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Paul Krugman: Ron Paul on Money Market Funds

Brad DeLong has a post on Paul Ryan’s hysterical reaction to QE3, which is worth reading just for this:

“Honest money” is a Ron Paul dog whistle: the good productive workers, the bad exploitative usurers, the necessity of a hard-money depression to cleanse the monetary colon–you know the drill.

But the Ron Paul link, in which he condemned fractional reserve banking, prodded me to ask a question I’ve been meaning to ask: How do the Austrians propose dealing with money market funds?

I mean, it has always been a peculiarity of that school of thought that it praises markets and opposes government intervention — but that at the same time it demands that the government step in to prevent the free market from providing a certain kind of financial service. As I understand it, the intellectual trick here is to convince oneself that fractional reserve banking, in which banks don’t keep 100 percent of deposits in a vault, is somehow an artificial creation of the government. This is historically wrong, but maybe the actual history of banking is deep enough in the past for that wrongness to get missed.

http://krugman.blogs.nytimes.com/2012/09/16/ron-paul-on-mone...

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Here comes Mr. Strawman

> How do the Austrians propose dealing with money market funds?

What do you mean, Mr. Krugman?

> I mean, it has always been a peculiarity of that school of thought that it praises markets and opposes government intervention — but that at the same time it demands that the government step in to prevent the free market from providing a certain kind of financial service.

Austrians do not demand that government prohibit fractional reserve banking. This is a straw man.

Austrians demand that government uphold the rule of law, prohibiting fraud, equally with respect to banks, corporations, individuals, and even itself.

If individuals wish to deposit money in a fractional reserve scheme they are free to do so, as they are also free to suffer the losses that may result from their choice. Austrians demand two things:

1) That the bank is honest with the depositor that it is a fractional reserve and that the depositor is at risk of loss.

2) That the government doesn't make laws giving banks that use a fractional reserve system a monopoly on currency.

> As I understand it, the intellectual trick here is to convince oneself that fractional reserve banking, in which banks don’t keep 100 percent of deposits in a vault, is somehow an artificial creation of the government.

Krugman chooses not to understand it. Fractional reserve banking is not a creation of government at all. Even so, everyone is now forced by government to submit to this unfair and dishonorable system. Individuals and corporations that do not wish to participate in this scheme have it forced upon them by legal tender laws, tax laws, and a mountain of other regulation.

> This is historically wrong, but maybe the actual history of banking is deep enough in the past for that wrongness to get missed.

Yes, that argument that Krugman just made up and then falsely attributed to his intellectual opponents is indeed historically wrong.

> But consider a more recent innovation: money market funds. Such funds are just a particular type of mutual fund — and surely the Austrians don’t want to ban financial intermediation (or do they?).

Surely Keynesians don't want to have sex with prepubescent boys (or do they?).

> Yet shares in a MMF are very clearly a form of money — you can even write checks on them — created out of thin air by financial institutions, with very few pieces of green paper behind them.

They're no more a form of money than any other equity.

> So are such funds illegitimate? What about repo, which has many of the same features?

No, they aren't illegitimate. Krugman hasn't even shown that Austrians claim that there's a problem. Austrians have absolutely no problems with repos either, as they are just contracts. This line of reasoning is utterly non-sequitur.

> One of the key lessons of the 2008 crisis was precisely that banks are defined by what they do, not by what they look like, and there are a whole range of financial arrangements that in economic terms act a lot like fractional reserve banking.

No, one of the key lessions of the 2008 financial crisis is that Paul Krugman does not know an economic model that predicts reality. Not only is he lost, he cheers when we move in the wrong direction.

http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip...

"To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."

How did that work out, Mr. Krugman?

> So would a Ron Paul regulatory regime have teams of “honest money” inquisitors fanning across the landscape, chasing and closing down anyone illegitimately creating claims that might compete with gold and silver? How is this supposed to work?

Another blatant Strawman argument. Who can even imagine Ron Paul inquisitors enforcing legal tender laws favoring gold? Gold doesn't need legal tender laws, and if half the people would rather trade some form of IOU, that's fine with Ron Paul and that's fine with all the other Austrians too.

> OK, I don’t expect a serious answer. But it’s scary that this has become the more or less official doctrine of the GOP.

It's scary that this crap is what passes for intellectual opinion.

What a dumbass. Fractional

What a dumbass. Fractional reserve banking is a creation of the market but it's existence would be minimal if it would exist at all were it not for government interference. If the government didn't protect depositors and banks from losses due to fractional reserve banking, who would use a bank practicing it?

Either your money is your money (true banking), or your money belongs to the bank and while you have a claim to it they can do with it what they will (fractional reserve banking) and the money is at risk. Under true free market fractional reserve banking, depositors would have to have a great deal of confidence in the bank itself, rather than simply confidence that the government will bail their asses out when they screw up,

Maybe, in a free market system, fractional reserve banking could exist, but we don't know because we don't have a free market system and faux intellectuals like Krugman and his toady DeLong are afraid to find out. So they make up lies. So sad.

I must be willing to give up what I am in order to become what I will be. Albert Einstein