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?

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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.

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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

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