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> "Bank regulation tends to backfire" Warning: <rant> Hmm ..., let's see: As I recall, in the 1920s some "unregulated banks" were a major part of the mecha

by graycat 12y ago

> "Bank regulation tends to backfire" Warning: <rant> Hmm ..., let's see: As I recall, in the 1920s some "unregulated banks" were a major part of the mechanism that caused the US economic boom of the 1920s, the stock market crash of 1929, the banking crisis soon afterward, i.e., runs on the banks, catastrophic shrinking of the money supply, massive price deceases, massive unemployment, bankruptcies, the Great Depression in the US, the US slowing buying from Europe, the Great Depression spreading to Europe, the great economic stress in Germany, the rise of Hitler for a command economy, which actually did get the German economy going again, WWII, the deaths of maybe, what, 50 million people, maybe 100 million, ah, why sweat over few tens of millions of people more or less (right, Marc?), and, then, some really severe laws for the regulation of banks. We said, "never again will the banks do that to us". Indeed, from now on the banks will be creatures of the US Federal Reserve. But, in 2008, with not enough regulation, the banks did it to us again. Hurt a lot of people, and we got some more banking regulations. BTW, we are still cleaning up the mess the banks left behind, once again, in 2008. Paulson, Bernanke, etc. remembered with full clarity and had no doubts: "Your banking regulator is sitting right here, and if you don't take this money you will be declared capital deficient on Monday morning. ... You will not leave here before you sign the paper in front of you." Paulson, Bernanke were just determined, as immediately was Congress, that the US banks would not fail; there would be liquidity; the banks would be well capitalized with plenty of reserves with no doubts; there would not be runs on the banks; AIG could be $85 billion in the hole and cause no problems, etc. Bernanke was just determined not to be the Fed Chair who presided over the second Great Depression, e.g., from banking regulation failures. Marc, in the US, we regulate the banks. The US Federal Reserve, etc. has the banks by the short hair, holds on with a tight grip, and just will not let go. Marc, are we learning, now? Are we getting some clarity about banking "regulation"? In many ways, in social and psychological capital, the US is still recovering from the severe damage and losses of the Great Depression and WWII: People that lived through those years, and many didn't, often suffered horribly and, thus, did some relatively poor parenting, passing on a lot of really strong anxieties and not nearly enough in security, insight, social, psychological, emotional, artistic, and intellectual capital. The anxieties led to stresses led to depression, incapacitation, more stresses, more depression, clinical depression, a huge range of social problems, including some suicides. I know far too much about what I am describing. We're talking big deficits in social and psychological capital passed from parents to children. We have not recovered yet. It appears that full recovery will take a few more generations. E.g., I can believe that a tribe in Brazil that never saw civilized people is generally much happier than people in the civilized countries that went through the Great Depression and WWII. Those tribes have no banks, bubbles, and Great Depressions. The Great Recession? Still a lot of people are not yet back to work, and that situation is well known to lead to more in abused wives, abused children, alcoholism, drug abuse, crime, infant mortality, divorce, and suicides, little results like those. Marc, you can understand wrecked families, right? It seems that banking regulation is just crucial unless, of course, we want to kill tens of millions of people a few times each century. Ah, let's don't just mince words, kill a few hundreds of millions of people a few times each century? More? Sure, maybe more! Right, Marc? Sure, I know; I know; we can agree that the dangers of unregulated banks won't last very long. I mean, that is, don't you see, another WW will mean we no longer need any more banking regulations, or coal, natural gas, oil, cars, houses, plastics, trash pickup, clothes, schools, hospitals, restaurants, smart phones, libraries, the Internet, venture capital firms, venture partners, or people -- there won't be anymore people, puppy dogs, kitty cats, birds, etc. Gee, "Look, Ma, no more banking regulations! Ma? Ma? Are you there, Ma? Ma, where are you? Ma!!!!" Thank you Marc. Your knowledge of finance, banking, and economics is showing through with great clarity!!!!!! Gee, I thought that we were all supposed to understand financial bubbles, the Great Depression, etc. by, what, somewhere in middle school? Marc, did you skip middle school? Maybe you'd want to go back, sit in the front row, and pay attention? And put away your mobile devices. Unregulated banking? I'd rather give chunks of plutonium to naughty 8 year old boys just to see what they could do with it. Marc, unregulated banking is the fast way to the end of at least human life on earth. Wouldn't be very good for your deal flow or venture returns either! Sorry to be so negative: 50 million, maybe 100 million, dead, the suffering of my ancestors and my wife's ancestors who went through the Great Depression and WWII and the Cold War tend to make me a little, just a little, shall we say sensitive on this subject. But, I'd rather be sensitive and negative than silent and dead. Right, it's just my opinion, and YMMV. </rant>

