U.S. Financial System Prone to Systemic Failure
By Staff News & Analysis - September 11, 2009

Less than 24 hours after his swearing-in ceremony, U.S. Treasury Secretary Timothy F. Geithner (pictured left) surprised Camden R. Fine with an invitation to a one-on-one meeting about the financial crisis. "I about fell out of my chair," said Fine, president of the Independent Community Bankers of America, a Washington-based trade group with about 5,000 members. He was in a corner office overlooking the White House at the Treasury Department the next morning, telling Geithner that behemoths such as Citigroup Inc. and Bank of America Corp. were a menace, he said. "They should be broken up and sold off," Fine, 58, said he declared, as Geithner scribbled notes before thanking him for his time and ushering him out into the January chill. The Treasury secretary didn't follow through on Fine's suggestion, just as he didn't act on the advice of former Federal Reserve Chairman Paul A. Volcker, or Federal Deposit Insurance Corp. head Sheila C. Bair, or the dozens of economists and politicians who pressed the White House for measures that would limit the size or activities of U.S. banks. One year after the demise of Lehman Brothers Holdings Inc. paralyzed the financial system, "mega-banks," as Fine's group calls them, are as interconnected and inscrutable as ever. The Obama administration's plan for a regulatory overhaul wouldn't force them to shrink or simplify their structure." – Bloomberg

Dominant Social Theme: A system that changes slowly.

Free-Market Analysis: Actually, it is a system that changes not at all. We wrote the other day of a British banker calling for more social consciousness and decrying money-center banks evident parasitism in forceful terms. On and on he went, until he began to remind us of the Lewis Carroll's Walrus and Carpenter poem in which those two rogues pretend sympathy for the oysters who are their victims – "until they'd eaten every one."

The easiest way to rein in out-of-control large banks is to do away with central banking. It is the ability to print endless amounts of money that swells the larger banking system and gives rise to out-of-control financial engineering, tidal waves of hot money and bonuses the size of the GNPs of small nations. The market and the invisible hand are never fooled. The West has provided its banking structures with the monopoly privilege of creating money, and the rewards are commensurate all around. If you could print as much money as you wanted to, your bonus would be substantial as well.

If Western leaders took the privilege of central banking away from the banking industry, then the banking industry would shrink back down to normal size. And that would be a blessing in every way. From our point of view it would be a blessing because we wouldn't have to read the constant complaining, much of it from the banking industry, which happens, coincidentally, to be running scared.

There is nothing that top bankers won't complain about EXCEPT THE PRIVILEGE OF PRINTING MONEY ITSELF. But everything else is fair game. Hedge funds are devious black holes. Large commercial banks are socially irresponsible. Derivatives are the crack cocaine of the financial system. Wall Street is fully of greedy guys – and its money and technology gives it an advantage over the average trader. Congress is full of enablers. Investors are saps that need to be more careful. Regulators are too trusting.

Of course all this would stop if central banking were done away with. There is nothing inherently wrong with institutional trading. There is nothing wrong with financial engineering, computer power, etc. The trouble is that the huge money flows of fiat paper issued by central banks poison every financial activity. The unholy amount of paper frothing forth can turn a normal college grad into a millionaire "rocket scientist" overnight.

This is the reason of course that Wall Street jobs are sought after, but it didn't used to be that way. It only started to get that way after the Civil War, when the Eastern establishment of the US assumed full sway over what was becoming the most powerful country in the world. The coupe de grace was the Federal Reserve itself. After that, if you could somehow get onto Wall Street, into Wall Street, sweep up after Wall Street, your future was relatively golden.

But these Wall Street and London City bankers simply won't admit it. You could hang them upside down and tickle their naked feet with feathers and they still wouldn't talk about the central banking money monopoly. They will decry greed, meanness and corruption all day long. They will point their fingers (or toes) literally in a million different directions but never at the large cupolas of central banking establishments. Here's some more from the article cited above:

The [latest American] plan would label Bank of America, New York-based Citigroup and others as "systemically important." It would subject them to capital and liquidity requirements and stricter oversight, relying on the same regulators who didn't understand the consequences of a Lehman failure. And while companies could be dismantled if they got into trouble, they, their creditors and shareholders could also be bailed out with taxpayer money, according to the plan.

The chief architects, Geithner, 48, and National Economic Council Director Lawrence H. Summers, 54, say they don't think it would be practical to outlaw banks of a certain size or limit trading activities by deposit-taking banks, according to people familiar with their thinking. They said the two men, who declined to be interviewed, and others on Obama's team believe the lines are too fuzzy between banking and investing products and that forcing the divestiture of units and assets would create bedlam.

"It's a very difficult thing to say as a national policy goal that we're going to limit the success of an American firm," said Tony Fratto, 43, a spokesman for President George W. Bush and former Treasury Secretary Henry M. Paulson who now heads a Washington consulting firm. ( Bloomberg)

It's just incredible from our humble point of view. Because central banking destabilizes economies on an ever wider scale, the largest banks, tottering evermore during every exaggerated business cycle, are now to be labeled systemically important and subject to ever stricter oversight.

It won't matter a damn of course, because come the next boom, the same systemic risks will occur. The ONLY thing you really have to do is get rid of central banking. The market would take care of everything else, and the dangerously exaggerated boom-bust pendulum would gradually slow and nearly stop. But that's not an option. It's not even something you can talk about, apparently (unless you're Ron Paul). No, the idea is that you have to twist the entire financial system into knots because you won't take the one, simple, realistic action that will end the madness. Hmmm… wonder why that could be?

After Thoughts

It's so simple, but apparently it is to be, instead ever more complex. We liken it to a game of Twister gone wrong. Everyone is contorted into knots and in order to free themselves, they continue to contort their limbs into ever more bizarre positions. The easiest thing would be to stand up. But somehow that simplest of all actions is never explored. Get rid of central banks and let the market do its work. The first thing that would arise spontaneously would be a private market gold and silver standard. And things would likely get better from there. In the meantime, we think individual human action, transferring out of fiat currency and into gold or silver, makes a heck of a lot of sense – always has actually.

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