Steve Keen missed the point a little bit with his recent Debtwatch #31, stating that Marx was correct and that the "Cavaliers" are to blame. I apologise to Steve for not reading the whole issue -- I only read the first two sections and the conclusions. But that was enough to find this error in thought:
This month’s Debtwatch is dedicated to analysing how these Cavaliers actually “make” money and debt—something they think they understand, but in reality, they don’t. A sound model of how money and debt are created makes it obvious that we should never have fallen for the insane notion that the financial system should be self-regulating. All that did was give the Cavaliers a licence to run amok, with the consequences we are now experiencing yet again—150 years after Marx described the crisis that led him to write Das Kapital.
On the contrary, the financial system would function perfectly well if it was self-regulated, the problem is the regulation! In a self-regulating free market, banks would be able to engage in fractional lending if they so choose but the penalty of getting it wrong is bankruptcy. People would only put their savings in banks that they knew had a 100% reserve backing (i.e. did not engage in fractional banking) and as such they would be the only banks to receive deposits and stay in business. Market forces would ensure that only the most trustworthy and sound banks are able to function. There would be no bailouts, no rescue packages and therefore no moral hazard.
The current problem stems from government regulation encouraging banks to engage in fractional banking. That, combined with the government-sponsored reserve bank continually inflating the money supply and artifically setting interest rates is the issue, not the "cavaliers" -- they are a symptom but not the cause. I will agree with Steve that the half-hearted mix-match of capitalism/socialism does not and has not worked. But he's recommending we move further to the left, a stance I disagree with wholeheartedly. Banks should be completely de-regulated and the government should cease all involvement in financial markets, starting with the removal the Reserve Bank.
