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December 01, 2011

Another Day, Another Bank Bailout

The US Federal Reserve along with other central banks is making it easier – i.e. cheaper – for European banks to borrow US dollars. In other words we're giving the banks a gift of the half percent discount in interest rates the fed is financing. The action is cloaked in the usual rhetoric about encouraging banks to lend etc. etc.; but it has no purpose unless it's to make the banks stronger by letting them pocket the extra margin on loans made possible by giving them a break on their borrowing costs and deliberately ignoring the fact that they themselves are not credit-worthy since they hold scads of nearly worthless sovereign debt that isn't ever going to be repaid. As the Wall Street Journal, which apparently approves of this actions, says: "The coordinated action doesn't directly address Europe's government-debt and budget woes. Instead, it is aimed at alleviating the impact of those troubles on global markets." For "global markets", read "banks".

Don't worry though, we're not doing this generous deed for the sake of European money center banks; we're doing it to protect US banks. Again from the WSJ article: "Michael Feroli, an economist with J.P. Morgan, said Wall Street traders took the move as a sign that 'the Fed and central banks are there to support things' and that 'these guys have our back.' Yup. Make all the bad loans you want; pay your executives huge bonuses based on the short-term interest on loans whose principal we'll never be repaid; and we've "got your back." It's almost enough to make you camp out in Zuccotti Park – or, even better, watch who you vote for.

But, you ask, don't we want to "strengthen the banks". NO! We want to weaken and dismember any organization which is too big to fail. We want institutions which we can afford to let fail (given FDIC insurance) to compete for both our savings dollars and our banking business. We want institutions which can't afford to flood Washington and other world capitols with lobbyists and have to do business the old fashioned way on Main Street.

Governments and central banks share the blame for the predicament the "banking system" is in. In the US regulators as well as rating agencies let banks pretend that subprime mortgages were a rock-solid asset and that housing prices never could decline. For those who claim that the TARP money was paid back, consider that rescuing Fannie Mae and Freddie Mac has SO FAR cost us taxpayers $151 billion. This money goes to hold banks harmless from bad loans they made. If these had indeed been private insurers, they would've gone broke and the banks would be holding the bag. This is bank bailout money; it won't be repaid.

In Europe regulators doing stress tests on banks assumed that sovereign debt would be repaid even though they knew that the governments behind the debt were broke. The banks got to charge high interest rates on these loans to feckless governments because of risk which, according to the regulators, didn't exist. Good business if you can get it. Problem is that the banks aren't going to get repaid in full for loans to Greece and perhaps other countries. They don't really have the assets regulators encouraged them to report.

But regulators and central banks don't like to think of the plight of these poor bankers – especially because these very same regulators and central banks were complicit in creating the crisis of mis-priced assets and too-big-to-fail institutions. So we're back shoveling money into the bailout trough and being told that our future depends on more bank bailouts.

Which gets me back to voting.

According to an Economix blog on the New York Times site by former International Monetary Fund chief economist Simon Johnson:

"…More bailouts and the reinforcement of moral hazard — protecting bankers and other creditors against the downside of their mistakes — is the last thing that the world's financial system needs…

"Is there really no alternative to pouring good money after bad?

"In a policy statement released this week, Jon Huntsman, the former governor of Utah who is seeking the Republican presidential nomination, articulates a coherent alternative approach to the financial sector, which begins with a diagnosis of our current problem: too-big-to-fail banks:

" 'To protect taxpayers from future bailouts and stabilize America's economic foundation, Jon Huntsman will end too-big-to-fail. Today we can already begin to see the outlines of the next financial crisis and bailouts. More than three years after the crisis and the accompanying bailouts, the six largest U.S. financial institutions are significantly bigger than they were before the crisis, having been encouraged by regulators to snap up Bear Stearns and other competitors at bargain prices.'…

"The goal is simple, as Mr. Huntsman said in his recent Wall Street Journal opinion piece: make the banks small enough and simple enough to fail. 'Hedge funds and private equity funds go out of business all the time when they make big mistakes, to the notice of few, because they are not too big to fail,' he wrote. 'There is no reason why banks cannot live with the same reality.'"

I'm making a contribution to the Huntsman campaign. Ron Paul is for abolishing he Fed altogether; I'm not sure I'm there yet and I disagree too strongly with him on other issues to suppory him. Mitt Romney has says he thinks that TARP and the bailouts by the Feds were needed as does Herman Cain. Newt Gingrich did too much lobbying for Freddie Mac and ais been an unrepentant supporter of corny ethanol. And Barack Obama appointed Timothy "Tarp" Geithner as Treasury Secretary and reappointed "Bailout" Ben Bernanke as Fed Chairman.

Simon Johnson concludes his Economix piece:

"Only Theodore Roosevelt could take on the industrial and railroad monopolies in 1901, only Richard Nixon could go to China in 1972, and only Jon Huntsman seems prepared to face down the too-big-to-fail banks today."

Hope he's right that someone is prepared to do this. Hope we can elect politicians who will end the occupation of Wall Street by government-backed too-big-to-fail institutions.

Related posts:

"Too Big to Fail" Assures Bigness – and Failure

Preparing for the Next Banking Crisis

When Regulation Is Justified

The Occupiers and Tea Partiers Are Both Right

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