Are conservatives right about the Fed? Is it a malign force in America?

Summary: Central banks have never been more powerful, more significant to the economy, more controversial (although they’ve often been unpopular), or more misunderstood. Today we debunk two of the myths about their evil they do; at the end are links to posts about their limitations.

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World money

Contents

  1. About conservatives’ faux history and economics
  2. About investment bubbles
  3. About the joys of unregulated banks
  4. Instead of the Fed, look at the new banks
  5. For More Information

(1)  About conservatives’ faux history and economics

Conservatives have devised a body of faux history and economics to justify their 1%-friendly public policies. Central to this is Fed-hating.  The 1% uses hatred of the Fed to motivate its troops, while cherishing the Fed as one of its most useful agents. The Fed by design supports the banks’ solvency and profits (hence drawing its governors from bankers and known bank supporters). This contradiction shows how our inability to see the world around us prevents our effective political action.

Let’s examine two charges of the Fed haters:

  1. The Fed creates investment bubbles that distort and disturb the economy — unlike the good old days under the gold standard.
  2. The Fed, and the other bank regulatory agencies, restrain the natural entrepreneurial vigor of the banks.

(2)  About investment bubbles

Economic bubbles occur naturally in free-market systems, occurring often even under a gold standard. Such as the 17th century Tulip Mania (see Wikipedia), the earliest documented bubble (although details are uncertain). There are different kinds of bubbles. Here we discuss investment bubbles, excessive enthusiasm for a specific kind of investment which attracts too much capital, followed by a bust.

The giant UK investment bubbles of the 19th century were more similar to those of our time (e.g., in technology and housing). To learn more about them I recommend reading “Charles Mackay’s own extraordinary popular delusions and the Railway Mania” (26 February 2012) by the brilliant Andrew Odlyzko (Prof Mathematics, U MN; his bio here). Excerpt:

Those {bubbles} of the 19th century lasted for several years, and involved huge real capital investments.

… The British mania of the mid-1820s … involved real capital investments of about £ 18 million in joint-stock companies, most prominently for mines in Latin America, and £ 25 million for loans to foreign governments, again largely in Latin America. The total, £ 43 million, was slightly over 10% of British GDP of that period, comparable to $1.5 trillion for the U.S. today, and was regarded by the British public at the time of the Railway Mania in the 1840s as an almost complete loss.

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Meet your banker
Meet your banker

The mania of the mid-1830s … involved real capital investment, almost exclusively in railways, of about £ 70 million, comparable to $2 trillion for the U.S. today. … it appears to be the unique example of a gigantic investment mania that succeeded. The … returns to those who invested in the mid-1830s that were higher than the risk-free government bond yields.

What little has been written about this mania by such famous economists as Bagehot, Juglar, Rostow, and Schumpeter is incorrect or at least seriously incomplete. They typically considered only the early collapse of share prices after the most ebullient phase of this episode, and were unaware of the extended period of heavy capital investment and the eventual high profits.

However, the investors of the Railway Mania were very conscious of what had happened during the preceding period. The nice profits resulting from that earlier period of extreme exuberance were the foundations for their belief they could make money from the new wave of railway construction … The Railway Mania … was the third and greatest of the four large investment bursts in Britain in the 19th century. It involved real capital investments, from year-end 1843 to year-end 1853, of about £ 180 million, comparable to $5 trillion for the U.S. today.

The fourth, and final, gigantic investment mania of 19th century Britain was the railway mania of the mid-1860s. Investment in this industry between year-end 1860 and year-end 1870 reached £ 180 million, about 20% of the GDP of the UK of that time, so comparable to $3 trillion for the U.S. today.

For a summary of the Railroad Mania see Wikipedia. For more detail see these two articles by the Odlyzko:

  • “The collapse of the Railway Mania, the development of capital markets, and the forgotten role of Robert Lucas Nash (a forgotten pioneer of accounting and financial analysis)”, Accounting History Review, November 2011 — See an extended preprint PDF
  • “The Railway Mania: Fraud, disappointed expectations, and the modern economy”, Journal of the Railway & Canal Historical Society, November 2012 — See a preprint PDF

Sidenote: another of the Right’s bugaboos, fractional reserve banking, predates bubbles and central banks by centuries (see Wikipedia for details).

(3)  About the joys of unregulated banks

The Fed-haters show a remarkable lack of interest in our history before the Fed. The United States had two short-lived central banks, 1791-1811 and 1817-1836. The massive damage — and widespread suffering — during Long Depression (1873-1879), the Panic of 1893, and the Panic of 1907 persuaded the nation’s leaders to establish a strong central bank.

Each of these downturns included massive bank failures. The loss of depositors’ savings plus widespread foreclosures played a big role in the Gilded Age’s liquidation of America’s small farmer and merchant classes, which Jefferson saw as the foundation of the Republic. These in turn drove the economy into the ground.

The elites suffered less than the people, but this experience with laissez faire banking exceeded the maximum pain our elites could take. Hence the creation of the Fed in 1913, and the subsequent waves of bank regulation. Unfortunately for us, our inattention has allowed bankers to game the new system.

(4)  Instead of the Fed, look at the new banks

“The best way to rob a bank is to own one.”
— William Crawford, Commissioner of the California Department of Savings and Loans, 1988 testimony before the House Committee on Government Relations

“In Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks.”
– Spencer Bachus (R-AL), Chairman of the House Banking Committee, The Birmingham News, 9 December 2010

While conservatives’ attention has been focused on hating the Fed, they have ignored a more important evolution in the banking industry.  (The enlistment of the Tea Party Movement — born in opposition to the bank bailouts — to elect hard-core Republican supporters of banks provides a wonderful example of the political processes at work building the New America).

The bankers are long gone who invested in sound businesses, and so grew the real economy. Modern large commercial banks (i.e., the money center banks) have little resemblance to traditional banks.  The new bankers are as greedy as their predecessors, but specialize in speculation and depend on government bailouts from the resulting losses (every decade in the US). Secularization, proprietary trading, trading in derivatives and currencies, and higher leverage — the profit centers of a radically new form of bank.

Higher leverage is the key, and changes everything. From “The Doom Loop: equity and the banking system“, Andrew Haldane (Executive Director at the Bank of England), London Review of Books, 23 February 2012:

As unlimited {shareholders’} liability was phased out, leverage among banks rose from about three or four in the middle of the 19th century to about five or six at its close. Leverage continued its upward march when extended liability was removed, and by the end of the 20th century it was higher than twenty. In 2007, at its high-water mark, bank leverage hit thirty or more.

This strategy translated, by the arithmetical magic of leverage, into higher shareholder returns. Having begun the 20th century in modest single figures, equity returns to banks were, on average, close to 20% by its end. At the height of the boom, bank equity returns touched 30%. Higher leverage accounted for almost all of this.

Bank managers no longer had to sweat their assets: they simply had to borrow against them.

The new banking system works well for bankers and the 1%, but not so well for the rest of us who fund the bailouts for the inevitable busts. We have not learned from the experiences of the past 40 years, and have been warned about the future.

Perhaps we need a reminder of how banks worked when their greed built nations, before they became destabilizing parasites. From Mary Poppins:

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(5)  For More Information

(a) Modern Money Mechanics; a workbook on deposits, currency and bank reserves“, Federal Reserve Bank of Chicago (1992)

(b) About faux economics and history:

  1. A look at Faux Economics, increasingly popular but bizarrely wrong, 15 June 2010
  2. Programs to reshape the American mind, run by the left and right, 2 August 2010
  3. American faux history: could we have avoided the Civil War?, 23 January 2012
  4. American faux history: why did the South leave the Union?, 24 January 2012

(c) About banks:

  1. A free lesson from Russia: how to manage a banking crisis, 6 February 2009
  2. The best way to rob us is to own a bank, 10 April 2010
  3. Former Central Bank Head Karl Otto Pöhl says bailout plan is all about ‘rescuing banks and rich Greeks’, 20 May 2010
  4. FDR explains one dimension of our problem: bankers own the government, 23 November 2011
  5. The bailout of Spain’s banks shows the heart of our problem, 12 June 2012

(d) About central banks:

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38 thoughts on “Are conservatives right about the Fed? Is it a malign force in America?

  1. Just today, someone pointed out the 1/3rd of all US Bonds are owned by the Fed. A Fed that was functional is one thing. This Fed does more harm than good.

    1. Slabinja,

      It is interesting to see the engines of disinformation at work.

      The report was by the highly respected research firm of Stone McCarthy, copied by Zero Hedge.

      Your conclusion is unjustified by any analysis. The economy has been running at stall speed for 3 years. It is possible that only the Fed’s actions prevented a recession, which we are far too weak to take easily.

