Saturday, June 16, 2012

Burma's Aung San Suu Kyi highlights just how wrong is the western politicians' choice of protecting banks over protecting citizens

In her Nobel Peace Prize acceptance speech, Burma's Aung San Suu Kyi shows just how wrong the EU, UK and US politicians' and regulators' choice of protecting meaningless bank book capital levels and not protecting their countries' citizens and social contracts is.

As your humble blogger has frequently noted, by protecting bank book capital levels under the Japanese model for handling a bank solvency led financial crisis, governments put the burden of the excess debt in the financial system onto the real economy.  A burden that the real economy is not able to carry.  A burden that forces the real economy into a downward spiral.

The governments' pursuit of austerity policies and its abandonment of its social contract is a direct result of this downward spiral in the real economy.  Why?  Because as government tax revenue declines there is the growing perception of the need to cut back government spending to keep the growth in government debt under control.

Politicians and financial regulators could, if they wanted to, change this dynamic by putting protecting the social contract and the citizens ahead of the banks.  The FDR administration was the first to do so.

They were the originals when it came to adopting the Swedish model with ultra transparency.  When they did so, they broke the back of the Great Depression.

What the FDR administration did was to design a modern banking system so that the banks can and are suppose to absorb all the excesses in the financial system so these excess do not burden the real economy.

They did this by making bank book capital levels an irrelevant accounting construct.

With the invention of deposit insurance, depositors don't care whether their bank has positive or negative book capital levels.  They only care that they can get their money back.  Hence, the only issue that matters to depositors is whether the government can perform on its guarantee.

With access to central bank liquidity, under the model for central banks developed by Walter Bagehot, the depositors knew that banks had the funds so that depositors could, if they wanted to, get their money back.

Once bank book capital levels became just an accounting construct, this accounting construct was there to be used to absorb the losses in the financial system.

The EU, UK and US have bankings systems based on the FDR administration model.  It is time to use the banks' book capital levels to rescue society.  In short, it is time for Wall Street to rescue Main Street.
"Often during my days of house arrest, it felt as though I were no longer a part of the real world," she said, during her 40 minute speech. 
"There was the house which was my world. There was the world of others who also were not free but who were together in prison as a community and there was the world of the free. 
"Each one was a different planet pursuing its own separate course in an indifferent universe. 
"What the Nobel Peace Prize did was to draw me once again into the world of other human beings, outside the isolated area in which I lived, to restore a sense of reality to me. 
"What was more important, the Nobel Prize had drawn the attention of the world to the struggle for democracy and human rights in Burma. We were not going to be forgotten."... 
"If I advocate cautious optimism, it is not because I do not have faith in the future, but because I do not want to encourage blind faith. 
"Without faith in the future, without the conviction that democratic values and fundamental human rights are not only necessary but possible for our society, our movement could not have been sustained throughout the destroying years," she said...

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