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Friday, December 31, 2010

Gary Gorton speaks...time to listen. There is no one of greater value speaking on the financial system today.

http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4596

1 comment:

Jeffrey said...

"Interestingly, FDIC insurance was opposed by economists." - because it socializes risk.

"One of the most fundamental of these has been the rise of institutional investing. The amount of money under management of institutional investors has just been exponentially increasing. These include pension funds, mutual funds, large money managers." - this change came about because our money is not a good store of value as a result of the socialized risk.

"So if you’re a large institutional money manager, you may need a place to put $200 million, and you want it to earn interest and to be safe and accessible." - when we take action to deny reality in basic banking with things like the FDIC then reality will poke its head through in higher levels - like a repo market. The risk of a run is obviously still very real and it still hurts us all just the same, only now its harder for the little guy to avoid the pain and high costs because it's built into the value of his money.

We have been trying to eliminate risks through socialism rather than teach everyone to deal with and manage their own risk. We have been trying to artificially lower the price or cost of risk for the average individual, but this like everything else is just a lie about supply and demand, and reality in general.

I love that they keep calling it "innovation" in banking - the banking sector has grown and changed because the FDIC and low interest rates, as dictated by the Federal Reserve, are direct subsidies to the banking industry at the expense of anyone who uses dollars. Ask China and Russia why they are no longer trading in dollars.

The whole issue of determining discount rates on different competing currencies is solved through exchanges and the use of modern communication technology - today all a business owner would need is a smart phone.

"This elaborate system of securitization evolved over 30 years" - so has the debt bubble we are in that has been fueled by the actions of the Federal Reserve since we moved to a completely fiat currency.

Banks aren't lending because the demand for loans from low risk consumers has been met for a good amount of time into the future. Interest rates are the prices that allow us to allocate resources across time - if we artificially lower those prices then we are stealing demand from the future. As long as we continue to prevent foreclosures and to provide bailouts then the economy will remain stagnant and horribly under productive.