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.

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.

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.

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.

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.

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.

(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:-)

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.

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.