Banking: Success Through Failure
by Gary North: Population
Growth as Propaganda: The Greens and the Reds
has invented two institutions that have taken over the world: the
university and the central bank. Today, both are under fire as never
before. At the same time, both are in their respective driver's
seats. The greater the criticism, the better they do for themselves.
We are finally
seeing articles on the bubble in higher education. It
isn't a bubble. Government money still flows in by the hundreds
of billions a year.
We hear that
college isn't worth the money. Well, if it isn't, why are parents
paying it? Because they are buying a consumer good: social acceptance.
They are buying off peer pressure. They are unwilling to say to
their friends, "Billy Bob is going to become a plumber." Yes, Billy
Bob will always have a good income, but Billy Bob's parents are
unwilling to accept this. Billy Bob will get his hands dirty . .
. with "filthy" lucre. Oh, the horror! Better that he should be
an unemployed B.A. in sociology with $23,000 of student debt, and
his parents $50,000 to $150,000 poorer.
That is to
say, people have priorities that are different from what the journalists
(with B.A. degrees in a field with a dismal future) write about
in their articles. The parents will not admit to their children
what they are really buying: social acceptance. "You have to go
to college." Why? "Because it is the pathway to success." Not any
more, it isn't, but it is the pathway to social prestige in the
circles in which parents move.
The fact that
any student can earn an accredited B.A. in the liberal arts in four
years, and maybe three, for under $15,000, is never mentioned in
the "college costs too much" articles. The journalists have never
looked at the alternatives. They do not report on them. They just
write their cookie-cutter articles that few parents will read and
most will ignore.
is this bad in a field where parents have $50,000 to $200,000 on
the line after-tax money consider the situation with central
bankers. If the colleges still get a free ride, totally immune from
criticism, think of the sweet deal that central bankers have, where
people neither understand what is going on or can do anything about
today are the beneficiaries of a familiar law of government-run
economics: failure is regarded with increased budgets. Massive failure
is rewarded with budget increases and increased responsibility and
When it comes
to civil government, nothing succeeds like failure.
Ron Paul writes
a book, End the Fed. It sells well. We hear echoes of this
on the Web. Yet what was the result of the FED's disastrous policies,
2001-2007, which caused the recession in 2008-9? An increase in
the FED's supervisory powers over the banking system.
On March 10,
Bernanke testified before the Committee on Financial Services,
U.S. House of Representatives, Washington, D.C. This was three days
after the initial version later revised of the Dodd-Frank
banking reform bill was released to the media.
testimony is one of the classic cases of institutional self-puffery.
Here is a man who oversaw the big bank bailouts. He engineered the
swap of T-bills with toxic debt at face value, bailing out otherwise
insolvent banks had the Financial Accounting Standards Board's
rules not been reversed after the swap. Here are some highlights
from his testimony.
crisis has made clear that all financial institutions that are
so large and interconnected that their failure could threaten
the stability of the financial system and the economy must be
subject to strong consolidated supervision. Promoting the safety
and soundness of individual banking organizations requires the
traditional skills of bank supervisors, such as expertise in examinations
of risk-management practices; the Federal Reserve has developed
such expertise in its long experience supervising banks of all
sizes, including community banks and regional banks.
Here is the
Ph.D.-holding expert whose relied on data and analysis supplied
by hundreds of other Ph.D.-holding experts. None of them had seen
the recession coming. But Austrian School economists had, and said
so repeatedly. I was one of them.
What is needed?
Why, more of the same!
But the supervision of large, complex financial institutions and
the analysis of potential risks to the financial system as a whole
require not only traditional examination skills, but also a number
of other forms of expertise, including macroeconomic analysis and
forecasting; insight into sectoral, regional, and global economic
developments; knowledge of a range of domestic and international
financial markets, including money markets, capital markets, and
foreign exchange and derivatives markets; and a close working knowledge
of the financial infrastructure, including payment systems and systems
for clearing and settlement of financial instruments.
None of this
had helped the FED to foresee the recession. But, have no fear!
Tomorrow is a better day. The FED is so much wiser now, so much
the course of carrying out its central banking duties, the Federal
Reserve has developed extensive knowledge and experience in each
of these areas critical for effective consolidated supervision.
For example, Federal Reserve staff members have expertise in macroeconomic
forecasting for the making of monetary policy, which is important
for helping to identify economic risks to institutions and markets.
In addition, they acquire in-depth market knowledge through daily
participation in financial markets to implement monetary policy
and to execute financial transactions on behalf of the U.S. Treasury.
Similarly, the Federal Reserve's extensive knowledge of payment
and settlement systems has been developed through its operation
of some of the world's largest such systems, its supervision of
key providers of payment and settlement services, and its long-standing
leadership in the international Committee on Payment and Settlement
Systems. No other agency can, or is likely to be able to, replicate
the breadth and depth of relevant expertise that the Federal Reserve
brings to the supervision of large, complex banking organizations
and the identification and analysis of systemic risks.
