Matt Yglesias has a new Substack on money and banking, with the following title and subtitle: How banks create money out of nothingThe Fed’s two missions are intimately linked Given that most colleges have a course on “Money and Banking”, the claim in his subtitle is not particularly controversial (although I don’t entirely agree.)  But first let’s consider the concept of banks “creating money”. If you define money to include bank deposits (as most people do), then obviously banks do have some role in the process of money creation.  Because arguments about “banks creating money out of thin air” involve a great deal of confusion, let’s start there first.  I’ll begin with an analogy using the restaurant industry.  What determines growth in the nominal size of the restaurant industry? 1. Growth in nominal GDP. 2. Growth in the share of NGDP comprised by the profit-maximizing restaurant industry. 3. Non-profit maximizing growth in the restaurant industry. Suppose that in 2000, restaurant comprised 5% of GDP.  If GDP were $10 trillion, then the restaurant industry would be $500 billion.  Now assume that NGDP doubles to $20 trillion in 2020.  Other things equal, the restaurant industry will double to $1 trillion. Other factors (both supply and demand side) may impact restaurants as a share of GDP.  Immigration might add to the supply of restaurants with tasty new menus.  More women working and rising real incomes might lead to people eating out more often.  Suppose these factors push the restaurant industry up to 6% of GDP.  In that case, the industry would increase to $1.2 trillion in 2020.  And finally, a restaurant might decide to grow larger even though it reduced profits.  They could offer larger portions to induce more customers, selling meals at a loss.  I don’t think this factor is all that important in the aggregate, but it’s a theoretical possibility. Banking is similar, with three factors determining the nominal size of bank deposits (i.e. bank “money”): 1. Growth in nominal GDP. 2. Growth in the ratio of deposits to NGDP in the profit-maximizing banking industry. 3. Non-profit maximizing growth in bank deposits. The first factor is easy to explain.  In the US, the Fed determines NGDP.  If NGDP doubles over time, that will tend to double the equilibrium quantity of bank money.  This is related to the concept of “velocity”. We all know that velocity is not a constant, as the ratio of deposits to NGDP changes over time.  Lots of factors cause that ratio to change, but the only ones worth spending much time thinking about are the factors that influence the profit-maximizing ratio of bank deposits to NGDP. Yglesias provides a typical thought experiment: Alternatively, you can ask a bank for a loan that’s secured by the equity in your home. The way that works is the bank will put down in a spreadsheet “John owes us $X, with the loan secured by his home.” Then in another spreadsheet, they’ll put X additional dollars in John’s bank account. When you get a loan like that from the bank, they don’t tell you “hang on for a couple of hours, we need to scrounge up some extra deposits before we can lend you the money.” In part because just like the deposits “in” the bank are, for the most part, not physically located anywhere, the expectation is that you’re not going to be getting your loan in the form of physical cash. These are all just spreadsheet entries. The bank goes from having no entries about you on their spreadsheets to having one entry about the money in your bank account and another entry about the money you owe them. The act of lending you the money created the bank deposits. And by taking out the loan, you transform yourself from being someone who has a lot of home equity but no money into someone who has a bunch of money but less home equity. You and the bank worked together to create money. I don’t find that sort of thought experiment to be particularly helpful, as it isn’t clear whether this transaction is assumed to be profitable. When I think about factors that affect the ratio of deposits to NGDP, I focus on those that impact the equilibrium size of the banking industry.  Consider the following example: An economic boom leads banks to spot more opportunities for making profitable loans.  When the loans are made, the borrowers are given a bank deposit in the fashion discussed by Yglesias.  But then the borrowers withdraw the money to pursue their goals.  Here there are several possibilities.  One possibility is that the same shock that caused more equilibrium lending also causes people to wish to hold proportionately more bank deposits in aggregate, even at the same interest rate.  If that is not the case, it’s possible that interest rates rise during the boom.  Increasingly profitable firms are willing to pay higher borrowing rates, and banks can then offer depositors higher rates to induce them to keep the money in banks rather than moving to alternatives such as mutual funds. In that case, you can think of new loans leading to new deposits.  But one can also envision a shock where people become more inclined to deposit money in the bank (perhaps due to more generous deposit insurance.) That inflow of funds into banks depresses interest rates, which increases the number of profitable lending opportunities.  