Well, it looks like it's been twenty-five days since my last post. That's pretty bad! My excuses aren't necessarily that great, but it's been a combination of three factors: a) busy work/personal life stuff, b) getting more up-to-speed on local issues/politics, and c) reading some books.
In the meantime, Sen. Evan Bayh (D-IN) announced that he would not run for re-election. This was a bit of a surprise and big news here in Indiana. Bayh timed his announcement well with clear knowledge that no Democrat would be able to get enough signatures to have ballot access in the primaries. This will allow the party insiders to choose the candidate rather than the electorate.
I truly do hope to post more regularly going forward, but I am undecided on how I plan to focus my efforts. I have some desire to focus on more local issues - especially as the 2010 election cycle ramps up and I get more involved with the local LP. This blog may not be the best outlet for that. The national/global/economic scene always interests me, but I probably won't churn out content as frequently and would prefer to focus on analytically-driven essays rather than the news cycle.
I'm open to all comments, feedback, and requests... I'd like to thank everyone who frequents the site and enjoys my ramblings.
Saturday, February 27, 2010
Tuesday, February 2, 2010
A Libertarian View Against the Banks
There has been much ado over bailouts and socialism, Wall Street and Main Street, greedy bankers and noble capitalists, and a myriad of other related catchphrases and ideological positions when it comes to a discussion of the state of our financial system over the last year and a half. The debate rages on as today former Fed Chairman Paul Volcker testified before the Senate Banking Committee and with Barack Obama's recent call for a new tax on banks. Volcker has suggested a ban on proprietary trading for certain banks. This is a modified reinstatement of Glass-Steagall which served to separate standard commercial banking from hedge fund like behavior.
Lately, the conservative mainstream has taken to siding against such reforms. Typical free market rhetoric has led the way. It's been suggested that a ban on prop trading would over-regulate the banks and inhibit growth. We also hear the usual arguments against corporate taxes which state that it such policies only hurt the end consumer. I'd like to offer an alternative point of view on this subject that I think libertarians (and Libertarians) should consider supporting. I'll present my logic one point at a time.
1. Our System Encourages "Too Big To Fail"
This is a complex and very difficult issue. My free market ideals support a position which would say that companies can engage in any behavior they want and get as big as they want. They should be able to do this so long as they do not engage in fraud and/or stealing. The problem with today's system is that fraudulent behavior is supported. Banks can engage in expanding the money supply at will via credit creation in our fractional-reserve, fiat monetary system. I recognize that there is a legitimate debate to be had on the degree of fraud that such activity constitutes, but banks are allowed (and encouraged) to extend their liabilities well beyond their liquid assets. This creates an environment which is recipe for Too Big To Fail.
2. The Federal Reserve Further Enables Such Behavior
The Federal Reserve is the watchdog of the banking system. Large institutions have a direct line to the Fed in the primary dealer relationship. The liquidity provisions which the Fed has created over the last two years has not only expanded its balance sheet, but it has allowed these large banks to trade potentially risky assets for cash. This strengthens their reserve asset positions artificially and allows for further credit expansion. In the case of the last year, credit expansion has been swapped for asset speculation via proprietary trading.
3. Too Big To Fail Presents a Hazard to the Broader Economy
I wish I had a dollar for every time I've heard Tim Geithner, Ben Bernanke, random talking heads on CNBC, or any other person in power discuss why we had to bail out AIG. I understand their point of view. Most Americans who were opposed to bailout frenzy probably do not truly grasp the meltdown we would have experienced. No one can say definitively how bad it would have been, but it would have been painful. I would posit that Too Big To Fail would not exist in a true free market. That is an ideal which is too far from reality. Poor investments should be liquidated but are allowed to persist and grow in a bubble economy. This should be prevented.
4. Proprietary Trading Serves Marginal Economic Value and Enhances Too Big To Fail
Some large banks also serve as market makers by providing liquidity to investors. This legitimate role was developed long ago to fill in the gaps in the market to make it easier for investors. (More on this in a future post.) However, market making has been extended to significant trading. This is gambling plain and simple. I am not opposed to gambling, but it is important to understand that it serves no economic purpose other than speculation. When several large banks trade in the markets for speculative purposes, they create counter-party risks between each other. So, large banks (and other financial institutions) which participate in such activities ultimately enhance Too Big To Fail regardless of their direct participation in commercial banking. (For more detail, read this at Naked Capitalism.)
