Monday, February 16, 2009

Are Banks Involvent?

From Steve Randy Waldman, New York magazine
Illiquidity = "If you owe someone a dollar and you don't have on, you are illiquid."

Insolvency = "If you owe someone a dollar and you don't have one, and if you sold everything that you own and you still wouldn't have one, you are insolvent. (But as long as you own something that's hard to put a value on, no one can prove that you're insolvent. Upon this [foundation] stands the entire financial system.)"
For decades we economists have been teaching the naive students who trust us that the Federal Reserve System is the bulwark of our banking system. Created by Congress and charged "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates," the Fed is also the regulator responsible for ensuring stability of the banking system and financial markets.

I guess it's fair to say the Fed has failed. The prescription? More money and credit from the Fed, more regulation, and more government control of financial markets. Wish the Fed, Congress, and BHO good luck. They're going to need it.

Pronunciation: lay-zay fair
Function: noun

Etymology: French laissez faire, imperative of laisser faire to let (people) do (as they choose)
Date: 1825

1 : a doctrine opposing governmental interference in economic affairs beyond the minimum necessary for the maintenance of peace and property rights 2 : a philosophy or practice characterized by a usually deliberate abstention from direction or interference especially with individual freedom of choice and action
We should give this a try. It couldn't possibly work out worse than the heavily regulated economy we've had since 1913.

No comments: