Anarchy on the Field

An interesting post at Samizdata: sports as anarchy.
The Organization of the Political Means

Wandering the blog world, came across an interesting blog item. The author is an Iraqi who appear to have been there through the recent unpleasantness. This post is dated Aug 30:
The looting and killing of today has changed from the looting and killing in April. In April, it was quite random. Criminals were working alone. Now they're more organized than the CPA (Coalition Provisional Authority) and the troops combined. No one works alone anymore- they've created gangs and armed militias. They pull up to houses in minivans and SUVs, armed with machineguns and sometimes grenades. They barge into the house and demand money and gold. If they don't find enough, they abduct a child or female and ask for ransom. Sometimes the whole family is killed- sometimes only the male members of the family are killed.

For a while, the men in certain areas began arranging "lookouts". They would gather, every 6 or 7 guys, in a street, armed with Klashnikovs, and watch out for the whole area. They would stop strange cars and ask them what family they were there to visit. Hundreds of looters were caught that way- we actually felt safe for a brief period. Then the American armored cars started patrolling the safer residential areas, ordering the men off the streets- telling them that if they were seen carrying a weapon, they would be treated as criminals.
This quote is almost too good to be true for an anarchist. Anarchy releases criminal elements (the unorganized political means). This is opposed by the armed people, which works: "we actually felt safe". But the state interposes; it will not permit any challenge to its monopoly, regardless of the price that the peons pay.
Gay Marriage: Politics

Meanwhile, there's an interesting aspect to the developing story of gay rights that I haven't seen talked about yet, so I thought I'd bring it up in case you want to think about it. And that is, that outside of some fairly small (but important) issues, gays on the whole are in many ways a natural Republican constituency. They're on average white, educated, high income. Of course, the Republicans will never give up the religious right (~15%) for gays (~3%). That's simple math. But if the political party is more or less impotent to legislate, then both factions can live under the tent. This is the case for, i.e. abortion: because of Roe v. Wade, the ability of the party to make serious change is null. Thus there can be prochoice Republicans - it's an issue, but not a party-central one.

The Republicans can benefit from gay marriage, assuming that they don't do anything in the coming backlash that locks them in as the antigay party. If the courts manage to legislate gay marriage, and there is not the democratic wherewithal from the legislative branches to stop it, then we may well see gays abandon the Democrats in the coming years.

If, on the other hand, the Republicans manage to pass an antigay Constitutional amendment, then they will alienate gays more or less permanently. I wonder if Rove is working this angle yet? Gays might be secured to the Republicans in a matter of 10 or 20 years. It will take generations for Hispanics to go Republican, if they ever do, seeing as they are already on the transfer-payment gravy train.
Gay Marriage: Woohoo!

A great decision in Mass. Garth writes a good bit about it.

I know there are a few libertarians that oppose it. The argument can be made: state-sponsored marriage gives unwarranted privilege (which is true), such as the privilege to force an insurer to cover you simply because they cover the spouse. Expanding marriage expands this rights violation. But that must be weighed against what marriage offers: some of the most fundamental rights that humans have. The right to proxy decisions. The right not to be forced to do certain things against your will (i.e., to testify against a loved one). And the right to control your own property: to have less taxes stolen from your income, or as inheritance. These and many other aspects of marriage are freedoms that everyone ought to have; expanding them to allow gays to have them too isn't much, but it is something.

Of course, the symbolic aspect of this decision is huge. It won't have much effect on the real world - gays are a small minority, after all. But it's a huge win for human liberty.

Matt Taibbi writes that America needs to get tough in Iraq:
The spectacle of last week’s embarrassing events ought to send shivers up the spine of anyone who derives comfort from our great power status. In case you missed it, the U.S. responded to a series of suicide attacks with a volley of deranged, incoherent strikes at empty buildings. In particular, the U.S. rocketed an abandoned dye plant at the edge of Baghdad, making sure that it was empty first, and not even destroying the structure but simply shooting it full of holes to render it dysfunctional. It had not been functioning anyway. The "new ‘get tough’ policy" (what was it before?), code-named Iron Hammer, was designed, allied commanders told reporters, to "send a message." Here is how the AP described that "message":

On Thursday, U.S. soldiers with loudspeakers drove through the neighborhood warning occupants to leave before the impending strike. Later, at least nine large-caliber shells were fired into the empty plant, heavily damaging the structure. The tactical goal was not immediately clear since this sprawling metropolis of 5 million people has other sites to launch attacks.

