derryl

The State of Banking: Banking on the State?

I found it interesting that the authors cited the structure of the hedge fund industry as a possible model for a more "robust" banking industry. A growing number of diverse, specialized and increasingly decentralized hedge funds as contrasted with the growing size of a homogenously 'diversified' and increasingly dominant megabanks. The authors point out that while diversification of business reduces risk for individual banks, when all the big banks pursue the same kind of diversification the consequence is an increase in systemic risk. The banks are individually diversified but collectively homogenous.

The too big to fail banks are pleading that their size (and dominance) is necessary for conducting global business and realizing economies of scale. While it may be true that this strategy increases the scale of profits for these banks in rising economies, the strategy conversely increases the scale of losses during downturns. And because all these banks have 'diversified' into all asset classes it cannot be the case that some of them specialized into lucky assets while others specialized into losers. The whole megabanking system rises and falls in synch, with the profits privatized on the way up and the losses socialized on the way down. There are no big "lucky banks" to pick up the assets of failed big 'loser banks' in a receivership sale, which makes an orderly dissolution of big banks difficult to do, so all the big banks are propped up at taxpayer expense.

The US has over 8000 banks. If the too big that failed had been dissolved, or if they are going to be dissolved as the mortgage crisis and their insolvency worsens, then America's 8000 smaller banks can pick up the pieces and the US banking system will be structured more like the decentralized and truly diverse hedge fund industry. This looks to me like a good way to start the needed reform of this dangerously out of control megabanking system.

Sound Lending Practices in One Simple Sentence

I like Karl's idea. It immediately separates taxpayer backstopped gambling from good old fashioned banking by putting the banker's own skin on the line. If JPM really is prepared to accept its own failure then it should be prepared to lose its own capital on every unsecured loan it makes. This restores the incentive for TBTF bankers to take a realistic look at their potential losses on loans, rather than merely seeing all the potential upside as they do now. If big business needs big banks to lend big bucks, then all parties should be prepared to lose their money, like us small fry do, if our plans go awry.

U.S. Handling of Financial Crisis - A Less Optimistic View

Obama is certainly not the first President who got elected and then discovered that "the world is ruled by very different personages than it would appear" (I think I'm misquoting what FDR said upon leaving office, though I may have the wrong President, but that's the gist of the message).

I think Obama really believed that the Presidency would give him the power to implement the kinds of changes that he thought would improve America. Then he discovered that banksters own the economy and various sub-system interest groups rule their own fiefdoms within the country; the medical-industrial complex for e.g., and the trial lawyers.

I think most of us on SA have to admit that we have learned a lot about how the financial system is run, things we didn't know before, over the past year. And there is no reason to think Obama understood the system and its rulers when he took office. Only a few Wall St insiders know what has been going on over the past decade or more and it is only recently that investigative journalists and bloggers like Matt Taibbi and Edward Harrison have been making that information widely known.

To make the changes he wanted Obama would have to pry all the entrenched interests out of their fiefdoms and subject them to the kinds of regulations that serve America as a nation rather than merely serve the interests of the fief-lords and their vassals. But how can a President hope to win battles against trillionaire banksters who understand their system, when Obama has no money and no understanding? Likewise with other captured industries. The entrenched interests have all the weapons and all the power.

It's not too late for Obama. He's still in his first year in office. But if he's to succeed he'll have to transform himself from a naive idealist into a hardass realist. He'll have to be a trustbuster, an enemy of oligopolists and entrenched interests, a restorer of free markets. Obama still seems to think central planning can solve a lot of America's problems. So I'm not sure he's the right guy to break up the central planners in America's captured financial, health care, military and other industries. But I wouldn't be shocked if Obama did a mid-term about face in his thinking, after realizing the true state of the nation that he genuinely wants to heal.

Re: Banker's Pay - The Paper of the Year

"Now in one sense the defenders of high Wall Street pay are correct: people are probably getting roughly what they could make if they walked across the street and went to another bank. But that doesn’t answer the question of whether the whole industry is making a mistake and transferring wealth to employees that should go to shareholders."

All oligopolies tend to harmonize both their cost structure and their pricing structure. Oil companies pay essentially the same rates for exploration leases and the same rates for office space and they pay the same rates to drilling contractors and they offer essentially the same compensation packages to their employees, and they charge the same prices for gas at the pumps. But it has NEVER been the case that 1000s of employees of a single oil company ALL receive an average of $600k 'bonus' for a single year's work.

Yet Goldman Sachs is able to do just that. Among oil companies there is at least a passing degree of competition that keeps prices and employee pay realistic. If the oil industry shared a new miracle technology that allowed them to produce the same amount of energy at one one hundredth of the cost then maybe for a year or two they could pay all their employees 6 figure bonuses. After that they would either drop the price of their energy to match its new low production cost, and eliminate the 'bonuses', or they would be nationalized and clawed back and lynched and drawn and quartered, just as a warmup to the real nastiness they would be subjected to.

Wasn't it you, James, who explained that prices in an efficient industry go down, in contrast to finance where prices for services keep going up? If the megabanks justify their bonuses on the grounds of how productive their workers are, then wouldn't those benefits disperse into the broader economy over a couple of years by way of lower prices and a reversion of megabank profitbability back down to reality?

The only other economic sector where prices and wages always go up is government, and they do it by exercising monopolistic power over us backed up by the exercise of deadly force. We didn't elect the megabankers. We have the right and the obligation to regulate them. We do not have to let them financially pillage our economy and share the spoils among themselves. It's bad enough having elected governments doing that. We don't need private sector copycats.

Why We Must Act Now on Our Economic Structural Problems

Kimball,
I think the simplest way to revive US mfg and address the trade deficits is to allow the US$ to continue to fall. The US would have to ramp up domestic production of energy as imported oil becomes prohibitively expensive, as well as domestic production of all other resources that are necessary inputs into mfg. Imported commodities and consumer goods would become expensive and this would open the domestic market for domestic production of these. Currency devaluation is the historic way of fixing trade deficits and it should work again now.

One way to ensure the currency continues to fall would be a program of naked QE whereby the Fed and Treasury print money and deliver it to all Americans as 'stimulus checks', with the provision that anyone who has debt must use the money first to payout their debts. This would reduce US household and small business indebtedness and increase aggregate demand and savings.

The money would not be issued in the normal way as new bank loans or new Treasury debt. It would be naked QE, creating free money and giving it away free to all Americans. I have suggested checks of $1000/month to everyone over 18 with a SS number, continued for a year and renewable thereafter if it is working. It would put about $2.5 trillion per year of non-debt money into the system.

This new money can be used to liquidate old debt so the money and the debt cancel each other out with no change to money supply, just a reduction of debt (it's kind of a partial debt Jubilee program, among other things). Unless increased savings encourage banks to lend more, which it probably wouldn't, all the stimulus money that is saved would not be inflationary; it would simply be removed from circulation and stored in savings accounts paying nearly no interest.. Only the stimulus money that is spent on consumption would be CPI inflationary, and the stimulus money that was invested in financial assets like stocks would inflate those markets somewhat.

Really, it's a way of deleveraging American households without simultaneously driving the financial system into insolvency. The financial system would enjoy deleveraging of its balance sheets as borrowers repaid their loans, but bank asset values (mortgages, etc.) would not be pressured down like they are when loan losses are written off after foreclosure sales at firesale prices.

So the simple act of introducing new free non-debt money into the system could restore the balance sheets of both US households and US banks while generating enough money supply inflation to keep the US dollar declining, which would ultimately revive the US goods producing economy and employment.

Big Banks: The Consensus Is Cracking

greencanbgood wrote, "All you "break up" propoenets out there have yet to come up with a reasonable strategy for calculating how you would do so (by business line, by assets, by geography [which, by the way already occurrs], by deposit base). Everyone has opinions but no solutions."

