There is no such thing as a free market - and never will be!

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There is no such thing as a free market - and never will be!

John Michael Greer's latest blog post, called Harnessing Hippogriffs.  He debunks the idea that a free market has ever existed or even can exist. He also exposes the argument that we can either have a "free-market, capitalist" system or a "socialist" system for what it is: a straw man.  I'm sure it will generate some controversy here, so have fun!

Harnessing Hippogriffs

One of the more interesting aspects of writing these essays is that I can never predict in advance what will get me a flurry of outraged responses each week. It’s a fair bet that something always does; the collective conversation of the modern industrial world has become so overheated in the last decade or so that it’s difficult to say much of anything without getting somebody in a swivet; still, what it is that sets off the swiveteers routinely catches me by surprise.

Last week was no exception. Of all the things in that essay that might plausibly have launched the usual cries of outrage, the one that did so was an offhand reference to the free market fundamentalists of the Austrian school, many of whom insist that the proper solution to every economic problem is to let the market have its way. As it happens, in making that comment I was thinking specifically of Michael Shedlock aka Mish, whose blog is one of the handful I read daily. 

Mish is among the most thoughtful and articulate proponents of the Austrian school in today's blogosphere, and he has an excellent eye for the economic news that matters – which is by and large exactly the economic news that the rest of the media avoids covering. Very nearly the only thing on his blog that makes me roll my eyes is his repeated insistence that the market is always right and government regulation is always wrong; no matter how berserk the market gets, its vagaries are for the best, and any problems should be corrected by privatizing even more government functions. Now of course Mish is hardly an official spokesperson for the Austrian school, as if there were such a thing, but he's not exactly alone in his insistence, either.

Enough people in the peak oil scene share similar views that it's probably necessary to say something about the free market and its potential for solving or creating problems during the twilight years of industrialism ahead of us. Any such comments need to be prefaced, though, by a reminder that a spectrum consists of something other than its two endpoints. Just as a great many people on the left have picked up the dubious habit of using labels such as "fascism" for any political system to the right of Hillary Clinton, a great many people on the right seem to have convinced themselves that any form of economic regulation at all is tantamount to some sort of neo-Marxist hobgoblin – a "socialist-communist-ecologist" system, to use a phrase that actually appeared in one of the comments fielded by last week's post.

Now it bears remembering that drowning is not the only alternative to dying of dehydration; there's a middle ground that is noticeably more pleasant than either. The same principle also applies in economics. The experiment of having government own all the means of production in an industrial society, along the lines proposed by Marx, received a thorough test at the hands of the Communist bloc and failed abjectly. At the same time, the experiment of having government keep its hands off the economy altogether in an industrial society, along the lines proposed by a great many free-market proponents these days, received an equally thorough test, and failed just as dismally. The test took place a little earlier; in America, it ran from the end of the Civil War into the first decade of the twentieth century, and the result was a catastrophic sequence of booms and busts, the transfer of most of the nation's wealth to a tiny minority of wealthy people, the bitter impoverishment of nearly everyone else, and a level of social unrest that included two presidential assassinations and so many bomb attacks on the rich and their families that bomb-throwing anarchists became a regular theme of music-hall songs.

Now it's always possible for theorists to contrast a Utopian portrait of a free-market economy against the gritty and unwelcome realities of extreme socialism, just as it's possible for people on the other side of the spectrum to contrast a Utopian portrait of a socialist economy against the equally gritty and unwelcome realities of unfettered capitalism. Both make great rhetorical strategies, since the human mind is easily misled by binary logic: if A is evil, it seems wholly reasonable to claim that the opposite of A must be good. The real world does not work that way, but this is hardly the only case in which rhetoric ignores reality. 

The problem with the rhetoric, however, may be stated a bit more precisely: however pleasant they look on paper, free markets do not exist. Strictly speaking, they are as mythical as hippogriffs.

