Poor Richards Report
Chapter 10
Big is Bad
In June 1913, right after J P Morgan had died, the Congress formed a bipartisan committee to form a new national banking law. It’s mandate was to establish a Federal Banking Authority above politics. It would consist of 3 senators from each party and 3 congressmen from each party. These 12 men were to be the ones held in the highest regard and their mandate was to form a new banking law. The kicker here was that the vote had to be 12 in favor. Imagine that!
It was a real Donny Brook with everyone giving an opinion including President Woodrow Wilson.
On Dec 23, 1913 they agreed. The house voted by voice without a single nay.
In the senate I believe 2 senators voted against it.
That afternoon President Wilson signed the mandate into law: The Federal Reserve Act of 1913. President Wilson appointed JP Morgan’s right hand man to serve as President of the NY Federal Reserve Bank. (That is the main power base since all international transactions are settled through that bank. The Chairperson of the Fed was titular until President Eisenhower became president.)
The Federal Reserve was to remain above politics. It did until Treasurer Donald Lynch under Ronald Reagan refused to reappoint Paul Volker because he was a democrat. In the history of the Federal Reserve that was the worst mistake ever.
With the new chairman came a new mantra; “too big to fail”.
Bigness brings power, power leads to globalization, which can lead to corruption.
Witness all the banking and financial scandals going on today.
The only person capable of shutting the barn door before ALL THE HORSES ARE GONE is Janet Yellen the current Fed Chairperson.
Here is a present day example of being too big.
When William Gross left Pimco, their flagship Bond Fund was swamped with redemptions. Major liquid government treasuries dropped a few basis points as dealers bought back bonds. But, there were smaller illiquid issues that were bought to increase the yield. They probably are secure notes, but now when billions of marketable bonds have been sold, who wants to buy a low rated, or non-rated bond of First Bank of East Podunk NJ?
Vanguard Group has recently closed bond funds to new investors when they got too big. A great example of prudence and caring for the customer.
A banker should be in the business of lending money, period. A savings bank should be in the business of lending money locally for homes. Research firms provide information for a fee to a bank who handle legal trusts and large individual accounts on a fee basis. Then there are regular brokerage firms for commodities, stocks and bonds. Each firm has set fees and no “net” trades. This would be Transparency at its fullest; everyone knows where the money is.
Market makers who take positions in securities should posts their positions and charge interest that the bank charges them on positions held overnight.
Limit money market funds and their size. They should be run by the savings banks only.
Central bankers shall act as bankers between nations. This could stop certain corporations or nations piling up an unfathomable amount of debt that can not be easily paid back on time.
The overriding principal here is that major banks must be reined in world wide before we slip into the abyss. Janet Yellen is the only person that can do it now.
It would take a 2/3rds vote of the congress to impeach her.
She has the chance to become known as ” The Iron Lady of Finance” before it is too late. Right now she has the potential to become the most powerful person on this planet.