Posted by: graemebird | December 11, 2011

Gresham’s Law/ Contract Enforcement / “Freedom Of Contract” ……… And Financial Market Regulation

Guest post from Jean-Paul Christoff-Marie. Taken from elsewhere:

Libertarians must note that we cannot get to sound money except through public policy, from our current starting point. Gresham’s law, and the reality of a motivated banking cartel, make such a prospect entirely untenable. This in no way goes against the hopes of anarcho-capitalists. Other factors may well judge against anarcho-capitalism. But not the Gresham’s law point I make above. The key to understanding this is to note that in a functioning anarcho-capitalist system, no enforcement agency, is going to give legal cover for contracts, that are problematic, expensive, or impossible to enforce. Fractional reserve contracts quite literally are impossible to enforce, much less indemnify. This points to the reality of “Freedom Of Contract” that some people have around here as a notion, is entirely incompatible with a working and just minarchist or anarcho-capitalist setup. Or indeed to any functioning setup. Since what the people who take this particular view of “Freedom Of Contract” are telling us, is that the public have to give legal cover for every numbers game racket and ponzi-scheme, or any unworkable contract, that some charlatan or other, sees fit to try on, when he himself can afford enough lawyers.

Gresham’s law also implies that we can never have a decent financial system without regulation. And we may need to have quite a lot of regulation in transition if we want to progress smoothly and rapidly as we slide nicely into excellence in money, banking, finance and capital markets resource allocation. But Gresham’s law implies that sound finance will never be regulation free, at least until such time as contract enforcers have replaced the legal system, which of course may never happen.

There are two different kinds of regulations. One in which utopian nut balls and little-Hitlers, try and act like bully-boys from above. The other is more akin to a private road owner making a stipulation that we will drive on the left side of the road and not the right side. Some of these regulations will be arbitrary, in that you could choose either left or right were you in that situation.

Now let us look at what John has to say:

“But triangles are defined as having three sides. It is not similarly true that giving somebody a loan is defined as not giving somebody a loan. The analogy is entirely bunk. All parties to FR-banking have the legal right to what they are trading, and are engaging in trades that make perfect sense. You might not like them… but that’s an entirely different matter.

Leithner is defining a word for his own convenience. First, he doesn’t own the English language, so as long as the contract is clear about the definition of it’s words, then there is no problem. Second, most dictionaries include “putting money in a bank” as a part of the definition of “deposit” anyway… so it is actually Leithner who is out of step with modern English. Thirdly, if every bank changed the name of “deposit” to “bob” then we would have entirely the same system… so wtf is he complaining about other than a pointless semantic wank? Does he really think that if all banks did a “find and replace” for all future contracts, then suddenly the banking system would have a revolution? Seriously?”

“All parties to FR-banking have the legal right to what they are trading,……”

They do if fractional reserve is legalised, in which case it will enjoy crony-priviledge and crony-socialist status.

“All parties to FR-banking have the legal right to what they are trading…….”

No they don’t, if fractional reserve is legally defined as a crime, and outlawed. Then they have no such legal right. Funny how people get confused about something so simple as that.

Well how about taking the entirety of the screed? Leithner wrote a whole book, and a very good one, making a case for fractional reserve being made illegal, and considering it as fraud. What John is doing here is taking a small part of that book-length case, and judging it against an absolute standard (like we may have in Maths for example) and finding that case to be wanting. But this sort of thinking is inappropriate in the humanities. Where is John’s case? Its basically absent. Leithner makes a convergent case, based on legal theory, banking history, economics, utilitarian considerations, and so forth. Where is John’s competing case on all these grounds?

You see in science there is no “null hypothesis.” Thats all rubbish and epistemology fail. Leithner’s case must be judged, not against a handicap-priviledged null hypothesis, nor against some absolutist standard, as though we can determine things by a single killer-sentence, to be written on the back of a postage stamp …. but rather on the basis of a fully-fledged competing case. One which is clearly absent.

One competing case against Leithner, would be the Bill Still case. A viewpoint which also seeks to outlaw fractional reserve. This is a serious competitor. The Humphreys point of view is not. Make your case Humphreys or get out of the way. Let us not have a repeat of your years-long performance collaborating with the global warming fraud.

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