Fantasy Politics: On Reforming the Banking System
by Gary North: The
Crackpot Economist Who Provided Milton Friedman With His Monetary
banks are immune to reform or regulation. They control the Federal
Reserve System, and have since the beginning in 1914, when it opened
for business. The Congress defers to the FED. So, the banking system
never changes much. There is never a significant reform.
12 largest U.S. commercial banks hold 69% of the deposits. If you
think the free market produced this allocation, you are the victim
of a Keynesian economic theory. The centralization continues relentlessly.
All the "democracy" chatter in Congress is simply a form of self-delusion.
the so-called reformer, signed the Federal Reserve Act of 1913,
passed in the final hours before the Christmas recess. He signed
it within two hours after the Senate passed the bill.
The fix was
The fix has
been in ever since.
There are three
main approaches for banking reform: the Austrian approach (end the
FED: the free market precious metals coin standard), the monetarist
approach (reduce bank regulation: automatic fiat money), and the
Greenback approach (bank nationalization: fiat money). None of this
is likely until after Washington defaults.
Richard Fisher is the president of the Federal Reserve Bank of Dallas,
a privately owned regional central bank that operates under the
monopoly-granting authority of the United States government. This
year, he is a member of the Federal Open Market Committee (FOMC).
The FOMC is described as follows on the website
of the Federal Reserve System, a government agency.
Fisher is the
FOMC's lone monetarist. He is a disciple of Irving Fisher (no relation),
the Yale University economist whose monetary theories were adopted
by Milton Friedman. Friedman called him America's greatest economist.
In a previous
article, I have argued that Irving Fisher was a true crackpot.
He was a racist. He was a leading eugenicist. He believed that science
could be used by the government to reverse the negative effects
of mentally and morally inferior races that reproduce more rapidly
than whites do.
wrote this laudatory
recommendation of Irving Fisher's monetary theory.
the first quarter of the 20tth century, Irving Fisher was one of
America's most celebrated economists. But sadly, most Americans
today have not heard of him. Even as his reputation among the public
faded with the years, his reputation within the economics profession
has steadily risen. Fisher (no relation to the undersigned, though
I would like to claim access to his gene pool) was a pioneer in
many theoretical and technical areas of economics that today are
the foundation of central bank policy. One such achievement was
the creation of indexes to measure average prices, the bedrock for
all current monetary policy.
Mises in The
Theory of Money and Credit (1912) spent many pages refuting
Fisher's monetary theories. I can do no better than to parrot Richard
Fisher: "But sadly, most Americans today have not heard of him."
correct when he said that Irving Fisher's reputation has been restored
among professional economists. I have described this rehabilitation
as an aspect of academia's
war against free market money.
was a vocal
opponent of Ron Paul.
As I said,
Richard Fisher is a member of the FOMC this year. What is the FOMC?
Here is a description on the website of the Federal Reserve System.
Federal Open Market Committee (FOMC) consists of twelve members
the seven members of the Board of Governors of the Federal
Reserve System; the president of the Federal Reserve Bank of New
York; and four of the remaining eleven Reserve Bank presidents,
who serve one-year terms on a rotating basis. The rotating seats
are filled from the following four groups of Banks, one Bank president
from each group: Boston, Philadelphia, and Richmond; Cleveland and
Chicago; Atlanta, St. Louis, and Dallas; and Minneapolis, Kansas
City, and San Francisco. Nonvoting Reserve Bank presidents attend
the meetings of the Committee, participate in the discussions, and
contribute to the Committee's assessment of the economy and policy
holds eight regularly scheduled meetings per year. At these meetings,
the Committee reviews economic and financial conditions, determines
the appropriate stance of monetary policy, and assesses the risks
to its long-run goals of price stability and sustainable economic
government's members, meaning the Board of Governors, have a majority
vote if they vote as a bloc. They usually do. Notice also that the
New York FED has a permanent vote. This is where the power resides
among the 12 regional FED banks.
With this as
background, I will now analyze a January
16 speech by Fisher on banks that are too big to be allowed
As you read
this, remember: Fisher is the closest thing to a free market economist
on the FOMC.
Fisher refers to "the injustice of being held hostage to large financial
institutions considered "too big to fail," or TBTF for short." He
describes the situation correctly. The problem comes when he gets
to a solution. He calls for a government-enforced break-up of the
large banks. He does not believe that free market competition is
adequate to do this. In this, he follows his mentors: Irving Fisher
and Milton Friedman.
submit that these institutions, as a result of their privileged
status, exact an unfair tax upon the American people. Moreover,
they interfere with the transmission of monetary policy and inhibit
the advancement of our nation's economic prosperity.
He wants to
free up "the transmission of monetary policy." Whose policy is that?
Not the free market's policy, which is achieved through unregulated
open entry and competition. It is the FED's policy, which has been
ad hoc hyperinflating of the monetary base ever since later 2008.
There is policy; there is no theory undergirding policy.
Where do they
get their privileged status? Where all privileged status originates:
from the State. So, why not just revoke this privileged status?
Because that would not be scientific, according to Irving Fisher.
In this policy
to break up the banks, he stands alone on the FOMC, and he knows
Federal Reserve convention requires that I issue a disclaimer here:
I speak only for the Federal Reserve Bank of Dallas, not for others
associated with our central bank. That is usually abundantly clear.
