Government Subsidies Are Not the Money Problem
By Staff News & Analysis - April 02, 2013

Stop Subsidizing Wall Street … Imagine if the United States had an airline industry in which the biggest carriers that fly both domestically and internationally received a larger government fuel subsidy than those flying only domestic routes. Unfair? Yes — and that's exactly how the U.S. financial system works. The fuel of the largest firms in our financial services industry is subsidized, and the public bears the cost. – Washington Post

Dominant Social Theme: Let Wall Street stand on its own two feet.

Free-Market Analysis: This editorial makes the case that the US government is propping up Wall Street products and production and needs to stop it.

The free market and risk taking needs to return to the larger securities industry. When government makes risky activity profitable then risk increases to the detriment of us all.

The article is written by Thomas Michael Hoenig who is described by Wikipedia as director of the Federal Deposit Insurance Corporation. "From 1991 to 2011, he served as the eighth chief executive of the Tenth District Federal Reserve Bank, in Kansas City, United States. In 2010, he was serving as a voting member of the Federal Open Market Committee, as one of five of the twelve Federal Reserve Bank presidents that sit on the Committee on a yearly rotating basis. He is known as an anti-inflation hawk."

This last description is enlightening. Mr. Hoenig is to be seen as one of those relentless apostles of fiscal rectitude. He wants free-market principles to apply to the current financial system. He doesn't want to forgive speculators. He wants them to suffer for their mistakes.

The trouble with this perspective – and Mr. Hoenig's position – is that he works for the mightiest central bank in the world, one that has issued tens of trillions into the marketplace over the past five years to try to defuse the current financial crisis.

It hasn't worked well because issuing debt IOUs into a weakened economy merely expands the money float and puffs up financial assets. Mr. Hoenig doesn't explicitly deal with this issue, or not in this editorial, anyway. He IS concerned about government fiscal profligacy however and is an eloquent spokesperson for what he considers to be the benefits of free-market discipline. Here is more from the article:

Financial firms can borrow money — their equivalent of fuel — more cheaply and with less market scrutiny when they have access to government guarantees of deposit insurance, loans from the Federal Reserve and, ultimately, taxpayer support such as we saw with the Troubled Assets Relief Program in 2008. This safety net was intended to stabilize the financial system by protecting the payments system that transfers money around the country and the world as well as the essential lending that commercial banks provide. But these protections also assure those who lend to banks that they will be repaid regardless of the condition of the bank. Under such circumstances, creditors give the firms a discount on the cost of the funds they borrow.

Things are made more difficult by the fact that the largest financial companies now combine traditional commercial banking with higher-risk activities such as trading so that both their banking and betting activities get access to these government protections and the multibillion-dollar subsidy that comes with them. Using subsidized money to finance the conglomerates' bets encourages ever-higher levels of debt, risk and interconnectedness not attainable or sustainable in a truly free market.

… This system distorts the market and turns appropriate risk-taking into recklessness. The result is a more concentrated and powerful financial sector — and a more fragile economy. The way to return the financial services industry to the free market is by separating trading from commercial banks and by reforming the so-called shadow banking sector. Government guarantees should be limited primarily to those commercial banking activities that need it to function: the payments system and the intermediation process between short-term lenders and long-term borrowers.

This last paragraph is where we really begin to depart from Mr. Hoenig's narrative. The system of government assurances does NOT distort the system nearly so much as the system of PRODUCING money that Mr. Hoenig participates in with some evident enthusiasm.

How can you work as the executive director of a Federal Reserve Bank and take the securities industry to task for being feckless? What is more feckless than Ben Bernanke propping up the world's corrupted and dysfunctional banking "system" by apparently printing up to US$16 trillion in a weekend to give away to foundering financial institutions around the world.

Doesn't that count as "distortive"?

It is fine to rail about government interference in the marketplace but it is a tad hypocritical to do so while building a fine professional career in the belly of the beast itself. Nothing is more distortive than monopoly central banking, which creates tremendous bubbles via excessive money printing and then ruinous busts as bubbles deflate.

After Thoughts

If Mr. Hoenig wanted to make a significant, immediate difference he would address his remarks to the monetary system itself rather than governmental excrescences.