Federal Reserve Regulation

Case Assignment: Banking Industry and Regulation: To Regulate or Not to Regulate?
Introduction
In order to be effective, regulation must focus on issues that make a difference. For instance, a school might regulate the use of the drinking fountain—but if it has a drug problem, no amount of drinking fountain regulation is going to make one ounce of difference in curbing drug use by students. The same analogy can be applied to the banking industry in the U.S. The U.S. has a central banking problem—i.e., it has given over its natural sovereign right to coin its own currency to a group of bankers, who print money when and lend it to the government at interest. This practice effectively places the Federal Reserve in a sovereign position, since it wields a sovereign power, recognized for centuries—millennia even—throughout all history all over the world. Why this transfer of power was approved by Congress in 1913 is not difficult to guess—but that is not the point of this essay. This paper will address the question of whether more or less government intervention is required in the banking industry. The answer it proposes is that more regulation is needed—in fact, what is needed is the sort of regulation implemented by President Andrew Jackson, which essentially amounted to a revocation of the national bank’s mandate through Executive Order.
The Purpose of Regulation
In light of the recent banking crisis, the global economy revealed the extent of how interconnected all the markets of the world truly are. The banks have certainly intertwined their tentacles with one another in such a way that they form an apparent grinding of buying, selling, lending, and monetizing all across the globe. How to regulate such an intricate, international network? First, what is the purpose of the main banking regulations we see today?
The purpose of the main banking regulations is to allow government to have control over what banks are allowed and not allowed to do. For instance, banks are allowed to possess only a percentage of the actual wealth that they create when lending to borrowers. Banks are required to be transparent, to adhere to fiduciary duties, and so on—though, of course, mega-banks like Goldman Sachs and J.P. Morgan may bend these rules as they see fit and receive fines (small relative to the revenue they enjoy for bending the rules) because their organizations are so intertwined within government and the Federal Reserve. In short, there is regulation of smaller banks, by the big banking cartel in order to ensure that the banking cartel maintains strict control of the market. There is no real governmental regulation of the Federal Reserve: it is an independent entity that enjoys near autonomy (only having to make speeches and disclose certain financial accounting statements from time to time). In reality, the Fed regulates the U.S. and its economy—the U.S. does not regulate the Fed.
The Impact of Tightening
The impact of tightening regulations depends upon which way one is looking at the issue. Is the U.S. tightening regulations on the Fed by having it audited or its books made fully transparent to the public? Or is the Fed tightening regulations on the U.S. in terms of controlling interest rates, re-starting QE (quantitative easing) or some other type of unconventional monetary policy so much in vogue by central banks around the world today? The way in which one approaches the question of who is regulating whom will determine the outcome of the question.
Were the U.S. to tighten regulations on the banks, nothing would happen. The banks are still beholden to the Federal Reserve, and it sets the overall tone and mood of the market. The banks themselves already have it fairly easy: as of 2 April 1992, “the 12 percent required reserve ratio against net transaction deposits above the low reserve tranche level was reduced to 10 percent. The action reduced required reserves by an estimated $8.9 billion” (“Reserve Requirements,” 2016). Proponents of de-regulation say this is good for the economy because it allows for more credit. Opponents say it is bad because it leads to a lack of accountability. But as Macey (2006) states, “where government is free of political pressures to accept responsibility for the consequences of market forces, including market corrections and the bursting of bubbles, then regulation may not be necessary in order to protect the operation of markets” (p. 3). This of course is not the case.
The reality is that fractional-reserve banking allows for banks to engage in Ponzi-scheme type lending practices. Were the Fed to tighten this type of regulation, the easy credit that flows these days would dry up (in proportion to the tightening): the less money banks need to keep on reserve in order to make loans, the more loans they can make. If they are suddenly required to keep more on hand, suddenly they cannot make as many loans—which means fewer profits for the banks and less consuming for the general public (since much of what is purchased today is purchased through credit). As Calfas (2017) reports, “new data shows that 73% of American consumers die in debt. The average total balance left over is $61,554 (and that includes mortgage debt). The numbers come from Experian FileOne and Credit.com, which examined the average debt of people who were alive in October 2016 but died in December 2016.” With so many people up to their eyeballs in debt, perhaps tighter regulation over the banks would not be a bad thing—at least it would keep people’s spending check: they would not be borrowing so much to pay for items they cannot afford, as Strahan (2003) implies. Yet, if that were to happen, what would be the effect on the overall economy? Car manufacturers are already having trouble selling cars with incentives at all-time highs (Tuttle, 2016). A tightening on banks with regard to fractional-reserve banking could lead to an economic recession.
