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No risk for the bankers
I found a GREAT article but, it isn't linked. I really like the rationale of Jim Grant. From The Daily Reckoning;
One Simple Step to Fix the U.S. Financial System Immediately
Jim Grant, editor of the eponymous Grant's Interest Rate Observer,
was the speaker. The occasion was a lecture -- called a "Tea Talk" --
one of many put on every so often by our former employer Dr. Ron Paul.
The Great Depression, we remember the tall, thin, bow-tied Grant saying,
ended "something called 'double liability in bank shareholdings.'"
Today:
"Before 1935, if a bank failed, the shareholders of the bank got a capital
call. The courts insisted that they, the shareholders, put up funds with
which to pay off the creditors, including the depositors. It was their
bank. It wasn't the taxpayer's' bank, it wasn't the government's bank,
it was their bank. If the bank failed, the stockholders should put the
money up. That was capitalism.
"Gradually, and by degree since the early 1930s, it seems to me, we have evolved a
system of socialized finance. Socialized in one direction chiefly: To
the capitalists go the swings to the up, and to we the people come the
costs of the downside increasingly in this country."
"What a concept," we thought to ourselves. "People having skin in the game
and those who take risks bearing the risks. That's what this country
needs to work again." [Ed note: Forgive our naivete. We had no idea what the country needs.]
With that, we plunged into our first and only foray
into legislative study. With the tutelage of Mr. Grant and a man named
Paul Isaac, your editor crafted a bill proposal for our boss at the time
-- a Floridian congressman.
The idea was simple. Washington tries to micromanage the financial system
via the Federal Reserve, the Federal Deposit Insurance Corp., the
Consumer Financial Protection Bureau, the SEC, the Comptroller of the
Currency… the list goes on.
But having enough busybodies poking their noses in banks' books isn't the
issue. All of the banking regulations and regulators in the world are as
useless as the Chicago Cubs in October if the banks don't have the right incentives.
Which brings us back to June 15, 2012...
"Here's a bill you could introduce that would virtually end excessive
risk-taking on Wall Street," we told the congressman. "You'd nip the
next financial crisis in the bud.
"Introduce a bill giving the federal government the power to claw back all bank
executives' pay, including from stock options, greater than [enter your preferred amount here], from the past seven years anytime their bank goes bankrupt... becomes insolvent…or anytime the government has to intervene in any way -- whether the bank is nationalized, bailed out or whatever."
“Here’s a bill you could introduce that would virtually end excessive risk-taking on Wall Street”
Bankers love money, no? Who doesn't? So why not put that love to good use, instead of mischief?
Because the plan "was too extreme" replied the congressman -- or at least his
facial expression said so. Either that or he had more pressing
legislative priorities, because our one-law-to-fix-it-all was shot down
as quickly as it would've solved the nation's woes.
We protested feverously…
"But the system we have right now is all reward and no risk! Each time the
system busts, nobody ever pays for it! Haven't you ever read about the
1920s, congressman? There was an 18-month depression… GDP fell by 20%...
but there wasn't one major bank failure. Not one. So why were there so
many in 2007? Are people dumber today than in 1920-21?"
OK, OK. That last part never happened. We wanted very badly to say that, though.
What really happened is that we were thanked for our grand proposal and politely blown off.
Now here we are, two years later. Too big to fail has become way too big to fail. And the house of cards waits to fall.
If you're reading this, congressman, there are two lessons...
As Hartley Withers, editor of The Economist in the early 1900s, rightly opined: "Good banking is produced not by good laws, but by good bankers."
And where are all the good bankers? Bailouts, soft penalties, low interest
rates and revolving doors drove them into extinction long ago.
"The cardinal maxim," once explained economist Walter Bagehot, "is that any
aid to a present bad bank is the surest mode of preventing the
establishment of a future good bank."
I found a GREAT article but, it isn't linked. I really like the rationale of Jim Grant. From The Daily Reckoning;
One Simple Step to Fix the U.S. Financial System Immediately
Jim Grant, editor of the eponymous Grant's Interest Rate Observer,
was the speaker. The occasion was a lecture -- called a "Tea Talk" --
one of many put on every so often by our former employer Dr. Ron Paul.
The Great Depression, we remember the tall, thin, bow-tied Grant saying,
ended "something called 'double liability in bank shareholdings.'"
Today:
"Before 1935, if a bank failed, the shareholders of the bank got a capital
call. The courts insisted that they, the shareholders, put up funds with
which to pay off the creditors, including the depositors. It was their
bank. It wasn't the taxpayer's' bank, it wasn't the government's bank,
it was their bank. If the bank failed, the stockholders should put the
money up. That was capitalism.
"Gradually, and by degree since the early 1930s, it seems to me, we have evolved a
system of socialized finance. Socialized in one direction chiefly: To
the capitalists go the swings to the up, and to we the people come the
costs of the downside increasingly in this country."
"What a concept," we thought to ourselves. "People having skin in the game
and those who take risks bearing the risks. That's what this country
needs to work again." [Ed note: Forgive our naivete. We had no idea what the country needs.]
With that, we plunged into our first and only foray
into legislative study. With the tutelage of Mr. Grant and a man named
Paul Isaac, your editor crafted a bill proposal for our boss at the time
-- a Floridian congressman.
The idea was simple. Washington tries to micromanage the financial system
via the Federal Reserve, the Federal Deposit Insurance Corp., the
Consumer Financial Protection Bureau, the SEC, the Comptroller of the
Currency… the list goes on.
But having enough busybodies poking their noses in banks' books isn't the
issue. All of the banking regulations and regulators in the world are as
useless as the Chicago Cubs in October if the banks don't have the right incentives.
Which brings us back to June 15, 2012...
"Here's a bill you could introduce that would virtually end excessive
risk-taking on Wall Street," we told the congressman. "You'd nip the
next financial crisis in the bud.
"Introduce a bill giving the federal government the power to claw back all bank
executives' pay, including from stock options, greater than [enter your preferred amount here], from the past seven years anytime their bank goes bankrupt... becomes insolvent…or anytime the government has to intervene in any way -- whether the bank is nationalized, bailed out or whatever."
“Here’s a bill you could introduce that would virtually end excessive risk-taking on Wall Street”
Bankers love money, no? Who doesn't? So why not put that love to good use, instead of mischief?
Because the plan "was too extreme" replied the congressman -- or at least his
facial expression said so. Either that or he had more pressing
legislative priorities, because our one-law-to-fix-it-all was shot down
as quickly as it would've solved the nation's woes.
We protested feverously…
"But the system we have right now is all reward and no risk! Each time the
system busts, nobody ever pays for it! Haven't you ever read about the
1920s, congressman? There was an 18-month depression… GDP fell by 20%...
but there wasn't one major bank failure. Not one. So why were there so
many in 2007? Are people dumber today than in 1920-21?"
OK, OK. That last part never happened. We wanted very badly to say that, though.
What really happened is that we were thanked for our grand proposal and politely blown off.
Now here we are, two years later. Too big to fail has become way too big to fail. And the house of cards waits to fall.
If you're reading this, congressman, there are two lessons...
As Hartley Withers, editor of The Economist in the early 1900s, rightly opined: "Good banking is produced not by good laws, but by good bankers."
And where are all the good bankers? Bailouts, soft penalties, low interest
rates and revolving doors drove them into extinction long ago.
"The cardinal maxim," once explained economist Walter Bagehot, "is that any
aid to a present bad bank is the surest mode of preventing the
establishment of a future good bank."
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