Sure point taken (I'm a econ n00b), but does it really have to be the governments job? I'm sure banks could come together and create a similar system to prevent disasters like the GD. It would def be in their best intrest to do so.

Like I said, I'm a n00b in this area but I've have been listening to alot of stuff from mises.org (http://mises.org/media.aspx?action=search&q=fed) and it definitely makes you question the function of the FED for example.

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Originally posted by robstar Sure point taken (I'm a econ n00b), but does it really have to be the governments job? I'm sure banks could come together and create a similar system to prevent disasters like the GD. It would def be in their best intrest to do so. Like I said, I'm a n00b in this area but I've have been listening to alot of stuff from mises.org (http://mises.org/media.aspx?action=search&q=fed) and it definitely makes you question the function of the FED for example.

well, banks can't do anything together because that's called collusion

and who trusts the banks to do the right thing anyway? the current financial crisis in the US was brought about by banks.

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Originally posted by robstar Sure point taken (I'm a econ n00b), but does it really have to be the governments job? I'm sure banks could come together and create a similar system to prevent disasters like the GD. It would def be in their best intrest to do so.

The government makes the laws, so it has to be the one to enforce them. Besides, banks coming together violates anti-trust laws. Free markets rely on competition and there's no competition if the banks come together to set the rules. There sole purpose for existence is to make a profit, so if they were to theoretically be given the power to make and enforce their own regulations, they would obviously do it in the interest of the profit motive, not to protect the economy or consumers.

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I'm going out on a tangent here but isn't the EU and UN effectively government collusion?
I do not trust them one bit (big suprise) and they have a loooong way to go before I put my trust into a politican.

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and who trusts the banks to do the right thing anyway? the current financial crisis in the US was brought about by banks.

Who trusts *insert company* to do the right thing?
They have to earn that trust just like everybody else.

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Originally posted by robstar I'm going out on a tangent here but isn't the EU and UN effectively government collusion?

no. collusion is a very specific term to describe the illegal practice of businesses getting together to organise aspects of their business (such as price fixing) to avoid the competition in the free market. so, banks could never set an overall cash rate like the federal reserve does because this would be collusion.

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Originally posted by robstar I do not trust them one bit (big suprise) and they have a loooong way to go before I put my trust into a politican.

the difference being of course that we get to choose our politicians, whereas only the shareholders get to choose the board of a bank (the exception being the central banks which are set by the government).

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Originally posted by robstar Who trusts *insert company* to do the right thing? They have to earn that trust just like everybody else.

the point being that you cant trust a private enterprise to make decisions that are in the interests of the nation, because they are duty-bound to make decisions based on the interests of their shareholders.

central banks are a necessary part of the capitalist economy, end of debate.

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Originally posted by pkcRAISTLIN and who trusts the banks to do the right thing anyway? the current financial crisis in the US was brought about by banks.

Banks share some of the blame, but I don't think you can say they brought it on alone. The fed and the federal government deserve much of the blame. I forget the name of the legislation, but the government passed some "community reinvestment" bill a few years back that required banks to give mortgages to people with poor credit and low incomes...people who normally would not have qualified for the loans. The banks were required to make these ridiculous loans...knowing full well they would not be getting their money back...so they tried making up lost revenue by selling a bunch of fancy variable rate mortgages to people with better credit. Well, when the fed slashed rates to 1%, this was fine and dandy because variable rate mortgages seemed like an incredibly attractive deal, so we had record levels of home ownership and everyone was happy. But the rate set by the central bank was artificially low...It led to a bubble in the housing market..with record levels of personal debt being created. Once the economy slowed and the bubble popped, many of those prime mortgages became sub-prime as people started to default on their payments.

So yes, the problem was caused by banks...but they made many of their stupid decisions only because they had to. They were forced to give loans to unqualified people, and they were forced to make up for lost revenue by selling as many "good" loans as possible with artificially cheap money. If rates in the marketplace were determined by supply/demand and risk/reward...rather than fixed by a monolithic central bank, the housing bubble would likely not have happened.

Last edited by Capitalizt on Aug-01-2008 at 02:48

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Originally posted by Capitalizt The banks were required to make these ridiculous loans...knowing full well they would not be getting their money back...

forgive me if i dont accept your paraphrase of the situation. do you have a link?

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Originally posted by Capitalizt so they tried making up lost revenue by selling a bunch of fancy variable rate mortgages to people with better credit. Well, when the fed slashed rates to 1%, this was fine and dandy because variable rate mortgages seemed like an incredibly attractive deal to many people, so we had record levels of home ownership and everyone was happy. But the rate set by the central bank was artificially low...It led to a boom/bubble in the housing market..with record levels of personal debt being created. Once the economy slowed and the bubble popped, many of those prime mortgages became sub-prime as people started to default on their payments.

i have explained to you before- the rate the fed sets is irrelevant, and that the banks set their own rates independently.

