Submitted by PragmaticIdealist on 10/23/2010 15:37 -0500
FailFederal Deposit Insurance CorporationFederal ReserveFederal Reserve BankMonetary PolicyMoral Hazard
One of the most valuable insights provided by Mises was that any political body that commits the sin of monetary inflation is effectively placing a de facto tax upon all non-impacted carriers of money, the full effects of which can remain hidden for many periods. Instead of taxing its inhabitants and spending the revenue on some cause (i.e., sustaining bankers’ well-deserved bonuses), or establishing specific rules/requirements for market participants, policy-makers have learned over the years that it is far more politically expedient to simply debase the value of their currency, and use technical mumbo-jumbo to provide a justification. In other words, for any valid or non-valid societal problem that money printing can alleviate, there is an alternative and less opaque policy that a government could initiate in its stead.
Indeed, many of the policies in place today that regulate America’s banking system (FDIC insurance, monetary policy, TBTF , guarantees on private obligations) merely subsidize the cost of capital of financial institutions whilst providing a very much undefined cost to tax-payers. The benefits that accrue to tax-payers from all the support to the financial sector is even more difficult to define, especially as more and more instances of fraud and malinvestment comes out of the woodwork. Moreover, such continuous subsidation for the financial sector is really nothing more than sustained trickle-down economics, where the hope is that, after the money bypasses the inefficient banks and large and powerful corporations, a few more jobs would be created. In other words, the effect of a heavily subsidized banking sector is that the public’s money is forced into investment and the main winners of such increased investment are initially the banks and the large and powerful corporations. Additional jobs and/or higher wages follow eventually (note: not necessarily in America), but this also causes further price inflation in the things that commoners consumers buy.
The cost to tax-payers of the support to the financial sector can be approximated by a simple relation, namely:
Cost of Capital for FI’s (without intervention) – Cost of Capital for FI’s (with intervention) = Cost to Tax Payers
Given that the core components of most financial institutions’ weighted average cost of capital are either virtually nil or heavily subsidized (deposits pay marginal interest rates due to FDIC guarantees, FDIC charges a laughably minimal fee for the risk that it assumes, the cost of equity for banks is now heavily reduced with the advent of TBTF, and the cost of debt for banks has been manipulated for decades thanks to ultra-low interest rate policy and now ZIRP), and that we cannot compute something that does not exist (the cost of capital in a world without intervention), all we can do is wonder as to how much support or risk assumption is on the shoulders of you and me. This relates back to Mises’ teachings about the calculation problem inherent in most statist systems. Throw in the obvious moral hazard that Wall Street thrives on (record bonuses during a record depression?) and you can bet the house that the effective cost to tax payers of the whole American banking system is truly obscene.
So what if we were to get rid of the system and start afresh? “But then banks won’t be able to lend massive amounts of money and speed up the process of capitalism,” claim the supporters of the status quo. “And what about bank runs??” First of all, the detonation of the crony banks will reduce the malinvestment and overinvestment brought about by the artificially low cost of capital that I previously described. Second of all, if the government sets up a system of electronic money, than regular Joes and Janes who previously deposited in bank savings accounts for 1% will simply put most of their money in these new government accounts (where the money is not invested but simply sits dormant, as a risk-free store of value is supposed to do), and the remainder of their money could go to mutual funds or other investment houses that would be set up to fill the gap by the monstrous banks. In any free society people should have the right to store away money with the knowledge that said money is not being used to fund bankster overinvestment or to fund burgeoning state deficits that will only cause inflation since we all know governments rarely spend money wisely (in the risk-return sense at least). But today, most people must keep most of their money for liquidity requirements in retail bank deposits as there is no effective alternative, or because they are simply unaware that banks are able to lend their hard-earned money with impunity and with an artifically reduced cost of funds.
Why can’t we let TBTF banks fail? Why can’t we eliminate the federal reserve system? Why can’t we tear down the useless FDIC? If the financial crisis has taught us anything it is that banks cannot be trusted, and that subsidizing their lending is unfair to tax-payers at best and suicidal at worst. It is time to eliminate this archaic system and thereby purge ourselves of not only the direct costs of maintaining the hegemony, but the incalculable indirect costs as well.
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by Commander Cody
on Sat, 10/23/2010 – 16:28
How do we do it? Firstly, we starve the beast. Secondly…?
Login or register to post comments by e_goldstein
on Sat, 10/23/2010 – 16:54
replace banks with a system of public or private mints that provide the service of coining precious metals.
Login or register to post comments by Rasna
on Sat, 10/23/2010 – 18:10
Why not let the Treasury handle coinage as the Constitution specifies?
Login or register to post comments by Selah
on Sat, 10/23/2010 – 20:15
I thought this “Constitution”, that you speak of, was repealed a long time ago…
Login or register to post comments by hooligan2009
on Sat, 10/23/2010 – 16:44
Well said and entirely logical! You and Bruce K should run for the senate, that would shake up the status quo. We just need another 98 now. Not sure a Zero Hedge name would stand up in front of the electorate. Any ideas? How about TEN (for This Ends Now)!
