In his testimony before congress yesterday, former Fed Chair Alan Greenspan stated that he incorrectly anticipated how the market would value mortgage securities, and how easily people would take risks with them.
His suggested method of correction, was to require loan originators to maintain a minimum percentage of any loan, in order to insure that they did not take unnecessary risks. In other words, he wants lenders to have an incentive.
Now, the implication here is that if we put the right incentives and punishments in place, then people will do the right thing. They will be better lenders.
But it’s not an incentive problem, it’s a knowledge problem.
The purpose of property is first to inventory our skills so that, like a store of food, we can weather the variations in our world. Secondly, once we begin to cooperate in a division of labor, the purpose of property is to allow us to use our limited and fragmentary and disparate knowledge, and together with money and prices, cooperate in calculating the use of resources for our, and everyone else’s benefit. We can use our limited knoweldge, and self interst, in order to manage the world’s resoruces, and to instruct each other how to act both with those resources, and in persuit of other resources.
We have developed counting numbers, then mathematics, and finally accounting, to use with money, and prices, in order to assist us in calculating the use of our resources, as our populations have increased, the division of labor has increased, specialization has increased, production has increased, and the fast number of parts and products have increased.
For a variety of reasons that are too complicated to go into here, numbers, and accounting, the way we use them, cannot be used to measure the relative value of land, in the same way we measure the relative value of say, Oil or Wheat. Oil and wheat are products that are consumed quickly, and to some degree are perishable. Land on the other hand, …..
So, first, we should not lend money on a mortgage of property beyond the temporal horizon of utility of the person borrowing the money. In realistic terms, this is no more than fifteen years. In this posting, I can’t go into why that’s an approximate value, but in general, it’s probalby the forecast limit of the individual.
Extending beyond that range is simply another vehicle for redistribution, and inflation pressure. And that’s before we start considering
I know a lot of people around the world, involved in all levels of the investment process, from the federal reserve, to bank executives, to fund managers, to bankers, to investment bankers.
The problem is, that other than a few people I know in central banking, precisely NONE of them know anything about the banking process whatsoever. They are accountants, not bankers. And teh difference between the two is the ownership of risk.
Bankers should be required to understand lending principles in the Rothbardian sense, and be tested on that knowledge they way we test lawyers and accountants. We need to certify bankers. The reason we need to certify them is to make sure they understand, that they are involved NOT in private activity, but as privately employed partiticipant in the public service. They administrate the process of redistribution. Because that’s what the process of central banking actuallly does: redistribute money. It is a national intertemporal welfare system.
THe centralization of the banking system, has had the unintended consequence, of producing a universe of bankers who are entirely ignorant of what it is that they do, or rather, their place in the banking process, and it’s impact on the overall economy.
Interview them sometime. Bankers have very little knoweldge, and since we centralized risk management, the average banker has become even more ignorant of the banking process. Rothbard’s book on Banking should be a mandatory textbook for bankers.
So, I agree with greenspan on the cure. But the cause is something quite different from incentives. It is simply the knowledge incentives create.
I don’t think bankers are greedy.
I just think they’re ignorant, and we have given them incentives precisely to be that way: ignorant