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If this is Capitalism then I am a Communist

What caused the economic crises?

“Greedy bankers” says some people.

There is certainly a lot of greed about. For example, the people who trampled a part time Security Guard to death at a Walmart on Long Island (as he shielded a fallen pregnant women from them) were certainly greedy. Even after it was announced they had killed a man they still did not want to give up shopping for bargains in the sale and were very angry at being removed from the store. But I doubt there were any bankers in the Walmart sale crowd – although I am open to being proved wrong.

And the lawyers who are talking about “going after Walmart” over the death are greedy also – they are targeting Walmart, rather than the mob of shoppers, because Walmart has “deep pockets”. But these lawyers are not bankers.

In fact I rather doubt that bankers are either more greedy than other people or more greedy than they used to be. Someone does not tend to go into banking as a vocation – it has always been a “for the money” job. Although (and this may shock people) I suspect a lot of bankers are rather more innocent minded than bankers, at least in Britain, were in the past. Many (although far from all) British bankers in past decades were very aware that banking (as practised in the modern world) was based on very “dodgy” foundations and limited themselves with some care – not out of lack of greed, but because they did not have a university education in progressive ideas of “economics” telling them there was nothing dangerous (for example) in lending out money that was not 100% from real savings – indeed modern bankers are taught, as students, that “savings” and “lending” (or “investment” – as all lending is considered “investment”) are automatically the same whatever they do.

A certain Scotsman (an historian who does not thinks that fractional reserve banking in England came from copying Holland – even though the main bank in Holland, the Bank of Amsterdam, was famous at that time for not being a fractional reserve bank) blames the present crises on “Enron style practices” even though Enron was not a bank, and most of the bankers in trouble have not committed fraud in the way the Enron management did – whether fractional reserve banking is itself fraud is something the Scotsman does not consider.

No doubt some bankers were corrupt. Indeed on the board of Citigroup sat (indeed still sits) the disgusting Robert Rubin – one of the very people who was paid to help Enron cover up its debts, and who was listened to because of his high place in the Clinton Administration. Mr Rubin advised Citigroup to “invest” in securities based, credit bubble pyramid style, on home loans granted to people of whom Citigroup knew nothing – and by this advice and other advice Mr Rubin has helped Citigroup build up two trillion Dollars of “toxic assets”.

Mr Rubin has now secured Citigroup a vast government bailout which will support politically connected shareholders and managers and which has so far allowed Citigroup to go on doing things like paying about half a billion Dollars to name the Mets new baseball field “Citifield” and to pay ten billion Dollars (as of Monday) to buy a road building company in Spain – a country where the construction boom went bust some time ago.

One could then talk about the corruption in the (Democrat dominated) Fannie Mae and Freddie Mac and their political cooperation with people in Congress (such as Senator Chris Countrywide Dodd and Congressman Barney I-was-just-helping-the-young-boys-out Frank) and the work on the ground of such organizations as ACORN (an alliance of groups specializing in extortion and election fraud, whose most powerful section appears to be in Chicago) and how it used the Communities Reinvestment Act to get banks and other such to make loans to people who could not pay them back – when these people really existed at all.

However, all the above could not have produced the present level of crises… The size of the crises is vast – so vast that the human mind falls over trying to fully grasp the size of it. Already in the United States alone over seven trillion Dollars have been promised to aid various enterprises. Only some of this has been spent by the Treasury and by the Federal Reserve system – but the debt support pledges and other such are there if enterprises “really need them”. For example, General Electric had been pledged 138 billion Dollars in debt support – no wonder the top managers there have long acted as if their unfocused conglomerate had a divine right to exist, and have treated the shareholders with utter contempt. Not only were the managers, like so many corporate managers, protected from the shareholders by the various regulations and statutes government has passed over the decades – but they were also certain in the knowledge that their political connections would declare them “too big to fail” a “risk to the whole financial system if they failed” and therefore bail them out.

Even fractional reserve banking, on its own, can not be held responsible for a crises of this size. Lending out money that is not from real savings (i.e. money that does not really exist) is self limiting in the end – although not in the way the early 19th century “Banking School” said it was. It is self limiting in the way that the credit boom quickly turns to bust, and the castles-in-the-air wealth of mal-investments is liquidated, a long with a lot of people’s fortunes which depend upon the bubble.

A credit boom can only carry on if it is supported by a Central Bank – whatever this Central Bank is called.

