In their March 24th testimony before the House Financial Services Committee Bernanke Geithner called for new regulatory authority that would allow the government to take over non-banking institutions and, among other things, "rework" salary and bonus structures (paragraph 3) in ways that seem, paradoxically, to suggest a 'legal breach of contract.' This, of course, cannot happen without congressional legislation. As per the doublespeak of the congress where "The No Vote Union Dues Confiscation Act" is called the "Employee Free Choice Act," one can expect the bill to be given a name such as "The Smaller Government Financial Freedom and Liberty Act' of 2009."
Perhaps it is only Torpedo Geithner's way with words, as demonstrated by the way his glib discussion of a new international currency two days later sent a rebounding market into a tailspin, but the idea that anyone would ask for what amounts to a unilateral eminent domain over all large corporations that deal with money, and, furthermore, assert that this regulatory authority should be operated by political appointees in the treasury department is simply astounding. Bernanke, though, proposes a far more rational expansion of the authority of the FDIC. Setting aside Geithner's seeming delirium, both he Bernanke assert that they want a new right to step into private sector corporations that is modeled on the FDIC authority to put banks into receivership. A comparison of the claims of these noble statesmen with the facts about the FDIC makes such a model seem, at best, improbable. Bernanke and Geithner's Plan is NOT the Banking Act of 1933.
First of all, the formation of the FDIC in the 1930's occurred despite the objections of the popular newly elected President (FDR), the Chairman of the Senate Banking Committee, and the American Banker's Association (see article subsection: "Federal Deposit Insurance Legislation" paragraphs 2 and 4). In contrast, if those initiating this discussion of future sweeping regulatory powers are any indication, bank masters, presidents, and currency officers will all assure the mystified people of these United States that they, the wise, have "taken care of everything." Instead, of an educated and outraged populace supporting their representatives' bold congressional agendas, it seems far more likely that these regulatory powers would be inaugurated as a populace, suffering from shock and awe at a fiscal debate that has changed from billions to trillions in fewer than three months, is scarcely able to get a question in edgewise.
The second difference between the origins of the FDIC and the powers Bernanke and Geithner request is that the first was inaugurated only after the banks had collapsed. These new powers are now proposed where no market consequences have been observed. The regulatory standards instituted at the inception of the FDIC worked well for decades because they were based on long and painful experience. Even if the appearance of evil suggested by Geithner's request for unprecedented powers is only more evidence of his political ineptitude, and even if none of this is as nefarious as it seems; neither Geithner, Bernanke, nor congress has any informed experience upon which to base new regulations. It is very unclear, to say the least, whether the methods of sustaining these large institutions was correct. Even if, by some miracle, the tremendous infusions of cash already planned turn out to be recoverable by taxpayers, it is bizarre legislation that would base a regulatory authority on such rescue measures in the future. Is this the power Geithner and Bernanke's desire? Do they want the power to set tax payer money at risk to save large distressed American companies in the future? Are such bailouts now supposed to become a matter of course? If so, this is the logical opposite of the original FDIC model. The original FDIC model was designed to protect the private citizen's dollar. This model seems designed to protect the funds of public companies by setting taxpayer money at a permanent risk. If any lesson should be derived from this recent financial debacle, it is that laws must be passed that absolutely prohibit the government of the United States from using tax payer dollars to protect private financial institutions. An FDIC bank may be protected in accordance with the FDIC's own charter and its independent funding, but a Savings and Loan, a Freddie Mac, a Fannie Mae, and certainly an AIG should never again be bailed out with public funds.
Hence, the powers the leaders of government now propose are in no way akin to the regulation the people of the 1930's demanded. The original FDIC legislation only began after the mighty had fallen. The people wanted an architecture for rebuilding a nation's savings plan; at the very least, our government now seeks to take over the collection of the "rents" from thirty-year mortgages, the nation's credit cards, and college loans by setting taxpayer money at permanent risk. At worst, our government representatives are seeking the right to invade, based on taxpayer money that they purposely set at risk, any large industry in our nation and redistribute assets by abrogating contracts and confiscating property.
The latter is plainly tyranny. However, concerning the first, this nation should be warned that a government with the power to impoverish its citizens through taxation has a conflict of interest when it also has the authority to oversee the collection of the debts of private citizens. Why should the policies of this nation be those that lead to individual solvency when government organs stand to gain power from increases in the interest paid on debt? The vampires are in charge of the blood bank!
The contradictions that seem obvious between the banking reforms of the 1930's and the plans now being hatched make it all the more obvious that it is not the private citizen of the United States that is being offered protection. No, if the people of these United States desire to protect themselves from such "culling" of their retirement savings in the future and their tax dollars in the present, they should send representatives to congress who will legislate against any future bailout of private corporations with the public dollar. Any FDIC institution should, of course, be brought back to the definitions of the 1930's and, one more thing, our Social Security System should be transformed. If our Social Security system were transformed from a Ponzi scheme "insurance" model (see previous article: "Social Security, Ponzi Schemes..."), to a genuine retirement system that rids us from a dependence on banks (see previous article: "Ending Social Security..."), we would reduce the size and scope of any potential future financial fiasco.
©2009 Paul Benedict, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Friday, March 27, 2009
Last modified: Saturday, March 28, 2009
The views expressed in this article are those of Paul Benedict only and do not represent the views of Nolan Chart, LLC or its affiliates. Paul Benedict is solely responsible for the contents of this article and is not an employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.
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Reader Comments:
Posted By: Walt Thiessen
Date: 2009-03-27 14:06:55
Interesting viewpoint, but I see some glaring problems with it.
You refer repeatedly to a free market that you infer we currently have. What free market would that be? To the best of my knowledge, no market in the world today is free. They are all heavily regulated and are therefore, by definition, not free markets but rather regulated markets.
You also wrote, "An FDIC bank may be protected, but a Savings and Loan, a Freddie Mac, a Fannie Mae, and certainly an AIG should never again be bailed out with public funds." Why should an FDIC bank be protected (presumably by taxpayer funds)? Also, why (apparently) do you condone the fact that the FDIC, as it is currently configured, overcharges premiums to banks that engage in more prudent lending practices and undercharges premiums to banks that engage in risky lending practices? After all, FDIC premiums are based solely on number of dollars on deposit, not on lending practices themselves. It's like charging everyone the same amount for auto insurance, regardless of their driving records.
Finally, why do you refer to the Treasury Secretary with the name Torpedo? Your article doesn't make your implied analogy clear.
Posted By: gene
Date: 2009-03-27 14:44:38
"If any lesson should be derived from this recent financial debacle, it is that laws must be passed that absolutely prohibit the government of the United States from using tax payer dollars to protect private financial institutions. An FDIC bank may be protected, but a Savings and Loan, a Freddie Mac, a Fannie Mae, and certainly an AIG should never again be bailed out with public funds."
Why would a FDIC bank be protected, they are nothing but a private financial institution, very similar to savings and loans but also similar to the others mentioned. We needn't protect any private institution, we just need to insure that when an institution claims it is "storing" a clients money, that is exactly what it is doing. And when it claims it is investing, all are aware of the risk.
What we need is honesty, institutions to follow laws with regard to fraud, deception and contract law rather than regulations. Regulations are almost always rules to try enforce laws after they have already been broken.
The FDIC merely insures that people will loan banks money so those banks can take risks with that same money that are greater than the small return they pay the depositor. It enables bank profits. Without the FDIC people would demand truly safe storage of their funds or the real return for the risk.
Posted By: Paul Benedict
Date: 2009-03-28 10:43:21
Hi Walt,
Don't FDIC deposits only occur in banking institutions regulated by the FDIC? I believe the banks sign on for the privilege of being an FDIC institution with the understanding that if they are violating certain regulations they can be placed in receivership and shut down. The notion congress writing laws that permit a "lawless" takeover of a large "financial institution" is not part of the FDIC's scope.
I gather that a "wall" between banking and financial institutions has recently been deregulated. That seems to have been a mistake.
Was it Milton Friedman who thought that the FDIC did more to insure economic stability than the FED? Anyhow, Geithner and Bernanke claim to want FDIC like powers, so they are appealing to those who have a respect for those regulations. The new authority they want seems to be based on consistently setting trillions of taxpayer dollars at risk. That is something that the FDIC hasn't done.
I believe you are correct about the FDIC allowing banks to earn greater profits on the money we deposit (i.e. lend) them. That is part of the trade off that makes banks willing to be regulated. It's a contract. Hopefully it is transparent and not made under duress.
Posted By: gene
Date: 2009-03-29 10:22:40
You are right Paul, the will be putting trillions of taxpayer dollars at risk.
What they want to do is eliminate all risk by backing it with everything we [taxpayer] have and produce. In the sense that they are trying to "spread" the risk [it can never be eliminated] they are instead bringing the risk to the entire economy.
The average worker who doesn't want to experience much risk, should be able to take his paycheck and know it is safely stored, that is not backing the risks of some mega conglomerate investment firm. The banking system takes this away and what they are proposing is just an extension of that, first backing with bailouts and then the regulation of risk investment firms. by the way, good article.
Posted By: Paul Benedict
Date: 2009-03-31 21:50:59
Hi Gene,
The FDIC institutions have been deregulated in some way that we must restore.
The periodic collapse of our banking systems before the FDIC continued with greater and greater intensity in the Post Civil War period. If the past is any tutor on this matter, worse worse disasters are yet to come.
We need to find representatives that will plainly prohibit, at least by law, if not by constitutional amendment, any future bank bail out with taxpayer money. With the Senate filibuster being so easy to maintain a law would be sufficient...
Sadly, one must imagine that the politicians are all working for the banks.