Re:Follow the money: Apple vs. the FBI
by pdonis on Monday March 28, 2016 @11:32PM
(#11379312)
> We haven't had another great depression
But we did have one, and it happened almost two decades after the Federal Reserve was put in place.
Also, I think the situation in 2008 qualifies as a "meltdown", even though it was not as severe as the Great Depression. It was just a meltdown in a reactor that had had some additional backup safety features put in place since the last one.
> That argument only works if you think the banks don't make their own assessment on the risk of individuals and whether they are even going to lend.
Of course banks are going to do that, but I don't see how that invalidates what I'm saying. In a banking system where there is no FRB and no fiat money, there is no way to expand the money supply at will to provide enough for everyone who wants a loan. So there will be more potential borrowers than there are real assets to lend to them. Obviously banks ultimately get to choose who they will lend to, but a key component of their decision is going to be what interest rate various borrowers are willing to pay. A rational bank will choose whichever set of borrowers will maximize its expected return, adjusted for risk, and the higher the rate a borrower is willing to pay, the more likely it is that that borrower will be in the set that maximizes the bank's expected return. See further comments below.
> As it is now, different people and different ventures get different rates because the risk is not the same.
Sure, and that would still be true in the hypothetical system I was describing; a borrower who was more risky would have to be willing to pay a higher interest rate. And a rational borrower would only be willing to do that if his expected return, adjusted for risk, was high enough to make it worth paying the higher rate. So there would be risk assessment being done on both sides. In other words, there would be a functioning price mechanism driven by supply and demand.
> The Fed provides liquidity, which makes the market more efficient, and uses rates to simulate supply. The banks provide market pricing by assessing borrowers and additionally tweaking the interest rate up or down, further simulating supply.
Yes--"simulating" supply. But why does supply have to be "simulated"? Because the usual price mechanism has been broken. In a market with a functioning price mechanism, nobody has to "simulate" anything.
> if we don't attempt to steer in any way, for all we know we'll just start going in circles
You're assuming that the entire economy has to be "steered" in a single direction. But an economy is not a monolith; it's billions of people each with their own needs and wants, trying to improve their condition through specialization and trade. Why does it have to be "steered"?
But we did have one, and it happened almost two decades after the Federal Reserve was put in place.
Also, I think the situation in 2008 qualifies as a "meltdown", even though it was not as severe as the Great Depression. It was just a meltdown in a reactor that had had some additional backup safety features put in place since the last one.
> That argument only works if you think the banks don't make their own assessment on the risk of individuals and whether they are even going to lend.
Of course banks are going to do that, but I don't see how that invalidates what I'm saying. In a banking system where there is no FRB and no fiat money, there is no way to expand the money supply at will to provide enough for everyone who wants a loan. So there will be more potential borrowers than there are real assets to lend to them. Obviously banks ultimately get to choose who they will lend to, but a key component of their decision is going to be what interest rate various borrowers are willing to pay. A rational bank will choose whichever set of borrowers will maximize its expected return, adjusted for risk, and the higher the rate a borrower is willing to pay, the more likely it is that that borrower will be in the set that maximizes the bank's expected return. See further comments below.
> As it is now, different people and different ventures get different rates because the risk is not the same.
Sure, and that would still be true in the hypothetical system I was describing; a borrower who was more risky would have to be willing to pay a higher interest rate. And a rational borrower would only be willing to do that if his expected return, adjusted for risk, was high enough to make it worth paying the higher rate. So there would be risk assessment being done on both sides. In other words, there would be a functioning price mechanism driven by supply and demand.
> The Fed provides liquidity, which makes the market more efficient, and uses rates to simulate supply. The banks provide market pricing by assessing borrowers and additionally tweaking the interest rate up or down, further simulating supply.
Yes--"simulating" supply. But why does supply have to be "simulated"? Because the usual price mechanism has been broken. In a market with a functioning price mechanism, nobody has to "simulate" anything.
> if we don't attempt to steer in any way, for all we know we'll just start going in circles
You're assuming that the entire economy has to be "steered" in a single direction. But an economy is not a monolith; it's billions of people each with their own needs and wants, trying to improve their condition through specialization and trade. Why does it have to be "steered"?