Socialism. Von Mises demonstrates the impossibility of socialism and of effective state intervention in the economy. His thesis explains theoretically why the socialist economies of the Eastern Bloc failed. It also explains the growth of the tensions, maladjustments and inefficiencies in western economies which have led to our present crisis.

Crisis is the inevitable outcome of the application of coercion and privilege by government, which systematically worsens social maladjustments, hinders the creativity of entrepreneurs, distorts economic information, encourages irresponsibility, corrupts individuals and encourages the underground economy.
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Jesus Huerta De Soto’s book, “Money, Bank Credit and Economic Cycles” arrived today, all 875 pages of it. It is, apparently:

by far the most thorough treatment in print of Austrian ideas on banking and the business cycle 

It looks insightful already (from the preface to the second, 2001, edition):

While governments and central banks have reacted to the terrorist attack on New York’s World Trade Center by manipulating interest rates, reducing them to historically low levels … the massive expansion of fiduciary media injected into the system will not only prolong and hinder the necessary streamlining of the real productive structure, but may also lead to dangerous stagflation.

And so here we go. More to follow as I work towards his proposals for reform.

Via Britain’s bankers plumb new depths – Times Online :

Jon Moulton, the private equity chief, warned a City lunch this week that he feared serious civil unrest. There was, he said, a 25 per cent chance of one of the 15 member countries of the eurozone pulling out of the currency club. That, he said, would be a catastrophic shock leading to a “far greater financial crisis” than the current one.

But thinking is established in this area: we are not without explanations and options. See for example Denationalisation of Money — The Argument Refined, by F A Hayek.

From the cover page:

Diseases desperate grown,
By desperate appliances are reli’ved,
Or not at all.
– William Shakespeare, Hamlet, Act iv, Scene iii

Hayek makes practical proposals for free trade in money and explains:

The purpose of this scheme is to impose upon existing monetary and financial agencies a very much needed discipline by making it impossible for any of them, or for any length of time, to issue a kind of money substantially less reliable and useful than the money of any other.

He considered the proposal “more practicable than utopian European currency” which

would ultimately only have the effect of more deeply entrenching the source and root of all monetary evil, the government monopoly of the issue and control of money.

And his remarks on monetary policy and a common European currency now look prescient indeed. Consider:

On the effects of the adoption of the proposal all I will add at this point is that it is of course intended to prevent national monetary and financial authorities from doing many things politically impossible to avoid so long as they have the power to do them. These are without exception harmful and against the long-run interest of the country doing them but politically inevitable as a temporary escape from acute difficulties. They include measures by which governments can most easily and quickly remove the causes of discontent of particular groups or sections but bound in the long run to disorganise and ultimately to destroy the market order.

Reason has shown and history has proven that the free market is the only successful system for cooperation in a society based on the division of labour. We must find the courage to fix what intervention has broken.

It’s not exactly clear how the Federal Reserve’s policy of pushing interest rates well below where the free market would have set them, thereby inflating the biggest asset bubble in the history of the world, could be the fault of the free market, or attributable to “laissez faire.” But since hardly anyone discusses the Fed, no one has to answer this inconvenient question. The Fed’s very existence is a violation of laissez faire. Yet the destructive effects of what it does are then blamed on the market. This charade has gone on long enough.

via Why the Downturn? – Thomas E. Woods, Jr. – Mises Institute .