Fractional-reserve banking is a criminal sham that meets the legal definition of embezzlement.

They should be outlawed and the government should issue debt-free fiat currency (as the Social Credit movement advocated years ago).

This ridiculous fraud kills people and whole economies. We are seeing it right now. Tinkering around the edges will solve nothing.

OUTLAW FRB.

1) I’m annoyed by the phrase “expropriation” of the shareholders. Expropriation is the implication that someone takes something of value from you by force. The govt. isn’t taking anything from shareholders. They’re merely letting shareholders lose their money in a venture that they themselves invested in. Last I checked, BSC’s shareholders didn’t have to write a check for the value of their shares to the Federal govt. The use of the term expropriation automatically implies that the govt. has some sort of obligation to preserve shareholder valuation that it clearly does not. Indeed, if anyone will be expropriated, it will be taxpayers, who will be forced to write a check to the govt to clean up this mess.

2) Both schools have developed consistent views. Consistency doesn’t imply accuracy in modelling reality. Lunatic paranoids can build surprisingly consistent models of their world using selective emphasis of different facts / theories. It doesn’t mean their worldviews should be accepted.

3) The Fed has been of the Buiter school??? Please tell that to Mr. Buiter who’s been excoriating the Fed on a near weekly basis. The sum total effect of the Fed’s actions for the past 18 months has been to delay the inevitable bankruptcy of the U.S. financial sector at the expense of the dollar, inflation, government debt, and its own balance sheet, while creating vast new moral hazards and federal obligations / guarantees without any appropriate regulation that would prevent an even “wilder” party in a decade or so (if recent past cycles replay). I wish my parents punished me as “strictly” as the Fed has punished the financial sector.

4) Still, because bank credit is the bloodline of the economy, we cannot let our banking system sink. Yes, our economy needs credit. But we’re talking about all the CDOs, MBS, etc, etc, that are tanking. Do we really need all of them? And while we need a banking system, do we need the companies and banks that we have now? Or would we be better served by new players / industries? If Citibank is allowed to fail, then whatever services they provided that had value would surely be provided by other firms who’d rise to supply a need. Why bail out Citi?

Similarly, those people who argue that the GSEs should be allowed to fail don’t argue that we don’t need mortgages. Just that the GSEs are not the best way to serve that market.

This is a strawman argument, as no one, not even Buiter, is arguing that we don’t need a banking system. Just that the current banks don’t need to survive in order for the system to serve its vital functions.

5) Either way, taxpayers are always the losers. This line is always trotted out by supporters of the Summers school, who like to imply that if the taxpayers are going to lose regardless, then why don’t we just spend $1 trillion bailing out Wall St.? That money is good as gone anyway, so what does it matter?

But this is an intellectually dishonest way of phrasing it. Of course taxpayers lose. The real point however, is how much do taxpayers lose, and what do they get for it? Wyplosz’ analysis of Sweden vs Japan shows why. Sweden spent 4% of its GDP and was back on track in 3 years. Furthermore, as a result of the shareholders losing their investments, their banks were much more cautious, and the taxpayers won’t have to spend a dime bailing out their banks this turn around.

Japan has lost 20 years with no end in sight as their banking sector takes their lumps from the current downturn as well.

Which country’s actions have caused their respective taxpayers to lose more? That is the real question.

At any rate, it’s a real testament to the weakness of the Summers’ school of thought that despite all the pro-Summers biases inherent in this article, Wyplosz is still forced to conclude that the Buiter school is the better course of action.

You’re kidding, right? The Bear Stearns rescue would have stunned Walter Bagehot. Bear Stearns was not a banking institution; not a member of the Federal Reserve; not statutorily entitled to any protection.

Indeed, it’s always been understood that investment bankers are on their own, earning outsized profits in return for taking outsized risks. The British government, for instance, didn’t step in to protect Barings when Nick Leeson blew it out.

The Bernanke/Paulson government-sponsored bailout of Bear Stearns represents a horrendous precedent, particularly since Bear Stearns was very active in issuing the toxic mortgage securities which destabilized banks worldwide. Not merely closing down Bear Stearns, but hanging its principals in Battery Park would have been a salutary move ‘pour decourager les autres.’

Sorry…I’m confused by your article. In one breath you seem to argue for the Bagehot rule (e.g., shareholders ought to bear serious costs and the managers ought to be promptly replaced) but this appears to me to be the exact opposite of the Freddie/Fannie rescue operation. Indeed the proposal seems to favor privatizing the profits and socializing the losses. So where is the discussion on replacing the execs, freezing bonuses, higher rates, etc? What am I missing here?

And we know this because, like all private institutions, its governing body is appointed by the President of the United States.

Absolutely we don’t yet know. The same holds for Fannie and Freddie.

The notion that losses are certain at this point is the big lie in all of this. It’s an agenda driven lie.