By Tom Woods
March 17, 2023
From the Tom Woods Letter:
Nobody wants to talk about something as abstruse as banking until the you-know-what hits the fan.
Then, when people do start talking about it, all kinds of nonsense comes pouring out of their mouths.
Tomorrow on the Tom Woods Show I'll be talking about the Silicon Valley Bank fiasco and its implications. In the meantime, I want to take aim at the absurdities making their way around social media.
Let me start by saying: the present system of money and banking is really indefensible. It is the farthest thing from a free market.
There's no other way to describe it: what we have is a cartel, overseen by a non-market institution, the Federal Reserve System, which is a creation of Congress and has been given monopoly privileges by which it directs money and banking in the United States.
According to the mythology, the Fed has given us more stability than we once had - fewer and shallower recessions. This is provably false, but I'll write about that another time.
The system we have generates the boom-bust cycle, redistributes wealth from the poor to the rich, makes saving for retirement borderline impossible, and institutionalizes the problem of moral hazard, because everyone knows there is no physical constraint preventing the paper-money producer from bailing out powerful financial institutions.
You will hear plenty of cries about "deregulation" and the alleged need for "more regulation." These completely miss the point.
Trying to "regulate" our way to stability in a rickety state-established system is an attempt to put lipstick on the proverbial pig. The problem is the system itself, not some lack of "regulation."
Not to mention: most of the alleged "deregulation" that is supposed to have caused our problems over the years is a phantom. It does not exist. Or when it does exist, it is irrelevant to the problems at hand.
Today I got into an argument on Twitter with someone who complained about the alleged deregulation of the 1980s, which he said caused the Savings & Loan (S&L) crisis that my fellow oldsters will remember.
The Savings & Loan institutions were launched by the Federal Home Loan Bank Act of 1932 for the purpose of promoting homeownership.
The so-called deregulation of the S&Ls began under Jimmy Carter, not Reagan. I say "so-called" because, as with most measures trumpeted as "deregulation," it wasn't really: all throughout the process of alleged deregulation, the S&Ls' deposits continued to be covered under government deposit insurance. It gave us the worst of both worlds.
Under the government-established rules, the S&Ls could charge 6 percent on loans, and could offer depositors a mere 3 percent. Since most depositors had nowhere else to go, they had to content themselves with a miserable 3 percent return. (These days people would be dancing a jig if they got a 3 percent return, but that's another matter.)
With the advent of the money-market mutual fund, ordinary people suddenly had the chance to earn higher returns than that, and began pulling their money out of S&Ls in droves. Consequently, the S&Ls wanted permission to offer higher interest returns for depositors, so "deregulation" allowed them to do so.
Had the original government requirements remained in place, the S&Ls would have gone under then and there.
A consensus began to form that in order to save the S&Ls, their government-established loan and deposit interest-rate requirements, as well as the kind of loans they could make, had to be modified in light of the impossible conditions under which these institutions were forced to operate. The S&Ls needed to be permitted to engage in riskier investments than 30-year mortgages at 6 percent.
(Note how they've rigged the argument against us: it's supposed to be the fault of the free market when the government modifies the government-established rules of a government-established institution, while its deposits continue to be guaranteed by the government.)
Maybe the S&Ls should have gone under in 1980. Perhaps they really did have an impossible business model. There is no non-arbitrary basis for deciding one way or the other, since the S&Ls were never genuinely subject to a market test. The government husbanded and cartelized the S&Ls, and stood ready to bail them out after that.
The point is, there was no magical regulation fairy that could have saved those institutions. Either they failed in 1980, or they failed a few years later.
An enemy of all thought on issues like this is the myth of the all-seeing regulator, and the related myth of the perfect regulation that would have prevented all problems.
For the full truth, enjoy my free eBook The Deregulation Bogeyman:
Finally, two announcements about where I'll be:
(1) Catch me in New York City (April 1, alongside Dave Smith) and Denver (May 27):
(2) The world premiere of the first episode of the docuseries Follow the Science: Lockdowns Go Viral is taking place in Orlando on April 19. This is the series produced by that group of (necessarily) anonymous filmmakers I told you about.
Please, please make an effort to be there, and/or please help me spread the word. It costs nothing. I will be hosting the evening, and the great Broadway actor Clifton Duncan, who sacrificed everything over his refusal to take the jab, will be there with me. I made a five-figure contribution to this project because I believe in it so strongly. Please try to join me. Link to register: