Iceland let their banks fail

Originally posted by no1marauder
The ending of fractional reserve banking would cause a depression that would make the 1930s seem tame.

I didn't suggest that in any of my posts here, but I do think reserve requirements should be raised slowly over time. Reserve requirements are almost non-existent in the USA.

Originally posted by no1marauder
An article from the Center for Economic and Policy Research makes the following point (among others):

Suppose the TARP money had not started flowing and we saw the chain of bank collapses continue. The two remaining independent investment banks, Goldman Sachs and Morgan Stanley, would surely have been killed absent TARP and other special assistance fr ...[text shortened]... mained extraordinarily wealthy). This hardly seems like the disaster we were told it would be.

I don't really understand how the bail-outs played out in the U.S. - my comments are based more on the British bail-outs where the treasury took large stakes in some of the banks. When Northern Rock became the first British bank in 150 years to suffer a bank run they were nationalized without compensation to the existing shareholders. After a good bank/bad bank split the good bank was sold to Virgin for £750 million or so. The government still wholly owns Northern Rock Investments. When the rest of them started failing Brown was faced with the prospect of having to nationalize the entire banking system.

The problem for a government is that if they don't catch the bank, depositors lose out and therefore don't make deposits in the first place. So in the U.K. they guarantee the first £85,000 of a deposit; leaving them in a position where they are basically forced to bail them out as otherwise they are left with a liability and no compensating assets. The key really is to ensure that the bank's shareholders and directors take the loss, with the government contributing the difference. If shareholders think they can lose their investment then they'll apply better controls to the directors, or vote with their feet. The difficulty is that institutional shareholders also come from financial institutions and so will tend to vote with the directors, which is why the directors of banks should be forced to hold a significant fraction of their wealth in shares in the bank to ensure that they lose out badly if they don't exert control over risk taking.

I agree with your wider point that the people who should be paying for this are our overpaid bankers rather than tax payers. I don't think that Iceland provides a model of how to do it, as Metal Brain seems to.

As an aside, I don't think there's a problem with any of these financial instruments per say. C.D.O.'s are a good idea, provided they are correctly labeled and not just constructed to fail, and the emptor pays attention to the caveats. I'm skeptical about the value of Credit Default Swaps as if the original investor wants a secure investment they should buy AAA stuff in the first place, but the real problem comes with naked swapping as the over issuance of insurance on a basically risky asset means that should a credit event happen the C.D.S. sellers can find themselves with arbitrary losses. When they change regulations governments totally fail to consider exactly how the gambling fiends that run our financial institutions are going to abuse whatever new instrument is being allowed.

Originally posted by Metal Brain
Your claim doesn't add up. Bailing out the banks didn't result in lending. That caused deflation just as much as would have happened if the banks were allowed to fail.

Deflation is what causes depressions.

If you can explain why it would have been worse go ahead and support your claim using economics. I don't think you can, but I'll give you that chance to prove me wrong.

Well, Metal Brain, I'm sorry you disagree. As I said... "bailing out the banks was not a perfect solution". But what's the alternative? Let the big banks (and many small one's simply fail? If you'll recall, the period from June of 2008 to June of 2009 was a pretty scary one, would you want to add an all out panic, and a run on the banks to that mix? Deflation may not a good thing, but sometimes one has to pick the lesser of 2 evils.....unless of course you have a better idea.

Originally posted by no1marauder
......Goldman Sachs and Morgan Stanley, would surely have been killed absent TARP .....all but certain that Citigroup and Bank of America would have gone belly up as well, along with many other large financial institutions.....Would this have led to financial Armageddon? Well, it surely would have created considerable disorder..... but the Fed and FDIC no doubt would have taken over these institutions to keep the system of payments operating.

This conclusion from the same unnatributed CEPR blog. 'This is the story of the TARP..... a gift from the taxpayers to some of the richest people in the country.' There are too many surely would have's and no doubt would have's in this blog to be of any comfort. That the Fed had a contigency plan for bad debt out of Latin America in the 80's to take over the money centre banks is not a cogent argument for presupposing in 2007 it would not have balked at trying to save a drowning cabal of financial malfaesance that had every potential to drag it [the Fed] under with it.

If Enron and their collusion with Andersons taught us anything, it is that the house of swiss cheese we call Wall St is riven with worm holes and sink holes of cross leveraged disaster that at any moment can collapse and that the master's of the universe that run that system are only too eager to melt it down and cover their tracks when its collapse is imminent. Unfortunately main st got bundled into the fondue to drag out the analogy even further. What with the global reach of these finiancial institutions I would argue that their influence in every aspect of our lives will only be greater going forward. Trying to reign in the mentality that drives Wall St would be as successful as trying to reign in the mindset that drives Defense consumption of the public purse.

