Today's banking system is based on a principle that did not exist until the 17th century. The notion of fractional reserve banking is that bankers lend out more money than they actually have on deposit because they can predict with some accuracy how much money depositors will reclaim each day. Currently, the supply of money is about double the cash and reserves on deposit in banks, so half the money supply is due to bankers' lending money that does not really exist anywhere.
Academics vigorously argue in favor of fractional reserve banking. They claim to be in favor of the poor and of economic development, but a little common sense tells you that enabling bankers to double the money supply chiefly benefits bankers. Moreover, bankers do not lend to the poor, they lend to the rich and to the middle class, and to government's favored recipients. Hence, the traditional tendency is that fractional reserve banking is most beneficial to the wealthy.
Bankers refuse to lend to entrepreneurs. This is a well known phenomenon to anyone interested in starting a business. Bankers view lending to innovative start ups as too "risky". On the other hand, they are eager to lend to sub-prime mortgage borrowers, Bunker Hunt when he was eager to corner the silver market, Long Term Capital Management when it claimed to have "hedged" all bets based on crackpot theories of modern finance professors, and to sellers of credit default swaps that the bankers did not understand, but what the hell, they're less risky than investing in A/C electricity or a cure for cancer.
The main problems of capitalism have related to the fraud in which bankers engage in lending money. Economically illiterate historians and historically illiterate economists both make the argument that without fractional reserve banking there would have been no progress. But they cannot point to examples of progress that depended on fractional reserve banking. Nikola Tesla depended not on banking but on venture capital from JP Morgan to work on energy transmission and earlier inventions. Milton Hershey depended not on banking but on friends and family to build his candy empire. Do most entrepreneurs today depend on bank loans to finance new business concepts, or on private investment capital that they save themselves, from friends and family or from private "angels" who do not benefit from the fractional reserve system?
Where do bank loans go? They go to the least risky investments: real estate and to finance lumbering, incompetently managed large firms.
Now, let us think for a moment who pays for fractional reserve banking. When a bank lends a dollar it does not have, it collects interest on that dollar. But it has increased the money supply. By increasing the money supply, it reduces the value of everyone else's dollars. So anyone who holds dollars, workers and savers, subsidize the bank. As the value of everyone's dollars is reduced, the borrower repays the loan in cheaper dollars. So the banker is subsidized and the borrower is subsidized, but the thrifty and poor who do not borrow pay.
Now who are the chief borrowers? Large corporations are the most indebted. Hedge funds, investment banks and large real estate investors are the chief borrowers. It is true that the middle class has also borrowed. The group that borrows least is the poor.
Inventors who are trying to build a new business based on an invention cannot borrow because banks will not lend to them. So money is transferred from innovators to borrowers. From inventors to real estate developers.
Banking is not necessary for progress. Innovation has not depended on banking. It has depended on private capital. Rather, banking stalls innovation. Thus, as the Federal Reserve Bank's power to create money has increased, and Wall Street and the banking system has flourished over the past 35 years, innovation has been limited to a few industries that stock brokers favor. Real estate and stock investment has soared. And American workers' real wages have declined.
Fractional reserve banking is not necessary to American progress. It is a form of income redistribution from the innovative to the opportunistic.
Wednesday, November 12, 2008
AIG Investors Not Allowed To Lose
It's nice to be a bank. You can lend people money you don't have, and make reckless investments at that. Then, when the reckless investments bail, er, I mean fail, economists are eager to justify subsidizing you through public funds in the interest of the "public good". I wonder how hard these guys are laughing when they're on the way to the bank.
According to the Wall Street Journal:
>"Banks in the U.S. and abroad are among the biggest winners in the federal government's revamped $150 billion bailout of American International Group Inc...Banks in the U.S., Europe and Canada bought credit-default swaps on these securities from AIG, which in turn promised to compensate them if the securities defaulted. Defaults haven't been a major problem, but the market values of these CDOs fell sharply over the past year or so...Throughout its AIG rescue efforts during the past two months, the government has had the banks in its sights; it made its initial bailout of AIG in part to avoid potential bank losses that might have threatened the broader financial system...The banks that participate will be compensated for the securities' full, or par, value in exchange for allowing AIG to unwind the credit-default swaps it wrote..."It's like a home run for some of the banks," says Carlos Mendez, a senior managing director at ICP Capital, a fixed-income investment firm in New York. "They bought insurance from a company that ran into trouble and still managed to get all, or most, of their money back."
According to the Wall Street Journal:
>"Banks in the U.S. and abroad are among the biggest winners in the federal government's revamped $150 billion bailout of American International Group Inc...Banks in the U.S., Europe and Canada bought credit-default swaps on these securities from AIG, which in turn promised to compensate them if the securities defaulted. Defaults haven't been a major problem, but the market values of these CDOs fell sharply over the past year or so...Throughout its AIG rescue efforts during the past two months, the government has had the banks in its sights; it made its initial bailout of AIG in part to avoid potential bank losses that might have threatened the broader financial system...The banks that participate will be compensated for the securities' full, or par, value in exchange for allowing AIG to unwind the credit-default swaps it wrote..."It's like a home run for some of the banks," says Carlos Mendez, a senior managing director at ICP Capital, a fixed-income investment firm in New York. "They bought insurance from a company that ran into trouble and still managed to get all, or most, of their money back."