What was the
proper conclusion? Could anyone doubt it? Extend greater supervisory
authority to the FED.
summary, the Federal Reserve's wide range of expertise makes it
uniquely suited to supervise large, complex financial institutions
and to help identify risks to the financial system as a whole. Moreover,
the insights provided by our role in supervising a range of banks,
includingcommunity banks, significantly increases our effectiveness
in making monetary policy and fostering financial stability. While
we await enactment of comprehensive financial reform legislation,
we have undertaken an intensive self-examination of our regulatory
and supervisory performance. We are strengthening regulation and
overhauling our supervisory framework to improve consolidated supervision
as well as our ability to identify potential threats to the stability
of the financial system. And we are taking steps to strengthen the
oversight and effectiveness of our supervisory activities.
The final version
of Dodd-Frank bill increased the regulatory power of the FED. The
FED got new control over the banks. We
read in the detailed entry on Wikipedia:
or the "Enhancing Financial Institution Safety and Soundness Act
of 2010" is intended to streamline banking regulation and reduce
competition and overlaps between different regulators by abolishing
the Office of Thrift Supervision and transferring its power over
the appropriate holding companies to the Federal Reserve, state
savings associations to the FDIC, and other thrifts to the Office
of the Comptroller of the Currency.
This bill was
signed into law on July 21, 2010. Dodd did the decent thing and
went away. He decided not to run in 2010. Frank came back.
BANK OF ENGLAND
Lest you think
that the law of government failure is confined to the United States,
consider the original central bank, founded in 1694. It followed
Greenspan's inflationary policies, with the same results: bubbles.
A recent article in the "London Telegraph" surveys the carnage and
the results. The government has quietly transferred extensive new
regulatory authority to the Bank of England.
ancient institution has long been referred to as the Old Lady of
Threadneedle Street. This makes as much sense as referring to the
Mafia as the Old Men from Sicily.
a grand experiment in macroeconomic management the like of which
has never been tried before. In addition to its existing powers
to set interest rates and manage the money markets, the Bank of
England will acquire responsibility not just for banking supervision
but for controlling the credit cycle in the round a function
known as "macroprudential regulation."
once more be forced to jump to attention before the Old Lady's
command, while with a nod of the head the Bank's newly formed
Financial Policy Committee which meets for the first time on
June 24 will be able to adjust the supply of credit like water
through a sluice. After 30 years in which the collective will
of financial markets has dominated the commanding heights of the
economy, the Bank is being put firmly back in the driving seat.
Parliament do plan to hold hearings on this transfer of power. The
author is presumably trying to persuade members to ask tough questions.
Parliament does ask tougher questions than Congress does. It is
an old British tradition to ask tough question. Then it does what
the Bank of England says, just as every other Western government
does what its central bankers say.
refusal to accept any degree of culpability in the crisis is already
well known. But to general astonishment, it has emerged that there
hasn't even been so much as an internal inquiry at the Bank as
to what went wrong.
surveys what took place. This parallels the Greenspan years like
For the first
10 years of its reign as an independent monetary authority, it
was hard to fault the Bank's performance at all. Inflation was
tame, and the UK economy entered one of its longest ever periods
of uninterrupted growth. Some called it the Great Moderation.
Mervyn King, the Governor, christened it the NICE decade, standing
for non-inflationary-continuous-expansion. These were halcyon
days for the Bank. Rightly or wrongly, the Old Lady got much of
the credit for delivering an apparently golden age of economic
stability and prosperity.
The glory years
of monetary inflation were followed by the crash that overwhelmed
Wall Street, the U.S. Treasury, and the Federal Reserve.
will think the mere fact of the downturn, and its gruelling aftermath,
evidence enough of bad policy. Some Treasury insiders still bitterly
blame the Bank for the supposedly botched way in which the crisis
was initially handled. The Bank had to be dragged kicking and screaming
into doing the right thing, one said, a version of events supported
by a number of Financial Services Authority (FSA) accounts.
FSA and the former Chancellor, Gordon Brown, have been widely
blamed for the catastrophe, yet the policymaker which must be
judged to have been more at the centre of things than any other,
the Bank of England, has emerged from the storm not just unscathed,
but with even greater powers than it had before.
goes on to survey five areas of criticism that have been lodged
against the BoE. They are all reasonable, though not based on the
gold coin standard, the evils of fractional reserve banking, or
any of the other products of the boom bust cycle. The author even
blames the BoE for not re-inflating fast enough.
the European Central Bank and the Federal Reserve responded to the
initial stages of the credit crunch by flooding the system with
cheap liquidity, the Governor's inclination was to dismiss the move
as an overreaction. Just two days before it emerged that Northern
Rock had requested lender of last resort support, he wrote a letter
to the Treasury Select Committee in which he said that not enough
regard had been given to the dangers of moral hazard.
So, the Bank
of England receives no criticism that goes to the bottom of
the problem: fractional reserve banking. So, it trudges forward,
now armed with new powers.
somehow the Bank has emerged from the wreckage, if not quite smelling
of roses, grudgingly thought of as the only way forward. All things
considered, it's an astonishing escape, for which the Governor has
justifiably earned himself a notable place in the history books.
The more things
change, the more things stay the same. The more havoc the central
banks cause, the more power that governments transfer to them.
There is no
turning back. The central banks will keep centralizing power, and
the result will be a far greater swath of destruction when, at last,
they must decide: hyperinflation or Great Depression II.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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