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The end of the law is not to abolish or restrain, but to preserve and
enlarge freedom. For in all the states of created beings capable of laws,
where there is no law, there is no freedom. For liberty is to be free from
restraint and violence from others; which cannot be where there is no law:
and is not, as we are told, a liberty for every man to do what he lists.
~ Second Treatise on Government, John Locke
(1690)
With a certain weary inevitability, the cries of
pain emanating from those seeing their aspirations ground to dust amid the
current upheaval in financial markets have been interspersed with the shrill
descant of those all too eager to proclaim a "crisis of
capitalism."
The implication that it is now time for those
far-seeing, disinterested Solons in government to
step forward once more and to put right what mere "market forces"
have again so woefully failed to correct.
High finance, we are told, has become a business of
"privatizing profit and socializing losses," a thoroughly
inequitable mechanism which the state now has a duty to redress by erecting a
whole new framework of Do’s and Don’ts in order to rein in the 21st
century’s version of the Robber Barons.
With a breathtaking degree of effrontery, we are
even being asked to take seriously the idea that the very institution which
has been one of the most culpable in laying the groundwork for the disaster
– the Federal Reserve of pre-ordained, baby-step rate rises and
skyscraper-ledge rate reductions – should, henceforth, be accorded
unparalleled powers of oversight and direction over every facet of our everyday
business!
While the initial diagnosis is fairly
unexceptionable – since the game of
"heads-I-win-tails-you-lose" is precisely what financial market
institutions have long been conditioned to play – the corollary is not.
Nor is this just because politically opportune Witchfinders
General tend to be more guilty of fighting the last war than even the most
hidebound of generals; nor because the analogy is decidedly unfair to the
original Robber Barons, many of whom grew rich by creating genuine wealth and
not simply by living, often obscenely high on the hog, off that generated by
others.
No, the whole concept of a "market
failure" is a hoary old canard which it is vitally
important to dispel for fear that an eager Leviathan will again exploit
its subjects’ understandable present anxieties in order permanently to
increase its power over their lives and liberties.
If the basic tenets of free-market
"capitalism" include the full recognition of property rights, the
sanctity of voluntary contract, and the relegation of government to a
minimalist role as arbiter – and, reluctantly, as enforcer – of
last resort, it can hardly be argued that we have ever actually lived under
such a regime.
Indeed, the roots of today’s woes – as
of those suffered innumerable times in the past – lie not in whether
this or that regulation was sufficiently well-crafted or implemented, but
rather go deeper into the issue of whether banking as currently instituted is
– in any way, shape, or form – an activity consonant with such
principles.
If the very act of asking such a question sounds
insupportably radical to modern ears, we would say, in our defence,
that we are only following in an honourable, republican tradition
which stretches all the way from Jefferson and Jackson to Ron Paul.
Firstly, the ability of banks to create money simply
by making a book entry in favour of a borrower, without first asking whether
anyone else would be willing to place their previously earned cash at the
latter’s disposal, is nothing other than a legalized act of counterfeiting
or, if you prefer, an act of "watering" the stock of claims upon
the totality of private property; of diluting the existing
"shareholders" rights to the social product without their prior
consent.
That such a practice of issuing monetary substitutes
willy-nilly is the fons et origo of inflation (at least in countries where
similarly forcing government liabilities into circulation does not
predominate) should need little explanation. What might bear emphasis,
though, is that if one considers the state’s indulgence in such crude
coin-clipping as a "tax" – i.e., as a legal, if unethical
(and often unconstitutional), act of expropriation, one
is forced to conclude that the banking equivalent is nothing less than an unauthorised
expropriation – in other words, a theft.
Such a crime is no less worthy of outrage simply
because it has long been officially sanctioned, even encouraged. Nor is it
pardonable because there is no one, single, identifiable victim, for the
truth is that we all suffer from such depredations – or, at
least, all of us excluding the initial borrower (able to spend the new money
before the rest of us realize it should buy fewer goods than it does) and the
issuing bankers themselves.
Secondly, the fact that depositors are led to believe
that they do not relinquish any rights over the funds they entrust to the
banks – when, in fact, they are no more than the unsecured creditors of
a commingled holding – leads to the reprehensible business of promising
demand account customers instant access to "their" cash, while
being fully aware that such a promise is wholly fraudulent since the bulk of
this "cash" will be rapidly deployed to "fund" any number
of the long term, potentially illiquid ventures being undertaken by the
bank’s lending department.
That this "cash" can therefore only be
repaid by luring other dupes into the scheme means that the whole businesses
has its foundations in a further falsehood, one which seeks to make profit
from what is little more than a typically lucrative, if undeclared, actuarial
subterfuge.
The fact is that, by some twisted thread of history,
banks have been accorded the unjust privilege of being allowed to ignore the
absolutely crucial lines of demarcation between four, wholly beneficial, but
utterly distinct, roles.