That last sentence, with the "sprawling metropolis" line, is about as sarcastic as wire service reporters get. Since the collapse of the Soviet Union, the AP has reigned as humanity’s most impenetrable fortress of unfunniness. So when even they are laughing at you, you know you have problems.
Economics is not Science

Last week Garth over at America's Outback posted some criticism of Austrian economics. I've been wanting to respond to it, but I haven't made the time. Well, enough of that - do what you can.

I'll take the last question first, as I think it is illuminating:
Austrians, were is all the math to back up your views? You seem light on models. So far my reading has seemed more like philosophy than economics.
Yes, precisely. In the Austrian view, economic knowledge can only come from two places: reason and introspection. This is a radically different methodology (they call it praexology) than mainstream economics. On the face of it, it is crazy-talk. And I don't completely accept that one should do completely without data, models, and all the other physics envy. Still, when you think about it there is something to recommend it. People's tastes and desires are not open to our examination; indeed they are impossible to measure in any absolute way. We can get relative information about people's tastes (via revealed preference: "I'll trade you the orange for the apple."), but we can never get any absolute information. ("I like the orange three utils more than the apple.") It is hard to get honest information from people - only by watching them act with real money (goods, value in general) on the line, can we see what we think are honest actions. Furthermore, people are not always rational, either because of lack of information, because they are stupid, because we have built-in irrationality (that we can in theory characterize), or, in the worst case, just because we are ornery. Building any theory based on this slippery substrate is difficult at best.

I think that trying to test theory against reality is, even if extremely difficult, worth trying. But there always comes the problem of how to interpret what you find. History is problematic that way, because it only happens once. We can't rerun it, varying the conditions each time, the way we'd like to (from the scientific POV). Ultimately, I find it much more satisfying to look at things like money from the Austrian standpoint than to try to figure out what is going using econometric data. Malinvestment is a logical consequence of money creation. That much is true in all possible worlds (given certain assumptions). How large of an effect it has - that, theory tells us nothing about. It is not logically safe to identify any feature of the real world with the theory. In particular it is not sound to say that the predicted "business cycle" is in fact the business cycle that econometric data see. Still, that is my odds-on bet. But that's going to be an awfully hard thing to prove.

Proving causation in the real world in something as large as the macro economy is hopeless. That's why we need economic theory, and why praexology makes a certain kind of sense. So, to take one example, there's there issue of who to blame for the 90's tech bubble:
Where do I lay the blame? The private sector’s misallocation of capital as was clearly evidenced by massive investment in firms whose P/E ratios were infinite. Remember the “new paradigm” where old measures of value were discounted, cash flow was considered a meaningless concept, and the Dow was going to 36,000? Fed policy did not create any of this, a mania did.
Yes, but who created the mania? Perhaps central banking did; perhaps not. We can't tell. What we do know is that Greenspan et al were creating a boatload of money. Connecting the two we simply cannot do with any logical rigor.

As an Austrian, I look at it this way. A shady character was seen lighting a match in the vicinity of a building that later burned down. Was it arson, or just irrational flame exuberance? In the case of the economy, we know that the Fed was (and is) creating lots of money, which must cause malinvestment And we know there was a bubble. I choose to connect the two. It's not a hard connection to make, just hard to prove anything about.

But let's run with it, anyway.
The argument... is that economic recessions; the recent bubble in tech stocks; and all manner of horrors are the fault of the Federal Reserve making interest rates artificially low thus encouraging mal-investment. Presumably this all has to do with the failings of “fiat money” and the inefficiency of the public sector in comparison to the private sector in allocating capital.
The banking system is not exactly public, nor is it completely private. I would not place the blame for the malinvestment on that: it's not that there is necessarily a certain amount of bungling of investments. Rather, it is that there is too much investment. No matter who is running it, public or private, you simple cannot channel more money into capital goods than the market wants, without creating a lot of useless factories. That's what the theory says: the interest rate has a communicative function. It signals entrepreneurs as to the overall level of future demand. If you communicate massive future demand falsely, then you will induce a lot of people to borrow and build stuff that won't actually be fully utilized in the future.

