In theory I am for limited government. In theory I like the idea of no bailouts and no regulation. However, I don't think that this doctrine is so workable. To be consistent with the no bailout crowd, Mises, Mish (Mike Shedlock) and Ron Paul, there would have to be little or no fractional reserve banking and money would have to be backed by gold.
But pragmatically these solutions don't seem to work. So, I am for a modified version of limited government. I believe government should disclose the existence of a plunge protection team that pushes against declines in the stock market until it doesn't, for whatever reason. Selling Bernanke's bonds is a good reason to stop it. But investors need to know if the market manipulation of the PPT exists.
I am for bailouts only when my taxpayer interest is protected. So I want a piece of the action and profit for the firms bailed out. If you want to be pragmatic, just don't steal from me. That is a hard lesson that Timothy Geithner is just now learning. Clearly he did not protect the interest of the taxpayers with the AIG fiasco and by giving Goldman Sachs a free ride (as did Paulson).
I am for fractional reserve banking if capital requirements are kept high. The way to create a bubble is to keep them low and add off balance sheet ponzi banking as was done in Basel 2. I don't want hard money, which was used against farmers in the late 1800's to not lend. We don't want easy money but we don't want ridiculously tight money either. I like Ellen Brown's plan.
I like the idea of governments issuing their own money, so like Ellen brown, I am not for the Fed private bank doing this. Like Mish, Mises, and Ron Paul, I oppose the money supply being in the hands of the Fed. I just don't buy all the other libertarian deregulation that comes with their positions. We should all be crying out against the Fed, but deregulation puts the fox in charge of the hen house.
Mish has written about his disdain of the FDIC. Mish is for absolute survival of the fittest and doesn't want the FDIC to get in the way of his desire to see banks that are insolvent fail. But there is nothing inherently evil with insurance. I am not putting my money in a bank that is not FDIC insured. Maybe Mish would but I will not. I like my insurance regulated as well, thank you. Look what happened when it wasn't regulated. We have swaps gone wild.
Like Mish and Ron Paul, I support the free market but unlike them I don't trust the free market. I don't think that having just capitalists in charge of the free market can possibly keep it free very long. Capitalists cannot police themselves. Every game has rules. Try playing baseball without umpires. Try playing tennis without line judges. There are even rules when racing at the Indianapolis 500.
I have a lot in common with Mish's views, and with Ron Paul. But lets get real. When Mish is ready to get rid of cops on the street then I will advocate the complete deregulation of the capitalist system. I hope that these guys don't really think that capitalists are inherently "good", because the concept of absolute power corrupting absolutely runs against that pie in the sky optimism.
I do think that if we are to allow FDIC to continue to exist, the funds insured must be kept out of the casino. Perhaps the new Volcker plan would do that. I also think that the concept of the FDIC is not to cover every loss, but losses that are under a certain value. Higher losses are paid out as funds are available at takeover of the insolvent bank.
I am in total agreement that the bubble in housing and in corporate borrowing was unsustainable and helped by interest rates that were too low for two long. We are all Austrians in a sense if we believe that to be true. Low interest rates caused excessive borrowing that put companies in great debt. If you didn't borrow you couldn't keep market share against those competitors who were borrowing.
If interest rates go up these companies will be burdened with with major debt. That is of course, a reason to believe that the Fed cannot afford interest rates to go up. The crash in housing, commercial real estate and corporate excessive debt would start all over again.
I don't know if post bubble, low interest rates will increase demand for loans. In Japan that didn't seem to be the case. Demand for loans seems to be diminishing as well as the supply of loans. So post bubble, the Austrian School of thought may not apply.
I just don't believe, as the Austrians do, that crashes will be avoided if we return to gold, stop FDIC insurance and abolish the Fed. I think we need clarity and full disclosure regarding the flow of capital from the central bank. If we don't get it, the government of the United States should nationalize the central bank.
Disclosure: no positions
