Tuesday, October 4, 2011

Fractured Banking


"As Europe's Crisis Grows," The New York Times frets, "suddenly, over there is over here." 

They are right. We live in an interconnected world. It used to be said that when the US sneezed, Europe (or Japan or South America) caught a cold. Now, it goes both ways, since we have so much money invested around the world, and the stewards of all this money are batwinged dastards who have suborned sovereign nations into their dark schemes.
A crucial mechanism linking financial players in the United States to the problems in Europe involves credit default swaps, those insurance-like products that did so much damage during the 2008 financial crisis. (Think American International Group.)
Billions of dollars in swaps have been written on sovereign debt, guaranteeing that those who bought the insurance will be paid if Greece or other countries default. But since these instruments trade in secret, investors don’t know who would be on the hook — as A.I.G. was in its ill-fated mortgage insurance — should a government default or a bank fail. (NY Times)
What the international financial insurers need to be told is that they’d better make good on it or they’re going to jail. Same for the bankers who loaned irresponsibly knowing that governments would bail them out or print them more money once they blew through their allotted portion.

Fractional Banking is Fractured

The first problem is that banks are loaning out money they don’t have, essentially creating money out of thin air. The second part of the problem is the exotic financial instruments that allow companies to gamble with money they don’t have and to write insurance policies full of promises they can’t keep.

If this were just financial giants screwing one another, who would care? Unfortunately, it’s not. Central banks of sovereign nations fund all of this high-flying chicanery, which really means you and I are the ones who pay when a bankster shoots craps at the casino.

Paul Volker warned us. He was the Fed Chairman who cleaned up Carter's mess. Obama hired him on to much high hope and fanfare when he first took office, and then promptly ignored him because he was crapping in the punchbowl.

Is Limited Purpose Banking the Answer?

Christophe Chamley and Lawrence Kotlikoff wrote a great little paper entitled, Limited Purpose Banking - Putting an End to Financial Crises.  Muchas gracias to Conservatives on Fire for turning me on to this little Gem.  Chamley and Kolitkoff's solution?

They propose restricting banks to traditional banking, and putting similar restrictions on brokerage houses and insurance companies.  Presumably, this would let the high fliers continue flying, they just would have to do it outside of our financial system and without the taxpayer-funded safety net.
 
Please go read the article.  It is very short, and his entertaining analogy explains those exotic instruments known as credit default swaps.

23 comments:

Speedy G said...

Buying a credit default swap is like buying fire insurance on your neighbors house. Now where should I store all my oily rags and gasoline cans.... ?

bunkerville said...

There needs to be an end put to all of these exotic "investments" the purpose of which is to prey on good people who want to make a decent investment. Banks need to be banks period. The stock market now is for fools.

Ducky's here said...

Yup, Obummer might have done well to listen to Volcker instead of Fat Larry Summers and his Cabana Boy, Timmy Taxes.

Z said...

"The first problem is that banks are loaning out money they don’t have, essentially creating money out of thin air."

What a perfect match for Obama; spending money he doesn't have, essentially creating even larger debt out of thin air.

conservativesonfire said...

Thanks, Silver, for putting out a plug for Kotlikoff's Limited Purpose Bnaking. I the world had listened to Kotlikoff two or three years ago, Europe and the US wouldn't be in this mess. I guess a little common sense is too much to ask of our leaders.

Most Rev. Gregori said...

The United States should have realized right from the get-go that something was truly amiss when the Federal Reserve was declared immune from government audits.

Finntann said...

Makes perfect sense, what's wrong with you?

Government works on the philosophy of "what do you mean I have no money, I still have checks".

Never happen, at least not until this existing economic structure implodes.

Oh wait...


Cheers!

98ZJUSMC said...

Finntann said...
Government works on the philosophy of "what do you mean I have no money, I still have checks".


Worse. More like: I ran out of checks, but I still have three out of 26 credit cards that aren't maxed out, yet.

...and look, this one is from the Bank of China.

Jersey McJones said...

The convolution of the right will never cease to astound me.

Silver, Carter named Volker, and Greenspan and Bernanke have followed. That crowd of anti-inflation fighters ensured the middle and working classes wen stagnant, or worse, and the very wealthy could loot the nation while "conservative" sycophants like you got it all wrong.

You have the right idea, but you're all out of focus.

JMJ

98ZJUSMC said...

Most Rev. Gregori said...
The United States should have realized right from the get-go that something was truly amiss when the Federal Reserve was declared immune from government audits.


Rectifying that should be job one for the new Republican Congress.

98ZJUSMC said...

Silver, Carter named Volker, and Greenspan and Bernanke have followed. That crowd of anti-inflation fighters ensured the middle and working classes wen stagnant, or worse, and the very wealthy could loot the nation while "conservative" sycophants like you got it all wrong.

Funny. I have been middle class my entire life. From Reagan thru Bush II, I did better and better each year. All came to a screeching halt with OBen Hogan, though. How do you explain that? I'm just a conservative sycophant so, accurate data would be appreciated.

