I believe there are two major threats facing the American economy, both now and in the future.  One is the unfunded liabilities, which by some estimates is now over $200 trillion.  This will be solved through default.  It is hard to say how this default will take place, but it will be mostly older people who feel it the worst, since most of the unfunded liabilities are in the form of Medicare, Social Security, and government pensions.  While this will be a painful process, there is a solution, even if it isn’t exactly ideal.

The other major threat facing America is the banking system.  It is highly regulated.  There is essentially a cartel.  There is no free market.  The Federal Reserve and the FDIC are the biggest problems as they create a giant moral hazard in which the big banks reap major profits during the good times and then get bailed out during bad times.  It is corporatism at its worst.

The banks were majorly bailed out in 2008.  It is still questionable just how solvent the major banks are today.  It is always hard to say because of the presence of the Fed and the FDIC.  If those entities didn’t exist and there were a true free market in banking, then insolvent banks wouldn’t last long.  They would have to be far more responsible or face bankruptcy.

This is an extremely difficult subject for libertarians.  If I had the opportunity to eliminate the federal Department of Education tomorrow, I would do it instantly.  While it wouldn’t be pain free, it wouldn’t be devastating for anyone, except perhaps the bureaucrats working there.  I could say the same thing about many federal programs.  They could be eliminated almost immediately without having any widespread devastating impact on the whole economy.  I can’t say the same thing for the FDIC.

While most Americans opposed the bailouts in 2008, Americans would have been far more upset if they had gone to their local ATM and not been able to withdraw funds.  It would have been even worse if they couldn’t write checks or use debit cards.  I understand how fragile the banking system is right now and how dependent the whole economy is on the current system.

I have my ideas on what a libertarian society should look like.  There should be a free market in banking and money.  The marketplace should determine the money used.  It would probably pick gold.  It might be more than one thing.  Regardless, that is for the market to decide.  If banks are honest about their fractional reserve lending, then I don’t think it should be illegal.  I have written about this before.  But they would be on their own, with no bailouts.  I don’t believe we would see much fractional reserve lending in a true free market environment.

The big question is how we get from here to there.  How do we phase out the FDIC and the Fed?  It surprises me how little I see this discussed in the libertarian community.  I think it is a difficult subject for libertarians because it almost takes some form of central planning to get away from the central planning.  It is hard just for me to say that as a libertarian.

Jeffrey Herbener presented testimony before the Subcommittee on Domestic Monetary Policy and Technology Committee on Financial Services back in May 2012.  If you go to the latter part of his written testimony titled “Monetary Reform”, you can read his idea on how to reform the system.

In short, Herbener advocates getting to a system where the primary step “is to turn FRNs into 100-percent-reserve redemption claims for gold coins.”  He continues, “The other step along this path to a market monetary system is to establish a 100 percent reserve of money against bank-issued fiduciary media.”  He goes on to advocate that banks would need to build their cash reserves up to 100 percent of their checkable deposits (which would be much easier to do now since banks have accumulated massive excess reserves).

Assuming that the Fed holds the gold that it says it does, this could then be used to back up the existing cash in the banking system.  Herbener calculates that the redemption ratio would be $4,207 per ounce of gold.

I give Herbener great credit for at least trying to lay out some sort of solution.  Most libertarians can not offer any serious ideas on how to get out of the current mess without creating total havoc.  I think Herbener is somewhere along the right track.

Herbener says, “Once this transition was accomplished, the government should permit private production of money and money certificates according to the general laws of commerce.”  I would amend this slightly and say, “why wait?”  I think private competition should be allowed at any time, whether it is in banking or money production.

I would like to build on Herbener’s suggestions slightly and say that we should repeal legal tender laws as soon as possible and we should allow free banking as soon as possible as well.  To get out of the current mess, I think any bank should be able to get away from government regulation and control, so long as they agree to not be insured under the FDIC.  While I’m not a fan of government regulation, I think all banks currently insured under the FDIC should be subject to oversight and be required to increase their reserves to 100 percent, until such time as the FDIC is fully abolished.  If they don’t like the rules, then they can get out from under them and no longer be insured by the FDIC.

I think we need to phase out the FDIC and I think Herbener has a plan that is a great starting point for this discussion.  I only wish that more libertarians would have the courage to study and address the issue.  The government and the bankers have made a mess and we need to find a way to get out of it without causing a total collapse of the financial system.  We need libertarian solutions to achieve libertarian goals.