Last week the Federal Reserve announced new ‘Enhanced Prudential Standards and Early Remediation Standards as required by the dreadful Dodds-Frank law. As recent history advises, if Ben Bernanke can mess things up he assuredly will do so. And once again, the historical message is spot on.
The issue addressed by the Federal Reserve is how to prevent the 2008 financial crisis from ever recurring. To deal with that issue, it is important to identify what did and what did not trigger that financial crisis. So let us start right there – something incidentally that the Fed does not do in some 168 waste-of-time pages.
The 2008 financial crisis was a classic bank run. Investors pulled money from banks that had speculated wildly in junk mortgage bonds that had been packaged and falsely promoted by two corrupt GSEs, Fannie Mae and Freddie Mac, both operating under pressure from vote-seeking presidents and vote-seeking congressional politicians.
Center-stage in creating that bank run were two especially unethical politicians, Christopher Dodd and Barney Frank who, in typical Washington Cosa Nostra style, were subsequently empowered to write new financial regulations supposedly designed to secure the public from their own filthy hands.
The Federal Reserve and the Treasury could swiftly have aborted the run – and stopped it for all time – by cutting off all lender-of-last resort funding to the leading five or six insolvent U.S. banks, denying any bail-out funding to anyone involved except the insured bank depositors, and allowing the laws of bankruptcy to take an expedited course. In such an environment, there would be no ‘too-big-to-fail’ moral hazard problem. And little or no reason to worry over any potential repetition of excessive speculation within the banking system.
Given that the Fed and the Treasury pursued policies exactly opposed to those that should have been in place, moral hazard now exists, and must be aggressively addressed. But not in the shiftless manner now proposed by the Federal Reserve: requiring the bank-casinos to put less than one investor dollar at risk for every ten borrowed dollars; restricting the big banks to betting no more than 10 percent of their equity on a single counterparty; and requiring a bank’s covered board of directors to oversee its its liquidity risk management processes. Each and every one of these new rules can and will be manipulated by the next generation of corrupt bank employees trained in the ethically-challenged quadrangles of Harvard and Yale.
What is now required is a return to Glass-Steagall separation of commercial banking from casino-banking. Lender of last resort and depositor insurance should be limited strictly to commercial banks. Anyone who chooses to play in the casino should do so caveat emptor. Antitrust laws should be applied strictly to the commercial banks as a means of avoiding the too-big-to-fail moral hazard. Strict and completely transparent reporting rules should be applied to the commercial banks. Tier One Capital to total liability ratios for all commercial banks should be held at a minimum of 12 per cent. Expedited bankrupcy should be required of any commercial bank that breaches the rules and/or becomes insolvent.
That is all that is needed to avoid future financial crises affecting the commercial banks. And frankly, who cares about the casinos except those who indulge them? And the gamblers should be strictly on their own; every last tub on its own bottom, so to speak.
In the Goldman Sachs’ of this world, no one in his right mind should ever trust. And we cannot write rules to protect the insane, except to incarcerate them in suitable medical facilities.