Two comments from Michael Lewis in his review of Capital by John Lanchester caught my attention. Writing in the New York Review on 7 March 2013, Lewis says:
"Wherever it traveled, American high finance required an irony-free zone, in which otherwise intelligent people might take seriously inherently absurd events: young people with no experience in finance being paid fortunes to give financial advice, bankers who had never run a business orchestrating takeovers of entire industries, and so on."
Anyone who has had the experience of meeting with a recent business school graduate at an investment services company, or in an estate planning service capacity, or in any other activity involving investing, insurance, banking, capital management, or finance, has probably had a moment of irony in dealing with an extremely young person who does not have any relevant experience, but who is confidently asserting an ability to manage large sums of money, give out serious advice, and plan your future. If you haven't had that experience, you may have dealt with very professional-seeming individuals, or maybe you haven't looked far enough for input from financial service enterprises.
An example of the difficulties involved in having bankers running businesses they don't understand arose in the recent global financial meltdown (of 2006-2012 vintage) when a gentleman named Vikram Pandit was running Citigroup, one of the world's largest financial services enterprises. At the time, Pandit had no commercial banking experience, yet he was running one of the world's largest commercial banks, according to Sheila Bair in her book Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself, from Free Press, 2012. (Bair's opinion seems relevant since she was chair of the Federal Deposit Insurance Corporation from 2006 to 2011.)
The other comment from Lewis that caught my attention was:
"In neither place were the windfall gains to the people in finance widely understood for what they were: the upside to big risk-taking, the costs of which would be socialized, if they ever went wrong. For a long time they looked simply like fair compensation for being clever and working hard. But that's not what they really were; and the net effect of Wall Street's arrival in London, combined with the other things that were going on, was to get rid of the dole for the poor and replace it with a far more generous, and far more subtle, dole for the rich. The magic of the scheme was that various forms of financial manipulation appeared to the manipulators, and even to the wider public, as a form of achievement."
In a recent post, I commented on the FDIC's listing of Ponzi schemes and Get Rich Quick business opportunities as suitable for government intervention (along with dozens of other business enterprises) to push banks to deny service to these companies or criminal enterprises. Isn't it ironic that the very largest Ponzi scheme in the history of the world seems to be the Social Security system, which taxes current job holders and the companies that employ them in an attempt to continue paying former job holders the "pensions" they were promised by the government? Isn't it ironic that the largest and most deeply regulated financial services companies are, to all intents and purposes, judging by the results of their behaviour and not only by their stated intentions, seemingly nothing more than get rich quick schemes?
If you think that financial services companies ought to be regulated, perhaps you can explain what it is in the history of the last one hundred years of regulation of banks and financial services companies that you think is desirable. Do you think the state chartered banks in the United States during the late 19th Century were disorderly in a way that was excessive compared to the disorder of the Great Depression and the recent Financial Meltdown? Do you think that there is some sort of stability brought about by government regulations that isn't denied by the extremes of the boom and bust cycle during the entire history of the Federal Reserve System? Do you think that inflation and deflation are less extreme, that unemployment is more stable, or that price fluctuations are less of an issue under government regulation?
If you think any of those things, you are entirely mistaken. I would be happy to detail at length the reasons why each of these arguments is wrong. Meanwhile, I should simply like to point you at a few links.
Here is a chart illustrating the relationship between the price of gold and the Dow Jones Industrial Average. As you can see, there is considerably greater volatility, a more extreme boom-bust cycle, after the creation of the Federal Reserve.
http://bullmarketthinking.com/wp-content/uploads/2013/03/ratio-flat-chart2.jpg
An overview of the difficulties inherent in the power of the Federal Reserve System being concentrated in those hands is given here: http://theeconomiccollapseblog.com/archives/11-reasons-why-the-federal-reserve-is-bad
Please pay close attention to this graphic: http://theeconomiccollapseblog.com/wp-content/uploads/2010/07/Inflation.png
Finally, consider this data:
http://www.shadowstats.com/alternate_data/unemployment-charts
Notice that in 1994, the government "defined out of official existence" those long-term discouraged workers who live and breathe, but have concluded that they have very little chance of getting a job, in order to claim that the unemployment rate is now 6.3% instead of somewhere upward of 23%.
So if you consider that among the purposes given for creating the Federal Reserve System were to reduce the extremes of the boom-bust cycle, to limit the effects of inflation, and to provide for closer-to-full employment of the people of job age capable of working, you should get the idea that the system has failed. Regulating financial services doesn't work. It does none of the things it was designed to do.
Being of an ironical outlook, you might ask, "Why does regulation of financial services persist?" And to answer that question, you only need to look at who benefits.
The simple answer is: the big banks. In its 2011 Annual Report, the Dallas branch of the Federal Reserve reported that since the creation of the Federal Reserve, big banks have consolidated their control over financial assets. The addition of other regulatory agencies has not slowed that consolidation, at all.
Here is that report: http://www.dallasfed.org/assets/documents/fed/annual/2011/ar11.pdf
According to the New York Times, writing here:
http://dealbook.nytimes.com/2012/03/28/banking-regulator-calls-for-end-of-too-big-to-fail/?_php=true&_type=blogs&_r=0
'They have "increased oligopoly power" and "remain difficult to control because they have the lawyers and the money to resist the pressures of federal regulation," Harvey Rosenblum, the head of the Dallas Fed’s research department, wrote in the essay. Having seen the biggest banks make risky bets, crush the economy and get rewarded leaves "a residue of distrust for the government, the banking system, the Fed and capitalism itself," Mr. Rosenblum wrote. It's one thing for the Occupy movement to point out how bailing out the biggest banks — with little cost to their executives or shareholders and creditors — has demolished credibility. It’s quite another for top officials in the Federal Reserve system to put it in an annual report.'
Just from 1970 to 2010, the top five banks increased their share of total financial assets from 17% to 52%. In that same time period, the next 95 largest banks and financial services companies decreased their share slightly from 37% to 32%. What happened to the rest of the industry is more impressive: There were 12,500 smaller banks, according to the Dallas Federal Reserve annual report cited above, in 1970, and they had 46% of all financial assets in the country. By 2010, there were only 5,700 smaller banks, and they controlled only 16% of the financial assets. More than half, or 6,800 total, banking enterprises known to the Federal Reserve in 1970 were gone by 2010.
If financial services regulations only benefit the big banks, what can be done about it? Obviously, we're not about to tell you to start writing to your representatives in Congress or Parliament. Nor are we optimistic about calls for deregulation or re-regulation or other musical chairs. The big banks have enormous financial power, as illustrated above, enormous arrogance and contempt for everyone else, and the capacity to hire lobbyists to corrupt regulatory agencies, representatives in office, and anyone who stands in their way, judging by their actions, in my opinion.
The only rational path forward seems to be to resist regulation that benefits the big banks by using financial tools and cryptographic operations that continue to exist, and to be developed, outside of the mainstream financial cartel. Bitcoin is certainly an excellent example of a possible alternative approach to exchanging value. We think it can be improved, which is why we've developed SilentVault.
You are, of course, free to disagree. But we're not going to stop pointing at the evidence that regulations are not working.