读书笔记The creature(美联储传)
Chapter1 Summary
The Federal Reserve System was formed on the basis of an agreement on “the structure and op-eration of a banking cartel”. Six poweful men in the financial world secretly hied to Jekyll Island to negotiate the internal competition and create a blueprint for the The Federal Reserve System.
A reckless bank policy will possibily lead to a currency drain once it was borrowed more money than its total deposits.
“The way a bank makes money is to collect interests, and the only way to do that is to make loans (p.47)”
The challenges faced the banking cartel are: How to maintain their oligopoly over the financial market? How can they prevent currency drains and bank runs? How can they shift the losses from the owners to the taxpayers?
The cartel was camouflaged with the operation of central bank. They even esblished regional branches as a main selling point. Paul Warburg was one of the advocates for a central bank in the US. He argued for an elastic money supply for the fluctuating needs of commerce.
The author thought the system was malfunctional and the public would be sacrificed when conflicts arised.
Chapter2 Summary
Bailout is a measure to shift the loss from bankers to the nationals in the name of saving the economy. Bankers are allowed to create checkbook money out of nothing. If borrowers cannot pay back the loan, the loss is simply written off and little tangible value is lost.
A bookkeeping loss is still undesirable because it causes a loan to be removed from the ledger as an asset without a reduction in liabilities. That means the banks still have to redeem those checks circulating in the market even though the borrower cannot pay.
Individuals and small businessmen find it hard to borrow money at reasonable rates because the bank can make more money on loans to the corporate giants and to foreign governments. Banks live on interests and actually they do not want their loans repaid. If a loan is paid off, they merely have to find the next borrower and that expects “an expensive nuisance”.
Because bailout saves the banks from dying, bankers are encouraged to create more unsound loans that are more precarious. If borrowers go default, the bank just simply loans more money to them so they can continually pay the interest.
"Insolvency is actually inherent in the system itself (p.67)."
FDIC increases the likelihood of bank insolvency. Because each bank is required to pay a certain percentage of its savings regardless of its previous records or how risky it is. The cost of protection fee is transfered to customers in the form of higher service fees and lower interest rates on deposits. Therefore, some banks pay to be reckless on loaning. This situation is called moral hazard, where policyholder has little or no incentive to be cautious about that which is being insured against. Moral hazard is inbuilt in the system.
However, FDIC operates on the same assumption as the banks: that only a small percentage of money is held in reserve, the rest is loaned out. Therefore, had one or two banks gone bankrupt at the same time, FDIC would not have enough money to bail them out. When FDIC is stripped of all its money, it turns to the Fed for help and whom is already in debt would either issue I.O.U or also turns to the congress for help. Thus, the congress who "has pledged the full faith and credit of the federal government" would print money out of air to save the economy. Eventually, more liquidity would dilute the value of all money in the economy, causing prices to rise.
