My own, I’m afraid. The thing about Mises, IMHO, is that while he was basically right, he was basically right in the context of Austro-Hungarian finance. (Mises actually had more or less Bernanke’s job in 1920s Austria, not exactly a placid lake of financial stability – he was no armchair theorist.)

There is not really anything new in the Austrian canon after Mises. If fact, if you only read one book by Mises, I favor his _Theory of Money and Credit_ – 1912. Rothbard was a titan, but he was also an orthodox Misesian, and his ideology tends to interfere with his economics. Everyone else, including Hayek, is just not in the same class. And worse, the modern Austrians are mostly focused on defending, rather than upgrading, the legacy. Quite understandably! But still…

Basically what I mean by “Austro-Hungarian finance” is that the Misesians took the gold standard for granted and considered fiat currency an abomination. Well, it is an abomination – in retrospect, it’s pretty hard to call it a good idea. But that doesn’t mean you can’t use the basic Misesian methodology to think about a fiat system.

So take this Ron Paul speech from 2002, on the GSEs. Prescient? Sure. The speech was probably written by Lew Rockwell (don’t even start me on Lew Rockwell), who was a student of Mises and Rothbard. But note that the only solution offered for the problem is to liquidate, liquidate, liquidate.

Well – in Austria in the ’20s, liquidating back to gold was an option. Almost, sort of. And theoretically now it is an option. I really think you might be able to get the gold price back to $20, or at least $33, if you liquidated to M0. But is this a *good* option?

As for government liabilities, I think of USG as a sovereign corporation – basically, it owns America. The only difference is that this ownership is enforced by its own guns and bombs, not some higher (temporal) power. And this is not a financial difference.

So you would expect USG’s paper, whatever we call it, to be pretty valuable. As indeed it is. Whether the source of the future payment streams USG can generate is taxation, real estate sales, or natural resources, it’s – as Cedric would say – money.

Your view of government liabilities as equity is intriguing. Is that an Austrian slant or your own?

Government and CB liabilities are uniquely strange. I’ve always thought of the consolidated balance sheet as having a hole that is plugged with the present value of taxation – which technically is a component of human capital rather than physical or financial capital.

Again, only for people who do their accounting in dollars. For those who do their accounting in other currencies, there is a huge currency risk, because they are only denominated in dollars, so the currency risk cannot be separated.

Such an innocent statement! With BoA/ML merger and the suspension of 23A, that’s no longer regulatory arbitrage, that’s regulatory policy — in effect the Fed is *requiring* banks to do that. Isn’t it funny?

The people who do this “regulatory arbitrage” are mostly the financiers. Ordinary depositors don’t normally bother partly because without leverage the small arbitrage gains are simply not worth it. Do you do your banking (I mean checking/savings accounts not long-term investments) at institutions based on how much interest they offer instead of convenience, location etc? This is purely a theoretical problem that does not exist in reality.

We can sit here all day and invent theoretical problems with any regulatory regime. In the real world well-designed regulatory policies work extremely well.

Twofish: It’s easy to say more and more regulation now. Just wait five to ten years. People have short memories.

Sure the financiers will whine and moan about any regulations that limit their windfall profits. They are a hypocritical bunch. The job of the regulator is to stay firm and say no.

This thing about short memories etc is just a cliche. People who lived through the 1930’s still remember lessons from that period. Normal people outside of Wall St are just not that short-term oriented.

Twofish: You are an unsecured creditor of an investment bank. You don’t know that you are, but you are. A owes B. B owes C. C owes D. D owes E. When A goes under, you have a chain of dominos falling and you are in that chain.

It’d be wonderful if creditors are forced to do their due diligence before lending to LEH or Citi in future. I see it as entirely a good thing.

I don’t think we disagree on anything substantive here, but let me explain anyway.

Basically, while I share the consolidated perspective, I see both FRNs and Treasury obligations as equity, not debt.

Certainly the dollar, being nonredeemable, is not a promise to pay anything. When it was redeemable for metal it was zero-maturity debt. The transition from debt to equity is the normal result of defaulting on obligations.

Moreover, “risk-free” debt is an oxymoron. But a T-bill *is* risk-free – the people selling CDS on them are pretty much charlatans. (I’ll sell you as many Treasury CDS as you want to buy. Cheap, too.)

In the equity space, however, there is an analogous instrument: restricted stock. Google, for instance, compensates its employees with restricted shares which vest over time.

Therefore it’s very easy to imagine restricted dollars. On the face of the dollar is printed a date, after which it is a valid dollar that you can use to buy a hamburger. Until that date, it has to be priced by a financial market. Try to spend it, and the cashier will get all huffy with you.

If we accept the premise that Treasury obligations are risk-free – implicit in the consolidated perspective – for any Treasury note, you can construct a precisely equivalent structure of restricted dollars.

In a non-MT financial market, these restrictions would be extremely significant. I’m very curious as to what 2038 dollars would go for. But under the rules of MT finance, banks can lend 2008 dollars which are backed by 2038 dollars. Naturally this has a considerable positive effect on the price of 2038 dollars.

Capisce? (I, too, am a huge Cedric fan.)

Moldbug,

You really lost me on this one. I’d need a rewording somehow in order to understand it.

But Brad’s point is quite correct technically. It would be overlooked by 99 per cent of people with an opinion on the subject, but is important to conventional interpretation. I understand your consolidated perspective on the government/treasury/Fed balance sheet and tend to think in those terms myself. You’re probably aware that the Fed has been controlling the monetary base as defined, first with substitution activity on the asset side (bills for “crap” (but “crap” fairly marked down at an inflection point for the substitution decision)), and now with intermediation activity sourced on the liability side that similarly doesn’t affect the monetary base. That’s all in terms of monetary tiers as conventionally defined, prior to your kind of conceptual transformation, of course, but Brad’s point still deserves some credit.

I really don’t think so, since people have short memories and incredible ability to rationalize behavior, and next time people will come up with fifty reasons why this time is different.

I think that the focus needs to be less on finding scapegoats and more on increasing regulations to make sure that when you have a downturn the next time, it doesn’t turn into a crisis.

In which case what people end up doing is to move their money from regulated insured deposits to unregulated deposits with pseudo-insurance. When the pseudo-insurance falls apart, we end up in the current situation.

The other problem is that you get regulatory arbitrage. You take money that is from low-yield regulated products and then you figure out ways of buying unregulated high-yield products. You end up making a lot of money until everything falls apart.

pseudo: Summary: with prudent regulation any moral hazard associated with deposit insurance can be reduced to negligible levels.

I think you are going to find it a lot harder to do this than you think. Especially in 10 years when everyone forgets about this little episode and are complaining about how little they are making in boom times.

It’s easy to say more and more regulation now. Just wait five to ten years. People have short memories.

pseudo: Compare this with the blatant hazard/unfairness involved in bailouts of unsecured creditors of investment banks.

You are an unsecured creditor of an investment bank. You don’t know that you are, but you are. A owes B. B owes C. C owes D. D owes E. When A goes under, you have a chain of dominos falling and you are in that chain.