Bank regulation shambles.

Nice to see current attempts at bank regulation descend to a shambles or something like that. The first piece of evidence is this article by Anat Admati.

The second piece of evidence to back that “shambles” description is some research by the Richmond Fed. There’s a summary of their research here and a longer article here. (h/t John Cochrane).

Basically the Fed research points out that over the last fifteen years, far from government having ceased to subsidise and stand behind private banks, that taxpayer funded support has INCREASED.

Seems bank regulators and politicians are complete suckers: you’re a bankster and you want taxpayers to underwrite your nefarious activities? No problem. There’s bound to be some sucker in the British House of Commons or in Congress who’ll fall for some story about economic growth being enhanced if your nefarious activities are subsidised or backed by taxpayers.

A paragraph in a Wall Street Journal article summarised the situation nicely. It said “The Dodd-Frank Act was then sold as a way to prevent such bank rescues. “There will be no more tax-funded bailouts—period,” said President Obama as he signed it on July 21, 2010. Five years later the Richmond Fed’s research suggests that he should have said, “If you like your taxpayer safety net, you can keep it.””

The reason the current bank regulation shambles gives me great pleasure is that there is a vastly simpler and more effective set of rules for government banks, which first makes it near impossible for banks to fail, and second, involves no sort of taxpayer funded backing or subsidy for banks. It’s called “full reserve banking”. And the basic rules are desperately simple, and as follows (in green italics).

The bank industry is split in two. One half consists of entities, bank subsidiaries, etc which LEND. Those entities are funded just by shares. The second half consists of entities which accept deposits. They can only lodge that money in a totally safe manner: i.e. lodge the money at the central bank, and perhaps also invest in short term government debt.

And that’s it!

Indeed that rule is currently being imposed on money market mutual funds in the US, and far as I know the sky hasn’t fallen in in the US (floods in Oklahoma apart).