In many matters, my staff and I entertain opinions that are very
different from those of many of our esteemed colleagues elsewhere
in the Federal Reserve System. Today, I "speak forth my sentiments
freely and without reserve" on the issue of TBTF, while meaning
no disrespect to others who may hold different views.
the other views have led to the injustice of the hostage-taking
large banks, disrespect is called for. But Fisher is a well-paid
team player. He is a lonely voice, but it is a polite voice.
He leads off
and their sister knows that financial institutions deemed too big
to fail were at the epicenter of the 2007 09 financial crisis.
Previously thought of as islands of safety in a sea of risk, they
became the enablers of a financial tsunami. Now that the storm has
subsided, we submit that they are a key reason accommodative monetary
policy and government policies have failed to adequately affect
the economic recovery.
"their" sister had no input with Secretary of the Treasury Hank
"Goldman Sachs" Paulson in the bailouts of late 2008. The FOMC provided
a trillion dollars of newly created fiat money to tide the big banks
over. It has subsequently added another $800 billion or so. The
FOMC says it will add lots more: $85 billion a month.
When you subsidize
failure, you will get lots more failure. It's a matter of supply
thought it would address the issue of TBTF through the Dodd
Frank Wall Street Reform and Consumer Protection Act. Preventing
TBTF from ever occurring again is in the very preamble of the act.
We contend that Dodd Frank has not done enough to corral
TBTF banks and that, on balance, the act has made things worse,
not better. We submit that, in the short run, parts of Dodd
Frank have exacerbated weak economic growth by increasing regulatory
uncertainty in key sectors of the U.S. economy. It has clearly benefited
many lawyers and created new layers of bureaucracy. Despite its
good intention, it has been counterproductive, working against solving
the core problem it seeks to address.
I agree. Congress
never makes things better. It makes things worse.
Fisher ever trust the judgment of Congress? But he does, as we shall
see. He thinks Congress has mandate successful reforms.
me define what we mean when we speak of TBTF. The Dallas Fed's definition
is financial firms whose owners, managers and customers believe
themselves to be exempt from the processes of bankruptcy and creative
destruction. Such firms capture the financial upside of their actions
but largely avoid payment bankruptcy and closure for
actions gone wrong, in violation of one of the basic tenets of market
capitalism (at least as it is supposed to be practiced in the United
States). Such firms enjoy subsidies relative to their non-TBTF competitors.
They are thus more likely to take greater risks in search of profits,
protected by the presumption that bankruptcy is a highly unlikely
This is a good
definition. The question is this: How did they get in this position?
It is a government-sanctioned policy. They got it because Congress
has deferred to the FED on everything, no questions asked.
phenomenon of TBTF is the result of an implicit but widely taken-for-granted
government-sanctioned policy of coming to the aid of the owners,
managers and creditors of a financial institution deemed to be so
large, interconnected and/or complex that its failure could substantially
damage the financial system. By reducing a TBTF firm's exposure
to losses from excessive risk taking, such policies undermine the
discipline that market forces normally assert on management decision-making.
I ask: Why
not just reverse the policy? The answer: because government's
decision-makers want control.
reduction of market discipline has been further eroded by implicit
extensions of the federal safety net beyond commercial banks to
their nonbank affiliates. Moreover, industry consolidation, fostered
by subsidized growth (and during the crisis, encouraged by the federal
government in the acquisitions of Merrill Lynch, Bear Stearns, Washington
Mutual and Wachovia), has perpetuated and enlarged the weight of
financial firms deemed TBTF. This reduces competition in lending.
So, again, what can be done about it? "Dodd Frank does not
do enough to constrain the behemoth banks' advantages. Indeed, given
its complexity, it unwittingly exacerbates them." Quite correct.
What can be done about it?
failed. He admits this. Dodd-Frank fails. What to do?
He has a plan.
what FDIC insurance covers. Limit it to traditional lending. Not
more credit default swap insurance. No more derivative insurance.
a nutshell, we recommend that TBTF financial institutions be restructured
into multiple business entities. Only the resulting downsized commercial
banking operations and not shadow banking affiliates or the
parent company would benefit from the safety net of federal
deposit insurance and access to the Federal Reserve's discount window.
the use of the passive voice: "be restructured." This conceals the
central issue: Who is to do this? Who is to take responsibility
for doing this? "Everyone who is ready to bear the consequences
for all of the unintended consequences of such a change, please
stand up." As Ben Stein put it in Ferris
Bueller's Day Off, "Anyone? Anyone?"
describes the enormous concentration of wealth in large banks.
of third quarter 2012, there were approximately 5,600 commercial
banking organizations in the U.S. The bulk of these roughly
5,500 were community banks with assets of less than $10 billion.
These community-focused organizations accounted for 98.6 percent
of all banks but only 12 percent of total industry assets. Another
group numbering nearly 70 banking organizations with assets
of between $10 billion and $250 billion accounted for 1.2
percent of banks, while controlling 19 percent of industry assets.
The remaining group, the megabanks with assets of between
$250 billion and $2.3 trillion was made up of a mere 12 institutions.
These dozen behemoths accounted for roughly 0.2 percent of all banks,
but they held 69 percent of industry assets.
Vilfredo Pareto's 20-80 law look like mass democracy.
the rest of the article
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 31-volume series, An
Economic Commentary on the Bible.
2013 Gary North
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