As Paul Krugman once said when exasperated tedious MMT arguments, “it’s a simultaneous system”. If there is no economic “shock” that affects the equilibrium size of the banking industry as a share of GDP, is it still possible for a banker to create money out of thin air?  Yes, if they are willing to lose money.  A banker could suddenly decide to make a loan to someone with a bad credit risk, thereby “creating money”.  But why would they do this? To summarize, when thinking about banks creating money, I’d focus on two primary factors.  First, the Fed determines NGDP, and money neutrality implies that a monetary policy that causes NGDP to rise will have a proportional effect on all other nominal aggregates in the economy, including the nominal size of the restaurant industry and the nominal size of bank deposits.  In addition, specific economic shocks can cause the profit-maximizing ratio of bank deposits to NGDP to change over time, and this is probably what most people mean when they speak of banks “creating money”.   In general, booms tend to lead to positive money creation, and vice versa.  Deregulation can also lead to money creation, whereas a financial crisis can reduce the money supply.  So far, there’s nothing strange or different about banking.  The same sorts of factors that determine the nominal size of the restaurant industry also determine the nominal size of the banking industry.  So why does Yglesias think banking is special and that the Fed should control both monetary policy and banking regulation? Under the gold standard, banking shocks often had a big impact on NGDP, whereas restaurant industry shocks have relatively little impact on NGDP.  The central bank might want to regulate banking to prevent a banking crisis from reducing the money supply and NGDP.   Yglesias worries that this issue might even arise under a fiat money regime: A lot of people made a lot of ignorant criticisms of the 2007-2008 bailouts. As bailout defenders have always argued, if we’d let more banks fail, we would have had a stronger pullback of lending activity and an even larger contraction in aggregate demand — more unemployment, a deeper recession, and so forth. Dean Baker always offered the non-ignorant counter that whatever contraction arose from bank failures, you could have just done more stimulus to compensate. I think the counter-counter is that sure you “could have,” but nobody was in fact going to. We had some bank bailouts and some interest rate cuts and some fiscal stimulus and it was all pulling in the same direction, and the problem was that it wasn’t enough. I’m not convinced the Fed would not have offset a more severe banking crisis, but it’s a defensible argument.  I’m also not convinced that the Fed needed to be involved in the bailout, but I suppose there are also arguments that the Treasury could not or would not have done as effective a job without Fed assistance. As I said at the top, I don’t think acknowledging the reality of endogenous money necessarily leads to any radical policy conclusions. “People put deposits into the bank, and then the bank lends the deposits out” is a decent approximation of how things work for most purposes, even if the reality is more complicated. One thing that does follow, though, is that central banks’ roles as bank regulators and as macroeconomic stability agencies necessarily get muddled together. I’m not sure it’s necessary, but perhaps it’s inevitable. In any case, Yglesias gets to the core issue in his Substack post, without all the nonsense you often see in “endogenous money” debates.  From a certain perspective, everything is endogenous.  But waving around the term “endogenous” like a magic wand doesn’t resolve any interesting monetary questions. Here’s a Buffalo bank from the golden age of bank architecture: (0 COMMENTS)

Savannah Smith and Art Carden At a marina in the Florida Keys, Rec-90 boat fuel was $5.16 per gallon in December. At a gas station just up the road from the marina, it was $4.20 per gallon. Why does boat fuel cost about a dollar more per gallon at the marina than at a nearby gas station? Boat fuel at the gas station and the marina are chemically indistinguishable. Shouldn’t the same fuel have the same price everywhere? Are consumers being cheated? At first, it might seem like it. However, when viewed in light of the economic way of thinking, there’s a more benign explanation. One of the nine Economic Essentials says every choice has a cost. If you find yourself in the water and wanting gasoline, you have to weigh the costs and benefits of getting gas at the marina versus getting it at the gas station. If you choose to gas up at the marina, it will cost you a dollar more per gallon, but you will be in and out in less than fifteen minutes. A dockhand will even pump the gas for you. If you go to the gas station down the road, however, you might save a dollar a gallon on gas, but you will spend two hours getting your boat out of the water, hauling it to the gas station, hauling it back, and then putting it back in the water. For example, consider a 200-gallon tank on dead empty. It would cost $1,032 to fill up at the marina but only $840 at the gas station. You could save $192 by going to the gas station down the street but at the cost of two hours. That’s time you’re not spending fishing, scuba diving, or enjoying the water, plus the frustration of moving a boat.  