Here’s what seems so weak about the Austrian theory of the business cycle: it assumes that businesses, entrepreneurs, financiers, and other investors take their cues solely from current Fed interest rate policy and without an ability to forecast a future realignment of those interest rates.
No. This reverses cause and effect. The interest rate does not cause people to borrow money. Rather, it is people borrowing money that creates the interest rate. It is a statistical construct; the reality is a million loans of various sizes, rates, etc. The Fed is shoveling money into banks (who loan it out, multiplied); it is the finding of enough borrowers that affect the interest rate. The point here is, people will be found. Yes, perhaps some or even many in the market anticipate higher interest rates. Perhaps everyone smart does. So what? The bankers will keep lowering the interest rate until they are fully loaned out. They do this because their license to print money is conditional: they only get free money as loans, not outright. If they have to find shady borrowers to take the money, they will. In fact the more "smart entrepreneurs" there are, that disbelieve the interest rate, the worse the resulting borrowers will be. That is the problem.

It is odd that the theory ... seems to assume that all long-run decisions are based on short-term, government interest rates when in fact (and I know this from a practitioner’s perspective) long-term investments are made based on the credit markets long-term interest rates.
It is not the short-term interest rate only that is forced down. This would be the case, if we imagine that the Fed would sometimes create money, sometimes destroy money. But they don't, at least in the longer run. They always expand the money supply. That's why the dollar is worth 1/4 of what it was in 1970. So bankers getting new funds coming in have no incentive to retain reserves against Fed deflation.

Furthermore, while Garth has experience with big borrowers, those are not the only borrowers in the market that fractional reserve lenders are trying to reach. There's also credit cards, home loans, car loans, small business loans, etc. These tend to be shorter term loans, in the case of credit cards, as little as a few weeks. So short term rate should apply to the extent that any do. Further, it's worth pointing out that consumers are notoriously less savvy as "entrepreneurs" than big business. Expecting everyone with a credit card to be a proto-Austrian who will discount the discount rate due to the Fed's evil influence is just silly. They're rationally ignorant. All they see is that if they refinance their house, they can take out $10000 in equity and buy a boat! Oooh!

The vast majority of credit in the economy is not created by the Fed, it is rationed by the private sector. Austrians argue that the banks are a collective cartel whose lending is artificially stimulated by Fed actions and desires. This completely ignores the tremendous amount of credit created by other actors in the economy such as General Motors which is not a bank, is not regulated, is not a part of the cartel yet which I believe (at least until recently) creates more credit than any bank in the system.
I would hope that the Fed has not yet crushed all private savings, and that is true. Private savers - including GM - certainly do play a part in the credit economy. But the point is, they should. That's the private market in action, is all. Nothing to see here. Sure, the Fed and the banks only create some fraction of the money. So what? They are still causing malinvestment. As such they must necessarily destroy wealth, causing business failure.

The thing to focus on is not credit creation, per se. Credit creation is a perfectly moral and rational behavior. Rather the problem is a particular species of fraud, fractional reserve banking, in conjuction with a particular species of immoral coercive action by the state, central banking. Fractional reserve with no moderating central bank was bad, not only because it would have bank runs, but because it was inflationary. Central banking would be wrong regardless of whether or not they allowed fractional reserve.

I will certainly agree that the combination of the two is more stable that the former system. However, solving a problem with a greater violation of liberty is, IMO, not the right solution. Rather, the whole business of fractional reserve should never have been allowed. Further, I don't think that creating a massive banking cartel somehow creates a crash-proof bank. What it does is to insure that the entire system fails in unison. It has not failed. Not yet. However, for a system to stand for 70 years is not proof of eternity.
Arnold Kling is ripe for the The Sect of Austrian Economics. Actually I doubt he will come around on defense. Just remember Arnold that war is the health of the state. But let me talk about the Austrian theory of the business cycle, and the analogy Kling makes to restaurants. Briefly stated, Kling gets it all wrong.