      Your conclusion would be sensible if there was evidence of ill effects from QE, such as inflation. If fact inflation is running at dangerously low levels (I.e., so low that the Fed has too little reaction time if inflation turns into deflation — potentially lethal for a high-debt economy like ours).

    2. Fabius, since food and petroleum prices are not included in “inflation figures,” how can you say that there is no inflation?

    3. Slabinja,

      “Fabius, since food and petroleum prices are not included in “inflation figures,” how can you say that there is no inflation?”

      Wrong. You need to stop reading people who lie to you.

      The econometric numbers measuring complex phenomena like unemployment and inflation come in various forms, each with its own insights. Like touching an elephant, there is no one “right” number.

      There are six major unemployment numbers. They all move roughly together.

      There are aprox a dozen measures of inflation. They all move roughly together. The broad measures include food and energy.

      It worries me that you believe otherwise. Do you believe the skilled statisticians who craft these numbers are stupid?

      The people who lie to you’re referring to the “core” inflation numbers, which are useful in two ways.

      (1) History shows they are a leading indicator for the broad inflation numbers.

      (2) they are a better measure for the effect of monetary policy, since commodity prices are global supply/demand balances, and so relatively insensitive too US monetary policy.

    1. slabinja,

      Yet more evidence that American have been fed so much disinformation they are incapable of seeing anything clearly.

      John Williams of ShadowStats is a bs artist (a profitable biz in the intellectual wasteland of New America). Economists have debunked his nonsense frequently, but such has as much effect as debunking astrology or creationism. If you would like some actual information about these things see this post: examples of his absurd forecasts, and two economists debunking his “methods”.

      Which of the six BLS measures of unemployment are measuring by “walking around”? As for accuracy, you might as well claim to be able to tell us about small changes in temperature (i.e., change in average temperature over months of one or two degrees). Also, you must walk a lot to measure national employment (it varies greatly across this large nation). In brief, it’s an absurd claim. This has been amply shown by social science research: people’s view of the world comes largely from what they’re told. They report recessions during expansions and vice versa. Hence the power of lies in our formerly great nation.

    2. slabinja,

      I have not seen you admission that this statement was incorrect: “Fabius, since food and petroleum prices are not included in “inflation figures,” how can you say that there is no inflation?”

      This is the pattern of people commenting about faux economics. False statement. I give a correction. They give another false statement. Rinse, repeat.

      Deeply indoctrinated Americans can continue this process for a long time, after which they repeat their original false statement. With Leftists it’s usually climate doomsterism. It’s like debating with the cultists handing out tracts in airports.

      Listen closely to hear the 1% laughing, and the Founders crying.

    3. Fabius, you’re defending a Bank that is privately owned (by who?) and has fought any audit. What are they hiding?

      In adddition, why is it taking this institution 8 years to give Germany its gold back?

      Indoctrination? Please try googling any of these things that I brought up, and you’ll find plenty of sources. Wasn’t it the Fed’s “easy money” policies that brought on the last “economic crisis?” It appears that the Fed is, once again, creating an even bigger bubble by printing money that in no way represents anything produced. Seems pretty simple. That being said, I hope that you’re right, and that we’ll all go back to being the America that we used to be. Personally, I doubt it.

    4. slabinja,

      You are hopelessly deluded by people who lie to you, whose lies you consume like a pig does slop.

      We know all we need to know about you seeing you refusal to admit your simple error, saying that “the CPI does not include food and energy”. Anyone who does not admit such a simple factual error is not worth talking with. Furthermore, like other indoctrinated folks, you work thru the endless cycle of lies. Each disproven, you respond with another lie. I’ll give a rebuttal to this comment (as I have so many times before), and moderate your further comments. Life is too short to deal with this nonsense.

      “you’re defending a Bank that is privately owned (by who?) ”

      You confuse the Federal Reserve District Banks with the Fed. They have very different powers and roles.

      The District Banks are formally owned by its member banks, but with many aspects of ownership held by the Fed’s Board of Governors. The Governors appoint 3 of the 9 members of each District Board of Directors — including the Chairman and Deputy Chairman. The Regional Banks have some regulatory functions, much like the other self-regulatory organizations operating under Federal authority (e.g., the New York Stock Exchange, the Financial Industry Regulatory Authority).