One of the Economic Errors claims that profit is exploitation. Someone might feel like they are getting ripped off when they hand a credit card to a dockhand knowing they’ll pay $1,032 for “the same” gas they would get for $840 down the street. However, they are not exploited: the marina is not just providing fuel. They’re providing service and convenience. Marinas “get away with” charging people an extra dollar per gallon because people are willing to pay for the additional service and convenience. Marinas, therefore, are not earning profits by “exploiting” boaters. In this example, they make an additional $192 by providing boaters with service and convenience for which they are willing to pay. That $192 is a reward for finding a way to cooperate with boaters in a way they find advantageous. Of course, every boater would rather pay less for fuel, just like every shopper would rather pay less for groceries, and every renter would rather pay less for an apartment. Marinas, however, stand ready to sell fuel at a slight markup because it makes them and their customers better off. Marinas get rewarded with an extra $192. Boaters get a quick, easy trip to fuel up, giving them that much more time to enjoy the open ocean and everything else the gorgeous Florida Keys offers.    Savannah Smith is a student, and Art Carden is an economics professor at Samford University. (0 COMMENTS)

There are two core questions when it comes to thinking about women in the classical liberal tradition. First, what have women contributed to classical liberalism as a body of thought? Second, what does classical liberalism as a set of ideas have to say about the question of women’s rights? I recently received an email asking where an interested undergraduate might start reading up on these issues, so I decided to put together a short, easy reading list for anybody looking to get started thinking about women’s rights in the classical liberal tradition. First, start off easy and inexpensive with the Fraser Institute’s The Essential Women of Liberty. I’m a little biased because I contributed the chapter on Elinor Ostrom, but overall the volume is well-written, well-researched, and informative. Further, the fact that the whole book clocks in at under 150 pages and the chapters can be individually downloaded make this an excellent resource both in the classroom and for those seeking a broad overview to start filling in their own gaps. The beginning chapters of the book are an excellent introduction to “the woman question” in classical liberal thought: do we owe equal rights and consideration to these creatures who seem so different than ‘us’ (i.e., male intellectuals)? Sylvana Tomaselli’s chapter on Mary Wollstonecraft and David Levy and Sandra Peart’s chapter on Harriet Martineau are particularly valuable given the importance of Wollstonecraft and Martineau’s contributions relative to the amount of attention they’ve received. Similarly, the chapters on Mary Paley Marshall, Rose Director Friedman, Isabel Paterson, and Anna Schwartz do a superb job educating on the sometimes forgotten contributions of women to 20th century economic thought. Second, although there are many important and rich original texts on these questions, there are two absolutely essential (says me) pre-20th century classical liberal texts on women’s rights. The first of these is Mary Wollstonecraft’s Vindication of the Rights of Women. A key theme to read for in Wollstonecraft’s text is the question of how it shapes and changes a person to live under conditions of subjection and unfreedom, how it dulls the potential for that person to contribute to the world and to really be her best. In addition to her classical liberal perspective, Wollstonecraft is considered something of a mother of modern liberal feminism in general. As such her work suggests that there is a strong argument to be made for women’s liberation having a strong grounding in classical liberal theory. The second essential early text is John Stuart Mill’s The Subjection of Women. Although it is not often labeled as such, I consider this to be important as an early institutionalist approach to questions of women’s rights. Mill focuses on the idea that women and men have often been governed by alternative sets of rules and laws, and that this has naturally—but often for the worse—shaped the choices and potential of people of both sexes. After those foundations are covered, there are a number of directions one could go to carry this inquiry about women and classical liberalism through the 20th and into the 21st century. In addition to the chapters in Essential Women of Liberty on more recent contributors like Jane Jacobs, Elinor Ostrom, and Deirdre McCloskey, Wendy McElroy compiled a 2002 volume titled Liberty for Women: Freedom and Feminism in the Twenty-First Century that connects the classical liberal foundations of women’s rights to a wide range of contemporary applied topics. In addition, there has been a more recent resurgence of interest in questions related to the relationship between economic freedom and women’s well-being from Rosie Fike, Chelsea Follett, myself, and an ever-increasing number of others. Who else would you add to this list of places to start reading about women in the classical liberal tradition?   [Editor’s Note: We also suggest the current Liberty Matters Forum at the Online Library of Liberty, Why Do We Need Feminist Economics? to which Lemke contributes.]   Jayme Lemke is a Senior Research Fellow and Associate Director of Academic and Student Programs at the Mercatus Center at George Mason University and a Senior Fellow in the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics.   (0 COMMENTS)

