Monday, February 16, 2009

Lindsey Graham: We might have to nationalise the banks.

One has to wonder just how much trouble we are in when even Republicans like Lindsey Graham are publicly making such pronouncements.


Steel Phoenix said...

You think that's bad, I'm even wondering if it is a good idea, and I'm way less into government intervention than this guy.

It is a tough issue. The way I see it there are three main ways we can deal with this:
We can do nothing. This is high risk in the sense that if the banks fail, the government is obligated to pay for most of what the banks lose (FDIC guarantee of 250k per account), so if they fall, we pay anyway. As for if they will fail; deflation causes defaults, which causes bank failure; inflation higher than interest rates makes the banks lose money on all of their loans. Due to fractional reserve lending, this means they will fail if the economy is at all unstable. Seeing how we just doubled our money supply last year, this is pretty much going to happen. A failure of the banking industry impacts lending, which is central to the Ponzi schemes that are most modern businesses, and to the housing market. If everyone has to buy their houses with cash, the price is either going to fall a lot farther, or they are going to be bought by China.

We can do what we are doing now, which is leave them private and give them money, which they will abuse, both due to human nature and greed, and due to it being in the banks best interest to hold the money as long as the dollar is gaining value (which it has been since the bailout), because using it causes inflation (see dilemma above). This is just meddling, and isn’t healthy for anyone.

We can nationalize the banks. It wouldn’t be the first time, and it would give the government the leeway to adjust the system without fear of conflict of interest in the private sector. Obviously, the government has its own problems with inefficiency and corruption, and this essentially gives a competitive advantage to those banks which are subsidized by the government (as does our current meddling in which we have seen bailed out failures buy up successful competitors).

The problem is that we are so deep in this Keynesian lunacy, that switching systems guarantees a crash. What are we to do?

Kel said...

This might be "Keynesian lunacy" but wasn't it a lack of government oversight which allowed the bankers to create this mess in the first place?

Steel Phoenix said...

I would say no. I maintain that we were not in a system of freedom or central control, but rather one of heavy handed meddling.

The fed didn't completely control the banks, but it set interest rates, and Clinton put pressure on "Government Sponsored Entity" Fannie May to relax credit requirements in order to try to boost lending to low income buyers. HUD wanted them to keep 50% of their portfolios in loans to low income people. Bush was even worse.

The internet is a remarkable resource for recent history. Look around. Most people now talk about the housing crisis as if it began in '06, but it began before the turn of the century. Here is what realtytimes was saying in the beginning of '03

Government policies encouraged riskier lending. They did this 'encouraging' with threats to step in with GSE reform legislation in response to accounting scandals, and other such methods.

There is clear evidence of both carrots and sticks being used by the government. This is not free market. Fractional reserve banking is not a free market concept. From the wiki: "fractional reserve banking benefits the economy by providing regulators with powerful tools for manipulating the money supply, interest rates, and government debt creation. From a Keynesian point of view this debt creation provides governments with much greater latitude to stimulate the economy through government spending." Throw a central bank in there and it is even worse. Lack of oversight? There is a difference between no oversight and bad oversight.

Kel said...

Thanks for that, SP. I read the link and had no idea that Bush had done that. I was aware of Clinton's intervention but unaware that Bush had gone for people even more financially disadvantaged. Did he hope to turn them into possible Republicans the way Thatcher did over here when she sold a lot of the council houses?

Steel Phoenix said...

I think it more likely that he was trying to increase the money supply in order to reduce the trade deficit. Remember that as dumb as seems to be, he does have an MBA from Harvard. Maybe it was bought, or maybe he earned it. Anyway, the way the fractional reserve banking system works, when the bank gives out a home loan, they don't have to have more than 10% of the money on hand. The rest is basically just created on a balance sheet, but it is real. The people who sold the house got it, the money and interest that is payed back is real. I think it was just a sneaky way to cause inflation. He thought he could force China to depeg the Yuan. He blinked first.

Kel said...

Interesting thought SP. Thanks for that.