It’s been over four years since the financial crisis ripped through the American banking system like a viral disease and put the world economy in a coma. From that fateful Autumn when Washington took off the blinds and showed its allegiance to the banking system by shoving almost $1 trillion in the pockets of Wall Streeters, public outcry has diminished to a low mute. Various political uprisings spawned in the wake in the blatantly fascist effort deceptively labeled the Troubled Asset Relief Program, each falling back into complicity of the prevailing order. Times change; and so do people’s priorities.
Today the big banks are larger than ever with assets to the tune of $8.5 trillion. Public interest for reining in the excess has largely faded away while the political will to crack the whip lingers. Back in 2010, the regulatory bill named after the toad-resembling Congressman Barney Frank and Senator turned Hollywood whore Chris Dodd passed Congress to much fanfare and little results. Certainly no financial meltdowns have struck, but catastrophic events in complex systems like economies are not a common occurrence. Still, there is an unease in many, ignorant in basic economics as they are, over another contagion event that could tear a hole in the collective balance sheet of the banking system.
Senators Sherrod Brown of Ohio and David Vitter of Louisiana are coming together to put out the fire before it grows any bigger. Their newly introduced bill to tame the big banks includes a 15% reserve requirement for mega institutions that hold over $500 billion in assets. Currently, the Fed mandates banks hold at least 10% of their deposits at the vault of the central bank. The Brown-Vitter effort would force large players to keep more of their deposits on hand, thus decreasing the amount available to lend out and put to work. In theory and practice, it would seem quite sensible to limit the amount by which the banking class can get themselves in trouble with. But as is the case with all government legislation, this is kabuki theater designed as a pat on the back for “doing something” instead of accomplishing a laudable goal.
The Brown-Vitter legislation is being hailed as reform with enough bite to actually subdue the reckless tendency of banks. It’s assumed that economic catastrophes stem from the financial system – a suspicion that is more or less correct. Given money’s ubiquitous role in the operation of a modern economy, the notion of a select bunch of finely dressed men on Wall Street sending the economy careening off into another abyss is a sane concern. The question is why the practice of deposit warehousing and lending appears to give birth to all types of calamity. In better terms, why does the banking system seem to be at heart of, in Murray Rothbard’s words, an entrepreneurial “cluster of errors?”
The answer is contained in the Brown-Vitter bill, as well as every government crackdown on lending. Praise is being thrust upon the Brown-Vitter legislation for the new reserve requirement. It begs inquiring as to why stop at 15% and not extend all the way to 100%? I assume every crank economist would object to such a stringent restriction because it would greatly deplete a bank’s ability to earn revenue by borrowing short and lending long. But, therein lies the problem: it is the loaning out of unbacked funds which leaves the banking system, and thus the economy, privy to downturn. Slapping a 15% reserve requirement on the largest financial institutions does little to address the continual teetering on the brink fractional reserve practices create.
In any other industry, claiming to warehouse a good while simultaneously applying ownership of said product to another party constitutes fraud. For instance, if a car service center were to lend a customer’s automobile without his express consent, a legal case could be made should the original owner discover the operation. The same concept applies to banking, except the loaning of deposits available on demand is quite common. There exists a deeper contradiction in fractional reserve banking – one that violates the very nature of the physical world. When a depositor puts his money in a bank, assuming it is loaned out, two objects are created out of one when only one truly exists. A contradiction of rights (as in the claim to the money) comes into play, which Walter Block calls a “logical impossibility.”
The crew lapping praise over bank regulation rarely give an iota of consideration to the fraudulent nature of present banking. Paul Curmudgeon (Krugman), who never tires of filling the Grey Lady’s sheets with Keynesian tirades, will spill plenty of ink over the great need for oversight but never devotes a word, let alone a paragraph, to the special privilege afforded to the banking class. The fiction posing as economic ideology in major press presumes the creation of money and credit facilitate economic growth in a positive manner. Yet the expanding of money substitutes – that which represents real money – is not at all similar to the pro-creating stones of Pyrrha and Deucalion. The poisonous idea that an increasing amount of money is needed for robust, modern economies is pervasive in much of the public. But the production of what Mises named “fiduciary media” beyond society’s collective time preference in the form of real savings does not facilitate economic vigorousness; it simply sets the stage for a subsequent bust. The money is lent, pushing up the asset prices of first receivers along the way. Along with a central banks’ inflating of the money supply, the expansion of unbacked credit induces malinvestments through the process of corrupting economic calculation. The old-fashioned dictum of there being “no free lunch” makes no exception. Eventually this process must be quelled to prevent inflationary pressures. The unraveling and ensuing corrections must then begin to liquidate themselves.
The talk surrounding the Brown-Vitter regulation bill is cheap to say the least. If passed, it will do little to prevent another economic bubble or financial crisis. The existence of the duration mismatch in deposit banking is what fosters the boom-bust cycle. All the political parroting that surrounds Wall Street regulation falls within a chasm of little length and even smaller intellectual depth. If the newest escapade in reining in the excesses becomes law of the land, it will do nothing but help the democratic peoples feel satisfied. Government and the banks are adjoined at the hip for each’s mutual benefit. No amount of outcry is going to sever the incestous partnership anytime soon.
The modern central banking system is setup for the express purpose of coordinating unbacked credit expansion, and thus increasing marginal profits with the charging of interest on loaned funds. In a sense, Ben Bernanke, or whoever happens to be chairman of the operation, is the conductor while the various bankers, moneylenders, and traders are musician men playing a symphony of destruction. As long as the masses don’t suspect anything is amiss with their deposits, there will be no grand effort to reclaim what is rightfully owned. The entire foundation of fractional reserve banking rests entirely on eroding sand.
The riches made in banking come from the privilege granted to create resources out of thin air. As famed bank robber Willie Sutton observed, banks are where the money is at. That depravity is alive and well today, albeit in a different manner. Under Roman law, it was plainly illegal to lend money and credit unbacked by real deposits. It’s a shame that lesson in justice and logic has been forgotten. Then again, such is the outcome of the omnipresent state dictating property rights.