Fixing the Dollar Machine
By Staff News & Analysis - May 03, 2010

Big business pleads for loopholes in financial regulatory reform … Here's a simple explanation for the financial crisis: Too much cheap credit was extended to households, businesses and even sovereign governments that couldn't afford to carry that debt or pay it back. The obvious implication is that, going forward, credit and other financial risks should be made more expensive and harder to get. Now, however, as we close in on the endgame for financial regulatory reform legislation, special interests are crawling out of the political woodwork demanding loopholes and exemptions. And if you strip away their end-of-the-world-as-we-know-it rhetoric, their basic complaint is that the reform bill would make credit and other financial risks more expensive and harder to get – in other words, the bill is doing exactly what it is supposed to. – Washington Post

Dominant Social Theme: Do the math!

Free-Market Analysis: This Washington Post story is a great example of how the mainstream media goes about supporting a power elite dominant social theme. In this case the fear-based promotion is that there will be another financial meltdown if "reform" isn't enacted. And to put the reform into context, the Post presents an admirably hard-hitting article about what went wrong and what can set it right. The Post then complicates the analysis slightly by explaining that while the problem and solution are simple, regulatory loopholes can sabotage the whole effort.

But let's drill down a little. According to the Post, the crisis was caused by bad lending policies that bankrupted institutions and finally led to massive bailouts to save the system. The solution is regulation that will restrict credit and make financial risks "more expensive." There are almost no words to describe the lunacy of this explanation and its general deviousness. However, since it is our job, we shall try. First, a little more from the article itself:

If there is one lesson that ought to have been learned from the recent crisis – as well as the savings-and-loan debacle of the late 1980s – it is that everyone who engages in the same business should be regulated in the same way by the same entity, irrespective of the charter they hold. If car dealers want to be in the lending business, they should be regulated like every other lender for the simple reason that their customers deserve the same protections as other borrowers.

Small banks are making many of the same arguments as the auto dealers as they seek to insulate themselves from virtually every provision of the financial reform bill. The community bankers are under the wrong impression that the aim of regulatory reform is somehow to punish those who caused the crisis or to ensure that the same crisis doesn't happen again. In fact, the purpose is to anticipate and prevent the next crisis, which is just as likely to be caused by hundreds of community banks simultaneously engaging in the same risky behavior (remember the savings-and-loan crisis) as it is from the mistakes of a few large Wall Street banks.

The Post article maintains that the lesson that ought to be learned from the recent financial crisis is that regulation should be across-the-board, without loopholes. Funny, the article began with the idea that the lesson learned was not to extend too many high-risk loans. But let us grant that there are several lessons to be learned from this worldwide financial debacle. We would think that one would need to move beyond the provision of risk to the question of why the risk was granted, in aggregate, in the first place.

There is only one answer to this of course. It is inherent in Austrian free-market finance, which explains that central banks themselves, by printing too much money, cause business and banking euphorias that eventually turn into busts. If this is the case (and it seems obvious that it is) then all the regulating in the world will be powerless to combat the next crazed euphoria. Of course it won't happen for quite a long time since the system itself has been blown apart by nearly a century of central bank money printing and subsequent ever-increasing distortions of businesses throughout the West.

Each time the system fails, central banks print more debt-based money to pump it back up again. The economy, rather than cleansing itself, simply continues to support ever-more inefficient and massive corporate structures that break down once more during the next boom-bust cycle. This is why the financial system itself is always in jeopardy during a severe downturn because the financial system itself, supported by the money printing of central banks, is the worst and most pernicious bubble of all. The root cause if you will.

So how do you fix America's and the West's financial system? Get rid of central banks and allow the economy to purge itself of inefficient investment and commercial financial entities. This would take a year or so and then the pain – rather than lingering as it does now – would dissipate and the economic distortions (which rob the West of millions of jobs and their productive wealth) would be alleviated.

Each time there is bad recession, central banks and other entities step in to "save" the financial system as we know it. They are doing no one any favors, though those in charge of these bailouts certainly try to strike heroic poses – as Fed chairman Ben Bernanke is currently trying to do. But in fact, having salvaged the dysfunctional and bloated system, the powers-that-be are faced with trying to explain what went wrong and how they can show they are dealing with it. Enter yet more dysfunctional solutions by way of regulation.

If the United States and the West generally end up with laws that restrict credit and lending, it is a foregone conclusion that even more entrepreneurs and small businesses will suffer. Having been flattened by the financial crisis itself, these fragile but promising entities will be whipsawed by a legally initiated lack of credit that will do NOTHING to alleviate the West's problems with booms and busts but will certainly further centralize enterprises and destroy vital start-ups.

After Thoughts

Regulation itself is a dominant social theme – a promotion, in that regulation can never be anything but a distortive price fix. If one is looking to reduce business initiatives and centralize industrial power in the fewest hands, one could not do better than design the West's current financial structure. The financial disaster has taken place, wiping out much of the West's business vitality. Now the regulatory shoe seems set to drop, tightening credit and reducing the ability of lending institutions to take even reasonable risks. Meanwhile the central banking apparatus will, of course, remain in force.

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