Actually no less a luminary than Kansas City Fed President Thomas Hoenig has laid out a detailed strategy for dissolving these "Too Big Has Failed" institutions.

www.kansascityfed.org/...

So we have Hoenig, Alan Greenspan and Paul Volcker all arguing for the breakup of the too-bigs. That's three highly prominent central bankers who agree that too big has failed and needs to be broken up. And we thought the Fed was just running interference for the too bigs. But now that these wise gentlemen are speaking out it is apparent that many of the central bankers are actually interested in saving the American financial system from the banking oligopoly that is destroying it for its own perverse gains.

Numerous less high profile monetary authorities, many right here on SA, agree. I would suggest that if there is any "consensus" about too big to fail, the consensus is restore Glass-Steagall and carve these money suckers down to size. The only people who seem to have a consensus that "too big is ok" are the too big bankers themselves. Their bonuses depend on being too big to fail, which explains the "logic" behind their opinion and their increasingly desperate rationalizations for their continued existence.

Ultimately, Who Benefits from Too-Big-To-Fail

Calomiris wrote, "Limiting the size, complexity and global reach of financial institutions is fraught with downsides for the international economy. We can solve the too-big-to-fail problem without destroying global finance."

Is he talking about the same "international economy" that has seen all the benefits for the past 3 decades flow to corporate profits and zero to US workers? And the resultant overconcentration of wealth in the top 10% and overconcentration of debt among the middle class? The same international economy that saw China sell $2 trillion more goods to the US than it bought from the US creating a debt fueled US consumer bubble whose ongoing collapse is still threatening to bring down the very global finance that Calomiris defends? The global finance that securitized unpayable US mortgages on bubble priced houses and sold them to suckers across the planet to earn fees and commissions? The same MBSs that the Fed is now buying en masse to prevent a Depression?

If that's the "international economy" and "global finance" that Calomiris seeks to defend then I suggest this man is our enemy, not our ally.

Debunking the 'Too Big to Fail' Myth Once and for All

bob adamson wrote, "The danger, if fundamental reform does not occur, is that the global and US economies will simply be recreated as they existed in 2005 except that government debts and deficits will be much higher; a recipe for true disaster."

I think this is exactly what the powers that be are trying to make happen. Not the future disaster part, just the keep the party going awhile longer part, so each of the banksters can glean their last few hundred million in bonuses and the politicos can take their rightful thrones on the boards of the TBTF. But it will end in calamity as the nation's monetary wealth is transferred to a few while the nation's debts are spread to everybody. This is a classic recipe for Depression.

By last January I was pretty sure that this is not "the big one". But I am pretty sure the next one, not too many years out, will be.

The Problem with Smart Bankers

Letting the quants play with banks' real money based on mathematical theories is no different than letting the chemistry students try out their theories in the lab. The professor is dazzled by the brilliance of his students and doesn't really understand their newfangled equations (the prof is too proud to admit he doesn't understand), but for awhile they work and the students get A+. Until they blow up the school. Because the brilliant students didn't know how their theories were going to turn out either. They were just too young, well paid and empowered to understand and be constrained by the concept of "consequences".

Our Banks Are Nowhere Near Up to the Task of Serving Big Global Companies

"Global reach"---into US taxpayers' pockets.

Diana Farrell And The White House Theory Of Bank Size

greencanbgood wrote,

"All you "too big" people out there, I wonder why you aren't writing to your congressional representatives to break up Microsoft also. You can't have it one way for one industry and anohter way for a different industry. Let a free market reign and eventually, the poorly run will fail."

This is precisely our complaint. Too big HAS failed, but unlike companies in any other industry these banks still exist. Their shareholders have not been wiped out. Their employees have not been thrown out of work with no severance pay and no pensions as happens in other grossly insolvent bankrupt companies. Their successful, solvent competitors are not presently feasting on their assets at firesale liquidation auctions.

