I wrote the letter below in answer to the essay by Sanford Weill and Judah Kraushaar in today's Wall Street Journal. They are singing the government's tune--the banks did it and they need more supervision, higher capital requirements, etc., etc., all the statist solutions. But, since these so-called solutions will not prevent another crisis, the obvious conclusion for all those who believe in this nonsense is a complete government takeover of the financial markets. They want bankers working for the government in the same manner that they want everyone in healthcare working for the government.
From: Patrick Barron
To: Wall Street Journal
Sent: Monday, October 26, 2009 4:00 PM
Subject: Missing the Point
Re: Six Steps to Revitalize the Financial System, by Sanford I. Weill and Judah S. Kraushaar, 26Oct09
As my friend, Professor Thorsten Polleit of the Frankfurt School of Management, is fond of saying, if you do not understand the cause of the problem, you will not propose the proper solution. Mssrs Weill and Kraushaar would have us believe that banks are inherently unstable beasts that must be kept on a short government leash lest they bring down the entire financial system. Thusly, they propose more financial regulation; specifically, greater transparency, a single streamlined and more vigorous regulatory agency (the Fed), more rules for the securities market, higher capital requirements, etc.,...the same "reforms" that other insiders assure us will prevent a similar crisis in the future. Nevertheless, an army of regulators empowered with new authorities and new analysis tools will not prevent another crisis, because the cause of the crisis lies deeper in our financial system. Our fractional reserve, fiat money, central banking system gives banks the ability to create money out of thin air. Our Federal Reserve Bank spurs them on by manipulating said reserves in order to create economic booms for the benefit of elected politicians. But it just doesn't work; the Fed simply creates one boom/bust business cycle after another, with each cycle creating more havoc than the last. Contrary to the implied system deficiencies embedded in Mssrs Weill and Krausahaar's recommendations, banking is as subject to Say's Law as any other business, meaning that banking ever tends toward equilibrium. In a free banking system, unhampered by government money and interest rate manipulation, poorly run banks go out of business and properly run ones survive. Absent socialization of risk by the FDIC, depositors would reward successful banks and punish unsuccessful ones as they do any other consumer product company--by rewarding or withholding their patronage. Those depositors who eschew risk can keep their money in a demand deposit account backed one hundred percent by gold. Those who desire to put some of their money to work would have the option of opening a savings account that was not backed by anything other than the banker's reputation and his capital. Now that is real banking, honest banking, stable banking! And there is no room for government in this free banking system other than to prosecute fraudulent bankers who fail to back their demand deposits one hundred percent by gold. The market takes care of everything else.