There is no zombie free lunch

[GRG55]

Re: There is no zombie free lunch

Yes, exactly! The market forces to produce sound, understandable, non-fraudulent financial statements (and businesses!) have been removed. Ask most people why they bank with any particular bank. "It's convenient," or "Free checking," "They pay high rates," etc. I've never heard "Because they're financially sound." No one seems to know or care about that.



So, you're saying that without FDIC insurance, that you currently wouldn't be comfortable putting money in a bank? If so, you've made my point for me. Without insurance, the risk would be too high. So removing or downgrading the insurance is exactly the kind of free market force that's required to make the banks change.



Do you think banks would have been willing (or able) to pursue the securitized crap even if they didn't have government guarantees like FDIC, Fannie Mae, Freddie Mac, etc? If so, we'll just have to agree to disagree on that one.

Okay, we are coming at this from completely different paths, but looks like the actual level of fundamental disagreement is small.

[vanvaley1]

Re: There is no zombie free lunch

"The Best Way to Rob a Bank is to Own One" a book by William Black apparently lays it all out. Saw his interview with Bill Moyers tonight. Anybody read his book yet?

Seems he's saying there's a cover-up of the corruption in the banking system. He is kind in describing it as principally due to the fear of the cover-up'ees...or is it...cover-up'ors...that there will be a collapse of the financial system and economy unless they can wave their drooping magic wand, that so disasterous wrought the mess in the first place, over the beautiful banking damsel's corpse. And as they chant their mantra, "We'll get the spell right this time", the middle class continues to disappear in a poof of smoke, the taxpayer's dollars are thrown into the pot of a foul smelling witches brew only the sacre and secret 'coven' are allowed to ingest, and the pot of gold at the end of the promised rainbow appears full of gluttonous nouns, verbs, and adjectives that sound pretty but echo in the hollowness of the valley of value by the chief chef. Guess Mr. Black is walking a narrow path with a libel poisonous snakepit on one side and a slander gator gathering on the other. He appears to walk it well. Nevertheless, he points out the incredulity of having those who have engaged in fraud and/or poor banking practices still running 'the system'. Indeed, they're being enabled to do so by this and past administrations and profiting from it with the taxpayer's lucre.

Wonder if the courageous AG who has thrown out the messy prosecution of the previous Alaskan politician will now turn his attention and courage to investigating the secretive miscreant banking system with a RICO ruthlessness reminescent of Attila the Hun. Somehow the aggressive act of throwing out an auto CEO for his actions has removed the attention from those whose banking and rating incompetence far exceed the auto's exec's shortcomings. However, now armed with righteous fervor, filled with integrity's indignation, and after successfully slaying America's first dragon of poor diligence our courageous politicians lead by the indomitable silver tongued tortorise... blinded by the splendor of the occasion... will lead the nation to the nirvana of a corruptless banking system. Right?

Am I missing something here...other than using too many words?

[Fiat Currency]

Re: There is no zombie free lunch

We agree on many points, with some nuances and different angles.

Savers should be hit because they are the enablers of the bankers, and because making a deposit should not be a risk-free decision.

The Gov't provides (and controls) the bank's charter, and the legal structure.

Depositors are loaning their deposits to banks, and getting some value in return: interest, safe-keeping, checking, etc. Without deposits, banks would be unable to make loans, unable to create toxic crap, etc.

Most of those services are paid for through fees. If a bank is not collecting those fees - they should be forced to through regulation! As for the loans, this should also be better controlled through regulation - which is my main point. The system is forced upon you by the Gov't you elect. If everything I read is true, here in Canada our average bank leverage is 18 times - which is very conservative when compared to the rest of the world. They are all leveraged 40-90 times, and places like the U.S., U.K. and most of Europe are among the worst - yet these are a big chunk of Global GDP. It's a Global fiat currency system now, and it needs Global coordination and regulation. It needed it 6 months ago, and needs it now more than ever! We still have debt deflation, recession, unemployment and the rest of "Ka-Poom" to deal with. Let's not even talk about China, Russia and the rest for now.

My point is that making a deposit IS an investment.

This a very valid point which is the frightening part. It IS an investment, but it SHOULDN'T be! The regulation will cure this. The alternative is hoarding Gold, Guns and Groceries. There's enough of that thinking on this site already ;)

A large chunk of the world's wealth is proving this out. They ARE hoarding cash, gold and silver, building bunkers, buying guns and safes, storing groceries, guessing about capital controls, looking for "backup" countries to "run to" etc. Their collective actions are TELLING Governments WORLDWIDE that they'd better start fixing this now, or it's all going to get very "sporty" soon!! Capital needs to know whether it is going to the BANK, engaging in CAPITALISM, or just going to the CASINO. You have to separate all three.