One the key Austrian insights as regards money is that, ideally, the interest rate is a market-created phenomenon. People don't actually hold more than token amounts of money as money. Instead they either spend it (consuming now), or invest it (consuming it later). All spending is aimed towards consumption; the question is simply now or later. The interest rate is a price, like the price of bananas, that reveals the outcome of that negotiation by all parties in the economy: from both the consumer/investor side, and the producer/borrower side. Alternatively it can be helpful to see the spend/save decision as a decision to spend, either on consumer goods or capital goods.

Now what happens when the interest rate is in some manner falsified? Well, as economists we know what happens when the price system is interfered with: it's always bad. Let's take for example bananas. What happens when the price of bananas is falsified? If the price of bananas goes low, then producers cease to supply them, and consumers find them a great deal. Thus a shortage erupts, and (absent the ability for the price to change), bananas must be rationed by some non-price method. If the price of bananas goes high, then producers rush to plant more trees, banana production increases, but meanwhile consumers aren't buying. Bananas pile up in the stores. Bananas rot.

Bad outcomes result no matter if the price if falsified as too low, or too high. (And note that you are invited to plug in "marginal" in the above paragraph in 27 places if that helps you feel good about it.)

The same is true with the price of money. Interest rates are routinely depressed via central bank manipulation. This will predictably cause people to stop saving (why save if interest rates are pathetically low), and it predictably will cause capital spending to increase (the rate signals that people want goods in the future). So people spend on current consumption (keeping all of the businesses concerned with current consuption busy), and businesses expand (keeping all of the businesses which make capital goods busy). Everyone is busy - that's a boom. But there is no future consumption - the businesses were fooled. The interest rate "lied" to them. So eventually, when the new productive capacity comes online, there is overproduction. More is being produced than people want to consume. The capital structure of the economy is disaligned with the consumer reality. That's the recession part of the cycle.

Now, Kling makes some very imprecise restaurant analogies from the simple theory above. You can read them yourself. So what's more straightforward: the idea that waiters can submit extra orders, and thereby cause the cooks to be frantically busy? Or that the cooks just get manic every so often? If you think of there being only one or two cooks, maybe that is plausible. But we are analogizing cooks to be the entrepreneurs and business owners of the whole economy - so we must imagine many, many cooks. How likely is it that 100 cooks in a large restaurant all happen to be manic-depressives, and all skip their medicine the same day, and all get manic together? Yet Kling is apparently happy with the notion that all of the sanest, wisest leaders in a modern economy can get a bit manic synchronously.

By contrast, what are the waiters being analogized to? Banks. Banks are the middlemen in the economy between people saving and business. What are the chances of a large number of a waiters all turning in extra orders? Well, in a normal restaurant not large. But that's where the analogy just fails. For in our economy, banks are cartelized, and there is one single central bank which can cause the entire system to inflate. So, in terms of the restaurant analog, we might imagine that the owner hangs out at the place. He believes that the waiters are deliberately "under ordering" food, and he thinks he should therefore "juice the kitchen economy" by making lots of orders that he is sure the patrons will end up wanting. But if the waiters aren't under ordering, what we have is a system that will waste a lot of food.

Note that this analogy does point out one thing wrt the theory of the business cycle: it is quite possible for the system to be in a steady state, the owner continually falsifying kitchen orders and food continually being wasted and thrown out. Only if the owner submits his extra orders in blocks (then backs off when the piled up food is clearly visible) do we get something analogous to the business cycle. Which of these is better analogous to the real economy, I don't know. What is clear, though, is that no matter how it happens, for the owner to order extra food that nobody wants is clearly wasteful.
Everything has an End: oooh, Deeeeep, Dude!

Saw the last Matrix movie over the weekend. It's crap. Oh yes, lots and lots of shoot-em-up bang. FX still amazing, though, we've come to expect that, haven't we, Mr. Anderson? Some nice new PC type heros. But there's nothing left of the old Matrix (#1), except parts of the look and feel. It's a inflatable doll of a movie, where there used to be a real live woman. It's paint by the numbers. It's cell-phoned in.

The first Matrix really was fresh, though it was marred as scifi by the utterly silly explanation for why the machines keep around humans. Still, it was possible with a small leap of imagination to get past that. Maybe the machines actually want to harness humans to do interesting things for them that they cannot do well themselves. Who knows. Meanwhile, the scene between Agent Smith and Cypher alone was worth the price of admission. The philosophy was, if obvious, nifty.

The second movie was bloated, but still a pretty good movie. The philosophy was perplexing. Many at the time took this as a good sign, signifying that there was a real philosophic destination the filmmakers were going to, and that the viewer needed to work a little bit, and it would be worth it when the 3rd movie came out. I always suspected it merely indicated that the filmmakers were reaching for Philosophy, at the film-student level of understanding (that is, near zero). Still, I was happy to play the game of philosophize in the blanks. I was happy to speculate on what was really happening, and what would happen. When Neo talks to the Oracle, that's a great scene.

Well, here's movie #3 and now we know for sure: the second movie was just slinging around big words. Reality is hard to underand not because it is complex. Rather, it is hard to understand because it is magical and follows no rules. Philosophy has been replaced by action, meaning by explosions, self-consistency with a cute kid. The movie is hollow to its core. Oh, sure, go ahead and see it - you want to know how it comes out, right? Well, probably worth the eight bucks on that score, but as a testament to the first two movies.

In my mind, the Matrix trilogy ends when the Architect offers Neo the choice. That's cute, but drastically stupid. I don't know where it should have gone, but I'm sure I'll think of a suitable ending.

The movie world is a hard place for the real scifi lover. It's full of visually-oriented fantasists who think that the future will look neat, and therefore, that they should be setting their magical fantasy films in the future and selling them as scifi.
The parable of the trees

Once there were two people living in a primeval forest. They were innocent, and had no notion of laws or property. Now, Adam liked apples, but they were hard to find in the forest. One day he invented the idea of farming. He realized: if I cut down some of the trees, that will create a clearing. Then I can plant an apple tree there, and then eventually it will grow and produce apples. So, he chopped down some trees (luckily he had an axe handy), planted some apple seeds, and went on his way.

Eve came along. Eve did not particularly like apples. She thought: how lucky to find this nice clearing, but how unfortunate that there are apple trees growing here, and not yummy plums! Then she had a flash of creativity, and invented the idea of farming. She thought: if I tear out these apple trees, then I can plant some plum trees, and then eventually they will grow and produce plums. So she did, and proceeded on her way.

Later on, Adam returned to the clearing. Seeing the plum trees, he was puzzled. I know I planted apples, he thought. Hmm, that's odd. He tore up the plum trees, and planted apples.

Later on, Eve returned to the clearing. Seeing the apple trees, she was perplexed. I know I planted plum, she thought. Oh well, whatever. She tore up the apple trees, and planted plums.

The next spring, Adam returned to the clearing. Seeing the plum trees, he got a little angry. Someone else is tearing up the apple trees! This time I'll hang out here so I can guard the trees. So he pulled up the plums and planted more apples, and he made his camp there.

A couple days later, Eve came to the clearing. She said to Adam: what have you done to the lovely plum trees I planted here? He said, I tore them up. I like apples. Well, she said, I like plums. So she tore up his apple trees. He tried to stop her, but being innocent he could not force her to stop, and she darted around him to get the trees. He said, If you plant plums, I'll tear them up. Well if you plant apples, I'll tear them up, she shot back. They glared at each other.

Then she had an idea. She said to him, how about we both plant trees? I'll plant a plum tree over here, and you plant an apple tree over there? (Eve was known for uptalking even then.) Adam said OK, so they both planted a tree.

Later that week, Eve returned to the clearing and pulled up the apple tree, and planted a plum tree. After all, she didn't like apples.
The parable of the pie

Once there was a man who loved apple pie. But he didn't know how to make it. He knew how to make pumpkin pie. His neighbor was a friend, and sometimes he would take a pumpkin pie over to share with her. Sometimes she would make an apple pie and bring it over to share with him.

One day they were talking, and he asked her: How do you make such wonderful pie? She said, well, it's not hard. Just apples, crust, and spice. Spice? he said. Yes, spice - nutmeg and cinnamon. I see, he said.

