Financial Reforms Commonly Longed In Democracies

April 17, 2010

Sankarshan Acharya
Pro-Prosperity.Com and Citizens for Development

April 17, 2010

To:       Honorable President Barack Obama

Cc:       Honorable House Speaker Nancy Pelosi

Honorable Senators Harry Reid and Richard J. Durbin

Honorable Chairman, House Oversight and Government Affairs Committee

Sub:     Financial Reforms Commonly Longed in Democracies[1]

Dear President Obama,

Why are plural democracies floundering, globally, as compared to the single party system in China?

It is because the rulers (political, bureaucratic and embedded media) in the democracies tend to serve the voters, not the producers who feed and secure a nation including the rulers and non-producers. 

My father, in a remote village in India, used to emphasize the importance of inducing the smartest children in a family to pursue for their best to help the laggard siblings who were unwilling or unable to persevere.  If my father followed democracy at home, two of his children would not have reached two best institutions in India.  The principle of my father is the bedrock doctrine of the Chinese system of governance.  The ex-Chinese President has stated this doctrine in various policy statements. 

The democracies can also adopt the above doctrine to enjoy the best of both worlds.  This necessitates constitutional rules of governance, as shown in my research.[2]  My April 9 memo on “Media on Truth and Wealth” depicts how the prevailing system of market-based governance is a mere design for self-entrenchment and self-entrenchment of the designers.  The April 12 memo on “In God We Trust” uncovers the roots of this design.  My policies seek to reform this system constitutionally to achieve the best of both worlds.

To restore trust in the financial markets, the government institutions (regulatory, bureaucratic and embedded media) have to be founded on truth.  A glaring deviation from truth is the painting of the ex-Fed chairman as the maestro of wealth creation.  He must have created wealth for the painters.  But the truth discovered by yours truly, since 1995 and more firmly since 2001, is that he has created a giant American Ponzi scheme[3] centered in the Federal Reserve that nurtured indolence and stifled perseverance.  Many persevering entrepreneurs, technologists and manufacturers were simply pushed overseas as their hard earned equity interests and savings were squeezed by Wall Street shenanigans with conforming Central Bank policies.[4]  This resulted in a transfer of wealth to indolent bankers and private trusts.  But the wealth, stored in terms of credit to households and businesses, is withering as the borrowers’ incomes have dwindled due to unemployment and severe underemployment caused by the same banking shenanigans.  It has been a titanic steered by captains hailing themselves while jettisoning the truth about an impending engine crash.      

Now the embedded media outlets are spreading the myth that the maestro wants to spread as truth: “Everybody missed it [the Great Recession],” Mr. Alan Greenspan said, “academia, the Federal Reserve, all regulators.” That people have lost trust in the embedded media outlets is clear from a declining readership and looming bankruptcy of many media firms. 

The principle of a free market economy is enshrined in the American constitution.  This principle guarantees that the individuals who produce, create and innovate get their due fairly through trading in free markets, without government-enforced quotas, subsidies, price-fixing or manipulation of the truth.  The government strictures on individuals, markets and businesses tend to reward indolence and discourage perseverance. It is like pulling the legs of people who produce, innovate and create to benefit those who don’t.  Moral hazard subverts the constitutional principle of free enterprise.

The prevalent moral hazard-plagued philosophy of market-based governance has abjectly failed everywhere.[5]  This should be alarming, to say the least, to leaders running a country.  Here is a list of common longing of people that can be accomplished by moral hazard free constitutional governance:

1.      Smaller government (lower government expenses and taxes)

2.      Less regulation

3.      Less government interference in businesses

4.      Less regulatory failures

5.      Less market crashes

6.      Constitutional

I am not a Democrat, Republican or a Tea Party member.  But my rational inference is that everyone irrespective of party affiliation will agree with the above goals. 

The proposed Senate Bill on financial reforms will not accomplish the above goals:

a.       The bureaucracy will expand to increase the government size.

b.      Regulations will increase.

c.       Bureaucrats will interfere in businesses (banks and financial firms) more deeply.

d.      Since the regulatory structure is not changing, regulators will fail again.  The addition of a consumer reform wing to the Federal Reserve will make no serious change because the Fed is already doing some consumer protection work now. 

e.       Market crashes will recur leading to Great Depression II because the internal functioning of the markets is not being reformed.

f.       The Bill does not ask for discontinuance of the prevailing unconstitutional rules.

I understand the difficulty of extricating the nation from a deep ditch in which market making bankers have taken us.  For example, will the taxpayers cover the unconstitutional short positions held by these market making bankers?  Who will buy the overpriced assets these bankers seem to be holding?  In other words, banks are basically shells with the creams gone to private accounts and trusts, according to my rational inference. 

The communication among the regulators (OTS, FDIC, Fed, Treasury) about JP Morgan and Chase’s acquisition of Washington Mutual was released on April 16, 2010 by the Senate Permanent Subcommittee on Investigations[6].  The regulatory confusion, fear, and disarray are very evident in their communication.  Washington Mutual was a solvent bank according to the primary regulator, OTS, at the time of seizure.  The FDIC had duly signed on such evaluations until the seizure.  There was no problem of liquidity, despite some drain triggered by pre-seizure knowledge circulating among some depositors.  The FDIC nevertheless wanted a downgrade of WaMu to facilitate its seizure, just a few days before the Congress passed TARP legislation and raised the limit on deposit insurance.  The FDIC had sought a clearance from the Federal Reserve and Treasury to go ahead with the seizure. 

JPM had made an offer ($8 per share of common stock) few months before seizure that was rejected by the WaMu management.  One billion or so of naked short positions were built perhaps by the interested parties or their proxies.  JPM had dissuaded other interested acquirers of WaMu.  JPM sits on the BOD of NY Federal Reserve Bank and is an adviser to the Federal Reserve in Washington.  The then Chairman of FRB-NY was ex-CEO of Goldman Sachs and the then Treasury Secretary was ex-CEO of Goldman Sachs.  It is obvious that the FDIC was pressured to seize WaMu and let JPM takeover WaMu’s assets and deposits, by zeroing out valuable investments of thousands of families made in WaMu securities.  The government has thus taken over private property, unconstitutionally, for aggrandizement of a favored banker.

Whereas China has recently instituted US-style individual property rights, the U.S. government is transgressing such laws, enshrined constitutionally two centuries ago, to transfer the hard earned household savings to indolent bankers.  The WaMu seizure is serious because it decimated the trust in the U.S. government and financial system.  Trust is vital for sustenance of the nation. Such regulatory fiascos are inevitable in future even if the currently proposed Bill is enacted.  It is because this Bill does not eliminate moral hazard in banking and regulation.  Without moral hazard free reforms, the economy will gravitate towards Great Depression II. I wish I did not have to say this. 

The reason for non-revival of job growth in the small business sector is that these employers’ savings have been decimated by the shenanigans of the market making bankers.  The small business owners are relatively rich, but erosion in their savings has broken their trust in government and Wall Street.  They seem to have joined the Tea Party movements to seek small, constitutional government without the debilitating control of Wall Street.  This does not bode well for either party.  The outcome of the election will be driven by unforeseen developments in the markets.


With profound regards,

Sankarshan Acharya

[1]This memo is based on a paper, entitled, “An Economic Theory of Constitutional Governance,” which originated in 1990 as efficient resolution of moral hazard due to free trading.  This paper is available on the internet,

[2] and



[5] “An Economic Theory of Constitutional Governance,” available on the internet at this link: