"Either the Fed kills the dollar or the banks. It's that simple. The poor innocent employees. How touching. Where's RL's concern for poor innocent dollar holders?"
Forbes: Communist Tool - The Skeptical CPA
Succinct, a little overstated to our eye moderated by the graying of experience, but true enough if one adds "the few Wall Street banks that gamed the system" and "the dollar over time." Either the Fed kills the Dollar over time or allows the Banks that have gamed the system and lost to accept their losses as gracefully as can be arranged.
The losses must be taken; they do not simply vanish. Every dollar of loss taken by the public trust is a hidden tax that is levied on all holders of the dollar. Even if one tries to make the improbable case that this inflation is offset by deflation it is still a reallocation of net wealth from the many to financial insiders.
The upper bound of the Fed's latitude is the dollar and our sovereign debt. The recent support of the banks is a policy choice, not a monetary action: a means of socializing the losses of the elite few for the sake of expediency.
A capitalism where an elite keeps all their profits and force their losses on the public is no capitalism and not even a democratic republic: it is a form of unrepresentative taxation by the banks that is a tyranny known as crony capitalism.
How can one set up a free market system in which one set of players have access to the house's funds and cannot lose? How does one sustain a game like that until the other players realize it is a blatant fraud and kick over the table?
The usual response is "but what are we to do? It is a crisis! Act now! Here are your choices!"
Make it an orderly process of receivership if required, but put the losses and the taxes directly on those who profited from the loss generating enterprises: shareholders, management, affiliates, and above all the insiders. By all means the central bank should lend freely, but at high rates of interest, not at subsidies.
Support what must be supported temporarily, but extract all incentive for those who gained so that they might be less tempted to do it again. That which is unprofitable and not rewarded is not desired; that which is punished will be deterred. These are the basics of natural law.
Investigate and punish any wrongdoing with commensurate fines and appropriately deterrent punishment including loss of freedom. Restore the integrity of the system through the enforcement of law and regulation already in place that has been undermined and neglected. Keep and reinstate that which has worked and reform the rest.
But above all, do not allow the situation to be resolved by an injustice to the public trust even 'this one time' for the sake of expediency. That is a moral hazard that stays with us and keeps regenerating. It is a distortion of the capital market system and an invitation to a procession of frauds and bubbles that eventually will wreck the dollar and the nation as we know it.
At first the comparison of this crony capitalism to communism was jarring. But as we thought about it, we saw that it was just another form of statism, in that the unelected few are unjustly apportioning resources at odds with a free market and the law.
Yes, it can be that simple. We might also say that either we restrain the incredible growth of the financial sector as a percentage of GDP and restore the system to some balance of production and capital allocation and accumulation or we will destroy it through this cycle of bubble, bust and credit crisis.
The share of financials in value added has steadily increased and has reached about 8 percent in 2006-2007. The share of profits, however, climbed to reach an extraordinary 40 percent and more!
The Financial Sector and Its Growing Excesses - Mostly Economics