      The Board of Governors is a government agency. The Governors are appointed by the President and confirmed by the Senate. Only one member of the Board of Governors may be a district bank governor. The salaries of the agency’s senior staff are set by Congress. The Governors and staff are Federal civil servants. It is subject to the Freedom of Information Act and other legislation regulating Federal Agencies. All profits go to the US Treasury.

      For example, the Federal Reserve website explains why they are subject to the FOIA (bold emphasis added):

      The Freedom of Information Act (FOIA), 5 U.S.C. § 552, generally provides that any person has a right of access to federal agency records.

  2. Fabius: As the Founders were largely 1%ers themselves, and some of them had interesting views, I would imagine a good portion of the Founders would be chortling. Remember that one of the main reasons for the Revolution was minor limits on further invasions of native lands (reducing land speculators’s profits!) and the request by the British for their colonies to pay for the expensive wars which the colonies benefited from.

    1. Brian M,

      That is a very powerful point, clearly a best of thread winner. Thank you for the reminder. It’s so easy to slip into romanticism or even deification of the Founders.

      In fact only a few were democrats in the modern sense. Jefferson, Sam Adams, Thomas Paine, etc. I don’t know enough about Madison or Monroe to say.

      I’d want to re-read the Federalist Letters to say more.

  3. (Sigh.) Shadowstats again. After another commenter quoted some junk from Zerohedge. What next, a url “proving” that UFOs are demons in disguise out to destroy our souls?

    The plain historical fact of the matter remains that financial bubbles and crashes were much worse before the creation of the Fed. The commenters need to read up on huge financial crashes like the Panic of 1907. That nationwide financial collapse destroyed thousands of businesses and wrecked the financies of millions of Americans. The Panic of 1983, the Panic of 1873…on and on the list goes, vast financial bubbles and collapses caused by unregulated markets with foolish greedy businessmen running amok.

    The plain fact of the matter also is that after a Democratic congress passed financial regulations to restrain the worst excesses of financial markets and banks in 1932, these panics and financial bubbles greatly moderated.

    Lastly, the plain fact of the matter is that we got a gigantic financial bubble and collapse only after our politicians foolishly repealed the financial regulations that had restrained banks and brokerage houses since the 1930s. See “Repeal of Glass-Steagall Caused the Financial Crisis.”

    (Of course the repeal of these regulations was not the sole cause of our current depressed economy following an epochal financial bubble and subsequent market collapse, but repealing these regulations played an important role in creating the economic crisis which still grips America.)

    Moreover, none of this is new information. Economists have known the importance of a central bank in restraining the market excesses of greedy businessmen and irresponsible investment bankers ever since Walter Bagehot wrote Lombard Street in 1877.

    You have to admire FM’s perseverence in continuing to repeat these well-known facts in the face of massive ignorance and delusion and propaganda. He’s the financial equivalent of Sisyphus.

    1. “Lastly, the plain fact of the matter is that we got a gigantic financial bubble and collapse only after our politicians foolishly repealed the financial regulations that had restrained banks and brokerage houses since the 1930s. See “Repeal of Glass-Steagall Caused the Financial Crisis.”

      I felt this needed repeating. Simply put, we’ve allowed our banks to act as casinos. With some exceptions (USAA and BB&T come to mind), a lot of our problems stem from the fact that banks are allowed to merge investing and savings.

      We’re doing this to ourselves. For the average American, the banks create indentured servants with credit cards massing debts that will never be paid off. But, we don’t call it slavery now- it’s free will.

      The only small measure of reform we’ve seen over the last six years is that the FED forced the banks to raise their reserve rates- Thus, they have less money to gamble with.

    2. MikeF,

      I agree, that is an important point.

      The New a Deal reforms were the fruit of bitter lessons. As part of the great forgetting of our history, we allowed conservatives to dismantle these regulations on the banks.

      Now we reap the harvest. Predictable bitter fruit. Nature always punishes the slow and stupid.

  4. Fabius,

    For all the good points you make on other issues, I fear you wholly misunderstand the Federal Reserve system and its transfer of wealth mechanisms. Banks want as much debt as possible placed on the populace. Since banks have the franchise to create money out of nothing, the create a senior claim on as much physical and intangible capital as possible through principal and interest claims. The banks’ expansion of credit inflates property prices and thus increases the total tax take of the government. Zero interest costs savers (those who have created surplus for future consumption) at least $400 billion per year. All of the Federal debt is moved through the primary dealer system. So banks, a private cartel, create money out of nothing and charge the Republic and its citizens principal and interest on money that is constitutionally the right of the people to own and control.

