Friday, January 22, 2010

Controlling banks? I don't know about that...

The Wall Street Journal has an article discussing President Obama's appeal to the international community for support in a plan to control aspects of the largest banks in the United States, calling on them to pass the same legislation in their nations. Now, I've got a problem with this on several levels. Because my focus here isn't to call the President to task for his hubris in what the Executive Branch of the American government is permitted to do, I'll save that rant for another day. No, my focus is on the banking regulation efforts and what I see as it's effect upon the economy. I'm not an economist by any stretch of the imagination, but I have taken two college level classes on the subject and read several book on personal finance to help me understand it.

Even with my limited understanding of this subject, I can see that controlling how the private banks are run is a bad thing. People may find the analogy I'm about to use like comparing apples and steaks. Apples and steaks, however, have a very basic thing in common (that they are food) and the commonality between banks and what I'm using for my analogy is going to be equally apparent with a little thought.

John Doe runs a car repair shop in little town A. His repair shop isn't very big but he is competent and does relatively brisk business. At the other end of town is a competing repair shop that is part of a national chain Brakes-R-Us. They do a large amount of business and carry the major burden of car repair for town A. Brakes-R-Us could actually be described as handling the majority of the needs because their workload is approximately twice that of John Doe's shop.

One day, Brakes-R-Us's location in town A makes the announcement that they are going to be closing their doors. This is after their location has been reassessed for property taxes and it becomes apparent that their tax burden, like that of John Doe's business, is going up. The town council becomes alarmed at this news and holds an immediate session. At the session it is argued that the tax increase should be waived for Brakes-R-Us because the only other car repair shop in town does not have the capacity to service everyone.

Now, I ask you, dear Reader, is it right for this town's government to waive the property tax for Brakes-R-Us? I believe that your answer will be the same as mine. No because waiving the property tax does not address the underlying problem at Brakes-R-Us's location in town A, among other things. If something else increased in expense, like if there was an unexpected increase in the cost for power or something else similar, Brakes-R-Us would be in the same position.

Let's say the town council votes to waive the property tax in exchange for Brakes-R-Us being required to show the town council their budget and making adjustments suggested to them by the town council. This again fails to solve the problem and actually creates an entirely new one. Because the town council is influenced by political agenda, this would in turn influence the suggestions made to Brakes-R-Us. This not only deprives the owners of Brakes-R-Us of their right to operate their business as they see fit, but makes them dependent upon the good will of the town council to remain in business. For the town council could force Brakes-R-Us out of business and do so under color of law in light of the arrangement presented.

Now, here's another scenario, let's say that the town council votes to waive the property tax and puts in place the requirement that they review the budget for Brakes-R-Us. The town council then determines that part of the problem for Brakes-R-Us is that they're offering too many services and are losing money by providing oil changes to their customers. The town council passes a law requiring that oil changes are done only by places that specializes in them. This is not a good solution either because it limits the choices of the customers of Brakes-R-Us and at John Doe's repair shop artificially. It also establishes the precedent for the second scenario to happen industry-wide in town A.

These three scenarios are describing the effect of government interfering with private business to the detriment of the community. Laws against child labor and preventing the abuse of employees by their bosses are examples of laws that are in place that are good for the community. The difference between the 'good' regulations and the 'bad' regulations is fairly simple. Is the law putting the population in a measure of duress? Is the law favoring one segmant of the population above the rest? Is the law inhibiting the population's exercising of their inherent civil rights? If the answer to the above is yes, it is a bad law and it should be abolished.

The banking system's failures over the last few years are not because the banks are flawed. They are the result of a confluence of factors that highlight the flaws in the system and the effects of generations of government interference. When you look at the long term cycle of how the economy functions, specifically a capitalism based economic system, you will see that it moves from a period of growth into a plateau followed by a period of loss, another plateau and then another growth period. Within this larger cycle are smaller cycles that follow the a similar pattern.

When the government takes action to artificially extend or promote periods of growth this makes the drop from plateau to plateau larger. Things like switching from a currency based in real goods (like gold) to one based in a concept (like what we have now) encourages inflation of the currency which occurs as the growth period is artificially extended. When the inflationary period collapses, it is a correction of the market back to parity. If you study the financial history of the nation, you will find that we are not only due for market correction but also a period of loss. We're actually past due for a period of loss.

The inflation of the US currency in an desperate effort to stave off the period of loss that is inevitable has had the exact opposite effect of what was intended. It did not bring greater stability to the economy or equality in the socio-economic classes. Instead it brought the illusion of stability and laid the ground work for a deeper drop into (and possibly a longer) plateau following the period of loss. For those who are a little confused between the terms recession and depression, by the way, when it comes to economics here's a quick heads up. A recession is the period of loss that I mentioned earlier. A depression is the plateau that follow the recession.

Instead of preparing the nation for the coming depression, the economic policy of the United States government had been to inflate the currency in a desperate effort to avoid it. They were pushing the proverbial pendulum farther and farther to one side in an effort to have it not swing in the other direction, completely ignoring the fact that a pendulum simply doesn't function that way. They are only providing more potential energy to be turned into kinetic when the pendulum swings back in the other direction. This makes the pendulum swing faster and go higher when it reaches the other side. The same is true for the economy.

What the government should have been doing was encouraging people to be more conservative in their spending during the 'Roaring 90's' and laying the ground work to provide for the needs that are going to come up during the next depression. This, however, was the last thing upon anyone's mind in the government or the population at large. If you want to prepare, it's not completely too late. Look into what you can do to get a small garden going, learn a skill that uses real goods and that you can barter with others if needed, or start building up your emergency supplies for a possible storm or major crisis.

Practical measures mean hoping for the best and preparing for the worst. The government has always failed to do that and has encouraged the population to ignore taking such steps. Why is that? Because when a crisis happens, the government can step in and seize more power from the people under the guise of helping them. I, for one, refuse to trade my liberty for the warm fuzzy feeling of security. That's all it is, a feeling and a state of mind. We are no more secure today then we were yesterday. Economically, socially, or physically, this has not changed. As a people, we need to take control of our destiny and take the measures required to keep ourselves safe, healthy, and to advance our goals.

You don't trust a complete stranger with your bank information, why do you trust the government? All it is is a large group of strangers with an agenda. And that agenda is to control you and justify their salaries and power base. Do you really want to trust that group of strangers?

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