Today’s New York Times article by Senators Brown and Vitter (the preview of their much-touted “bank break-up” bill) starts with a very encouraging line: “governments shouldn’t pick economic winners and losers.”

Senator Brown, in particular, seems to have learned this important lesson fairly recently (auto bailout, anyone?). But putting this aside (and also ignoring the ongoing debate about the purported subsidy to large banking organizations, which should be eliminated, if it indeed exists), Senators Brown and Vitter display some disturbing, though not uncommon, misconceptions about U.S. and global banking. And, as is always the case, poorly understood and inaccurate facts create bad policy suggestions.

The first problem is the implicit assumption that large size and diversity of operations are negative traits. In fact, diversity is the key to managing risk in banking. Part of the reason why US banking has had such a checkered history relative to many other countries is because of its historical lack of geographical and product diversity – a result of the long-standing prohibitions on inter-state banking and branch banking and limitations on combining investment and commercial banking activities. One of the single biggest causes of the banking crisis in the late 1920s was a lack of geographical diversity (and, as congressional records show, States that prohibited branch banking fared the worst). Similarly, one of the primary causes of the 2008 financial crisis was a lack of asset diversity — too many banks holding too many securitized sub-prime mortgages.

Second, is the implicit assumption that investment banking and underwriting activity are inherently more risky than loan activities. Certainly, imprudent investment banking can be disastrous. So can making risky loans. And the 2008 crisis was, at its core, a loan origination problem (a fact largely ignored by Congress because of the uncomfortable questions it raises about the two GSE’s — Fannie and Freddie).

Third, is the belief that the 2008 bank bailouts were somehow linked to the FDIC deposit insurance scheme and that if we ‘narrow’ the safety net, all future bailouts will be avoided. I am no fan of federal deposit insurance, but the bailouts were unrelated to it. TARP was a Treasury creation, passed by Members of Congress under extraordinary circumstances. The only way to ensure it doesn’t happen in future is to rein in Congress and limit their ability to (in the words of Brown and Vitter) “pick economic winners and losers”.

As it turns out, the Brown-Vitter Bill is less about bank ‘break-up’ and more a U.S. variant of the FSB’s G‑SIFI surcharge – which raises the question why it is necessary at all, except to put the U.S.’s global banks at a disadvantage, even though they are already disproportionately affected by the surcharge. Brown and Vitter’s calls for higher capital requirements are not objectionable per se, but as the ongoing problems with the Basel Accord shows, the devil is always in the details. And if you get it wrong, you risk creating exactly the systemic problems — such as an excessive reliance on sovereign bonds or mortgage-backed securities — that you were trying to avoid.

Essentially, the only way to end the perception of a government backstop is to put in place a credible system to allow large firms to fail if they make poor decisions. To this end, the Brown-Vitter Bill doesn’t add anything except more confusion.

How much does the United States spend on the military relative to our allies? A lot. 

A new Cato video, produced by Cato multimedia gurus Caleb Brown and Austin Bragg, puts this comparison in perspective. The data jumps out of the Cato infographic from last week, and shows how we are subsidizing the security of our wealthy allies who can and should defend themselves. Instead, we provide for their security while they free-ride and spend their money on everything else (including bloated welfare states). Your tax dollars at work. 

Check out the video below.

Thomas Perez, the assistant attorney general for civil rights who personifies both the Peter Principle and this administration’s flouting of the rule of law, is due this week for a vote in the Senate Health, Education, Labor, and Pensions Committee on his nomination to be Labor Secretary. If senators who understand how destructive he is don’t do more than simply vote against him, they will have missed a key opportunity not just to stop a bad nominee, but to score easy political points too.

