Mitchell’s laws: The more budgets are cut and taxes inceased, the weaker an economy becomes. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Austerity = poverty and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.

In the 9/14/11 post titled, “How about socialized banking,” and elsewhere, I have suggested that all banks be federally owned – i.e. the elimination of private banking.

I gave the following reasons:

No bank ever would become insolvent. There would be no “runs” on banks by depositors. Savings would be 100% protected. The lack of a profit motive would eliminate “credit default swaps” and other risky investment derivative beasts that helped lead to the Great Recession. The lack of a profit motive also would eliminate the temptation to lend to credit-poor borrowers.

The absence of outrageous, multi-million dollar salaries would translate into less costly banking services, plus services would be offered in what are now “bank deserts,” where the poor are required to use expensive, neighborhood check-cashing storefronts. There would be no need for “reserves” or for the massive bureaucracy needed to track reserves, nor for the massive compliance bureaucracies, nor for FDIC insurance. No need for Fannie Mae or Freddie Mac.

I was reminded of this when I read in the naked capitalism blog:

JP Morgan Loss Bomb Confirms That It’s Time to Kill VaR
Posted: 11 May 2012

One of the amusing bits of the hastily arranged JP Morgan conference call on its $2 billion and growing “hedge” losses and related first quarter earning release was the way the heretofore loud and proud bank was revealed to have feet of clay on the risk management front. Jamie Dimon said that the bank had determined that its Value at Risk model was “inadequate” and it would be using an older model.

While firms look at VaR over a range of time frames, daily VaR (what is the most I can expect to lose in the next 24 hours) to a 99% threshold is widely used. The fact that VaR is a lousy metric should not come as a surprise.

When people are paid bonuses annually, with no clawbacks for losses, and banks show profits a fair bit of the time, who is going to question bad metrics when the insiders come out big winners regardless?

But VaR is a particularly troubling example, more so because it is sufficiently, dangerously simple minded enough that regulators and managers a step or two removed from markets have become overly attached to its deceptive simplicity.

As mathematician Benoit Mandelbrot discovered in the 1960s, and Nassim Nicholas Taleb popularized in his book Black Swan, risks in financial markets do not have normal (Gaussian) distributions. Taleb, in his article The Fourth Quadrant, pointed out there are many situations where statistics are at best questionable and at worst unreliable: where you have non-Gaussian risk distributions (as you have in financial markets) and complex payoffs.

Now VaR isn’t the only risk model JP Morgan is using, but it has served to allow the inmates to run the asylum.

Basel Committee on Banking Supervision has considered alternative risk metrics, in particular expected shortfall (ES). ES measures the riskiness of a position by considering both the size and the likelihood of losses above a certain confidence level. In other words, it is the expected value of those losses beyond a given confidence level. The Committee recognises that moving to ES could entail certain operational challenges; nonetheless it believes that these are outweighed by the benefits of replacing VaR with a measure that better captures tail risk.

See the problem, here? The regulators believe that to prevent bank failures and malfeasance, banks need a better model to evaluate risk. That’s like saying, “To prevent losing in Las Vegas, people need to improve their gambling systems.” How about, just not gambling? Wouldn’t that work better?

Banks are run by humans. As long as humans are rewarded for risky behavior, they will engage in risky behavior. Period. No models, no regulations, no punishments can prevent it.

Rather than trying to develop the impossible — a system that not only will evaluate risk, but prevent motivated humans from engaging in risk — how about if we eliminate the risk and the motivation, altogether.

If all banks were owned by the federal government, there would be no profit motive — no reason why banks would trade for their accounts — and no personal motivations for bonus rewards based on trading success.

JPMorgan, “a-too-big-to-fail” bank, is not the first — not by a long shot — to engage in excessively risky behavior. And it absolutely, positively will not be the last. So long as there is a profit motive and a bonus motive, these events will happen, again and again and again.

The Basel Committee on Banking Supervision is whistling past the graveyard if it believes there is any solution for the problem, so long as banks are profit-making enterprises. There is not one good reason why banks should be privately owned, and a multitude of reasons why they should be owned by the federal government.

In the past decade, how many U.S. banks have failed? Go to: The FDIC’s “Failed Bank List”. I was too lazy to count; you can see for yourself. At least 450 U.S. banks have failed in the past 10 years!

That’s an astounding number. A ridiculous number. And those are just the banks taken over by the FDIC. This huge list doesn’t include all those banks that were rescued without FDIC intervention. The cause was always the same: The profit motive led to greed overriding sense.

And this was not an unique occurrence. In the 1980’s hundreds of Savings and Loans went bankrupt, costing the public hundreds of millions of dollars. Why. Again, the profit motive overrode sense.

Finally, there is one more reason the federal government should own the banks and indeed, all lending institutions. Today, there are about $38 trillion dollars in the U.S. domestic economy. Of these, only about $10 trillion (26%) were created by the federal government. The rest were created by banks.

History shows that when the federal government begins to lose control over its money creation, we have recessions. It seems that when times are good, banks become more and more reckless with their lending and investment, until they cause a recession, at which time the federal government has to step in with stimulus spending.

Monetary sovereignty

Wouldn’t we be better off if there were no recessions and no reasons for the federal government to save the risk-takers and the public?

I call on Congress and the President to have the courage to protect the public and to do what is necessary: End private banking, and have the federal government assume ownership of all lending institutions.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports