Well why not ban credit cards and unsecured laons?

Because this is wrong.

Banks don't create money when they issue debt. A credit corresponds with a debit and they can't lend out what they don't have. Retail banks still make their money out of earning more on their deposits (and fees) than they pay in interest. Investment banks well invest.

Increasing the money supply remains the purview of central banks (and sometimes governments).

I grant you I was not particularly technical but I thought that what I mean will come through.

Let us try again while wearing my philosophy hat:

A "free" society is one which treats individuals as autonomous agents capable of forming their own goals and does not legally subordinate goals of any one individual to those of another (or a group) except insofar as to prevent individuals from interfering with other's pursue of their goals.

In other words - in a free society you can not be a slaver - even if you do not require state's support in hunting down your escaped slaves - because state has a legitimate mandate to protect the ability of your would-be-slaves to pursue their own goals.

In the financial crisis the problem wasn't really capital (for every loss theres a gain to someone else after all) at least in aggregate. Some banks were broke of course but the real danger was that liquidity froze up. Noone was lending money to anyone partly because banks wanted to hold on to their cash and partly because noone was really sure who was a bad credit risk until the dust settled. Without liquidity even solvent banks were at risk and everyone of those that fell over would make the problem worse and worse. This is where the "we should have let the market sort it out" sentiments become fantastical.

Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages. The largest borrower, Morgan Stanley (MS), got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress.

“These are all whopping numbers,” said Robert Litan, a former Justice Department official who in the 1990s served on a commission probing the causes of the savings and loan crisis. “You’re talking about the aristocracy of American finance going down the tubes without the federal money.”

In most cases, the Fed demanded collateral for its loans -- Treasuries or corporate bonds and mortgage bonds that could be seized and sold if the money wasn’t repaid. That meant the central bank’s main risk was that collateral pledged by banks that collapsed would be worth less than the amount borrowed.

Herring, the University of Pennsylvania professor, said some banks may have used the program to maximize profits by borrowing “from the cheapest source, because this was supposed to be secret and never revealed.”

Whether banks needed the Fed’s money for survival or used it because it offered advantageous rates, the central bank’s lender-of-last-resort role amounts to a free insurance policy for banks guaranteeing the arrival of funds in a disaster, Herring said.

An IMF report last October said regulators should consider charging banks for the right to access central bank funds.

“The extent of official intervention is clear evidence that systemic liquidity risks were under-recognized and mispriced by both the private and public sectors,” the IMF said in a separate report in April.

Access to Fed backup support “leads you to subject yourself to greater risks,” Herring said. “If it’s not there, you’re not going to take the risks that would put you in trouble and require you to have access to that kind of funding.”

I'll admit, that's a surprisingly good definition for an abstract concept. Not that I won't attempt to crack it later but there don't appear to be any major weaknesses on first reading. Props for that, really.

Of course, it's still open to many, many systems that aren't capitalistic. For one thing, you say nothing of economics in there. There's absolutely no reason a country couldn't meet your definition of freedom and not even have a currency or any interest in trade. That's probably not good from where you're sitting, right? "Opt-in" varieties of communism where individuals receive benefits only to the degree that they accept responsibilities would technically count as well, and that's no more "become another's tool" than getting a job in a capitalist system.

...zero-bound interest rates do not always and necessarily force investors to take more risk by purchasing stocks or real estate, to cite the classic central bank thesis. First of all, when rational or irrational fear persuades an investor to be more concerned about the return of her money than on her money then liquidity can be trapped in a mattress, a bank account or a five basis point Treasury bill. But that commonsensical observation is well known to Fed policymakers, economic historians and certainly citizens on Main Street.

What perhaps is not so often recognized is that liquidity can be trapped by the “price” of credit, in addition to its “risk.” Capitalism depends on risk-taking in several forms. Developers, homeowners, entrepreneurs of all shapes and sizes epitomize the riskiness of business building via equity and credit risk extension. But modern capitalism is dependent as well on maturity extension in credit markets. No venture, aside from one financed with 100% owners’ capital, could survive on credit or loans that matured or were callable overnight. Buildings, utilities and homes require 20- and 30-year loan commitments to smooth and justify their returns. Because this is so, lenders require a yield premium, expressed as a positively sloped yield curve, to make the extended loan. A flat yield curve, in contrast, is a disincentive for lenders to lend unless there is sufficient downside room for yields to fall and provide bond market capital gains. This nominal or even real interest rate “margin” is why prior cyclical periods of curve flatness or even inversion have been successfully followed by economic expansions. Intermediate and long rates – even though flat and equal to a short-term policy rate – have had room to fall, and credit therefore has not been trapped by “price.”

When all yields approach the zero-bound, however, as in Japan for the past 10 years, and now in the U.S. and selected “clean dirty shirt” sovereigns, then the dynamics may change. Money can become less liquid and frozen by “price” in addition to the classic liquidity trap explained by “risk.”