It occurs to me that some of my readers may not be as familiar with hippogriffs as they ought to be. (Tut, tut – what do they teach children these days?) For those who lack so basic an element in their education, a hippogriff is the offspring of a gryphon and a mare; it has the head, body, hind legs, and tail of a horse, and the forelimbs and wings of a giant eagle. Hippogriffs are said to be the strongest and swiftest of all flying creatures, which is why Astolpho rode one to the terrestrial paradise to recover Orlando's lost wits in Orlando Furioso, and why Juss rode one to the summit of Koshtra Pivrarcha to rescue Goldry Bluszco in The Worm Ouroboros. They are splendid creatures, no question; their only disadvantage, really, is the minor point that they don't happen to exist, and drawing up plans to use them as a new, energy-efficient means of air transport in the face of peak oil, for instance, will inevitably come to grief on that annoying little detail.

Free markets are subject to essentially the same little problem. There have been many examples of market economies in history that were not controlled by governments, but there have been no examples of market economies that were not controlled, and if one were to be set up, it would remain a free market for maybe a week at most. Adam Smith explained why in memorable language in The Wealth of Nations: "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or some contrivance to raise prices." When a market is not controlled by government edicts, religious taboos, social customs, or some other outside force, it will quickly be controlled by combinations of individuals whose wealth and strategic position in the market enable them to maximize the economic benefits accruing to them, by squeezing out rivals, manipulating prices, buying up their suppliers, bribing government officials, and the like: that is to say, behaving the way capitalists behave whenever they are left to their own devices. This is what created the profoundly dysfunctional economy of Gilded Age America, and it also played a very large role in setting up the current debacle.

There's a rich irony here, in that the market economy portrayed in textbooks – in which buyers and sellers are numerous and independent enough that free competition regulates their interactions – is exactly the sort of commons that so many free market proponents insist should be eliminated wholesale in favor of private ownership. All commons systems, as Garrett Hardin pointed out in a famous essay a while back, are hideously vulnerable to abuse unless they are managed in ways that prevent individuals from exploiting the commons for their own private benefit. This year's Nobel laureate in economics, Elinor Ostrom, won her award for demonstrating that it's entirely possible to manage a commons so that Hardin's "tragedy of the commons" does not happen, and she's quite right – there have been many examples of successfully managed commons in history. Strip away the management that keeps it from being abused, however, and the free market, like any other commons, rapidly destroys itself.

This does not mean that the best, or for that matter the only, alternative to the unchecked rule of corporate robber barons is Marxist-style state ownership of the economy; once again, dying from heatstroke is not the only alternative to dying from hypothermia. It means, rather, that something between these two extremes might be worth trying, especially if it can be shown by historical evidence to work tolerably well in practice. Of course this is what history shows; broadly speaking, economies that leave the means of production in private hands, but use appropriate regulation to harness their energies to the public good, consistently produce more prosperity for more people than either unfettered capitalism or extreme socialism.

This being said, the midpoint between these extremes may not lie where today's conventional wisdom tends to place it. Consider an example from the not too distant past: a large industrial nation with a capitalist economy, but remarkably tough regulations restricting the growth of private fortunes and the abuses to which capitalist economies are so often prone. The wealthiest people in that nation paid more than two-thirds of their annual income in tax, and monopolistic practices on the part of corporations faced harsh and frequently applied judicial penalties. The financial sector was particularly tightly leashed: interest rates on savings were fixed by the government, usury laws put very low caps on the upper end of interest rates for loans, and hard legal barriers prevented banks from expanding out of local markets or crossing the firewall between consumer banking and the riskier world of corporate investment. Consumer credit was difficult enough to get, as a result, that most people did without it most of the time, using layaway plans and Christmas Club savings programs to afford large purchases.

According to the standard rhetoric of free market proponents these days, so rigidly controlled an economy ought by definition to be hopelessly stagnant and unproductive. This shows the separation of rhetoric from reality, however, for the nation I have just described was the United States during the presidency of Dwight D. Eisenhower: that is, during one of the most sustained periods of prosperity, innovation, economic development and international influence this nation has ever seen. Now of course there were other factors behind America's 1950s success, just as there were other factors behind the decline since then; still, it's worth noting that as the economic regulations of the 1950s have been dismantled – in every case, under the pretext of boosting American prosperity – the prosperity of most Americans has gone down, not up.

It makes a good measure of how far we have come as a nation – and not in a useful direction – that the economic policies of one of the most successful 20th century Republican administrations would be rejected by most of today's Democrats as too far to the left. A case could be made, in fact, that far and away the most sensible thing the US Congress could do today, in the face of an economy that has very nearly choked to death on its own bubbles, is to reenact the economic legislation in place in the 1950s, line for line. (When you're hiking in the woods, and discover that you've taken a trail that leads someplace you don't want to go, your best bet is normally to turn around and go back to the last place where you were still going in the right direction.)

Yet there's an interesting point that also ought to be made about the economic regulation of the 1950s. Outside of antitrust legislation, not that much of it applied to the economy of goods and services on any level, whether that of Mom and Pop grocery stores or big industrial conglomerates. The bulk of it, and very nearly all the strictest elements of it, focused on the financial industry. More broadly speaking, instead of regulating the production and consumption of goods and services, the economic policies of the Eisenhower era focused on regulating money: on ensuring that too much of it did not end up concentrated unproductively in too few hands, and on controlling its propensity to multiply as enthusiastically as rabbits on Viagra. The relative success of these measures points toward a distinction already made in these posts, and to practical steps that will be explored in next week's post.

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Re: There is no such thing as a free market - and never ...

Thank you, thank you, thank you for posting this!

Finally. I've been saying this for a long time while being branded as a socialist.

Communism, Socialism, Capitalism ----> Unregulated and unaccountable ----> Wealth transfer to small minority ----> Feudalism.

Police departments, fire departments, public works, military (all socialistic by definition) are necessary for a healthy vibrant civilization. If you privatize these then some will not be able to afford them and soon only a small minority can afford them and again, feudalism.

The solution isn't 'no government intervention at all'. The solution is 'how much and where government should be involved'. Remember, "We the people..." We are the government. For it to be that way 'WE' need to stay involved and insist on accountability and results.

 

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Re: There is no such thing as a free market - and never ...

Great post Johnny Oxygen,

What you said is so true, and that government IS the solution to our problems, because we have the greatest form of government ever invented, the problem is the people running it.  WE (I can't stress this enough) have to start putting enough pressure collectively on our state and local governments to start passing laws that benifit the people (like the MTA) and get rid of the laws that are only passed to help transfer the wealth of the many to the few.

It's only the people who own and control most of the worlds wealth that fear the citizenry taking back control of the govnernment because if that were to happen I highly doubt We The People would allow the elite to use our government as an enforcement tool to transfer all the wealth of the people into a few private hands, and what gives the elite this power is the fact that they own and control 100% of the nations money supply as interest bearing debts owed to them and all the power associated with that.  When the banking system can take everything you own in an instant, or make you rich beyong your wildest dreams by simply writing down numbers in a checking account, how long do you think it would take to corrupt an entire political body?  Don't play ball, they break you, play ball, you're set for life.

Is it any wonder why the powerful elite contantly push the idea that government is the problem when its the powerful elite who fund all that propoganda to keep the masses distracted while they commit their crimes against humanity?  The elite know that the people are fully capable of self-government, what they fear is self-government because if that were to happen the masses would probably not allow the elite to steal from them.

 

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Re: There is no such thing as a free market - and never ...

I think its such a cop-out to blame the goverment for all our problem in the same way it is a cop-out to expect the government to fix all our problems.

It's time to grow up and assert ourselves. The tools are there. The founders gave us all the tools we need we just have to have the will to fight for it, and thats just what is is...a fight. Quit buying crap you don't need, take your money out of national banking chains and put it in local credit union. Cut off the blood to the vampires and they will die.

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Re: There is no such thing as a free market - and never ...

So surprising that only two people responded to this thread.  In my opinion, it's one of the most relevant and important topics to be discussing in all of this. 

I guess the middle way never was very popular.  

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Re: There is no such thing as a free market - and never ...
switters wrote:

So surprising that only two people responded to this thread.  In my opinion, it's one of the most relevant and important topics to be discussing in all of this. 

I guess the middle way never was very popular.  

Sorry, Swits, I've been preoccupied with living, and haven't gotten a change to peruse this one . . . I'll try to sit down and read it tonight. 

Until then,

Cloudfire

 

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Re: There is no such thing as a free market - and never ...

Me too.

Really important topic. Would be really nice to hear CM's opinion.

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Re: There is no such thing as a free market - and never ...

Wow, are we all reading the same posts? My takeaway from this is nothing like what Johnny Oxygen got (although I like his post), and my take on Johnny's post is NOTHING like what Thomas Hedin got from that  either!

But anyway...

switters wrote:

So surprising that only two people responded to this thread.  In my opinion, it's one of the most relevant and important topics to be discussing in all of this. 

switters

It's definitely not for want of a catchy title. You must be an advertising man! I think the problem is, even on an enlightened site like this one, the number of comments tends to be inversely related to the length of the original post!   But I'm actually surprised too. 

switters wrote:

There is no such thing as a free market - and never will be!

John Michael Greer's latest blog post, called Harnessing Hippogriffs.  He debunks the idea that a free market has ever existed or even can exist. He also exposes the argument that we can either have a "free-market, capitalist" system or a "socialist" system for what it is: a straw man.  

I wouldn't call the argument Greer is trying to expose a 'straw man' (actually I think HIS argument is a straw man! - but I'll get back to that). Instead I'd say what he's trying to expose (and what you're describing here) is a classic 'false dichotomy,' or as some prefer, the 'fallacy of the excluded middle.'

But before any one gets ready to knock the chip off my shoulder, let me concede up front - I'm no particular expert on logic, neither in it's nomenclature, nor more importantly, in it's application! 

But to the story.

There's actually quite a bit I agree with in Greer's post. But while he's advancing his excluded middle argument quite persuasively, he's also creating a straw man of his own by redefining the free market argument in unrealistically absolutist terms, people like Mish have never claimed. Is a free market not free unless it's pure anarcho-capitalism? I could just as well make the argument that "there's no such thing as freedom - and never will be," because even in the freeist society, there are always a few necessary restrictions. If my neighbor's fence prevents me from wandering wherever I please, does that mean I'm not free? (Of course today, government confiscates 50% of everything we produce, but that's another story!)

Greer's preference for much more regulation and his criticism of Mish completely omits game changing aspects of Mish's ideology. Yes, Mish favors market based solutions, but he also advocates eliminating the central bank (the Federal Reserve) and eliminating fractional reserve banking on the libertarian grounds that the first is unconstitutional and the mother of all regulations, and the second constitutes fraud. This changes everything. Certainly, fractional reserve banking goes a long way towards explaining the19th century booms and busts Greer alludes to. And in today's world, with Mish's model, Credit default swaps, CDOs, the Gramm-Leach-Bliley deregulation, and all the other financial weapons of mass destruction wouldn't even be an issue. But instead, we now have the government expanding itself and adding new powers to counteract what it got wrong in the first place.

And so Greer longs to return to the 50's when the market was much more tightly regulated. I agree, if we're going to have the Fed with it's reckless printing press, and the private banking system conjuring money out of thin air, then yes, we need scrupulous regulation (although, especially having watched the Markopolos hearings, I have absolutely no confidence in their ability to do it). But why just treat the symptoms, and put the patient on more medicine with ever more side effects, when you can eliminate the root cause? And let's not forget, the problem is not just systemic risk. The insidious inflation tax baked into this system, even if mitigated somewhat by more responsible regulation, will always be inherently regressive, requiring ... more government to counteract it.

I don't disagree, some blend of socialism and free markets is necessary and desirable. Traditional libertarians harking back to the Founding Fathers have always understood this to be a necessary compromise. There are certain fundamental needs in which the public good is far better served by government and public commons. And markets need the rule of law and fair arbitration. But while Greer's surprising notion that the ideal blend actually falls far to the left even of today's Democratic Party, probably WOULD actually be an improvement in some ways over today's grotesque uber-capitalist welfare/warfare state, it falls far short of the dramatic improvement I think we would see if we could somehow implement a plan more in line with Mish's thinking instead.