(Photo by: Patti Perret/Hulu) Here’s the whole article I wrote with Phil Magness, published in the Wall Street Journal on February 20 (February 21 print edition.) ‘The 1619 Project’ on Hulu Vindicates Capitalism Its examples of racism are all the result of actions by governments. Hulu’s series “The 1619 Project” blames economic inequality between blacks and whites on “racial capitalism.” But almost every example presented is the result of government policies that, in purpose or effect, discriminated against African Americans. “The 1619 Project” makes an unintentional case for capitalism. The series gives many examples of government interventions that undercut free markets and property rights. Eminent domain, racial red lining of mortgages, and government support and enforcement of union monopolies figure prominently. The final episode opens by telling how the federal government forcibly evicted black residents of Harris Neck, Ga., during World War II to build a military base. The Army gave residents three weeks to relocate before the bulldozers moved in, paying below-market rates through eminent domain. After the war, the government refused to let the former residents return. Violation of property rights is the opposite of capitalism. The series also highlights the noxious role of the Federal Housing Administration in red lining. The FHA discriminated against minority neighborhoods by classifying them as too “hazardous” for lending. The writers could have strengthened their case by citing Richard Rothstein’s 2017 book, “The Color of Law.” Mr. Rothstein quotes the FHA’s statement in the 1930s that “no loans will be given to colored developments.” This policy lasted into the 1970s, leaving a legacy of economic segregation. Capitalism wasn’t the culprit; the government was. Economic historians have long known about discrimination by all-white labor unions. Jimmy Carter’s labor secretary, Ray Marshall, a labor economist, chronicled this discrimination in his academic work. The Wagner Act of 1935 gave white unions privileged bargaining positions under federal law. This government-sanctioned cartelization of labor allowed entire industries to exclude black workers. “The 1619 Project” asserts that labor unions advance the cause of civil rights, though the historical record says otherwise. The series recognizes the discriminatory effects of Franklin D. Roosevelt’s legislative agenda, which depended on the Democratic machines of the Jim Crow South. The narrator states that “the New Deal represented the first affirmative-action policy for white people.” We couldn’t have put it better. These and other government policies caused immense economic harm to African Americans. But they aren’t capitalism. They’re interventions into markets, state-sanctioned theft, and political payoffs to segregationists. The answer to these problems isn’t to place the burden on the market through reparations. It’s to root out bad government policies that continue, sometimes unintentionally, the long legacy of state-sponsored racial discrimination. That would be a worthy 2023 project. Mr. Henderson is a research fellow with Stanford University’s Hoover Institution and editor of The Concise Encyclopedia of Economics. Mr. Magness is director of research at the American Institute for Economic Research and author of “The 1619 Project: A Critique.” (0 COMMENTS)

What does it mean to say something is risky? How would we know? Would a failure confirm the view that a particular activity was risky?Consider two people gambling at roulette. Joe puts $100 on each number from 1 to 35. Jane puts $3500 on number 36. Both have bet $3500, and both bets have negative expected values (assuming a 36-1 payoff on the winning number, and 38 total numbers.)To me, Joe’s bet looks less risky. There’s more than a 90% chance he’ll win $100, although the expected value of the bet is still negative due to the fact that he loses $3500 if number 36, 0 or 00 comes up. Jane has more than a 90% chance of losing all $3500, but will win very big if number 36 comes up. That seems riskier. Now let’s assume that both people make their bets, and the little ball lands on number 36.  Does that improbable outcome mean that Jane’s bet was actually less risky than Joe’s.  I’d say no; she just got lucky. When I speak with people, I often get the impression that they conflate “risky” with “failure”.  That’s not how I interpret the term.  Consider two banks: 1. Silicon Valley Bank (SVB) takes deposits and invests them in Treasury bonds.  It is a fast growing bank. 2. Bank OZK (formerly Ozark) rapidly grows from a small Arkansas bank to a major lender for real estate projects in America’s largest cities. Which bank’s assets seem risker?  Based on this evidence, I would say that Bank OZK was far riskier. Now assume that SVB goes bankrupt, while Bank OZK is doing great.  Does that impact your view as to which bank engaged in a riskier strategy?  Should that fact influence your view as to which bank engaged in a riskier strategy?  If failure is evidence of riskiness, what does that imply about the roulette example discussed above. In 2018, I did a post on Bank OZK, citing it as an example of the sort of risk-taking bank encouraged by the moral hazard in our banking regime.  