What Should Be Done: Subject Banks To The Free Market or Turn Them Into Utilities (XLF, SKF, FAS, FAZ, UYG)
Shah Gilani: Let’s face it. Banking is a protected industry. It’s a government-coddled industry. The problem with that is, banks (NYSEARCA:XLF) really aren’t subject to free market forces that would naturally eliminate insolvent and inefficient institutions. The result is more bad banking.
If we ever want to free ourselves from the yoke of czarist money-changers and free up capital to flow into and throughout the economy, we must subject all banks, and all financial institutions, to free market forces so the weak ones fail and the strong survive.
How do we that?
It’s easy. We remove the rocks under which banks hide by making all banks’ (including the U.S. Federal Reserve) books and records transparent with a one-month lag. While we’re at it, why not legislate the same rule for all regulatory bodies? They are supposed to be protecting us, after all, so what’s there to hide?
(Speaking of transparency, it wouldn’t be a bad idea to stop members of Congress from trading stocks that are directly affected by pending legislation. More on that here.)
And, if that’s not a palatable option for bankers used to being sheltered, we should give them the ultimate protection they demand and simply turn them into utilities, along with the transparency that comes with it.
Let me make this simple.
If banks get into trouble and have to borrow huge amounts from each other, or have to borrow from the Federal Reserve – either from its discount window, through swap lines, or through any of the other central bank liquidity provision programs currently available – we should know about it. I suggest a one-month lag before that information is released because that’s all the time they should be given to fix themselves.
If the banks are so important to the economy that they have to be given massive liquidity and regulatory cover to right themselves when they are in danger of sinking, then the financial system is nothing more than the clever rhetoric of an ensconced oligopoly manifesting its power.
If we had “one-month transparency,” and faltering institutions were clearly identifiable, their stockholders would jump ship, their debt holders would man lifeboats, and unless the institution could be saved from free market destruction by the free market intervention of risk-takers willing to saddle themselves with personal exposure, they would fail.
Look through the bankers’ rhetoric that they need protection and cover from public scrutiny, and what do you see? You see inefficient institutions that leverage themselves for profit, get bailed out, merged, and recapitalized by an unsuspecting public that’s been duped into believing bank CEOs, regulators, and the Fed that everything is fine — or will be with time.
Who cares if banks fail before they get too big to have to be bailed out, or too big to be systemically threatening? We all should care. They should be allowed to fail.
And the sooner the better.
If that’s not a palatable solution for the industry, then why don’t we treat banking like we do utilities? After all, that’s what banks are. They are utilities – although their profits are not capped, nor is their leverage, nor is the disaster they can wreak on all of us.
Fixing America, and the world for that matter, isn’t complex. It’s just hard because banks control us, not the other way around.
The only way to get around the global banking cabal is to dismantle all the too-big-to-fail banks everywhere and let the world see what’s on every bank’s books. Let the world see how leveraged they are, how much they have to borrow to cover holes in their balance sheets and their capital reserves, and make all regulators findings, admonishments and help known to the public fairly immediately.
Transparency is next to godliness, even if you don’t believe in God.
Related: Financial Sector ETF (NYSEARCA:XLF), Direxion Daily Financial Bull 3X Shares ETF (NYSEARCA:FAS), ProShares UltraShort Financials ETF (NYSEARCA:SKF), Direxion Daily Financial Bear 3X Shares ETF (NYSEARCA:FAZ), ProShares Ultra Financials (NYSEARCA:UYG).
Shah Gilani is the editor of the highly successful trading research service, The Capital Wave Forecast, and a contributing editor to both Money Morning and The Money Map Report. He is considered one of the world’s foremost experts on the credit crisis. His published open letters to the White House, Congress and U.S. Treasury secretaries have outlined detailed alternative policy options that have been lauded by academics and legislators.
His experience and knowledge uniquely qualify him as an expert. Gilani ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When the OEX (options on the Standard & Poor’s 100) began trading on March 11, 1983, Gilani was working in the pit as a market maker, and along with other traders popularized what later became known as the VIX (volatility index). He left Chicago to run the futures and options division of the British banking giant Lloyds TSB. Gilani went on to originate and run a packaged fixed-income trading desk for Roosevelt & Cross Inc., an old line New York boutique bond firm, and established that company’s listed and OTC trading desks. Gilani started another hedge fund in 1999, which he ran until 2003, when he retired to develop land holdings with partners.