Extending this analogy further, say at some point, you flipped tails 10 times in a row thus causing sizable losses to the counter party under the terms of the bet. Mathematically, given that the bettors created capital out of nothing and continually made this bet, wouldn't the counter party now potentially face losses orders of magnitude greater than his ability to pay? But, would you really care? Of course not. You would simply hope that at some point they make the game available to you again.
Now, if you were the counter party who offered this bet and the one who faced untold losses, what might you conclude from this series of events, i.e., how would you go about "reforming" this bet? Would it dawn on you, that this is a bad bet to make in the first place? Would it dawn on you that the nature of this bet systematically provides incentives for anyone to take the other side and mathematically insures that you will face significant losses at some point? Really, wouldn't you just stop?
Or, would you take a different approach?
Would you continue to offer the bet but attempt to "oversee" or "regulate" the coin flip in such a way as to prevent it from landing on tails too many times? Would you continue to offer the bet but just "cap" how many times bettors could flip? Would you continue to offer the bet but turn around and castigate the bettors as greedy profiteers and threaten them with retribution if and when you face the inevitable carnage? Would you just raise the amount they pay from their earnings into the loss pool?
Does this sound like an insanely idiotic example that would never take place in real life? Well, in fact, this bet is the essence of the United States banking system, because it is the essence of the FDIC. The Federal Deposit Insurance Corporation is a government program which insures bank deposits. In other words, if a bank takes a risk and makes a lot of money - they win, but if they don't, the FDIC loses. And, unlike private insurance, which would discriminate against poorly run banks by not agreeing to insure their depositors - the FDIC must insure every bank that meets its regulatory criteria. Not surprisingly, the FDIC is broke:
The FDIC estimates bank failures will cost the fund around $70 billion through 2013. Ninety-two banks have failed so far this year. Hundreds more are expected to fall in coming years largely because of souring loans for commercial real estate.Did you catch that? The FDIC is now considering borrowing from the taxpayers!
The FDIC's fund has slipped to 0.22 percent of insured deposits, below a congressionally mandated minimum of 1.15 percent. The $10.4 billion in the fund at the end of June is down from $13 billion at the end of March, and $45.2 billion in the second quarter of 2008.
The FDIC board will meet at the end of the month and will likely put out several options, Bair said Friday, including tapping a Treasury credit line, assessing fees on banks in advance and again increasing the fees that banks must pay.
The chairman of the Federal Deposit Insurance Corp. says she is "considering all options, including borrowing from Treasury," to replenish the dwindling fund that insures bank deposits.Please, please say "never"!
"I never say never," FDIC Chairman Sheila Bair told an audience at Georgetown University Friday.
The moral hazard created by the FDIC is compounded by the government run banking system's ability to literally create money . First, the Federal Reserve creates money out of thin air whenever it purchases government securities on the open market. Second, banks, which receive these reserves, pyramid them by lending multiples of the reserves in their possession to businesses and the public. This creates massive amounts of leverage in the banking system all backed by the FDIC's explicit guarantee. This inflation, which causes malinvestment predicated on continually increasing nominal prices, coupled with regulations and other government policies that explicitly encourage bad loans (see The Community Reinvestment Act) render this system a house of cards waiting to collapse.
In fact, such a system necessitates a recurring cycle of booms and busts. No amount of central planning, oversight, or threats can stop the laws of reality from operating. With that in mind, consider Treasury Secretary Timothy Geithner's recent testimony to the House Financial Services Committee on Financial Regulatory Reform. Rarely do we see such a blatant demonstration of utter intellectual bankruptcy. Consider the following:
Uh, ok, I actually agree with that. What else?:
But make no mistake: The flaws in our financial system and regulatory framework that allowed this crisis to occur, and in many ways helped cause it, are still in place.
We may disagree over details of how to best fix those flaws, but that cannot mean we do not act.Well, at least we had a sentence together. Consider the literal meaning of that last sentence. How can we disagree "over the details of how to best fix those flaws"? They are logically obvious. In any case, if we do disagree, how could we act? What exactly would we do? Let's say that I hold that logic dictates that the system be dismantled and replaced with a completely private banking system based on a 100% reserve hard money standard under a system that respects private property and upholds contracts. On the other hand, let's say that Geithner thinks we must leave the system completely intact but increase the budget of the regulators by $500 billion so that there are 185 regulators for every employee of every bank on the planet that watch and monitor them even when they go to the bathroom. What would we do?
Of course, as a pragmatist, Geithner does not literally think we could disagree over essentials. He takes for granted that businessmen who seek profit are evil and must be throttled by the state. How exactly you do that in terms of fines, jail sentences, and how many regulators to send to the bathroom with the bankers is a "detail" that he is open to discussing, but "action" is what is truly important - as long as it is action in the direction of statism and more government control.
Naturally, Geithner goes on to detail his plans for more regulation, more oversight, etc., i.e., more "action", without ever questioning the essence of the nationalized banking system or evaluating the causes of the collapse. In fact, he regards the collapse as "sudden" as if on the basis of hundreds of years of economic history and theory, no one could possibly have foresaw such an outcome. Then, in a final demonstration of the essence of all that is destroying this country, Geithner makes the following statement:
But as we do this, we must remember the President's admonition on Wall Street last week. Time is the enemy of reform.Is there any better expression of the philosophy of pragmatism than that last line? To the pragmatist mind, "time", meaning some form of reasoned deliberation over the causes and therefore fundamental solutions to the crisis, is regarded as the "enemy". To him, facts, reason, principles, i.e., thought is the enemy. "Action" is paramount and, implicitly, "reform" is statism not "efforts to make something better."
Geithner is literally saying that "reason is the enemy of statism". For the second time, we agree.