This is why the credit-money bubble of the late 1920′s was bigger than previous credit-money bubbles of American history. Because the Federal Reserve system, specifically New York Federal Reserve Bank Governor Ben Strong, had pushed it up and up.

Do people remember the newspaper headlines every so often between 1987 and 2007?

Specially the “Alan Greenspan saves the world” stories?

Ever wondered what the great Alan Greenspan, Chairman of the Federal Reserve, had actually done?

What he had done is as follows:

Every time the credit-money bubble looked like it was finally going to burst Alan Greenspan jumped in and increased the money supply to “save” things. And he did prevent the credit bubble bursting – but at the price of making it bigger and bigger. Without this increase in the money supply, ACORN and Chris Dodd and Barney Frank and Freddie Mac and Fannie Mae, and the private banks, insurance companies (like A.I.G.) and other such would have no funny money to work with. They could not have wreaked everything without the ammunition (the money) Alan Greenspan was indirectly giving them. Of course he did not work alone, for example the present head of the New York Fed (who will be Treasury Secretary soon) has been involved in almost every bailout since Mexico in 1995.

And nor was it confined just to United States – for example the Bank of England has been supporting the wild expansion of the credit money supply for years, and even if one is just talking about notes and coins (not bank credit) the money supply in Britain is still going up at a about 6% a year (last time I checked).

The Fed in the United States is desperate to prevent the “deflation” of the credit money balloon it has created, but the Bank of England is no less desperate – indeed the Governor of the Bank of England has talked about nationalizing banks (those who have not already been nationalized) that does not “resume normal lending” – i.e. keep up the All Fools Festival with the bailout money they have been given rather than using the money to try and bring some sanity to their balance sheets. We live in a country where everyone is connected to the credit bubble and it is considered normal and respectable (rather than a sign of desperation) for a business to borrow money even to cover normal expenses – such as payroll.

This is not a serious credit money bubble in an otherwise sound economic system (as were the credit-money banking boom-busts that occurred in the United States before the creation of the Federal Reserve System in 1913) this, in both United States and Britain, is a system that is rotten to the core.

However, of course, that can not be admitted. Already there is a search for scapegoats as I mentioned at the start of this bit of writing – greedy and corrupt bankers are top of the list, but there are others. Already former Senator Phil Gramm is under fire – because he led the charge to “deregulate banking”.

I have no time for Phil Gramm as a monetary economist, he is a Chicago School man and I am a student of the Austrian School. And the two schools do not get on when the questions are about monetary policy. However, to say that allowing merchant banks to engage in retail banking and retail banks to engage in merchant banking is the primary cause of the present crises is, to use technical language, a load of dingos kidneys. But attacking “deregulation” like attacking “tax cuts” is always popular with such things as the mainstream media. And, at the margin, there is even a grain of truth in the charge against Gramm – as the deregulation made it more straightforward for the banks to play with the tidal wave of funny money that Alan Greenspan let lose on the world. But it is the tidal wave of new money (the increase in the money supply) that is the key.

Will the bailouts continue? Will the Federal Reserve Board continue to push the money supply up (according to some measures – I do not have any M3 statistics) 7.5% a year and direct it at the banks?

Will the official bailout number grow from 7 trillion to 9 (already the number of 700 billion is regarded as small) – are we really going to talk about tens or (perhaps) even hundreds of thousands of Dollars for every man women and child in the United States?

Actually it hardly matters any more, because the “financial system” is already broken. All the demented attempts to “save it” will achieve is to prolong and deepen the agony. However, as I hope I have made clear, if this system has anything to do with free enterprise “Capitalism” then I am a Communist.

42 comments to If this is Capitalism then I am a Communist

  • Millie Woods

    Paul, what I call this is the BIC syndrome. BIC = Boomers in Charge, the generation which the late Auberon Waugh once described as knowing everything so they had nothing to learn from anybody.
    The BIC syndrome reigns supreme in the academic field where professors borrow concepts from other disciplines which cannot and do not apply in their own. For example they use contrastive analysis from my field, linguistics, in Math! Entropy from the physical sciences is batted around in political science. Management principles are trotted out for curriculum design as educational technology.
    These monstrous know nothings like Obama who has never met a medial t he can pronounce and who believes that there are 57 states in the US and Afghanistan has a coastline and oil industry is typical of this kind of total failure to understand some basic knowledge. If I were dean of the so-called law schools these dullards graduated from I would sue for defamation.