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Originally posted by Capitalizt So yes, the problem was caused by banks...but they made many of their stupid decisions only because they had to. They were forced to give loans to unqualified people, and they were forced to make up for lost revenue by selling as many "good" loans as possible with artificially cheap money. If rates were set on the marketplace..determined by supply vs demand and risk vs reward...ather than set by a monolithic central bank, the housing bubble would likely not have happened.

sorry, i simply dont believe you that the banks were forced to give money to anybody. and there is no such thing as "artificially low" rates.

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Originally posted by pkcRAISTLIN forgive me if i dont accept your paraphrase of the situation. do you have a link?

I don't think this is exactly the legislation I'm thinking about, but it is in the same vein. Banks over a certain size are required to make loans to underqualified individuals.

http://en.wikipedia.org/wiki/Community_Reinvestment_Act

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i have explained to you before- the rate the fed sets is irrelevant, and that the banks set their own rates independently.

If one bank is charging the fed rate + 1% for mortgages, all banks must do this. Otherwise they will lose all their business to the competition. Yes they are free to set whatever rate they want, but in a competitive environment they tend to stick close to what the fed does.

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and there is no such thing as "artificially low" rates.

Oh yes there is.. When inflation outstrips the rate of interest, it is artificially low. In a free banking system, the rate of interest would never be less than the rate of inflation. The fed is keeping rates low in hopes of forcing people out of safe havens and into riskier investments like stocks and mortgage backed securities. They want investors to buy all of the crap paper floating around to keep the system from collapsing. Keeping rates artificially low means a negative real return on savings, and this is a great way to force people into foolish investments that keep our economic bubble inflated a little longer.

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Originally posted by Capitalizt If one bank is charging the fed rate + 1% for mortgages, all banks must do this. Otherwise they will lose all their business to the competition. Yes they are free to set whatever rate they want, but in a competitive environment they tend to stick close to what the fed does.

but that's completely untrue. for instance, australia's banks have different interest rates from each other. and in any case, as you have rightfully identified, the banks have a choice to set rates to whatever they wish.

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Originally posted by Capitalizt In a free banking system, the rate of interest would never be less than the rate of inflation.

but who measures inflation? certainly not the individual banks. inflation is measured by the fed, and inflation isn't even a "hard science" figure at all.

every single advanced economy has a central bank, do you think this is a fluke? the idea that the individual banks could self-regulate the economy is just nonsense.

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Critics claim that government policy encouraged the development of the subprime debacle through legislation like the CRA, which in effect forces banks to lend to the same otherwise uncreditworthy consumers they are now being criticized for accepting.[2] [3] Defenders of CRA disagree, pointing out that half of all subprime loans were made by institutions that are not subject to CRA and another substantial share of subprime loans were made by subsidiaries of banks that do not fully come under CRA. They estimate that the substantial number of riskier loans banks were forced to accept by CRA were not enough to be a problem.[4]

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Originally posted by pkcRAISTLIN every single advanced economy has a central bank, do you think this is a fluke? the idea that the individual banks could self-regulate the economy is just nonsense.

First of all, the economy is nothing more than a collection of individuals pursuing their own interests, so I don't like the idea of any institution trying to "regulate the economy." People should be left as free as possible.

Secondly, we will never know how an alternate system will do because competition is illegal. If the fed is keeping it's books in order and being responsible with our currency, they should have nothing to fear from a little competition. We don't need to abolish central banks. Just legalize alternatives (competing currencies, etc) and let the people decide.

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Originally posted by Capitalizt First of all, the economy is nothing more than a collection of individuals pursuing their own interests, so I don't like the idea of any institution trying to "regulate the economy."

yes yes yes, i know the idea flies in the face of your adolescent viewpoints, but the fact of the matter is that markets need regulating in an environment that is a slave to self interest. these systems and structures didnt just appear one day, they came about because they were needed and are a logical part of modern capitalism.

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Originally posted by Capitalizt People should be left as free as possible.

this has nothing to do with freedom.

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Originally posted by Capitalizt Secondly, we will never know how an alternate system will do because competition is illegal. If the fed is keeping it's books in order and being responsible with our currency, they should have nothing to fear from a little competition. We don't need to abolish central banks. Just legalize alternatives (competing currencies, etc) and let the people decide.

this has nothing to do with "competition". the fed isn't a business in the traditional sense of the word, any profits the fed makes is reimbursed to the government. they're not in it for the money, they are in it to manage monetary policy for the good of the nation. im no economist but i think you really misinterpret how central banks work.

we'll never know what an alernative system will do because there is no valid alternative system.

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