Quin Hilyer provides a useful recap of Perez’s nefarious dealings:

• Interference with the Supreme Court case of Magner v. Gallagher, getting the City of St. Paul to dismiss its appeal to prevent what would’ve been a sharp (and probably unanimous) rebuke to the federal government regarding its use of “disparate impact” racial theories in housing policy, to the detriment of minorities and poor people everywhere;
• Refusal to comply with subpoenas from the U.S. Commission on Civil Rights;
• Dismissal of the Justice Department’s already-won prosecution of the Black Panthers for voter intimidation during the 2008 election;
• Repeatedly stating and running a department dedicated to the proposition that voting rights and other civil rights law don’t protect white people;
• Willfully misleading and lying to Congress under oath several times;
• Racial abuse of the New York fire department, to the detriment of public safety and qualified minority applicants;
• Hiring for “career” (non-political appointee) slots only attorneys who have demonstrable left-wing credentials—making Alberto Gonzales’s politicized-hiring foibles look like the model of civil service administration;
• Trampling on religious liberties to the point that the Supreme Court unanimously rejected his arguments in Hosanna-Tabor v. EEOC regarding the “ministerial exception” to employment laws;
• Conducting government business from a personal email account as much as 1,200 times (!) and now refusing to comply with congressional subpoenas to release those emails; and
• Unrelated to him personally, being nominated to lead a cabinet department whose jurisdiction overlaps with an independent agency, the National Labor Relations Board, that was improperly constituted via illegal recess appointments and has continued to issue rulings even after the government lost its case unanimously at the D.C. Circuit.

About the only thing that The Talented Mr. Perez has going for him is that his performance at his confirmation hearing wasn’t the complete disaster that Defense Secretary Chuck Hagel’s was at his (a low bar). In short, if there is ever a reason not to simply defer to the president in his choice of cabinet members or to make political hay rather than simply have a quiet vote, this is it. 

Prior to the bombing and manhunt in Boston last week, Bruce Schneier pointed to an interesting interview with Rebecca Solnit, author of the book: A Paradise Built in Hell: The Extraordinary Communities That Arise in Disaster. She talks of a concept called elite panic.

The term “elite panic” was coined by Caron Chess and Lee Clarke of Rutgers. From the beginning of the field in the 1950s to the present, the major sociologists of disaster — Charles Fritz, Enrico Quarantelli, Kathleen Tierney, and Lee Clarke — proceeding in the most cautious, methodical, and clearly attempting-to-be-politically-neutral way of social scientists, arrived via their research at this enormous confidence in human nature and deep critique of institutional authority. It’s quite remarkable.

Summarizing her research, Soltis found a portrait elites paint of the public, to which they respond in times of crisis:

Part of the stereotypical image is that we’re either wolves or we’re sheep. We’re either devouring babies raw and tearing up grandmothers with our bare hands, or we’re helpless and we panic and mill around like idiots in need of Charlton Heston men in uniforms with badges to lead us. I think we’re neither, and the evidence bears that out.

There’s no denying the importance and value of investigating and capturing the perpetrators of the bombing, and I do not do so here, but elite panic seems to have been at play in Boston. 

The lockdown—technically voluntary, but tell that to the guy in the tank (HT: Bovard)—treated the public variously as suspects, sources of interference, or targets for display of governmental authority.

Who are the elites? How does their panic manifest itself? “Elite panic” is not a tight enough concept to declare affirmatively that Boston is its examplar, but the concept is worth having in mind. The resources and resourcefulness of civil society are great and entirely accessible in times of peril. They should not be pushed aside at these times—certainly not at the business end of a gun.

Last week, the American Federation of Teachers released a blacklist of financial asset managers that fund organizations supporting education reform and/​or switching from defined-benefit to defined-contribution pension systems, such as StudentsFirst, the Show-Me Institute and the Manhattan Institute. The report urges AFT affiliates to pressure pension fiduciaries not to invest their money with such asset managers. The AFT also makes a not-so-subtle threat to go after the donors to other think tanks and education reform groups:

This report is not intended as a one-time publication. Future versions will incorporate additional political organizations and their donors. The AFT is committed to shining a bright light on organizations that harm public sector workers, especially when those organizations are financed by individuals who earn their money from the deferred wages of our teachers.