Instead the TBTF honchos are still paying themselves billions of dollars in "bonuses". I suppose they deserve a big bonus for "succeeding" in controlling the government and f___ing American taxpayers out of hundreds of billions of dollars.

I'm not arguing that we should have let capitalism run its course and wiped out these failures last winter. I don't want a Depression any more than Ben Bernanke does. What I do want is for the failure to be acknowledged and some discipline to be accepted by these people. Failure is supposed to be humbling, not exhilarating and highly profitable.

Shortly before the central bankers get-together in Jackson Hole last summer Kansas City Fed President Thomas Hoenig (who was hosting the conference) published "Too Big Has Failed", in which he advocates an orderly unwinding of these failed businesses. So even among the monetary elites within the Fed there is not consensus that these megabanks should be allowed to exist. Sadly, I saw no mention of Hoenig post-Jackson Hole. His rational approach to actually solving the financial logjam was likely ignored just like BIS economist William White was ignored by Greenspan when he stridently warned of the bubbles that were forming. These TBTF guys are making WAY too much money to let a little thing like causing an economic crisis with mass unemployment and currency devaluation bother them.

There are valid arguments for economies of scale. A one man shop can neither afford nor utilize a $400,000.00 machine that does the work of 100 men. A larger scale operation can afford and use the machine to vastly increase its productivity which ultimately reduces costs to consumers.

But when an operation gets so large that no individual ever knows everything that's going on in the company at any given time, then the operation becomes LESS efficient. All kinds of redundancies and other waste happen because the big picture of the company is too big for one person to see. From that point up the only reason these too-big-to-be-efficient companies appear to be 'efficient' is that they enjoy oligopoly pricing power. The consumer (or the taxpayer) can be made to subsidize the inefficiencies so the company remains highly profitable even while overpaying its employees and wasting large amounts of its resources.

I would argue that the TBTF "bank-like businesses" are in this latter category. They get laws and regulations written that favor them over their competitors. They have large scale money that enables them to move markets, and profit on the moves because they alone know beforehand which direction they are going to move the market. They are allowed to park their computers at the NYSE to front run and 'tax' equity trades.

All of this enhances profitability for these companies, but all of these "excess profits" are not from creating additional value but from sucking money away from everyone else in the economy. By this standard IRS employees should also be paying themselves billions in bonuses because the taxman is the money sucker par excellence.

As John Lounsbury implies in his comment above, overconcentration of wealth is an economy killer. It is not "envy" that should motivate policymakers (and shareholders) who want to rein in the big bankers. It is the desire for a sustainable economy and for sound economic policy that should motivate them.

Bearish on Banks - Why Now Is the Time to Sell

Tack wrote, "As this proceeds, the insolvency argument will be imitating the Cheshire Cat, and eventually the only thing remaining will be his grin."

The insolvency is merely transferred from US banks to the US government. Check out carey_jim's comment and link above.

A Two-Track Economy

Simon wrote that the boom-bubble-bust-bailout cycle "will go on until at least until one or more major countries goes completely bankrupt, or until a real financial reform movement takes hold either among technocrats or more broadly politically – and the consensus then shifts back towards the kind of much tighter financial regulation that was established after the last major global fiasco in the 1930s."

We had our butts handed to us last September but due to the successful financial resurrection there is no mood for reform. Only a year ago we thought the world was ending. These 'near death experiences' are supposed to be life changing, but we won't learn. So I think it may take a real collapse, where "one or more major countries goes completely bankrupt", before euphoric thinking gives way to realism.

It may not take a national bankruptcy. The fiscal collapse of one or more big states like California should be enough to swing the consensus. At the political level it is the 'entitlement', of all classes, to get things they haven't earned which will have to change. But try walking into the 'free drinks for all' party and taking away the punch bowl before the building has crashed and burned and you will see the political impossibility of reforming entitlements until AFTER the fiscal collapse.

What’s My Payment?