  • dWj

    Some members of the New York city council have suggested that, after the bailout, the new stadium be named “Citi/taxpayer field”, in recognition of the new ownership.

  • Alan Forrester

    “Even fractional reserve banking, on its own, can not be held responsible for a crises of this size. Lending out money that is not from real savings (i.e. money that does not really exist) is self limiting in the end – although not in the way the early 19th century “Banking School” said it was. It is self limiting in the way that the credit boom quickly turns to bust, and the castles-in-the-air wealth of mal-investments is liquidated, a long with a lot of people’s fortunes which depend upon the bubble.”

    There’s nothing wrong with fractional reserve banking in a free market:

    http://mises.org/journals/rae/pdf/R92_5.pdf
    http://www.independent.org/pdf/tir/tir_05_1_selgin.pdf
    http://www.independent.org/pdf/tir/tir_07_3_white.pdf

  • Sam Duncan

    BIC isn’t a new phenomenon either. There’s a passage from PJ O’Rourke’s “Parliament of Whores” – which I can’t find for love nor money, so I’m about to quote from memory – in which he marvels at the preponderance of people then in their 40s at the Bush I inaugural. “People like me are now in charge,” he says. “This is awful. I know people like me. We’ll screw it up.” How right he was.

  • Jacob

    There is this wonderful (and very long) tale by Michael Lewis about the banking world. He know’s, he worked at Salomon Brothers, then quit and wrote a book, Liar’s Poker.
    He tells how the (private) bankers were either corrupt or fools or both, they commited fraud in inventing all those funny poison papers. They destroyed the banks they worked for.
    He also tells the amazing tale of Steve Eisner, who also worked at a bank and quit when he saw what fools they were, and made a fortune shor-selling the big investment banks.
    He also tells how hired managers destroyed the banks. The banks, like Solomon Brothers, were originally partnerships – unlimited liability – the family that built them took pride in them and nurtured them. Then came the hired managers, incorporated, and milked them for personal benefits and bonuses, then destroyed them.

    There remains, though, enough blame for Greenspan, and the funny doctrine that you can create money out of nothing and get away with it.
    As Johnathan said in a post below – capitalism needs to be saved from the capitalists.

  • mike

    “Freedom, you all most like to bellow: but I have unlearned belief in ‘great events’ whenever there is much bellowing and smoke about them. And believe me, friend Infernal-racket! The greatest events – they are not our noisiest but our stillest hours. The world revolves, not around the inventors of new noises, but around the inventors of new values; it revolves inaudibly“.

    [Emphasis original]

  • PersonFromPorlock

    Our real economic system is ‘capitolism’ and has been for a long time now. Maybe it’s time for a new political movement, one with a slogan of “Forget the Debt!” and a platform of repudiating government debt issued after, say, January 1st 2009. I don’t believe there’s any way to keep American governments from borrowing themselves further and further into the hole except by making lenders afraid to lend to them.

  • Too bad the “conservatives” in America felt the need to serve as Yes Men for the Bush administration instead of telling the truth about it, because it is somehow “unpatriotic” to criticize your government when it is “at war” with a tactic or with a country which happens to be in the same region as a country in which a particular gang of criminals was based.

  • As for the “Forget the Debt” message, I’ll go you one further — here is my “bailout” plan:

    1) Legalize trade, without tax consequences, in precious metals: silver, gold and platinum. Don’t make it legal tender, but treat it as money.

    3) Introduce coinage of silver at the USMint, at about a 2% fee. The mint would certify the purity and weight of their coins. Private enterprise would be permitted to do the same, with their reputation as their bond.

    3) Repeal legal tender laws.

    4) Eliminate all taxation and government borrowing. Let the government pay for anything it wants with freshly printed money, hot off the presses.

    5) Wait for the currency to reach par with Zimbabwe Dollars. This should not take long. Most people will escape the currency as fast as they can. Those who cannot may be forced into Bankruptcy. Then again, nearly every American is bankrupt as it stands.
    + Govt Liabilities: 75e12 (75 trillion)
    + Population: 300e6 (300 million)
    + Per Capita Income: 38e3 (38 thousand)
    + Years of Debt: 6.14

    Sounds insolvient to me!

    5) Print out about 20 to 50 “Trillion Dollar Bills”, send them to our creditors, tell them to keep the change, and to hold on to the bills, because “someday they’ll be worth something to collectors”.