Monies given into their possession in their guise as
"giro," or transmission, agents, or as the custodians of what are,
today, largely virtual safety deposit-boxes, are one thing: quite
another are the resources entrusted to them in their equally laudable
function as asset managers whose job is profitably to invest their
customers’ term deposits in a range of what are presumed to be
creditworthy ventures.
A third – individually irreproachable –
business is that of facilitating the raising and transfer of capital between
customers; mobilizing savings, large and small, in order to fund
entrepreneurial attempts at wealth creation, whether through arranging trade
finance or by bringing issues to the bond and stock markets.
Finally, there is no intrinsic demerit to bankers
speculating either with their own capital or, indeed, with that of those
clients who are fully cognizant of the fact that their money will be used to
bankroll an attempt to outguess other traders and to pre-empt changes in the
valuation of securities, currencies, or commodities.
The underlying problem is that banks have been
granted the right indiscriminately to mix all four of these often
incompatible activities. This gives rise to an unhealthy promiscuity, corrupting
their fiduciary duties, introducing irreconcilable conflicts of interest, and
opening up countless opportunities for a wholly legal embezzlement which has
a small, but significant, chance of going horribly awry – as
today’s events have once more forcibly brought home.
Moreover, this is a world in which banking
"capital" is a veritable Cheshire Cat of insubstantiality (since
banks are unique in having little but their own debauched "money"
on both sides of the balance sheet). That "capital" is most easily
increased by means of the notional profit booked on a deal – a profit
which is often no more than a deliberately optimistic, upfront reckoning of
many future years’ prospective income and, so, is one which is subject
to a whole array of possibly unjustified, "modelling" assumptions.
As ethereal as this gain might turn out to be, the
fact is that, for as long as this fiction can be maintained, it strongly
induces banks to lend and re-lend against the collateral afforded by the very
same assets which have most appreciated under the influence of their original
loans, thus ensuring that they re-attain the maximum permissible degree of
leverage and hence most flatter their returns on equity.
This powerful positive feedback – one whose
underlying fuel is the banks’ unnatural ability to create money, simply
by granting loans – means that they are rewarded (at least while things
are in the upswing) for reinforcing any resulting instabilities. Thus, they
frequently find themselves turning the most innocuous of convective puffs
into a raging hurricane of wasteful malinvestment.
What this implies is that fractional reserve banking
not only gives rise to a fall in the value of money, per se, but it is
also the well-spring of that thoroughly avoidable and widely destructive
bipolar disorder we know as the business cycle – i.e., the boom and the
bust itself – and so gives the main impulse to those periodic,
lemming-like waves of folly which so mar the history of material progress.
While this indictment would seem to suggest that
– as those now waving pitchforks and mattocks on the intersections of
Wall St. are noisily demanding – banks should be subject to an
unusually strict scrutiny in place of the rather lax regime prevalent of
late, the truth is that no special rules whatsoever are necessary: on the
contrary, all that is needed is for the same basic principles of law to apply
to banks as to any other commercial enterprise, in a manner that they have
never done heretofore.
Those who would deny the validity of this last
contention might reflect upon the fact that the very existence of legal
tender laws, government-administered deposit insurance schemes, and – a
fortiori – public sector "lenders of last resort" reveals
the inherent invalidity of the banks’ logical, economic, and
jurisprudential position, despite centuries of positivist legal precedent and
state-sanctioned privilege.
It should be obvious by now that none of this has
anything to do with "capitalism," properly defined, but rather is
something more common to the practice of rent-seeking despots – whether
those of the ancien régime,
or of our modern elective dictatorships.
Without the honest money which presupposes a system
of 100% specie reserve, free banking with no second recourse – should
bankruptcy still occur – to its victims’ property via forced
taxpayer restitution or compensatory central bank inflation, there can be no
truly free market and hence no "capitalism" to let us down so
badly. Instead, what we are suffering is yet another demonstration of the
perils of state intrusion into the sphere of private relations, with all the
perverse disincentives it entails and with all the faulty signals it gives
off to businessmen and consumers alike.
In fine, what we are having to endure is the latest example
of the many crises brought on by financial corporatism – a sorry
situation which will neither be remedied nor prevented from re-occurring in
future by succumbing to the panic and taking measures which will only serve
to strengthen the stranglehold already exerted upon our lives by a voracious,
interventionist bureaucracy; measures which would only come at the expense of
that genuine freeing of the economic realm which would most rapidly heal our
present hurts and so assure our continuing prosperity.
Sean
Corrigan
Diapason Commodities Management
Sean Corrigan
is Chief Investment Strategist at Diapason Commodities Management (Lausanne
and London)
Copyright © 2006 - Copyright © Diapason
Commodities Management - Sean Corrigan
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situation. The opinions expressed herein are those of the author and are subject to change without notice.
The information herein may become outdated and there is no obligation to
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