This is the point where fiat currencies, macroeconomics and geo-politics all collide.

[c1ue]

Re: There is no zombie free lunch

Sharky,

I understand where you are coming from.

I would point out, however, that a lack of deposit insurance does not automatically make a sound banking system.

Prior to the FDIC, the US banking system had panics pretty much every 15 years.

Deposit insurance does help to smooth out the lower level perturbations which could lead to bank runs, but naturally cannot prevent large scale systemic manipulation.

That's what regulation is for.

Of course ultimately what drove the smooth functioning of the US system since the founding of the Fed was actually the rise of America to superpower status.

While America's influence will not disappear, it will be interesting to see how much does - and with it the 'superpower put' underlying the 'Fed put', the 'government put', etc.

[Sharky]

Re: There is no zombie free lunch

I would point out, however, that a lack of deposit insurance does not automatically make a sound banking system.

Agree.

Prior to the FDIC, the US banking system had panics pretty much every 15 years.

Yes. The problem is that fractional reserve banking is, by it's nature, unstable.

Deposit insurance does help to smooth out the lower level perturbations which could lead to bank runs, but naturally cannot prevent large scale systemic manipulation.

Deposit insurance helps calm the public, but establishes a moral hazard that encourages risky behavior on the part of the banks. It also encourages corruption, since some people are more inclined to fraud or to looking the other way if they believe that "no one will really get hurt" (just the faceless "public").

That's what regulation is for.

Banks are more regulated today than at any time in American history. One problem with regulations is that they are only selectively enforced. Another problem is that the regulations are so complex, no one really understands them. More regulation isn't the answer, it's part of the problem.

[c1ue]

Re: There is no zombie free lunch

Sharky,

I understand your libertarian sentiment.

However, despite my own paranoid nature, I do believe that it should not be necessary for everyone to act as I do.

Banking systems are inherently unstable, but I do believe that the mechanics of failure are much better understood. While the issue of "Quis custodiet ipsos custodes?" will always be there, perhaps in time the general increase in knowledge will be sufficient to reduce the need.

Merely removing all possible props such as deposit insurance in my view only clears the field for the stupider and more violent criminals.

The absence of deposit insurance and regulation would, for example, make it much easier for the generic con man/Ponzi artist to fleece the public.

Asking little old ladies to paranoically watch their money is exactly what government is intended to ameliorate. That the present US government is failing to do so doesn't invalidate its original charter.

[Sharky]

Re: There is no zombie free lunch

I understand your libertarian sentiment.

Eckk. Libertarian! That's not me, for sure.

However, despite my own paranoid nature, I do believe that it should not be necessary for everyone to act as I do.

Nor do I.

Banking systems are inherently unstable, but I do believe that the mechanics of failure are much better understood.

So the fact that the mechanics of failure are better understood means what? It certainly doesn't mean that they will fail any less often. Maybe that those who benefit from the failures can be more easily predicted and controlled?

While the issue of "Quis custodiet ipsos custodes?" will always be there, perhaps in time the general increase in knowledge will be sufficient to reduce the need.

So the guards will get more honest as the public wakes up? Why is that?

Merely removing all possible props such as deposit insurance in my view only clears the field for the stupider and more violent criminals.

So smart and peaceful criminals are OK?

The absence of deposit insurance and regulation would, for example, make it much easier for the generic con man/Ponzi artist to fleece the public.

How does deposit insurance prevent a con man from fleecing the public? It seems very prevalent today, for example.

Asking little old ladies to paranoically watch their money is exactly what government is intended to ameliorate. That the present US government is failing to do so doesn't invalidate its original charter.

This is the core point where we differ. I think the world would be a better place if little old ladies were paranoid about where they put their money, rather than relying on government to bail them out in case they make a bad decision. That would also encourage things like due diligence, diversification, etc, that would be good for the system as a whole.

The role of government should not be to protect people from making bad decisions. It's role should be to protect them against fraud and other forms of violence. If people commit fraud, they should be prosecuted and locked up. That's certainly not what we have today.

BTW, on a related note, something I've figured out over the years is that people who aren't smart enough to earn money in the first place are rarely smart enough to hold onto it if it gets dropped in their lap, as through an inheritance, gift, lottery, etc. If a little old lady was smart enough to earn her nestegg in the first place, she will be plenty smart enough to save it safely.

[flintlock]

Re: There is no zombie free lunch

I'm curious what pension funds were major investors in these investment banks getting bailouts. Could that be a clue to why they are getting bailed out? Who stands to lose if they aren't?

