Wednesday, October 21, 2009

Disorderly Order

There are Those who take the tough path like Paul Volcker, and then there are the politicians. The repeal of the 1933 Glass-Steagall Act allowed the big Banks access to the investment cash of the Equities markets; a huge amount of Cash carrying a huge level of Profits, the substance desired by the Banks. The problem came in the form that it also made the Banks subject to the huge level of Losses which could come through a Recessionary decline in Equity pricing. The trouble appears as the federal government poses to backstop the Banks, through a number of legal and regulatory instruments; meaning that the Taxpayers always get stuck with the bill. I am on Volcker’s side, knowing that the federal government will always get the bill, come every Recession time; the Banks having already made and distributed the Profits along the way in the previous Boom. This will always be the Case, as long as the federal government does not separate Banks and securities. The Politicians, on the other hand, always have received the Contributions of the Sky-pilots of the Booms so that the practice of mixing continues; and the Taxpayers will again and again be made to assume the raised debt. There are Those who desire a better world, and Those who insist on the Roman circuses; the Crowd will always win, and Civilizations will always fall. Think of what could have been saved, if Egyptians had not invented Paper!

Here is the Argument with which I have the most difficulty. The claim states that Banks must be big to finance large Credit consumption. Why? I know of no Bank, or regulatory officer in review of such bank, who would make any loan of excessive size, in percentage terms of the assets of the bank. This means that they outsource any large loan to partner banks so that the Risk is spread. The only thing that the Glass-Steagall Act inhibits in this process is the freedom to escape from regulatory review of the stability of the outsourcing. Simply put, poor Risk ventures are cancelled out by the difficulty of accessing the necessary funding through the outsource process. The later is the problem for the large Banks, because it naturally cancels the interior huge Profits to the bank of origin, as well as the insecurity of the loan process. The loan process continues, though, even if it is more difficult to subscribe with less Profit. There is no real need for Banks of huge size, except for huge Salaries and huge Bonuses.

There will never be a ‘resolution authority’ of sufficient size to curtail the excesses of big banks with the power to manipulate Securities. The idea of holding more Capital reserves is ridiculous, as no such Reserves could be accumulated; the loan process would be stopped in entirety for lack of excess funds. Reserves on Deposits can be maintained, Reserves on Securities depend upon a fickle market with no respect for Bankers. Reserves on Deposits could never achieve sufficient size to cover Securities borrowing. The Solutions are traditional in this discussion, and practical working failures. What worked was the process developed under the Glass-Steagall Act, and probably no other process will actually provide Safety to the practice. Now to convince an irritable Banker who sees their Bonuses evaporate, and their employees–the Politicians of previous discussion. We need to build a huge Circus tent over Wall Street. lgl

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