And So I Go: Yesterday, Today and Tomorrow

>>The Folly of Financial Reform – Big Government

Posted on: February 13, 2010

» The Folly of Financial Reform – Big Government

I have been taking pot shots at the proposed Financial Reform packages being promoted for some time now for the ludicrous side show it is.  Government is working hand in glove with the “fat cats” to write all these proposals.  Barney Frank, Chris Dodd and Obama  are in the grav y bowl with the Fat Cat bankers!  This is a case where the fox and the farmer are working together in the Hen House.   The Farmer is waving his shotgun around and blasting away at times but making damned sure not to hit the Fox as he   feeds on the poor hens.

This article explains the situation very well and explains why it won’t work and is just show casing for the government.   Dear Lord, but how I yearn for some truth and ethics in Congress.  BB

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While these ideas may all have merit, the reason that financial reform will be disastrous is that all legislation points towards dealing with symptoms rather than addressing the root causes of our financial collapse. While of course the narrative in the MSM centers on greedy “fat cat” bankers taking big risks and predatory lenders taking advantage of hapless borrowers, the fact of the matter is that in every aspect of this crisis government was the major enabler.  Ironically all financial reform centers around giving government more power.

(Make sure and click on the referred sites in blue.  ACORN is set to get  $4.5 BILLION in the Presidents current budget.  BB)

Consider housing.  As we know, under the CRA and due to the “activities” of ACORN and subsidization from our taxpayer-owned siblings Fannie and Freddie, banks granted mortgages to borrowers far riskier than they would have in an uninhibited mortgage market.  That one of the innovations to meet the demand for mortgages was, for example, the adjustable-rate mortgage which reset to sky-high rates after a specified amount of time was not predatory but rather the natural way for banks to compensate for the massive incremental risk being taken by lending to uncreditworthy borrowers.

To castigate and regulate lenders for charging interest rates deemed “unfair” or “punitive” as our politicians have spoken to in their reasoning behind creating a Consumer Finance Protection Agency (a moral hazard-enabling bureaucracy, if ever there was one) is not only reckless but also ignorant.  Absent fraud, the lender and borrower are both responsible for voluntarily signing the contract.

mistakes were amplified by the moral hazard inherent in having an SEC purportedly created to protect investors, an FDIC which effectively removes all responsibility from commercial banks in the loans they make and the past bailouts of large US businesses including those in finance.

I would argue that most importantly, fueling the bubbles that occurred in housing, stocks, commercial bonds, consumer credit and numerous other assets was the Federal Reserve, which set interest rates artificially low, leading to excessive and imprudent lending and concomitant excessive and imprudent investment and spending.  Jefferson was prescient when he said,

If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered…I believe that banking institutions are more dangerous to our liberties than standing armies.

It is important to understand that shrouded behind its mystique, the Federal Reserve is merely a handful of bankers that centrally plan the price of credit, the interest rate.  For them to ever pick the Federal Funds rate, of which almost all interest rates are based, is a fool’s errand.  The monopoly control over money supply by the “quasi-private” bank suffers from the same defects as the central planning of the supply of any good in a socialized economy.  The true or real interest rate would reflect the intersection of the supply of and demand for loanable funds, which would come from the savings of people. By driving interest rates down and printing money, the Fed distorts the rate and causes unsustainable and unjustifiable bubbles.

is it any wonder that banks levered themselves up to obscene levels, took reckless risks and grew supposedly too-big-to-fail?  The “heads I win, tails you lose” attitude engendered by institutionalized moral hazard, history and the distortion of the economy by the cartelized banking system under the Federal Reserve is only natural.  Excluding the Madoff’s of the world (whose schemes may incidentally be loosely based on our Social Security system), government enabled this crisis, and government has failed to acknowledge its endemic role in it.  Yet despite its essential role in the crash, government is now asking for an unprecedented even greater amount of control over finance.

I submit that an honest conversation on financial reform must deal with causes rather than symptoms. Word out of Washington in my view fails to address these causes, but focuses on controlling business rather than the culprit enabler of the state.  Contrary to the arguments of Chris Dodd, Barney Frank and friends and foes alike, the antidote to our problems in finance and our economy in general will not come from Big Government but from Big Individual.

If the government would get out of the bail out business and trying to micro-manage what they don’t know a damned thing about  and allow the banks to wallow out there on their own using their own money when they take risks instead of the tax payers then our financial community will curtail all this risky business and make sound loans thus putting the economy on a sound base.  Small businesses will flourish, jobs will be  created and Americans will prospers.  So simple.  All government needs to do is take a hike!  BB


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