
Greenspan Says U.S. Should Consider Breaking Up Large Banks  - nice1
http://www.bloomberg.com/apps/news?pid=20670001&sid=aJ8HPmNUfchg
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nickpinkston
Let's change the reserve ratio requirement to a sliding scale with larger
ratios required for larger deposit holding banks, we'd see large banks broken
up naturally to take advantage of the better investment deals by being small.
The FTC might be appropriate now, but we need to stop being so reactionist.

~~~
dantheman
Let's make the reserve ratio 100% if any other business did what banks did
they'd be prosecuted for fraud.

~~~
philwelch
Actually, they would be prosecuted for banking without following the relevant
regulations.

That's like saying, "if any other professional did what proctologists do,
they'd be prosecuted for sexual assault".

~~~
dantheman
If you put gold in wharehouse and they say that you can retrieve it at
anytime, and then turn around and give it to others -- how is that not
fraudulent? It only works because they hope that not everyone will demand
their gold back at the same time, so they can give you other peoples gold.

My issue is only with demand deposits; if you put the money in an account like
a CD where you agree to take it out in X amount of time, then they can lend it
out.

~~~
philwelch
Your argument seems to hinge on the idea that nobody knows about fractional
reserve banking. The fact is, not only is it well-known and fully regulated
that banks use fractional reserves, but there is even FDIC insurance and
similar programs to guarantee the safety of deposits.

Now, if there was a legally regulated system where you could do fractional
reserve banking of gold, complete with a government insurance program, then it
would be perfectly fine and not fraudulent at all. As it turns out, no
countries have a gold standard anymore.

Comparing some guy with a warehouse of gold who doesn't tell you what he's
doing with a publicly insured and regulated system with published reserve
ratios is not a particularly honest or fair argument.

~~~
dantheman
I'm arguing against fractional reserve banking, and the continued bailout by
the government of banks - FDIC is bankrupt and will need tax dollars or new
dollars (inflation). Also, I wasn't using gold because I'm advocating a gold
standard (even though I do), I used it because it can be used as substitute
for dollars in the example.

The problem we were discussing was one of the points from the article:
"requiring higher capital ratios on larger banks to ensure the firms’ safety"
I was advocating that instead of tinkering with this system, we should fix it.

Just because the something is legal and "well regulated" doesn't mean that it
is not fraudulent.

~~~
pyre
Just curious, do you have some sort of justification for the idea that a gold
standard is somehow better than fractional reserve other than the out-dated
idea that your dollar has something 'physical' to back it? Gold is just an
object the only value that it gets is the value that humans give it. It's not
like gold has some 'inherent' value just for being gold; a value the is
constant and unquestionable.

Most people that I've talked to that support bringing back the gold standard
only have some vague idea of not wanting their money to be 'just paper' and
needing to have something 'physical' that backs it. But their thinking never
goes any deeper than that. Most of their ideas come off as lacking in thought.
Much along the lines of people that keep all their money in cash in a mattress
because they "don't trust the banks;" never mind that it makes it easier for
any corner street thug to break your window and steal all your money.

~~~
dantheman
Oh I don't care if it's based on gold or some other physical asset, my only
concern is that it can't be created out of thin air. Throughout history
governments have struggled to get control of the monetary supply, separate it
from anything real (give it a name deutschmark, pound, dollar), and then
create more of it out of thin air. In this way they are taxing everyone who
holds that currency without there direct knowledge. Eventually the money
becomes worthless.

In general people are against central planning when it comes to goods and
services, but are in favor of it when it comes to monetary supply for some
reason that I don't understand. Throughout the history of central banking in
the united states we've had all of the worst financial crises and extreme loss
of value (the dollar has lost 98%) of it's value since the federal reserve
took over.

I also have a problem with the way the new money enters the system. As it
enters the market those who get the new money first are able to use it on
prices that are set for the old monetary supply so they get great deals, over
time prices will rise hurting those not receiving the new money.

Lastly, I have no problem with banks, but I do have problems with fractional
reserve banking -- as I stated above I feel it's fraudulent. I do believe that
through fractional reserve and fiat currency, money is produced is such great
speed that when investing one must take inflation into account and seek out
riskier and riskier investments to try and make any decent return. It adds one
more variable to be considered whenever making a decision, for instance
Harvard just lost 500Million due to an interest rate swap agreement because
they didn't predict the Fed would hold interest rates at zero for so long.

Lastly, if a currency is good it doesn't have to be forced upon you; if people
actually believed in fiat currencies they would allow competing systems and
abolish legal tender laws.

I'd be more than happy to answer any other questions/clear up any
misconceptions about this issue -- It's important to me.

