Friday, December 31, 2010

Re: Ineffectiveness of Banking Accords, at The Daily Bell

The original article appears here:

"The whole exercise of regulating banks capital reserves is fairly ludicrous given that banks have no control over the economic environment that central banks create. So long as central banks continue to flood economies with excess paper money, the commercial banking sector shall struggle with overwhelming booms and subsequent busts."

If only those who believe a lack of regulation was the cause of our financial ills could wrap their minds around these statements, we would all be better off.

Imagine an industry where raw materials can be produced for free by the producer, cost almost nothing for the middleman to acquire, who can also get his hands on as much of the raw commodity as desired.

Further, there are no physical limitations on the throughput of said raw materials: one worker can process 1,000,000,000 units just as easily as 1,000,000. No physical, mechanical, computing, or energy differences regardless of throughput.

Finally, the members of this industry can exist solely by trading by and between each other. While they also go outside of the industry for revenue streams, this is not necessary. Swaps, derivatives, etc., all are created and can be traded, if not solely within the cartel, certainly primarily within the cartel.

So, raw material is free, production volume is not hindered by physical constraints, and profit can be generated solely by means of transactions within the cartel.

What do they gain by all this? After all, if they are just shuffling money between and amongst each other, where is the gain to the cartel?

The gain is, they get the money from the Fed. Money and credit is created. This funny money is not backed by new wealth - meaning real wealth. But it is a claim on the existing wealth. The pile of money in front of the cartel gets bigger, while the pile of money in front of the rest of us stays the same, or, as has been true over the last couple of years, shrinks. So the cartel can lay claim to more of the goods in the same proportion that their pile of money has grown relative to the total.

This is banking as we have come to know it. In any industry, faith in government regulation is idol worship. However, because of banking’s unique production cycle, banking regulation holds the highest seat in worship to this false god. To think such a system can be "regulated" is dreamland. The system is designed to pour gasoline on a fire. All the firemen in the world cannot stop the result.

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