Ah, Paul Krugman. He’s a master of sounding like a critic of the banks while at the same time defending the institutionalized Federal Reserve monetary system and fractional-reserve banking system and arguing in favor of the status quo rather than serious reform. In his latest column, about JPMorgan’s recent woes, he writes:
Just to be clear, businessmen are human — although the lords of finance have a tendency to forget that — and they make money-losing mistakes all the time. That in itself is no reason for the government to get involved. But banks are special, because the risks they take are borne, in large part, by taxpayers and the economy as a whole. And what JPMorgan has just demonstrated is that even supposedly smart bankers must be sharply limited in the kinds of risk they’re allowed to take on.
Think about that for a moment. Do you see the flaw in reasoning?
So the government needs to “get involved” to more heavily regulate the banks so that the “kinds of risk they’re allowed to take on” is “sharply limited”.
Because “banks are special, because the risks they take are borne, in large part, by taxpayers and the economy as a whole”.
Do you see the fallacy yet?
Okay, so the government interferes in the market and undermines market discipline by incentivizing banks to take on greater risks than they otherwise would with the promise of taxpayer bailouts (this is what makes the banks “special”), so therefore the government must “get [even more] involved” to try to cure the very problem government involvement created in the first place.
Krugman is the doctor who prescribes a medication to treat the symptoms of a patient that causes some unintended side-effect and who then prescribes yet another medication to treat the symptoms of the first. The concept of just treating the disease that causes the symptoms never seems to cross his mind.
That is, the idea of just getting the government out of the banking business and not making banks so “special” as to never be allowed to fail is a solution beyond Krugman’s comprehension. If banks had to fear bank runs and bankruptcy, they wouldn’t take on such excessive risk. It is government interference that removes that fear of God from the banks that incentivizes them to take on that risk in the first place.
Now look at what Krugman argues in his next paragraphs:
Why, exactly, are banks special? Because history tells us that banking is and always has been subject to occasional destructive “panics,” which can wreak havoc with the economy as a whole. Current right-wing mythology has it that bad banking is always the result of government intervention, whether from the Federal Reserve or meddling liberals in Congress. In fact, however, Gilded Age America — a land with minimal government and no Fed — was subject to panics roughly once every six years. And some of these panics inflicted major economic losses.
So what can be done? In the 1930s, after the mother of all banking panics, we arrived at a workable solution, involving both guarantees and oversight. On one side, the scope for panic was limited via government-backed deposit insurance; on the other, banks were subject to regulations intended to keep them from abusing the privileged status they derived from deposit insurance, which is in effect a government guarantee of their debts. Most notably, banks with government-guaranteed deposits weren’t allowed to engage in the often risky speculation characteristic of investment banks like Lehman Brothers.
This system gave us half a century of relative financial stability. Eventually, however, the lessons of history were forgotten. New forms of banking without government guarantees proliferated, while both conventional and newfangled banks were allowed to take on ever-greater risks. Sure enough, we eventually suffered the 21st-century version of a Gilded Age banking panic, with terrible consequences.
It’s clear, then, that we need to restore the sorts of safeguards that gave us a couple of generations without major banking panics.
So Krugman considers banking panics and bank runs of the past to have been a disease, and the cure was for the government to ensure deposits so that ultimately the taxpayers would bail out any bank that got itself into trouble, thus institutionalizing the kinds of behaviors that would get a bank into trouble. Krugman doesn’t realize that the panics and bank runs were not the disease, but symptoms of the disease.
Consider that banks operating under our fractional-reserve system are effectively legalized counterfeiting operations. Another thing that makes banks “special” is that they can loan out many times more than they actually have in reserve. They do this by creating “money” out of thin air. When you sign that loan agreement, they punch some keys on a computer and some digits are entered into your account representing “dollars” that don’t actually exist. It is a confidence game, a legalized Ponzi scheme, in which the banks in this way lend you something of no real value and then charge you interest for its use, which you do have to pay with something representing real value, such as the fruits of your labor, or, if you can’t make your payments, your home, etc.
If any business in any other industry acted this way, they would be charged with committing fraud. But the banking industry, as Krugman reminds us, is “special”, because governments have legalized their counterfeiting operations and permit them to operate even though they are at all times inherently bankrupt.
Which brings us to a “run” on the banks. Why should it be a problem for banks to simply meet their contractual obligations to their depositors and return their depositors’ property on demand? It shouldn’t, in a free market, because any business that couldn’t do so would instantly be declared bankrupt and its assets liquidated, and the fear of such happening would keep businesses more honest. But not our “special” banks, whose counterfeiting operations and inherent bankruptcy have been institutionalized. The government steps in and relieves the banks of their contractual obligations in one way or another. Throughout the 1800s, for example, the government responded to the banking “panics” Krugman speaks of by relieving the banks of their obligation to redeem their notes in specie (i.e., gold or silver coin), thus interfering in contracts and violating the property rights of the depositors.
