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Posted by on Jul 13, 2012 in At TMV, Business, Economy, International, Politics, Society | 13 comments

Let’s NOT Save The Banks

One day this week two things happened in Spain. Its banks received another bailout to help “save” them. And the government announced crushing new austerity measures in the form of reduced services, worker firings, and higher taxes.

One might easily conclude from this confluence that saving the banks and saving the economy don’t run in tandem. But central bankers and government policy makers in this country, Europe, and indeed much of the world, seem not to have so concluded. These worthies have pumped up banks, the depository kind and the investment variety, to the tune of trillions of dollars (that trillions with a “t”) in recent years for the oft-stated reason that this is critical to getting overall economies healthy — though economies continue to mop along at best, and more often just keep sinking.

Why is that? Why hasn’t “saving the banks” actually kickstarted economies the way it is supposed to do? And why do central bankers and government officials continue to claim it should and eventually will — abundant evidence to the contrary notwithstanding? Here’s the answers.

A huge chunk of this money — mostly created with the modern equivalents of cranking up government printing presses — has merely gone to improving the balance sheets of banks. Bankers’ greed and arrogance led to a huge numbers of costly bad loans, and even the happy face audits regulators like to apply when so many banks are in this fix could not prevent them coming in with insolvency ratings. So this newly created money simply replaces the vanished old money represented by assets no longer worth what they seemed to be worth when the bad loans were made. It never leaves the banks.

This still leaves a lot of money, however, that could be used for new loans to consumers and struggling businesses, bailing them out in the process, and actually giving a huge boost to the overall economy. However…

So many consumers have become bad credits (to use banking lingo) that born-again prudent bankers and their regulatory keepers won’t permit such lending.
Instead, money available for lending after making depleted bank books look healthier is given as loans to rich individuals and to large corporations with still good credit ratings.

The top one percenters who get these loans pay off old debts with higher interest rates and have enough left over to invest heavily in hedge funds that prey on weak economies and vulture funds that gobble up tottering enterprises.

Large corporations, meanwhile, get their own new loans at exceptionally low rates because the money banks get from governments is practically free so the loans actually made by banks have very low rates. These companies then use this money to purchase labor-saving technology and reduce their outstanding corporate debt, making their own books healthier and their earnings stronger without the need to hire workers or increase sales in a market where consumers are so strapped.

Since all of this is so obvious to anyone, even bankers, whose head isn’t buried in Atlas Shrugged, why do governments continue to make “saving the banks” their primary priority, even though it clearly generates so few benefits for the overall economy? The answer is equally obvious. Governments now exist primarily to service the interests of banks, bankers, corporate CEOs, and the upper one percent generally.

Banks and bankers get richer from this policy. Corporations get more profitable without having to resort to new hiring, boosting the take of their top managers. Wall Streeters get richer from markets that spew profits from strong bank and Fortune 500 company earnings. The top one percent who make most of their own money these days from low taxed capital gains, realize a lot of such gains from investments in banks and fortune 500 shares, or from hedge funds that make bets on sovereign debt, derivative sputters, and cheap takeovers of parts of the economy their other activities make vulnerable.

A major factor motivating the central banks that play at this game is that they can pump trillions into an endlessly leaking banking hose that waters only the few without causing a dreaded inflation, since these infusions never reach Main Street where increased purchasing power would cause rapid price hikes (inflation). Pols of all parties who happily collude with central bankers here are gifted with campaign lolly from the top one percenters that permits these pols to advertise their love of the people during periodic elections whose outcome never any longer seem to change the game in meaningful ways.

Paul Volcker famously said that he no longer understands capital markets. Poor man. Of course he doesn’t understand them any longer. His thinking is hopelessly anchored in a fast disappearing world in which capital markets serviced the larger economy, rather than the larger economy and its government wings existing to service capital markets and their own constituents.

OK. Let’s say this analysis is accurate. And we stop “saving the banks.” What happens then?

I don’t know. But I do know what will happen if this save-the-bank policy continues. The very rich will get very richer. The rest of us will slip further and further into the tank. Democracy as we have known it will become little more than a theory. And the new normal will be an endless drag-ass depression.

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Copyright 2012 The Moderate Voice
  • slamfu

    That all sounds about right. Once again we have let the banks do as they pleased and once again the national and world economies teeter on the brink of ruin because of their greed and short sightedness. The idea that these institutions should have ever been deregulated was sheer folly, and major steps need to be taken now to prevent basically what we had to do in the 1930’s. Which is retool the whole system, and that will be even more painful.

    Sadly, neither candidate seems to be interested in doing this. Nor are there even any major voices in either party that seem to be serious about this. We are screwed.

  • RP

    Slamfu,,Agree completely. I think a couple things the US could do to bring back some logic in banking is the return of Glass Seagall prohibiting banks from combined investment brokerage activities and possibly to bring back the pre 90’s regulations where banks were state wide and not regional or national.

    Why these two things were undone in the 90’s is hard to understand, but I guess Bush 41, Clinton and everyone in congress that voted to deregulate during this period did not look at history to see what could happen.

