Preventing the Last Crisis

Clear thinking and discerning rigor when it comes to the twisted state of present economic policy matters brings with it many physical ailments.  A permanent state of disbelief, for instance, manifests in dry eyes and droopy shoulders.  So, too, a curious skepticism produces etched forehead lines and nighttime bruxism.

 

The terrible scourge of bruxism and its potentially terrifying consequences. Curious skepticism can lead to the darnedest things, which is why Big Brother strongly recommends that citizens remain in a medication and cable TV-induced apathetic stupor. To make this happy outcome easier to achieve, stagnation in real wages was successfully introduced a number of moons ago; forced to work to exhaustion just to keep their heads above water, citizens tend to be more docile in their shrinking free time. [PT]

 

Nonetheless, these are small prices to pay for the simple delight that comes when a central planner opens their mouth and inserts their foot.  Last Friday, for example, Fed Chair Janet Yellen gave a speech to her friends and cohorts at the annual central banker’s powwow in Jackson Hole, Wyoming.  There she patted herself and the financial regulatory community on the back for what she believes has been a successful execution of financial regulations:

 

“The events of the [2008] crisis demanded action, needed reforms were implemented, and these reforms have made the system safer.”

 

How Yellen knows the reforms have made the system safer is unclear.  Like France’s impenetrable Maginot Line, the regulations Yellen lauds are backward looking.  They are suited to preventing the last crisis while ignoring new and greater threats amassing just beyond the horizon.

 

If mouse traps were designed like our nifty new financial regulations, this is what they would look like. Don’t you feel safer already?  [PT]

 

No doubt, the greatest of these mounting threats are of the Fed’s own making.  After adding $4 trillion to the Fed’s balance sheet and dropping the federal funds rate to near zero for many years they’re now in the early stages of their great endeavor to ‘normalize’ monetary policy.

But, alas, it’s no longer a normal world.  Years of abnormal monetary policy has fabricated an abnormal world.  Surely something will break before things are bent back into place, assuming they ever get there.

 

Dead Wrong

The reforms Yellen was referring to include the Dodd-Frank Act.  The Frank part of the regulation, if you recall, is former Congressman, and overall repulsive being, Barney Frank.  Despite being out of office for over four years, Frank’s grubby finger prints continue to besmirch the economy.

The Dodd-Frank Act, which was rolled out in response to the 2008 financial crisis, has turned out to be a classic case of knee-jerk regulatory overkill.  President Trump has promised relief to certain aspects of the Dodd-Frank Act’s suffocating regulatory regime, including stress test and capital requirements. These requirements force banks to keep more capital on their books as opposed to investing it in interest-earning assets.

 

Das abominable Frank, who lives on in the Act named after him. After aiding and abetting  the very lending practices that brought Fannie Mae and Freddie Mac to their knees, he was somehow held to be the go-to person to work out a new set of regulations for the financial industry. He and Dodd created a telephone book-sized monstrosity of regulatory guidelines, which via implementation of administrative law by the bureaucracy has by now grown into several hundred telephone books of rules. The main effect of this was that the banking industry has become even more concentrated and so-called too-big-to-fail banks have grown even larger. They certainly are not happy with numerous aspects of the new regulations, but on the other hand, they no longer need to fear competition from upstarts, as compliance with this jungle of laws has essentially become unaffordable for institutions below a certain size threshold. [PT]

 

The rules also dictate how banks allocate their assets between highly liquid securities and illiquid loans – with greater preference for the former. Rolling back capital and stress test requirements would directly reduce compliance costs for banks and financial institutions.  It would also give banks greater autonomy in how they manage their lending operations.

But Fed Chair Yellen, a dyed-in-the-wool central planner, has a very narrow focus.  In her world, more control via more regulations always provides for a more stable financial system.  Yet she’s dead wrong.

 

We were unable find more recent data than those depicted in the above chart, so we cannot comment on the current situation, but shortly after the GFC, business closing did begin to exceed the number of new start-ups. Note that this trend has been in place for a long time – and it goes hand in hand with the growth on regulations in the Federal Register. The longest interruption occurred during the Reagan administration, which is not a coincidence: it was the only time in the entire post-war era in which the number of regulations in the Federal Register actually declined. This is of course precisely what one should expect – it is not rocket science. Unfortunately the political and bureaucratic elites are so far removed from the real world in their echo chambers that they apparently don’t understand even the most simple cause-effect chains. We should add, Mr. Bernanke also echoed the false claim that the mortgage credit market – one of the most tightly regulated sectors of the economy –  somehow suffered from “too little regulation”. It should be obvious that his aim was to deflect blame from where it should have been rightfully placed: the loose monetary policy of the Federal Reserve and the system-immanent drawbacks of a fiat money-based fractional reserve banking system that can expand the supply of money and credit willy-nilly. [PT]

 

The new financial reforms that were instituted following the 2008 financial crisis have had the adverse effect of constraining economic growth.  U.S. gross domestic product growth has lagged behind asset price and debt growth.  Moreover, more businesses are vanishing than are being created. Barney Frank’s maze of regulations has made it harder for small businesses and entrepreneurs to access the capital needed to grow and create jobs.

 

How to Make the Financial System Radically Safer

At the same time, the new financial reforms haven’t minimized risk.  Moreover, they’ve set taxpayers – that’s you – up for a future fleecing.  Congressman Robert Pittenger elaborated this fact in a Forbes article last year:

 

“Even Dodd-Frank’s biggest selling point, that it would end “too big to fail,” has proven false.  Dodd-Frank actually created a new bailout fund for big banks–the Orderly Liquidation Authority–and the Systemically Important Financial Institution designation enshrines “too big to fail” by giving certain major financial institutions priority for future taxpayer-funded bailouts.”

 

What gives? Regulations, in short, attempt to control something by edict.  However, just because a law has been enacted doesn’t mean the world automatically bends to its will.  In practice, regulations generally do a poor job at attaining their objectives.  Yet, they often do a great job at making a mess of everything else.

Dictating how banks should allocate their loans, as Dodd-Frank does, results in preferential treatment of favored institutions and corporations.  This, in itself, equates to stratified price controls on borrowers.  And as elucidated by Senator Wallace Bennett over a half century ago, price controls are the equivalent of using adhesive tape to control diarrhea.

 

The dangerous conceit of the clueless… the house of cards they have built is anything but “safe” and they most certainly can not “fix anything”. Listening to their speeches that seems to be what they genuinely believe. A rude awakening is an apodictic certainty, but we wonder what or who will be blamed this time. Not enough regulations? The largely absent free market? As they say, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” (this quote is often erroneously attributed to Mark Twain: we think it doesn’t matter whether he created it, it is often quite apposite and this is a situation that certainly qualifies).  [PT]

 

The point is that planning for future taxpayer-funded bailouts as part of compliance with destructive regulations is asinine.  In this respect, we offer an approach that goes counter to Fed Chair Janet Yellen and the modus operandi of all central planner control freaks.  It’s really simple, and really effective.

The best way to regulate banks, lending institutions, corporate finance and the like, is to turn over regulatory control to the very exacting, and unsympathetic, order of the market.  That is to have little to no regulations and one very specific and uncompromising provision:

 

There will be absolutely, unconditionally, categorically, no government funded bailouts.

Without question, the financial system will be radically safer.

 

Chart by: Gallup

 

Chart and image captions by PT

 

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

One Response to “How to Make the Financial System Radically Safer”

  • Hans:

    America, has set in motion a new and frightful, financial crisis, which
    will surpass that of 2008-09. It will again require massive governmental
    unit intervention, even greater in scope than what was witnessed some
    nine years ago.

    The timing of this event will be dreadful because it will either trigger
    other pending economic events or compound the severity of those
    upheavals.

    I am afraid that the die has been cast and the opportunity to prevent
    or diminish their impact has past.

    All that is left to do, is to prepare one’s own economic preservation
    as best as possible.

    The tragedy and suffering shall be enormous. There will be no sanctuary
    for massive mismanagement and decades of follies shall exact a dear and unwanted price.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • America Goes Full Imbecile
      Credit has a wicked way of magnifying a person’s defects.  Even the most cautious man, with unlimited credit, can make mistakes that in retrospect seem absurd.  But an average man, with unlimited credit, is preeminently disposed to going full imbecile.   Let us not forget about this important skill...  [PT]   Several weeks ago we came across a woeful tale of Mike Meru.  Somehow, this special fellow, while of apparent sound mine and worthy intent, racked up...
  • Retail Capitulation – Precious Metals Supply and Demand
      Small Crowds, Shrinking Premiums The prices of gold and silver rose five bucks and 37 cents respectively last week. Is this the blast off to da moon for the silver rocket of halcyon days, in other words 2010-2011?   Various gold bars. Coin and bar premiums have been shrinking steadily (as have coin sales of the US Mint by the way), a sign that retail investors have lost interest in gold. There are even more signs of this actually, and this loss of interest stands in stark...
  • Credit Spreads: Polly is Twitching Again - in Europe
      Junk Bond Spread Breakout The famous dead parrot is coming back to life... in an unexpected place. With its QE operations, which included inter alia corporate bonds, the ECB has managed to suppress credit spreads in Europe to truly ludicrous levels. From there, the effect propagated through arbitrage to other developed markets. And yes, this does “support the economy” - mainly by triggering an avalanche of capital malinvestment and creating the associated boom conditions, while...
  • Gold Divergences Emerge
      Bad Hair Day Produces Positive Divergences On Friday the ongoing trade dispute between the US and China was apparently escalated by a notch to the next level, at least verbally. The Trump administration announced a list of tariffs that are supposed to come into force in three week's time and China clicked back by announcing retaliatory action. In effect, the US government said: take that China, we will now really hurt our own consumers!  - and China's mandarins replied: just you wait, we...
  • Industrial Commodities vs. Gold - Precious Metals Supply and Demand
      Oil is Different Last week, we showed a graph of rising open interest in crude oil futures. From this, we inferred — incorrectly as it turns out — that the basis must be rising. Why else, we asked, would market makers carry more and more oil?   Crude oil acts differently from gold – and so do all other industrial commodities. What makes them different is that the supply of industrial commodities held in storage as a rule suffices to satisfy industrial demand only for a...
  • Chasing the Wind
      Futility with Purpose Plebeians generally ignore the tact of their economic central planners.  They care more that their meatloaf is hot and their suds are cold, than about any plans being hatched in the capital city.  Nonetheless, the central planners know an angry mob, with torches and pitchforks, are only a few empty bellies away.  Hence, they must always stay on point.   Watch for those pitchfork bearers – they can get real nasty and then heads often roll quite literally....
  • Lift-Off Not (Yet) - Precious Metals Supply and Demand
      Wrong-Way Event Last week we said something that turned out to be prescient:   This is not an environment for a Lift Off Event.   An unfortunate technical mishap interrupted the latest moon-flight of the gold rocket. Fear not true believers, a few positive tracks were left behind. [PT]   The price of gold didn’t move much Mon-Thu last week, though the price of silver did seem to be blasting off. Then on Friday, it reversed hard. We will provide a forensic...
  • Merger Mania and the Kings of Debt
      Another Early Warning Siren Goes Off Our friend Jonathan Tepper of research house Variant Perception (check out their blog to see some of their excellent work) recently pointed out to us that the volume of mergers and acquisitions has increased rather noticeably lately. Some color on this was provided in an article published by Reuters in late May, “Global M&A hits record $2 trillion in the year to date”, which inter alia contained the following chart illustrating the...
  • Cryptocurrency Technicals – Navigating the Bear Market
      A Purely Technical Market Long time readers may recall that we regard Bitcoin and other liquid big cap cryptocurrencies as secondary media of exchange from a monetary theory perspective for the time being. The wave of speculative demand that has propelled them to astonishing heights was triggered by market participants realizing that they have the potential to become money. The process of achieving more widespread adoption of these currencies as a means of payment and establishing...
  • The Fed's “Inflation Target” is Impoverishing American Workers
      Redefined Terms and Absurd Targets At one time, the Federal Reserve's sole mandate was to maintain stable prices and to “fight inflation.”  To the Fed, the financial press, and most everyone else “inflation” means rising prices instead of its original and true definition as an increase in the money supply.  Rising prices are a consequence – a very painful consequence – of money printing.   Fed Chair Jerome Powell apparently does not see the pernicious effects...

Support Acting Man

Item Guides

j9TJzzN

The Review Insider

Dog Blow

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com