• Chris Dodd: Confidence Man Our Senator wants us to have more faith in a system that was always a giant fraud

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    Sen. Christopher
    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
    happen.

    Here’s
    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.

    Here’s
    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.

    Here’s
    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?

    Those three
    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.

    Everything
    there is to know about financial regulation comes from this insurance
    – because regulation is really intended to insure against bank
    runs.

    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.

    What? Where
    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 system
    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.

    The current
    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.

    This article
    originally appeared in the Fairfield
    Weekly
    .

    October
    8, 2009

    Dr. Phil
    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

    and Yankee
    Wake Up
    .

    The
    Best of Phil Maymin

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