The Fraudulent Tower Of Basel

Oh look, says the magician while he diverts your eyes…

The Federal Reserve is expected to embrace a new global framework that requires giant financial institutions to hold extra capital, said people familiar with the situation.

The central bank’s decision to accept the rules laid out by regulators in Basel, Switzerland, as part of a draft proposal that could come before Christmas is a defeat for giant U.S. banks that argued the guidelines needn’t be so strict. They contended the Basel approach could prompt them to reduce lending and hurt the economy.

Wow, that sounds like The Fed is clamping down on the banksters, right?  “That’s good!” I’m sure people will exclaim.  There’s only one problem — it’s not true.

Preliminary, internal estimates from the Basel Committee on Banking Supervision put J.P. Morgan Chase & Co. in the top category of global banks, showing that the bank would have to hold 2.5% of extra capital as a percentage of risk-weighted assets, on top of the 7% base that all institutions will be required to hold, said people familiar with the early Basel calculations.

The problem with Basel, and indeed all of these clowns, is that the premise is wrong.  That is in its very inception Basel opines that a bank should be able to go from a lubricant of commerce to the source of something fungible with actual money in the marketplace, able to generate it more-or-less “at will.”

Traditional “fractional reserve” lending practices do not discriminate between different sorts of assets.  That sort of scheme is bad enough, but at least it runs to exhaustion at a known and predictable rate.  Basel’s rules do not, because they declare that certain debt — specifically, sovereign debt, has no risk (that is, it has a “risk weighting” of zero.)

This is an outright fraud, albeit a convenient one.  In truth all lending to a sovereign government is unsecured and thus should be 100% weighted — there’s no collateral you can seize and sell if the government doesn’t pay.  Banks have indeed survived the governments that they lived under, and as such any sort of “doomsday” argument (that is, “it’s zero risk because if the government dies so do we”) rings hollow as well, never mind that banks can buy debt from a nation outside of their own sphere of direct operations.

But Basel is even more disgusting in that it opines that banks are the regulators of credit money, and thus they usurp the sovereign right of governments. That Basel believes it has the right to do this outside of Switzerland is an outrage — they most certainly do not.

Switzerland, of course, is free to allow the Basel Committee to set standards inside their nation, however foolish that might turn out to be.  But beyond the boundaries of that nation their right to set such standards does not exist, and further, to do so without explicit Congressional authorization amounts to usurpation of the explicit Constitutional Authority found in the Money Power.

CNBC this morning is asking “is this yet another reason to stay away from the financials?”  Of course this belies the reality of what’s going on here — the financials are only “buys” if they can effectively counterfeit money!

Let’s be straight here — I can make a lot of money if I can get away with printing it up on my laser printer!  And while it’s “funny money” so is unbacked credit — it has no predicate base at all. 

Remember folks that money and credit are not the same thing even though they spend exactly the same way.  In the essence money is the economic surplus generated through past economic activity while credit is a promise to perform economic activity in the future.

That they spend identically and are in fact indistinguishable in your wallet doesn’t change this differential.  One — money — is limited by your previous economic surplus.  You can only spend as much money as you previously labored to produce, ex that which you had to spend to sustain your life.  The latter you may spend in an unlimited amount provided you can convince someone that you will wake up and perform labor tomorrow.

Of course that latter promise is speculative.  You might have a heart attack this evening or you might simply have promised the output of more than tomorrow’s hours that you intend to expend on the necessities of life tomorrow!  In either event the entity that created the credit is not going to get paid back.

This, incidentally, is why lending against an asset is not “creating money”, as I have repeatedly gone over.  This essential function of commerce has a many-thousand year history and without it international trade (and some intranational trade) comes to an immediate halt.  The ordinary function of buying gasoline or a loaf of bread all depends on lending against assets.  A letter of credit secures payment for goods being shipped; the security is the value of the goods which exceeds the charged price, and the credit self-extinguishes when the payment is tendered after delivery is made.  When you write a check and I cash it, the bank does so against the assets in my account “on the come” believing that the check will clear.  If it doesn’t they have security (my other assets at the bank) to offset against. 

Self-extinguished credit is not inflationary over the intermediate and longer term and is not “money creation.”

But unbacked credit — the creation of credit against nothing but a promise — is another matter.  Not only is that monetary inflation in the truest sense it is a nearly-guaranteed generator of economic bubbles and distortions.

Until we demand that all unsecured lending be backed by a dollar of capital in each and every case we will never restore the money power to where it belongs.

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