    6) Shut down the Federal Reserve, liquidate it’s assets, and devote them to providing some form of Social Security for those who are trapped in that system and too old to work.

    This would somewhat randomize the distribution of wealth, but in our heavily regulated economy, it’s pretty much random anyway. In a free market, wealth will quickly flow to those who earn it.

  • Paul Marks

    I agree with a lot of what you say Rich Paul, but I differ on some points – here is a few which, hopefully, I will get to type and send (I never know on this machine).

    The Federal Reserve Board does not really have much assets of value – the building is interesting, but those bits of paper are mostly I.O.U. (a bit like the government bond and such that make up the so called Social Security trust fund – it does not really matter if Presidents from Johnson onwards spent the money directly or not, as “investing” the payroll tax in government debt is not really “investment”).

    The government does own a big road network (although it is badly designed and, therefore, needs a lot more repairs than it should) and it owns about a third of the whole country – although the real estate market is not doing too good right now.

    I just do not know whether government assets would be enough to pay off the people dependent on Social Security or not – still it would help them.

    As for the government debt – well the bailout is about 7-8 trillion Dollars and the unfunded liabilities (even before the bailout and the recession) were about 40 trillion Dollars.

    So (as you know) the government is bust. And the financial system is a chain letter.

    Oh on coins:

    Let private companies compete on how much they will charge people to mint their gold or silver into coins.

    They used to California – till the late 1850′s when the government bought out the largest private mint and banned the rest.

  • Paul Marks

    On the conservatives:

    How to tell a real conservative from a false (or at least weak-when-it-counts) one:

    It used to be really difficult – a matter of judgement.

    Now it is easy – “did you maintain an opposition to the bailout to the end”.

    Quite a few Republicans in both House and Senate can say “yes” to that – but the majority (in both places) can not.

    Considering that conservatives in the country (let alone libertarians) were against the bailout perhaps they should consider who leads the Republican party in future.

    Time to have a leadership that actually stands for the principles that you do?

    Or is that to “radical” and “unrealistic”?

    The “realistic” thing being to keep nominating people who urinate on conservative principles (let alone libertarian principles) and treat their fellow Congressman and Senators who do not urinate on these principles as “extremists” or “freaks”.

    By the way – it is the same for State Governors.

    If a Governor is in D.C. asking for a bailout (from a bankrupt Federal government) then that Governor is a waste of space.

  • Chez

    If there really are companies that are so big that their failing would be a systemic risk, does this not mean that there is insufficient competition in those sectors?

    Or is the key word “considered”, i.e. they just have friends in high places?

  • Paul Marks

    Why are some banks allowed to go bust and others are not – yes Chez it is political pull.

    As Millie Woods pointed out the establishment have no shame at all. Sure establishment people have done terrible things in the past – but when it expossed they have fallen apart.

    The new establishment have no sense of shame – so they spent (like the present Tres Sec and the incomming one), even after they have been caught telling lie after lie. No resignations.

    As for the head of the Senate and House Banking committees.

    Only a generation ago Senator Dodd would have resigned (his father did – for less than the present Senator Dodd has done).

    And Congressman Frank?

    He would, of course, have killed himself. Although it would have been hushed up as an “accident cleaning his revolver” or whatever.

  • Paul Marks

    A question for people to consider.

    The old Murry Rothbard plan.

    Get the amount of gold the government owns and then divide it by the number of Dollars – and then declare that the Dollar is worth that amount of gold.

    Do you just apply this to MB (the Monetary Base – the present fiat notes and coins) or to M3 (bank credit – which has gone so out of line in recent years that the government refused to even give numbers on it).

    Do the latter and the banks might be “saved” (well…….).

    Although Rothbard (of course) demanded that the latter course be dependent on the banks giving up fractional reserve ism for ever.

    “We will print new fiat Dollars to cover your bank credit, and we will declare that the gold is divided by the new fiat Dollars as well as the old notes – but that is it, no more, you are finished after this”.

    Was his line at times (at other times he was not so generious to the banks).

    What do people think?

    It is pure theory.

    As, of course, the rulers want “normal lending” (i.e. fractional reserve insanity) to resume.

  • PersonFromPorlock

    The thing about the “Forget the Debt” plan is that it would have a lot of appeal for young voters whose future income is being frittered away by current politicians; it’s a politically possible idea. And because it’s possible, even if not likely, it will put the fear of God into an Establisment that, as noted, has no capacity for shame.

