Bitcoin and the “non-economists” at The Economist

Here are some quick comments on a recent article from The Economist:

In the article the unnamed author makes the following statement:

“Attracting enough users to smooth such volatility seems unlikely in the foreseeable future. Established fiat currencies—ones where bills and coins, or their digital versions, get their value by dint of regulation or law—are underwritten by the state which is, in principle at least, answerable to its citizens. Bitcoin, by contrast, is a community currency that requires self-policing on the part of its users. Most people would rather devolve this sort of responsibility to the authorities.”

Yes, many people prefer to shirk responsibility and succumb to what Rose Wilder Lane described as “the pagan faith in external authority”. We’ve seen the results of abdicating personal responsibility. You cannot have liberty without personal responsibility.

The article also goes on to state:

Moreover, Bitcoin may be useful for trading goods and services but it does not yet allow borrowing or lending. In the physical world this happens through financial intermediaries: you put money in a bank, and someone else borrows it. A virtual Bitcoin bank might spring up but that would create problems of its own. How would a saver be assured that he would get his money back when he wants? If a bank got into trouble, who would be the lender of last resort? The usual answer is a central bank: exactly what Bitcoin is trying to avoid. Bitcoin is technically sophisticated. As a monetary system, it looks primitive.

The Economist fails to acknowledge the “moral hazard” built into the current banking system. This moral hazard is the primary cause of the recent banking crises and the many crises that preceded it. This is the same system where depositors fail to do their “due diligence” on the banks that they entrust their money to because they are lulled into the false sense of security of FDIC insurance. In turn, the banks fail to be wise stewards of that money because they know they are backed up by the central bank and that losses will be socialized. This is the system which The Economist is advocating for bitcoin.

What The Economist faults as a weakness of bitcoin is actually what gives bitcoin one of its greatest strengths. If a depositor knew that his deposits were not guaranteed he would be a little more careful in choosing who he entrusts them to. If the banks were not backed up by the central bank (and the duped taxpayer) they would be much more prudent with their lending policies. There are no risk-free investments. Economist, you can do better than this.

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8 Responses to Bitcoin and the “non-economists” at The Economist

  1. Welp says:

    “If the banks were not backed up by the central bank (and the duped taxpayer) they would be much more prudent with their lending policies.”

    Patently false, as demonstrated by the thousands of bank runs prior to the establishment of the FDIC. Banks make bad decisions because they’re run by people, and people can be irrational and greedy. Not because of a central government.

    • @Welp,

      I stated that banks (without the government/taxpayer backstop) would be more prudent – not infallible. Also, the last time I checked, governments are run by people too – the difference being the fact that they are shielded from personal responsibility and accountability for their actions.

      • Welp says:

        But it’s STILL patently false. There is no reason to believe banks are any less prudent than they were ages ago at all. In fact, it was far easier to pursue risky strategies in the ages before banks were heavily regulated due to the lack of transparency regarding bank reserves or what banks were investing in. (And, of course, we know that the 2007 Financial Crisis was caused by the elimination of Great Depression-era policies that prevented banks from doing a lot of the things that they did)

        And here’s what I think is truly ridiculous. You’re saying that consumers need to do “due diligence” on banks they invest in – yet, how exactly can they do that in a bitcoin economy? Any “bank” is free to lie or mislead about its assets and without a central regulatory agency there is nothing you can do about it. In fact, in a Bitcoin economy, investing in any sort of bank (or, in fact, anything at all) is just plain idiotic. Unless your returns are astronomical, a plain USD investment is vastly more reliable because your money can’t be stolen by some dude copying the wallet onto a USB drive and then transferring everything to another account (among other problems involved with the inability to regulate Bitcoin transactions).

      • If a bank does not have central bank/government backing they live or die based upon performance. In a free market we would not have “zombie” banks that are propped up by government with stolen taxpayer money. In a free market, if a bank wanted to attract customers it would have to go above and beyond current regulations to provide transparency and gain consumer trust. With government regulation banks are able to hide behind the arbitrarily required minimums and no more.

        Yes, in a so-called “unregulated” market banks have failed and customers have lost money but you fail to realize that the failure of the bank is a natural form of regulation. They are regulated by the market. In a government regulated market consumers not only get penalized for their own mistakes but they also get penalized for the mistakes of others due to the socialized losses funded by government bailouts using taxpayer money. It all comes down to understanding individual liberty. I recommend reading My Philosophy of Liberty for further insight.

        BTW, protection of a bitcoin wallet is a simple matter once you understand the nature of bitcoin.

  2. TraderTimm says:

    The Federal Reserve Bank is run by humans, and look at the bang-up job they’ve done saddling the entire country with trillions in debt. Bitcoin is going to cannibalize any economy that doesn’t integrate them. Just watch.

  3. Pingback: Expect bitcoin to be “banned” – expect the ban to be ignored | Economics and Liberty

  4. RDM says:

    Liked your post.

    You could also add in response to your first quote of the economist that while “Most people would rather devolve this sort of responsibility to the authorities.” is true, it is also true that those who don’t want to devolve this responsibility are free to participate in the process of self policing.

  5. Pingback: Expect ….. to be “banned” « Authentically Wired

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