PUBLIC LENDING TO PRIVATE HEDGE FUNDS IS INEFFICIENT, UNSTABLE, UNCONSTITUTIONAL AND UNANIMOUSLY DISAGREEABLE

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Abstract

Public funds include federally insured deposits held under the custody of private banks, central bank loans and taxpayer funds. The principal finding of this paper is that lending such public funds through a private banking system to private hedge funds allied with the banks is inefficient, unstable, fundamentally unfair (unconstitutional) and unanimously disagreeable. This finding is akin to the unanimously agreeable safe central banking policy (Acharya, 1991-2016) which, in dynamic general equilibrium, (a) eliminates federal guarantee of bank deposits, (b) offers every business enterprise and household an option to keep in the central bank any part of its deposits it wants to be held absolutely safely, (c) completely deregulates all private banks without any privilege to rob public or private wealth like too-big-to-fail or too-big-to-be-jailed status or the power of market making and clearing. Safe central banking is the only way to make private banks responsible to hold sufficient capital to attract uninsured private deposits like the trading houses currently do. The private banks will then have complete freedom to lend their uninsured deposits to private hedge funds. The Volker Rule (NYT, January 30, 2010), incorporated in the Dodd-Frank Act of 2010, is an infeasible and unworkable band-aid for the moral-hazard driven systemic robbery of wealth creators wrought by the government-ordained private banking custody of public funds. The established systemic moral-hazard problem can be efficiently and constitutionally resolved only through unanimously agreeable safe central banking. Current proposals on overhauling of Fannie and Freddie made by various pundits of systemic robbery amount to a gargantuan amount of public lending to private hedge funds and, hence, inefficient, unstable, unconstitutional and unanimously disagreeable.

Keywords: Public Lending, Hedge Funds, Moral Hazard

How to cite this paper: Acharya, S. (2016). Public lending to private hedge funds is inefficient, unstable, unconstitutional and unanimously disagreeable. Journal of Governance and Regulation, 5(2), 40-49. https://doi.org/10.22495/jgr_v5_i2_p5