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Source link: http://archive.mises.org/10842/it-aint-gonna-work-anyway/

It Ain’t Gonna Work Anyway

October 15, 2009 by

The current obsession with systemic risk is understandable. After all, we came darn close to experiencing it, with every money-center bank, most secondary banks, and many tertiary banks verging on collapse not long ago. FULL ARTICLE by Stephen Mauzy


Ohhh Henry October 15, 2009 at 2:06 pm

“bankers are aware that innovation enables profits; thus, bankers … strive to innovate in the assets they acquire and the liabilities they market.”

Quite innovative – Mark to Make-Believe Turns Junk Loans into Gold.

This innovation is basically to add zeroes to your balance sheet and then calculate and dispense salaries and bonuses accordingly.

That’s great work if you can get it. But what do you think ordinary people are going to do when they finally understand that they’ve been played for complete idiots by thinking that it is necessary to get out of bed in the morning, produce actual goods and services, and pay off their credit cards and mortgages? Back in the days of the S&L scandal I guess the dollar was strong enough to withstand the papering over of losses, but what about now, when Japanese are sneaking into Switzerland to unload hundreds of billions in greenbacks. There is no more exit strategy that lets you keep your job and your condo in Manhattan. If I was a banker I would think in terms of passports and offshore havens as a line of retreat. If, that is, there is any haven far enough offshore to protect them from the backlash.

Walt D. October 15, 2009 at 3:34 pm

Per Kurowski, a former Executive Director at the World Bank sees regulation, in particular Basel I and II as the rotten apple that caused the whole financial crisis.
His thesis is that the Minimum Capital Requirements distort the risk profile, setting up the Credit Rating Agencies as a time bomb. Normal lending requires 8% capital, or 12.5 to 1 leverage. AAA lending requires 1.6% capital or a 62.5 to 1 leverage. This funnels money into activities that are seen as less risky and imposes a regulatory tax on riskier ventures, stifling growth The current crisis was caused almost entirely by securities that were rated AAA. Iceland, and all the other who bought the AAA rated securities, were risk averse, not risk seeking.
Ironically, he laments, we have not learned the lesson – the regulatory rotten apple is still in the barrel. People are calling for more regulation and more control of risk

Ohhh Henry October 15, 2009 at 3:52 pm

Isn’t fractional reserve banking the original rotten apple in this barrel, and the illusion that its dangerous and fraudulent nature can be fixed by regulation?

Walt D. October 15, 2009 at 5:21 pm

“Ohhh Henry – Isn’t fractional reserve banking the original rotten apple in this barrel”?
Yes – of course. In fact it’s the rotten barrel in which the rotten apple has been placed!

Axiomata October 15, 2009 at 8:05 pm

Your conclusion, specifically the anti-FRB sentence does not follow from the wealth of important evidence you presented. I enjoy a good article promoting full reserve banking (as well as a good free banking defense) but I don’t see value in inserting that debate in to every single article unless sufficient evidence for the position taken is provided.

Bennet Cecil October 15, 2009 at 10:31 pm

Changing the financial regulation structure is a political maneuver to gain power and a lucrative source of campaign contributions.

American taxpayers do not want to keep bailing out big banks, and they mistakenly think government regulation will protect them. Many Americans are angry that some bankers make huge amounts of money after government handouts last year. The politicians who are creating huge deficits need the sideshow of greedy business people to distract voters.

If president Bush had intervened in the crisis in a different way we would now be in a better spot. He should have let insolvent banks enter bankruptcy or nationalization followed by liquidation. Either way, management should have been fired, stockholders wiped out and assets sold to investors. They would have reaped the results of their moral hazard instead of the taxpayer.

Finally, Americans do not want a society with sound money and tight credit. They want easy credit and inflation. Expect it to continue until it collapses under its own weight.

sb101 October 16, 2009 at 10:17 am

“interest groups and political representatives will use the regulatory powers of government to shape laws and regulations to their advantage”

you hit the nail on the head. also, no regulatory regime can keep up with innovation. The market is always smarter than the regulator.

Solution? Put people in charge of the regulators that actually care about regulating (Bush and Clinton put anti regulatory idealogues in charge of the SEC…stupid) and LISTEN to the market. We don’t new laws/rules/regulations. The market was screaming for years we had an issue brewing. Appraisers begged the adminstration to investigate fraudalent appraisers. Honest mortgage brokers begged the adminstration to clean up the fraud. And anyone with half a brain knows 30:1 leverage only leads to disaster.

Like every other bust/recession/depression in history, the market gave us all fair warning. The regulators knew it, but did nothing to respond. Why? Who in Congress wants to be responsible for pricking an asset bubble during an election year? Listening to the market is the best regulatory policy, and then having a regulator with some backbone to prick/prevent bubbles is what the market needs.

Ohhh Henry October 16, 2009 at 12:40 pm

“If president Bush had intervened in the crisis in a different way we would now be in a better spot. He should have let insolvent banks enter bankruptcy or nationalization followed by liquidation.”

No doubt that you and I would be better off. But for Bush to do anything differently would be to go against his own interests and against the interests of his associates. He is a member of the banking and the military/espionage establishments. There is no way that he is going to irreparably harm those interests in order to benefit the overall wealth and freedom of millions of people whom he will never meet and who are unlikely to ever be able to effectively resist or punish his actions.

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