Sometimes the reforming radicals are those
who also seek to conserve.

Via The Telegraph, Will the great interest rate gamble pay off?

By the time this month’s auction is over, the ECB will have doled out nearly one and a half trillion euros of “free” money to help keep the banking system alive, with much more to come over the months ahead.

Nobody is under any illusions. These actions have not succeeded in vanquishing the crisis. Underlying structural issues remain unresolved, and it is most unlikely that the starvation diet to which much of the eurozone periphery has been condemned will result in robust recovery. But Mr Draghi has at least prevented the patient from dying on the slab. Two cheers for that.

During the IMF debate, I quoted Mises, who predicted the German hyperinflation:

The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion.

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

Right now, it seems clear which path the western world has chosen. “The great interest rate gamble” will make our problems worse later. It’s an unhappy thought but denial will not help.

Here are ten plans which would deal with the structural problems in our financial system.

Update: I just discovered this Zimbabwe 100 trillion dollar note in my email. Amazing what governments will do.

A speech on money and banking given to Positive Money’s conference last October (sorry about the cold!):

See also my writing on economics here and for The Cobden Centre.

Last night, I caught up with Martin Wolf’s November programmes for Radio 4 Analysis, which you can find here. He offered a predictable blend of commentators calling for more money printing, world central banking and greater global governance. It prompted me to look out Monetary Theory and the Trade Cycle (1933).

Hayek wrote (emphasis mine):

It is a curious fact that the general disinclination to explain the past boom by monetary factors has been quickly replaced by an even greater readiness to hold the present working of our monetary organization exclusively responsible for our present plight. And the same stabilizers who believed that nothing was wrong with the boom and that it might last indefinitely because prices did not rise, now believe that everything could be set right again if only we would use the weapons of monetary policy to prevent prices from falling.The same superficial view,which sees no other harmful effect of a credit expansion but the rise of the price level, now believes that our only difficulty is a fall in the price level, caused by credit contraction.

All eerily familiar. And:

We must not forget that, for the last six or eight years, monetary policy all over the world has followed the advice of the stabilizers. It is high time that their influence, which has already done harm enough, should be overthrown.

The truths set out by Hayek in that crucial essay – and in Prices and Production in the same PDF – are ever more relevant today. Yet, despite the evidence of the intervening 80 years, the Keynesians, and indeed the Monetarists, continue to peddle their interventionist policies and monetary statism. Their intellectual bankruptcy is plain but still institutions are regarded as august which hawk their poor ideas about money and bank credit.

The economic truths which Hayek set out in the 1930s are much neglected. It is high time that they were widely read by economists and businessmen and that the impoverishing ideas of Keynes which are now doing so much damage are laid to rest.

In this mad age of yet further taxpayer-backed lending, the BBC’s new series may or may not be something to look forward to:

More here.

From a magnificent article by Philipp Bagus – Why Is There a Euro Crisis?

Today’s banks are not free-market institutions. They live in a symbiosis with governments that they are financing. The banks’ survival depends on privileges and government interventions. Such an intervention explains the unusual stock gains. On Wednesday night, an EU summit had limited the losses that European banks will take for financing the irresponsible Greek government to 50 percent. Moreover, the summit showed that the European political elite is willing to keep the game going and continue to bail out the government of Greece and other peripheral countries. Everyone who receives money from the Greek government benefits from the bailout: Greek public employees, pensioners, unemployed, subsidized sectors, Greek banks — but also French and German banks.

Europeans politicians want the euro to survive. For it to do so, they think that they have to rescue irresponsible governments with public money. Banks are the main creditors of such governments. Thus, bank stocks soared.

The spending mess goes in a circle. Banks have financed irresponsible governments such as that of Greece. Now the Greek government partially defaults. As a consequence, European governments rescue banks by bailing them out directly or by giving loans to the Greek government. Banks can then continue to finance governments (the loans to the Greek government and others). But who, in the end, is really paying for this whole mess? That is the end of our story. Let us begin with the origin that coincides with beneficiaries of the last EU summit: the banking system.

The vast majority of commentary — particularly this week’s extremely disappointing Economist magazine — crassly neglects the tight nexus between banks and the state which has funded politician’s unrealistic promises for a generation through currency debasement. It’s good to see Philipp Bagus — a German economist working in Spain — making a case which is sadly lacking elsewhere.