Can we fix banking before crisis hits?

By Mike “Mish” Shedlock

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I was asked a few days ago by Zócalo Public Square, a not-for-profit daily Ideas Exchange, to contribute a brief comment to coincide with their upcoming event on banking issues.

I was specifically asked to address: “Should we have bailed out the banks?”

No, we should not have bailed them out. That's the easy question.

Now that we have bailed them out, however, here's the important question: “Will we fix what's wrong with banking before there is a global currency crisis?”

On that score I have my doubts. The simple fact of the matter is we have a massive mountain of debt everywhere you look: Federal debt, State and local debt, student loans, housing, unfunded liabilities in Medicare and Social Security, and untenable pension promises at every level of government.

Most agree that is a problem. Unfortunately, that's where the agreement stops.

Yet, before we can address the debt crisis, we have to understand how it happened. The source of the debt crisis is twofold:

l Fractional reserve lending (lending out more money than banks have a legitimate right to lend)

l The Fed (central banks in general)

Everything else is a sideshow, but few realize it.

The symptoms of the debt-bubble are slack demand, a lack of jobs and stagnant growth. Most policymakers are hellbent on attacking those symptoms, not the problem.

Many point to the end of Glass-Steagall, rating agencies, “too big to fail,” bank bailouts, and excess spending by governments. There are screams for more regulation in nearly every corner. The unions want more handouts. The socialists want to redistribute wealth. Those on fixed income want bigger Social Security checks.

The Keynesians and Monetarists want to attack the symptoms with more government spending and more central bank printing.

The average 8th-grader can see how foolish most of those ideas are, but the average economist can't, and the average government bureaucrat does not want to be told he has to stop spending.

The notion that a nation can spend its way to prosperity has been disproved time and time again.

The U.S. housing bubble was a direct result of the Fed bailing out banks in the wake of the dot-com bust.

Japan, once the world's largest creditor, now has a debt-to-GDP ratio approaching 250 percent, the highest in the industrialized world. It took three decades of foolish spending for Japan to achieve that debt-to-GDP level, and Japan believes it failed because it did not try hard enough.

Central banks blow bubbles of increasing amplitude over time. And every step of the way, they bail out banks that get into trouble. This is the legacy of central banks, and especially the legacy of the Greenspan and Bernanke Fed.

The solution to the symptoms of massive income disparity, a dearth of jobs and lack of growth is not wage caps on executive pay or hikes in the minimum wage or a return of Glass-Steagall. The real solution is elimination of the Fed, elimination of fractional reserve lending and a return to sound money policies that do not benefit the already wealthy at the expense of everyone else.

Can we fix the problem? Of course we can. I just outlined how. But if it's so easy, then why don't we do it?

The answer to that question is remarkably easy. All you need to do is figure out who benefits from inflation. I addressed it in this article: http://globaleconomicanaly

sis.blogspot.com/2013/03/inflation-targeting-revisited-t0hree.html

Here's the short answer: the banks, the wealthy and the politicians, and they are also in control of the system.

So, are we going to fix what's wrong with banking before there is a global currency crisis? I am betting against that idea, holding gold as my method.

Mike “Mish” Shedlock of Prairie Grove, Ill., is a registered investment adviser whose blog has received national recognition from the New York Times, Time Magazine, Bloomberg and CNBC. Comments: MikeShedlock@SitkaPacific.Com