This isn’t the first time the AFT has employed strong-arm tactics, but I find it hard to muster any outrage. As this report makes clear, the AFT’s mission is not about providing the best education for children, it’s about protecting the jobs of its members. It makes perfect sense that they wouldn’t want their money going to organizations that they perceive as working against their interests (whether that perception is accurate or not). If they would rather have lower returns on their investments, that’s their prerogative.

That said, if the AFT is going to be consistent and principled, they should support public-sector “right to work” legislation so that no one who wants to teach in public schools is forced to join a union and have their mandatory dues go toward a cause that they oppose. Moreover, the unions should end the practice of having state and local governments collect dues for them, essentially using state power and tax dollars to fund causes that some taxpayers, parents, and even teachers perceive as against their interests.

Of course, they’ll never do that. Without the use of coercion, the entire machine would fall apart.

The University of Georgia having, in its infinite wisdom, decided long ago to make its faculty do without sabbaticals, yours truly, sensing impending burnout, determined to do the next best thing, by taking leave for several months from all extra-curricular economics, including participation in economics discussions in this forum, in the blogosphere generally, and (so far as he could manage it) in the larger world.

Having thus refreshed myself, I now feel fit not only to return to the monetary-economics fray, but to plunge straight into the bitcoin melee, by means of a declaration calculated to make every true-blue bitcoiner take aim for my jugular.

The declaration? Simply, that no matter how often bitcoin enthusiasts state otherwise, bitcoins aren’t currency. Nor are they money of any other sort. They aren’t–to employ economists’ standard technical definition—a “generally accepted medium of exchange.” Perhaps some day they will be. But not yet—not even by a (very) long chalk.

But that bitcoins aren’t money doesn’t mean that monetary economists shouldn’t be interested in them. On the contrary: they ought to find them very interesting indeed, both because of the puzzle their presence poses, and because of the possibilities that presence points to.

What’s puzzling about bitcoin is that it has gained a foothold at all. Thousands of retailers (some are listed here) now accept bitcoin in payment for everything from restaurant tabs to dating site dues, not to mention marijuana and other black-market stuff. And the number keeps growing daily. That growth itself isn’t puzzling, for once a payments-network bandwagon gets going it becomes more and more tempting for merchants to hop on. But how did it get going in the first place? It is said that the first person to eat an oyster had to have been exceedingly brave or exceedingly crazy or some of each. But that primordial mollusc eater had nothing on the first, equally anonymous person to receive bitcoins in exchange for valuable merchandise, in the hope of somehow fobbing them off in turn on others. The earlier pioneer might, after all, have simply taken his cue from a seagull or oyster-catcher.

Unlike the rise of bitcoin’s network, that of various past money commodities like tobacco, cowries, and salt poses no puzzle: whoever first toyed with accepting such commodities for goods could count on the existence of persons who desired the commodities in question for their own sake, even if no one else was prepared to hazard their employment as exchange media. By adding their own willingness to try a commodity as an exchange medium to the preexisting non-monetary demand for it, such experimenters enhanced the likelihood of success on the part of others who made the same gambit, and so on. Such, in essence, is the basis for Menger’s famous (if controversial) conjecture regarding the spontaneous evolution of early (commodity) monies. The first person to accept bitcoins in exchange, in contrast, couldn’t hope to smoke them, make them into a nice bracelet, or sprinkle them on his food, in case he couldn’t trade them away: he (or she) could only hope that someone else would attempt a similar leap of faith, or face the consequences of trading some useful goods or service for so many units of digital dross.

