Must our economy be constructed in this fashion?!
Given that both these industries are in turmoil, and that at least a substantial portion of each has undergone serious scrutiny in recent years, I want to ask some fundamental questions about these two pillars of our economy.
Can you imagine a free market in insurance? Can you imagine a free market in banking? Ought these industries be regulated? By the Government? By some quasi-governmental agency?
My sophomore year in college, I learned something deeply disturbing about the banking system in the United States (and most other industrialized countries). That is, modern banks operate on a fractional-reserve basis. If a bank has reserves, say, of $1,000,000, it may use that to create money, out of thin air, by virtue of granting loans to individuals and businesses. Then, according to its balance sheet, the bank appears to have assets of many times that amount … perhaps $5,000,000!
The fact is that capitalistic forces create wealth by combining resources and producing goods and services in new ways. The creation of wealth is not done via accounting tricks. There must be a better way to reflect this in the financial world.
Meanwhile, this is what fractional-reserve banking is all about. It is a system created on the gamble that not everybody wants or needs to withdraw and hold (or spend) all their money at the same time. This system allows for an “expansion” of the money supply … presumably to help “fuel” the economy and help citizens buy, consume, and operate daily in the market place.
Even hard-core proponents of this scheme acknowledge that fractional-reserve banking is potentially dangerous, for it can lead on occasion to bank runs. If all the depositors go to a bank and demand their money – in cold, hard cash – it will be impossible for the bank to comply. The banking system is betting on this not happening. On what authority do banks play this shell game?
Let’s compare and contrast the banking system to the world of insurance.
The big difference between the two is that everybody knows that insurance is a gamble from the outset. We buy insurance knowing ahead of time that if nothing bad ever happens, we will have “lost” our money. Yet, most of us are willing to do this because we know – from the moment our provider states we are covered – that what we are really buying is peace of mind.
Furthermore, we know mishaps and accidents are part of life, but that they rarely come in huge numbers. Hurricanes, floods, and earthquakes are those exceptional events that keep the actuarial experts up at night.
One good thing about insurance is that it is optional. Just as flat screen TVs, motorcycles, gold earrings, and cowboy boots are but choices in the gigantic market place of life, so are insurance policies. We do not have to buy them, but many of us choose to – for we believe we gain value. An apparent exception is that we are required to carry liability insurance if we own and operate an automobile or motorcycle, but of course we could choose to take a bus, a taxi, or to walk.
On the other hand, fractional-reserve banking, embedded in the secret world of the Federal Reserve, is not realistically optional. Citizens of the United States of America are forced to use the “legal tender” of this nation, like it or not. Yes, a few of us have practiced barter – direct trade of one good or service for another – but this is extremely limiting.
To the extent that we use money, have bank accounts, use ATM cards, and take out the occasional loan, we are caught in the web of those who have perpetrated the biggest con game in history: the Federal Reserve System. The usefulness of widely-accepted currency notwithstanding, the ability of those at the Fed to strategically adjust the money multiplier, the prime lending rate, and other basic financial parameters is anathema to the Free Market.
Besides the questionable legitimacy of fractional reserves, our government representatives have seen fit, over time, to strip away any meaningful connection of our money to a base value or commodity. We now use fiat money. It is money that has value “by decree” … of the Government.
When I buy insurance, even in today’s fouled-up and misregulated environment, I still get some peace of mind. On the contrary, when I go to my bank, I wonder how much devaluation will occur between my deposit and my withdrawal. How many billions of new dollars are being printed daily, created by the ignorant and illegitimate decrees of the Central Bankers?
I’ve asked several anti-establishment questions, and I’ve failed to supply any hard data. I know that. But, can you deny that you feel powerless knowing the over-riding forces that are manifest in our lives are being manipulated by a cadre of elite authorities, with God knows what ulterior motives and schemes at work?
Wouldn’t it be vastly better to allow those phenomena – money and credit – to be “managed” simply and automatically by virtue of the egalitarian justice of the Free Market?
Food for thought … Imagine a healthy insurance industry – one in which providers enjoy the freedom to sell policies only to those individuals or outfits that they deem fair risks given the premium/deductible/coverage structures of the contracts. Imagine that the barriers to enter this industry are minimal, and that people are free to establish their own companies, selling policies to niche customers (e.g. those individuals “hampered by” pre-existing conditions). Imagine a government that accepts and honors that its only proper obligation is to enforce the contracts.
Here’s a tougher one … Imagine an economy that has no Central Bank, no Federal Reserve System, no fiat money, and perhaps no fractional-reserve scheme. Imagine instead a healthy banking system that consists of private banks that issue their own currencies – based on immutable commodities (e.g. gold, silver, platinum). Imagine a return to objective value, and thus a repudiation of “value by governmental decree.”
Both of these visions are idealistic, especially the banking scenario. To transform the current clusterfuck of manipulation and government-approved, high-level embezzlement to the free market approach of money and lending would be horrendously complex. Perhaps it could only happen after a complete collapse of the House of Cards, exposing it for what it really is. Woe be unto Society if that occurs, but it may be inevitable.
Does the man with chronic pain benefit from knowing what disease is making his life miserable, perhaps killing him? I believe so, for then he has the possibility of discovering a way back to health. Know then, comrades, that you are handing your vaunted leaders the bats with which they gladly and prosperously beat you over the head, and charge you for the experience.
Don’t forget to say, “Thank you.”
