Treasury Now Favors Creation of Huge Banks, New York Times, 1987:
The Treasury plan, which would permit the acquisition of banks by large industrial companies, was also endorsed by Alan Greenspan, in an interview before President Reagan nominated him this week to be chairman of the Federal Reserve Board.
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Mr. Gould acknowledged that any policy promoting the creation of very large financial institutions encounters deep-seated sentiments that date from the founding of the Republic. But he thinks the nomination of Mr. Greenspan could provide an important stimulus for change. Mr. Greenspan contends that many of the laws restricting commercial banks severely limit their ability to adapt to a changing marketplace.
The Reagan Administration has met frustration in its efforts to lessen regulation of banking, largely because Paul A. Volcker, the current Federal Reserve chairman, has firmly opposed any move that would begin to break down the barriers that prohibit large nonbanking companies from owning banks. Mr. Volcker has also been rather grudging in his support of changes that would allow interstate banking and the underwriting of securities by banks.
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”We have been the beneficiaries of living in a relatively insulated big economy, and only recently have we found out that the Japanese can make automobiles better than we do,” said Hans Angermueller, vice chairman of Citicorp. ”We are discovering that the same thing may apply in the financial services area, and to meet that challenge, we need to get leaner, meaner and stronger. We don’t do this by preserving the heartwarming idea that 14,000 banks are wonderful for our country.”
The New York Times web archive is a great resource for viewing the historical trends to turn away form the capitalist ideas of free market competition and instead move toward large market dominating banks. You get the impression from people talking about “free markets” that they have never actually read Adam Smith, Ricardo, Mills…
Related: Ignorance of What Capitalism Is – Not Understanding Capitalism – Canadian Banks Avoid Failures Common Elsewhere – Monopolies and Oligopolies do not a Free Market Make – Estate Tax Repeal
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FDIC to double bank fees in face of $40bn loss
About 90 per cent of US banks will see their basic deposit insurance fees double in the first quarter of 2009, from between 5 cents and 7 cents for each $100 of deposits to between 12 cents and 14 cents, according to a plan laid out yesterday by the FDIC, a government-backed agency that insures consumer deposits up to $250,000. From the second quarter that range would widen to from 10 to 14 cents per $100.
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Banks with the riskiest profiles could end up paying fees as high as 77.5 cents for every $100 of insured deposits under the plan, compared with a maximum of 43 cents under the current structure.
The FDIC insures bank deposits with fees charged to banks. The recent increase of the FDIC Limit to $250,000 seems to indicate that taxpayers will now pay for any costs for covering above $100,000 per account-holder (which I think is a mistake – the fund should be self supporting). But this increase in fees is to restore the fund to the minimum capital requirements of the insurance fund.
Related: posts on banking – Avoid Getting Squeezed by Credit Card Companies – Where to Keep Your Emergency Funds?
Cost of U.S. Crisis Action Grows, Along With Debt
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The 2009 budget deficit could be close to $2 trillion, or 12.5 percent of gross domestic product, more than twice the record of 6 percent set in 1983, according to David Greenlaw, Morgan Stanley’s chief economist. Two weeks ago, budget analysts said the measures might push deficit to as much as $1.5 trillion.
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The financial health and earnings prospects of Fannie Mae and Freddie Mac — seized by the government on Sept. 7 to prevent them from failing — worsened in the second and third quarters, the companies’ government regulator said this week.
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On top of all that, budget watchdogs say the sheer size of the interventions is making Washington more profligate than usual. To attract votes in Congress, leaders added several costly items to the $700 billion rescue, including extensions of some tax credits and tax breaks for makers of wooden arrows and stock- car racetrack owners.
Under normal circumstances, there would have been more resistance to such expenses, said Robert Bixby, executive director of the Concord Coalition, a non-partisan budget watchdog.
The news sure is not yet getting better. And our failure to act responsibly in good times now seriously increase risk. Just as someone that lived far beyond their means, with excessive debt, debt on multiple credit cards… we have continually elected politicians that had our government live beyond our means for decades. And that means we don’t have the resources to pay for the measures we are talking. For now the world markets are willing to give the USA government more credit cards to finance more spending. But at some point that stops.
At some point the loans have to be paid back. The only options are large reductions in spending, large increases in taxes or just printing more and more money people don’t want to pay off loans (which will cause massive inflation). There is also the possibility of growing our way out of the problems (the equivalent of yes, I have $40,000 in credit card debt but when I make $150,000 a year paying that off will be easy). To some extent this will happen (unless things get very very bad) but the level of economic growth needed is unlikely to fix the problem we make worse every year (as we fall further and further behind). We are now spending huge amounts to money we didn’t save in the good times. That means we are mortgaging even more of our future than we already had before this mess.
