Broken Windows versus Banking
Several days ago I wrote about the broken window fallacy. Tonight while listening to Barack Obama address Congress, I grew troubled when he argued for supporting failing banks because “getting lending going again” would provide benefits that essentially mirrored what the broken window fallacy talks about: a young family that otherwise couldn’t would be able to obtain a loan to buy a house; some company would hire workers to build the house; the workers would have more money to spend in their communities; and so on.
Recall what the broken window fallacy says:
The basic idea is that it is temping to think that a hoodlum breaking a bakerâ€™s window stimulates the economy because the baker must go buy a window from the glazier, who then can go buy additional things from others in the community and so on.
It sounds strikingly similar, doesn’t it? I don’t think it is a coincidence. So, I immediately started wondering, where is the broken window in the lending example? When a bank creates money through a loan, whose window is metaphorically broken?
My guess is that there is no specific victim, which is why this is so insiduous. Instead, the loser is, in some way that I don’t fully understand yet, a large group of us — perhaps all of us, and the winner is a small group. I am beginning to belive that the only way to not be hurt by the banking system, in aggregate, is to be partaking of loans yourself — to be leveraged yourself. Suddenly, it doesn’t seem too strange that this nation is addicted to debt.Â It is simply the best response to a set of incentives enshrined in law by our government.