Mush: One Goldbug Cowering In Fear
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2010-12-22 09:33 by Karl Denninger
in Editorial , 12 references Ignore this thread
Mush: One Goldbug Cowering In Fear

The response from Shedlock to my previous missive on Kucinich's bill is amusing.

Denninger is not the only one who is stunned. I am stunned that anyone could support this preposterous idea, assuming they read it and are sober.

Neither sound money nor the free market comes from printing money into existence. Arguably the only thing worse than the Fed printing money out of thin air is Congress printing money out of thing for the purpose of full employment and/or any other absurd ideas Congress has.

As opposed to loaning it into existence at gunpoint (literally in the case of TARP, QE1 and QE2), as is done now?

The last thing we need, the very last thing we need is Congress lending money into existence to pay the bills or to do anything it wants for any reason. Those looking for hyperinflation can find the roots of it in that bill.

Might I remind Mish (or should I rename him as "Mush", as in "for brains") that the bill contains an explicit provision prohibiting that which he claims will happen?

(5) GOVERNING PRINCIPLE OF MONETARY POLICY.The Monetary Authority shall pursue a monetary policy based on the governing principle that the supply of money in circulation should not become inflationary nor deflationary in and of itself, but will be sufficient to allow goods and services to move freely in trade in a balanced manner. The Monetary Authority shall maintain long run growth of the monetary and credit aggregates commensurate with the economys long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates.

Gee, an actual zero inflation mandate!  Funny how we finally define stable prices and Mush has a problem with it.

One should look at The Federal Reserve Act for reference - you'll find the same mandate less the definition of "stable prices." 

Of course if you're an "asset manager" you have a hell of a reason to like "small inflation", because that is what creates the dynamic that forces people to spend or take risk instead of saving, as savings are under such an inflationary system a sinking fund.

I am 100% in favor of eliminating fractional reserve lending.

Ironically, Denninger once challenged me on that score, defending the practice. Please see Fractional Reserve Lending Constitutes Fraud for the debate.

Hopefully Denninger has changed his mind.

Bah.

Once again the nuts are loose rolling around on the floor and intentional distortions and in fact outright lies are again becoming the stock-in-trade of those who wish to claim a "debate."

I have repeatedly pointed out that the solution to the games played by the banking system can be found with a standard of One Dollar of Capital.  This standard prohibits unsecured lending that exceeds the excess capitalization (whether through bond sales, paid-in-capital or retained earnings) of the firm in question.  And incidentally, Kucinich's bill effectively does exactly this and in fact goes further.

As a practical matter lending against secured value must (to be safe) have a significant margin built-in so as to prevent an unexpected "draw" against a bank's excess capital.  That is, if you lend someone $100,000 to buy a house you suddenly become very concerned about down payments and such (and likely require 20% or more down) if such is a fully-secured loan, as without doing so the risk of an "unexpected" incursion into the bank's excess capital becomes very real - and should it happen you could literally be forced into liquidation with no notice at all.  This risk prevents most of the abuses all on its own, but I can live with Kucinich's solution - he simply requires that if you want to lend against assets without having a dollar of capital for each dollar lent that the loan must come from the Federal Government.

Kucinich's bill also turns banks into fiduciary depositories for customers, ending the possibility of the FDIC - that is, the government - having to cover fraudulent lending.  By designating a transaction account as having a bailment arrangement fiduciary responsibility and criminal sanction suddenly appears should the system be gamed.  Gee, what's the problem with that?  If you wish to loan money to a bank (in exchange for interest) you may, but such a loan must be designated as a loan (not claimed to be a "deposit") and further, there is no insurance or guarantee upon it. 

You might suddenly become very interested in the safety, soundness and activity of such an institution before you lend it money, eh?  Yeah.

The bill also includes two other provisions - an interest-rate cap (8%) and a limit on all fees, costs and interest that may not exceed the principal, with the exception of mortgages.  This will cut off predatory lending at the knees - since the risk-free rate of return is about 3% ex-inflation, and the bill contains a zero-inflation mandate, this means that someone who's risk is a bit more than twice the "risk-free" rate will be denied credit.  This provision stops the pyramiding of risk that by and large led to the housing bubble - the predatory lending that was at the core of the asset-price runup could not happen, nor could complex securitizations with embedded costs in the mid-several-percent range be completed and put together with such a cap.  In short, if you're not a good credit risk you will be paying cash - that is, spending from economic surplus instead of pulling forward demand.  This again is good, not bad.

Finally, the bill requires that the emission of currency to match economic growth (which, incidentally, is what we wind up with under the Kucinich bill) be allocated such that 25% of it be distributed to the states for infrastructure, education, health care and unfunded Federal mandates.  That is, at least one quarter of the monetary balancing will have to go toward the States, rather than being dissipated in The Federal Government.   While that's not perfect it sure beats what we have now, where state and local governments wind up engaging in hinky derivative deals with banks that end up screwing their citizens when they need a new sewer system.

To answer the question Mush asked up top of his post, yes, I did read the bill.  In full.  It is, after all, only 46 pages.

No, it's not perfect.

But it would be a monstrous improvement over what we have now, and I will remind Mush that in point of fact we had Colonial Script some rather long time ago, and further, there is nothing in The Constitution that prohibits the Federal Government from issuing and fixing the value of fiat currency.  In fact, such is explicitly contemplated and expected by The Constitution. 

The criticism that such constitutes the road to "hyperinflation" is pure hyperbole.  Anyone who wants to find "hyperinflation" need only look at the premise of QE-Part-Whatever, extending credit against bogus assets by the so-called "monetary authority" (which we now have proof of) and intentional hiding of losses through the printing of money, all of which is then beyond the review of the people.  If Congress pull this sort of crap (and they might) they're subject to being voted out of office. 

Representative Republics are all about the right of review by the people, and this bill provides it in spades, correcting what has been a stunning lack of enforcement of alleged mandates of "price stability" in the original Federal Reserve Act - a mandate that has been utterly ignored without consequence for nearly 100 continuous years.