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Tuesday, April 27, 2010

Resolution Fund

This story was interesting. The proposed financial "reform" law has a provision for a "resolution fund". There will be a tax on banks, with the proceeds going to a "resolution fund". This fund will be used to bail out banks during the next severe recession/depression.

This sounds a lot like FDIC insurance. FDIC insurance is paid via a tax on bank deposits. The tax is used to bail out failing banks. The tax isn't free. It's passed on to customers via lower interest rates or lower quality service.

Banks have an explicit State-backed monopoly. Placing a tax on businesses with a monopoly is pointless. If you tax a monopoly, the cost of the tax is passed on to customers as higher prices.

For example, banks borrow at the Fed Fund Rate, currently 0.25%, and lend at 5%. If politicians place a 0.1% tax on banks, then banks merely lend at 5.1% instead of 5%. The banks make the same amount of profit.

Only banks may create money. Everyone else needs bank-issued money to pay taxes. You can't boycott bank profits and bank taxes unless you also boycott the Federal Reserve and income tax. The rules of the monetary system and taxation system are set up so that the banksters get their cut no matter what. "Banking is a huge % of the economy" isn't the result of a free market; it's the result of regulations and State subsidies and the inflation tax.

The "resolution fund" is itself an illusion. The "resolution fund" is held in dollars or Treasury debt. It makes no sense when a government holds a trust fund in its own money. It's just an accounting gimmick. A taxation surplus is deflationary. A budget deficit is inflationary.

When money is paid into the "resolution fund", that's slightly deflationary, but negligible compared to the overall inflation rate. When the "resolution fund" makes a payout, that's inflationary. FDIC insurance and the Social Security Trust Fund function similarly.

BTW, the Social Security Trust Fund is cashflow negative. Benefits paid exceed taxes collected. Interest on the trust fund should be excluded from the cashflow analysis, because that's just an accounting trick. Until this year, Social Security taxes collected were more than benefits.

In other words, Social Security was a huge cash cow for State parasites. Like all Ponzi schemes, it must end eventually. There will have to be a tax hike, an inflation hike, a benefit cut, or some combination of all three. Inflation is a stealthy way to cut benefits; you get your check but the purchasing power is less.

The Federal government promises to explicitly and indirectly guarantee bank deposits. This creates the illusion that a bank deposit is a safe investment. If you put money in a bank, the nominal value of your deposit is guaranteed by the State. However, it's practically guaranteed that the interest is less than true inflation. The inflation tax makes a checking account the riskiest investment. State comedians promote the lie that inflation is low and that a checking account is safe.

Bank deposits receive many direct and indirect State subsidies. The State guarantee on deposits, combined with propaganda that inflation is low, tricks people into keeping their savings in a checking account where they can be ripped off via inflation. FDIC insurance is part of this illusion. During a recession, the Federal Reserve cuts interest rates. An interest rate cut is a bank subsidy, because it makes outstanding loans worth more. During a mild recession, a Fed Funds Rate cut is sufficient to bail out banks. During a severe recession/depression, bailout money is explicitly allocated by the government.

The taxation system and monetary system make everyone dependent on the banksters. The rules of the monetary system were chosen by the banksters. "Banks are too big to fail!" doesn't occur in a really free market. It's a consequence of State restriction of the market.

The Federal Reserve price-fixing cartel is the most evil aspect of bank regulations. None of the mainstream "reform" proposals seriously consider eliminating the Federal Reserve.

Recessions and depressions don't occur naturally in a free market. They are caused by State restrictions on the monetary system. Even before the Federal Reserve was created, there were many bad laws regulating money and banks.

The "resolution fund" is just an evil fnord. There is the illusion of reform. Insiders will still be able to steal. The problem with the US economy is that stealing via the State is more profitable than doing actual useful work.

There's really only one way to avoid theft by the banksters and State parasites. You should invest in gold/silver and take physical delivery. You should boycott the Federal Reserve and income tax. Politicians can't implement real reform, because too many people profit from the corrupt way things are now.

The banksters receive massive direct and indirect State subsidies. They can always profitably lobby against real reform. That's the reason the Federal Reserve is "politically untouchable".

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