Archive for the ‘banks’ Category

Part 4 Dialogue on Moral Hazard, fixing the financial sector and certainty of knowledge:

September 25th, 2013 No comments

Cross-posted from “we build our society” Facebook group:!/groups/webuildoursociety/permalink/426598337444055/

Terry, 2007-09 flow from various government interventions, not limited to those I just outlined, that served the purpose of blowing a bubble and freeing those playing with money from personal responsibility. This meant that smart men focussed on how they could game the system for their own profit. It happened continually and is still underway, though 1994 in Boca may be a good example.

Doug, [Jekyll Island 1913] was just the creation of the Fed (and just part of my item(3) above); the roots go much deeper to other state interventions I noted. The pre-Fed booms/panics also flowed from the state-level creation of banks as corporations and monopolies, and interventions to save banks that essentially broke promises to depositors by creating un-backed paper money. See Rothbard’s History of Money and Banking in the United States,

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Part 3: Dialogue on Moral Hazard, fixing the financial sector and certainty of knowledge

September 25th, 2013 No comments
Cross-posted from the “we build our society” Facebook group:
Terry, yes the entire financial sector is rotten/corrupt and rife with moral hazard. And things are now WORSE, as the banks are now TWICE as large as they were previously, and banking reform has served to squeeze smaller banks out of business…. Most of the approaches you suggest would be worthwhile (as would heads on pikes), but none of them actually address the roots of the moral hazard–
(1) the centralizing/federalizing Deposit Insurance by which Govt pretends to “protect” us, but instead builds a regulatory house of cards that puts the robbers in charge of the larger banks, and ultimately leads to taxpayers holding the bag when the bank fails or the “unexpected” but entirely natural/predictable “crisis” occurs and forces “responsible” pols/bureaucrats in DC to bail out the firms whose employees/managers/execs have done all the looting,
 (2) the federal effort (on behalf of favored elites) to take control of the money supply,
(3) the state/federal replacement of paper money as redeemable warehouse receipts for physical currency with just IOUs (and now backed by nothing), as long as the bank maintains “reserves” of cash or “secure assets” like federal bonds (so that the govt can loot the banks to fund pet “public infrastructure” projects; and
(4) the state creation of banks as limited liability local monopolies in the first place (in exchange for money to the state treasury/pols hands), and the then subsequent protection of bankers (by banking “holidays” etc) when they found it convenient to rob their customers by issuing more IOUs than could be redeemed in physical currency. Limited liability has always been the core intervention.
 The Big Boys now have entirely too much power to effectively regulate on a large scale, but we MIGHT be able to pare back deposit insurance, which would restore to some savers (rather than taxpayers) responsibility for figuring out where to put their money (and would create a REAL market for bank analysis). What we also need is to offer much lighter regulation to new banks that are exempt from any federal or state deposit scheme–and let depositors and shareholders manage their own risks, as they are now doing in private companies that are avoiding the public securities markets.

Rot at the Core: KC Fed Pres. Hoenig says "Too Big has Failed", and calls for receivership of failed banks / end to bailouts

March 9th, 2009 No comments

Finally, someone in the Fed is arguing that the Fed should stop printing money like crazy to bail out managers, owners and counterparties of failed banks.

In a speech on Friday, March 6, Thomas Hoenig, President of the Kansas City Fed, argued strongly that “Too Big has Failed“, and that the continuing ad hoc bailouts are just stringing out the ultimately necessary realization and workouts of failed banks and bad assets, thus creating uncertainty while increasing the cost of the crisis by prolonging the unavailability of credit.  Hoenig argues that a transparent receivership program should be set up for large, insolvent institutions, whose management should be fired and shareholders wiped out.  The whole speech is worth a read.

It is bracing to see someone in the Fed finally start talking about action to end the bailouts, but an honest observer would have to realize that federal and state regulators already have all the authority the need to take over insolvent banks; they just need to have the Fed and Geithner stop handing out money to those who have already lost hundreds of billions.  In rougher terms, no more “stinking badges” are needed; just action.  It is unlikely that simply the creation of a new RTC for too-big-to-fail banks will, as Hoenig suggests, by itself “restore an important element of market discipline …, limit moral hazard concerns and restore  and restore … fairness of treatment”.   Federal and state banking regulators already have sufficient authority; what they`re lacking is the political will to stand up to the managers and owners of failed institutions and pull the trigger.  Hoenig is essentially punting to our lazy and corrupt Congresscritters, who will no doubt give owners and managers a chance to influence any new receivership law.

Hoenig does indicate that lawmakers/regulators should consider how to prevent firms in the future form backing “to big to fail”; my suggestion?  Follow the suggestion of Glassman and Nolan that banks be encouraged to adopt a partnerhip or corporate structure that does not include a limited liability feature for owners, who, because they would have unlimited personal liability for losses, would  be incentivized to very closely monitor risks.

h/t to Calculated RISK  

Categories: banks, Fed, limited liaiblity, moral hazard Tags: