An Austrian Bailout Plan
Austrian Bailout Package--Part A
1. Suspend Basil II regulations (to at least 4/2/09)
2. Cancel FDIC insurance on all demand deposits after 1/1/09.
3. Increase FDIC premiums on short term time deposits of less than one year.
4. Make interest earned (starting 1/1/09) on bank time deposits and non-governmental, non-agency, and non-authority bonds tax free (not demand deposits and MMMF).
5. Convert Fannie Mae and Freddie Mac's status from conservatorship into receivership.
6. Convert AIG's status from government owned to receivership.
7. Cancel the Primary Dealer Credit Facility (PDCF) and the Term Securities Lending Facility (TSLF) at the end of the announced program (January 30, 2009).
8. Announce that the Federal Funds rate will be allowed to "float" at market rates starting January 30, 2009.
9. Announce that the Federal budget will be prorated beginning with the fiscal year starting 10/1/08 including all defense spending and transfer payments.
10. Restore constitutional monetary status to gold and silver to act as an alternative medium of exchange (no capital gains taxes).
Comments (19)
Stine
I understand all of the points except 2 & 3. What would be the purpose and effect, other than saving the banks money on premiums and put the average americans money at risk?
Published: September 29, 2008 12:01 PM
Ron
I'll take a stab, Stine...
By ensuring coverage of deposits, FDIC encourages irresponsible behavior on the part of the banks. A bank will take more risks with depositors' funds if all or part of it is guaranteed to be repaid by the Fed than it would if they had to be responsible for paying any losses. Getting rid of FDIC "insurance" would subject banks to the same market discipline as any other business.
Increasing the premiums on short-term deposits would encourage longer-term savings by driving down returns gained from short-term savings. You would see more locked-in savings vehicles such as CDs, thereby increasing bank reserves and reducing the inflationary effects of fractional reserve banking.
Published: September 29, 2008 12:21 PM
Brian
Is there any way you could expand (even breifly) on these points and what their intentions are?
Published: September 29, 2008 12:22 PM
Jeff Harding
I don't quite understand how you float the FF rate. How can the market set that rate? Tie it to . . . LIBOR? But isn't LIBOR tied to FF and Discount Rates?
Thanks.
Published: September 29, 2008 12:27 PM
Stanley Pinchak
Ron,
I agree with your assessment of 2 and 3, but would also like to point out the incoherence of insuring fractional reserve deposit banking. This will allow banks to compete with each other in terms of third party insurers who will mandate the reserves, the risk premiums and account coverage. Current FDIC insurance gives a false sense of security to depositors because they can only be saved in the event of systemic bank failure by ultimately destroying the value of their savings, which the FDIC is supposed to prevent. Its very nature is contradictory and as you mentioned a moral hazard.
Published: September 29, 2008 12:35 PM
John Delano
Two minor additions:
11. Construct a 40 foot wall with electrified barrier around the district of Criminals.
12. Dissolve the Federal government effective 20 January 2009.
These will help prevent this from happening again. Maybe some charitable people could throw food over the wall.
Published: September 29, 2008 12:36 PM
John Delano
Two minor additions:
11. Construct a 40 foot wall with electrified barrier around the District of Criminals.
12. Dissolve the Federal government effective 20 January 2009.
These will help prevent this from happening again. Maybe some charitable people could throw food over the wall.
Published: September 29, 2008 12:37 PM
Hmmm
Don't really understand, how you can let the federal reserve exist? Isn't that central planning, or worse yet a criminal cartel.
A private monopoly on currency seems antithetical to free market.
Published: September 29, 2008 12:38 PM
Stanley Pinchak
Jeff,
I would imagine that the Fed could "float" the FF rate by aggregating and averaging the the individual interest rates for very short duration loans that the individual banks make. Then to be safe, add 500 basis points, so that banks are more likely to rely on each other directly.
Hmmm,
Your point is well taken here. The largest obstacle of the removal of the Federal Reserve is the fear factor associated with its removal. By starting to eliminate its functions one by one, starting with its most pernicious activities, its abolishment can proceed without the hysteria that calls of for immediate removal would elicit.
Published: September 29, 2008 12:48 PM
Andy Stedman
re Ron:
Counterintuitively, my understanding, which may be wrong, is that CDs, MM, and even savings accounts, are not counted as demand deposits by the Fed, so the reserve requirement, instead of being merely low, is zero. Someone correct me if I'm wrong.
Published: September 29, 2008 2:58 PM
Tom Lyons
Andy,
I work in commercial banking, you are correct. No reserve requirement for anything that is not a DDA.
Generally, though, the reserve costs are lower than market interest rate, so banks still prefer to sell DDAs and deal with the reserve than a CD and pay the interest rate, PARTICULARLY banks that go to LIBOR for loan funding (as opposed to fund everything with in-house deposits).
Published: September 29, 2008 3:52 PM
Pete
I take it, by letting the rate float, you mean ending Open Market Operations? If so, that is a very good suggestion.
Ending OMO and taking FDIC insurance away from demand deposits are two very important steps.
As to CDs encouraging fractional reserve inflation. No. What you are suggesting is that people ought not loan their money to banks. Clearly, people loaning their money to banks is important. CDs would exist in 100% reserve banking.
Published: September 29, 2008 7:29 PM
Ben W.
Is that "Basel II" you refer to in point 1?
Published: September 29, 2008 9:46 PM
Robert Vann
Very interesting. I wonder what will be in Part B?
For those of us still (slowly) learning about the Austrian economics side of things, can you explain a bit more about the suggestions?
Would suspending Basil II actually liberate capital for interbank lending?
Isn't there a way, given the premise of FDIC's validity, to maintain demand deposit insurance but still encourage a shift toward long term savings and lower risk bank behavior?
Published: September 29, 2008 10:57 PM
jomama
John Delano's program is one I can get behind.
All other solutions will be counterproductive.
Published: September 30, 2008 9:15 AM
Stanley Pinchak
jomama,
-- William Lloyd GarrisonPublished: September 30, 2008 11:55 AM
Johnny Ames
Debtors prison for those not paying their mortgages? Garnish their wages?
Published: September 30, 2008 11:05 PM
jomama
Stanley,
Just about in the bag.
Published: October 1, 2008 6:32 AM
Mark Thornton
I've posted a revised bailout plan on the blog. Thank you for all your comments and suggestions. Please keep them coming.
Published: October 2, 2008 2:44 PM