~~~
philwelch
"Eventually the money becomes worthless."

This is a fundamentally untestable hypothesis: there are many currencies that
have suffered hyperinflation, yes, but many others which have gone on for
decades without any real harm. You can claim that at some point in the future
the currency will fail, and no matter how much time goes by you still won't be
proven wrong.

As it happens, commodity-backed currencies aren't immune to problems either.
The informal use of tobacco as currency in the colonial South led to a vast
overproduction of tobacco and what we would today recognize as severe
inflation (Friedman, Free to Choose). You need commodities that are inherently
difficult to increase the supply of. In the 19th century, the American
government had a seemingly perfect solution: a fixed ratio of dollars to
silver, as well as a separate fixed ratio of dollars to gold. Long story made
short, a silver rush disrupted this system and necessitated a move to the pure
gold standard. The gold standard directly caused a lot of deflation though,
which was a severe practical problem and a contributing factor to the Great
Depression.

"Throughout the history of central banking in the united states we've had all
of the worst financial crises and extreme loss of value (the dollar has lost
98%) of it's value since the federal reserve took over."

As it happens, this doesn't cause any real problems. It's ideal of course for
neither inflation nor deflation to occur, but the consequences of deflation
are so much more dire that, as a practical concern, we err on the side of
inflation.

The economic consequences of mild inflation are as follows: there is an
incentive to invest or spend money rather than bury it in your back yard, and
there is a small degree of information loss in the price system as prices rise
due to inflation. The economic consequences of deflation (an incentive to bury
money in your back yard) have catastrophic consequences. The main advantage of
fiat currencies is that it's possible to grow the currency at close to the
same rate as the economy itself, so the degree of inflation or deflation can
be controlled and minimized, with a bias towards inflation since that is the
less harmful of the two. Any natural commodity has its own fluctuations in
value, both natural and artificial, i.e. the Fisk/Gould plot to corner the
gold market during the Grant administration.

Finally, some notes about gold in particular. There are a number of reasons
gold is an infeasible currency base in the modern day. One is that, were the
entire world monetary supply backed by gold, the price of gold would be so
high as to all but eliminate the use of gold for any useful purposes. Of
course, the whole world wouldn't switch over at once, but any single country
that did would run into a lot of problems. A large country would increase the
cost of gold to unreasonable levels--a small country would be at the mercy of
any other country with significant gold reserves which could, by selling off
gold, tactically devalue that country's currency.

"Lastly, if a currency is good it doesn't have to be forced upon you; if
people actually believed in fiat currencies they would allow competing systems
and abolish legal tender laws."

Legal tender laws predate even the gold standard, and are probably a practical
necessity for debt to be enforceable. At the very least, the government has to
mandate a specific currency for people to pay their taxes in, and it's
probably just as important for the government to mandate a specific currency
for legal judgments to be paid in. There is no actual law against you setting
up shop and accepting gold as payment, but if someone runs their truck into
your shop and you sue them, no court is going to bend over backwards to make
the truck driver pay you anything except US dollars. What you're describing is
essentially a barter system, where you only accept payment in gold, your
neighbor only accepts payment in silver, your friend only accepts payment in
chickens, and I only accept payment in portraits of Benjamin Franklin.

So, let's say we have a gold standard. Well, as I intimated above, a gold
standard is just as much a fiat currency as a "Ben Franklin portrait"
standard: the government up and tells you that something is money, therefore
it's worth more than it should be for any practical purpose. Given the choice,
a currency that can be managed to prevent serious financial problems is
preferable to a currency that can't.

