12 Warning Signs Of U.S. Hyperinflation - By National Inflation Association (28/3/11) PDF Print E-mail
National Inflation Association   
Monday, 28 March 2011 09:18

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Protests, State Budgets & Collapsing Artificial Employment - By Daniel R. Amerman (25/3/11) PDF Print E-mail
Daniel R. Amerman   
Friday, 25 March 2011 22:04

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The Japanese Currency Intervention - By Robert P. Murphy (25/3/11) PDF Print E-mail
Robert P. Murphy   
Thursday, 24 March 2011 20:11

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Will JP Morgan Now Make And Take 'Delivery' Of Its Own Silver Shorts? - By Avery Goodman (25/3/11) PDF Print E-mail
Avery Goodman   
Thursday, 24 March 2011 20:07

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Rethinking Iceland's Recovery - By David Howden (24/3/11) PDF Print E-mail
David Howden   
Thursday, 24 March 2011 09:05

Mises Daily 

Iceland lapsed into the largest recession of the new millennium more than two years ago. As Philipp Bagus and I argue in our new book, Deep Freeze: Iceland's Economic Collapse, the obvious culprit is an oversized banking system, which at its peak had assets amounting to 11 times the size of the small island's economy. But like many economic events, the key lies not in what is immediately apparent but in those causes and conditions that are veiled. Politicians, pundits and the population of the Icelandic nation have had a difficult time explaining how such a large financial sector could develop in the first place.

Like in many other countries of the world, Iceland's large, unstable banking sector developed with the advent of deposit insurance. While the fractional-reserve banking system has a tendency to lead to unstable consequences, this day of reckoning is thought to be offset by ensuring depositors that a backstop exists in times of turmoil. Banks that overissue fiduciary media and face reserve-draining runs are "saved" by an insurance scheme guaranteeing depositors their quickly disappearing funds.

While this guarantee may delay a damaging bank run, it also fosters an environment that breeds increasingly risky bank activity.

On the one hand, banks can take comfort in knowing that added risks will result in higher profits. Normally the profit-and-loss system limits risk-taking behavior by burdening market participants with any losses of their risky activity. Deposit insurance effectively socializes losses while leaving profits private. This allows banks to seek higher profits through increased risk taking while simultaneously alleviating their fear of losses.



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Last Updated on Thursday, 24 March 2011 09:39
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