    1. The function of a central bank does not necessarily have to be at issue so you set up a false choice.

    2. The central bank could be located within the US Treasury. Recommend you read the Chicago Plan Revisited that places that function in the hands of the political system. The ramifications of this could lead to the equivalent of 100% reserve banking. What are the implications?
    a. The elimination of all US Treasury debt and interest paid;
    b. Reduced or eliminated risk of a bank run or bank failure domino fallout. The lending function could be conducted through lending institutions other than banks potentially in the form of mutual funds.
    c. The reduction in bubbles as a result of Wall Street control fraud. US Treasury officials could change the cost of capital in overheating sectors or industries.

    Hopefully you will reconsider your position on this issue.

    1. I mean to say the banks and the Fed are essentially the same entity. Separating the fed from the banks weakens with analysis because the Federal Reserve System is the center of gravity for fascism or corporatism in the US. The ability to inflate or deflate asset prices or make senior claims grants inordinate power to a select few who can capture the system.

    2. C,

      “I mean to say the banks and the Fed are essentially the same entity.”

      That is quite obviously false in any usual sense of the words.

      Banks have great influence over Fed policy. This is regulatory capture, the standard practice (to greater or lesser degree) in US Federal and State regularly agencies.

      To say they are the same entity is incorrect, however. Words have meaning.

    3. That comment seems a bit over scrupulous. The Fed is beyond capture and acting outside of the law (ie violating sections 13(3) of the Federal Reserve Act when illegally setting up entities for JPM’s acquisition of Bear Stearns). The banks are owner/members of the Federal Reserve System and have de facto control over its operations.

      I find it baffling that you deny this. The Fed Res Bank Presidents, their respective Boards and the Board of Governors all breath same air.

    4. C,

      I will speak more clearly. You are wrong. The Fed and the banks are not the “same entity.” It is a commonplace error of people deeply indoctrinated in faux economics.

      “The banks are owner/members of the Federal Reserve System and have de facto control over its operations.”

      Yes, they are members. I am a member of a credit union. That means almost nothing.

      No, they are are not owners of the Federal Reserve System, nor do they have “control” over its operation. The Federal Reserve — what we call the Fed: the Governors, the staff, the Open Market Committee — are a Federal Agency, and wield its great powers.

      Banks are owners of the Federal Reserve Regional Banks, although the Fed has a high degree of control over them. They provide clearing services to banks, other support operations, and have some self-regulatory role (i.e., like that of the NYSE and other self-regulatory organizations in the financial sector).

      I went over this in detail earlier in this thread.
      http://fabiusmaximus.com/2013/12/02/federal-reserve-myths-59466/#comment-85257

      This is a simple matter of fact, and can help you by showing that you rely on sources that lies to you.

      My explanation was in vainly for slapinja. Please tell us if it was in vain for you as well. Almost all of these explanations end in demonstrations of Americans’ failure to learn. Make my day by being the exception.

    5. You are overly precise, but not accurate. No one is disputing entities are lines of control as written in legislation or operating documents. The broader point is that in a very real sense the facts support that Fed actions do nearly everything to support the banks at the expense of citizens.

      Witness the Fed balance sheet, various back door financing entities, tacit support for market rigging… The banks create money out of nothing. That command of resources allows the banking system, the Federal Reserve System, to control the political system. The ‘independent’ (lie) acts against the interests of the State and its people. It is a system of concentrated benefits and distributed losses. It is the prime institution with ultimate power to make the US version of corporatism/fascism the reality it is today.

      I know who the liars are when it comes to economics. I studied at the very best schools under Nobel Prize winners and can point to a record of capitalizing on their half truths.

    6. C,

      I am trying to be nice about this, but you are just making stuff up. It is nice that you entertain yourself by reading extremist political nonsense, but this is a no-fantasy website.

      Cite sources or stop.

      Yes, the Fed acts to protects the banks. It’s job is to stabilize the banking system — since banking collapses tend to result in depressions.

      Yes, the Fed does so in a manner that allows banks to take excess risks and escape full consequences of their errors. That results from their political strength in *Congress* — who put in place bank-friendly Fed governors. Lately that bank support was boosted by the Tea Party movement, born in opposition to the bank bailouts, but helped elect a bank-friendly Congress.

