The Banking System Was Set Up to Fail

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I read your article this am waiting for the market to reach my entry. Some good points, but the basic thesis is incorrect if it is to imply that banks were intentionally set up to fail. Or did you mean banks were unintentionally set up to fail?

The analysis is too simple in any case, and it is self-evident that banking is a business, therefore it is a failure unless money is made. The ideal is for bankers to provide something of use to the public while still making a fair return. But something went drastically wrong. To explain that would require a far more perceptive analysis, and that already been offered ad nauseum. The meat of the article seems to be in the final paragraph, with which it would be hard not to agree if you only consider the TBTF banks and ignore those many banks that have failed since 2008.
 
Quote from piezoe:

I read your article this am waiting for the market to reach my entry. Some good points, but the basic thesis is incorrect if it is to imply that banks were intentionally set up to fail. Or did you mean banks were unintentionally set up to fail?

The analysis is too simple in any case, and it is self-evident that banking is a business, therefore it is a failure unless money is made. The ideal is for bankers to provide something of use to the public while still making a fair return. But something went drastically wrong. To explain that would require a far more perceptive analysis, and that already been offered ad nauseum.
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Yeah I think you are right about the title. I should have given it a different name. The point I am trying to push is that the detraction of competition which was caused by the central bank giving cheap credit stopped banks looking into the credit worthiness of borrowers and the borrowers were also not looking into the long term consequences because of the cheap debt.

Anyway I think it is a bit different to other commentry in that it isolates the action of the central banks taking away the natural manager of greed from competition. I don't know if anyone has pushed that argument before. Yes it is a bit basic but it was written for the Huffington Post. I have to write for my audience.
 
Quote from morganist:

Yeah I think you are right about the title. I should have given it a different name. The point I am trying to push is that the detraction of competition which was caused by the central bank giving cheap credit stopped banks looking into the credit worthiness of borrowers and the borrowers were also not looking into the long term consequences because of the cheap debt.

Anyway I think it is a bit different to other commentry in that it isolates the action of the central banks taking away the natural manager of greed from competition. I don't know if anyone has pushed that argument before. Yes it is a bit basic but it was written for the Huffington Post. I have to write for my audience.
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Yes. I like your response to my comments and agree. I wish you had said exactly that in your article. I have always considered that the root of the recent failures lay mainly in too places. One was of course the removal of the barrier between investment and commercial banking, that Phil Gramm and his House cronies laid on us. Most of us, i think, would like to go back and put these barriers back in place. Is it too late for that? I don't know. The recent banking legislation does a rather half- ass job of it in my view.

The other root problem was, as you point out, a failure of the central bank -- under Greenspan -- to do its job. Greenspan was the chief regulator but he did not believe in regulation. When the excesses in the mortgage market were repeatedly pointed out to him he dismissed the concerns by stating his unwavering conviction that market forces would take care of the problem. He was right of course, and market forces did intervene. But sadly we found that letting natural forces take their toll was going to lead to a less than satisfactory outcome, as that course would have, if allowed to go to completion, led to unacceptable collapse of the financial system. Thus the rather unsatisfactory, botched, and late intervention of the Treasury and Fed under Paulson and Bernanke. Oh well, we've made our bed, I guess we'll have to lie (in both senses of that word) in it.
 
Quote from piezoe:

Yes. I like your response to my comments and agree. I wish you had said exactly that in your article. I have always considered that the root of the recent failures lay mainly in too places. One was of course the removal of the barrier between investment and commercial banking, that Phil Gramm and his House cronies laid on us. Most of us, i think, would like to go back and put these barriers back in place. Is it too late for that? I don't know. The recent banking legislation does a rather half- ass job of it in my view.