Related: Financial Market Meltdown – Warren Buffett Webcast on the Credit Crisis – FDIC Limit Raised to $250,000 – Financial Markets Continue Panicky Behavior – USA Federal Debt Now $516,348 Per Household
Plan Pushed for Government to Buy Bank Stocks
Canada’s banking system kept high and dry by strict regulation: Flaherty
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Some of the fundamentals credited with keeping Canada’s banks in the safe zone were put in place nearly a decade ago by the Liberal government of Jean Chretien, including a refusal to approve any Canadian bank mergers.
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The finance minister said Canada is in a strong position to deal with the global crisis, with a strong banking system, a stable housing market and a federal budget surplus. “Other countries have been increasing their deposit standards, but they’re still for the most part below the high Canadian standard,” he said.
Related: Monopolies and Oligopolies do not a Free Market Make – Too Big to Fail – What Should You Do With Your Government “Stimulus” Check? – The Budget Deficit, the Current Account Deficit and the Saving Deficit – 2nd Largest Bank Failure in USA History
The FDIC limit has been raised to $250,000 which is a good thing. The increased limit is only a temporary measure (through Dec 31, 2009) but hopefully it will be extended before it expires. I don’t see anything magical about $250,000 but something like $200,000 (or more) seems reasonable to me. The coverage level was increased to $100,000 in 1980.
What does federal deposit insurance cover?
FDIC insurance covers funds in deposit accounts, including checking and savings accounts, money market deposit accounts and certificates of deposit (CDs). FDIC insurance does not, however, cover other financial products and services that insured banks may offer, such as stocks, bonds, mutual fund shares, life insurance policies, annuities or municipal securities.
Joint accounts are covered for $250,000 per co-owner. The limit is per person, per institution, so all your accounts at one institution are added together. If you have $200,000 in CDs and $100,000 in savings you would have $50,000 that is not covered.
FDIC is an excellent example of good government in action. The Federal Deposit Insurance Corporation (FDIC) was created in 1933 and serves to stabilize banking by eliminating the need to get ahead of any panic about whether the bank you have funds in is in trouble (which then leads to people creating a run on the bank…)
From an FDIC September 25 2008 news release: the current FDIC balance is $45 billion (that is after a decrease of $7.6 billion in the second quarter). The FDIC is 100% paid for by fees on banks. The FDIC can raise the fees charged banks if the insurance fund needs to get increased funds.
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I give more credence to Warren Buffett’s thoughts on this than anyone else, though, of course, he could be wrong. Buffett: My fix for the economy
Buffett, the chairman and CEO of Berkshire Hathaway (BRK.A), called the problems facing world markets “unprecedented” and warned of a “disaster” if Congress does not move faster to shore up the economy.
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Under Buffett’s plan, Treasury would lend hedge funds, Wall Street firms or any other investors 80% of the price for distressed assets. Investors would benefit from borrowing at lower rates available to the Treasury. But the government would get first claim on the sale of those assets, which means it would get its loan back plus interest and possibly turn a profit. Only then would investors see a penny.
“Now you have someone with 20% skin in the game,” explained Buffett. “Believe me, I won’t be overpaying if I’m buying with that kind of leverage. And you have someone [the investors] to manage the assets to the extent they need to be managed.”
Buffett also noted that the presence of the government in the transactions would raise the price of assets above the absolute firesale levels for which they could now be sold. That would benefit the banks trying to unload them.
It is a mess. And politicians should be held accountable for eliminating regulation (through law changes, political appointees that were chosen specifically to not enforce regulations, restricting money for enforcement…) to reward those that paid them a lot of money. But they won’t be, so there you go. I would love to be wrong about that but I don’t think I will.
Related: 2005 annual meeting with Buffett and Munger – Misuse of Statistics, Mania in Financial Markets – General Air Travel Taxes Subsidizing Private Plane Airports – Central Bank Intervention Unprecedented in scale and Scope (March 2008)
re: New Rule: If your company is to big to fail, your company is too big to exist. The next Prez. needs to split up huge companies like we did with AT&T.
Exactly right. Companies too big to fail have massive negative externalities that should be managed through regulation. And the discussion (see link) of this claiming that the huge, anti-capitalist, companies that exist now are not monopolies and therefore anti-trust laws should not be used makes no sense. Anti-trust laws are not for monopolies. Trusts were huge anti-competitive organizations that sought to eliminate the free market and extract benefits by distorting the market. Those laws were adopted not to regulate monopolies but to regulate anti-competitive behavior.