Thanks!

Ducky's here said...

How do I explain it? Freaking simple Marine, Obummer is part of the continuum that started with Saint Ronnie Raygun. He just happened to be prez immediately after Wall St. completely screwed the freaking pooch.

Watch the initial deregulation failures during the freaking idiot Raygun's term. In fact Knuckles McCain made good money covering up the S&L fraud for Keating.

The came Clintoon and Rubin. Get rid of Glass-Siegle and lay the foundation for disaster.

Then comes Chucklenuts and the moron Greenspan makes sure there are plenty of free chips for the Wall Street tables.

Obummer arrives to make sure nobody on Wall Street loses money or gets thrown inside and you seem to dense to see past the last year or so.

It's a shame you have the vote.

Finntann said...

Ducky, since you obviouly didn't follow the link:

What about investment banks, brokerage firms, hedge funds, and insurance companies? What’s
their right financial order?

Again, regulate to purpose. Investment banks take companies public and assist in mergers and
acquisitions. They shouldn’t be permitted to invest in their clients’ companies. Brokerage firms
are here to help us buy and sell assets, not to gamble on spreads. Hedge funds are here to help
limit risk exposure. They aren’t here to insure these risks themselves. Finally, insurance
companies are here to diversify risk, not write insurance against aggregate shocks.

In other words, government should set up the basic rules and quit meddling in an attempt to gain political advantage and donations.

Cheers!

Anonymous said...

Ducky, in the interests of maintaining good orthographical, grammatical and syntactical standards you need to know that you appear "homonymically-challenged."

Please review the proper uses of to, two, too and there, their, they're, room, rheum, ruin, rune, etc.

Since you are a cinematic as opposed to a literary type, you may not think these basic rules of written communication matter anymore, but I assure you they do. We're almost at the point now where young people have as much difficulty reading nineteenth and twentieth century English literature that I do dealing with Chaucer in its original form.

It's a great pity that doors to worlds of wonder and delight are closing rapidly to future generations, because of rotten "trendy" educational policies and giving way to the all-too-human tendency to follow the paths of least resistance.

Ignorance and sloth are greater enemies to human progress than poverty and disease.

~ FreeThinke

Anonymous said...

" ... this would let the high fliers continue flying, they just would have to do it outside our financial system, and without the taxpayer-funded safety net."

What a fine idea! How novel! Something that's fair-minded and also makes good practical sense. Wow! I love it.

It would do a great deal to break up the marriage of Business with Government -- an unholy union that continually and unmercifully victimizes taxpaying members of the populace.

There may be some justification for bilking taxpayers to take care of the aged, the handicapped, the mentally deficient, and helpless infants and minor children born to incompetent, irresponsible parents, but there could be no excuse whatsoever for policies that require the general public to pay for the sins of inept entrepreneurs.

~ FreeThinke

Anonymous said...

The article by Chamley and Kotilkoff provides a witty, succinct explanation of why the Almighty said, “Thou shalt have no other ‘GODS’ before me.”

Three points stand out as vital and pivotal:

”... To safeguard the payment system, banks must hold 100 per cent reserves against their deposits either in cash or short-term US treasuries. With 100 per cent reserves, bank runs will be history. ...”

”... With the government ready to absorb losses, banks are talking outrageous risks knowing that Uncle Sam will cover them if things go south. ...”

”... Banks should be allowed to initiate only conforming, i.e., government-approved, AAA-rated mortgages and business loans. These would be long-term, fixed-rate loans with 20 per cent-down and payments below 25 per cent of income. ...”

I doubt, however, that I could ever support the following recommendation:

”The Fed would also gain full control of the money supply. To expand the money supply, the Fed would continue buying treasuries from the public and supplying cash ...”

I have a sneaking suspicion that must have been Mr. Kotlikoff’s idea. College professors seem always to embrace ideas that take power away from individuals and cede it to large impersonal, unfeeling, untouchable authoritarian entities -- to which I say BOO!

Isn’t the Federal Reserve -- that mysterious private, unelected, unaccountable, unconstitutional body of international bankers that controls our money supply and determines its value thereby having more power over our lives than the three branches of government provided in the Constitution combined -- largely responsible for the financial predicament in which we currently find ourselves?

Or is it really all the fault of Bonnie Fwank and Christ Dodge?

~ FreeThinke

PS: The Verification Word for this post is COPILING. I thought that was too apt not to mention. - FT

98ZJUSMC said...

Ducky's here said...
How do I explain it? Freaking simple Marine, Obummer is part of the continuum that started with Saint Ronnie Raygun. He just happened to be prez immediately after Wall St. completely screwed the freaking pooch.

Watch the initial deregulation failures during the freaking idiot Raygun's term. In fact Knuckles McCain made good money covering up the S&L fraud for Keating.