Such is the problem with today’s banking industry, however: the world has gotten used to easy credit, which has allowed a bubble economy to develop. Wage increases have not kept track with the rising prices of everything from education to health care to housing to cars to gas to food: the only thing that has allowed purchasing to continue is credit. Take away the availability of credit and the bubbles begin to pop one by one. Will the government then step in to put tax payers on the hook for more trillions in bailouts? Tax payers are already feeling the brunt of pension funds going belly up as a result of Fed interest rate policies that have forced money out of the hands of savers into the over-priced stock and bond markets.
If the U.S. government were to begin regulating the Fed, disallowing it to artificially keep interest rates low through QE, and requiring it to hand back the power to print money to the government (thereby negating the interest owed on dollar creation), the implications would be far-reaching as well. Recent history shows that whenever governments attempt to take back power from the international community of central banks, regime change follows—whether it is in the Middle East or in Europe (Germany issued its own currency backed by its own authority—and was promptly obliterated by the Allied Powers in WW2). Therefore, unless a government has a death wish or the confidence of Andrew Jackson to go up against the central bank in what amounts to a power struggle of sovereign proportions, there is no sense even discussing regulation of this type.
The Current Banking Crisis
Yet, the current banking crisis is an effect of exactly such a lack of regulation—or rather of such a lack of sovereignty. In reality, the central bank is unaccountable to any sovereign power. The sovereign powers of the world have relinquished their sovereignty to the central banks via the printing presses. The banking crisis that erupted in 2008 is just another chapter in the same book. 1929 was an earlier chapter. The dot-com fiasco a later one. This most recent example just more of the same. The banks are untouchable—and when they are threatened, they have their friends and allies in government draw up legislation that ensures they will be bailed out by tax payers.
Banking regulation in this sense is really just a red herring. The entire system of banking as established by the Federal Reserve Act of 1913 is a farce of government of epic proportions. It transferred the balance of power from the government to the banks—and that transfer has not be reversed. The only way in which the government could take back control would be through Executive Order, as Jackson did in 1833—but Congress, filled to the brim with bank-backed Senators and Representatives, would surely fight it every step of the way and a new President, ushered in by the same banking cartel would surely reverse policy. The problem is so large that without a fundamental, cultural reversal and epic awakening to the facts of the matter, no governmental policy or regulatory body will have any impact whatsoever. Creating bubbles and benefitting from them is what the CB’s do—it is their playbook: they are the original Ponzi schemers. The only difference is that, unlike Ponzi, they also have immunity from the law because they are, in effect, above the law.
Conclusion
Today’s banks are controlled by the Fed and the Fed controls the government via the money supply. However, the Fed has also backed itself into a corner: the global economic system has been pushed to the brink. U.S. debt is at an all-time high and servicing that debt requires that interest rates stay low. Yet with low rates, funds cannot safely expect the necessary ROI needed to pay out pensions. This could be the cause of the next blow-up—and perhaps then real regulation (like what Jackson accomplished) may be seen. However, the public would have to rally behind such a decision—for Jackson was a populist who appealed to the common man against the banking establishment and its representatives. Without that movement force, no real regulation is possible.


References
Calfas, J. (2017). Americans have so much debt they’re taking it to the grave. Retrieved
from http://time.com/money/4709270/americans-die-in-debt/
Macey, J. (Winter 2006). Commercial Banking and democracy: The illusive quest for
deregulation. Yale Journal on Regulation. New Haven: Vol. 23, Iss. 1; p. 1
Reserve Requirements. (2016). Retrieved from
https://www.federalreserve.gov/monetarypolicy/reservereq.htm
Strahan, P. (Jul/Aug 2003). The real effects of U.S. banking deregulation. Federal
Reserve Bank of St. Louis: Vol. 85, Iss. 4; p. 111
Tuttle, B. (2016). New cars are being discounted at the highest levels ever. Retrieved
from http://time.com/money/4510238/new-cars-deals-discounts-sales-september-2016/