Private Banking and Other Free Market Myths

Filed under Economic, History, Political

It's time to have an adult conversation about private vs. public.  There is no private banking system, at least not on the large scale.  If we had a private banking system, it would be able to go under.  The ability to fail is one of the main criteria that makes something private.  Safety nets obscure this notion.  It blurs this distinction.  If the safety net is big enough and strong enough, it obliterates this distinction.

No organization that is shielded from failure is private.  It can't be.  Failure avoidance is the incentive that makes organizations efficient.

If you could eat ten cheesecakes with no risk, wouldn't you?  I mean no risk at all.  If the cheesecakes were free ... if you knew you wouldn't feel sick later in the short term ... if you knew you wouldn't gain weight in the long term ... if you knew you would have no chance of a coronary in the very long term ... what would stop you from eating ten cheesecakes every day?

Failure and risk are natural checks and balances.  It's the ultimate cost of doing business.

The same is true financially as with the cheesecakes.  There is no credible risk of a large bank going under.  Even if a bank looks like its at risk, it will be absorbed by another.  Assets will be transferred, liabilities will be wiped out.  The executives get their pay.  Their bonus will resume.  Did you know CEO bonuses are higher today than they've ever been, even in the middle of this recession?


I don't want to focus on the bonuses.  They are a drop in the bucket.  Focusing on executive bonus is just an indicator, similar to porkbarrel spending, which is also a drop in the bucket.  But if you want to know the health of an institution, take executive bonuses for banks and porkbarrel spending for legislators to extrapolate.  When they're out of whack, the institution is in trouble.

"Too Big To Fail" is just a cute euphemism for nationalization.  The banks have been nationalized long long ago.  You could say it happened in 1913 when the Federal Reserve was created.  It took a long time to devalue the currency to this point.  It's just like the frog in luke-warm water.  The frog has been in there a very long time.  It's a very tender frog.

In the real private industry, if you do a bad job, your profits are hit at some point.  You might be able to shield or cloak your losses for a while.  But eventually, reality sets in and you have to deal with the problem.  The more deception used to shield the loss, the more the losses pile up.  And if you can just call your "uncle" to make the losses just disappear, then guess what?  You are no longer in the private industry.  You've been nationalized.  It's that simple.

So what's wrong with nationalization?  Well, the failure guarantee is no longer implicit.  The failure guarantee becomes explicit.  Is there an implicit guarantee for banks anymore?  No.  It's completely explicit.  Therefore, they are a nationalized industry.  There's no need for speculating when nationalization will happen.  It's a done deal.  The implicit guarantee is an indicator that will lead to the explicit guarantee.

Has healthcare been nationalized?  Yes it has.  Is the doctor guaranteed to get paid?  Well, at the moment, the guarantee is just implicit.  If enough of them suffer devastating losses (high malpractice, financial ruin from non-payment, anything you can think of), they will become "Too Important To Fail" (or come up with some other cute euphemism).  So while doctors are still at risk of financial ruin at the moment because the relationship between doctor and government hasn't been completely hammered out in practice, there is no doubt in my mind, if a sudden crisis hits the medical field, government will pull out the safety net.  If the sudden crisis isn't forthcoming, it will be created.  "Never waste a disaster," as they say.

Is this all some big mistake?  Nope, it's by design.

Posted via email from Anthony Martin's Weblog


No tags for this post.

Post a Comment

You must be logged in to post a comment.