Dear Harold,
On Tuesday the 17th March 2009, Professor Kevin Dowd gave the Second
Chris R. Tame Memorial Lecture at the National Liberal Club in London.
His subject was "Lessons from the Financial Crisis: A Libertarian
Perspective".
You can see the video of this lecture at:
http://video.google.co.uk/videoplay?docid=2495820480786986515
Here is an account of the lecture, written by Jonathan Pearce on the
Samizdata Blog:
The Kevin Dowd lecture on free banking
Johnathan Pearce (London) Globalization/economics
"As promised, I have some thoughts following on from the talk given by
Kevin Dowd, a professor at the Nottingham University Business School and
a noted advocate of what is called "free banking". He gave his talk at
the annual Chris R. Tame Memorial Lecture as hosted by the Libertarian
Alliance. (The LA was founded by Mr Tame, who died three years ago at a
distressingly young age after losing a battle against cancer.)
"Professor Dowd covered some territory that is already pretty
well-trodden ground for Samizdata's regular readers, so I will skim over
the part of the lecture that focused on the damage done by unwisely loose
monetary policy of state organisations such as central banks, or the
moral-hazard engines of tax bailouts for banks.
"Instead, I want to focus on those aspects of Professor Dowd's talk in
which he tried to sketch out what a laissez faire, free market banking
system would actually look like. This is essential; a great deal of
commentary so far - while it is very good - has mainly focused on how we
got into this fix and why the fixes being attempted by Western
governments are proving so stupid. As PJ Rourke said recently, the
attempt by the Obama administration to flood the market with cheap money
as a "solution" is a bit like the case of when your Dad has burned the
dinner, so you ask the dog to cook it instead. No, what Professor Dowd
did this week was lay out three broad areas for reform.
"Firstly, he says we should remove many of the existing regulations,
government-mandated deposit protection schemes, bank capital adequacy
rules and other restrictions on what banks can do and how they work. For
example, government support for depositors - who are also effectively
creditors to their banks - means that there is a moral hazard problem;
the banks have less incentive than they would otherwise have to act
prudently if there is always the government, acting like a sort of 7th
Cavalry, able to ride to the rescue. That has to go. Professor Dowd also
wants to hack away at the morass of rules and regulations that violate
client/banker confidentiality, or those rules that force banks to lend to
people, as is the case in the US, where banks are forced to lend to
certain groups or else violate laws about racial discrimination, etc.
"Secondly, Professor Dowd addresses the issue of letting banks fail. At
the present, policymakers adopt a sort of "too big to fail" doctrine;
this doctrine, while not explicitly laid down in any form of statute or
operating manual - as far as I know - is a rule that says that some
institutions are so large, and the attendant systemic risks posed by
their failure so catastrophic, that they should not be allowed to go out
of business. The problem of course is that this rule of thumb is often
arbitrary and subject to political horse-trading. To wit: the US
government's decision to let Lehman Brothers go down last September,
followed shortly by the $85 billion bailout for AIG, showed a total lack
of clear message to the markets, and to bankers, one way or the other.
"Professor Dowd believes that banks should be allowed to fail and
furthermore, if modern limited liability laws were weakened or abolished
completely, then such massive conglomerates would be economically and
legally unsustainable in the first place.
"As a result, banks would probably be smaller, and there would be a lot
more of them, so the failure of any individual bank, while unpleasant for
some, would not wreck the system as could happen if a mega-bank goes
wrong. Also, instead of wide-ranging and hideously expensive bailouts,
Professor Dowd favours putting banks into administration, writing down,
in full, the value of their loan books, and getting depositors to
exchange their status as creditors for that of an equity holder.
"This "debt for equity swap" arrangement, while it would anger depositors
who lose money, would come with the promise, and hopefully the reality,
of a rise in the capital value of their equity stake in a bank if
confidence returns to a more robust banking sector, as the debt/equity
swap recapitalisation is designed to achieve. And of course banks are
entirely free, as are their clients, to take out deposit insurance in a
commercial market.