[c1ue]

Re: There is no zombie free lunch

This is the core point where we differ. I think the world would be a better place if little old ladies were paranoid about where they put their money, rather than relying on government to bail them out in case they make a bad decision. That would also encourage things like due diligence, diversification, etc, that would be good for the system as a whole.

Well, you have your beliefs, and I have mine.

And my belief is that the ability to make money is not the same as the ability to invest money. A person may be a fine salesperson and equally a poor investor.

But the issue isn't investment. The issue is whether we have a government which provides services like regulation, roads, utilities, etc.

If government providing these services interferes with 'natural law' and causes more problems than it solves, then down with government.

But my view is that financial crimes are in no way different than physical crimes.

If the little old ladies should be more aware of the financial crooks, so too should they be aware of the muggers with switchblades.

Or the factories dumping toxic chemicals into the drinking water.

Or the substandard building codes in her condominium complex.

I fail to understand why the little old ladies must be on top of their game to weed out the Cramers and Madoffs of the world when they don't have to be that way for a whole slew of other situations.

And yes, the belief that everyone can do it for themselves is exactly Libertarianism.

[ThePythonicCow]

Re: There is no zombie free lunch

I'd split the baby, and recommend government regulated rating agencies, by law isolated from the economic pressures of the banks and investments being rated. Then those with money who want a simple, safe place to put it could just stick to the well rated banks and investments. Current rating agencies and government regulatory agencies are of course not at all well isolated from the banks and financial institutions they rate and regulate.

As usual, there is a necessary and fitting role for central authority, and as usual, one should continually distill that role down to its essential minimum, then further separate those powers into multiple branches.

[Sharky]

Re: There is no zombie free lunch

Well, you have your beliefs, and I have mine.

Indeed. Sorry you chose to evade my questions, though. Your answers would have been interesting.

But the issue isn't investment. The issue is whether we have a government which provides services like regulation, roads, utilities, etc.

Government provides utilities? Oh, you mean how they enable the utility monopolies?

Why do we need more regulation other just "no fraud"? It seems to me that one reason for the complex laws of today is to make certain kids of fraud OK. If you have a principle that says "stealing is wrong," then why do you need another law that says "robbing banks is bad," or "stealing from seniors is bad." It can only be because there are certain kinds of stealing that you don't really think are bad -- that you don't really hold the original principle after all.

Since regulations are already being ignored, why will suddenly having more of them make everything better?

If government providing these services interferes with 'natural law' and causes more problems than it solves, then down with government.

But my view is that financial crimes are in no way different than physical crimes.

Agree on both points.

If the little old ladies should be more aware of the financial crooks, so too should they be aware of the muggers with switchblades.

But they are aware of muggers! What little old lady in her right mind would go walking down a dark alley at night in a bad part of town? They know what to avoid. And if she does get mugged in spite of taking precautions, the mugger is arrested and sent to prison.

Or the factories dumping toxic chemicals into the drinking water.

Dumping toxics into drinking water is directly causing harm to people, and should be prosecuted as such.

Or the substandard building codes in her condominium complex.

How does she know that isn't happening today? Inspectors can be bribed. Law alone isn't enough to keep people honest. If one builder developed a reputation for creating substandard housing, then those who were concerned would hear about it. They wouldn't have to do much to know: they would hear it from the RE agent or from others in the area, in the same way they hear that a particular neighborhood is bad.

I fail to understand why the little old ladies must be on top of their game to weed out the Cramers and Madoffs of the world when they don't have to be that way for a whole slew of other situations.

Because investing involves taking a risk. The minute the risk is removed for her, the odds of fraud by the other party skyrocket. If she's not equipped to make the risk assessment, then she shouldn't make the investment. Otherwise, she is rewarded by investing in the riskiest thing she can find; it feeds the monster of fraud that's always lurking, rather than starving it.

However, since you disagree, please explain how you think it should work instead... How would you propose to reverse the trend of what we have today?

[Sharky]

Re: There is no zombie free lunch

I'd split the baby, and recommend government regulated rating agencies, by law isolated from the economic pressures of the banks and investments being rated. Then those with money who want a simple, safe place to put it could just stick to the well rated banks and investments. Current rating agencies and government regulatory agencies are of course not at all well isolated from the banks and financial institutions they rate and regulate.

If the existing regulators can't enforce the existing regulations for banks and other parties involved in finance, why do you think that they would be able to enforce them for a ratings agency? Will they only hire special, pure-of-heart raters and regulators?

