FedUpUSA

Archive for the ‘Regulation’ Category

Bernanke, Geithner And Company Derelict In Their Duty

Not just Bernanke and Geither but they along with the rest of the clown-car brigade at the NY Fed and Treasury.  The Fed must be stripped of its authority to “supervise” institutions as it has repeatedly refused to perform its legally-mandated duties when it comes to regulating these firms.

Here we again have proof of outrageous dereliction of duty.

The Federal Reserve Bank of New York has informed MF Global Inc. that it has been suspended from conducting new business with the New York Fed.  This suspension will continue until MF Global establishes, to the satisfaction of the New York Fed, that MF Global is fully capable of discharging the responsibilities set out in the New York Fed’s policy, “Administration of Relationships with Primary Dealers,” or until the New York Fed decides to terminate MF Global’s status as a primary dealer.

For those who are unaware the status of “Primary Dealer” is a firm that has a responsibility to maintain an orderly market in the sale of US Treasury securities.  That is, they’re required to bid.  As compensation for this they’re the market makers and of course get their cut from that intermediation activity.

Here’s the problem: MF Global got in trouble by taking on too much European debt, gearing itself too highly, and they had inadequate capitalization to withstand the problems present in Greece and elsewhere in Europe.  The NY Fed and The FOMC, for their part, again failed to do their job exactly as they failed to do their job in 2008 and did nothing about this right up until the firm effectively failed.

Why do I charge that this is the second time around for them?  Because it was and this is a statement of fact.

In 2008 roughly a month before Lehman failed the firm attempted a routine repo transaction with Citibank.  Citibank rejected their collateral and Lehman had nothing else to pledge.  The NY Fed had to know this had occurred because tri-party repos inherently involve the NY Fed as the third party.  Yet the NY Fed did nothing in the context of suspending Lehman, they did not inform the public of this material adverse event, they did not demand that the market be informed despite the fact that this is a requirement of a public listing and certainly merited a Form 8-K filing.  That Citibank knew and thus The NY Fed had to know Lehman was bust well in front of the markets and the public being told was one of the things we learned from the Jenner and Block report into the Bankruptcy of Lehman that was part of the bankruptcy proceedings and is now part of the public record of the events surrounding Lehman’s failure.

In general I have no duty to inform someone else if I find out about some sort of problem with a public company.  If I discover that problem without resorting to non-public information (e.g. by reading their balance sheet) I am entitled to use it to trade on and attempt to make a profit.

But I’m not a regulator — The NY Fed and Federal Reserve are.  The Fed has an overriding duty to the markets and to the public as the primary regulator for these institutions, and post 2008 there is simply no excuse for what amounts to willful blindness.

These people need to be removed from power — at minimum — as they have repeatedly demonstrated an unwillingness to perform their duties with regard to regulating financial institutions.

* * * * *

The Consequences Of Failed Regulators

Now we get to see the consequences of the failed regulation with regard to MF Global.

CME and other exchanges have all suspended the firm’s clearing capabilities.  This resulted in the turnstiles being literally locked for those who were members of the exchange and clearing through MF.

So if you are a floor trader using MF as your clearing firm and went to take a leak, you can’t get back on the floor.  Whatever positions you might have held at that time cannot be hedged or otherwise managed!

This is going to severely hurt — and probably bankrupt — a lot of people through no fault of their own.

Who’s fault is it?

Bernanke’s, the NY Fed’s and Geithner’s (Treasury’s.)

Why?

Because MF should have never been allowed to carry that much exposure on their book without enforcement action taken by the regulators.  The regulators allowed it and the firm is now collapsing.

So be it – those who owned the stock will “get theirs” for their lack of diligence.

But the traders who had no idea what was going on and get reamed as a consequence should be surrounding the NY Fed, The Federal Reserve and Treasury tomorrow morning.  They ought to put on their own “Occupy” movement until this clowncar brigade is removed and replaced for rank dereliction of duty.

