13 April 2012

the Fed and government independence

The Fed is an insurance coop among large banks. It is arguably anti-competitive towards smaller and newer banks, but does generate increased lending among member banks via risk abatement. Member banks ascribe to certain behaviors, and should they fail while acting in accordance to Fed terms, have access to cheap loans to recapitalize (bailed out). Whether this agreement's benefits (increased lending), outweigh the costs of decreased basic competition today is an open question.

If the benefits outweigh the costs, which i believe they do slightly, a new type of competition could be free to emerge. coalitions of fed non-members could unite, and build a competitive bank insurance program (that is, if the government didn't endorse the fed) and issue their own currency just like the article points out that Ron Paul said Wal-mart is capable of.

Therefore, where the clear trouble arises is with the government involvement in the agreement. It has been at least somewhat beneficial to the banks and the government for the government to get involved. The government endorses the agreement rather than bring anti-trust suites to bear on it, and this prevents competition from insurance coalitions of non member banks. But the government also gets access to Fed low-interest emergency lending, and gets a big say in Fed activity (chairman appointments, and banking regulations).

A final note on the quotation "the Fed stopped the the financial panic from becoming a global depression." This line embodies so much popular sentiment about the Fed.  Sure, it helped, but remember it's imperfect stimulation attempts prior in the decade are what is mostly responsible for the panic in the first place! The article does point this out at the end.

In conclusion, the idea of a banking coop is not evil.  The coop being in bed with the government is. That relationship with the government is what explicitly prevents competition between fed-like bodies, and competitions in currencies. This is a personal position, and is similar, but slightly different than that of Congressman Paul.

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