The other root problem was, as you point out, a failure of the central bank -- under Greenspan -- to do its job. Greenspan was the chief regulator but he did not believe in regulation. When the excesses in the mortgage market were repeatedly pointed out to him he dismissed the concerns by stating his unwavering conviction that market forces would take care of the problem. He was right of course, and market forces did intervene. But sadly we found that letting natural forces take their toll was going to lead to a less than satisfactory outcome, as that course would have, if allowed to go to completion, led to unacceptable collapse of the financial system. Thus the rather unsatisfactory, botched, and late intervention of the Treasury and Fed under Paulson and Bernanke. Oh well, we've made our bed, I guess we'll have to lie (in both senses of that word) in it.
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It is not just America it is universal. All central banks have done the same. Perhaps monetarism and also government greed. If the inflation target was to be met, high government expenditure could only be compensated for with low interest rates.
 
Don't you think that that is an inevitable consequence of moving to fiat currency everywhere? I mean given human nature, about which we can't do much.
 
Quote from IanMacQuaide:

Competition = Capitalism=Individual Right to Fail or Succeed on your own=Benefit to Mankind=HAPPY
:)
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This is right up there with the most incorrect statements ever made on ET.

That's certainly what most believe, and it a lie due to capitalists constantly referring to free enterprise and capitalism in the same sentence as if these to things had something to do with each other. I should know. I am a capitalist. In reality competition and capitalism are to distinct things, and should never be spoken of in the same sentence. Capitalism has nothing whatsoever to do with "individual Right to Fail or Succeed on your own."

Capitalism is merely an economic system where capital and the means of production are largely in private hands. In general, real capitalists hate competition, as they should. Capitalists much prefer a situation where success is guaranteed, i.e., a monopoly or cartel. The proper role of government is to protect free enterprise from the capitalists. The U.S. government has failed to do that, and now the capitalists are in bed with the government and as a result free enterprise has suffered.

This, in a nut shell, is why medical care is so expensive in the U.S., i.e., no competition, because of too much, and very bad government regulation. But there are endless other examples I could point to where government has failed to protect free enterprise from capitalists.

When you have any area of the economy where it is difficult to maintain free competition, then the government must regulate closely with the goal of preventing the capitalists from ridding roughshod over captive customers, or else competition must be increased. Germany follows the former model of close, and good regulation. As a result medical costs in Germany are much lower, yet the system is essentially privitized. Alternatively -- and this is the model i personally prefer, because i like to keep the government out of things as much as possible-- one can introduce competition. For example, if the U.S. had prescribing pharmacists, as in many other countries, that measure alone has the potential to cut total U.S. medical costs in half! Fully 10-20% of the medications one now needs to have a prescription for could be safely available over the counter, again as in other countries, and another 10-20% could be safely pharmacist prescribed. One can argue that this would involve increased risk. I think in fact the risk would be no greater than it is now, and possibly less. But even if it was increased a small amount it would be well worth it. There are many other reasonable ways to introduce competition into medicine as well. I have only touched the surface.

It is simply wrong to equate capitalism with free enterprise, or as you have, with the "...right to succeed or fail on your own." One can have capitalism with free enterprise, or without it.

You're not alone here. Millions of others make this same mistake.
 
The actual concept you are trying to get a handle on is actually more fundamental and simplistic - Too Big.

Everything is Too Big - gov, cental bank, banks, corporations, stock market,...

Centralization has led to multiply entities being too big to properly perform their intended function.

As a simple analogy - Bank. In the past you had a local community bank making loans to people in the community. The bank had to live with its lending decisions. If it made a lot of bad loans then this would harm the community and hence the bank.

When you act anonymously and your decisions do not directly effect you or your immediate environment, then as you have mentioned, greed will manifest.

More specific you your analysis - you failed to mention the improprieties of the rating agencies, the ability to bundle good with bad and the lack of enthusiasm to check what was in the bundle, appraisers knowing that if they didn't come up with the magic number business would go elsewhere, and on and on and on.

As long as it seemed like it was working, no one was going to pull the plug.
 
nobody was accountable
Like Morgan said, it was always somebody elses money
too late now, but a more sensible approach would have been, We'll bail you out after you reimiburse everybody for the fees you charged."

then it would have been, "Don't make a bad loan or they will claw back your fees."
 
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