    It’s even morally defensible: if you lend money to a bankrupt who’s lending money to other bankrupts, what do you expect to happen?

    Subtle and detailed it ain’t, but that just makes it easier to sell. What it is, is the 2×4 in the famous ‘mule’ story or, as I first heard it that story told, the corncob up the arse.

  • PersonFromPorlock

    Arrgh! “…heard it that story told” = “heard that story told.”

  • To the average American, it might seem ludicrous to suggest that the United States is not in a recession right now. But economists’ fuzzy definition of the term makes it hard to say when a recession actually starts until we’re well into one. You might hear, for example, that recession occurs when GDP growth is negative for two or more consecutive quarters. But that’s not an adequate measure, most economists agree. Right now there is a lot of talk about a recession. The financial buzzword that is out there this month is “Recession” and for good reason. t has become increasingly vital that as American citizens, we begin to understand how we can properly safeguard ourselves against the risk of a potential downturn in the economy. Obviously there are no real guarantees in life, but there are numerous healthy and advantageous steps that can be taken in order to mitigate your losses during any financial turbulence that should occur in the near future.

  • lucklucky

    “There is this wonderful (and very long) tale by Michael Lewis about the banking world. He know’s, he worked at Salomon Brothers, then quit and wrote a book, Liar’s Poker.”

    Well i have read it all and i found it mediocre and in some parts not even believable.

  • Johnathan Pearce

    I am beginning to come around to the point, spelled out by Paul, that fractional reserve banking is at the core of the problem. It would not – possibly – be able to exist in a truly free market.

  • aletoledo

    I can agree with the idea that fractional reserve is not a bad thing. As the links that Alan Forrester provided show, the idea of a bank using a fractional reserve is merely a contract between a company and a customer.

    While I can agree with this, the problem is fiat currency and a fractional reserve system have a synergistic effect. A fractional reserve based upon gold, still maintains a semblance of control. A fiat currency on the other hand has no controls and a multiplication of inflation occurs with the fractional requirements.

    The recent bailout has eliminated the reserve requirements, so the discussion is essentially moot. Here is a link detailing the change http://www.wakeupfromyourslumber.com/node/8418, but note that this is the failed bailout. The bailout that passed had the same provision in it (HR 1424 sec 128). This is how they pass changes through Congress, by making the language difficult to trace back to the older provisions.

  • tdh

    Forgetting the debt overtly in the US would require a Constitutional amendment. It happens covertly via inflation and the consequent fall in the value of the dollars in which debt is denominated, or, with inflation-adjusted securities, via cooked inflation numbers.

    Fractional-reserve banking cannot be a simple matter of contract between a bank and its customers, because the diffusion gradient of money would amount to theft on a grand scale, even if the panics that such a policy would cause were tolerable, and because of externalities; once the currency leaves the bank customer’s hands, it is still inflated currency, and would somehow have to be identifiable as such for all collaborators in its use not to be defrauded when that particular pool of currency effectively contracts.

  • RAB

    We have Spent
    Therefore shall we
    Weep…

  • Paul Marks

    Quite so RAB.

    As for “fractional reserve banking”.

    It is NOT lending out 90% (or whatever) of the money deposited – as is normally described. Although even this is dodgy as most (contrary to some 19th century court judgement) most people think the money they have “on deposit” in a bank is their money (not the bank’s money) – although if they really do think that they should not be expecting interest on the money (in fact they should be paying the bank for looking after the money in the vault).

    What I am pointing at is when the banks (by lending out financial instruments rather than notes and coins – and accepting cheques and other such as deposites) end expanding the money supply itself.

    You end up with bank credit being more that all the notes and coins (that the people either have lent to them, or have deposited).

    In short lending is greater than real savings. Quite possible – for awhile.

    Actually it is self limiting (although in a nasty way – not a nice “Banking School” way) as the boom ends in a bust and various banks go “bankrupt”.

    However, if the Central Bank (of “Federal Reserve” or whatever) gets involved to “save the financial system” and does it AGAIN AND AGAIN.

    Then you get into a situation like this one – way beyond a normal boom/bust.

    So what I really using the term “fractional reserve banking” to mean is “banks using various tricks to expand the money supply so they can expand lending far beyond real savings”. And then this madness being supported by government (again and again and again – in a vast bubble).

    I apologize for being unclear.

  • Paul Marks

    I heard President Bush a few hours ago:

    “We are working to make credit cheaper and more available”.