      People, elections, democracy — those sort of things.

      Your the “banks create money from nothing” refers to fractional-reserve banking, which has been around for centuries and works quite well if the banks are adequately regulated.

    7. AIG bailout – AIG was largest counterparty for GS. SecTreas former GS, Chairman NYFRB former GS offered $85 bn loan facility to an insurer thereby saving GS. GS was a major counterparty to the other big banks-JPM, BAC, …there is the ability of the Fed to guarantee deposits and the government has bankruptcy court to sort out other creditor claims. There is no need for a depression in this case given the multiple policy levers available including raising rates and letting markets clear. The 1921 contraction holds as an example of an industrial contraction where the market cleared.

      Who is giving orders to who? Does it matter? Regardless, the net effect is that the policies of the Fed are factually so unbalanced against the interests of the citizenry that they are in fact the same as if the banks controlled the institution.

      http://www.firstprinciplesjournal.com/articles.aspx?article=1322&theme=home&loc=b

      “Instead of “fiscal stimulus,” Harding cut the government’s budget nearly in half between 1920 and 1922. The rest of Harding’s approach was equally laissez-faire. Tax rates were slashed for all income groups. The national debt was reduced by one-third. The Federal Reserve’s activity, moreover, was hardly noticeable. As one economic historian puts it, “Despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction.” 2 By the late summer of 1921, signs of recovery were already visible. The following year, unemployment was back down to 6.7 percent and was only 2.4 percent by 1923.”

      http://online.wsj.com/news/articles/SB124139546243981801
      WSJ:
      “The 12 regional Fed banks, contrary to a common impression, aren’t government agencies. Nor are they private banks: They’re a hybrid. Each is owned by member commercial banks, which collect a 6% dividend and control six of nine board seats.”

      http://www.federalreserve.gov/newsevents/press/other/20080916a.htm – Fed press release of the AIG loan.

    8. C,

      Nothing you say here contradicts my comment or supports your odd ideas. After scores of these discussions with wingnuts, I lose interest rapidly — since it is a waste of time because they learn nothing from this. Unless you can do better than this I’ll end this soon.

      (1) I don’t know what the Intercollegiate Studies Institute is (Wikipedia is quite vague about it). But citing Harding as a precedent for what we should have done in 2008-2009 is a combination of mad and ignorant.

      “Harding cut the government’s budget nearly in half between 1920 and 1922.”

      Federal spending was about 8% of GDP in 1920. It’s aprox 25% now. Cutting it by half in two years would be instant Great Depression. A horrific shock to the system, with massive unemployment only one of the results.

      Plus some other details:
      * The US and global economy are quite different than they were in 1920.
      * Hoover tried that in 1929-30, on a smaller scale. Not a pretty result.
      * This was the austerity policy implemented by Europe from 2010 – now. It’s trashed the economies of the weaker members, inflicted uncounted human devestation, and destroyed their solvency (cutting government spending in recessions deepens the deficits).

      (2) Perhaps the Fed should have done something else with AIG. It’s easy to second guess what they did as the world financial system burned. But it worked. The US economy was stabilized. The Treasury and Fed turned a profit on the bailout.

      If all the government’s projects turned out so well we’d all be happy people.

      (3) Nice of you to echo what I said about the Fed. So you admit you were wrong?

  5. I don’t think it was all conservative ideas. I believe it was Clinton who dealt the final blow to Glass-Steagall. Largely based on the ideas of Quigley from his college days.

    1. slapout9,

      Do you know who Prof Quigley is? A history prof with interesting ideas about western civ.

      To disregard the massive lobbying effort by conservative institutions in the 1990s and point to some lectures Clinton heard in 1964 — that is really really daft.

      The whole financial de-erg issue was not even imagined in 1964, when the New Deal bank regs were still in effect, with their unwinding an issue for the next decade.

    1. Fab Max,
      Here is a Wikipage with a list of references including his influence on Bill Clinton. Surprised you have not heard of him (Quigley) being a X-Marine officer, Quigley’s book on “Weapons Systems and Political Stability” used to be required reading. Also I am NOT dismissing the conservative influence, just pointing out that some Lefty’s also have similar points of view.

      http://en.wikipedia.org/wiki/Carroll_Quigley

    2. Slapout9,

      You have not shown anything substantive linking the Clinton-era deregulation of the financial system to one class Bill Clinton took ~1964.