So the man thought, now I can make my own apple pies. He put cream, eggs, apples, nutmeg and cinnamon in the blender, and whipped them up. Then he poured the pies and baked them. It wasn't very good.
The parable of Laketown

Once there was a small town in the mountains called Laketown. It sat next to a small lake in a deep valley. The lake was drained by no stream or river, and so its level would fluctuate up and down. But it never raised very high, because the people in Laketown would prevent that. Long ago, their ancestors had built a clever bucket-carrying system at one end of the valley. Volunteers would gather there when the lake rose too high, and together they would carry water up high enough to spill it over into the next valley. In fact they didn't really have to lift the water very high - that end of the valley was split by a deep canyon. Some people said that the canyon had been cut by water, and that was proof that in the prehistoric past the lake had been higher. But most people pooh-poohed such talk, pointing out all the land that would be flooded in the valley if the lake were to rise even a tiny bit above its current level. No, they said: the lake must stay where it is. Too much is at risk. In any case, they said, it's no big deal. Just a few days each year, and a few people can prevent any flooding.

Time went on, and Laketown prospered. But there was a problem. The climate around Laketown changed and became wetter. (Some folks said that the new farms and roads that people were building affected the weather.) People had to spend more time each year carrying water to prevent flooding. In fact there weren't enough volunteers, and the town flooded several times. What panic! So the people got together and made flood control mandatory.

It was called the Mandatory Volunteer Lake Control Program. Early on, helping out was only required for the biggest farmers, and the ones nearest the lake. But they weren't enough. More days of rain came, so they extended the Program to everyone. First for a few days each year, which everyone thought was OK except a few grumblers. But then it rained, and rained. And it became 10, 20, 50, 100 days each year. The people groaned, but nobody could see anything to do. If they let the lake rise, wouldn't they be ruined? Sure it was objectionable to be forced to spend half your life carrying water, but wasn't that the price that one had to pay for civilization?

Pretty soon everyone was working 200 days a year, just bailing the lake.

One man rose to address his fellows. He said, My Friends, we're attacking this problem in the wrong way! If we just let the lake rise a little bit, then it will be high enough to once again spill down the canyon where it once ran. Then we won't have to spend any of our time bailing!

He was, of course, shouted down. Everyone knew that the only way to prevent flooding was hard work. So they exiled the man, and returned to their work.
Review: Manias, Panics, and Crashes: History of Financial Crises by Charles P. Kindleberger

Recently I spent time in America's outback with a friend with excellent credentials in economics in general and big-money investment in specific. We argued, as libertarians are wont to do, over fine points of theory. In particular I expounded Austrian economics. He doubted, and gave me this book, Manias, Panics, and Crashes, to read. A good thing too, since the flight into flyover territory is rather long.

Having finished it, I think it is a good book from the point of view of a sort of passive-voice history: a history of facts. So and so was here, and did this, said that. A battle was fought. Lives were lost. It is a history devoid of theory, almost, and therefore hard to understand. In this case, it's about financial history, but only the panics. A fraud was discovered. A panic started. Money was tight. Money moved. A lender of last resort appeared, or didn't. Missing from all that is the why: why do bubbles happen? What is speculative mania? Why do bubbles pop? Kindleberger does not explain these things; a sense of the economic structure is quite missing. In fact he willfully ignores most of them: the economic expansion period preceding a bubble he explicitly disattends.

It all reminds me of reading biological tracts written before the theory of evolution. Before then, it was quite evident that animals were designed, and designed pretty well. Much good work was done without evolution; but you could see ever so much more with that simple theory to guide you.

In the case of Manias, there is an abject ignorance of the theories of Austrian economics, in particular the theory of the business cycle. I doubt Kindleberger had heard our theories when he wrote the book. It's a revised edition I read, so there is all of one paragraph in the entire book where Kindleberger notes that there's this "new" theory about but dismisses it out of hand. (The fact that Kindleberger was completely ignorant of Austrian theory about the business cycle, which dates to Von Mises in the thirties, is a sad reflection on the damage Keynes inflicted and continues to inflict on economics.) In the Austrian view, trying to understand panics without understanding credit and money creation is like trying to understand for what purpose God put nipples onto men.