In retrospect, it looks like SVB would have been a better example.  But is that true?  Was SVB actually a riskier bank?  Or did number 36 come up on the roulette wheel? My failure to spot the bank that actually failed illustrates a problem faced by regulators.  In 2018, I was presumably looking back at the banking crises of the 1980s and 2007-10, and noticing that real estate lending often led to banking distress.  At that time, Treasuries had been in a bull market from almost 4 decades.  We tend to estimate risk based on past performance, especially the recent past.  Regulators are unlikely to spot risk that comes from an area that was not previously a major problem.  (Recall that in 2006, MBS investors were lulled by the fact that the US had never experienced a large nationwide decline in house prices.) In recent years, real estate has done surprising well, as inflation tends to boost the value of hard assets like land and buildings.  On the other hand, inflation reduces the value of T-bonds.  It’s quite possible that, ex ante, SVB’s approach was less risky (perhaps even profit-maximizing!), but these unpredictable macro trends hurt SVB and helped Bank OZK.  (To be clear, I suspect that there were other differences as well, perhaps Bank OZK has superior management.) I don’t believe we’ll ever be able to fix the banking system through regulation.  Regulators will always be like generals fighting the pervious war.  Instead, we need to remove the underlying problems—moral hazard and a lack of diversification.  Trump likes to talk about “Making America Great Again”.  How about “Make America’s banking system more Canada’s”? PS.  David Beckworth has an excellent piece in Barron’s discussing how the rise in interest rates has helped long-term borrowers (including the Treasury) while hurting bondholders.   (0 COMMENTS)

Scott Sumner recently posted on the importance of holding views that are inconvenient to your larger beliefs. I agree – it’s important for good intellectual hygiene to be aware of these things. In his excellent book Governing Least: A New England Libertarianism, Dan Moller makes a similar point, using constitutional law as a framing device: In theory, there ought to be a gap between one’s substantive position on abortion, or capital punishment, or gun control, or flag burning, or campaign spending, and what the Constitution says about these things, which would create the possibility of painful tensions – “I support abortion, but must concede that the Constitution contains no right to abortion”; “I support unlimited campaign spending by corporations, but deny that the Constitution carves out such a right.” The fact that one so rarely encounters partisans of issues tormented by constitutional barriers to their side prevailing indicates that in practice we are reluctant to acknowledge the distinction between substantive values and legal process – a depressing sign of how powerful motivated reasoning is. (A good test of our intellectual honesty is how often we experience this kind of torment.) With only slight exaggeration, I can say that when Obamacare was being challenged in the Supreme Court, knowing someone’s opinion on whether government should be more or less involved in health care predicted their belief about the constitutionality of Obamacare with a 100% success rate. Similarly, if I know someone believes the impact of private gun ownership is negative, I can make money all day long betting on what their view is about the meaning of the Second Amendment. In theory, it should be possible for someone to hold the belief that widespread gun ownership is bad, and should be curtailed by government, but also believe that such action is inconsistent with the Constitution, and therefore the Second Amendment should be repealed in order to permit such laws. In practice, I’ve had fewer encounters with such a person than I have with Bigfoot (if a vivid dream during a bout of sleep paralysis involving Bigfoot in your room counts as an encounter, anyway). What a remarkable coincidence that what the Constitution allows or forbids seems to always perfectly line up with what the advocate wants to permit or ban! But this post isn’t just here for me to make fun of motivated reasoning (or at least not just for that reason). I wanted to talk about a view I hold which is very inconvenient for me but, unfortunately, seems to be true. Much of what I find to be dysfunctional about the news media environment in America is being driven by market incentives. If I had to sum up my reasoning in a single soundbite, it would be something like this. The same incentives that led to the creation of the Discovery Channel’s Shark Week also led to the news media’s Summer of the Shark. The Discovery Channel airs Shark Week because doing so is a proven way to draw ratings. And the mainstream media hypes up rare but sensational events like shark attacks for the same reason – it’s an effective way to fish for ratings (no, I will not apologize for that pun). Media is, at bottom, a business – it makes its money by getting clicks, shares, views, selling subscriptions, and so forth. If there is a conflict between “produce content that provides a well-researched, nuanced, and thoughtful analysis of an important issue” and “produce content designed to get as many views as possible,” most news organizations have every incentive to go for the latter over the former. Like most businesses, success depends on