"The third leg of his solution is broader, and more long-term, although
there are some immediate measures that could be taken. Professor Dowd is
against fiat money - money not backed by actual commodities or real
assets of any kind - and in moving to a commodity-based/asset-based
system. He is not, by the way, necessarily arguing for the gold standard
or some gold-based system, although he points out that in the 200 years
up to the First World War, the UK enjoyed a remarkable period of stable
prices, with the odd blip. What he is arguing, however, is that the
message on a banknote that says "I promise to pay the bearer on demand
the sum of X" should be an enforceable legal contract, not what amounts
to the jeering joke that it now is.
"In the subsequent Q&A session afterwards, one person made the excellent
point that a simple reform would be to ban legal tender laws. Such laws
currently require a person to accept as legal tender a currency that the
state has mandated for a particular region. Instead, if a person wants to
refuse to accept sterling and only wants to accept dollars, euros or
Swiss francs instead, he can do so. He can also choose to trade in
whatever medium of exchange he wants, and with whoever wants to accept it.
"Inevitable questions arise. First of all, in thinking about free
banking, private monetary systems and the like, the first objection will
be is that this will be very messy; there has been no real experience of
such monetary systems in the past, etc.
"But this is incorrect. Free banking, as defined by Professor Dowd, in
fact operated in Scotland, for example, up until legal changes in 1845.
South of the River Tweed, the English system had operated under what
amounted to state-controlled banking under the Bank of England, set up in
1692. In the 18th and 19th centuries, England saw a number of booms and
recessions, such as the 1840s railway boom and the downturn of 1870s. One
should remember that the BoE was established by the-then post-Glorious
Revolution government as a way to raise money for wars without having to
keep asking a fractious public for taxes, and without having to borrow at
expensive rates in the money markets. N.A.M. Roger has explained this
issue of financing for naval warfare brilliantly. Indeed, it reminds us
that state monopoly money systems typically arose in order to finance
wars, while the welfarist aspects came later.
"There are also current, not just old, examples of banks that operate
with unlimited liability partnership structures - Pictet, the Swiss bank,
and Lombard Odier, are just two examples. There are dozens of such banks
using these structures in Switzerland and by no coincidence; they have
avoided the worst of the credit crunch. These banks are typically for the
rich but it seems to me that there is no logical reason why such an
approach could not be used more widely. So there are different ways of
doing banking right now. And do not forget the humble UK mutual building
society: they have their limitations, but as a business model they had a
lot to recommend them.
"Another objection might be that the debt-for-equity swap way of
restructuring failed banks under bankruptcy protection laws would be
politically unfeasible, since depositors would be hit. I understand that,
but Professor Dowd is not trying to imagine what sort of reforms would
appeal to David Cameron, say, but what sort of reforms would be workable.
That is a rather massive difference, as I am sure readers will agree.
"Another objection is that "real money", as opposed to the state-arranged
fiction that we have now, cannot work for as long as governments take
such a large slice of GDP. That is probably correct. One of the reasons
why so many advocates of Big Government regard "gold bugs" or free
bankers as dangerous nutters is that they realise their welfare states
would be unworkable under such monetary arrangements. The Ponzi schemes
of most welfare states would not be able to function. Even so, as long as
governments retain the ability to tax, they have the ability to raise
debt in the financial markets in the knowledge that their collateral can
be collected at the point of a gun. But a real-money system still hampers
such activity considerably.
"In the longest run, the best hope of avoiding such financial disasters
in the future is to wean the public and policymakers off the seductive
delusion that one can create wealth by turning on a printing press.
Sooner or later, if you try to fake reality, it bites you hard in the
arse. Of course, it is a mark of the kind of man Professor Dowd is that
he is too polite to put it as bluntly as that.
"I await comments!"
--
Sean Gabb
Director, The Libertarian Alliance
sean@libertarian.co.uk
Tel: 07956 472 199
Skype Username: seangabb
http://www.libertarian.co.uk
http://www.seangabb.co.uk
http://www.hampdenpress.co.uk
http://libertarianalliance.wordpress.com
Linkedin Details: http://www.linkedin.com/in/seangabb
Wikipedia Entry: http://tinyurl.com/23jvoz
FREE download of my book - "Cultural Revolution, Culture War: How
Conservatives Lost England, and How to Get It Back" -
http://tinyurl.com/34e2o3
On Tuesday the 17th March 2009, Professor Kevin Dowd gave the Second
Chris R. Tame Memorial Lecture at the National Liberal Club in London.