I'd be more than happy to answer any other questions, or clear up any
misconceptions about this issue.

~~~
dantheman
Thanks for detailed response.

1\. Bimetallism (mixed gold/silver) caused significant issues due to the fact
that they were setting the price of gold/silver. Setting prices never works.
2\. The consequences of deflation IMHO are overblown -- eventually people will
need purchase goods and stop saving/hoarding. Now of course these days with
massive amount of debt everyone has deflation would be horrible. Massive
inflation on the other hand, Zimbabwe today, or Weimer Germany (getting paid 3
times each day) are real threats and will rob the life savings of anyone who
doesn't have the money invested or converted to real assets. Driving
asset/speculation booms.

3 I agree legal tender laws have existed for a long time, but if you advocate
competing currencies then legal tender laws will quickly chase the good money
out of the system.

4\. Anything back by a physical commodity that people want is not a fiat
currency: >>the government up and tells you that something is money,
>>therefore it's worth more than it should be for any >>practical purpose.

The government doesn't have to tell you that something is money the market can
decide on what it wants to use as a medium of exchange.

5\. The US went off the gold standard in the 1970s and gold was still used for
things besides money so I don't really see how that argument holds water.

Lastly >> Given the choice, a currency that can be managed to prevent serious
financial problems is preferable to a currency that can't.

Do you mean like how it's currently managed now? how it was managed in the
great depression? Manipulation of the primary information mechanism in the
world may be able to change people's behavior but only by misleading them, and
only for a temporary amount of time.

~~~
philwelch
"The consequences of deflation IMHO are overblown -- eventually people will
need purchase goods and stop saving/hoarding."

Eventually, yes, but as a noted economist once said, in the long run we're all
dead. The point is that there's a real and significant economic cost to
deflation, one that is much greater than the economic cost of inflation to an
equivalent degree.

"Massive inflation on the other hand, Zimbabwe today, or Weimer Germany
(getting paid 3 times each day) are real threats and will rob the life savings
of anyone who doesn't have the money invested or converted to real assets."

I don't see any risk of that happening to the currency in a major country that
isn't completely corrupt or totally broke. One thing the Fed _is_ able to do
is prevent hyperinflation. Mild inflation, which is what we've had instead, is
probably the best long-term target for currency to take.

"I agree legal tender laws have existed for a long time, but if you advocate
competing currencies then legal tender laws will quickly chase the good money
out of the system."

"Competing currencies", as you put it, is simply a barter system. There's no
way that civil law or tax law could even work without legal tender laws, and
in any case, going back to barter would be a bad solution to a non-problem.

"The US went off the gold standard in the 1970s and gold was still used for
things besides money so I don't really see how that argument holds water."

The US has been cheating on the gold standard since the FDR administration
anyway--and there's been enough economic growth since then to create a really
big wealth-to-gold ratio compared to what it was back then. If you take the
level of M2 in the United States and divide it by the US gold reserves, which
is what a US return to the gold standard would require, the resulting price of
gold would be orders of magnitude above what it is now and what is affordable
for any feasible purpose.

"Do you mean like how it's currently managed now? how it was managed in the
great depression?"

As you yourself just noted, during the Great Depression we were on the gold
standard. That was actually one of the causes of the Depression.

~~~
dantheman
"In the long run we're all dead" is a cop out, and is used to back up theories
that can't withstand logical scrutiny.

I see runaway inflation as a serious threat to the united states, and I think
it is very possible.

Here's a good take on the FED and it's relation to the great depression:
<http://mises.org/rothbard/agd.pdf>

All money is simply a barter system; money is a commodity that is traded that,
there is nothing stopping and in fact many stores do have prices in dollars
and euros, etc. So there is no problem with competing currencies, the problem
you mention with taxes is easily fixed by specifying in what currencies your
taxes will be payable in. Eventually we settle on 1 or 2 currencies, but if
there was ever a problem there would not be legal reasons for creating a new
one.

~~~
philwelch
"I see runaway inflation as a serious threat to the united states, and I think
it is very possible."