producing something your customers wish to consume. Normally, that’s a great thing! But if most people want insubstantial piffle that flatters their existing political biases and confirms everything they already believe, media organizations that are most effective at providing that will get the most views, the most clicks, the most shares, and the most subscriptions. I don’t like this situation. I am a fan of the market mechanism and incentives, and I also think a free press is important. But I can’t deny that much of the sensationalism, the hype, and the echo chamber creation we see makes sense as a rational response to market incentives. And I don’t have a great solution for this either – as bad as I think things are, I believe attempting to counter it with government control of the news would be even worse. The best I can do is vaguely gesture at the need for a cultural, bottom-up solution where political loyalties are de-emphasized and viewed as less important, but that’s a pretty thin reed. Personally, I’d love to be convinced I’m all wrong about this, because I find this view very inconvenient – but at the same time, I’m aware that the fact that I want to be talked out of this belief probably makes me more susceptible to accepting bad arguments against it. As Richard Feynman once said, “The first principle is that you must not fool yourself, and you are the easiest person to fool.” Still, by all means, try to convince me in the comments I’m wrong.   (0 COMMENTS)

I’ll be discussion leader of a symposium this coming Friday and Saturday on the work of Thomas Sowell. I spent more time than I usually do coming up with discussion questions because Sowell’s writing is so clear, so evidence-based, and so persuasive, that I had trouble injecting controversy. The main controversy I could come up with is over his distinction between the “constrained vision” and the “unconstrained vision.” A very early article by Bryan Caplan helped me put my finger on my difficulties. Other than that, I found virtually everything in his writing straightforward. Here are some of my favorite quotes from Sowell. In his 1980 book Knowledge and Decisions, my favorite of his books, he discusses a famous economics article, “The Economics of a P.O.W. Camp,” written by R.A. Radford, a British economist who had been a prisoner in a P.O.W. camp. (By the way, if recall correctly, this article was on at least 3 of the syllabi we had during my first year of graduate school at UCLA, 1972-72. The article is a masterpiece.) Sowell writes: What is of wider social significance is that those prisoners who performed these services [as middlemen] were both widely utilized and deeply resented. The physical fallacy arose as spontaneously as the actions which demonstrated its falsity. In many of my classes I taught at the Naval Postgraduate School, after teaching Hayek’s “Use of Knowledge in Society,” which was also on at least 3 syllabi in my first year at UCLA, I used a short excerpt on the “Physical Fallacy” that includes the quote above. Here’s another excerpt from the same Sowell book: Like other forms of price controls, usury laws distort the communication of correct facts about credit risks without in any way changing those facts themselves. Here’s Sowell on the misallocation of labor due to conscription: Even in an all-out war, most soldiers do not fight, but perform a variety of auxiliary services, many of which can be performed by civilian employees, since most of these services take place far from the scenes of battle. From the standpoint of the army as an economic decision making unit, it is rational to draft a chemist to sweep floors as long as his cost as a draftee is lower than the cost of hiring a civilian floor sweeper. From the standpoint of the economy as a whole, it is of course a waste of human resources. Again, the use of force is significant not simply because force is unpleasant, but because it distorts the effective knowledge of options. One would take him to be saying that conscription is a bad idea. But an interaction I had indirectly with him (through his assistant at Hoover) in 1980 made me wonder. There are so many good Sowell quotes. I’ll do more later. (0 COMMENTS)

What is the libertarian analysis of the student loan forgiveness policy now being implemented (subject to Supreme Court approval) by the Biden Administration? Before we can offer any such examination, let us consider the following. The government first boosted tuition into the stratosphere by requiring all sorts of silly reports of universities, which necessitated the hiring of all types and varieties of academic bureaucrats. At one time, in the history of higher education, professors greatly outnumbered administrators; not any more. Then, in its largesse, this self-same institution lent money to students so as to be able to pay for the resulting enhanced tuition. Talk about creating the very problem you think you must solve. Now, the proposal is to forgive these resulting student debts. Libertarianism, of course, is the viewpoint that it should be illegal to threaten, or engage in, initiatory violence. With that introduction, we are ready to try to apply this perspective to this issue of the day, student loan forgiveness. One response to this challenge is to ask who is more worthy, on libertarian grounds, of being subsidized? That is, here is a booty seeking (or rent seeking, as the Public Choice theorists