Saturday, November 22, 2008

Banking Idiocracy

Almost 100 years ago the nation made a decision to permit bankers to control the nation's money supply. This did not have to be, and it does not have to be now. The principle of "easy money" had been publicly rejected in 1896, when William Jennings Bryan, who favored "free silver", lost to William McKinley, who continued the hard money policies of the late nineteenth century, the period of America's greatest economic growth and a period of deflation.

In 1913, Woodrow Wilson established the Federal Reserve Bank under the guidance of JP Morgan's associates (Morgan had died that year, and some argue that the Federal Reserve is just an institutional embodiment of JP Morgan himself). A number of leading bankers associated with Morgan had met in 1910 on Jekyll Island in Georgia and drafted a plan that served as the basis for the Federal Reserve Bank. These bankers included "Frank A. Vanderlip of National City (now Citibank), Henry P. Davison from the Morgan Bank and Paul Warburg of the Kuhn, Loeb investment house."*

Banks need not be granted authority over the creation of money. Instead, there could be a steady increase in the money supply created by general distribution to the public or to borrowers selected by the Treasury Department or private investors. Alternatively, for the nation's most productive years the gold standard was in place. Yet another alternative would be competitive money supplies which existed before the National Banking Act passed during the Civil War. There is no empirical evidence that any of these alternatives would work worse than the current system.

The current system is based on the premise that professional bankers are better equipped to assess investment risk than would be the alternatives, and that their wisdom is greater than the market-neutral approach of a gold standard or broad distribution of new money.

Recent events contradict this claim. From what I can see of the descriptions of what has gone on in the banking world, the banking world is dominated by nincompoops who are worse-equipped to allocate credit than would be a random sample of Americans taken from the Yahoo! phone directory.

The story that I have heard is that first, bankers were willing to lend to non-credit-worthy borrowers because (a) real estate never goes down and/or (b) because the Democrats said they should. Now, I hear, despite a doubling of the money supply, the bankers are afraid to lend money to each other or to borrowers because they made the bad decisions a few years ago. This phenomenon is said to occur despite the ability and availability of loan money directly from the Federal Reserve Bank itself. In other words, the Fed has created a huge amount of new money, is willing to lend to the banks directly, and yet the banks are afraid to borrow. A few years ago, they were willing to lend $200,000 to hair dressers making $8 per hour. Stupidity on this scale exceeds even the market frenzy concerning the Internet stocks that the Federal Reserve and the banking system also created.

This is not a monetary system. This is a sacking of the monetary system by a federally enforced idiocracy.

Perhaps it is time to reconsider the odd claim that bankers are better equipped to decide on how to manage the nation's money supply than would be a neutral, market-based rule like a gold standard. As an institution, the Federal Reserve Bank has come to look like a barbaric relic, and its officers and owners among the commercial banks an idiocracy.

*William Greider, Secrets of the Temple, p. 276.


Anonymous said...

Thanks for the timely article.

I've been saying elsewhere that the way out of this is (1) "honesty injections" (2) allowing the public's massive distributed intelligence to rapidly produce solutions.

Hard money is an honesty injection. Distributed forms of money are a way of activating the public's massive intelligence.

USpace said...

It’s a shame politicians and the racial grievance industry forced banks starting back in the 80s to give home mortgages to poor people who weren’t credit worthy enough.

Then, they just started lending mortgages way beyond many people's credit abilities. That’s where all this mess started. And also that they didn’t regulate Fannie Mae and Freddie Mac like they do other banks.

This government intervention did not allow the Free Market to operate, a truly freer market employs credit standards.
Alan Greenspan should be exposed for the problems he helped cause by allowing credit quality to be ignored for so long before he said anything.
Scary, will sanity ever prevail?
if money were free
it would have no value
- extreme inflation

ignore credit scores
give everyone homes
- like musical chairs

to deny a mortgage
must be due to racism

absurd thought -
God of the Universe says
forgive all debts

settle all accounts
no one owes anything

absurd thought -
God of the Universe says
make housing costs look cheap

go paint a rosy picture
just get people to sign up

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