“The State of Modern Economics”
http://www.richmondfed.org/publications/research/region_focus/2008/spring/pdf/cover_story.pdf

“Is Rational Man Extinct?”
http://www.richmondfed.org/publications/research/region_focus/2008/spring/pdf/rational_man_extinct.pdf

I really think that regardless of best intentions and current management
personnel, the leveraged nature of the banking system will be prone to blow ups taking the economy (us) with it.

More than most, Roach’s article provides an objective assessment of Greenspan’s tenure at the Fed under four Presidents.

An interesting view you might consider is that Greenspan came out of the Reagan years, that Milton Friedman’s influence of monetary policies in economics at both the macro and micro levels started to predominate, that inflation was recognized as the chief impediment to stable economic policy, and that an ebulient mood for growth and expansion on the part of the public combined to achieve the largest continuous success of economic policies in recent world history.

If we look at the lastquarter century, much of which was under the guidance of Alan Greenspan, we can see the positive influence of long-term stability, rather than erratic fiscal adjustment.

The various “bubbles” or crises throughout that time cannot be laid squarely at the feet of either one man, or one institution, but on the outlook of human nature itself.

but

fueled by bank credit originating from Greenspan’s pumping of bank reserves during his tenure.

I doubt if the carnage would be so bad if you just had a bunch of greedy speculators with their own money.

I look back at the the dot-com bubble and the stock speculation that led to the 1929 stock market crash.

The fuse was easy bank credit .

I

It’s often called the “Goldsmith Principle” and goes back to the times of St. Thomas Aquinas. (thirteenth century) It is the foundation of modern banking, now referred to as “fractional reserve” system.

The goldsmiths of the time knew that people were unlikely to withdraw all their gold at the same time.

Thus, they could lend out a certain quantity on that premise, isue promissory notes in exchange for the gold, and essentially modern banking developed beyond its ancient roots. Over the centuries since, the practices became highly sophisticated.

That principle of fractional reserve lending became widely accepted, athough Aquinas decried the practice of usury (the charging of interest for lending).

Strict Islamic banking still follows that premise of usury.

In today’s world, there are, of course, many differences in the interpretation of fractional banking, such as the Austrian school of thought. Whether actual gold is held against a currency in a country or whether the Fed “creates” money through a modern system and the currency has nothing to back it except “faith” is an ongoing controversy.

Today’s financial panic is a good example of that faith being severely tested, since there is no “hard” backing of the U.S. currency.

At the bottom of the problem is not the fractional reserve system itself, but the wide level of speculation fueled by greed.

There … there’s one economist who said it!

Bankers helped shaped banking laws and the monetary system of today— which is fractional reserve banking. Keynes was a British economist and his views
had great influence on policymakers of the day.

Fractional reserve banking?

You know, where a banker takes One dollar in deposit then turn around and loan out Eight dollars. Banking law allows them to do this, so it is legal, for them. So the bank is actually collecting interest income from the phantom Eight dollars created by bank laws. Read that again.

The fragile nature of this system is exposed when all depositors want to withdraw all their money. How dare them.

Of course the bank cannot possibly honor all the withdrawals since they do not have all the money.

These bank runs used to turn into panics. Banks call their loans early and cause businesses to collapse and the economy falls into recessions. In fact this caused the depression in the 1920s if I’m not mistaken.

My point is that even then, no one seem to place the blame
on the leveraged nature of the banking system itself.
Except maybe a foreigner named Ludwig von Mises.
But he was dismissed as some irritating heretic who didn’t understand the new economics.

The fragile system was left intact and has since spawned
numerous economic displacements.

Now which economist of today has the “perception ” to actually point out what the cause of the problem is?

Not a lot.
Perhaps they were drinking from the same punchbowl served at American universities today.

You can poll the same amount of business owners as economic students.

Withdrawals anyone?

The current financial crisis is sure to have an impact on shewing the curves …especially on self-perception!

I agree, “the goal of maximization in a physical sense is bound to have many undesirable effects” — “homo economicus,” as the sum of the following traits: “rational, self-centered, perfectly informed individuals who want wealth and avoid unnecessary labor,” is a no-go.

Cristian -your article should be a “must read” for all of our “Amateur Economists” readers. Obviously I agree with your concept of “successful existence,” which really cannot (or should not) be reduced to a pat formula, economic or otherwise. This might even, as you suggest, include maximizing, as long as the inherent dangers of such maximization are considered. It would seem that at this stage of our world, the goal of maximization in a physical sense is bound to have many undesirable effects. If man is “rational” perhaps maximization is not a desirable alternative for which to strive, even if deemed to be “inherent to all living things.”

MLB – I think the appropriate model for “Homo economicus” would be from econometrics, showing reasonable maximized alternatives as measurable potentials, but not as simple, yet iron-clad facts of life showing it as a goal.

For example, how much do we need to eat as a minimum? We could even use a quantifiable measure like “caloric intake” as a guide, rather than a purely American vle (and not run the risk of an overweight population?? Then we might consider how we could distribute more effectively using “satisfycing” rather than “maximizing.” Agree?

Chris – The Austrian School is closer to the “satisfycing” view in that it is more subjective and encompasses more indivudal choices, rather than simply aggregating those choices.

You might find Cristian’s article of interest!