Sunday, September 20, 2009

Stupid People Running the Financial System of the United States

So after railing against stupid people in France in the previous article, I'd like to spend some time on seriously-stupid people right here at home. It's helicopter Ben Bernanke and associates, the folks who run the mis-named Federal Reserve Banking system. It is mis-named because these are private banks with the power to create dollars out of thin air. Unfortunately, despite their role in precipitating the financial crisis and their 100% track record of getting it wrong every time, these are the individuals that Congress has put in charge of our financial system. This takes stupid to a whole 'nother level!

See the problem is that the big banks know that if they buy bad assets, their buddies in the Fed will rescue them using the guarantee of taxpayer protection. They are deemed "too big to fail" aka "too well connected to prosecute". This means that the big banks are more incentivized than ever to purchase risky assets with high potential returns. After all, if the asset makes money, the big banks keep the high returns. If an asset blows up, they take it to the Fed discount window and get close to book value for it anyway.

Bernanke and company have decided the solution is to have a federal program which decides how much bank executives can get paid. The thinking is that if they can't get huge bucks for making huge returns on investments then they won't take such risks. That thinking is correct so far as it goes, but there are some bad side effects. The risky bad investments don't get funded, but the risky good ones won't either. This will retard innovation in our economy. All that assumes the bankers won't find a way around the restrictions to keep doing what they are doing.

So how do you balance risk with return? You don't want banks to gamble too big, nor do you want them to be so averse to high-risk investment that they leave good ideas unfunded. What is the answer? Well, until retard Bernanke decided that some banks were too big to fail, the answer was to let the market do that. A bank who chooses the right investments makes obscene amounts of money and a bank that chooses the wrong ones goes bust. The risk/reward was borne by the banks. Bernanke thinks the solution is a plan for Fed micromanagement which eliminates both risk (by using the taxpayer to insure these banks can't fail no matter how badly they mismanage their portfolio)and the reward (by strictly limiting compensation to bankers no matter how good they are at funding the right projects).


Anonymous Anonymous said...

The Helicopter Ben cartoon is cute, but it's deceiving. As asinine as randomly dispersing dollars into the air may seem, it's actually fairer than the system under which Bernanke and the Fed truly operate: trickle down liquidity, where banks, the government, and specially privileged corporations get first dibs on newly printed dollars, while the rest of the market eventually gets the over-inflated leftovers.

7:39 PM, September 20, 2009  
Anonymous Anonymous said...

good point

6:31 AM, September 21, 2009  

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