Do you have any historical evidence that it's happened in our system or in
other systems like ours? The main flaw I see in your argument is your
conflation of mild inflation with runaway inflation.

The kicker is, runaway inflation would happen just as readily even under a
gold standard if major new gold sources are discovered, or if another major
power sells their gold reserves. We have even less control over that risk than
we have over the Fed.

"All money is simply a barter system..."

Yes, except you have to have a common medium of exchange that's widely
accepted, and a situation without legal tender laws would eliminate that.

The thing is, once you define what currency you accept taxes in and what
currency legal judgments are determined in...you have legal tender laws by
definition.

~~~
dantheman
1\. Your first point is incorrect, when a massive amount of gold is found
there will be inflation -- but it won't be runaway, prices will quickly come
to reflect expected future increases in the monetary supply whereas when the
government prints it there is no limit. That is why people advocate tying it
to something tangible. To limit their ability to inflate.

2\. You can define that you accept taxes in the following currencies; and then
when defining contracts you can specify what you will be paid in. The legal
judgements would support that.

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protomyth
I do wish, instead of "saving" the big banks, we had broken them up and given
the chunks to the smaller well run banks. Instead we gave them the money to
buyout better run banks.

~~~
kgrin
I agree, though as a matter of policy you have to ask - how do you actually
"break them up"? On what basis? You can't just have the government ordering
companies to break up.

Unlike, say, Standard Oil, antitrust laws don't apply here (the problem isn't
antitrust, it's systemic risk). So either you need some new laws, or just have
to ask very nicely (though as a matter of future policy, regulators can - and
should - refuse to approve these financial mega-firm mergers).

I suppose the government could have played a game of chicken (as it did with
GM): "do what we tell you (break yourself up into smaller pieces) or we'll let
you go under"... but if we've demonstrated that we weren't willing to
countenance these institutions going under at that particular point in time,
I'm not sure how credible the threat would be.

~~~
anamax
> I agree, though as a matter of policy you have to ask - how do you actually
> "break them up"? On what basis? You can't just have the government ordering
> companies to break up.

It's not clear that govt can't break them up now. Govt is technically the
controlling entity for a large number of them. It can bring the question to
the board and if the board votes for breakup....

With ordinary shareholders, there are laws protecting the minority on a
fiduciary basis, but they don't apply to govts. Besides, one can reasonably
argue that a breakup would increase shareholder value.

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known
While <http://en.wikipedia.org/wiki/Fed> is regulating the Cash Reserve
Requirements why isn't <http://en.wikipedia.org/wiki/SEC> regulating the
Market Capitalization to 2 times the Company's Quarterly Sales?

"If it moves, tax it. If it keeps moving, REGULATE it. And if it stops moving,
subsidize it." --Reagan

~~~
anamax
> "If it moves, tax it. If it keeps moving, REGULATE it. And if it stops
> moving, subsidize it." --Reagan

Note that this is a description of govt from a criticism of govt by Reagan.

------
Flemlord
Duplicate: <http://news.ycombinator.com/item?id=884462>

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joe_the_user
_At one point, no bank was considered too big to fail, Greenspan said. That
changed after the Treasury Department under then-Secretary Hank Paulson
effectively nationalized Fannie Mae and Freddie Mac..._

Uh, actually I think the first "too big to fail" bank was Continental
Illinois, bailed out in the seventies. Funny how this claim might give one the
impression that the Fed under Greenspan wasn't indirectly pumping up the
market based on investors relying on the credit of "too big to fail"
institutions. But it absolutely was. Indeed investors relying on the "too big
to fail" assumption underlay the whole subprime/AIG/etc episode and Greenspan
was at the helm at this time.

Though to be fair, the collapse was somewhat hastened by Paulson and company
being inconsistent in their judgments about who should fail, killing Lehman
but saving AIG. This, and _only this_ , is something Greenspan might complain.

 _"Look, my house of card, you Cretans let it collapse"_

~~~
theoneill
"Look, my house of card, you Cretans let it collapse"

It sounds like you're talking about Knossos.

------
hristov
Very interesting development, but it has already been discussed on YC.