The free market theory formulated by Adam Smith et.al. was based on perfect competition where no one entity could influence the market. In reality that is not possible but approximations of it can exist (we are far from such a state today, however). Fine, the anti-capitalist large corporations are not monopolies – they are oligopolistic that can still extract profits through their ability to distort the free market. Is the fact they are not a monopoly really that relevant?
Enforcing rules that prevent businesses from using their size and power to extract outsized profits is the right thing to do. Anti-trust laws are the proper tool. when politicians are paid lots of money by people with the gold to allow them to cripple the free market and create large corporations that profit, not by competing in a free market, but by manipulating the market that is a bad practice. It won’t change until people stop electing politicians that reward those that pay them for favors. And that is unlikely to happen anytime soon.
What we can hope is that there is some limit on how egregious the favors politicians grant those paying them money are. Maybe this latest escapade (and the costs of those favors to bankers) will cause a reduction in the favors granted. I don’t have high expectations for the changes though.
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SEC to temporarily ban short-selling: report
Wow, that would be very surprising to me (especially if you asked more than a month ago the chances of this happening). But given these crazy times I can believe it. I wish they just properly regulated short selling the last 10 years (the failure to do so has been very disappointing). And I would be against banning short selling unless there were a very extreme situation. I don’t see that are necessary now, but I have far from all the details so maybe it is warranted now (though I am skeptical).
Update: SEC Halts Short Selling of Financial Stocks
Given the importance of confidence in financial markets, the SEC’s action halts short selling in 799 financial institutions.
Related: Naked Short Selling – Shorting Using Inverse Funds – Investor Protection Needed
Fed to Loan A.I.G. $85 Billion in Rescue
The decision, only two weeks after the Treasury took over the federally chartered mortgage finance companies Fannie Mae and Freddie Mac, is the most radical intervention in private business in the central bank’s history.
This whole meltdown of the companies that exemplified the mantra that government regulation is bad (when they would like to make money by avoiding regulation) that now come begging for government bailouts because of the risk to the economy of failing to provide bailouts sure is disheartening. You might even think real changes will be made. I am sure changes will be made for awhile and then people will forget and special interests will pay politicians to get special favors and we will find ourselves in a different but similar mess a few decades from now.
Related: Fed Continues Wall Street Welfare – 2nd Largest Bank Failure in USA History – Estate Tax Repeal
Chatting with Obama by Bill O’Reilly
I really wish people understood capitalism. Capitalism requires regulation. It was known to all the economist in Adam Smith’s time that the government must regulate or powerful forces that would not allow the free market to function as it should – which destroys the potential of capitalism. This is not some minor point, it is absolutely essential to the theory of how capitalism provides value to society.
The ignorance that equates allowing manipulation of the market by powerful forces undermining capitalism (which is supported by those that claim to support capitalism – “regulation distorting free markets”) with disrupting the free market annoys me. I know I should accept that ignorance is just rampant but sometimes I can’t get over it. I truly support capitalism and seeing it abused by so many ignorant pundits and politicians is distressing.
And when those with influence constantly reinforce ideas based on ignorance then many, that can’t think for themselves, accept idiotic ideas like “free markets” should allow oligopolies to consolidate reducing the benefits of capitalism, that polluters should be allowed to push negative externalities onto the public, that allowing trust fund babies to receive massive inheritances is good (capitalism is meant to reward those that contribute, not reward those who were related to someone useful) and that the inheritance tax is bad (it is the BEST tax that exists, arguably along with taxes on negative externalities) and on and on.
The idiotic idea that government regulation of markets is interference is equivalent to saying police interfere with freedom by enforcing laws against violent crime. Yes the watchmen must be watched. You can have bad policing and bad regulation; but the idea that policing the free market, in itself is wrong, is so ignorant we have to stop accepting such claims as if they were anything but ravings of radicals or ignorant people (or people that are both).
By the way I am using ignorant with the sense of “lacking knowledge or comprehension of the thing specified.” Sometimes the word is used to claim the other person’s opinion is wrong, which is not an accurate way to use the word. It is my opinion that those espousing crazy ideas like, free markets are those without regulation, don’t understand capitalism is based upon the idea of perfect competition. If they do, but have decided that fundamental aspect (along with negative externalities, rewards based on who your parents are instead of what you produce…) of capitalism is wrong, but they have a new theory that somehow updates capitalism I am waiting to hear about it. I am basing my guess of their ignorance on their statement seeming to be completely disconnected with capitalist theory.
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