It’s owing to the leap (or leaps) of faith required to turn otherwise useless stuff into exchange media that it has generally been supposed that fiat money could never become such except by means of government coercion, meaning not simply that the government must stamp “this is legal tender” on otherwise worthless pieces of paper, but that it can only get such pieces of paper to circulate in the first place by first making them convertible claims to either a commodity money or some established fiat money (which must itself have once been convertible into either a commodity or some other fiat money, and so on). Once it has managed to get its convertible paper into orbit, a government can then (suddenly) withdraw the convertibility launching pad without having its paper spiral back to earth, thanks to the now established demand for it as a pure exchange medium. Such, at any rate, has been the standard view of those (including the present writer) endeavoring to bridge the chasm separating Menger’s theory of commodity money from the modern reality in which irredeemable fiat monies rule the roost.

Such bridge building has had as its counterpart several studies casting doubt on the possibility of a “private” (which is to say voluntarily adopted) fiat money of the sort that Benjamin Klein and (despite his Austrian heritage) Friedrich Hayek have thought possible. According to such critical studies, such a money, being potentially infinitely expandable, would tempt its suppliers to reap high short-run profits by hyperinflating, rather than settle for the more modest periodic gains they might have by preserving their currencies’ purchasing power. Knowing this to be so, rationale persons will steer clear of such would-be exchange media, making them non-starters.

So much for received wisdom. Bitcoins challenge this wisdom, not quite by flatly contradicting it—to do that bitcoins would have to be money, which (as I’ve said) they aren’t—but by having managed to get off the ground at all, despite lacking any sort of convertibility “launching pad” and despite being “intrinsically” useless. Just as a toddler’s first steps don’t qualify it for the Olympics, the first barely above-ground flight of bitcoin is far from guaranteeing that it will stay aloft, let alone keep gaining altitude. Still it does seem to show that otherwise useless stuff can become an exchange medium without resort to trickery, and indeed without any sort of government encouragement. And that’s neither a mean nor an uninteresting accomplishment.

Just how did bitcoin manage to overcome what (for want of a better name) I’ll call the “oyster” problem? My partial answer is that, at least for some time after they first became available in 2009, bitcoins possessed three qualities such as no other actual or potential exchange medium had yet managed to combine. First, the open-source software providing for them to be “mined” by persons commanding sufficient computer-power allows only for a strictly limited annual output, with steadily diminishing returns such as will make unit mining costs approach infinity as total output approaches 21 million coins (as it is scheduled to do in 2040). In short, with just over 11 million bitcoins outstanding so far, no amount of computer power or time will ever expand the quantity by more than another 10 million. No one, in other words, is able to make a bundle by striking bitcoins at libidum. The problem of securing trust that might confront a prospective issuer of private “fiat” money is thus averted. In this respect bitcoin is more like a commodity than a fiat money, which is why I prefer to label it a “synthetic” commodity.

The other features that made bitcoin unique are (1) the untraceable nature of transactions conducted using it and (2) the fact that, being a “digital” money, it can circulate electronically. Bitcoin, in short, was the first medium to allow for perfectly anonymous transactions, avoiding both a paper trail and face-to-face contact, and to do so with the same convenience as any other sort of “digital” payment. Bitcoin’s inventors were thus able to take advantage of an unfilled niche. But filling it guaranteed nothing: the water was there for the horses to drink, but whether any would risk a first sip remained to be seen.

Risk it, of course, some did; and now, after some dramatic gyrations, with more undoubtedly to come, bitcoin, having already merited at least a footnote in the history of exchange media, might well manage to do considerably better than that. It is, after all, the nature of network goods to go from strength to strength, with every uptick in network size enhancing the prospects for further growth. That, so far as bitcoin enthusiasts are concerned, is the good news.