Greg

 

 

 

 

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Re: There is no such thing as a free market - and never ...
Johnny Oxygen wrote:

I think its such a cop-out to blame the goverment for all our problem in the same way it is a cop-out to expect the government to fix all our problems.

It's time to grow up and assert ourselves. The tools are there. The founders gave us all the tools we need we just have to have the will to fight for it, and thats just what is is...a fight. Quit buying crap you don't need, take your money out of national banking chains and put it in local credit union. Cut off the blood to the vampires and they will die.

Except what I read in this topic is also Uptopian dreaming.

Our "government regulations" are all under complete regulatory capture. And the reasons why our economy is haywire is that the governmental institutions are all controlled by the corporate structure.

You are assuming a rational, thinking body politic. I think that is a fatal assumption. We do not have a diligent and educated public. Au contraire, we have a public chock full of simpletons, easily satiated by bread and circuses.

That said, and I hate to be the guy to rain on anyone's ideas, but a "regulatory" government hasn't worked either. While the idiocracy is amused with NFL football, the hottest 5th Avenue supermodel and Everyone Loves Raymond, those same merchants that the author speak of have captured the government and made it a wholly owned subsidiary of their "society", working for the benefit of them, and against us, the sharecroppers.

So, I sound fatalist. Probably because I am. We have two solid generations of idiots populating the 50 states. As George Carlin once said "Just smart enough to operate the machines, but too dumb to understand what's going on around them".

Socialism doesn't work. We know that.

Robber barron capitalism doesn't work.

And modern day regulatory markets don't work. Believe it or not but that is what we have now. And it may be one of the most tyrannical and despotic forms of government in human history (look at the body count post WWII of our overseas adventures in the name of "freedom" ~ read: exploiting other's resources for the merchant class).

I don't know the answer. But the author's answer is an abject failure too. We're living through the logical evolution of it. Sooner or later the merchant class was going to get it's hands on the reigns of power. And now that they've figured out how to do it, something tells me that they'll resort to bloodshed before they give it up.

We are not dealing with moral people at the reigns of power here.

Our only solution is to have a new era of enlightenment on a mass scale. I'm not holding my breath though. The public is narcotized and reduced to a state of intellectual feebleness.

They NEED the merchant class to give them their basic daily needs. And worse, they don't even realize that they contribute to their own enslavement.

Idiots.

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Re: There is no such thing as a free market - and never ...

something tells me that they'll resort to bloodshed before they give it up.

except all they have is one simple accounting principle where they create all the medium of exchange as interest bearing loans.  All we have to do is revoke and destroy that ability and we win the fight without firing one shot.

We are not dealing with moral people at the reigns of power here.

Absolutely.

Now the question is where did they get all this power to take the reigns of power across the globe and what can we do to revoke then destroy it.

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Re: There is no such thing as a free market - and never ...
Thomas Hedin wrote:

something tells me that they'll resort to bloodshed before they give it up.

except all they have is one simple accounting principle where they create all the medium of exchange as interest bearing loans.  All we have to do is revoke and destroy that ability and we win the fight without firing one shot.

We are not dealing with moral people at the reigns of power here.

Absolutely.

Now the question is where did they get all this power to take the reigns of power across the globe and what can we do to revoke then destroy it.

PRECISELY.......  which is why I advocate that one day the masses will come to their senses and stop servicing their debts. End of problem.

They only ever lent "us" monopoly money (in the literal sense of the word I now realise!) so why should they be repaid with real money?

Mike

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Re: There is no such thing as a free market - and never ...

which is why I advocate that one day the masses will come to their senses and stop servicing their debts. End of problem

Then how will we put money into circulation?

 

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Re: There is no such thing as a free market - and never ...

I do agree that this passage from JMG is one of the more important themes I’ve seen on this site. I’ve read a fair bit of his work, and I think his perspective in not only acknowledging the peak oil issues, but in proposing a more measured extrication from this crisis is a welcome breath of fresh air from the overnight cataclysm put forth by many.

I find his missive on the subject of free markets versus regulated markets to be an equally measured and reasonable approach, as well as bearing that elusive quality of common sense in an intellectual minefield.

