Free Banking

Elijah Lineberry's picture
Submitted by Elijah Lineberry on Wed, 2007-11-21 21:57

It is ironic that on the day Ian Smith dies there is an article on the Cato Institute website about 'Free Banking' in Rhodesia.

Steve Hanke argues it is more or less the only way Rhodesia can be saved from complete economic collapse.

What are SOLO-ists opinions of Free Banking?

I am all in favour due to the free market it would create rather than the Reserve Bank imposed restrictions on our financial system which leads to unnecessarily high interest rates and other impositions on the economy.

As Hanke argues we already have competition and subjective decisionmaking when considering which bank to keep money in with deposits, so why not extend that to the other side of the coin of withdrawals?

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With regards to your equity

Mark Hubbard's picture

With regards to your equity thing you can do to 'hedge' are 'Put' options on the Market Indexes.
If the market falls the shares you own will be worth less but you get all the money back with the options becoming more valuable.

Yes, I should be more sophisticated, however, time is the thing: I'm out of it until next March, other than tracking the odd forum Smiling Also, given 85% of my portfolio is in bonds and on term deposit, I've allowed myself to become a little complacent ... and my portfolio is this way because share market levels have been worrying me for some time now.


Elijah Lineberry's picture

credit squeeze will get a lot worse because Governments are sticking their beaks in.

The disgraceful bailout of the Northern Rock Bank in Britain, which I have written about on at great length..(despite apparently no one on the website appreciating the corrupt travesty which keeps unfolding and why I keep mentioning it so strongly) a case in point.

The UK Government should have shrugged their shoulders, let the Bank collapse a couple of months ago and let events take their course.

By offering bailouts they have made it a lot worse, created a crisis of confidence throughout the British economy and it will all snowball and inevitably end in tears.

With regards to your equity thing you can do to 'hedge' are 'Put' options on the Market Indexes.
If the market falls the shares you own will be worth less but you get all the money back with the options becoming more valuable.


Mark Hubbard's picture

I see you are a senior investment analyst. What's your reading on the credit squeeze, vis a vis, how much more pain to come - I'm finding it bloody depressing updating values in my share portfolios for the last two and a half weeks. It's pretty relentless at the moment.

The effects being seen on Nikkei, Hang Seng and ASX: is this just a confidence issue, given the latter two markets should still be commodity driven, or are commodity prices also getting way over-valued? I thought China would be insatiable for same for at least a couple of years yet, although, I've also heard that China has potential credit issues that will make the US credit squeeze, and the securitisation led effects of this around the world, seem like a walk in the park?

Fortunately, (read risk averse wife), I have only 10% of my portfolio in equities currently, however, I divide every days loss by my charge out rate, see how long it has taken to earn what has been lost, and ... well, bit depressing really.


Elijah Lineberry's picture

raise a valid point Ashley.

But in a genuinely free market banks would self regulate and decide for themselves about prudent capital ratios.
There would be fierce competition to publish those figures and let customers decide which bank is 'safest'...(in the same way they are fiercely competitive to attract Term Deposits or borrowers).

In a free market it would become obvious fairly quickly if a bank was issuing what amounted to 'wam-pum' the same way there would be understandable suspicion if a bank suddenly offered 15% interest on deposits.

What is the definition of

Ashley Chan's picture

What is the definition of 'free banking'? Should we follow Rothbard's line of thought and make a law that says all banks must have 'contributed equity', deposits (liabilities) and borrowings basically equal to its lending book...i.e. a bank can't print bank notes more than its asset base? Does this solve the boom-and-bust of the 18th and 19th centuries?
Scenario A: Bank deposits $90M + equity $10M, loans $100M...if 10% losses, then shareholders lose everything and depositors get money back, so all OK. In a libertarian society, should there be legal minimum capital ratios?

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