Bank regulation proposal

1. A bank which fails will be taken over by the FDIC regardless of size, the Federal Reserve will have the full authority to print money as needed to cover deposits. There will be no bailouts of any company.
2. A bank which is shut down that is within one state will be handled by the Federal Reserve bank it is located in and will be bought out by other bank(s). It may only be bought out by banks which do not have interstate operations. This is to keep diversity within the financial system with lots of lending institutions.
3. A bank which is shut down which crosses state lines will be divided by state, and be bought out by banks which do not have interstate operations. This is to insure diversity of the banking system and prevent any one bank getting too big to be a systemic risk. It will also increase the number of banks which is an essential part of a fully functional market.
4. Banks will be allowed to form in any region based on the credentials of that one bank’s operations regardless of the other banks operating in that region. A historic problem has been restricting the growth of the banking sector which has stifled the number of banks in this country from what we can have. One key to a successful market is having lots of sellers and this will ensure that will occur.
5. Current regulations that require banks to meet certain thresholds of reserves will continue and be more thoroughly enforced. Banks will have an extra penalty on loans they cannot collect on that will be paid into the FDIC fund.
6. A bank must retain at least 10% of the loans they make on their books. A bank may not sell a package of mortgages or other loans without information on the creditworthiness of the people and businesses in the package. The failure to do so after a long time will make it so they must pay higher interest rates when borrowing from the Federal Reserve and will be fined proportionately to the bank's asset value.
7. A bank must leave all of their investments on their balance sheet. If the regulator discovers a bank left investments off of its balance sheet for 3 different inspections will have its charter revoked and be treated like a failed bank. Every member of the Board of Directors, the CEO, CFO, and other people in charge of leading the bank will be charged with fraud as a felony and serve time in prison.
8. The FDIC will have full authority to invest and use its funds as needed. There is no reason not to use these funds and have them grow to create a strong fund.
9. Interbank lending will be fully insured up to 2% of deposits for all banks, so when one bank fails it won’t spread to other financial institutions. This is so future bank crises won't spread. They spread because banks lend to other banks, so if one bank fails and another bank has a large amount of deposits in another this creates an imbalance in the bank's balance sheet which is how banks fail. This is meant to protect well-functioning banks from a few bad apples because our economy is (and should be) highly interconnected.
10. Stricter regulation of credit rating agencies to ensure they accurately rate financial tools. The regulator will have full authority to punish credit rating agencies when they inaccurately rate financial instruments.

This is because if we bail out banks we create a problem that they cannot lose if they make bad decisions and will then take more risk than they can handle (Economists call this moral hazard). We need to keep the managers of banking institutions accountable to their actions, and this requires that we do not bail out banks when they start to fail because it means they will be more likely to put their institutions at risk. We need to protect depositors money, while still keeping the managers of the banks responsible for their actions. Otherwise we will have more banking crises because they will take more risk than they can handle which will create a larger financial crisis.

The other problem with this is the key to a successful free market is having a lot of sellers of goods and servies, and bailing out big banks creates a concentration of power where there should be many different types of banks. This policy outline aims to create a more diverse banking sector which will benefit lenders, borrowers, and also benefit banks because there will be more options to borrow with one another which leads to a more stable financial system. Bailing out banks defeats this important piece of the economy which harms everyone when lending and borrowing freezes.

I have also omitted the major parts of Glass-Steagall legislation (restricting types of banking and where banks can be formed) because it restricted competition between banks and restricted consumer choice. It also had the negative impact of increasing the price of loans for consumers without significantly stabilizing the financial sector. No other country in the world has ever done this type of legislation, and the proposals outlined above are designed to get the stability of banking without the costs of high lending fees and lack of choice that Glass-Steagall created. It is a very simple equation in economics, if you reduce supply this will increase price and this is always bad for consumers.

To be clear, this isn't about being pro-bank or anti-bank. This about ensuring that banks have the resources they need to operate without being destructive to the financial system, and ensure that borrowers and depositors are protected. In this way this plan tries to strike a balance between policies which are pro-lender, pro-bank, pro-borrower, and pro-investor. I think I have made the proper balance for a stable financial system which will lead to a stronger economy for America and protect everyone regardless of income level of profession.

