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Taub shows complete lack of understanding of how a contemporary monetary system actually operates July 27, 2014

Posted by larry (Hobbes) in economics.

The taxpayer meme is once again causing havoc and preventing deeper analysis and, down the line, effective legislation. Dodd-Frank got through by the skin of its teeth.  This extract from NYT is by Jennifer Taub of the Vermont Law School. I have never been able to get anyone to understand that taxpayers do not pay for anything, that the taxes they pay leave the monetary circuit never to return, that it is not a Peter-Paul situation or a zero-sum game. Nothing seems to get through, But Taub should be able to see through this. That she doesn’t should be deeply worrying to us all.

Taub ends her piece thus.

Delivering fruit and flowers is relatively easy compared with the need to tend to the deeply rooted practices of excessive leverage, over-reliance on short-term funding, and too-big-to-fail, and too-big-to-manage institutions, that persist.

Delivering fruit and flowers is also easy compared with the need to get a handle on how he money system actually works so that battles based on faulty premises can then end. If this is anything like her book, Other Peoples Houses, published by Yale last May, the book couldn’t fail to be deeply misleading, in this respect at least. OMG.

Orderly resolution was created as an alternative to the distasteful choice between a chaotic Lehman-like bankruptcy and a taxpayer -funded bailout. It involves the Federal Deposit Insurance Corporation quickly liquidating a large failing bank holding company or systemically important non-bank financial firm that is on the brink of collapse and poses a significant risk to our financial stability. Many wonder whether this process can function well across borders. If it works out as intended, however, a single bank’s failure will be isolated, and losses will be imposed on shareholders and creditors, and managers replaced.

Getting this right is critical. As the Fed chairwoman, Janet Yellen, testified in February, she is “not positive that we can declare, with confidence, that ‘too big to fail’ has ended until it’s tested in some way.” The test she suggested was putting a failing firm through the orderly resolution process.

As it stands now, upon F.D.I.C. takeover of a falling giant, taxpayers will advance the money needed to oversee the process via a line of credit from Treasury. If the proceeds from the F.D.I.C.’s sale of the failed institution are not enough to pay back the loan, then the large surviving banks will be assessed several years after.

For those who claim Dodd-Frank “enshrines” taxpayer-funded bailouts, an easy remedy would be a simple amendment to create a bank pre-paid risk fund. Bank assessments could be based upon risk factors including size, leverage, and dependence on short-term funding. In addition to avoiding Treasury fronting the funeral bill, a pre-paid fund would create better incentives for banks to monitor each other.

A $150 billion bank pre-fund was part of the House version of the reform bill, but was dropped during the Dodd-Frank legislative process after intense industry pressure. In Orwellian fashion, congressional opponents contended that bank pre-funding was a taxpayer-funded bailout.


What Taub says here about how the FDIC is supported or works is so far from being right that you can’t really say that it is wrong. “Wrong” is too weak a descriptor of what her piece is saying about the workings of the monetary system we actually have.


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