The Permanent Bailout

Milton Friedman once said that "Nothing is so permanent as a temporary government program." The central banks, as rogue private bodies exercising governmental powers a proving that axiom true yet again. The Federal Reserve claimed yesterday that we are in a recovery but none of their emergency programs can be rolled back.

... the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011.

Meanwhile, over in Europe, there is growing recognition that the bailouts have failed and that the money isn't going to be paid back. Instead of actually admitting anything of the sort, the ECB is now talking about effectively making the loans permanent. Sure, they SAY it's going to be a 30 year loan instead of 3 years but if Ireland and Greece can't pay the money back now and continue to run deficits, what makes anyone think they'll be in a better position to pay it back later?

The question sort of answers itself. The bailouts are throwing good money after bad as every one of these banks is so far underwater they can't even see the surface from here. Without honest accounting, we have no idea just how deep that hole is but it certainly looks like a bottomless pit from here. It's been stunningly clear for a while now that so much bad debt needed to be purged from the system but the central and TBTF banks have made every effort to PREVENT such a purge.

(Wall) Street Corner Hustle
The latest brainstorm from the ECB is exactly the same sort of shell game. Greece and Ireland can't pay the money back and they know it. Instead of acknowledging reality, we'll just convert it into a long-term "loan" so they don't have to pay it back within the term and maybe even the lifetime of the people making the decisions. It can't be paid back and it won't be paid back but maybe they can keep up the lies for a little while longer.

This is simply more Extend and Pretend so that they can keep trying to fool people into impoverishing themselves by overspending and taking on too much debt to keep up the illusion. That is the meaning of "prosperity" in a keynesian ponzi economy. You use inflation to convince people to eat their seed corn, making them feel better - for a little while. This is why central bankers place so much emphasis on "confidence" - in practical terms that measures the willingness of the population to deplete their capital and eat their seed corn due to the inflationary deception of the central banks.

The UDB gave us the biggest illusion of false prosperity the world has ever seen. The bankers are now trying to cover their tracks and delay the inevitable hoping you'll forget their complicity. But the best simple summation can be found from the creators of South Park:

An Elegant Solution

The heads of the global banking cartel are currently gathered for their annual meeting in Davos, Switzerland. They have received enormous subsidies and bailouts at the expense of taxpayers in many nations all around the world. Those nations that possess representative governments are now beginning to respond to the outrage of their citizens at this gross injustice. In Britain, this has taken the form of a proposal to tax financial transactions. In the US, President Obama recently proposed regulations to limit the risk-taking activities of banks and to force the "too big to fail" institutions to shrink. The bankers' response is a proposal to take regulatory power away from national governments according to a British Press outlet.

This of course would be precisely the WRONG action. National governments in representative systems are forced to respond to the concerns of their citizens. The bankers' proposal would push the power even further away from the people and vest it in unaccountable supra-national bureaucracies. Our response should be precisely the opposite - devolve regulatory power over the banks back from the Federal government back to the state level. This should be particularly true for commercial banking. First, power should be as close to the citizens as reasonably practical so that the exercise of government power will be as responsive as possible to the average citizen. Second, power should be decentralized so as to reduce the incentive to abuse it and to minimize the damage when such abuse does occur.

One very positive effect would be to create a framework that automatically penalizes large organizations. Giant banks constantly lobbied to reduce the role of the states in banking regulation in the name of "efficiency" starting in the 1970s. One of the chief claims advanced during that period was that US banks would be unable to compete with foreign (especially Japanese) banks without consolidation. That turned out to be correct as the US banks produced a bubble very comparable to the one that has led to a 20 year depression in Japan.

The collapse of the states' role led directly to the creation of corrupt TBTF mega-banks by reducing the cost of geographic consolidation, just as the weakening and then repeal of Glass-Steagall enabled the growth of financial conglomerates via acquisition across business lines. President Obama has called for limiting the ability of banks to take risk and also breaking up the TBTF banks. We agree and call upon the president to immediately re-implement Glass-Steagall in order to confirm the seriousness of his words via corresponding action. In addition, we call upon him to remove all federal roadblocks to state banking regulation.

The mega-banks object to state regulations because it would increase their cost of compliance. We agree that it would increase such costs and further state that such an outcome would be a GOOD thing. It would create an automatic systemic incentive not to expand. It would be far better for the banks to decide to break themselves up rather than to mandate such an outcome. The legal and regulatory environment can provide the proper incentives and then leave the implementation to the individual players when they find such actions to be in their self-interest. The explicit repudiation of the "too big to fail" doctrine should be sufficient as the only reason to create such behemoths was to become large enough to hold the US economy and financial system hostage. But it never hurts to create the right incentives - all that Washington DC needs to do is stop interfering with the states' ability to regulate.

This seems to be an elegant solution.