Banks: Join the Free Market or Become Utilities

December 17th, 2011
in Announcements, Op Ed

by Shah Gilani, Capital Waves Strategist,  Money Morning and creator of Wall Street Insights & Indictments

Let's face it. Banking is a protected industry. It's a government-coddled industry.

bank-break-hammerThe problem with that is, banks really aren't subject to free market forces that would naturally eliminate insolvent and inefficient institutions. The result is more bad banking.

If we ever want to free ourselves from the yoke of czarist money-changers and free up capital to flow into and throughout the economy, we must subject all banks, and all financial institutions, to free market forces so the weak ones fail and the strong survive.  How do we that?

Follow up:

It's easy. We remove the rocks under which banks hide by making all banks' (including the U.S. Federal Reserve) books and records transparent with a one-month lag. While we're at it, why not legislate the same rule for all regulatory bodies? They are supposed to be protecting us, after all, so what's there to hide?

(Speaking of transparency, it wouldn't be a bad idea to stop members of Congress from trading stocks that are directly affected by pending legislation.  More on that here.)

And, if that's not a palatable option for bankers used to being sheltered, we should give them the ultimate protection they demand and simply turn them into utilities, along with the transparency that comes with it.

Let me make this simple.

If banks get into trouble and have to borrow huge amounts from each other, or have to borrow from the Federal Reserve - either from its discount window, through swap lines, or through any of the other central bank liquidity provision programs currently available - we should know about it. I suggest a one-month lag before that information is released because that's all the time they should be given to fix themselves.

If the banks are so important to the economy that they have to be given massive liquidity and regulatory cover to right themselves when they are in danger of sinking, then the financial system is nothing more than the clever rhetoric of an ensconced oligopoly manifesting its power.

If we had "one-month transparency," and faltering institutions were clearly identifiable, their stockholders would jump ship, their debt holders would man lifeboats, and unless the institution could be saved from free market destruction by the free market intervention of risk-takers willing to saddle themselves with personal exposure, they would fail.

Look through the bankers' rhetoric that they need protection and cover from public scrutiny, and what do you see? You see inefficient institutions that leverage themselves for profit, get bailed out, merged, and recapitalized by an unsuspecting public that's been duped into believing bank CEOs, regulators, and the Fed that everything is fine -- or will be with time.

Who cares if banks fail before they get too big to have to be bailed out, or too big to be systemically threatening? We all should care. They should be allowed to fail.  And the sooner the better.

If that's not a palatable solution for the industry, then why don't we treat banking like we do utilities? After all, that's what banks are. They are utilities - although their profits are not capped, nor is their leverage, nor is the disaster they can wreak on all of us.

Fixing America, and the world for that matter, isn't complex.  It's just hard because banks control us, not the other way around.

The only way to get around the global banking cabal is to dismantle all the too-big-to-fail banks everywhere and let the world see what's on every bank's books. Let the world see how leveraged they are, how much they have to borrow to cover holes in their balance sheets and their capital reserves, and make all regulators findings, admonishments and help known to the public fairly immediately.

Transparency is next to godliness, even if you don't believe in God.

[Editor's Note from Money Morning: If you're fed up with the rampant corruption, double-dealing, and protection of Wall Street by Washington (at the expense of the taxpayers on America's Main Street), then you need to read Shah Gilani's Wall Street Insights & Indictments newsletter. As a retired hedge-fund manager, Gilani has firsthand knowledge of the strengths and weaknesses of our financial system. But unlike most insiders, he's not afraid to share that knowledge with the public. That's why his new newsletter has been such a hit. In fact, we've never seen such an overwhelming response to afree service. But don't take our word for it, click here to sign up and find out for yourself.]


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