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Why do bank CEOs fail or cheat?

July 6, 2012

Imagine for a minute! Think about it! You are Benjamin Franklin who escaped with 40 other rookies from the financial mess of England and the old continent to learn by buck shot approach how to build the framework for an American economy in 1776.  Two hundred and thirty-six years of classical Adam Smith and Maynard Keynes and you are out of work and your children are in debt before they are born! What happened? You have what a behavioural economist-psychologist like myself would call 200 years of  disorganized patch work of financial derivative rules and practices that no single CEO of any bank in the world today could really understand and follow.  So, they learn to pretend that they do  understand the complexity of “classical economics,” thus when a bad recession occur they give you the “bull…” before a congressional committee full of elected people who understand even less what they are talking about (They fake understanding even more!)  This becomes a “theatre of economic absurdity.”  So, the answer why bank CEOs fail or cheat is that it impossible for anyone to learn how to drive a disorganized economic machine. Did you ever try to drive your car holding the rear view mirror believing you are holding the steering wheel?  That is what they do!

Let’s take the disorganization out of the economic machine so at least you can learn to drive your car holding the right apps. The first economic act of government is to create a Treasury Department and appoint a great behavioral CEO (do it!). The second economic behavior of government is to create an independent Federal Reserve Board (FRB) to print national cash and provide Treasury with cash bonds carrying interest. The problem of classical economics start with the third act of government – to make the rules for the Federal Reserve Board. Well, the rules they made were – disorganized. The FRB became a Bank buying and selling bonds to Treasury, private banks, public financial institutions and anyone else in the world who has the money (or credit) to buy the bonds and earn the interest (China today  owns a big chunk the US economy). Basically, anything goes to make a buck in a classical economics FRB!

The organized part of the economic machine is the prime rate, discount rate to banks, fund rate and 11th district rate for ARM. Today the prime rate is $3.25, long-term discount rate to banks is $.75, and short-term fund rate is $.25 to regulate liquidity in the economy. 11th district fund rate is $1.118. This one I like because  my mortgage is always variable during recessions.

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