5. Too Big To Fail Risks Should Be Insured by Too Big To Fail Institutions
There has been a lot of arm-wringing that certain large banks already repaid their TARP money and should not be further penalized with a new tax. I disagree; although I would not position this policy as a tax. The government has enabled and continues to support Too Big To Fail. This should be ended. However, in the interim, this continues to pose a systemic risk. Failure should not be covered by taxpayers. As the FDIC collects a tax (fee or insurance premium) to build its reserve fund to address failed banks, so too should the government collect a similar tax on Too Big To Fail institutions to protect the taxpayer. (There is also a legitimate libertarian debate against the FDIC, but we'll save that for another post as well.)
It is not a popular position for libertarians to support government intervention in the markets. This is not the issue at hand. We must recognize that there is a close relationship between Washington and lower Manhattan. Our economy has been transformed over the last two decades to one built on financial engineering underpinned by credit expansion and cozy corporatism. This must come to end. It will either end by implementing policies which unwind it carefully or with a spectacular crash which will make last the last year and a half look like a walk in the park.
Lately, the conservative mainstream has taken to siding against such reforms. Typical free market rhetoric has led the way. It's been suggested that a ban on prop trading would over-regulate the banks and inhibit growth. We also hear the usual arguments against corporate taxes which state that it such policies only hurt the end consumer. I'd like to offer an alternative point of view on this subject that I think libertarians (and Libertarians) should consider supporting. I'll present my logic one point at a time.
1. Our System Encourages "Too Big To Fail"
This is a complex and very difficult issue. My free market ideals support a position which would say that companies can engage in any behavior they want and get as big as they want. They should be able to do this so long as they do not engage in fraud and/or stealing. The problem with today's system is that fraudulent behavior is supported. Banks can engage in expanding the money supply at will via credit creation in our fractional-reserve, fiat monetary system. I recognize that there is a legitimate debate to be had on the degree of fraud that such activity constitutes, but banks are allowed (and encouraged) to extend their liabilities well beyond their liquid assets. This creates an environment which is recipe for Too Big To Fail.
2. The Federal Reserve Further Enables Such Behavior
The Federal Reserve is the watchdog of the banking system. Large institutions have a direct line to the Fed in the primary dealer relationship. The liquidity provisions which the Fed has created over the last two years has not only expanded its balance sheet, but it has allowed these large banks to trade potentially risky assets for cash. This strengthens their reserve asset positions artificially and allows for further credit expansion. In the case of the last year, credit expansion has been swapped for asset speculation via proprietary trading.
3. Too Big To Fail Presents a Hazard to the Broader Economy
I wish I had a dollar for every time I've heard Tim Geithner, Ben Bernanke, random talking heads on CNBC, or any other person in power discuss why we had to bail out AIG. I understand their point of view. Most Americans who were opposed to bailout frenzy probably do not truly grasp the meltdown we would have experienced. No one can say definitively how bad it would have been, but it would have been painful. I would posit that Too Big To Fail would not exist in a true free market. That is an ideal which is too far from reality. Poor investments should be liquidated but are allowed to persist and grow in a bubble economy. This should be prevented.
4. Proprietary Trading Serves Marginal Economic Value and Enhances Too Big To Fail
Some large banks also serve as market makers by providing liquidity to investors. This legitimate role was developed long ago to fill in the gaps in the market to make it easier for investors. (More on this in a future post.) However, market making has been extended to significant trading. This is gambling plain and simple. I am not opposed to gambling, but it is important to understand that it serves no economic purpose other than speculation. When several large banks trade in the markets for speculative purposes, they create counter-party risks between each other. So, large banks (and other financial institutions) which participate in such activities ultimately enhance Too Big To Fail regardless of their direct participation in commercial banking. (For more detail, read this at Naked Capitalism.)
5. Too Big To Fail Risks Should Be Insured by Too Big To Fail Institutions
There has been a lot of arm-wringing that certain large banks already repaid their TARP money and should not be further penalized with a new tax. I disagree; although I would not position this policy as a tax. The government has enabled and continues to support Too Big To Fail. This should be ended. However, in the interim, this continues to pose a systemic risk. Failure should not be covered by taxpayers. As the FDIC collects a tax (fee or insurance premium) to build its reserve fund to address failed banks, so too should the government collect a similar tax on Too Big To Fail institutions to protect the taxpayer. (There is also a legitimate libertarian debate against the FDIC, but we'll save that for another post as well.)
It is not a popular position for libertarians to support government intervention in the markets. This is not the issue at hand. We must recognize that there is a close relationship between Washington and lower Manhattan. Our economy has been transformed over the last two decades to one built on financial engineering underpinned by credit expansion and cozy corporatism. This must come to end. It will either end by implementing policies which unwind it carefully or with a spectacular crash which will make last the last year and a half look like a walk in the park.
Subscribe to:
Posts (Atom)