RE: "What's my payment?"

I don't buy cars often, just drive em 'til they drop. But a few years ago I noticed that, of all the car ads in the newspaper I was reading I could not find ANY that listed the price, just the payments. Around that time someone explained to me that people cannot afford to buy used cars because you need some money to do that. New cars are bought with debt. I hadn't been aware how pervasive this debt culture has become until that eye opener.

The Coming Consequences of Banking Fraud

Great article Mr. Kim, telling it like it is.

Re: 'conspiracy': somebody explained in a SA article or comment that explicit collusion is not required in order for a conspiracy to emerge. All it really takes is a bunch of people sharing a common world view and working to maximize their self-interest according to their common view. That worldview can be called "finance capitalism" and it is certainly the case that Rothschild banking interests are deeply entangled with global central banking. Whether these are just people who share the same agenda or whether there are masterminds lurking behind the scenes is an open question and the answer is moot because the effects are the same either way.

Mrudula Shah asks what bankster interest could possibly be served by taking down the global economy. The question assumes that wealth is the only value at play. But for centuries already the banksters have learned how to create money out of thin air. Wealth is simply taken for granted by these people. Now they want power, global power (always by proxy through frontmen, never in person). Some people want to own the world, others want to rule the world. These are the two faces of megalomania.

So if a reduced global economy is the price to gain power, so be it. In the V for Vendetta clip the lever to gain power was fear of a variety of bad things like terror and disease. Fear of bankruptcy and poverty is another good lever, so taking down the global economy would set the stage for a 'savior' to emerge. All we have to do is give him total power and he will stop the fear and pain. That's the sales pitch. We all know what totalitarians really do--mass murder and stifling of all kinds of dissent. Nobody is allowed to "talk about" the s___hole poverty economy so, "Problem solved".

Tyrants almost always believe that their rule is better than self-rule by what they consider 'the idiot serfs'. That's because megalomaniacs only see value in wealth or in power. They scoff at ideas like 'freedom', which they believe does not exist, so they cannot see that self rule serves values other than maximizing wealth and power. I would go so far as to call those other values "spiritual", as opposed to material. The whole "service to Mammon or service to Spirit" issue. We all need to make money to live but we don't have to eagerly sell our soul to do it. You can be a decent person and still make a decent living.

So in the context of an obviously manipulated monetary and financial environment is NOW the time for the powers to play the endgame? I don't think so. The mechanisms are in place for finance capitalism to destabilize our economies by pumping up debts of all kinds. These have been working in the US since the formal adoption of the fractional reserve banking/central banking system where all 'money' is created as debt. Exponential debt growth is very good for the people who have the money but very bad for people who have the debt. "Indentured servitude."

Gold was a problem until 1971 because it was an alternative form of money that banksters couldn't print to order. After Nixon nixed convertibility fiat debt-money went viral. Controlling money is key to ruling the world. So watch for any move towards a single global currency. Controlling oil, the physical lifeblood of modern economies, is also key to ruling the world, so watch out for carbon control legislation that gives governments an effective mechanism to control our energy use. The pieces aren't in place yet for the final thrust to a global currency, and there are still a lot of credible anti global warmists raining on Al Gore's ambitions, so I think we have a decade or maybe considerably longer before the final push. Meanwhile our life in bubbleville will go on. I don't think the powers will permit a deflationary depression so we could see some novel QE reflation initiatives.

Really, I'm not paranoid. I'm convinced. I'm convinced there are a lot of people out there who want to control me for my own good, and I am convinced they are diligently working towards gaining the power to do so. They are not huddling in secret places. They are explaining their agendas in detail during election campaigns, all the good things the government is going to do for us. They are convening at all kinds of "global governance" meetings, widely publicized and hailed by the bought and paid for media as wonderful advances for humanity. Sheeple love it and can hardly wait to abdicate whatever personal responsibility they are still compelled to accept. Humans, like me for e.g., are not so keen on the whole project.