Tuesday, May 4, 2010

Comments on EconTalk Podcast on Finacial Fragility

EconTalk has a wonderful provocative podcast with Nasim Taleb author of "The Black Swan".

They discuss the the fragility of the financial system.  Here are my comments: 

I have this idea that the Federal Reserve and US treasury has a monopoly on money and so the system is fragile.  Also in a monopoly it is difficult to set price. 

I think that the monetary system is not robust because it did not evolve or at least its evolution was stopped when central banks were created.  From your (econtalk) Free Banking Pod Cats with George Selgin I got the idea that free banking was evolving toward a system where money was backed in nothing but assets of the bank.  The evidence is that they had gotten to the point where they held 30 capital but only 2 percent gold.  The money was backed in bank capital not gold to dump the gold backing all together would be only a crisis plus one innovation away.  IMO such a system would be robust. 

Having said all that I do not think that we could ever convince the median voter to allow free banking and allowing the monetary system to evolve so I am open to the post Keynesian idea that government should in a recession just spend money without selling bonds and tax the money back in response to inflation. 

Now on Nasim's ideas about nutrition and exercise I think that he should just say we do not know. 

We know we need some small amount of exercise (like walking), we know that we need a minimum of some vitamins, minerals and amino acids.  We know nothing beyond that! 

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