maxerickson 12y ago
The Federal Reserve system was established in 1913, in response to some earlier crises. The primary banking related response to the depression was the Glass–Steagall Act: http://en.wikipedia.org/wiki/1933_Banking_Act http://en.wikipedia.org/wiki/1933_Banking_Act It established the FDIC and curtailed speculative investment at commercial banks. There were some provisions giving the Fed some more powers and encouraging banks to become members, but those were at least as much about establishing lending facilities as they were about regulation.
- graycat 12y ago
  Agreed. But in practice the larger banks have no choice but to become Member banks so that in effect they are creatures of the Fed. 1913? A story went we didn't want to have to depend on J. P. Morgan again! To concentrate on the crucial bigger picture, I omitted mention of Glass-Steagall or its revisions that helped bring on 2008. So, banks are regulated on their reserve ratios, etc. My post boils down to a dirt simple but still basically correct: For banking regulated good, unregulated bad, very bad. For something this important, something dirt simple but still correct has some advantages.
  - praxeologist 12y ago
    >My post boils down to a dirt simple but still basically correct: For banking regulated good, unregulated bad, very bad. For something this important, something dirt simple but still correct has some advantages. I don't think your analysis is correct much at all. Perhaps you are genuinely not aware that these crises were the result of government intervention. I suggest you to read Rothbard's What Has Government Done to Our Money here: http://mises.org/money.asp http://mises.org/money.asp
    - graycat 12y ago
      Thanls for the link. I just followed it, and I believe I get the gist of what he is saying. I've heard of the Austrian economist before and heard some of the arguments. Of course, there are many examples from history that support those points. Right, on the banks, we can have (1) no regulation, (2) bad regulation, or (3) good regulation. I have to conclude that (1) no regulation is not a good solution because, with the history of banking crises, e.g., the crises that led to the 1913 regulations, when there was no regulation, since banking has such a crucial role in the economy and also has motivations for profit, we can too easily get serious systemic problems. E.g., banks need to be told to have sufficient reserves. For (2) bad regulation: Sure we don't want that. For (3) good regulation, maybe we can't really get that. And maybe attempts at (3) historically have caused lots of problems, e.g., dumb, nasty governments printing money by the trillions of trillions. Still, we don't want (1) or (2). So, we do the best we can trying to get (3). Here in the US, at least since 1933, I believe that the regulation worked fairly well (as intended, not so well more broadly, e.g., didn't get us out of the Great Depression; we didn't get people back to work until people started shooting at us and we started war production, in which case supposedly within 90 days everyone had at least one job offer and many people had 1+ jobs) until the crash of 2008. Well? No, only fairly well. My guess is that that regulation did work better than we would have had with (1) no regulation. My first cut take on your concerns is that you are more concerned about the Fed and it's role in the money supply than just banking regulation. So, right, for a recent mess up, Greenspan actually feared, in simple terms, that all the computers would stop on January 1, 2000 and, from this fear, opened up the money supply to keep the economy going nevertheless and, net, printed too much money. So, we get a suspicion: To drive the best in a straight line or fly an airplane at a constant altitude in a straight line, just tie the controls down with strong rope and keep human hands far away. Well, if only due to lots of random exogenous influences, that simplistic constant control doesn't work very well for cars, airplanes, or a money supply or an economy. Instead, we need a pilot, right, a good pilot, and maybe Greenspan was not so good near year 2000. Or, maybe instead of a Fed, just go on a gold standard. Maybe. But, I was talking about banking regulation and not so much what nasty governments can do to mess up the money supply with printed money. We regulate lots of things, medicines (safety and efficacy), food safety, auto safety, building safety (e.g., building codes, e.g., to protect against another shirtwaist factory or whatever it was fire), caps on aspirin bottles, age for drinking beer, and much more. Do I like some mandate of anti-lock brakes on cars? Nope: I don't want the extra cost at purchase or maintenance. Regulation on car tailpipe emissions? Out in the country, say, 90% of the US land area, I see little need for the regulations, but I concede that in the cities the regulations are from helpful and justified up to just crucial. Yes, those regulations recently cost me $300 for a catalytic converter, with, maybe, platinum, when out in the country where I live a simple piece of pipe, for maybe $2, would have been fine. But, no joke, the regulations did a lot to clean up the air in the cities, with no doubt good health effects. Even I'm not enough of a libertarian to conclude that we should have no regulations.

by graycat 12y ago

maxerickson 12y ago

The Federal Reserve system was established in 1913, in response to some earlier crises. The primary banking related response to the depression was the Glass–Steagall Act: http://en.wikipedia.org/wiki/1933_Banking_Act http://en.wikipedia.org/wiki/1933_Banking_Act It established the FDIC and curtailed speculative investment at commercial banks. There were some provisions giving the Fed some more powers and encouraging banks to become members, but those were at least as much about establishing lending facilities as they were about regulation.

graycat 12y ago
Agreed. But in practice the larger banks have no choice but to become Member banks so that in effect they are creatures of the Fed. 1913? A story went we didn't want to have to depend on J. P. Morgan again! To concentrate on the crucial bigger picture, I omitted mention of Glass-Steagall or its revisions that helped bring on 2008. So, banks are regulated on their reserve ratios, etc. My post boils down to a dirt simple but still basically correct: For banking regulated good, unregulated bad, very bad. For something this important, something dirt simple but still correct has some advantages.
- praxeologist 12y ago
  >My post boils down to a dirt simple but still basically correct: For banking regulated good, unregulated bad, very bad. For something this important, something dirt simple but still correct has some advantages. I don't think your analysis is correct much at all. Perhaps you are genuinely not aware that these crises were the result of government intervention. I suggest you to read Rothbard's What Has Government Done to Our Money here: http://mises.org/money.asp http://mises.org/money.asp
  - graycat 12y ago
    Thanls for the link. I just followed it, and I believe I get the gist of what he is saying. I've heard of the Austrian economist before and heard some of the arguments. Of course, there are many examples from history that support those points. Right, on the banks, we can have (1) no regulation, (2) bad regulation, or (3) good regulation. I have to conclude that (1) no regulation is not a good solution because, with the history of banking crises, e.g., the crises that led to the 1913 regulations, when there was no regulation, since banking has such a crucial role in the economy and also has motivations for profit, we can too easily get serious systemic problems. E.g., banks need to be told to have sufficient reserves. For (2) bad regulation: Sure we don't want that. For (3) good regulation, maybe we can't really get that. And maybe attempts at (3) historically have caused lots of problems, e.g., dumb, nasty governments printing money by the trillions of trillions. Still, we don't want (1) or (2). So, we do the best we can trying to get (3). Here in the US, at least since 1933, I believe that the regulation worked fairly well (as intended, not so well more broadly, e.g., didn't get us out of the Great Depression; we didn't get people back to work until people started shooting at us and we started war production, in which case supposedly within 90 days everyone had at least one job offer and many people had 1+ jobs) until the crash of 2008. Well? No, only fairly well. My guess is that that regulation did work better than we would have had with (1) no regulation. My first cut take on your concerns is that you are more concerned about the Fed and it's role in the money supply than just banking regulation. So, right, for a recent mess up, Greenspan actually feared, in simple terms, that all the computers would stop on January 1, 2000 and, from this fear, opened up the money supply to keep the economy going nevertheless and, net, printed too much money. So, we get a suspicion: To drive the best in a straight line or fly an airplane at a constant altitude in a straight line, just tie the controls down with strong rope and keep human hands far away. Well, if only due to lots of random exogenous influences, that simplistic constant control doesn't work very well for cars, airplanes, or a money supply or an economy. Instead, we need a pilot, right, a good pilot, and maybe Greenspan was not so good near year 2000. Or, maybe instead of a Fed, just go on a gold standard. Maybe. But, I was talking about banking regulation and not so much what nasty governments can do to mess up the money supply with printed money. We regulate lots of things, medicines (safety and efficacy), food safety, auto safety, building safety (e.g., building codes, e.g., to protect against another shirtwaist factory or whatever it was fire), caps on aspirin bottles, age for drinking beer, and much more. Do I like some mandate of anti-lock brakes on cars? Nope: I don't want the extra cost at purchase or maintenance. Regulation on car tailpipe emissions? Out in the country, say, 90% of the US land area, I see little need for the regulations, but I concede that in the cities the regulations are from helpful and justified up to just crucial. Yes, those regulations recently cost me $300 for a catalytic converter, with, maybe, platinum, when out in the country where I live a simple piece of pipe, for maybe $2, would have been fine. But, no joke, the regulations did a lot to clean up the air in the cities, with no doubt good health effects. Even I'm not enough of a libertarian to conclude that we should have no regulations.