Banking

    It is difficult to know where to start because our money and banking system is so complicated and have caused so many problems in this country.  An excellent book on this subject is The Creature from Jekyll Island by G. Edward Griffin.  If you read this book you will understand that the Federal Reserve (FED) is a private banking cartel sanctioned by the Federal government.  No one knows who actually owns the FED and they cannot be audited.  They are in charge of the government’s gold reserves and Congress has never been able to verify that these reserves still exist.

      Banks play a special role in any economy.  They are the trustees of other people’s money.  This money is also the source of loans made to individuals and small businesses.  Therefore, in order to ensure a prosperous economy, banks deserve special consideration.  We need to find a way to ensure that the depositor’s money is safeguarded while promoting the prudent lending of that money to individuals and businesses.

   Originally, banks were simply goldsmiths who agreed to safeguard other peoples gold for a fee.  After a while, the goldsmiths realized that very few people ever wanted to withdraw significant quantities of their gold at one time.  They realized that they could loan about 85% of this gold out to other people and make interest off of the loan.  The reality was that they were loaning out something that did not belong to them, which is immoral.

   Today, banks do the same thing.  However, the way our current system is structured, they can not only loan out 85% of the depositor’s money, but they can then re-loan the proceeds from the first loan again and again.  This is possible because the proceeds from the first loan are simply re-deposited back into the banking system and become a new source of funds.  When all is said and done, a $10,000 deposit into a bank can grow to $100,000 in loans.  This means that banks have created $90,000 of new money.  They are only paying the depositor interest on $10,000 but they are charging the borrowers interest on as much as $100,000 in loans.

   The second problem is that the Federal Reserve (FED) has the ability to purchase any debt instrument from any government or bank.  However, since the FED doesn’t have any money, it simply prints the money it needs.  When our government spends more money than it takes in it simply sells an IOU (i.e. a Treasury Note or Bill).  If the public doesn’t purchase the IOU then they sell it to the FED.

   All of this increases the money supply.  The effect is to de-value the US dollar.  When this happens we get inflation (i.e. more money chasing the same amount of goods).  Inflation is simply a hidden tax which falls on savers and lower income families.  The opposite happens when debt is repaid.  It contracts the money supply by a factor of ten.  These increases and decreases in the money supply are the primary causes of the boom and bust cycles in our economy.  If they are eliminated, or at least controlled, inflation will be dramatically reduced and the boom and bust cycles in the economy will be dramatically lessened.

   One of the primary, but undisclosed, functions of the FED is to protect the large banks and pass their loan losses on to the taxpayers.  This can be seen in the bailouts that have happened since the 1980s.  In the 1980s most of the bailouts involved loans to third world countries.  When these loans defaulted the FED took them over so the banks would not have to write them off.  Of course, the taxpayers really bailed them out.  Later, the FED bailed out the Savings & Loans and then bailed out Chrysler.  At one point, they bailed out Penn Central Railroad.  More recently, they bailed out virtually every large bank and brokerage firm in the country, plus Fannie Mae, Freddie Mac, AIG, General Motors and Chrysler.  Who paid for all of this?  The taxpayer did!  Now, virtually every large bank, investment company, insurance company and many large manufacturers have been designated as “Too Big To Fail.”  This means that, no matter how poorly they are managed or what risks they take, the FED (read you and me) will bail them out.  This is just another incentive for them to take risks and reap the huge rewards until they fail.

   It is even believed that the FED helped to bring the United States into WWI and WWII in order to protect the banks who had made large loans to the Allies.  Had the Allies lost these wars these loans could not have been repaid and it would have ruined the large banks.  It is also believed that the FED tried to bail out England after WWI.  England’s gold reserves were being rapidly depleated so the FED expanded our money supply and lowered interest rates.  This caused capital to shift to England where investors could get a higher rate of return.  This “easy money” policy contributed to wild speculation in the US stock market.  That resulted in the huge run up of share prices from 1920 to 1929.  When the FED finally contracted the money supply and raised interest rates the result was the stock market crash of 1929.  (The crash was also linked to the proposed Smoot-Hawley tariff bill which was passed in early 1930.)

   The FED’s two primary functions are supposed to be to stabilize the economy and prevent bank failures.  In these two functions, they have been a complete failure.  Since the FED was formed in 1913 the bank failures have increased in number and size.  And, if you include the taxpayer bailouts of large banks the number of real failures has been staggering. They have presided over numerous panics, recessions and the great depression of 1929.  Most of these have been the result of wild swings in the money supply and interest rates.  Low interest rates and loose money result in booms and high interest rates and tight money result in busts.