Post-Lehman, when the NY Fed and Federal Reserve did the same damn thing there is simply no excuse for what happened to these innocent parties in this instance.  While I know it won’t happen and the government will (of course) claim “sovereign immunity” the fact of the matter is that the officials involved should be held personally responsible for the harm these individuals suffer as a consequence of their malfeasance.

* * * *

Ah, Our Fine Regulators (MF Global – Again)

Here we are once again, with the fine federal regulators who do their job keeping track of primary dealers and properly looking at the health of the firms are the core of our financial system.

What began as nearly $1 billion missing had dropped to less than $700 million by late Monday. It is unclear where the money went, and some money is expected to trickle in over the coming days as the firm sorts through the bankruptcy process, the people said.

But regulators are examining whether MF Global diverted some customer money to support its own trades as the firm teetered on the brink of collapse. If that was the case, it could violate a fundamental tenet of Wall Street regulation: Customers’ money must be kept separate from company money.

Such a finding would move the discussion from sloppy internal controls at MF Global to something more troubling. While the investigation is in its early days, it raises the specter that regulators could sanction the firm or the employees responsible.

That’s right, “sanction” the firm.  And with what they would they pay any such “sanctions”?  Hmmm…. what’s going to happen to their customers?

Oh yeah, that’s right – they’re screwed, right?

Ps: Not all funds are SIPC covered, and this is going to come as an ugly surprise to a large number of people, I suspect….

Throw Bernanke’s and Timmy’s ass in the dock on this one; there’s absolutely no excuse for allowing this to occur.

Period.

The Market-Ticker

The only effective regulation is FAILURE.  Unfortunately only the little people are allowed to fail, and at the same time, they are being forced to bail out those who are ‘Too Rich, Powerful, and Big’ to fail.

If the banks had failed in the first place we wouldn’t be worried about home affordability anymore.

CNBC

That’s all I hear today in the media – that the market has lost confidence.

Yep.

Why have people lost confidence?  Was it an accident?  NO.

Was it an intentional act?  Yes.

Who’s responsible?  That’s easy.

• Congress.  We know why the meltdown happened in 2008.  Financial institutions sold crap to people claiming it was “Grade AAA” chocolate.  It was, well, crap and this was discovered when the first bite was taken.  There has been no penalty assessed for doing this.

• The Banks.  They repeatedly said “we’re well-capitalized” and then blew up.  Bear and Lehman among them.  There was no penalty assessed for doing this.

• The President.  He said he didn’t come to Washington to protect the banksters.  Then he did exactly that.  In short, he lied.  Even after we discovered over a hundred thousand perjured documents filed in foreclosure cases, there was no criminal penalty assessed for doing this.

• The President (again).  He said he’d cut the deficit in half by the end of his first term.  Instead he more than doubled it and last night put forward a demand for yet more unpaid-for spending that will guarantee more than a trillion in deficits on a forward basis, along with essentially defunding Social Security and Medicare taxes while both programs are deeply in the red.  In short he’s driving the nation straight toward ruin exactly like a junkie demands more and more drugs even though he’s aware that if he continues he will certainly die.
• Ben Bernanke.  He’s been wrong about virtually every prognostication he has ever made about the economy, going back to 2006.  He also lied when he told Congress that “The Federal Reserve will not monetize the debt”, just months before doing exactly that.  There has been no penalty assessed for doing this.

• Wall Street itself.  HFT abuse is the stuff legends are made of.  It’s a true outrage, really.  The bid and offer manipulation on a daily basis is chronicled by Nanex; I’ve also written about it repeatedly.  Market manipulation is illegal.  There has been no penalty assessed for doing this.

• The Banks (again) are lying about their balance sheets.  We know this is a fact because in virtually every case where the FDIC has taken over a bank, from big to small, it has resulted in monstrous losses against claimed “asset values” on the balance sheet, sometimes on values claimed just weeks before in public filings.  There has been no penalty assessed for doing this.