    Exactly what the vast majority of economists would adivse – and totally insane.

    I am too tired to be angry.

  • Paul, a question: you say “”banks using various tricks to expand the money supply so they can expand lending far beyond real savings”.

    Do banks do that – i.e. do they lend more than they have taken in in deposits ?

    I thought that only Central Banks (government banks) could do that, while commercial (private) banks could lend only 90% of their money, being forced by regulations to keep a certain level of liquid reserves.
    In case they need money, commercial banks need to “borrow” money from the central bank, not being allowed to inflate the money supply on their own authority.
    Which is it ? Can banks create credit out of thin air, or is this done exclusivly by the Central Bank ?

  • Jacob:

    http://en.wikipedia.org/wiki/Money_multiplier#Money_creation_through_the_fractional_reserve_system

    It’s not that the banks are required to lend 90% of their liquid money, it’s the other way around: they are required to maintain only 10% of the “money” they lend out in liquid assets.

  • …, the problem being, of course, that IOUs are regarded as liquid assets, as if the possibility of them being defaulted does not exist.

  • Thanks Alisa, I think I got it.
    While each individual bank is not allowed to “create money”, the cumulative effect of fractional reserve banking is the creation of new credit, without new money being created by the central bank or by real savings.

    Nevertheless, the reserve requirement imposes a limit on credit creation, for exaple: under 20% reserve – 100 pounds of “real” money creates 500 pounds of credit, no more.
    So we can still say that to expand credit further, new money needs to be created, and that can only be done by the central bank.

  • Yes, of course. If the central bank was not involved, the whole scheme (legal or not) would have gone bust long ago. And, IIUC, the minimal reserve requirement does not apply to the central bank: they can issue as much credit as they like (or as much as the politicians will let them). This last point is important, if you recall our recent discussion of Greenspan on your blog.

  • “they [central banks] can issue as much credit as they like”

    Of course. And they did. Just look at the M graphs in Wiki.
    The new economists (ex. Paul Krugman) have solved the alchemists’ problem. The alchemists tried to create gold from base metals, the economists (some of them) create money out of thin air.
    Still, even in this environment, the bankers (private banks) have some leeway. They can buy or sell more “funny” paper or less. They (many of them) bought more. They knew, or should have known, that they were taking too big risks. They behaved miserably.

  • They do have leeway, strictly speaking, but in practice – not that much. They have to compete on WS, and show profit to their shareholders. They were also pressured into unsafe lending practices by the likes of ACORN etc.

    I am not saying that they were not greedy, but greed is part of human nature, and it is not necessarily a bad thing, just like any other human trait. In a free market and healthy economy, greed is what drives capitalism. Without it we would still be living in caves. What is bad is excessive greed, but it is just as bad as excessive love or excessive generosity.

    And, BTW, bankers were not the only ones that were greedy – we all were. All those cheap TVs, DVDs, clothes, cars, vacations and homes – no one forced us to buy them. And even if we did not actually borrow to buy them (most of us did, at least for the homes and the cars), we still bought them with the funny money the government gave us. All that is not to say that we should be feeling guilty about it, and the same should apply to most bankers. They, like all of us, were just doing their thing.

  • Sunfish

    Jacob:

    Do banks do that – i.e. do they lend more than they have taken in in deposits ?

    In short, yes.

    IIRC, US banks are only required to carry 5% in reserve capital. Meaning that they only need to have five dollars on deposit for every $100 that they have out as loans.

    P.J. O’Rourke had a rather good chapter on this in his “Parliament of Whores.”[1] We were in a situation even more ridiculous than this 20 years ago, when savings-and-loans (like banks, more or less) started failing because they wrote loans that couldn’t be repaid.

    Part of the problem was, banks had to keep their reserve capital in the form of cash, or at least on deposit at yet another bank. Either way, the money at least pretended to exist.

    S&L’s, on the other hand, could actually count intangible (or at least illiquid) assets towards their reserve requirement. That means that the building, the sign out front, the artwork on the walls, etc were actually part of the 5%. That wasn’t what killed them. What actually brought them down was issuing loans that wouldn’t be paid back. S&L presidents would loan each other money for business ventures guaranteed to fail, default, and then the writing bank would have to just write it off.

    Yes, it is dishonest, absolutely idiotic, and a disaster looking for a good place to happen. We only just finished cleaning up that mess in the last year.

