Socialism didn’t work the first time…

From 1933 to 1938, the New Deal was created by FDR after the financial system had a meltdown, somewhat like we have seen now. The point was to get the United States out of the Great Depression and prevent future downfalls. As we can see this didn’t work so let’s break down the Great Depression and see if it can shed any light.

The Emergency Banking Act was passed. This was to close down the insolvent bank and reorganize. This also allowed the Treasury Secretary the authority to take private citizen’s gold and exchange it for paper currency.

We are currently under a fiat standard still, which allows more centralized control on our currency. It also allowed the Federal Reserve to inflate money as much as they want. This seems to shed no light on the current situation.

They then created the FDIC to insure that bank runs wouldn’t happen, while at the same time suspending the gold standard. This was under the Glass-Steagall Act. This legislation also allowed the Federal Reserve to control the interest rates on savings accounts (which was repealed in 1980). It also doesn’t allow bank holding companies to own other financial companies (repealed in 1999).

The FDIC today is at $100,000 per account. This allows banks to invest the first $100,000 riskly because they know it is insured no matter what. This is what Economists call a moral hazard problem. This could be some of the read why we had over investment and investment into risky loans like sub-prime.

This was just the financial industry, there was much more socialism programs that FDR implemented and there are even more regulations on banks. The point is none of these were able to stop the problem and could have been possibly the problem in the first place. It is the most regulated industry out nation has. Here is more regulations after FDR:

Capital Requirements – these are put into place to limit how the banks handle their capital versus their assets. This is suppose to reduce risk.

Reserve Requirements – in the case of a bank run these are suppose to make sure that you have enough cash on hand and that you would reduce insolvency.

There is also Corporate Governance Regulations, Financial reporting requirements, and credit rating requirement to give the consumer more power in the banks.

This didn’t work either. So sure someone could come to the conclusion that it was not enough regulation that caused this problem but why hasn’t anyone said the regulations were put in place to prevent this and they failed? Therefore, they do not work.

We are okay with the fast food industry being on it’s own and they do fine weeding out the bad banks and letting them fail. Instead, we expect every bank to survive and prosper. The argument goes that everyone’s life savings is tied up in banks and when one fails a certain number of people lose their life savings.

Well that isn’t how banks are suppose to work. They are instruments in which investments can be transferred from the savers to the people who want mortgages. Banks handle figuring out who deserves a loan and at what rate so you don’t have to. Some banks may take more risk than others but you wouldn’t know because the FDIC insures your money. The banking system should work in that you have some of your money in multiple banks. This way you earn different rate of returns and you don’t have all your eggs in one basket.

You wouldn’t do this with stocks so why would you do it with banking?

~PCCapitalist

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Published in: on September 29, 2008 at 11:07 am  Leave a Comment  
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