• Case-Schiller and Zillow both claim $9 trillion in residential property value losses. The Fed claims $500 billion, approximately, in decreased mortgage debt.  The rest cannot be found; the presumption must be that the banks are hiding trillions in bad paper in mortgages alone!  Is there another explanation?  Not really.  Sure, some of this loss is equity, but not $8.5 trillion out of $9 trillion.  There has been no penalty assessed for doing this.

• Federal Regulators.  They got caught allowing IndyMac to backdate deposits.  The really ugly part of it is that the same people were involved in that as were involved in the same offense during the S&L crisis!   The OCC sued to block state-level predatory lending statutes that would have largely cut off the housing bubble.  That’s not idiocy, it’s rank corruption.

So on what basis should we expect “confidence” in the markets, especially when the markets all clear those those very same banks that pulled the scams, appear to be still pulling the scams, and the governments and regulators are still enabling the scams while the market has every reason to believe that the scam won’t hold up and it will all fly apart on the back of Greece defaulting?

There’s your answer.

I warned last year:

Anyone   who thinks that Congress will use the current financial regulation -    Dodd-Frank – to break up banks in the middle of an even bigger crisis  is  dreaming.   If the giant  banks aren’t broken up now – when they are threatening to take down the  world economy – they won’t be broken up next time they become insolvent either.   And see this.  In other words, there is no better time than today to break them up.

Standard and Poors is providing evidence for this assertion.

As the Financial Times notes today:

Officials fighting the next financial crisis may again bail out banks using the public purse, S&P has said, in an opinion that casts doubt on one of the fundamental tenets of US financial reform.

The rating agency said on Wednesday that the US Treasury, Federal  Reserve and Congress might rescue a large financial group rather than  allow it to fail like Lehman Brothers. Dodd-Frank, the legislation  signed into law a year ago next week, was supposed to prevent bail-outs  by allowing the government to seize and wind down safely an ailing “systemically important financial institution”, or Sifi.
 

But  in a research note, S&P said: “We believe the government may try to  avoid contagion and a domino effect if a Sifi finds itself in a  financially weakened position in a future crisis.”The agencies’ views are crucial to the fight over whether the  phenomenon of “too big to fail” has been ended. If not, the largest  banks will continue to enjoy a funding advantage over their smaller  rivals.

And see this (written after the passage of Dodd-Frank).

Why Break Up the Giant Banks?

Virtually all independent economists and financial experts say that the giant banks are too big, and that their very size is hurting the economy:

• Nobel prize-winning economist, Joseph Stiglitz

• Nobel prize-winning economist, Ed Prescott

• Nobel prize-winning economist, Paul Krugman

• Former chairman of the Federal Reserve, Alan Greenspan

• Former chairman of the Federal Reserve, Paul Volcker

• Former Secretary of Labor Robert Reich

• Dean     and professor of finance and economics at Columbia Business School,    and  chairman of the Council of Economic Advisers under President  George   W.  Bush, R. Glenn Hubbard

• Former Director of the National Economic Council Larry Summers

• Former chief IMF economist and economics professor Simon Johnson (and see this)

• President of the Federal Reserve Bank of Kansas City, Thomas Hoenig (and see this)

• President of the Federal Reserve Bank of Dallas, Richard Fisher (and see this)

• President of the Federal Reserve Bank of St. Louis,  Thomas Bullard

• Deputy Treasury Secretary, Neal S. Wolin

• The President of the Independent Community Bankers of America, a Washington-based trade group with about 5,000 members, Camden R. Fine

• The Congressional panel overseeing the bailout (and see this)

• The head of the FDIC, Sheila Bair

• Former Tarp overseer and creator of the Consumer Financial Protection Bureau, Elizabeth Warren

• The head of the Bank of England, Mervyn King

• The leading monetary economist and co-author with Milton Friedman of the leading treatise on the Great Depression, Anna Schwartz

• Economics professor and creator of the “efficient market hypothesis”, Eugene Fama

• Economics professor and senior regulator during the S & L crisis, William K. Black

• Economics professor, Nouriel Roubini

• Economics professor, James Galbraith

• Economist, Marc Faber

• Professor of entrepreneurship and finance at the Chicago Booth School of Business, Luigi Zingales

• Economics professor, Thomas F. Cooley

• Economist Dean Baker

• Economist Arnold Kling

• Former investment banker, Philip Augar

• Chairman of the Commons Treasury, John McFall

• Leading bank analyst, Chris Whalen

Why do these experts say the giant banks need to be broken up?