   Federal and State regulations of banks are overbearing and crushing their profits.  It was estimated that bank regulations drained 60% of the profits of Savings & Loans. In order to cover these costs, banks must charge higher rates to their customers.  Banks are now afraid to loan money which restricts economic growth.  Banks are now required to get costly appraisals on all commercial loans, even when a company has a long history of profitable operations and has never missed a loan payment.  They are even required to get appraisals when the company simply wants to extend the term of the loan.  Many businesses whose value is more readily determined by their cash flow are still required to get a costly appraisal when the bank would be better served by having the company audited.

   Another major problem with the current banking system is the Federal Deposit Insurance.  All banks, good or bad, are assessed the same fees in order to pay for the depositors insurance.  This rewards banks who are poorly managed and who make speculative investments and it punishes the more prudent banks because everyone pays the same “insurance” rate.  Since the prudent banks are paying a higher rate than is justified by their performance, they are enticed into more risky investments in order to pay for the insurance.


   First, I would eliminate the FED. The FED has expanded the money supply by over 100% since 2000.  From 2008 to 2012 the FED expanded the money supply by a whopping 50% in just four years.  To my knowledge, this doesn’t even include the money that has been created out of thin air and has gone to foreign governments and foreign banks.

   Second, I would be to prohibit the FED or the government from bailing out any business.  If a business were deemed “too big to fail” then the Federal government should ensure that there was an orderly liquidation of the company.  If this required temporary loans to protect the assets they could be made by the Federal government but they would be given first position on the proceeds of the liquidation to ensure that the taxpayers did not foot the bill.

   Third, I recommend elimination of all Federal insurance of bank deposits.  Every bank could obtain private insurance and the amount of the insurance would be posted prominently in the bank.  The well managed banks could obtain insurance at modest rates and the riskier banks would have to pay more.  This would be a financial incentive for the banks to be well run.

   Fourth, I would eliminate all Federal and State audits of the banks.  All banks would be audited by public accounting firms and would be paid from assessments on all banks.  This would help to ensure that the auditors were independent of the banks.  Auditors would have to be changed at least every four years.  Important information about the banks critical assets and liabilities would have to be scheduled out and clearly documented for the public.  The primary ones would be sub-standard loans, non-performing loans and investments.  The banks would also have to disclose their loan to deposit ratios with comparisons to other banks of similar sizes.

   Fifth, the banks would be required to keep 100% of their demand deposits on hand for customers withdrawal.  For time deposits, they would have to clearly advise their customers that their money could only be withdrawn after a specified number of days.  Currently, most banks keep less than 10% of their customer’s deposits on hand.  If too many customers want their money at the same time the bank cannot comply unless they can borrow the money from another bank.

   Sixth, I would require that banks and investment companies be separated as was required by the Glass-Steagall Act.  This ensures that customers deposits were not being used for speculative investments in stocks and bonds.

   Seventh, I would eliminate virtually every restriction on bank’s lending.  Since they will be audited and privately insured they will have a strong incentive to make prudent loans.

   Eighth, banks would not rely on “credit rating scores” from the credit rating agencies.  These companies penalize individuals who are thrifty and pay down their debts.  The banks could use the individuals payment history but not their “credit scores.”

   Ninth, all private banks and investment companies would be completely free of regulation.

   I am not in favor of using tax credits to influence peoples behavior.  However, I will make an exception for banks because we need an incentive for banks to loan money within this country to help expand business and individual’s purchasing.  We do not want banks to invest in safe government bonds to the exclusion of private loans.

   Therefore, banks will be taxed at 25% instead of 15% for everyone else.   However, they will be eligible for a maximum tax credit of 10% for loans made within this country.  The credit will be computed by dividing the total gross interest income from domestic loans by the total gross income for the bank.  This percent will then be multiplied by the 10% credit to determine the total credit.  In computing the credit, preferred loans to stockholders and directors would be ignored.

   For example, if 70% of the banks gross income is generated from domestic loans, then it will be eligible for a 7% credit (70% x 10).  This would reduce the banks effective tax rate from 25% to 18%.  Banks would still be eligible for the 5% payroll tax credit.