  • merkin

    The economy really only requires fairly boring, pedestrian, services from the financial sector. Money is created by the banks in the consumer debt credit cycle of making loans. The banks are part of the trusted third party that facilitate day to day market exchange. We need stock and commodities markets to raise capital and improve the liquidity while reducing the risks in lengthy production and growing cycles. We need some risk pooling to reduce the risk that a single actor would otherwise face. And we need these things at a low cost so that they don’t distort the operation of the market by placing too much of a burden on the operation of the market, substituting the judgement of the financiers for the judgement of the market.

    What we really don’t need are the games that the financial people love to play, the casino like zero sum gambling of disassociated derivatives, highly leveraged products and schemes, program trading, etc. And we certainly don’t need these things tied to our deposit insured retail banking.

    We need to separate, again, the vital but boring retail banking from the speculation of Wall Street. We can quite easily handle the bankruptcy of retail banking as we have for over eighty years with no need for too big to fail. In fact, the mechanics of retail banking are so simple that 95% of them can be handled by a well written computer program. A great deal of regulation could be avoided if we used the market and competition to control the banking industry by forming a true central bank that offered retail banking in counter cyclical competition to the private banks. Not to make a profit but to offer the central bank closer control, if the economy needs more liquidity the central bank could offer to write loans directly. Savings deposited with the central bank would be money taken out of the economy, money that disappears. A secondary market buying and selling loans could be used to guarantee that the central bank always loses money, doesn’t take profits from the private banks.

  • dduck

    Yes, Glass-Stegall. Oh, and FNMA and FDMC are the bastard children of Congress, let’s pour more than the 100+ billions we have already pumped into them while we criticize the European banks.

  • merkin

    slamfu said:

    Sadly, neither candidate seems to be interested in doing this. Nor are there even any major voices in either party that seem to be serious about this. We are screwed.

    We actually have been screwed for the last thirty years. We are just slowly starting to realize it. It is a start.

    Politics is such a close thing now that few politicians can afford to not at least listen to even the smallest groups.

  • Rcoutme

    Hold these thoughts; I need to go buy a pitch fork and some tar…

  • merkin

    dduck said:

    Oh, and FNMA and FDMC are the bastard children of Congress, let’s pour more than the 100+ billions we have already pumped into them while we criticize the European banks.

    The mistake with Fannie and Freddie was in privatizing them. The stockholders pressured the management into accepting huge bonuses by dipping into the sub-prime market to boost short term profits at the cost of long term risk and loses. It is simple, don’t privatize your mortgage secondary buyers.

  • dduck

    Point is, we are not such stewards of our own financial “banks”.

    BTW: Lehman may not have deserved to have been let to fail, but I hope it sent a message to the other banks to straighten up and fly right (just joking).

  • We used to fight against Communism. We were scared about the domino affect. We were warned about creeping socialism that would supposedly lead to us becoming a communist state. Then the fight against terrorism – our most recent fight.

    I won’t get into the merits of these fights. That’s not my point. My point is that no one warned us about “Creeping Bankism.”

    The more I hear about how we must save the banks here in the US and seemingly expect nothing back from them to help the rest of society. And then there’s Europe.

    The main bank there just bluntly told the members of the European Union that they had to give over some sovereignty to the bank if they want any money.

    Just who are these bozos was my reaction. But we’ve gotten ourselves – unnecessarily in my view – into the state where we believe we have to kiss these guys toes and say thank you when they kick the world in the butt.

  • dduck

    I agree, KW, they are a bunch of creeps.

  • merkin

    dduck said:

    BTW: Lehman may not have deserved to have been let to fail, but I hope it sent a message to the other banks to straighten up and fly right (just joking).

    Actually, the Lehman Brothers bankruptcy did send a message to other banks. Lehman Brothers didn’t really do much lobbying or much legal bribery, aka campaign contributions, and the feeling is that this lead to them being selected to fail. It is a lesson that was not lost on the other banks.

  • Rcoutme

    D’oh! Forgot the feathers…I’ll be back in a jiffy!

  • LoR. Caarl Robinson

    Lest it get lost on the commentary, let’s not forget that the bailing out of the Euro is being underwritten by the American taxpay via our own Fed’s subversive bankrolling of their sovereign obligations and banks – making the TARP bailout look like a child playing in a mud puddle compared to this insidious selling off of America and its economy to fat cat Fed stockholder banks.

    “Creeping Bankism” hell, it’s more about Corporate Facism, done in the name of ‘free market economics,’ than anything else, and privately owned Federal Reserve is the ultimate recipient of ‘no risk, all profits,’ the antithesis of free market economics.

    All of this rooted in our own Fed’s shenanigans who sit atop the pyramid of global economics – at the taxpayer’s expense. Who do you think allowed all of this and has been the driving force behind the ‘Currency Wars’ that is tearing the global economy apart and putting America’s own economic stability at risk, neocon agendas not withstanding?

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