Well, small banks have been lending much more than the big boys.  The giant banks which received taxpayer bailouts have been harming the economy by slashing lending, giving higher bonuses, and operating at higher costs than banks which didn’t get bailed out.

As Fortune pointed out, the only reason that smaller banks haven’t been able to expand and thrive is that the too-big-to-fails have decreased competition:

Growth    for the nation’s smaller banks represents a reversal of trends from   the  last twenty years, when the biggest banks got much bigger and many   of  the smallest players were gobbled up or driven under…

As  big   banks struggle to find a way forward and rising loan losses  threaten  to  punish poorly run banks of all sizes, smaller but well  capitalized   institutions have a long-awaited chance to expand.

So the very size of the giants squashes competition, and prevents the small and medium size banks to start lending to Main Street again.

And as I noted in December 2008, the big banks are the major reason why sovereign debt has become a crisis:

The   Bank for International Settlements (BIS) is often called the “central   banks’ central bank”, as it coordinates transactions between central   banks.

BIS points out in a new report that the bank rescue packages have transferred significant risks onto   government balance sheets, which is reflected in the corresponding   widening of sovereign credit default swaps:

The   scope and magnitude of the bank rescue packages also meant that   significant risks had been transferred onto government balance sheets.   This was particularly apparent in the market for CDS referencing   sovereigns involved either in large individual bank rescues or in   broad-based support packages for the financial sector, including the   United States. While such CDS were thinly traded prior to the announced   rescue packages, spreads widened suddenly on increased demand for  credit  protection, while corresponding financial sector spreads  tightened.

In  other words, by assuming huge portions of  the risk from banks trading  in toxic derivatives, and by spending  trillions that they don’t have,  central banks have put their countries  at risk from default.

A study of 124 banking crises by the International Monetary Fund found that propping banks which are only pretending to be solvent hurts the economy:

Existing  empirical research has shown that providing assistance to banks  and  their borrowers can be counterproductive, resulting in increased  losses  to banks, which often abuse forbearance to take unproductive  risks at government expense. The typical result of forbearance is a  deeper hole in the net worth of banks, crippling tax burdens to finance  bank bailouts, and even more severe credit supply contraction and  economic decline than would have occurred in the absence of forbearance.

Cross-country   analysis to date also shows that accommodative policy  measures (such   as substantial liquidity support, explicit government  guarantee on   financial institutions’ liabilities and forbearance from  prudential   regulations) tend to be fiscally costly and that these  particular policies do not necessarily accelerate the speed of economic  recovery.

***

All too often, central banks privilege stability over cost  in the heat of the containment phase: if so, they may too liberally  extend loans to an illiquid bank which is almost certain to prove  insolvent anyway.   Also, closure of a nonviable bank is often delayed for  too long, even   when there are clear signs of insolvency (Lindgren,  2003). Since bank   closures face many obstacles, there is a tendency to  rely instead on   blanket government guarantees which, if the government’s  fiscal and   political position makes them credible, can work albeit at  the cost of placing the burden on the budget, typically squeezing future  provision of needed public services.

Now,  Greece, Ireland, Portugal, Spain, Italy and many other European countries – as well as  the U.S. and Japan – are facing serious debt crises. We are no longer  wealthy enough to keep bailing out the bloated banks.