Even if nodding in agreement, an observer might immediately comment that today’s yield curve is anything but flat and that might be true. Most short to intermediate Treasury yields, however, are dangerously close to the zero-bound which imply little if any room to fall: no margin, no air underneath those bond yields and therefore limited, if any, price appreciation. What incentive does a bank have to buy two-year Treasuries at 20 basis points when they can park overnight reserves with the Fed at 25? What incentives do investment managers or even individual investors have to take price risk with a five-, 10- or 30-year Treasury when there are multiples of downside price risk compared to appreciation? At 75 basis points, a five-year Treasury can only rationally appreciate by two more points, but theoretically can go down by an unlimited amount. Duration risk and flatness at the zero-bound, to make the simple point, can freeze and trap liquidity by convincing investors to hold cash as opposed to extend credit.

Where else can one go, however? We can’t put $100 trillion of credit in a system-wide mattress, can we? Of course not, but we can move in that direction by delevering and refusing to extend maturities and duration. Recent central bank behavior, including that of the U.S. Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside. Still, zero-bound money may kill as opposed to create credit. Developed economies where these low yields reside may suffer accordingly. It may as well, induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper.

Where does credit go when it dies? It goes back to where it came from. It delevers, it slows and inhibits economic growth, and it turns economic theory upside down, ultimately challenging the wisdom of policymakers. We’ll all be making this up as we go along for what may seem like an eternity. A 30-50 year virtuous cycle of credit expansion which has produced outsize paranormal returns for financial assets – bonds, stocks, real estate and commodities alike – is now delevering because of excessive “risk” and the “price” of money at the zero-bound. We are witnessing the death of abundance and the borning of austerity, for what may be a long, long time.

Some more words about the state of western capitalism and economic policies, this time from William H. Gross, managing director of PIMCO. (Emphasis mine)



http://www.pimco.com/EN/Insights/Pages/Life-and-Death-Propos...#

I agree with almost everything in this analysis.
Low credit rates and "abundant money" policy is single worst mistake made by the central banks world over and will carry extremely high cost.

Some say that this policy was the only reasonable option to prevent deep depression. If you were central banker, what would you have done differently when trust in Finance broke down in 2008?

They key link between capitalism and freedom is in ownership of property.

Skirting for a moment ownership of land - idea is that if we have system which does not hinder people's pursuit of goals we must allow them to retain (substantial) control over the results of their labour. If I build a house (because I want to live in it on my own) "society" can not demand that I now house 5 more people with me just because they are homeless.
To do so would be to treat my labour as means towards someone else's goals (homeless, government, do-gooders...).

Likewise if I build a house for you in exchange for your making a computer for me - we are both pursuing our goals without harming anyone else's ability do do likewise and free society has no business interfering with us.

Note that there is nothing here that *forces* people in free society to own property. I can equally choose - of my own free will - to enter a commune or to devote all my labour to the well-being of others. Those are all legitimate choices that a free society should and would respect. Key point is that in a free society those who wish to use their labour to amass property should be allowed to do so as a part of the general societal rules on non-interference with other people's goals.

Likewise, free society can and should persecute fraud. In a same way that a thief, slaver or a murdered acts to interfere with others pursuing their goals - so does fraudster. Persecution of frauds is logically equivalent to the enforcement of good-faith contracts.

Once you have freedom to own property and enforcement of contracts you have all the necessary conditions for capitalism.

Private property and capitalism are also foundational to alternate political systems, including fascism. Oligarchic landowner dictatorships, post-colonial cleptocracies or fascist corporatism demonstrate that private property and capitalism, by themselves, are not sufficient to produce freedom, and that at the very least additional political conditions have to exist.

Draghi $158B Free Lunch Boosts Bank Profits

Banks are benefiting from a European Central Bank subsidy that could reach 120 billion euros ($158 billion), enough to pay every bonus at financial firms in London for the next 24 years at today’s levels.

Royal Bank of Scotland Group Plc, BNP Paribas SA (BNP) and Societe Generale SA are among more than 500 banks that took 489 billion euros of three-year loans from the Frankfurt-based ECB at a December auction. The loans carry a 1 percent annual interest rate, less than a quarter of the 4.3 percent average yield on euro-denominated senior unsecured bank debt of all maturities in the past year, according to Commerzbank AG.

The ECB is flooding the banking system with cheap money in a bid to avert a credit crunch after the market for unsecured bank debt seized up last year and funding from U.S. money markets disappeared. Any bank in the region can borrow an unlimited amount, provided it pledges eligible collateral. Lenders won’t face curbs on bonuses or dividends.

Lenders could take 680 billion euros of loans at the second auction on Feb. 29, according to a Goldman Sachs Group Inc. survey of investors published last week. That would raise total borrowings from the ECB’s longer-term refinancing operation, or LTRO, to a record 1.2 trillion euros, surpassing the $1.2 trillion in peak lending by the Federal Reserve to U.S. banks after Lehman Brothers Holdings Inc.’s 2008 collapse.

Banks including Morgan Stanley, JPMorgan Chase & Co. and Goldman Sachs reaped an estimated $13 billion by borrowing cheaply from the Fed and lending at a higher rate, according to data compiled by Bloomberg from central bank records of transactions obtained by court order and under the Freedom of Information Act. That figure, based on the lending margins of 190 banks that borrowed from the Fed, isn’t comparable to the estimate of the ECB subsidy.

“You are certainly going to get banks that don’t need the funds profiting,” said Richard Werner, an economist at the University of Southampton, England. “It would be much cheaper to target support for the 20 or so banks that need it, but politically the central bank wants to be seen to be neutral. It is a massive money-making opportunity for those who don’t need it to play the yield curve.”