Is The Federal Reserve Weakening The Banking System?
A few days ago in my Ramblings..... post, I wrote of some unintended consequences and negative impacts of the current reasoning out of Washington. One was... Of course, why (would banks) lend or trade with other banks if you can go to the Fed? An unintended consequence of the Fed's significant credit facilities available to banks? Reuters is reporting today that bank lending through the Federal Reserve has hit another record confirming that very point.
I don't have a lot of time to right a lengthy post right now but I believe the market is clearly telling regulators what the end state should be. And, instead of embracing the market, the Federal Reserve is fighting it. I believe the Federal Reserve and other regulators should think about one point and devise solutions with this as one of the baselines - The U.S. has the most dynamic banking system in the world. We have twenty five thousand banking institutions. We also have a handful of Wall Street firms and major banks that have, through monopoly status, created chronic systemic risk. The Federal Reserve's policies are focused on saving these sources of risk at the expense of the world's most dynamic banking system. Officials should be focused on removing risk and restoring free markets.
How does one keep the banking system from collapsing while also enhancing the competitiveness of the healthy free market "distributed" model of banking that exists? I say healthy because we must let all unhealthy banks fail in an orderly fashion to return to economic vibrancy. Even if that number is in the thousands of institutions. Most importantly we need to kill the large bureaucratic, systemically risky model of European banking that has crept into our economy.
I suspect the FDIC should be administering a fair voluntary plan for all banks to access guaranteed loans instead of the Federal Reserve's monopoly bailout plan. And, banks would need to meet minimum safety requirements for participation. Weak banks are forced to fail while the government also removes the monopoly forces from the market. We have taken these approaches before so it's not a mystery. Failure can be accomplished without inciting a panic or run using proper crisis management, policy and leadership tools.
Instead of freeing capital movement and fixing the major problem of hoarding money, many of the Fed's policies are quite substantially contributing to it. In the process, it is weakening heretofore generally strong institutions at the expense of trying to save what should be killed. Regulators should embrace the transformation the market is begging for. That being kill these oversized banking messes and return to a free-market-driven local banking model.
I don't have a lot of time to right a lengthy post right now but I believe the market is clearly telling regulators what the end state should be. And, instead of embracing the market, the Federal Reserve is fighting it. I believe the Federal Reserve and other regulators should think about one point and devise solutions with this as one of the baselines - The U.S. has the most dynamic banking system in the world. We have twenty five thousand banking institutions. We also have a handful of Wall Street firms and major banks that have, through monopoly status, created chronic systemic risk. The Federal Reserve's policies are focused on saving these sources of risk at the expense of the world's most dynamic banking system. Officials should be focused on removing risk and restoring free markets.
How does one keep the banking system from collapsing while also enhancing the competitiveness of the healthy free market "distributed" model of banking that exists? I say healthy because we must let all unhealthy banks fail in an orderly fashion to return to economic vibrancy. Even if that number is in the thousands of institutions. Most importantly we need to kill the large bureaucratic, systemically risky model of European banking that has crept into our economy.
I suspect the FDIC should be administering a fair voluntary plan for all banks to access guaranteed loans instead of the Federal Reserve's monopoly bailout plan. And, banks would need to meet minimum safety requirements for participation. Weak banks are forced to fail while the government also removes the monopoly forces from the market. We have taken these approaches before so it's not a mystery. Failure can be accomplished without inciting a panic or run using proper crisis management, policy and leadership tools.
Instead of freeing capital movement and fixing the major problem of hoarding money, many of the Fed's policies are quite substantially contributing to it. In the process, it is weakening heretofore generally strong institutions at the expense of trying to save what should be killed. Regulators should embrace the transformation the market is begging for. That being kill these oversized banking messes and return to a free-market-driven local banking model.
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