James Grant is one of the happy few who has a real understanding of the credit markets. His newsletter, Grant’s Interest Rate Observer is required reading for the bankers and brokers who work those markets.
Generally apolitical in his musings, Grant is also a gold bug. While Fed Chairman Bernanke continues to oppose a return to the gold standard, Grant argues persuasively that the Bernanke method of dealing with debt—by inflating the currency—will necessarily lead to fiscal and monetary ruin.
I recall many years ago, around 2005 or 2006, Grant was warning against mortgage backed securities. How could it happen, he asked, that you take a bunch of sub-investment grade mortgages, put them in a package and then declare that the package to be as good as a treasury bond?
History tells us that we should take Jim Grant’s views seriously.
A few days ago Grant reviewed a new book for the Wall Street Journal. The book, by Simon Johnson and James Kwak, is called White House Burning. Link here.
To get our fiscal house in order Johnson and Kwak recommend a mix of liberal nostrums.
Grant summarizes their thesis:
To them, the problem today isn't paper money but a government that hovers too little and taxes too lightly. More regulation—especially financial regulation—and selectively higher taxes are the answers, they contend.
Not to put too fine a point on it, but Johnson and Kwak are staunch defenders of the Nanny State.
These wonky, seemingly clinical, policy prescriptions do not come from nowhere. Messrs. Johnson and Kwak are special pleaders. Human life being uncertain, they wish to protect us from it. How much risk of sickness, unemployment or indigence do you, a mere individual, wish to bear on your own? "The question we leave you with is this," the pair write: "Are you and your family willing to face these risks alone, not knowing what will happen in the future, or do you want to live in a society that will protect you from misfortunes that lie beyond your control? For that is what the debate over the national debt boils down to, and its outcome depends on you."
Of course, it never suffices to criticize someone else’s point of view. One must offer a better idea. So, Grant offers a policy framework of his own. He says: “Let’s try capitalism for a change.”
He continues, explaining what he means:
Rather than the bureaucratic monstrosity called the Dodd-Frank Act, for instance, why not hold the bankers personally accountable for the solvency of the institutions that employ them? Until 1935, bank stockholders would get a capital call if the company in which they had invested became impaired or insolvent. It was their problem, not the government's. In the same spirit, suggests the New York investor Paul J. Isaac, let the bankers forfeit a portion of their past compensation—say, that in excess of 10 times the average manufacturing wage—if they steer their employer on the rocks. And let them surrender not just one year's worth but rather seven year's worth—after all, big banks don't go broke all at once. Proceeds would be distributed to the creditors, as in days of yore. Bankers should not only take risks. They should also bear them.
I realize that it’s a radical idea, but we ought to weigh it carefully. Instead of trying to police the banking system, why not hold bankers personally responsible for their decisions?
It sounds radical, but it’s really as old as gold.