As usual, there is a necessary and fitting role for central authority, and as usual, one should continually distill that role down to its essential minimum, then further separate those powers into multiple branches.

Sure. The distilled role is simple: Enforce property rights. No fraud. No violence (except self defense). Prosecute those crimes when they are found. Imprison the guilty. Very little more is needed. If you like branches, how about: Enforcement (police and military), Judicial (courts), and Prisons?

[ThePythonicCow]

Re: There is no zombie free lunch

If the existing regulators can't enforce the existing regulations for banks and other parties involved in finance, why do you think that they would be able to enforce them for a ratings agency? Will they only hire special, pure-of-heart raters and regulators?

Good point. My recommendation does not apply to the current situation, because our government is too corrupt for any such scheme.

Sure. The distilled role is simple: Enforce property rights. No fraud. No violence (except self defense). Prosecute those crimes when they are found. Imprison the guilty. Very little more is needed. If you like branches, how about: Enforcement (police and military), Judicial (courts), and Prisons?

That breaks down when some affairs in which a reasonably large number of people might want to engage, reasonably and to their benefit, are simply too complicated for them to evaluate sufficient to their own protection with a reasonable effort.

I really really do enjoy the fruits of living in a more advanced, complicated, specialized, technical world, and really do count on various other organizations and individuals to be honest in their labors that affect me, even when I lack both the time on this planet and the mental genius to check them all out.

Uniform standards, in some case by legally enpowered and constrained rating agencies, really can enable more people to accomplish more. Freedom is not just about allowing; it is also about enabling. That includes providing the framework for more complex contracts, agencies, products, financial instruments, and services that don't tend to self organize into useful, honest, stable forms without some externally imposed constraints.

In some cases, such as frequently with financial services, the inside knowledge required to competently evaluate the quality or safety of the product cannot be shared with the customers of that product. I should not be allowed to know the other specific financial dealings (such as the loan they just made to you) of the bank in which I just deposited my savings. Some intermediate and independent agency must be able to see those account details for the specific purpose of extracting an overall safety rating of that bank.

[charliebrown]

Re: There is no zombie free lunch

Is it true that stock/bond holders capital would not make a dent. I am a reader of John Hussman manager of the Hussman funds. His assesment is that bond holders have enough capital in the game to protect the depositors if they take a significant hair cut.

But then again who are the bond holders? are they fat cats lighting cigars with 100 bills, or are they pension funds, trust funds, insurance companies etc. So even if the bond holders take the hair cut they its J6P's money anyhow?

[c1ue]

Re: There is no zombie free lunch

Sharky,

In my view the problem is not evasion of regulation - that is rather a symptom.

My view is that much of the difficulties arise from 2 primary areas:

1) Money is not equal to life

2) Legal process vs. Determining a breach of law

The first problem is that white collar crime is somehow not considered as bad as a violent crime - even when the sums involved are staggering.

I have never understood how a Milken $500M scam is somehow less harmful than stealing a single car. Perhaps it has to do with the New World Order, or perhap it is something legacy due to Christianity - either way there should not be an inviolable line between violent and white collar crime. Or in other words, we should put a monetary value on life.

The second problem is that with our present legal system, the spirit of the law is irrelevant. Thus any semi-intelligent individual can see that committing a crime for which there is not a specific enough law against means you largely are immune.

If, on the other hand, the purpose of a court trial was to determine the spirit of the law and whether it was broken - this wiggle room disappears.

The American solution has been to try and pass innumerable laws covering all possible instances, but clearly this can never work for 'new' scams.

I am not an expert, but I believe in Britain the system is more like what I describe. Adding a charge of 'contempt of court' for judges, prosecutors, and defense attorneys would just about wrap it up.

As for your example - the dark alleys are not a sufficient extrapolation.

Because if there weren't laws against mugging, the muggings would happen on the street. At the mall. etc etc.

Muggers only hang out in dark alleys because only the relative anonymity of these places makes their job feasible - and that is because of laws against that type of behavior.

Your view that somehow minimal laws will work out is something which to my knowledge has never historically worked.

As for throwing out the baby with the bathwater because the regulations are being ignored anyway - well - I'd have to point out that strictly speaking, the regulations aren't being ignored now. They are being circumvented, straddled, bent, twisted, etc but are not being broken.

As much as I am intensely irritated by the present events - it is important to distinguish this fact from what happens in banana republics where the regulations ARE completely ignored, or in places like Russia where the welter of Soviet and post-Soviet regulations are so ridiculously complex that everyone takes shortcuts.

When we start seeing outright breaking of the laws, well, then I will have been completely justified in my 'dark cloud' views of this nation.

But until then I actually do hold out some hope.