    [1] which is well worth the weekend you’ll spend reading it. It was marketed as humor but it’s a really good introduction to American government IMHO.

    [2] where it counted towards that bank’s 5% requirement.

  • “They, like all of us, were just doing their thing.”
    I beg to differ.
    When a private person goes too deep into debt, he endangers himself and his family mostly (and not very much, either).
    Bankers are receiving our (other people’s) deposits in trust and have a big resposibility to invest safely and mantain the solvency of the bank and safety of our deposits.
    You can’t compare irresponsible private behavior of people, to irresponsible management of deposits by bankers. It’s also a professional failure – it’s the bankers job to run a sound business, it’s their only ocupation.
    The bankers were’n just ordinarily greedy. They were extraordinarily negligent and foolish if not outright fraudulent, in managing other people’s money.
    You shouldn’t argue that, since government let them (i.e. failed to enact regulations), they were kinda ok in taking these risks. They had responsibility far beyond just obeying government rules, and they failed.

  • (i.e. failed to enact regulations)

    Well, you know as well as I do that the regulations are the bug, not a feature.

    We are in no argument on the moral aspect of the whole sorry affair. My point is that it is unreasonable to expect bankers to have higher morals than the rest of us. This is true in our business relationships with other humans in general (personal relationships may be a different matter). We should take other people’s (relative) immorality as a given, and build a system where what protects us from an immoral behavior of others is their own self-interest. If I apply this to banks, for example, the system should be such that in some way it would not be profitable for a banker to take risks with our money. From what we have seen so far, the best (although not the perfect) such system is free market.

    Anyway, I know that this is just another case where you and I are going to have to agree to disagree:-)

  • Jacob

    “My point is that it is unreasonable to expect bankers to have higher morals than the rest of us”

    I don’t expect them to have higher morals… well I do expect. Like I expect doctors or policemen to have higher morals, they should be screened for it as part of their job qualification.

    I expect bankers to be competent professionals in doing their job, acording to the job description. I expect honest (not fraudulent) and responsible and competent behaviour of all persons, the plumber, the grocer, the engineer, the scientist and the programmer (not only the banker).
    In the real world, people often fail. When failures occur, we must point them out, and criticize, and hope for a correction.
    That’s what I’m doing.
    The bankers failed in their job. They failed in what is rightfully expected of them. They fell short not of some lofty, idealized, unrealistic standard, they failed in their normal day job, failed to live up to minimal srandards for their job.
    They had good company. Greenspan failed too (in an impossible job). Wagoner (GM CEO) failed too, etc.
    But they failed. Miserably. That’s all I’m saying.
    If you try to claim that they did a reasonable job, given the circumstances – then, indeed, we disagree.

  • Of course I agree about pointing out failures. As to whether the bankers did a reasonable job given the circumstances, my hunch is that they did, if we define ‘reasonable’ as what most other people (rather than angels) would have done under the same circumstances. But I don’t know enough about banking to insist, so I’ll leave it at that.

  • jacob

    As far as I know, there are some 15,000 banks in the US. 23 failed so far. Among them some of the biggest investment banks.
    I would guess that most of the banks (14977) (and the bankers) performed reasonably, even if they sustained losses. Those who went bankrupt or were saved by government bailouts performed poorly, by definition, compared to industry average. Some of the biggest banks (if not most of them), were in this category. Not to mention Fannie and Freddie.

  • That’s useful info. Still, I would assume that being ‘some of the biggest banks’ is by far not the same as being ‘a bank’. Different league, different game, I would guess.

    Again, I am not justifying whatever stupid things the bankers have done (I am sure there were many). All I am saying is that in order to learn a useful lesson from this whole affair, we need to presume that people, including bankers, will continue being greedy and stupid. If we want to prevent something like this from reoccurring, we need to face this fact, rather than try to ignore it, or worse, try to change basic human nature. Communists tried doing both.

  • Paul Marks

    Exactly Alisa.

    And human nature is one of the reasons why “as long as it is kept within prudent limits”, the standard defence of credit bubble finance by Adam Smith and others, is not satisfactory.

    As long as it is “prudent” – what is a “prudent” level of a credit bubble?

    If it is O.K. to lend out a bit more than is actually saved – why not a lot more? And what is a “bit” and a “lot” anyway?

    No wonder this fuzzy defence drove Rothbard into a rage (not that I do not differ with Murry Rothbard on many other banking).

    “But how is it done?”.