His subject was "Lessons from the Financial Crisis: A Libertarian
Perspective".
You can see the video of this lecture at:
http://video.google.co.uk/videoplay?docid=2495820480786986515
Here is an account of the lecture, written by Jonathan Pearce on the
Samizdata Blog:
The Kevin Dowd lecture on free banking
Johnathan Pearce (London) Globalization/economics
"As promised, I have some thoughts following on from the talk given by
Kevin Dowd, a professor at the Nottingham University Business School and
a noted advocate of what is called "free banking". He gave his talk at
the annual Chris R. Tame Memorial Lecture as hosted by the Libertarian
Alliance. (The LA was founded by Mr Tame, who died three years ago at a
distressingly young age after losing a battle against cancer.)
"Professor Dowd covered some territory that is already pretty
well-trodden ground for Samizdata's regular readers, so I will skim over
the part of the lecture that focused on the damage done by unwisely loose
monetary policy of state organisations such as central banks, or the
moral-hazard engines of tax bailouts for banks.
"Instead, I want to focus on those aspects of Professor Dowd's talk in
which he tried to sketch out what a laissez faire, free market banking
system would actually look like. This is essential; a great deal of
commentary so far - while it is very good - has mainly focused on how we
got into this fix and why the fixes being attempted by Western
governments are proving so stupid. As PJ Rourke said recently, the
attempt by the Obama administration to flood the market with cheap money
as a "solution" is a bit like the case of when your Dad has burned the
dinner, so you ask the dog to cook it instead. No, what Professor Dowd
did this week was lay out three broad areas for reform.
"Firstly, he says we should remove many of the existing regulations,
government-mandated deposit protection schemes, bank capital adequacy
rules and other restrictions on what banks can do and how they work. For
example, government support for depositors - who are also effectively
creditors to their banks - means that there is a moral hazard problem;
the banks have less incentive than they would otherwise have to act
prudently if there is always the government, acting like a sort of 7th
Cavalry, able to ride to the rescue. That has to go. Professor Dowd also
wants to hack away at the morass of rules and regulations that violate
client/banker confidentiality, or those rules that force banks to lend to
people, as is the case in the US, where banks are forced to lend to
certain groups or else violate laws about racial discrimination, etc.
"Secondly, Professor Dowd addresses the issue of letting banks fail. At
the present, policymakers adopt a sort of "too big to fail" doctrine;
this doctrine, while not explicitly laid down in any form of statute or
operating manual - as far as I know - is a rule that says that some
institutions are so large, and the attendant systemic risks posed by
their failure so catastrophic, that they should not be allowed to go out
of business. The problem of course is that this rule of thumb is often
arbitrary and subject to political horse-trading. To wit: the US
government's decision to let Lehman Brothers go down last September,
followed shortly by the $85 billion bailout for AIG, showed a total lack
of clear message to the markets, and to bankers, one way or the other.
"Professor Dowd believes that banks should be allowed to fail and
furthermore, if modern limited liability laws were weakened or abolished
completely, then such massive conglomerates would be economically and
legally unsustainable in the first place.
"As a result, banks would probably be smaller, and there would be a lot
more of them, so the failure of any individual bank, while unpleasant for
some, would not wreck the system as could happen if a mega-bank goes
wrong. Also, instead of wide-ranging and hideously expensive bailouts,
Professor Dowd favours putting banks into administration, writing down,
in full, the value of their loan books, and getting depositors to
exchange their status as creditors for that of an equity holder.
"This "debt for equity swap" arrangement, while it would anger depositors
who lose money, would come with the promise, and hopefully the reality,
of a rise in the capital value of their equity stake in a bank if
confidence returns to a more robust banking sector, as the debt/equity
swap recapitalisation is designed to achieve. And of course banks are
entirely free, as are their clients, to take out deposit insurance in a
commercial market.