The came Clintoon and Rubin. Get rid of Glass-Siegle and lay the foundation for disaster.

Then comes Chucklenuts and the moron Greenspan makes sure there are plenty of free chips for the Wall Street tables.

Obummer arrives to make sure nobody on Wall Street loses money or gets thrown inside and you seem to dense to see past the last year or so.

It's a shame you have the vote.


Well that's a wonderful rant that underscores most every leftist talking point ever spewed.

Still doesn't explain why I, a middle class person, did incrementally better every single year, funded my own IRA's and bought and paid for two homes.

....and I still love the RoNNie RAyGun, RoNNie RaYGun schtick! Just never gets old.

So, no hard facts, huh? Just a bunch of abstractions pointed at fuzzy targets.

Thanks for the gumball, Popeye.

Anonymous said...

Watching Ducky try to hard to get himself banned by waxing ever more obnoxious is endlessly amusing.

It quite reminds me of Rumpelstiltskin.

~ FreeThinke

Ducky's here said...

I type quickly and don't proofread, Grammar Girl (aka freethinker) also I'm a pure left hander which makes spelling a little more difficult but I don't struggle with spatial relationships as you do.

But thanks Freethinker, you're a real prince.


Finntann - the issue is large scale deregulation not issues of regulation. We have watched Obummer do nothing about regulation.

Ducky's here said...

Let's help out the marine. He thinks he is extraordinary because he accumulated assets during a growing equity bubble. Let's inform him that is what happens in equity bubbles.

Then the bubble burst as all equity bubbles do. What's the freaking mystery.

You can point to years upon years of policies that inflated the bubble but this guy seems to believe some action by Obama deflated it. He's like the freaking fools at Lehman's who were betting the store that the housing market would never decline. Of course it did and it had nothing to do with Obama and everything to do with the problem we're in.

MK said...

If we could get just a few politicians in charge who refuse to bail out a few irresponsible financial institutions, that alone would set a good example to the rest to clean up their act.

Unfortunately much of the western world wants its various governments to 'help' with all sorts of crap, so we'll have to keep paying the price of the meddling we desire. Until we just can't pay anymore, that is.

Anonymous said...

Mr. Cain's apparently strong ties to the Federal Reserve are a huge black mark against him -- for me. The Fed is one of most potent enemies. Also his platform manner is too reminiscent of an old-time Tent Revival preacher for my tastes --- but no candidate is perfect. I do find him engaging and refreshing

Mitt is decent enough, but seems flat, wooden, dispassionate, unconvincing -- committed only to winning not to any potentially curative agenda.

Rick Perry has proved himself to be a dullard -- about as sharp as a mushroom in debate. It's time for the RNC to usher him quietly and politely out the door.

Bachmann is strident. Her delivery is monotonous, and she has an embarrassingly effeminate husband with too much public interest in homosexuality, even if he does claim to be able to "cure" it. [Talk about tosh, tarradiddle, stuff, nonsense, bullshit, baloney! and horsefeathers! WOO HOO!!]

Newt -- as someone wrote of Giuliani a few months ago -- too closely resembles an old wedding cake. It's all too clear his day is past. Besides, he has a plethora of powerful liberal friends with whom he's much too cozy, and has shown himself too many times to be anything-but a committed conservative. I think he's a New-World-Orderist- Bohemian-Grove type, myself.

Rick Santorum is sweet, kind, decent, and sincere, but but he's an obvious lightweight who's intellectually-challenged. [Absolutism on Right-to-Life issues GUARANTEES electoral loss, as does overt condemnation of homosexuality.]

Ron Paul is too old, too eccentric, too pointedly controversial, a bit schizoid, and frankly his thinking has too much depth ever to reach the "average" voter. Besides, Dr. Paul has been tarred with the brush of anti-Semitism. [It's not true, of course, but when certain quarters get down on you, you might as well fold your tent, pack up your belongings, put your tail between your legs, keep your head down, grit your teeth and head for home -- if they haven't yet burned it down.] Charges of anti-Semitism are like charges of Date-Rape or Child-Molestation. They don't have to be true to ruin you. You're as good as dead once such an accusation has been made -- thanks to leftist political activism of the Betty Friedanesque variety.

Who are the other Republican hopefuls? Gary Johnson? YAGOTTABEE KIDDING!!! I believe it says more about the unimpressive nature of the other candidates, if such there be, than it does about my aging memory.

So, where-of-where is The Knight in Shining Armor -- the Superman -- the Siegfried with BRAINS, a HEART, and a CONSCIENCE -- who could lead us out of this wilderness and back to "our" PROMISED LAND (as opposed to "the" Promised Land)?

Probably pulling levers behind a curtain in The LAND of OZ.

Wheeze in TRUBBLE, Pappy!

~ FreeThinke

Anonymous said...

Very sorry!

My last post was intended for the Herman Cain thread. If I could remove it from this one, I would.

Unfortunately, we live in a world where Stuff Happens!

~ FT