    Rothbard’s “The Mystery of Banking” deals with that – although there is little in there that would have come as a shock to Martin Van Buren or many others.

    Alisa is also correct in saying eventually the credit bubbles come crashing down – IF the government does not step in to support them.

    Jacob is quite correct to claim that only the government, in a fiat money system, can increase the money supply – FOR EVER.

    All the banks (on their own) can do is to play games. They can treat cheques and other such “as if” they were deposits of notes and coin and lend them out (and so and so on), but eventually the thing delates.

    Oh that horrible word “deflation” – in this context the return of the bank credit (M3 or whatever) to the notes and coin bases (the Monetary Base – MB).

    Governments are desperate to prevent that – because it means the end of the “boom”.

    So they expand the fiat money supply and they expand it again – and again and agian and ………..

    Not understanding that each time they do this the malinvestments (the whole distortion of the Capital Structure) gets worse and worse.

    For money is not like rushing water flowing everywhere – it is more like treacle pileing up in certain places (with those who have sticky fingers).

    A monetary expansion is not a neutral thing – it distorts the whole economy.

    For example, (Comrade Krugman please note) it promotes inequality – of the most crass kind.

  • Paul Marks

    Sunfish:

    Sadly the present situation is a lot bigger than the S&L’s – no one was talking about a 7 (plus) TRILLION Dollar support operation for the S&L’s

    However, it does raise a valid point about “deregulation”.

    “Free trade in banking is free trade in swiddleing” the old 19th century saying had it.

    Note that the saying was NOT “free trade in money lending is free trade in swiddleing”.

    If someone (or lots of people) are sacrificing X Dollars of their income so it can be loaned to you that is NOT a “swiddle”.

    But if loans are greater than real savings – how can that be anything but fraud (a swiddle) no matter how complex the shell game is?

    Deregulating honest things is good – deregulating fraud is not.

    Remember a lender (or lenders) are sacrificing present consumption – it order to fund loans to borrowers.

    If there is not a lot of sacrificing consumption (a lot of real saving) going on, how can there be a lot of lending?

    How can everyone be living high-on-the-hog at the same time?

    Only via credit-bubble-ism. And note that bankers did not seem to really care what they were “investing” in – almost as if they thought that any lending (any spending) was “investment”. Which is exactly what “modern economics” teaches.

    The same “modern economics” that teaches that lending and savings are always the same (by playing with the meaning of the words – and by a lot of math and double talk).

    What is comming is going to make the S&Ls mess look small.

  • tdh

    Paul, via private communication, seems to want me to acknowledge that only Constitutionally speaking, overtly repudiating the debt would require an amendment. Since the US Constitution is dead, and perhaps incapable of resurrection, its restrictions need not apply, formally or ethically.

    But you can bet that with the US having been sold down the river in 1913 to bankers for the third time, finally via the Federal Reserve Act, with no Jefferson or Jackson to champion the common man against them, the holders of the debt to be repudiated would surely have enough judges in their pocket, especially since all the judges’d need do would be to respect the Constitution for once, that there would be no practical chance of any overt repudiation of debt via extra-Constitutional means.

  • Paul Marks

    It was not private tdh

    I simply banged “reply” rather than doing what I should have done and replying here.

    Nor do I have a strong view on defaulting on the national debt – to do so would have terrible effects (and not just on those who hold the debt), but to try and keep up the debt service and other such (now the debt has been blasted into outer space by the insane bailout promises) would have terrible effects as well.

    Heads we lose, and tails we lose – and “we” even includes the bankers (no one is going to come out a winner in this mess).

    The point of all my legal history stuff was simply to point out that saying something was “unconstitutional” sadly does not mean much anymore as most of the things the Federal government does are unconstitutional.

    As for the Supreme Court.

    Have the judges ever said that expanding the money supply (which cheats people who have lent money to the government, as well as everyone else) is unconstitutional?

    The government could physically print (not use credit-money) a load of Dollars and “pay” the national debt tomorrow – and the Supreme Court would not make a peep about it.

    Of course once the banks (and other such) got hold of those physical fiat notes they would build a pyramid of credit money on them – hyper inflation would be created.

    The only way it is ever “safe” to give banks money (and I said “safe” not “moral”) is to first formally make clear that credit money expansion is fraud and will not be tolerated.

    But, of course, that is exactly what the government will not do – on the contrary they wish the banks to resume “normal lending” i.e. credit bubble castles-in-the-air.