And I find his quote from “Wealth of Nations” to be far more significant than his disagreement with Michael Shedlock in advancing his point.

Adam Smith wrote:

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or some contrivance to raise prices." When a market is not controlled by government edicts, religious taboos, social customs, or some other outside force, it will quickly be controlled by combinations of individuals whose wealth and strategic position in the market enable them to maximize the economic benefits accruing to them, by squeezing out rivals, manipulating prices, buying up their suppliers, bribing government officials, and the like: that is to say, behaving the way capitalists behave whenever they are left to their own devices.

As it is hard to disagree with the premise he (JMG) puts forth, I guess it comes down to a discussion of root cause.

As one who is struggling to comprehend competing theories, ideologies, and explanations, perhaps its useful to deconstruct the intellectual bantering to one of pragmatism by looking at a tangible example and trying to determine if there is anything to be learned.

I’d look to other governments that may exhibit similar symptoms, and examine the cause and effect relationship to see if there is a reasonable analog. One such country that may be worthy of comparison is that of Mexico. As a simplistic example, this is a government that is widely termed a “narco-democracy” wherein the overriding governmental and sociological influence is based upon the monetary inputs from a pervasive criminal operation.

Now, it seems to me that if we use this as a surrogate to examine root cause issues, we can interchange one of many different political and economic theories and postulate what effect this might have on any corrective action. For example, if Mexico had a highly regulated business culture would the problems of a narco-democracy change? How about the inverse arguments of a free market economy, keeping in mind that the drug trafficking is largely focused as an export business and not for consumption of the native population?

How about if the banking system in Mexico was removed from fractional reserve and the peso was locked to a gold standard? Any changes yet? How about if it were a dictatorship, or Marxist or Socialist or….. well, I think the point is made. In my view, none of these structural changes would overcome a pervasive criminal culture wherein money is used to unduly influence and corrupt whatever government structure is in place.

You can vote all day long, you can revolt and overthrow, replace politicians and monetary systems, stock up on canned foods and ammunition, but what have you really accomplished? The criminals are still there, biding their time until the “new” regime is in place and then it’s business as usual. I’d submit that this is a pretty strong argument for identification of an actionable root cause, and one that Adam Smith seems to have predicted.

The United States does not have a criminal drug conspiracy on the scale that Mexico does, at least as measured by the influence on government. The drug cartels simply do not have enough money to compete with those that do.

So is the answer to eliminate regulation, and rely on free market strategies to save the day? The only thin vestige of protection we have against these influences is the remaining semblance of government and whatever weak and ineffective regulation (created by those who need to be regulated) is in place. To dismantle this is to descend into the abyss.

So is the root cause out of control and inadequately regulated financial institutions framed by the fractional reserve banking system? Did these systems and operating principles create corporatists (financial and otherwise) who now redistribute wealth? Or were these systems simply mechanisms created by robber barons whose objective was to redistribute wealth in the first place?

History supports the latter conclusion, as the Rockefellers ,JP Morgan’s and their ilk of the early 20th century were in fact directly responsible for creating the central reserve bank in 1913, (Federal Reserve Act) and had an inordinate amount of influence on this institution.

I agree with all the commentary on closing the down the Federal Reserve Bank, and moving away from fractional reserve banking-but is this enough? If it isn’t (and I’d like very much to be talked out of this) than the implications for capitalism in general are not very comforting.

In the meantime, JMG offers a very sensible balance to regaining our footing.

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Re: There is no such thing as a free market - and never ...
darbikrash wrote:

History supports the latter conclusion, as the Rockefellers ,JP Morgan’s and their ilk of the early 20th century were in fact directly responsible for creating the central reserve bank in 1913, (Federal Reserve Act) and had an inordinate amount of influence on this institution.

I agree with all the commentary on closing the down the Federal Reserve Bank, and moving away from fractional reserve banking-but is this enough? If it isn’t (and I’d like very much to be talked out of this) than the implications for capitalism in general are not very comforting.

In the meantime, JMG offers a very sensible balance to regaining our footing.

Excellent analysis, darbikrash.  I couldn't agree more.

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