"The third leg of his solution is broader, and more long-term, although
there are some immediate measures that could be taken. Professor Dowd is
against fiat money - money not backed by actual commodities or real
assets of any kind - and in moving to a commodity-based/asset-based
system. He is not, by the way, necessarily arguing for the gold standard
or some gold-based system, although he points out that in the 200 years
up to the First World War, the UK enjoyed a remarkable period of stable
prices, with the odd blip. What he is arguing, however, is that the
message on a banknote that says "I promise to pay the bearer on demand
the sum of X" should be an enforceable legal contract, not what amounts
to the jeering joke that it now is.
"In the subsequent Q&A session afterwards, one person made the excellent
point that a simple reform would be to ban legal tender laws. Such laws
currently require a person to accept as legal tender a currency that the
state has mandated for a particular region. Instead, if a person wants to
refuse to accept sterling and only wants to accept dollars, euros or
Swiss francs instead, he can do so. He can also choose to trade in
whatever medium of exchange he wants, and with whoever wants to accept it.
"Inevitable questions arise. First of all, in thinking about free
banking, private monetary systems and the like, the first objection will
be is that this will be very messy; there has been no real experience of
such monetary systems in the past, etc.
"But this is incorrect. Free banking, as defined by Professor Dowd, in
fact operated in Scotland, for example, up until legal changes in 1845.
South of the River Tweed, the English system had operated under what
amounted to state-controlled banking under the Bank of England, set up in
1692. In the 18th and 19th centuries, England saw a number of booms and
recessions, such as the 1840s railway boom and the downturn of 1870s. One
should remember that the BoE was established by the-then post-Glorious
Revolution government as a way to raise money for wars without having to
keep asking a fractious public for taxes, and without having to borrow at
expensive rates in the money markets. N.A.M. Roger has explained this
issue of financing for naval warfare brilliantly. Indeed, it reminds us
that state monopoly money systems typically arose in order to finance
wars, while the welfarist aspects came later.
"There are also current, not just old, examples of banks that operate
with unlimited liability partnership structures - Pictet, the Swiss bank,
and Lombard Odier, are just two examples. There are dozens of such banks
using these structures in Switzerland and by no coincidence; they have
avoided the worst of the credit crunch. These banks are typically for the
rich but it seems to me that there is no logical reason why such an
approach could not be used more widely. So there are different ways of
doing banking right now. And do not forget the humble UK mutual building
society: they have their limitations, but as a business model they had a
lot to recommend them.
"Another objection might be that the debt-for-equity swap way of
restructuring failed banks under bankruptcy protection laws would be
politically unfeasible, since depositors would be hit. I understand that,
but Professor Dowd is not trying to imagine what sort of reforms would
appeal to David Cameron, say, but what sort of reforms would be workable.
That is a rather massive difference, as I am sure readers will agree.
"Another objection is that "real money", as opposed to the state-arranged
fiction that we have now, cannot work for as long as governments take
such a large slice of GDP. That is probably correct. One of the reasons
why so many advocates of Big Government regard "gold bugs" or free
bankers as dangerous nutters is that they realise their welfare states
would be unworkable under such monetary arrangements. The Ponzi schemes
of most welfare states would not be able to function. Even so, as long as
governments retain the ability to tax, they have the ability to raise
debt in the financial markets in the knowledge that their collateral can
be collected at the point of a gun. But a real-money system still hampers
such activity considerably.
"In the longest run, the best hope of avoiding such financial disasters
in the future is to wean the public and policymakers off the seductive
delusion that one can create wealth by turning on a printing press.
Sooner or later, if you try to fake reality, it bites you hard in the
arse. Of course, it is a mark of the kind of man Professor Dowd is that
he is too polite to put it as bluntly as that.
"I await comments!"
--
Sean Gabb
Director, The Libertarian Alliance
sean@libertarian.co.uk
Tel: 07956 472 199
Skype Username: seangabb
http://www.libertarian.co.uk
http://www.seangabb.co.uk
http://www.hampdenpress.co.uk
http://libertarianalliance.wordpress.com
Linkedin Details: http://www.linkedin.com/in/seangabb
Wikipedia Entry: http://tinyurl.com/23jvoz
FREE download of my book - "Cultural Revolution, Culture War: How
Conservatives Lost England, and How to Get It Back" -
http://tinyurl.com/34e2o3
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