Dodd wants you to “have confidence” in his financial system,
and he is willing to put your money where his mouth is to make it
his plan: Merge the Federal Reserve (“the Fed”), the Federal
Deposit Insurance Corporation (FDIC), the Office of Thrift Supervision
(OTS), and the Office of the Comptroller of the Currency (OCC) into
one single entity. Basically, the Fed is America’s central
bank, the FDIC insures bank deposits up to a certain amount, the
OTS oversees savings and loan institutions, and the OCC regulates
all national banks.
his rationale: Banks, he claims, have been able to choose which
entity supervises them, and competition among these various agencies
for “business” (i.e., justification to continue to get
public funding) has led to looser regulation than would have been
the case had there been just one monolithic regulatory agency. Essentially,
his reasoning is the same as President Bush’s was for creating
the Department of Homeland Security as an amalgamation of functions
from other agencies, and it is the same reasoning as President Obama’s
is for making health care a federal issue rather than one to be
decided by each state. It is also the same sort of reasoning used
by nearly all politicians throughout history to concentrate power.
the superficial difference between his plan and Obama’s bank
regulation plan: Obama wants the Fed to take on a larger role in
regulating “systemic risk,” but Dodd wants that role to
be taken on by some kind of council. (Perhaps, if he loses the next
election, he might graciously accept the honor of sitting on such
a council?) That’s as different as garbage and trash.
What does it
mean to “have confidence” in a private, voluntary, free
market transaction? If you deposit money in an ATM, how can you
be confident that the cash you put in will be available to you later?
If you pay an insurance company for future protection, how can you
be confident it won’t go out of business? If you invest in
the stock market, how can you be confident you won’t lose money?
examples are straight from Dodd’s mouth. He says you should
be confident buying stocks, making an ATM deposit, or buying insurance.
It’s an absurd claim. Each of those transactions is inherently
risky. If you are not confident enough to do it, you should not
do it. And neither Dodd nor Obama nor Bush nor Fed chairman Ben
Bernanke should take your money in an attempt to make you feel more
confident. It’s not their money.
Here is how
to understand all of financial regulation, current, past and proposed:
It all goes back to the FDIC. You’ve seen their proud little
plaques in every bank, announcing that deposits are backed by the
full faith and credit of the United States government (that means
your tax dollars). If you deposit money in a bank and that bank
fails, don’t worry – Uncle Sam has your back, up to a
quarter million dollars per depositor.
Why does Uncle
Sam make this guarantee? Shouldn’t it be up to me where I put
my money? After all, what does a bank do but turn around and make
loans with my money to other people?
A deposit in
a bank is an investment in a lender – you should be worried!
Some banks make better loans than others. But with the FDIC, we
don’t care about lender quality. Furthermore, why should you
have to invest in a lender as a way to put your cash somewhere?
Perhaps you should invest in Apple instead.
there is to know about financial regulation comes from this insurance
– because regulation is really intended to insure against bank
What is a bank
run? It’s what happens when depositors realize the bank is
garbage and decide to pull their money out. The bank, of course,
doesn’t have the cash on hand and can’t return it all,
so it goes out of business. With FDIC insurance, you should be less
likely to care if the bank is terribly run, and you wouldn’t
withdraw your money from it, since you will get it back anyway.
Yes, the FDIC
is a pre-bailout. It protects bad banks.
The real situation
is even worse. Banks have “reserves,” some amount of cash
they keep on hand as a portion of the amount of money they lend
out. You might think that if you deposit 100 dollars in a bank,
that the bank would loan out 90 of those dollars, and keep 10 as
a reserve. Uh-uh. It puts the entire 100 in its reserves, and loans
out 900 more.
did it get the 900 more? From the Fed. Banks borrow from the central
bank and loan out to whomever they want. Yes, the Fed is a pre-bailout
of every single person who has ever walked into a bank looking for
a loan. And the only reason the Fed can make this Ponzi-like bet
is because the FDIC keeps deposits more stable than they would be
if people knew the truth.
So what is
the “system” Dodd, Obama and others think that we, the
unwashed masses, need to have more confidence in? It is the FDIC/Fed
axis of evil. It is the insurance scam that encourages over-depositing
and the central bank scam that encourages even more overlending.
Heaven forbid citizens actually put their money where they want,
in enterprises they deem useful. No, we need to have the citizens
run their money through the banking system first, for a little light
rinse before it is sent out to arbitrarily bad lending destinations,
such as subprime mortgages.
the politicians want to protect is exactly the system that needs
to collapse. The Fed and FDIC ought to be abolished. If you want
insurance on money you gave to a bank, you should buy it from some
other insurance company. Just like if you want insurance on money
you used to buy a stock, you should buy puts or credit protection
from somebody else. And if you want insurance on your insurance
company, buy some of that from somebody else too. And if you want
fire, flood or health insurance, it’s up to you to buy it from
who you want or choose to self-insure.
Yes, the world
is risky, and you will have to choose where to invest your savings.
If you want to give it to your neighbor for his new business, you
can, but you take the risk, not all taxpayers. Pretending the risk
doesn’t exist, which is what the current “system”
does, simply makes things look a little better for a little bit
until they get much worse for a lot longer.
With the Fed
and the FDIC gone, there will be no need for the OCC or the OTS
either. You want to lend out money? Go ahead. You want to pool your
money with a couple friends and loan that out? Go ahead. Want to
start your own business? Go ahead.
financial regulatory system is exactly identical to paying off credit
card debt with new credit cards. For a little while, it looks like
you have a bunch of free stuff. But when you can’t get any
more credit, everything comes tumbling down. That’s the “system”
Dodd et al. want you to have confidence in. Politicians are the
original confidence men.
originally appeared in the Fairfield
Maymin [send him mail] is an
Assistant Professor of Finance and Risk Engineering at the Polytechnic
Institute of New York University. He is the author of Free
Your Inner Yankee