The last post I wrote on endogenous money and fully reserved banking set out a case for viewing the demand for credit to attain real or financial assets as a fundamental aspect of any monetary system. The point of that post was to make clear that the real economy comes first and that money is merely a tool to effect financial transactions in the real economy. The cause and effect of credit flows from this demand for real resources as cause to the increase of money or credit in the financial system as effect. One point I failed to mention was regulation and the role of government in setting the up the rules of the game.
I am in favour of a liberal, free market system of capitalism in which regulation is limited to setting the ground rules that let private enterprise flourish. As I recently wrote in the context of the Fed’s attempts to create wealth via quantitative easing, “the private sector composed of individuals and businesses creates wealth. Government facilitates wealth creation by setting up an economic infrastructure that leads to improvements in the long-term social and economic outcomes that an individual economy most values.” I see regulation as simply facilitating this process and nothing more.
The reality, however, is that governments are now fully in the thrall of corporate interests. I am not just talking about the infamous military-industrial complex of which US President Dwight Eisenhower warned just over 50 years ago. I mean to say that the playing field is fully tilted toward big business through and through. That’s why we got the Citizens United Verdict. That’s why corporate profits are near record levels despite the fact that we are going through the most severe economic crisis since the Great Depression. And that’s also why the last election cycle in the United States was the most expensive in history, driven as it was by corporate interests.
The Corporatist of today is clever in cloaking his rent-seeking in the mantel of free market ideology by asking government to take a hands-off approach so that he can have a free hand in bending the market to his will. This corrupt and cynical relationship between big government and big business is what I have called Corporatism masquerading as liberty. And the banking industry is foremost in playing this game. Money manager and blogger Cullen Roche was right when he wrote earlier today that “[e]ven our govt borrows from this banking oligopoly. Why do people think the govt is in control? The banks rule the monetary roost.”
It is interesting that well into the last global debt deflationary episode, US President Roosevelt in 1940 was forced to renounce claim to his party’s Presidential nomination until the party brought the corporatists to heel. His stinging rebuke of his party’s corporatism was largely unknown until Oliver Stone publicized it in a recent television documentary on the Untold History of the United States.
Roosevelt wrote***:
July 18, 1940
Members of the Convention:
In the century in which we live, the Democratic Party has received the support of the electorate only when the party, with absolute clarity, has been the champion of progressive and liberal policies and principles of government.
The party has failed consistently when through political trading and chicanery it has fallen into the control of those interests, personal and financial, which think in terms of dollars instead of in terms of human values.
The Republican Party has made its nominations this year at the dictation of those who, we all know, always place money ahead of human progress.
The Democratic Convention, as appears clear from the events of today, is divided on this fundamental issue. Until the Democratic Party through this convention makes overwhelmingly clear its stand in favor of social progress and liberalism, and shakes off all the shackles of control fastened upon it by the forces of conservatism, reaction, and appeasement, it will not continue its march of victory.
It is without question that certain political influences pledged to reaction in domestic affairs and to appeasement in foreign affairs have been busily engaged behind the scenes in the promotion of discord since this Convention convened.
Under these circumstances, I cannot, in all honor, and will not, merely for political expediency, go along with the cheap bargaining and political maneuvering which have brought about party dissension in this convention.
It is best not to straddle ideals.
In these days of danger when democracy must be more than vigilant, there can be no connivance with the kind of politics which has internally weakened nations abroad before the enemy has struck from without.
It is best for America to have the fight out here and now.
I wish to give the Democratic Party the opportunity to make its historic decision clearly and without equivocation. The party must go wholly one way or wholly the other. It cannot face in both directions at the same time.
By declining the honor of the nomination for the presidency, I can restore that opportunity to the convention. I so do.
No such appeals to “human values” over “dollar” values and Corporatism are going to be forthcoming in today’s political environment.
The right approach to regulation would be to set up a regulatory framework that leads to the improvements in long-term social and economic outcomes we desire but that also prevents market failure and is redundant enough to deal with market failure, should it come to that. And when you set up that framework, you have to enforce the rules or the result is catastrophe. We are doing none of this in the financial sector; it is just the opposite because of vested corporate interests. That’s what too big to fail is all about.
I find it interesting in this context that free market proponents would take the opposite tack of the Corporatist and promote an over-regulation of the banking sector via fully reserved banking in order to defend the free markets. This is what fully-reserved banking is: over-regulation. The calls for fully reserved banking have the same impetus as the calls for increased bank capital requirements. The thinking in both cases is that by increasing the regulatory hurdles for the banking system – by making the ground rules of financial services regulation tougher – we can safeguard the financial system and decrease systemic crises. I can see the benefits of increased capital given how the endogeny of money and credit creates capital constraints at the nadir of every business cycle. But on fully reserved banking reserve requirements, I fail to see the point. Here’s the thing: of the banking systems that have eliminated reserve requirements, only the United Kingdom was integrally involved in the last financial crisis. Canada, New Zealand, Mexico, and Australia were less affected than most. In Sweden, where no reserve requirement exists, the banking system’s connection to the Baltics made the impact very real, but even here, the banking system has recovered well.
My point? Fully reserved banking is not only ineffective at limiting credit growth because money is endogenous, it is also a form of heavy regulation that is unnecessary to safeguard a financial system against systemic crisis. The question I ask myself then is why are true free market proponents advocating this kind of regulatory intervention when it is antithetical to their ideological leanings of free markets and less regulation? Personally, I don’t have a clue. If someone has the answer why heavy regulation via fully reserved banking is necessary to successfully maintain a free market economy’s banking system, I’d love to hear it.
For now though, this is just an idle question because fully reserved banking has zero chance of happening in any advanced financial system because transitioning to such a system would instantly create an economic depression as financial institutions rebalance portfolios to accommodate the rules on holding only liquid assets. But I thought I’d put this out there because no one seems to be asking it.
**UPDATE 16 Nov 2012: Note that Roosevelt penned the anti-Corporatist letter above but never sent it because he was able to get his party to sanction his choice for running mate.