Sure-Fire Solution to our Banking Woes

All of the government's efforts to force the banking industry to its knees will probably backfire. I have designed a perfect solution.


[Click on the image for a larger version.]

Basically, what I'm saying is:

Go back to something like Glass-Steagall and force separation of the commercial banking function and the investment banking function, and:

COMMERCIAL BANKS

1. Allow commercial banks to accept savings for deposit, and/or offer checking accounts, and to create credit only for commercial-paper purposes, based 100% on bills of lading with maximum 90-day payoff.

2. Allow commercial banks to invest in other sound instruments and loans, but ONLY up to the amount of the savings on deposit plus bank capital and equity. No credit creation permitted.

3. Allow commercial banks to function on a 10-20% reserve requirement, whichever the system finally decides is best through trial and error.

4. Allow commercial banks to function under the FDIC's umbrella, and allow the Fed to issue money only in times of war or of serious disruption of the interbank lending system (which is unlikely to occur, because these banks are not playing Santa Claus with credit).

On the other hand:

INVESTMENT BANKS

1. Force investment banks to change their structure to a partnership, where the partners are 100% liable for losses. Change the laws so that poor investments mean personal wipe-out for the partners.

2. No FDIC, no bailouts.

3. Put a big sign on the front door that says, "Enter at your own risk."

How simple is that? Fits on one page, not 2,300 like Dodd-Frank.

I think this might go a long way to solving our problems in the future. Of course, we must eliminate all government-sponsored banking enterprises and all government participation in the banking industry.

There's nothing like failure to teach people a lesson. It's call Creative Destruction.

Government Regulation Gone Amuck, Three More Examples in One Day: No. 5 is Banking

5. Banking. The banking industry is "shopping proposals to Congress" so as to shift risk and eventual losses from bad loans to taxpayers.

In this WSJ article by Damian Paletta, we learn that banks are turning to the federal government, i.e. us as taxpayers, to bail them out of their mistakes. Credit Suisse and J.P. Morgan Chase are both proposing that the government step into this mess and save their butts.

And of course the bonuses their "mistakes" incurred have already been paid, nonrefundable.

They are worried, among other things, that in trying to help homeowners by writing off a portion of subprime loans, "they [the banks] might be sued by investors who hold mortgage-backed securities [i.e. the creditors who actually hold the debt]. However, if the industry came forward with a standard backed by the Treasury Department, the legal concerns would likely fade."

In other words, when you're about to break your contracted word and you're scared of the repercussions, look for a big thug with a gun.


[Thanks to hitman2.com for the image.]

The second thing they want the government to do is to guarantee the bad loans with taxpayer money. Do you and I really want to pay up when some homeowner who (knowingly or unknowingly) got in over his head decides to walk away from his house?

If you ask me, forcing us innocent bystanders to pay for the bad bets of investors, bankers, mortgage brokers and naive or greedy homeowners, is tantamount to embezzlement, racketeering, and tutti quanti.

Wake up, people. Your representatives in the legislator are about to steal your money, and they don't even have to put a gun to your head.

See my next post for Example No. 6.