Jeff over at Dash of Insight had an amusing take on the bailout plan, comparing it to a popular “asteroid apocalypse” movie. I told him that he missed two points – first, such asteroids tend to strike with alarming frequency, once every five or ten years, it seems, and second, they all appear to be man-made, and mostly launched from New York City.

These so-called “asteroids” are simply a deleveraging process. As such, it hits hardest where capital was misallocated the most. Think armies of QFEs with structured finance products, loans to stupid people, businesses that need credit to make payroll, etc.

Why is the system so leveraged in the first place? It’s actually designed to be leveraged at untenable, unstable levels, and this design leads us into the highly exaggerated series of fluctuations called “the business cycle.” In a free market, we’d still have these fluctuations, but they’d be much smaller, likely more frequent, and much less widespread.

The fractional reserve system is the reason behind the leverage, and it ain’t gonna change anytime soon, barring a total collapse of the system. Rome didn’t collapse in a day – this Rome will outlive both you and me. And remember, there will always be another Rome.

In a free market, banks would make use of fractional reserves at their own peril, and most likely only sparingly. Capitalist enforcers could cause runs on the bank very easily, consumer protection agencies would (for a FEE!) sell information on the reserve levels of banks, and leverage in the system would be light.

We don’t have a free market in the U.S. Our system is not, and never has been, capitalist. It’s actually corporatist-elitist, with enough socialist and populist bones thrown to the poor to keep outright revolt at bay, therefore basically screwing the middle class. Thanks!

Bankers don’t like the idea of low leverage, so about a hundred years ago they pushed for a system that allows them, through force of “government,” to have permanently low levels of reserves. It helps their profits. This is in essence the same process behind cosmetologists being required to have 2000 hours of training, or licensure of real estate and insurance agents, or safety and emissions regulations in automobiles; the industry willingly pushes for “tighter” regulation in order to drive up profits, limit participation in the labor force to drive up wages, or to keep foreign competition off our shores. Corporatist-elitist.

Now, in the case of state-protected fractional reserves, all banks are permanently insolvent. This “necessitates” a central bank “lender of last resort” in order to prevent nominal (rather than actual, which they’re in already) insolvencies and to create a yield curve that generally slopes upward, allowing long lending and short borrowing. This also “necessitates” a near-constant stream of “government” intervention in the system.

So we have asteroids every decade or so, and they’re man-made and launched from NYC.

Any move to a free-market system would be painful in terms of reallocating all of the misallocated capital. Some of us would fare better than others, some would probably make out like bandits while some others would go belly-up. However, any shake-up of the status quo is anathema to the nice, easy-going ride that our “public servants” have got going for them, especially since the members of the public getting the most disruption are the ones most likely to participate in the “political process.”

Likewise, a move to a non-free market system that involved fixed-reserve banking, one that would limit the exacerbations of our frequent deleveraging, is too painful to the bankers for contemplation.

Now, not every congresscritter is in the bankers’ pockets, so there’s no unanimity in protecting them specifically, no more so than there would be for protectionism towards any other industry. However, all actors in “government” have a stake in the increased power of “government” and so act with near-unanimity to expand the power of “government” wherever possible. Hence, they are almost all fans of the fractional reserve central bank system.

First and foremost, a powerful central bank represents control. No “government” willingly relinquishes control, except grudgingly, at the margin, and in expectation of avoiding more drastic alternatives, like the hangman’s noose. This is an area of ideological uniformity in all members of “government” and the bureaucracy, despite their other differences.

A powerful central bank allows the “government” to debase its currency. This is important, as it allows them to default on their debts and allows them to enact a de facto tax on holders of their currency.

Powerful central banks allow profligate spending, something that pretty much all members of “government” and the bureaucracy are fans of.

So the system isn’t going to change anytime soon. Some kind of bailout will come down the pike, and “confidence in the system” will be restored.

Since the system isn’t going to change, I prefer to focus on how I can capitalize on it. This is where the Cantillon effect comes in. The new money that is injected into the economy via the existence of a central bank benefits the first users of that money the most, and works to the detriment of the last users of that money. Think of a counterfeiter, a really good one – the spending power he “creates” is really stolen from the last person to get the counterfeit money. Thus it is with central banking.

The first user is the “government.” That’s why the system ain’t gonna change. The bankers and the military-industrial complex get the money second. That’s why they love the system, and that’s why they get rich on the Street and in the City.

If grousing about it and protesting it makes you feel warm and fuzzy, go right ahead – I understand, I really do. But at this stage of my life I’d rather just use the process to get more comfortable for my old age. This means to participate in that inflation in every way possible; owning real estate, speculating in the financial markets, “investing” in stocks, etc. Your mileage may vary.