This morning Jim Cramer, along with the rest of the CNBS crew, actually “endorsed” a return to Glass-Steagall in the wake of the JPM disaster.
When asked “but won’t that make American banks less competitive?” he answered with a bluster that was basically this: “What, like BNP Parabas?”
Glass-Steagall is a good idea but it doesn’t go far enough. The correct solution, as I have repeatedly pointed out, is One Dollar of Capital.
This is the only solution to both preventing banking panics and long-term economic stability.
One Dollar of Capital:
- Stops counterfeiting of the currency. Without the ability to create unbridled credit money the commercial banks and Fed can no longer create pretend GDP, which instantly reflects into asset prices in a bubble, foisting the costs off on those who cannot take advantage of those asset price increases. This is how your wealth and future have been systematically and intentionally looted over the last 30 years, and it’s one of the oldest games out there when it comes to banking. President Jackson knew it, as did others before him; this scam job literally goes back to Hammurabi! This old con must go away.
- Ends — without question — systemic risk. Since there is no longer unbacked emission into the economy there is no longer any possibility of systemic risk. A bank that wishes to loan more than the immediate liquidation value of an asset must attract actual capital from stockholders or bondholders to lend; it cannot create credit money unless it can show a perfected security interest against an asset that is worth more than the credit money created.
- Returns credit to its legitimate function in the economy — self-liquidating lubrication for trade. A self-liquidating loan is not inflationary and has no longer-term impact on the economy. It permits the use of credit for legitimate lubrication of commerce; trans-national trade, for example, relies on letters of credit to guarantee payment for goods in transit; the goods are the asset securing the paper. Likewise, a loan for 80% of a house’s market value is secured by the house, and if marked to the market on a reasonable basis (e.g. every three months or so) it is safe as additional capital calls will certainly occur before the value goes negative.
One Dollar of Capital simply says that you cannot issue unbacked loans. Period. You can lend against an asset, but only to it’s immediate liquidation value in the marketplace. That’s it.
Our current paradigm requires a roughly 6% excess asset valuation in banks. We retain this standard. Banks are then free to choose how close to that line they wish to dance; invasion of that 6% safety threshold results in immediate liquidation of the firm. If they wish to lend at 94% of a house’s value they can, but any movement against them results in the position going underwater. Most will choose to build in some sort of reasonable cushion — like 20% down — to prevent this.
All derivative positions must be individually reserved; nobody may depend on someone else’s promise to cover a transaction as a promise is not capital. If I wish to be short a derivative that requires me to deliver a given instrument then at the instant that position goes into the money against me I must be able to clear the underlying trade and must possess the actual capital to do so. If I can’t clear the trade at any instant in time then my firm is liquidated — period.
It’s not that difficult to understand folks. Oh sure, the mavens of Wall Street have screamed bloody murder about any such proposal, claiming that this would “damage American competitiveness in financial services.”
My retort in 2008 was “If you wish to juggle jars of nitroglycerin I hope you don’t mind if I ask that you do it in your country rather than in ours.”
Now, four years on, we’re finally hearing similar sounds in the mainstream media.
The effect of this regulatory change would be to end derivative trading by any actual bank. “Investment banks”, which take no deposits and are funded entirely by investor capital with no ability to write credit money into existence, can trade all they want. Margin supervision is perfectly adequate here, as the risk lies entirely within that firm. That’s fine.
As I wrote in Leverage (click on the book cover to the right to buy):
But One Dollar of Capital as presented above both goes further and shuts down all the schemes and risk-hiding that banks can engage in, making a bank an effective public utility, while retaining private ownership of the financial system. Whether a bank takes deposits under this standard becomes immaterial as deposit-based lending cannot happen on an unsecured basis. Banks that wish to loan against a known asset value can do so but to lend unsecured they must acquire lent capital from the market via the sale of stock or bonds, and cannot use depositor funds for this purpose.
We must end the unbacked emission of credit money into the system. That is where all of these problems come from — fake GDP, destruction of purchasing power, buying of votes and systemic instability.
It all begins and ends there and any Presidential, House or Senate officeholder or candidate who does not understand this is unfit to hold the office.
Those who do understand this and yet refuse to act are aiding and abetting economic terrorism and must be held to account.