"You holdin'?"

It can be said, in one respect, that the great capitalist crackup that led to current economic conditions was ironically triggered by deliberate lack of capital: high finance leveraged themselves stupid on ever-increasingly surreal bets, then didn’t have the funds to cover when the house won. Hence, the bailouts, both TARP and what the Federal Reserve did that far dwarfed it. Banks failed at a high rate, money collapsed, so more robbery and more zeroes on Bernanke’s computer to allegedly clean up the mess.  Yet, at the same time, it was also a problem of finance having too much money — that is, more than could be plausibly put anywhere productive.   The reasons for this are part of a long story that in short starts with the downfall of labor power and ends with debt. Lots and lots of debt.

These dueling roots make following the story difficult. Observe the following on Ezra Klein’s WaPo blog, describing a clear contradiction to his colleagues usual Republicans-are-anti-government line of nonsense:

The GOP has largely has a “just say no” approach to bank regulation: promise to repeal Dodd-Frank and, in the meantime, water down the pending rules. But at a Senate Banking hearing on Wednesday, some Republicans suggested there was one regulation that they not only supported, but thought could be even stronger.  To protect the financial system from risk — and taxpayers from bailouts — Sen. Richard Shelby (R-Ala.) stressed the importance of “high-quality capital,” which would ensure that a firm’s losses would be borne by shareholders, not depositors. Shelby pointed out that the new Basel III rules will require banks in the world’s leading countries to hold significantly higher levels of capital to protect them from risk. His primary concern, in fact, is not that the new capital requirements will be too weak — but that they won’t be strong enough.

What makes this particularly amusing is that such an idea, earlier actually echoed by the Fed, seems to also clearly conflict with the Krugman/Yglesias axis crowing that the Fed should go absolutely nuts. Think about this: if even more huge than already perpetrated infusions of “liquidity” occur, simultaneously with policy decisions saying for the banks to hold more money, then what exactly do they think is going to fuel their envisioned Grand Economic Awakening? The money will enter the system at the top, and then stay there.

If the view is that if the banks have more money there’ll be no more bailouts, that is a formulation completely independent of the larger economy.  Besides, if the money they had to have in order to cover ridiculous bets were high enough they would not make ridiculous bets at all — which is the entire point. The hope was that they could, using a relative pittance, make tons, and it worked until it didn’t, upon which point the Fed stepped in to make them whole and damn the consequences for your scratching by prole ass. What really needs to occur is the general public obtaining money sufficient to where consumption, if expected to fuel the economy, comes from money they actually have, making the finance sector largely irrelevant. In the meantime, why people expect the institution that found backing idiot bets important in the first place to somehow help them when the closest they get is lottery tickets is a puzzle.

My savings — what little I can muster — will never touch the inside of a for-profit institution again so long as I live. May ever more follow suit, among other changes.

Source of above pic.

About b-psycho

Left-libertarian blogger & occasional musician.
This entry was posted in economics. Bookmark the permalink.

3 Responses to "You holdin'?"

  1. RTod says:

    Dude – you should submit this (or something close) to the Inequality Symposium at the League. Great stuff.

  2. B Psycho says:

    I’m considering something, thanks!

  3. d.mantis says:

    Without a way to chop off finance at the knees, consumer consumption will never equal or outstrip the financial sector. Finance will simply grow in proportion (especially if this consumer revitalization includes a rebirth in the housing and realestate markets).

    It would be ideal for a seperation akin to Glass-Steagall, but short of that, this seems like a step in the right direction. On the surface, forcing money into banks for them to hold seems illogical. However, requiring a certain capital reserve would prevent these institutions from using things like CDS’s to inflate financial transactions in the trillions of dollars (which don’t actually exist except on someones spreadsheet). Even nefarious transactions of CDS and high rated toxic mortgage traunches would be backed by actual capital that would be lost.

    In my limited understanding this would lead to the shrinking of the finacial sector as institutions rush to build a reserve before gambling in the cesspool. Of course, I may be too optimistic and this bill is preceded by another TARP to artificially produce these reserves. Then we are truly fucked.

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