Indeed, the top independent experts say that the biggest banks are insolvent (see this, for example), as they have been many times before. By failing to break up the giant banks, the government will keep taking emergency measures (see this and this) to try to cover up their insolvency.  But those measures drain the life blood out of the real economy.

And by failing to break them up, the government is guaranteeing that they will take crazily risky bets again and again, and the government will wrack up more and more debt bailing them out in the future.

Moreover, Richard Alford – former New York Fed economist, trading floor economist and strategist – recently showed that banks that get too big benefit from “information asymmetry” which disrupts the free market.

Indeed, Nobel prize-winning economist Joseph Stiglitz has noted that giants like Goldman are using their size to manipulate the market:

“The    main problem that Goldman raises is a question of size: ‘too big to    fail.’ In some markets, they have a significant fraction of trades. Why    is that important? They trade both on their proprietary desk and on    behalf of customers. When you do that and you have a significant    fraction of all trades, you have a lot of information.”

Further,    he says, “That raises the potential of conflicts of interest, problems    of front-running, using that inside information for your proprietary    desk. And that’s why the Volcker report came out and said that we need    to restrict the kinds of activity that these large institutions have.  If   you’re going to trade on behalf of others, if you’re going to be a    commercial bank, you can’t engage in certain kinds of risk-taking    behavior.”

The giants (especially Goldman Sachs) have also used high-frequency program trading  which not only distorts the markets – making up more than 70% of stock trades – but which also lets the    program trading giants take a sneak peak at what the real (that is,    human)  traders are buying and selling, and then trade on the insider    information. See this, this, this, this and this. (This is  frontrunning,    which is illegal; but it is a lot bigger than garden variety    frontrunning, because the program traders are not only trading based on    inside knowledge of what their own clients are doing, they are also trading based on knowledge of what all other traders are doing).  Goldman also admitted that its proprietary trading program can “manipulate the markets in  unfair ways”.

Moreover, JP Morgan Chase, Bank of America, Goldman Sachs, Citigroup, and Morgan Stanley together hold 80% of the country’s derivatives risk, and 96% of the exposure to credit derivatives. Experts say that derivatives will never be reined in until the mega-banks are broken up – and see this – even though the lack of transparency in derivatives is one of the main risks to the economy.

The giant banks have also allegedly used  their Counterparty Risk Management Policy Group (CRMPG) to exchange secret information and formulate coordinated  mutually beneficial actions, all with the government’s blessings.

Again, size matters.  If a bunch of small banks did this,  manipulation   by numerous small players would tend to cancel each other  out.  But  with  a handful of giants doing it, it can manipulate the  entire economy  in  ways which are not good for the American citizen.

Further, fraud was one of the main causes of the Great Depression and the current financial crisis.  The banks are so big that they are buying off politicians so that it has become official policy not to prosecute fraud.   Indeed, everyone from Paul Krugman to Simon Johnson has said that the banks are so big and politically powerful that they have bought the politicians and captured the regulators. So their very size is allowing economy-killing corruption to flourish.

Moreover, the banks’ enormous size means that the executives make orders of magnitude more in bonuses and salary than the executives of small banks.  They are so big that their executives are living like kings.  This is making inequality worse … and rampant inequality was another primary cause of the Great Depression and the current financial crisis.

Indeed, failing to break up the big banks will result in the sale of national assets and the looting of national treasuries in order to pay off debts to the giant banks.  This, in turn, will destroy the national sovereignty of virtually every country.

Leading independent bank analyst Christopher  Whalen argues:

The  fraud and obfuscation now  underway in  Washington to protect the    TBTF  [i.e. giant or "too big  to fail"] banks … totals into the   trillions of dollars and rises to     the level of treason.

Just look at Greece.  That is our future – and see this – unless we break up the “too big to fails”.