      The Wikipedia entry in no way supports your theory (you thought nobody would check your bogus evidence):

      “As a teenager, I heard John Kennedy’s summons to citizenship. And then, as a student at Georgetown, I heard that call clarified by a professor named Carroll Quigley, who said to us that America was the greatest Nation in history because our people had always believed in two things–that tomorrow can be better than today and that every one of us has a personal moral responsibility to make it so.”

      It is just making stuff up, a way to ignore the massive multi-decade program by the banks to escape their New Deal-era regulations.

      Conservatives and their endless comments about faux history and faux economics. Nice of them to provide proof of my theory.

  6. I believe c is trying to advocate a much larger reserve requirement for banks, perhaps approaching 100%. This is not practical for a variety of reasons. The larger the reserve requirements, in the current depressed economic conditions, the lower the velocity of circulation — since banks will sensibly not be eager to lend money out in a depressed economy. Instead, the banks at present are concentrating on deleveraging all their bad loans. Most banks in America right now are operating in the black only due to various accounting tricks; in reality, if the bad assets of all U.S. banks at present had to be written off immediately, most American banks would be considered illiquid.

    In short, c appears to be trying to shut the barn door after the horse has left. The time to require increased cash reserves for banks is when times are good, the economy is booming, and people are having no trouble paying back their loans. Right now, in the aftermath of an epochal financial bubble and subsequent crash, the economy is badly depressed, the output gap in our GDP is huge by historical standards and shows no signs of getting better, and hysteresis is operating to lock in unusually high long-term unemployment, with the result that the U.S. economy is performing far below its optimal level and probably will be doing so for decades to come. Indeed, Larry Summers has sounded a warning that our current low-level financial near-depression may represent the “new normal” for the U.S. economy. This is exactly the wrong time to require much larger cash reserves for bank, especially insofar as banks are simply not lending money in the current economic environment. Indeed, the fact that banks aren’t lending is a large part of the reason for our current ongoing economic doldrums. Banks aren’t lending, businesses aren’t investing, individuals aren’t borrowing, because in the aftermath of massive fraud everyone is frantically trying to pay down their sky-high debts, and everyone is scared to death that if they lend or borrow or invest money, they’ll lose it due to fraud.

    No, a large part of the solution to eliminating irresponsible gambling by banks was stated by Walter Bagehot in 1877 in Lombard Street: after a financial crash, lend freely, but at a penalty rate. The Fed did not do that. Bagehot’s principle is to teach the irresponsible bankers and businessmen a lesson after a financial crash by making their mistakes very expensive. Save them with loans, but make the interest rate high. 15%, 20%, 35%, something punitive. Make it expensive for the banks to bail themselves out with taxpayer money. This, the U.S. government did not do in 2009. Instead, the U.S. government showered the banks with cheap money and even allowed the banks and brokerage houses to pay themselves obscenely lavish bonuses with low-interest taxpayer money. That is exactly the wrong way to do it.

    Most of all, the U.S. DOJ needs to start putting major Wall Street executives in prison for fraud. Many Wall Street titans went to prison starting in 1932. FDR and his congress understood what today’s politicians don’t seem to grasp — if you don’t punish illegal behavior, people will continue to engage in that behavior. If Jamie Dimon and his ilk were languishing in Vacaville prison right now serving life witout parole, I guarantee you there would be little enthusiasm for irresponsible gambling by Wall Street satraps. Instead, Wall Street satraps are currently driving around in luxury sports cars with the license plate 2BG2FAIL.

    1. Thomas,

      While I agree with all your points, there are deeper things at work — which I mentioned in my post, and to which we are blind.

      C gives the usual conservative deranged screed against the banks. But the powerful forces running the right-wing are the banks’ major supporters — as seen by the GOP in Congress. Toy parrots of the banks.

      Forget about 100% reserve requirements — the banks and their supporters oppose even the Basil 2 increased capital requirements.

      Here we have the oddity that has reduced US politics to catacophny. Conservatives natter on about rolling back centuries of financial evolution, but vote for GOP who oppose even minimal regulation. Both oppose the New Deal bank regulatory regime that more or less worked well for a half century.

      As we see with slapinja and Duncan and others, they parrot what they heard from some right-wing spokesperson, ignore disproof of their statements, and ramble from one fantasy to another. They make political discussion difficult (much as do Leftists about climate). So the wheels of our political machine have ground to a halt.