Needless to say, the bankers didn’t like being prevented from making greater profits by taking on greater risks with the threat of bankruptcy hanging over their heads. What they needed to do was to get the Congress to implement reform that would ensure that, as Krugman put it, “the risks they take are borne, in large part, by taxpayers and the economy as a whole”.
So Rockefeller, Morgan, Warburg, Schiff, et al, got together and conceived of the Federal Reserve, the “lender of last resort”, which would allow the banks to inflate through fractional-reserve lending in a coordinated fashion. Having come up with their plan, the bankers successfully conspired to get their legislation pushed through the Congress.
Thus was born “the Fed”, a government-enforced private banking monopoly over the supply of money and credit in the United States. Under the Fed system, money is debt. Every dollar is borrowed into existence, and thus this system requires that more and more debt be taken on, since the principal on that debt is owed back to the banks plus interest, which must also be paid back with “money” created out of thin air. Hence the need for the Fed to set a target rate of steady, constant inflation, the permanent erosion of the purchasing power of our dollars, a hidden tax that steals wealth from the public and effectively makes the 99% indentured servants who must offer a part of the fruits of their labor for the benefit of the 1%. In addition to the inflation tax, it’s no coincidence that the income tax was also implemented in 1913, the year the Federal Reserve Act was passed.
The government also took the additional step, as Krugman notes, of “insuring” deposits by promising to bail out any banks that overextended themselves and couldn’t meet their contractual obligations to their depositors. Notice that Krugman has absolutely no problem with the fact that the risk banks take on is borne “by taxpayers and the economy as a whole”. On the contrary, he showers praises upon this system, the whole point of which is to accommodate the banks in their goal of making private profits through inflation of the money supply by socializing the risk!
In this article, he focuses on the investment bank JPMorgan (Chase is their commercial banking side), which “somehow managed to lose $2 billion in a failed bit of financial wheeling-dealing.” He writes:
[JPMorgan CEO Jamie Dimon] has been particularly vocal in his opposition to the so-called Volcker Rule, which would prevent banks with government-guaranteed deposits from engaging in “proprietary trading,” basically speculating with depositors’ money. Just trust us, the JPMorgan chief has in effect been saying; everything’s under control.
What did JPMorgan actually do? As far as we can tell, it used the market for derivatives — complex financial instruments — to make a huge bet on the safety of corporate debt, something like the bets that the insurer A.I.G. made on housing debt a few years ago. The key point is not that the bet went bad; it is that institutions playing a key role in the financial system have no business making such bets, least of all when those institutions are backed by taxpayer guarantees.
But instead of arguing that the government just shouldn’t incentivize such risk-taking with the promise of taxpayer bailouts (privatized profit, socialized risk), Krugman’s solution is to get government even more involved in the banking business with more “regulation”, more medicine to treat the symptoms (where the “regulators” of course regularly turn out to be from the same institutions they are supposed to “regulate”, like Obama’s appointment in February of Jeremiah O. Norton, a former executive director at JPMorgan Securities, to the board of the FDIC). As Zero Hedge puts it:
At the end of the day, the real question is why did JPM put in so much money at risk in a prop trade because we can dispense with the bullshit that his was a hedge, right? Simple: because it knew with 100% certainty that if things turn out very, very badly, that the taxpayer, via the Fed, would come to its rescue.
Reuters reports that JPMorgan executive Ina Drew was forced into retirement as a result of its losses, and that “She will be succeeded by Matt Zames, a trader by background who is well-versed in risky financial bets. He was at one time employed at Long-Term Capital Management, a hedge fund whose 1998 collapse nearly caused a global crisis”—and which Reuters doesn’t mention was the recipient of a Fed-orchestrated bailout that further institutionalized the system of privatizing profit while socializing risk, thus further incentivizing the kinds of excessive “wheeling-dealing” risktaking we saw during the 2008 financial crisis in the wake of the collapse of the housing bubble.
Krugman is a shill for the banks, but he really is brilliant because he always manages to make it sound like he is their biggest critic. The man is a con artist whose whole purpose in life seems to be to maintain the status quo and protect the institutionalized confidence game that is our monetary and banking system from any serious scrutiny or reform.
For more on that, specifically with regard to his record on the housing bubble he advocated the Fed create to replace the dot-com bubble, see my book Ron Paul vs. Paul Krugman.