These concepts have been known for hundreds of years:

“When a government is dependent upon bankers for money, they and not   the leaders of the government control the situation, since the hand that   gives is above the hand that takes… Money has no motherland;   financiers are without patriotism and without decency; their sole object   is gain.”
- Napoleon Bonaparte

“There are two ways to conquer and enslave a nation. One is by the sword. The other is by debt.”
- John Adams

“If   the American people ever allow the banks to control issuance of their   currency, first by inflation and then by deflation, the banks and   corporations that grow up around them will deprive the people of all   property until their children will wake up homeless on the continent   their fathers occupied”.
— Thomas Jefferson

“I  believe that   banking institutions are more dangerous to our liberties  than standing   armies…The issuing power should be taken from the banks  and restored   to the Government, to whom it properly belongs.”
- Thomas Jefferson

“[It was] the poverty caused by the bad influence of the English     bankers on the Parliament which has caused in the colonies hatred of the     English and . . . the Revolutionary War.”
- Benjamin Franklin

“The   Founding Fathers of this great land had no difficulty whatsoever    understanding the agenda of bankers, and they frequently referred to    them and their kind as, quote, ‘friends of paper money. They hated the    Bank of England, in particular, and felt that even were we successful  in   winning our independence from England and King George, we could  never   truly be a nation of freemen, unless we had an honest money  system. ”
-Peter Kershaw, author of the 1994 booklet “Economic Solutions”

“[T]he   creation and circulation of bills of credit by revolutionary    assemblies…coming as they did upon the heels of the strenuous efforts    made by the Crown to suppress paper money in America [were] acts of    defiance so contemptuous and insulting to the Crown that forgiveness was    thereafter impossible . . . [T]here was but one course for the crown   to  pursue and that was to suppress and punish these acts of    rebellion…Thus the Bills of Credit of this era, which ignorance and    prejudice have attempted to belittle into the mere instruments of a    reckless financial policy were really the standards of the Revolution.     they were more than this: they were the Revolution itself!”
- Historian Alexander Del Mar

“The   British Parliament took away from America its  representative money,   forbade any further issue of bills of credit,  these bills ceasing to be   legal tender, and ordered that all taxes  should be paid in coins …   Ruin took place in these once flourishing  Colonies . . . discontent   became desperation, and reached a point . . .  when human nature rises  up  and asserts itself.”
- British historian John Twells

One of the brightest regulars who comments on my blog has a totally distorted view of what Libertarian economics is all about. Unfortunately, I am quite confident that her view is mainstream.

Tin Hat writes …

Here is the core premise behind libertarian economics:

The private business sector will put ethics, morality and public employee good above profits, shareholders, bonuses, golden parachutes and CEO compensation — IF they were completely unfettered from any government imposed rules, laws, and regulations.

And IF the private sector entity failed in its fiduciary duty to the public, Main Street would rise up and kick them out.

That’s Corporatism.

Regulation Model vs. the Libertarian Model

Sorry Tin Hat but that is not what Libertarian economics is all about or stands for at all.

First let’s ponder the “Regulation” Model.

The “Regulation” model assumes Barney Frank (feel free to substitute your least favorite representative) will write responsible legislation and Congress will stop taking bribes for legislation they want.

Here are some examples of what the regulation models has wrought.

• The regulation model sponsored Fannie Mae and Freddie Mac.
• The regulation model gave huge tax breaks written by GE for GE
• The regulation model encourages flight of jobs overseas
• The regulation model supports corrupt public unions that have bankrupted cities and states
• The regulation model gave us the Fed and its bubble blowing policies
• The regulation model gave us thousands of affordable home programs all of which drove up the price of homes
• The regulation model provides hundreds of billions of dollars of student loans the effect of which is to make those graduating from school now, perpetual debt slaves.
• The regulation model gave us a healthcare bill we literally “had to pass to find out what was in it” according to Nancy Pelosi. Congress did not write that bill, it was entirely written by a consortium of special interest lobbyists.

I can provide thousands of more examples of what the “regulation” model has given us.

The very best financial regulation will ever do is prevent the last crisis. However, we are not going to have another housing bubble for decades. At worst, and far more likely, new financial regulation is highly likely to sow the seeds of the next crisis.