    2. TM,

      I would refer you to the Chicago Plan of the 1930’s and recently reviewed by the IMF. It would effectively deleverage the entire US economy. Abstract:

      At the height of the Great Depression a number of leading U.S. economists advanced a proposal for monetary reform that became known as the Chicago Plan. It envisaged the separation of the monetary and credit functions of the banking system, by requiring 100% reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for this plan:
      (1) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money.
      (2) Complete elimination of bank runs.
      (3) Dramatic reduction of the (net) public debt.
      (4) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation.

      We study these claims by embedding a comprehensive and carefully calibrated model of the banking system in a DSGE model of the U.S. economy. We find support for all four of Fisher’s claims. Furthermore, output gains approach 10 percent, and steady state inflation can drop to zero without posing problems for the conduct of monetary policy.

      As an aside, I think that velocity is falls out of the monetary economics equation – mv = py. mv essentially are money and credit. The amount of output at some price will drive the v. v does not drive output.

      Output is a function of sound policy supporting capital formation(human and physical) and related productivity. Property rights, efficient taxation, proper regulation, reliable courts, strategic resources, security…all come into play determining the quality of growth.

      We have gross capital misallocation in the US. Macro stats that I would cite include low levels of investment-public and private; healthcare as a % of GDP vs other developed economies, highly excessive defense spending, systemic leverage, trade policy favoring multinationals, tax policy that favors capital over labor, regulation that favors large over small companies, expensive court systems…

    3. C,

      Your comments exactly follow the pattern of conservative wing-nuts. Weird and fictional statements, each shown to be false — followed by your amnesia (no acknowledgement of mistakes) and a new set of bold assertions.

      Each round broader, going further into wing-nut territory. As with this.

      There is a good reason than no nation followed the Chicago Plan, and that the western world instead followed Keynesian ideas and moved in the post-WW2 generations to an era of great prosperity — rapid growth, spreading across the world as more nations joined an obviously winning system.

      Starting with Reagan (and even more so with Bush Jr) we have abandoned Keynes’ ideas — with the GOP’s massive deficits during expansions — and so might face difficult times (although today’s post show that the future remains uncertain).

      You can stick with your false beliefs and crackpot ideas. The rest of us will move on to the future.

      No more of this. If you can cite something by an actual expert (not wingnut U), fine. Otherwise comments will be moderated. Life is too short to waste it like this.

  7. Yale and the University of Chicago are wingnut U? What in my comments has distanced me from Keynes? My belief that there is a lack of investment?

    The monetary system can be separate from fiscal policy.

    “Keynes argued that the solution to the Great Depression was to stimulate the economy (“inducement to invest”) through some combination of two approaches: A reduction in interest rates (monetary policy), and Government investment in infrastructure (fiscal policy).”

    Hence, we have the terms in economics of monetary policy and fiscal policy. Ad hominem attacks and your basic lack of understanding betray the weakness of your arguments.

    BTW none of your authors have any background in the financial markets, academically or at major banks. I would argue that you are talking out of your circle of competence. I respect your views on many things and believe that you are more often right than wrong. On this I respectfully disagree.

    1. C,

      (1) Quoting Yale and U Chicago economists’ rejected proposal from 1933 — 80 years ago — as valid advice today? Wingnut.

      The Chicago Plan was a bold idea in 1933, but not adopted by any nation for good reasons. Economists have learned much since then, both from experience and research. Plus the world economy has changed since then.

      It would be valid if you cited a *recent* proposal from an expert advocating it. Otherwise you might as well cite Lamarck as a cutting edge rebuttal to Darwin.

      (2) “BTW none of your authors have any background in the financial markets, academically or at major banks.”

      You are — as par in this thread — wrong.
      * About the history of the 19th century bubble I cite one of the top experts in the field.
      * About the finance and economics of central bank policy I cite an Executive Director of the Bank of England, a highly respected former Chief Economist of the IMF, and a Stanford Professor widely regarded for his work in this field.
      * About the Fed I link to a widely used Fed publication.
      * For more information I link to posts discussing these things in greater detail (this post is a brief historical survey).

      Furthermore, the posts about regulatory and monetary policy — of which this is just one of scores — cite a wide range of top experts from both economics and finance.

      The level of supporting citations in my posts are vastly larger than usual on the Internet, except for academic websites. These are almost unused by readers. I provide them to show that I’ve done my research.

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