The bad news is, first of all, that bitcoin remains a bit player relative to established moneys, which for all their shortcomings command vast networks that are correspondingly self-reinforcing. Second, bitcoin’s relatively tiny network goes hand-in-hand with a high degree of market volatility, and a correspondingly reduced attractiveness to retailers, with large orders placed by one or two “big players” sufficing to generate huge price swings. Finally, the very success of bitcoin is bound to inspire imitations combining the original product’s desirable features with others such as might cause it to suffer the same fate as Betamax and BlackBerries. Consider, for example, a private cybercurrency based on a “mining” protocol aimed at dampening short-run swings in its exchange value. Or consider MintChip, a cypercurrency now under development at the Royal Canadian Mint, which is supposed to be as anonymous as bitcoin, but with the very considerable advantage of being fully compatible and integrated with the already established Canadian dollar exchange network.

Paradoxically, the very innovations that may eventually doom bitcoin also explain why it deserves to be regarded as one of the most promising developments in the history of money since the invention of ordinary coins. For, as I explain in my paper on “Synthetic Commodity Money,” its otherwise modest achievement proves that, with the help of the right software, one might design an “ideal” money commodity, with a supply function guaranteed to achieve whatever criterion of macro-economic stability one likes—be it a constant nominal money stock growth rate, a stable general price level, or a stable level or growth rate of nominal GDP. No muss, no fuss, and, best of all, no FOMC. Admittedly, it’s only a possibility. But what a possibility!

Addendum (April 23): Over at Bitcoin Forum a commentator observes, regarding my post: “I don’t understand why so many ivory tower academics speculate about why and how Bitcoin got its initial value, given that the transition and motivations are fully documented and readily available for anyone willing to read the posts and threads on this forum from late 2009 and early 2010. It’s like they don’t want to get their hands dirty interviewing people like NewLibertyStandard or Theymos who can give them proper first-hand accounts of how and why BTC/USD markets for hobby-driven technogeeks and ideologically-driven anacrholibertarians arose lockstep with increasing mining difficulty.”

While I can’t pretend to be chaffing at the bit to converse with ideologically-driven libertarians, whether anarcho- or anacrho- or both, I will say that I don’t see what the emergence of BTC/USD markets has to do with the “oyster” problem I pose. Sure, once bitcoins became desirable enough people wanted to be able to get hold of them without mining for them themselves, e.g., by purchasing them with dollars. Nothing puzzling about that. But the fact that entrepreneurs were quick to respond to that desire hardly explains why anyone was willing to be among the first persons, if not the very first person, either to devote effort to mining bitcoins or to offer to exchange valuable stuff, whether dollars, merchandise, or labor, for them. Should anyone at Bitcoin Forum wish to enlighten me and others on the matter, as I’m sure many can, I should be very grateful to him or her.

According to The Hill, Sen. Marco Rubio (R‑FL) told Rush Limbaugh that the Republican Party is “primarily” to blame for the growth in government dependency: 

“I’d say that’s a growing problem in America in general,” Rubio said. “I think we have a growing problem in this country that too many people have forgotten what the true sense of prosperity is … and let me tell you who I blame for that first and foremost. I blame that primarily, quite frankly, on decisions made by the Republican Party in the past to embrace crony capitalism and corporate welfare as conservatism, when, in fact, that’s not what we’re about.”

That’s a pretty serious charge. Although I think both parties deserve equal blame (food stamps are an example), I give Rubio credit for not going along with the standard Republican delusion that Obama lit the torch of government dependency. The current occupant of the White House had it passed to him, and Rubio appears to acknowledge that reality: 

“I also think that while we’ve had multiple candidates in the past that have campaigned as limited-government conservatives … until it’s their government program that they’re trying to protect, or what have you,” he said. “So I don’t think necessarily Republicans have always governed as the limited-government movement and the result is you see this kind of confusion in the American electorate about what the source of prosperity is.”

Yep, Republicans talk a good game about limited government but talk is about as far as it goes.

There’s just one problem with Rubio criticizing Republicans who “have campaigned as limited-government conservatives…until it’s their government program that they’re trying to protect.” When it came time to vote to phase out the federal government’s Soviet-style system of subsidies and supports for sugar producers, Rubio sided with his state’s notorious sugar interests.