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Banks or utilities ?

August 10, 2010

Either END THE FED and truly privatize banks or blow it up… The more I read about the “unintended consequences” of financial regulation the more I am convinced banks need to be nationalized or transformed into utilities.

“financial regulation is bad for business on Wall Street. and It’s also bad for the economy, says Robert Prechter, president of Elliott Wave International. Prechter believes the measures are doing the exact opposite of their intention. “Even though they (the government) want credit to expand, because that’s the base of inflation, they’re doing everything they can to restrict it. On one hand we have the Fed trying to jawbone banks into lending but the government is doing everything it can to curtail the lending (through regulation)” he continues, noting the Senate’s bill will mean smaller bank profits, which in turn means less money to lend.”

A managing director at my bank recently argued – the Volker rule is silly – we need to make profits in order to lend.

So its obvious (to me) that people feel that banks are important, even more important that perhaps delivering the mail or providing electricity. That said, if banks are so critical to the economy – the days of a banks charading  as private institutions needs to end.   Bankers are nothing more than postal workers with a shit load more disposable income.

“Banks are currently operating with an explicit guarantee from the govt. “We do not currently intend to change the banks ratings – Depending on the final outcome of the legislation the prospect for what we define as extraordinary support for U.S. financial institutions may be diminished,”  – S&P

So, currently banks have a privileged standing and an explicit guarantee from the govt – whos programs and bailouts are tailored to improve banks financial standing (i.e. profits) So that banks may lend to small business and grow the economy.

Geithner-

“delaying capital rules will make it easier for banks to earn the money which they could then use to cover capital requirements.  Importantly, this means banks will have the opportunity to meet these new requirements in part through future earnings and that will help protect the recovery currently under way” he said.

“In effect, the policy allows banks several years of padding their capital with future profits instead of imposing immediate remedies, a policy sometimes referred to as “regulatory forbearance” that’s a little like allowing drivers to build up speed before buckling a seatbelt before a crash.”

Why should banks  – as private institutions – enjoy such privilege?

I say banks should be utilities.

“Electricity in the United States is mostly provided by private utility companies that are heavily regulated even more than banks. For instance, they usually need regulators to sign off on rate increases while no bank has to check in with the FDIC before raising fees for say, an overdrawn check. Still, utilities are not nationalized in any sense. They trade on public exchanges like the NYSE/Euronext and NASDAQ . You can invest in them and put your money at some risk but because their business is so stable their prices don’t fluctuate too widely, relative to the rest of the market, and so they tend to pay large dividends.

Nassim Nicholas Taleb, the author of The Black Swan:

It will be very different. Number one, banks will be utility companies, because we no longer will tolerate privatizing the gains and socializing the losses anymore. If you and I are going to bear the losses of bankers, we don’t want to pay them bonuses for five or six or seven years, and then bail them out. No more of that. Banks are going to converge with utility companies, because if you go to Detroit or LA you want to be able to get cash from a cash machine. It’s a utility.”

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