Revolving Door

Obama to Government Motors: "Let's Roll" - Karen De Coster - Mises Institute:

The revolving door between Wall Street and the bowels of Washington are getting a workout. It's the guys from Wall Street who run the government and the guys from government who run Wall Street. Only the guys from Wall Street - especially Goldman Sachs - who have taken over the Treasury Department are now taking over control of the domestic auto industry. You know what happened when they tried to run their own company, Goldman Sachs.

Emphasis added.

The big investment banks are the kings of leveraged banking. They've taken it to new levels of insanity.

Murry Rothbard wrote that fractional reserve banking is fraud. I couldn't agree more.

If you read enough Austrian economic literature (and I guess I've read enough to know the pattern, but nowhere near enough to be an expert on the subject), you'll notice a great deal of use of the word "if". For instance, in Rothbard's excellent The Mystery of Banking he describes how "free banking" would work. And the description is filled with (actual or implied) "if" clauses.

On page 113, Rothbard writes:

The bank run is a marvelously effective weapon because (a) it is irresistible, since once it gets going it cannot be stopped, and (b) it serves as a dramatic device for calling everyone’s attention to the inherent unsoundness and insolvency of fractional reserve banking. Hence, bank runs feed on one another, and can induce other bank runs to follow. Bank runs instruct the public in the essential fraudulence of fractional reserve banking, in its essence as a giant Ponzi scheme in which a few people can redeem their deposits only because most depositors do not follow suit.
But history tells us the threat of a bank run has a very different effect: the threat of a bank run encourages bankers to collude with one another to prevent bank runs. It does not prevent fractional reserve banking, which is a highly profitable business (I guess some would say the use of "profit" is a misnomer when income is based on fraud, but I digress); instead, it leads to collusion amongst bankers to prevent bank runs. This eventually results in so much collusion that a central bank is created to organize the collusion. And then the central banks collude; now they are debasing all of the world's currency somewhat in parallel.

All of this to avoid the biggest bank run of all: the dreaded run on the dollar.

To be sure, China is playing both sides. China continues to buy Treasury bonds (colluding with our central bank) but China is also taking steps to create yet another reserve currency.

(I read a really great conspiracy theory recently: China can convert its potentially valueless US Treasury and Agency debt into real goods by using the debt as AAA collateral for loans to buy gold (0r other commodities). If the value of the dollar drops significantly, the loan can be paid off in inflated dollars; or China can simply default, and let the owner of the loan have the US Treasuries backing the loan. That's pretty clever.)

This gets me back to primary thesis about banking: it is only by expanding the universe of banks that collude one with another that the Ponzi scheme of fractional reserve banking can continue. This is why a global central bank is inevitable unless we put an end to fractional reserve banking. It's fraud - but worse - it's fraud that spreads like a virus, slowly sucking in all productivity in a mad rush to make money from money rather than productivity and creativity. As the collusion continues the only way to make more money is with higher leverage which is made possible by the collusion. It is a Ponzi scheme that refuses to collapse.

How annoying.

Sadly, you can't outlaw fractional reserve banking. People have tried. The bankers, who have a great deal of money, just bribe the right people to get the laws changed. In principle, over a long enough time frame, market forces will correct this error, but at huge cost, as a huge amount of productivity is destroyed. Who wants that?

An once of prevention is worth a pound of cure.

I have a friend who has an idea for a technology that might finally put an end to this vicious cycle. The general principle, as he has described it to me, makes a lot of sense; however, getting to the point of a simple implementation has been hard. (Plus, it's a hobby task!) Still, I find myself thinking more and more about his idea and how to implement it with a clever hack.

Well, regardless of whether my friend figures it out, or someone else does, we need an inoculation for the viral infection that is fractional reserve banking. Otherwise it will eventually consume us all.

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