Are You Exposed to the Risks of the Fiat Financial System? Part 3: Regulatory Risk
In this third and last part of my analysis of the major risks inherent in the fiat financial system I would like to focus on regulatory risk. Regulators are presented as “champions of the people” but is this really the case?
Regulatory risk comes from the fact that the issuers of fiat currency are also the law makers. This means that law makers will make laws that support the fiat financial system. This is simple self-preservation. These laws can change at any time in order to meet the needs of the system. The risk comes from the fact that:
1. These laws can change quickly and dramatically. For example in 2010, Cyprus unilaterally seized many bank depositors’ funds to cope with an economic crisis. In 1933, the US abruptly demanded citizens surrender almost all gold they owned to the government.
2. Their purpose is to sustain the fiat financial system and this may not be in the best interests of people and their investments.
Currency issuers and lawmakers being one and the same government clearly has advantages. The fractional reserve banking system is unlikely to be sustainable if the government did not guarantee bank deposits to prevent a run on banks. During the 2008 General Financial Crisis the massive bailout of financial institutions most likely prevented the meltdown of the entire system. In The Big Short Michael Lewis describes the size of intervention required:
“By then it was clear that $700 billion was a sum insufficient to grapple with the troubled assets acquired over the previous few years by Wall Street bond traders. That’s when the U.S. Federal Reserve took the shocking and unprecedented step of buying bad subprime mortgage bonds directly from the banks. By early 2009 the risks and losses associated with more than a trillion dollars’ worth of bad investments were transferred from big Wall Street firms to the U.S. taxpayer.”
While this intervention may have prevented meltdown of the fiat system it also shows how lawmakers are capable of changing laws at will to meet the system’s needs. It is also clear that the purpose of the bailout was the preservation of the fiat system and its institutions. While these institutions where being saved millions of families lost their homes. From January 2007 to December 2011 there were more than four million completed foreclosures and more than 8.2 million foreclosure starts.
 Ibid. page 261.
As a home is the primary investment for many people, the example serves to demonstrate that regulation is primarily designed to support the needs of the fiat financial system before all other considerations.