Regulation sponsoring Moody, Fitch and the S&P did just that. So did thousands of affordable housing programs. So did the Community Reinvestment Act. So did sponsorship of Fannie Mae and Freddie Mac. So did HUD. So did thousands of financial loopholes. And most importantly so did the legislation that created the Fed and FDIC.

The legislation model has been disproved in spades yet otherwise intelligent people keep clamoring for more of it as if we could find, hire, and listen to some “all-knowing” super-regulator that can identify the next crisis in advance and write timely legislation that the likes of Barney Frank would deem wise and pass.

The idea is ludicrous given we cannot even get consensus about what to do after the housing bubble has already burst. Also bear in mind the Fed is supposed to regulate the economy. How well did that work out?

It’s preposterous to believe that Congress can identify and appoint some sort of super-regulator because no such person exists in the first place.

Sure, many people identified the housing bubble in advance. I did, so did other bloggers and so did people like Elizabeth Warren.

What good did it do?

I am quite certain a huge number of bight people can identify the next crisis. Indeed they already have. Some people are calling for hyperinflation, some are calling for deflation, some are calling for stagflation, some think Japan will blow up, and others think peak oil will send oil prices to the moon. Some think printing money is a good idea, others don’t.

Lots of people are going to be right because there are lots of people in every one of those camps, and one of them is guaranteed to happen. When one of them does, many people will say “I told you so”.

So who do you want the Fed to believe?

I don’t want the Fed to act on any of those calls because there should not be a Fed in the first place. The Fed failed as a regulator, again, and again, and again.

Libertarian Economic Model

The Libertarian model does not end all regulation. Indeed the basis of the Libertarian economic model is that we need to protect private property, prevent fraud, protect human rights, and give everyone an equal chance under the law.

Had we done that, and “just” that we would not be in this mess.

In the Libertarian model, Fannie Mae and Freddie mac would not have existed. Nor would there have been a Fed keeping interest rates too low, too long. Without the loose lending model of the Fed, and without banks being able to lend more money than they have, the housing securitization model that blew up would not have happened or if somehow it did, it would have been less problematic by orders of magnitude

In the Libertarian model, there would not have been government sponsorship of the rating agencies Moody’s, Fitch, and the S&P.

In the Libertarian model the construct of “Too big to fail” does not exist. Indeed, allowing failure is one of the tenants of the Libertarian model.

Note that something like Glass-Steagall would work in the context of a Libertarian model because its purpose is to put a firewall to prevent fraud. Pollution laws would still be needed to protect private property. Child labor laws would still be needed to protect human rights. Public safety laws are fine. No one would be allowed to yell “fire” in a movie theater.

If you want to take that model and add some social safety nets, all but strict Libertarians might agree.

Failure of Regulation

All the corporatism, all the bank failures, the credit bubble, the housing bubble, and all the warmongering is a direct result “of” regulation that Libertarian economics has nothing to do with.

Indeed most of those those things could not happen in a Libertarian model. To the extent that any of them could happen, they would not occur to the same magnitude.

Libertarian Solution

The solution is to throw away all legislation except what is needed to protect private property, prevent fraud, protect human rights, and give everyone an equal chance under the law.

That means all tax breaks that favor GE as well as all tax breaks for homes, have to go. Tax code should not favor any group or thing. Drug imports from Canada would be allowed in this model and warmongering would stop. Subsidies to home builders would stop. Subsidies for ethanol would stop. In fact, subsidies for everything would stop.

Government would not be allowed to spend more than it takes in, banks would not be allowed to lend more money than they have ownership of, and the Fed would be abolished.

Instead, those in the regulation camp want to patch a million misguided pieces of legislation that should not even exist, and worst of all they expect Barney Frank to get it right.

One model has been tried and failed a million times. One model has never been tried.

Yet misguided souls want more of the model guaranteed to fail. Quite frankly it is preposterous.

Mike “Mish” Shedlock
Global Economic Analysis