Boycott Firms that Receive Government Aid
The Wall Street Journal writes of another homeless corporation that is panhandling for $3.5 billion from the federal government: American Express. According to the Journal:
"The card issuer is the latest company not directly hit by the housing crisis to request cash from the federal government. While retailers, car companies and others hit by the slowdown in consumer spending haven't gotten the government money, financial firms of all kinds are getting federal bailouts."
There are about 130 million Americans who file tax returns but about one third of these pay no taxes, so the number of taxpayers is about 86 million. With a bailout of $750 billion, each taxpayer pays on average $8,720 to subsidize inept millionaire investment bankers, slothful auto executives and now, if they have their way, the people who bring you the American Express card.
I take it personally that my taxes are being raised to subsidize bozos at badly managed firms. I think that all Americans should just say no to any firm that receives a subsidy. The American car companies have been indifferent to the plight of their employees for decades. Now, they claim public subsidies. Investment bankers have been overpaid for decades. Now, they want average earners to subsidize their inept practices.
Boycott American Express. Boycott General Motors. Boycott the lot of them.
"The card issuer is the latest company not directly hit by the housing crisis to request cash from the federal government. While retailers, car companies and others hit by the slowdown in consumer spending haven't gotten the government money, financial firms of all kinds are getting federal bailouts."
There are about 130 million Americans who file tax returns but about one third of these pay no taxes, so the number of taxpayers is about 86 million. With a bailout of $750 billion, each taxpayer pays on average $8,720 to subsidize inept millionaire investment bankers, slothful auto executives and now, if they have their way, the people who bring you the American Express card.
I take it personally that my taxes are being raised to subsidize bozos at badly managed firms. I think that all Americans should just say no to any firm that receives a subsidy. The American car companies have been indifferent to the plight of their employees for decades. Now, they claim public subsidies. Investment bankers have been overpaid for decades. Now, they want average earners to subsidize their inept practices.
Boycott American Express. Boycott General Motors. Boycott the lot of them.
George Bush, Barack Obama and Nancy Pelosi: Dumb, Dumber and Dumbest
It is difficult to consider a more ill advised policy than propping up managements of large, poorly managed firms. Yet, Henry Paulson, Ben Bernanke and George Bush have decided to provide a massive subsidy to inept Wall Street executives. Few politicians in history have concocted dumber policies, but, believe it or not, the Democrats have come up with an even dumber idea: bail out Detroit as well as Wall Street.
According to the Wall Street Journal :
"Democratic leaders in Congress said Tuesday they will push legislation next week to use the $700 billion Wall Street rescue fund to bail out Detroit auto makers, and President-elect Barack Obama ordered his transition team to look at ways to aid the car industry even before his inauguration."
A good book on the mismanagement of the auto industry is John Z. De Lorean's and J. Patrick Wright's "On a Clear Day You Can See General Motors".
De Lorean's descriptions of massive incompetence and waste at General Motors in the early 1970s, 35 years ago, makes the reader laugh out loud. After four or five decades of GM's utter incompetence, the Democrats are eager to raise your and my taxes to force us to subsidize GM. If they made cars we wanted they wouldn't need the subsidy.
Isn't GM the company whose selfishness Michael Moore contemned two decades ago for moving half its plants to Mexico, stiffing American workers and thumbing its nose at Flint, Michigan in the name of "private property" and the prerogatives of private corporations? And now the Democrats are shelling out tens of billions of dollars to these self-indulgent incompetents?
Excuse me for my snit, but this is getting out of hand.
According to the Wall Street Journal :
"Democratic leaders in Congress said Tuesday they will push legislation next week to use the $700 billion Wall Street rescue fund to bail out Detroit auto makers, and President-elect Barack Obama ordered his transition team to look at ways to aid the car industry even before his inauguration."
A good book on the mismanagement of the auto industry is John Z. De Lorean's and J. Patrick Wright's "On a Clear Day You Can See General Motors".
De Lorean's descriptions of massive incompetence and waste at General Motors in the early 1970s, 35 years ago, makes the reader laugh out loud. After four or five decades of GM's utter incompetence, the Democrats are eager to raise your and my taxes to force us to subsidize GM. If they made cars we wanted they wouldn't need the subsidy.
Isn't GM the company whose selfishness Michael Moore contemned two decades ago for moving half its plants to Mexico, stiffing American workers and thumbing its nose at Flint, Michigan in the name of "private property" and the prerogatives of private corporations? And now the Democrats are shelling out tens of billions of dollars to these self-indulgent incompetents?
Excuse me for my snit, but this is getting out of hand.
Subscribe to:
Comments (Atom)
