A counter-argument that I've seen more than once is such as made by this correspondent:
I disagree with the underlying premise that volatility is a bad thing and that the goal of "architecting" a financial system is to smooth-out the ups and downs. I have no problem with volatility. There's no law of nature or moral principle that states that the optimal state of the world is an even keel with minimal volatility.The purpose of my proposal to phase out fractional reserve banking altogether is not to do away with volatility for the sake of itself. Rather, it is to remove the systemic harms and risks of this volatility, which are:
- On a small scale, when the malinvestment cycle caused by lending trends is small, the economic bust that follows is a form of pollution. Economic stability is a common good that benefits everyone who wants to make solid business plans for the long run. When this stability is distorted by economic busts, a common good is being destroyed just as if a factory spews toxic ash into the air of a residential area. The economic cycles have strong negative externalities, and it is the role of government - even small government - to eliminate such externalities. Just like a factory must not pollute the environment - or else must pay for it - banks must not pollute the economy; or else must pay for it. But they cannot pay, because it would annihilate their profit. Therefore their business model us unviable. This is a principled libertarian argument.
- Also on a small scale, the economic booms and busts are not something that's valuable for the economy. It's not that the busts are damaging, but the booms are beneficial, so it's all worth it in the end. No: the booms themselves are damaging, because they are widespread malinvestment; booms are valuable resources and human time that are largely being thrown away. The busts, in turn, are recognition of this waste, and a return to saner principles. The economy would have been better off if there was no boom and no bust. This is a pragmatic utilitarian argument.
- On a large scale, when the boom is too long and the bust too large, this can lead to acute and widespread unemployment, threatening the individual existence of a large proportion of people, which in turn threatens the existence of a libertarian state.