The Real Social Security Crisis

I just figured out why Social Security is in a crisis. There is a crisis, but it is not a governmental crisis, a senior crisis, or any of the other things that would concern the average American. Whether there is a crisis depends on your point of view. The crisis is that Social Security reduces the interest rate that the US Government pays on bonds.

When you look at who owns the national debt, Social Security is the second largest owner at just over $2.7 trillion, or about 1/8 of all debt the government owes. The second largest holder is the Federal Reserve at $1.66 trillion currently. Social Security has run a surplus for over 30 years now, and that surplus is reinvested in government bonds which over a long time has added up to a large surplus.

By providing the government easy money to cover the deficit we have run since the Bush tax cuts in 2001 (before which we had 4 years of a growing surplus) it diminishes the interest rate. Here is a chart I made demonstrating a constant demand rate, but a diminished supply, the simplest of economics graphs:

Basically, by having social security run a surplus year after year, which I have already blogged about, the US government pays less on the debt which means that we have easy access to a large amount of credit annually. This is good for the tax-paying American.

However, there are some people who don't benefit from such an arrangement, which is every Amrican who borrows more in bonds than he/she pays in taxes. Mostly finance people who work at banks who get easy money from the US government by selling bonds, at almost no risk. The money that they get from the government comes from taxes and future bonds. If the government was to run a surplus the government would not need to sell bonds and the interest rate would collapse because the supply would be 0, which would force banks to invest in other ways. Since the government routinely runs a deficit, there is always a need for bonds to be sold in order to cover expenses, so bonds will pay people money so the government can continue providing services that Americans rely on. If the government was to balance the budget or run a surplus this easy money would be gone.

By eliminating social security, as some Republicans want to do, or by reducing the tax rate and payments little by little until nothing is left, the government will lose this revenue that diminishes interest rates and income taxes beyond the level they would be otherwise. If Social Security was eliminated we would see that the interest rate the government pays on bonds would rise because they would need to sell more bonds to the private market in order to raise enough revenue, and the banks that buy large amounts of bonds will make more easy money.

If we eliminated the Federal Reserve as some Libertarians want to do, the government would lose the other major holder of American debt which further decreases interest rates. A lot of Tea Party Republicans claim how it is "monetizing the debt" which they say is a bad thing. While I agree that debt shouldn't be used in all times I recognize as a Keynesian that during recessions it is worth taking on debt to get the demand curve up to where it was to end the recession. But I do understand that if too much money is printed beyond the demand for it you could create runaway inflation which looking at a number of countries where inflation is out of hand is clearly bad for the economy. The people who would have the most to gain out of eliminating the Federal Reserve would be the people who would benefit from controlling monetary policy directly. I don't usually read CNBC, but they wrote a really good article on how creating a central bank under the executive or legislative branches would create endless problems of politics here that I don't feel like I need to duplicate. The system we have now is the best we are going to have in terms of monetary policy. Their leaders are appointed by Congress and are able to make quick decisions without needing constant political debate within their mandate. In other words, between the money it provides to reduce interest rates on American bonds and stabilization, ending the Federal Reserve would be a very bad idea.

Source on who owns the debt: http://useconomy.about.com/od/monetarypolicy/f/Who-Owns-US-National-Debt.htm

Social Security Surplus by Year

First you attack the seniors, then you attack the students, and nobody screams

I just read a summary from CPB on the President's budget for education, and he is going to set student interest rates to the market rate. This is bad for several reasons:

1. Sallie Mae is government corporation, and whatever money they make is extra. They don't need higher interest, and making lower interest is a good idea.
2. Tuition has risen so much at state schools over the past few years that college is becoming increasingly unaffordable. The least the government can do is decrease the interest rate which will save middle class families millions of dollars, but putting the rate at such a risk is a terrible idea.
3. The only motivation I can see to tying Sallie Mae interest rates to the market rate is that it will now be easier for large banks to steal a significantly larger share of the student loan market, by offering "discounts" which people will flock to. If everyone uses private banks than it will make it easy for Republicans (or as seems more and more likely, Democrats) to attack and dismantle Sallie Mae.
4. Eliminating Sallie Mae (which currently gives decent interest rates) and forcing people to go to banks which might then raise their rates for students will give a lot of free money to the big banks that practically own our government.