When the very basis of a well run market, your ratings agencies, are caught in the act of a pablum for profit scam, its not hard to understand the very real and palpable fear that gripped Treasury and the Reserve at that time. The reasons for staunching the wound to the system and not allowing in any reforming or investigative light was purely a survival instinct, borne out of the reality of how many major's would have been caught short or with their hand in the till had a true day of reckoning occured.

If America's credit rating had crashed even further the increased costs to repay existing debt would have made TARP look like school lunch money in comparison. Wall St could not afford to navel gaze and America could not have afforded any further erosion in the world market's confidence of its ability to perform and repay its creditors.

But we all live with the luxury of only having the smallest proprotion of that worst case scenario played out, and now, safe from the abyss of the most dire consequences had Treasury not acted the way it did, we are duty bound to suffer and endure the alternate reality of what could have happened had all these other 'probable' forces intervened.

Stiglitz who is on the advisory board of the CEPR denounces the notion of an invisible hand and suggests that markets tend to fail rather than right themselves and that the market requires intervention from Government to run efficiently. Something to do with the assymetric nature of information between agents in a market or some such sneezes, which is way above my pay grade, but what I extract from the aforementioned logic of this luminary, and not some unnamed blogger, is that when Treasury and the Fed dropped a plumb line and could not find a bottom, and after they had made a quick ring around and had their worst fears connfirmed, they decided to act before American Imperial Capitalism collapsed 100 years before its 'natural' demise. I for one am glad they did.

Originally posted by kmax87
This conclusion from the same unnatributed CEPR blog. '[b]This is the story of the TARP..... a gift from the taxpayers to some of the richest people in the country.' There are too many surely would have's and no doubt would have's in this blog to be of any comfort. That the Fed had a contigency plan for bad debt out of Latin America in the 80's to take o ...[text shortened]... talism collapsed 100 years before its 'natural' demise. I for one am glad they did.[/b]

It's an "unattributed blog" if you're blind; if you look about a half an inch to the right of the first paragraph you'd see the author is "Dean Baker is co-director of the Center for Economic and Policy Research". His credentials are here: http://www.cepr.net/index.php/biographies/dean-baker/

It's hard to make any sense of the rest of the post which is basically raving rather than a reasoned response to the points raised.

Originally posted by bill718
Well, Metal Brain, I'm sorry you disagree. As I said... "bailing out the banks was not a perfect solution". But what's the alternative? Let the big banks (and many small one's simply fail? If you'll recall, the period from June of 2008 to June of 2009 was a pretty scary one, would you want to add an all out panic, and a run on the banks to that mix? Deflatio ...[text shortened]... metimes one has to pick the lesser of 2 evils.....unless of course you have a better idea.

So all you have is that it would cause more panic? All that would do is make the stock prices at a more attractive value for bargain hunters. There is a limit to how low a company's worth becomes and even if it were to drop very low it would not stay that low for long. You talk like there would be a nuclear war or something.

Government could have reassured investors that the banks would be reopened for business quickly after it gained possession of them if panic is your only concern. Seems to me the stocks dropped as much as was possible without being bombed into the stone age. Maybe that was the goal though. Those investors that bought stocks when they were low got a terrific bargain. The people that sold out of fear got screwed, especially those that sold near the bottom.

Originally posted by no1marauder
It's an "unattributed blog" if you're blind; if you look about a half an inch to the right of the first paragraph you'd see the author is "Dean Baker is co-director of the Center for Economic and Policy Research". His credentials are here: http://www.cepr.net/index.php/biographies/dean-baker/

It's hard to make any sense of the rest of the post which is basically raving rather than a reasoned response to the points raised.

My bad, I hit the print icon and saved the article and then read it. His authorship is not noted on the blog when viewed this way. Other articles are however given authorship details under the title where you would expect to read it and not on some colourful side bar that looks like some promotional material which I routinely avoid as a result of much facebooking and other internet related trawling that keeps my eyes pretty much glued to the text under the title.

As to the rest of your characterisation of my response, you could level the same critique at his thinly velied contempt at the fat cats of Wall St.

Originally posted by Metal Brain
So all you have is that it would cause more panic? All that would do is make the stock prices at a more attractive value for bargain hunters. There is a limit to how low a company's worth becomes and even if it were to drop very low it would not stay that low for long. You talk like there would be a nuclear war or something.

Government could have rea ...[text shortened]... gain. The people that sold out of fear got screwed, especially those that sold near the bottom.

Earth to MetalBrain...I'm still waiting for your solution!

