Banking On The Next US Financial Crisis

(MENAFN- Asia Times) This is the first of a three-part series

Doomsaying, as Jonah complained to God, is a game that a doomsayer cannot win. This applies in spades to predicting a financial crisis. If proven wrong, the doomsayer is discredited. If proven right, he may be blamed for helping to precipitate the crisis by undermining public confidence.

Far be it from me, therefore, to predict a US financial crisis in the coming months. However, indicators that a US financial crisis might occur during this session of Congress, described by this first part of a three-part essay, warrant prompt attention, especially by the Republican Caucus of the House of Representatives, to two questions:

First, if a financial crisis does occur this year, will the still little-tested financial-sector-funded bail-ins authorized by Title II of the Dodd-Frank Act, enacted in 2010, prove adequate to obviate the Biden administration's asking Congress again, as in October 2008, to appropriate funds to bail out the financial system? The second part of this three-part essay discusses why financial-sector-funded bail-ins might fail to obviate a bailout.

Second, if the Biden administration does ask Congress this year for funds to bail out the financial sector, then how might the House Republican Caucus best respond? For House Republicans to support another bailout of Wall Street, or even to fail to prevent one, would outrage tens of millions of populists who dominate Republican primary elections.

However, for House Republicans to nix a bailout needed to mitigate an incipient economic contraction could enable Democrats to shift onto the Republican Party the preponderance of public blame for that contraction.

The third part of this three-part series suggests that the House Republicans might best respond to a 2024 bailout request by conditioning their support for it on prior enactment of legislation eliminating obstacles to profitable private conversion of banks, which are limited-liability corporations, into proportional-liability financial firms that would be less prone to default and would not need government insurance of their depositors.

To convert all banks into such financial firms – without any change in their employees, payrolls, physical plant, equipment, deposits, depositors or financial assets including outstanding loans – would render financial crises less frequent and less acute, and would lastingly obviate government bailouts of the financial system when such crises do occur.

The obstacles impeding profitable private conversion of banks into proportional liability financial firms appear to be wholly governmental. The greatest of them is government insurance of bank deposits, which reduces the profitability of such conversions.

By conditioning House approval of one last financial-sector bailout on prior enactment of legislation mandating imminent elimination of the governmental obstacles to the profitable private conversion of banks into financial firms that are less default-prone, need no deposit insurance and will generate fewer and less severe financial crises that will not require government bail-outs when they do occur, the House Republican Caucus could avoid blame for refusing to mitigate an incipient economic contraction in a way that does not alienate the affections of working-class populists who loathe having to bail out rich and systematically corrupt financiers.

In doing so, House Republicans would also seize a rare opportunity presented by a financial crisis to remove governmental obstacles to a simple, robust, and profitable private reform of the financial system that would make it lastingly more efficient and more stable. Opportunities to do so much good at so little cost are so rare that if a 2024 financial crisis presents one, all Americans might end up remembering that crisis as a blessing in disguise.


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