mischaracterize the matter) exercise, on behalf of supporters of this viewpoint. The two groups in contention for these benefits are these students who have not repaid their loans, and the general taxpayer, from whom additional taxes will be mulcted, if the program is executed. How shall we determine an answer to that question? It must be on the basis of which group adheres more closely to libertarian principles, of course. Someone has to pay for the forgiveness program; either the lucky students if this goes through, or the average taxpayer, who previously paid these monies, and, if these debts are repaid, will presumably benefit, other things equal, via lower taxes than would otherwise have prevailed. So, which group is more libertarian, and thus deserving of greater wealth? In my view, it is pretty much a tie. It is as if each assembly is worse than the other. On the one hand, the general electorate (apart from ballot box stuffing) is responsible for that senile old coot now occupying the White House. I need not say any more than that. This deviates markedly from libertarianism. What about the young students? According to that old maxim, if a young man in his twenties is not a socialist, he has not heart. If he still supports that malicious doctrine at the ripe old age of 50, he has no brain.  Then, too, through no fault of their own, these young ex students have been brainwashed into wokism, political correctness, virtue signaling, and more, which have been forced down their throats on campus. Probably, if this cohort were the only voters, Bernie Sanders would now be president. On the other hand, these ex students are innocent until proven guilty, and at least so far they are not entirely innocent of rights violations, but more nearly so than the general population. Hence, I call this a draw. There is another way to look at this matter. So far, we have left out of the equation government, which at least for radical libertarians, is nothing better than a vast criminal gang with excellent public relations ability. First, they engage in the robbery of taxation. Then, they lend some of the money compulsorily taken away from the entire population and lend it to college students. Now, the government wants to forgive these loans, turning these loans into outright gifts. So, who is further removed from the freedom philosophy? The evil state or these young people? Here, the case is fare more clear. The U.S. government is one of the most malevolent institutions now operating. They are far worse than any passel of recent college graduates. So, should money leave the hands of the devil, and be transferred to relative innocents? Yes, of course. That’s why they call me Walter Moderate Block. By all means forgive these loans, so that money can pass from the more guilty to those who are less so. It cannot be denied that the government will then have less money with which to perpetuate its wicked deeds. To be sure, they can always, subsequently, increase their tax take, but that is entirely a different matter. And, also, there are limits as to how much blood you can get out of a stone. As Arthur Laffer has shown, raising tax rates cannot always be relied upon to this end. There is a ceiling over which government cannot rise in its rate of intrusiveness. If they now thought is was optimal to raise their rate of theft, presumably they would have already done so. There is a third and even better libertarian way to look at this matter: via private property rights. Who are the rightful owners of the monies now in question? If we had a God’s eye view, we could easily settle this matter. We have no such vision. All we can do is, ineptly, try to put Humpty Dumpty back together again. The benefit of trying to trace from whence this wherewithal came, into whose hands it now rests, would be a full employment bill for accountants and economists. On the other hand, and there is another hand, if the government wants to forgive loans, presumably, it is in the interest of government to do just that. This would be the case for libertarians opposing this give away. However, the government is so inept, that we cannot blithely assume that just because it wants to pursue a policy, it really is in their best interest. That would be the case for favoring loan forgiveness. Sorry to be so unclear as to the final determination of the libertarian; but this really is a complex case. Two more considerations must be mentioned. First, what about those students who have already repaid their loans? By all means, government coffers should be reduced even further in favor of these people, too. Rights violations will thereby be reduced, when the statists have less money (However, those who repaid are not entirely innocent; they rendered money to Caesar, when with the benefit of hindsight, they may not have had to do). Second, why did so many students have such a hard time repaying their debt to the government? Simple, all too many of them majored in grievance studies. This renders them unusually chatty baristas, but they don’t earn enough money to support their misspent college days.   Walter E. Block is Harold E. Wirth Eminent Scholar Endowed Chair and Professor of Economics at Loyola University New Orleans and is co-author of the 2015 book Water Capitalism: The Case for Privatizing Oceans, Rivers, Lakes, and Aquifers. New York City, N.Y.: Lexington Books, Rowman and Littlefield (with Peter Lothian Nelson ). (0 COMMENTS)

Indeed, improvements in technology were so important that the one chapter Bryson devotes to something other than a room in the house or a physical area in or around the house is his chapter on the fuse box. Electricity truly revolutionized life. Bryson writes, “The world at night for much of history was a very dark place indeed.” A good candle, he adds, “provides barely a hundredth of the illumination of a single 100-watt lightbulb.” Although Bryson makes a good case for how important lighting was and is, he would have made an even stronger case had he drawn on the pathbreaking work by Yale University economist William D. Nordhaus. In a study done in 1996, Nordhaus found that failure to adjust appropriately for the plummeting cost of light has led economic historians to dramatically understate the growth of real wages over the last 200 years. That one invention, plus many others, led to a burgeoning middle class. This is from David R. Henderson, “Home Economics,” Policy Review, February 1, 2011. It’s my review of Bill Bryson’s excellent book At Home: A Short History of Private Life. For some reason, I’ve been appreciating electricity more lately. When our power came on at about 5:00 p.m. last Friday, we had already rented a motel room. My wife and my visiting daughter stayed there and I went home from the motel to feed the cats. The electricity gave me a lot of energy, so to speak, and I moved around the house, tidying things up and putting lanterns away, as if I had the energy of a 20-year old. There’s probably more to say, but that’s it for now. (0 COMMENTS)

A great deal of attention has focused on the bailout of SVB depositors, but the bigger story is the bailout of other banks. (At least bigger as of today, there are rumors the government may extend the over $250,000 deposit bailout to all banks. You can imagine what I think of that idea.)David Beckworth has a podcast where Steven Kelly discusses how the new Fed loan facility works.  Here’s David: Beckworth: Daniela Gabor, she wrote something in a similar vein. She said, “Forget about SBV liabilities for a second. The real bailout story is the regime change in the Fed’s treatment of collateral. Par value goes against every risk management commandment of the past 30 years. It turbocharges the monetary power of collateral.” Kelly explains the problem by considering a situation where banks paid $90 for bonds with a par value of $100, and then the market value fell from $90 to $80: Kelly: So not only did they say, “Well, we’ll give you the 80 and we’ll calm things down. We’ll replace the 80 that you lost from uninsured depositors being flighty. Nor will we give you 90, which is what you’ve been carrying your books at, so you don’t have to recognize the loss of funding there. We’re going to give you 100, which can solve other problems on your books too.” So that’s super unique. And Daniela’s language is more dramatic than mine and more eloquent than mine, but that’s exactly the point she’s making. The Fed’s treating these bonds as $100 worth of collateral, despite the fact that the banks paid $90 and the market value is only $80.   But I slightly disagree with Kelly’s framing here: Beckworth: So I like the framing you just made, that this is effectively a capital injection, because they’re paying above par. Well, they’re paying par which is above market value, so it’s effectively a capital injection. I also heard someone else put it this way on Twitter, “The Fed is effectively doing unsecured lending.” Is that also another interpretation? Kelly: So it is if you think, okay, you’re getting 90 bucks of collateral for a $100 loan. I mean the Fed’s not totally bound by those values. The Fed’s legal mandate, especially with 13(3), is that it does not expect losses ex ante. There’s really no reason to expect loss if you’re the Fed. You’re talking about treasuries… There’s no reason to expect a loss if you hold this stuff to maturity, which is typically how they think about it, and they have 25 billion from the Treasury, I would argue unnecessarily, but I don’t think the Fed needs to think about this as unsecured. It looks like a loan against underwater collateral, but they’re going to get paid back, which is sort of their floor for secured to satisfaction. He’s probably correct that the Fed won’t end up losing money here.  But it’s not quite correct to imply that holding these depressed bonds to maturity solves the problem.  The Fed is already likely to incur some very large losses from its current holdings of Treasury bonds.  In previous posts, I’ve explained how those losses cannot necessarily be avoided by holding the bonds to maturity. Of course it’s very possible that these bank loans do get repaid, and it’s also very possible that we have a recession and interest rates fall sharply, boosting the value of the Fed’s long-term bond portfolio.  So I’m not predicting big Fed losses from these particular loans.  But there’s no getting around the fact that if you treat $80 bonds as representing $100 worth of collateral, you are giving the banks a gift.  And someone must bear the cost if those loans default. We are adding moral hazard to the system so rapidly it’s making my head spin.  And not just in finance.  Think of the Covid bailouts of many businesses, or the student loan bailouts.  The more safety nets we add, the less incentive people have to be careful. (0 COMMENTS)