Distributive vs Creative Industry: Sins of the Financial Industry & Answers

"Successful societies maximise the creative and minimise the distributive. Societies where everyone can achieve gains only at the expense of others are by definition impoverished. They are also usually intensely violent."       -- Roger Bootle

I found this blog article from Bill Mitchell, which references another article by Roger Bootle.

The Mitchell article is a bit dense economically, but Mitchell talks extensively about the financial industry and how it interacts with the broader economy and how the unfettered access to the broader economy allows greed to disease the entire system.  This is a distributive process allowed by the lack of effective regulation limiting the access of the usually inherently distributive finance industry to the broader real economy.

This firewall used to exist.  It had a name.  The Glass-Steagall Act of 1933.


BANKING ISSUES:

This law existed to prevent banks from investing in speculative (and therefore risky) investments with depositors' (your) money.  Allowing commercial banks to engage in dangerous behavior and leaving loan-making rules too loose allowing them to make broad-based bad loans to people, businesses, or governments who cannot repay is a recipe for the destruction of society.  And God forbid if the government forces them to make bad loans for socialist reasons.  That is utterly unacceptable.

Commercial banks exist to receive deposits of consumers and businesses and to ensure availability of this liquid currency to their respective consumers at any time.  Investment banks are to be distinctly and completely separate entities where consumers are fully warned ahead of investing money in them of the risks involved.  Commercial banks include organizations like Wells Fargo, Citi, Bank of America, JP Morgan Chase, etc.  Investment banks are organizations like CharlesSchwab, TDAmeritrade, any venture capital organizations, etc. where no availability of liquidity or loan repayment is guaranteed.  The activities of commercial banks must be very carefully regulated and they must be prohibited from engaging in any kind of highly risky investment, including making loans to bad consumers.

I find it amusing the Bernanke finds the resurgence of interest in the Glass-Steagall Act "puzzling".  Especially, considering that his policies provoked the greatest unbalancing of economic investment across the board for all of history.  Mr. Bernanke lives in a theoretical world that has little, if any, relevance in the real world.

But back to the topic at hand, distributive versus creative activities in economics.

Any future iteration of the Glass-Steagall Act needs to have a quantitative manner to identifying "distributive" investments versus "creative" (or productive, as I have said many times in the past) investments and explicitly prohibit any distributive activities from commercial banks.  Every single job, every activity of all employees in the commercial banking industry needs to have a quantitatively describable "productivity score" that takes into account all debits and credits across not only the given bank's balance sheet, but all of their customer individuals, businesses, and corporations to create a composite productivity score for each asset on their balance sheet (there should never be any off-balance sheet assets allowed, ever, under any circumstances that I can see).

This way the health of their balance sheet, every asset and activity, can be objectively judged based on a "productivity score", publicly and objectively determined, determined by how many of their loans are actually producing real benefits to society.  Real benefits to society being measured by the creation of something that did not exist before or the funding of such an endeavor by a client or client business.  The object, idea, process, method, knowledge, etc goal to be created must be clearly stated, publicly distributed and plainly made known when a loan is made by a commercial bank.

This will place responsibility both on the bank AND the customer to ensure that they are acting in the best interests of society as a whole.


SOCIAL BACKSTOP ISSUES:

My complaint during the 2007-2008 crisis was the bank bailouts.  The FDIC exists to insure DEPOSITORS, NOT banking corporations.  The FDIC should have direct links between the banks and themselves detailing every deposit account, what balance is maintained in it, and who it belongs to.  When the bank fails, the FDIC needs to provide creditor of last resort services (powered by the Fed & Treasury) to provide an account for the consumer/business by simply handing printed money to the bank of the consumer's choice.  This will not produce inflation because the fractional reserve banking system operates on imaginary money that doesn't exist anyway, so printing money up to the depositor's balance is merely realizing the imaginary money for the consumer allowing them to tell the FDIC which bank that is still standing to deposit the money into.  Structuring the FDIC as such would eliminate the need to any kind of insurance payments by the banks to the FDIC, except perhaps what is required to pay for operations at the FDIC and minimize bank expenses related to FDIC access.

This will ensure that bad banks fail and better managed banks are recapitalized automatically as consumers direct their existing funds retained at the FDIC to another bank.

Currently, the FDIC is broken.  They plan on sticking consumers, the very sector they exist to protect, with the costs of bank failures which is unacceptable.  In their 2012 paper Resolving Globally Active, Systemically Important, Financial Institutions or G-SIFI, they lay out the plan for sticking "unsecured creditors" (that would be you, dear reader) with the failures of bank management by way of issuing bank stock to the unsecured creditors which will be promptly fire sold at severe losses to the unsecured creditors.


BANKING CRIMINALITY:

I was emailed this post regarding banks laundering money for drug cartels.  If you bank at Bank of America or Citibank, I would pull all of my deposits out of their bank and move to somewhere else... Wells Fargo if you insist on a big bank or a local bank or perhaps credit union.  The moral fiber of some of these big banks is very nearly non-existent.  Let alone being concerned about their loans-to-deposits ratio, which is a sign of how stable a bank is financially (Note: higher is better).


WHAT CAN YOU DO?

Pull your money out of unstable banks, which will tilt their LtD back in a more stable direction, and hopefully increase the overall system stability, barring catastrophic events like currency collapse.

Find a foreign bank to deposit into.  Which is where buying the book "Going Global 2015" comes in handy.

Demand that the U.S. debt limit not be expanded.  Expanding the debt load on our nation is not helpful and will result in a full fledged currency collapse if not managed.

Buy gold.  Physical gold, not GLD or any of those ETFs that do not hold 100% of the gold to back their contracts. And probably a gun.  These are all to hedge against a possible currency collapse which is looking more likely with the continued mismanagement of the fiscal government budget.

Demand a shift in legislation away from distributive policies (Obamacare comes to mind) and for creative or productive policies.

Rickards: Death of Money

The book "The Death of Money" details the currency crisis in both a straight-forward and in-depth fashion, and details exactly why the world's financial system is unstable, how we got to this point, and some possible solutions on avoiding complete collapse.  Sadly, we the people don't get a say on the financial future of our world, since the entire system is run by academic clowns whose heads are buried so far in theoretical models that they cannot see reality when it bites them in the derrière.

And even worse, our butts are on the line to be bitten by their incompetence.  Although, the central banks are in between a rock and a hard place courtesy of the fiscal policy of our government.  Ultimately, we either need to get our fiscal house in order, pray for a technological revolution, or collapse financially.  Barring major changes though, the United States is finished, both as a serious world power and as a stable social structure, and I can guarantee you that China is poised to pounce when we do ourselves in.

The Death of Money
by Jim Rickards