The Democrats ran last year on a platform to defend the middle class, it was practically the theme of their national convention. "Trust us, we are the defenders of social security, the givers of Medicare and affordable education" yet the past week has seen the Democrats leading the attacks on both education and Social Security.

If there ever was an appropriate time for a third party that represents the interests of average Americans to appear, the time is now.

BEDA 2013 post number 10!

Venezuela-American relations

America's relationship with Venezuela is... complicated. Venezuela currently holds the largest depository of proven oil in the world, and their government doesn't want our oil companies taking their oil, but want to use it for their own national development. This causes tensions, as America's politicians who routinely receive large donations (read bribes) from the oil companies that want to tap the largest proven oil reserve in the world. Venezuela is in a unique position that their late leader Hugo Chavez was a populist, with the goal of protecting Venezuela's natural resources for Venezuelan companies. This caused massive tensions between the government of the United States and Venezuela. Since President Theodore Roosevelt, the United States has mostly pursued an expansionist foreign policy not of military ends, but of economic. When we controlled Cuba under their pre-Castro dictators (let me be clear I am no fan of Castro, he was a dictator by any measure) we had access to large plats of land that we farmed, and controlled our economic interest mostly through military means. Venezuela and the United States have a similar interest in one another, and from the discovery of oil in 1908, which developed strong relations between Venezuela and American oil companies (represented by our government) which for 90 years was a very important source of revenue for our government. In 1943 they set up a 50/50 split with American oil companies which gave immense wealth to both American oil companies and the Venezuelan government.

2001 was a crucial year for the disintegration of Venezuelan-American relations because President Chavez declared all oil in Venezuela property of the state, as in not property of American companies. This means that the American companies that formerly owned and operated oil in Venezuela can't anymore. Oil companies have immense influence in several important ways, first of all they regular give campaign donations to our elected and appointed government officials. (which is often referred to as lobbying, which I personally refer to as bribery) President Bush of course made his fortune in the oil industry, which means that his company and the companies fellow oilmen in his cabinet lead/led (Condoleeza Rice was on the executive board for Chevron, among other high-profile connections) lost billions of dollars in assets in Venezuela with the Venezuelans seeking control over their own economy. This is what turned our relations sour. The second way that oil companies greatly influence our country is through popular perception, and I would bet that they have connections at some level. Corporate America is a very complicated mixture of companies and looking at who is on the boards of directors of different companies I find a lot of people will be on different boards. I didn't find any clear connection between the large companies that own American media (which are News Corporation, Disney, Comcast, and National Amusements) but I did find many connections between them and people on the boards of large financial institutions. Here the skeptical investigator reaches a question... is this enough evidence to become convinced there is a clear conflict of interest between the four large channels and reporting on Venezuela given its complicated connections to the oil industry? Oil is one of the most profitable industries in the world, and if a bank wanted a great industry to make a killing in, a large market would be oil. Looking at the list of people who are on the boards of directors of companies that are available, it is easy to see that many people who lead these massive companies are members of multiple boards, and many investment banks are represented. Looking at large corporations, here is a very small sample of the fortunes of oil in Fortune 500 companies:

1. Berkshire Hathaway has an interest in cheap oil through their subsidiary Lubrizol
2. Chase bank played a big role in financing Enron
3. One needs to look no further than the list of major holders of Exxon Mobil where one can see a number of large banking institutions.

With all of this evidence, it is hard to not be convinced that there is a major conflict of interest between the major news broadcasters regardless of their political alignment and their desire for the largest proven oil reserve in the world... It is quite damning in my opinion. This is enough information for me to conclude that there is enough evidence showing a clear conflict of interest in the foreign reporting of all major corporate American broadcasters.

No wonder American-Venezuelan relations are so poor.