Originally posted by bill718
Earth to MetalBrain...I'm still waiting for your solution!

Do you mean what should have been the solution instead of bailing out the banks and rewarding failure?

Foreclose on the banks so the government takes possession of them. Then reopen them and go back to lending as soon as possible. The government could sell the banks to private shareholders later after profits resume and the banks are stable. Some people should go to jail as well. Start with Goldman Sachs. There was clear wrongdoing there.

Originally posted by Metal Brain
Do you mean what should have been the solution instead of bailing out the banks and rewarding failure?

Foreclose on the banks so the government takes possession of them. Then reopen them and go back to lending as soon as possible. The government could sell the banks to private shareholders later after profits resume and the banks are stable. Some people should go to jail as well. Start with Goldman Sachs. There was clear wrongdoing there.

So long as banks run under the Fed with a predisposition to inflating and thereby degrading the currency, all the back and forth is just noise. Putting money in the bank is a guaranteed loser, and most bonds and stocks aren't any better. Inflation is plain and simple robbery of the common man, just as surely as was shaving coins in times past.

The result is the ability of a nation to make war easily, to move to central planning spending money created at a whim, and spent with the same amount of forethought.

Originally posted by normbenign
So long as banks run under the Fed with a predisposition to inflating and thereby degrading the currency, all the back and forth is just noise. Putting money in the bank is a guaranteed loser, and most bonds and stocks aren't any better. Inflation is plain and simple robbery of the common man, just as surely as was shaving coins in times past.

The re ...[text shortened]... ntral planning spending money created at a whim, and spent with the same amount of forethought.

That is true.

The inflation rate is under reported and most people are losing money in their "so called" safe investments. When people start to realize this gold will be the only true safe haven and the only place to park your money. The gold bull market still has legs.

Originally posted by Metal Brain
I didn't suggest that in any of my posts here, but I do think reserve requirements should be raised slowly over time. Reserve requirements are almost non-existent in the USA.

No1 fears a great depression, but the first one came a short 15 years into the era of the Fed. The fed of course didn't create fractional reserve banking, but it encouraged and let the practice get out of control.

What he doesn't fear is the reality that continued reliance on intentional and international degradation of currency has to result in a crack up bust, not a recession, or depression but total chaotic rejection of official currency, and a reversion to barter. As you suggest, a gradual backing off would possibly mitigate most of the pain, if it were pursued patiently.

Originally posted by Metal Brain
That is true.

The inflation rate is under reported and most people are losing money in their "so called" safe investments. When people start to realize this gold will be the only true safe haven and the only place to park your money. The gold bull market still has legs.

I agree with you except that if governments and central banks don't start to control themselves, the chaotic bust could be of such magnitude that it might be a long time before gold or anything else could be traded for necessity commodities.

There have been hyperinflation busts in places like Mexico, Brazil, and Zimbabwe, but the IMF was able to stabilize those situations. Today, right now, almost every nation on earth is deep in debt, and has been using inflationary currency manipulation for decades. The governments are all deep in debt. Who is there to turn to? The US going on $17 trillion in debt? China? Russia? It seems from all I've read, the entire human race has been living above its means on credit.

Originally posted by normbenign
I agree with you except that if governments and central banks don't start to control themselves, the chaotic bust could be of such magnitude that it might be a long time before gold or anything else could be traded for necessity commodities.

There have been hyperinflation busts in places like Mexico, Brazil, and Zimbabwe, but the IMF was able to stabil ...[text shortened]... It seems from all I've read, the entire human race has been living above its means on credit.

Perhaps there is a conspiracy to enslave the entire human race using debt. Economic slavery seems to be the result even if it is not a conspiracy by design.

I recall watching a documentary called "The Money Masters" that implied a conspiracy to get nations to go into debt with each other. I can't help but think there may be something to it.

Originally posted by normbenign
No1 fears a great depression, but the first one came a short 15 years into the era of the Fed. The fed of course didn't create fractional reserve banking, but it encouraged and let the practice get out of control.

What he doesn't fear is the reality that continued reliance on intentional and international degradation of currency has to result in a c ...[text shortened]... a gradual backing off would possibly mitigate most of the pain, if it were pursued patiently.

1929 was hardly the first economic depression though you may be ignorant enough to believe such drivel. The history of the US in the 125 years before the creation of the Fed was rife with prolonged economic downturns. Real economic growth per year has been about double in the 100 years since the Fed than the 125 years before.

It's hard to imagine any modern economy without fractional reserve banking. You may believe that the entire world economy is going to collapse because of modern economic principles and we'll revert to barter, but that's just crazy talk.