Kindleberger has no notion of where manias come from. To Kindleberger, they are just a given. Mania happens. People are irrational, and sometimes they just get nutty. End of story: now let's see how it unravels. That's not good enough for me. I'm an Austrian economist. The massive fraud of fractional reserve banking is what underlies the business cycle, including mania and crash if the swings are high/low enough.

To be specific, the source of mania is fractional reserve banking. In fractional reserve, demand deposits are lent out. The same money is supposedly available to the deposit any time he wants, even when it has been lent to somebody else. Banks are technically bankrupt at all times. There are real effects to this practice, even with all the moderating superstructure built by the modern state to try to prevent bank bankrupcies. In particular, when money happens to be flowing into banks (for whatever reason), it induces them to create and lend out large amounts of new money in an actuarially unsound structure. This falsifies the signalling that interest rates provides to entrepreneurs, and causes a boom. When money flows out of banks, the reverse must happen: they must reduce the money supply by a multiplied amount. But because the money is tied up in promises (which is what credit is, ultimately), it cannot be got easily. Thus the fundamental bankruptcy of the bank is exposed. Without state intervention, rational depositors, seeing that their bank is bankrupt, rush to extract their deposits. Panic ensues.

The state has, over time, evolved a number of ways to prevent the bankruptcy of banks. (Why, one might wonder. Is it for the good of the depositors, or the bankers?) With deposit insurance and the lender of last resort, there is no bank run. But there still must be the adjustment of the economic structure to reality. The structure was overbuilt due to false interest rate signals. Thus it must be partly liquidated. This process is recession.

Yes, a "lender of last resort" does help, in the sense that it can cut off a panic. But what is does not do is cut off the business cycle, nor the fundamental fraudulent nature of the system. Furthermore, the lender of last resort is itself, ultimately, just a big bank. Thus it, too, can be bankrupted if the crisis is large enough. What we have done, therefore, in tying all the US banks into one system is to guarantee that when failure happens it is absolutely catastrophic.

It is like playing double-or-nothing when one loses at blackjack. As long as the streak of losses is not too long, you stay ahead. But when you get unlucky enough - and it will happen - then you lose all. Meanwhile, though, you can be lulled into thinking that with your fancy betting strategy you have achieved something for nothing.

Perhaps an even better analogy would be in the way that the state has historically fought forest fires, without really understanding them. The more you fight fires, the more unburned stuff piles up in the forests; eventually a fire breaks out that you cannot contain. Modern foresting practice is to let fires burn and even set them; they happen yearly but no given fire is catastrophic.

What I did gain from the book was more of a sense of history, including some interesting panics. Most particularly, Kindleberger talks about a (fraud-based) mania/panic that happened in gold coins. In his mind that proves that mania and panic are not features of fiat money. In my mind, it is proof that monetary fraud underlies mania and panic.

I also deeply enjoyed the discussion of the connection of fraud with bubbles. Kindleberger can't really explain it; and I doubt he has a mind to. But I can, and do. The explanation is Austrian. Money is created in a fractional reserve system largely by banks, who must lend it out to stay competitive. This is what falsifies the interest rate. Bankers, naturally, want to invest in the soundest, safest investments they can. But the more money they have to invest, the further out they have to go on investment quality. But there is a smooth spectrum of quality connecting an outright fraud to a sound investment. For every sound investment, it is possible to find a slightly less sound one. If one man has a two year track record, another has only one. If one man is completely sure his idea will work, another is just pretty sure. If one man has $10000 in collateral, another has $9000. And so it goes, for every dimension you can imagine. Similarly for fraud: for every fraudulent scheme there is a slightly less fraudulent one. The spectrum meets in the middle. Thus, money creation via bank lending necessarily drives the society further out into the risk spectrum than it "should" be - that it would be without the fraud of fractional reserve. Some of those risks always turn out to be fraud; and thus, frauds inevitably accompany inflationary central bank policy in larger amounts than they would in an honest monetary system. Thus, it is almost always frauds being discovered that sets off a panic.