Liberal Japan

A post about booms and busts and banking.

This is Eisuke “Mr. Yen” Sakakibara talking about the recent turmoil in equity markets as of late:

Noting that the recent turmoil was triggered by a bubble in the U.S. housing sector, Sakakibara said, “Despite ongoing risk reassessment, markets will create another bubble again and experience its bursting. “But the authorities cannot stop this unless we are in a socialist economy,” he said. (Japan Times)

Now, many people reading this might never have studied banking or the monetary system, so let’s review this statement very carefully.

Boom and busts are just part of the market, so unless we want socialism, we’ll just have to live with them.

Okay. Let me ask you this, what is the defining principle of socialism? Probably, what comes to mind is that everything is owned by the state. That’s correct. But when you dig a little deeper, you see that the defining principle of socialism is not state ownership of everything, instead it’s central planning. In a socialist system you have bureaucrats, who act as master planners, determine how all resources should be allocated and used to generate the optimum situation for society.

It’s a bit too simple, but basically:

Now, let me ask you this. What is the defining principle of capitalism? Probably, what comes to mind is that everything is owned by individuals. That’s correct. But when you dig a little deeper, you see that the defining principle of capitalism is not private property, but the free market. In a capitalist system, no central authority determines how to distribute resources, instead the price system resolves these problems.

It’s a bit too simple, but basically:

Now, which is better, a free market or central planning? I would argue the free market.

However, let’s state a non-controversial, well-accepted fact. The central bank (Bank of Japan, Federal Reserve, etc) controls a nation’s currency via central planning. In other words:

Let me ask you this, you hear talk about interest rates all the time, right? If they go down, money is cheaper. If they go up, money is more expensive. If they go down, we all borrow more. If they go up, we all borrow less. If they go down, we spend more, if they go up we spend less. We all know how important those interest rates are. Well who determines those rates? The free market?

Nope, people like Sakakibara. (Through his position in the finance ministry he influenced monetary policy).

My guess is that the free market might have less to do with booms and busts than the central bank. It’s not more socialism that would stop these booms and busts as Sakakibara states, but less socialism.

Just like the market will set the price of apples if you leave it alone, so will the market set a determined interest rate. The market set interest rate will reflect market forces. When the central bank sets the rate, it will be below or above the natural market rate. This will interfere with the market. If the rate is below the natural rate, you will have a boom. If the rate is above the natural rate you will have a bust. At least that’s how some people see it. But certainly not central bankers.

This is a controversial issue. Am I guilty of simplifying it too much? Certainly. I could be wrong, and perhaps a socialized monetary system is a good idea. But my main point is that Sakakibara’s statement above is not at all fair, given our currency system already is a socialist one.

If you are really interested in this topic, by far the best introduction is Mystery of Banking [pdf] by Murray N. Rothbard. Happy reading!

Links:

• Jon Stewart to Alan Greenspan: Why do we have a Fed?
• Japan’s nomination of Mr. Eisuke Sakakibara … for the post of Managing Director of the IMF
• Nikkei Net: Eisuke Sakakibara
• Commanding Hights with Eisuke Sakakibara
• Eisuke Sakakibara, a Shaker of Markets,Is Seen Unlikely to Remain in Obscurity
• The End of Progressivism by Eisuke Sakakibara