And I think Commander that the way to do it…is to do it.
Login or register to post comments by Waterfallsparkles
on Sat, 10/23/2010 – 17:04
What does a devaluating dollar do to the average American?
Higher Wages = Higher Taxes to the Government.
Higher Stock Prices = Higher Capital Gains to the Government.
Higher Housing Prices = Higher Property Taxes to the Local
Higher Utility Bills = Higher Taxes to the Local Government.
Higher Clothing Prices = Higher Sales Taxes to the Local Government.
Higher Gas & Heating Oil Prices = Higher Taxes to the Government.
Higher Income due to Inflation – Higher Taxes to the Government.
More Printing of Money = Higher National Debt and Higher Income Taxes to the Government.
Login or register to post comments by Rainman
on Sat, 10/23/2010 – 17:04
Amusing. First, only Big Fail will cause the reset of the system. Second, if all the dilapidated bridges are to be torn down , there must be a plan or alternate mechanism by which the masses can still cross the river. No such plan or mechanism exists.
As long as government is consumed with pump, duck and cover, there will be no plan and no solution.
Login or register to post comments by Bluntly Put
on Sat, 10/23/2010 – 17:08
First of all, I agree with most of what you wrote. But, you neglected to include the effects of dismantling the cartel, that is the size of government would need to be reduced by more than 75%, which of course is a good thing if you have any common sense. But there are millions of zombies out there living off the government tit, in other words millions of people who after losing their goobermint job would have to work for sub minimum wage (of course there would no longer be a minimum wage) and who would have to learn entirely new skill sets.
In other words, a large prolonged depression. Of course we will have a long prolonged depression, it’s just that if we continue to subsidize the banking cartel we may end up losing the republic, so your solution is of course logical however politically impossible at this current time.
Login or register to post comments by eatthebanksters
on Sat, 10/23/2010 – 17:30
The easiest way to kill the big banks is to stop doing business with them. If every individual and small business pulled their account and took them to a solid regional or local bank, the TBTF banks woud F(ail). Barring that, if taxpayers finally got tired enough of footing the bill for the corrupt motherfuckers that run those institutions, perhaps their local politicians might react by shutting down the policy that allows the TBTF banks to keep going. Stop the treasury from printing money (what if they told Bernanke to fuck off?). Last option, kill the banksters.
Login or register to post comments by f16hoser
on Sat, 10/23/2010 – 17:34
They (Oligarchs) will never flush the debt (banks) and start anew. The debt is held in private hands now (Wall Street). We will have TARP-2 or son-of-tarp, what ever, because of the mortgage debacle. Get ready to rumble! Frank-Dodd did not regulate the TBTF like Obama says it did. You mean to tell us Obama lied again? Yes, I do mean to say that Obama lied again. Just like he’s been lying all along. Change you can believe in was Social Change that the poor and sometimes LAZY can believe in. They will never erase 1 penny of debt as long as those holding it can claim TBTF status or tax those still working. Financial sector owns politicians. Just look for the bar-code stamp on their foreheads……FUCK
Login or register to post comments by Problem Is
on Sat, 10/23/2010 – 19:11
I like that better than TARP2… May I use it?
Login or register to post comments by Selah
on Sat, 10/23/2010 – 20:10
How about Mother Of All TARPS?
Login or register to post comments by Bob
on Sat, 10/23/2010 – 18:20
I think the answer to your questions is, give or take a few details, that we could. And should. The system is costing us trillions per year . . . we could put that money to better use.
Login or register to post comments by Spirit Of Truth
on Sat, 10/23/2010 – 18:44
Our government has been bribed away. No one will step upon, never mind chop off, the hand that feeds us. The banksters want guaranteed profits for gambling with other people’s money and exorbitant bonuses for their “services”. If they don’t get what they want, there’ll be hell to pay.
“The government should create, issue and circulate all the currency and credit needed to satisfy the spending power of the government and the buying power of consumers….. The privilege of creating and issuing money is not only the supreme prerogative of Government, but it is the Government’s greatest creative opportunity. By the adoption of these principles, the long-felt want for a uniform medium will be satisfied. The taxpayers will be saved immense sums of interest, discounts and exchanges. The financing of all public enterprises, the maintenance of stable government and ordered progress, and the conduct of the Treasury will become matters of practical administration. The people can and will be furnished with a currency as safe as their own government. Money will cease to be the master and become the servant of humanity. Democracy will rise superior to the money power.” – Abraham Lincoln
Whoever controls the volume of money in our country is absolute master of all
industry and commerce…when you realize that the entire system is very easily
controlled, one way or another, by a few powerful men at the top, you will not
have to be told how periods of inflation and depression originate.
~James Garfield, 20th President
Assassinated shortly thereafter.http://www.zerohedge.com/forum/wilsons-folly-our-private-central-bank-allows-member-bankers-collect-rent-exponentially-invent
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