In part one of this series I suggested that the simple reason we were bailing out the banks and simultaneously cutting public spending was because,
If the banks were to be wound up it is their [the wealthiest 10%'s] credit/debt backed ‘money and the assets held in it, which would burn to ash….So the simple reason our rulers insist on bailing out the banks is that by doing so the wealthy and the powerful are simply bailing out themselves and guaranteeing the continuation of a system which suits them perfectly.
In part two I argued that while the simple selfishness answer is true there are also theoretical justifications (albeit flawed ones) for the bail and cut policy.
The two aspects of their policy ‘bail and cut’, they will insist are not contradictory at all. Simply put, they will say they are loosening or increasing the money supply (QE) in order to invest in growth (classic Keynesian) while simultaneously cutting those expenditures which they feel do not generate growth and which are in fact ‘drains’ on productivity – in their view any ‘public’ expenditure (Classic Free-market). Growth, for them, equals the free-market/private sector, while drains on growth equal government, public spending….Basically – Private Debt good, Public Debt bad.
I argued that one of the legion problems with this world view is the fact that whatever the ideology says should happen, the reality is that giving money to the banks for them to invest has simply not worked. It was never going to work because it is founded on a misapprehension about the nature and business of modern banks. Namely – that they invest for growth. They do not – certainly not in the broader economy during a recession. Banks used to ‘invest’. Today they much prefer to speculate. Investing is long and slow and does not make big bonuses. Speculating on food prices, currency fluctuations and sovereign debt, lending for leveraged, debt ladened buy-outs - now these things can all provide the quick returns and big bonuses which old fashioned investment does not.
The idea that ‘we are all in this together’ coupled with the other idea that the banks are there to help – or are ‘there for the journey’ as a UK bank advert claims, is wishful thinking at best. These notions may make snappy sound bites but that is all they make. Banks are not there to help. They are NOT a service industry. Banks exist to make a profit as fast and as often as possible for those who own them and large bonuses for those who run them. Which is fine. They are a business. As long as we remember that and treat them accordingly I have no problem. I have a massive problem when, in the good times, the banks insist on being recognized as a business in the free market, to be treated with a laissez faire, light touch. But then in bad times insist even more fervently that they are not just a business to be allowed to live and die by the rules of the market like any other business, but claim instead to be an essential, – no, THE essential public service which must be protected above all else. So essential, in fact, that all ‘other’ public services must be cut in in order to better save the banks.
Let’s be clear the banks are not a public service. Banking – rather than the banks – could be a public service, but it is not run as such today. The banks are run as ruthless businesses. They exist according to an almost entirely selfish philosophy which extends from how they imagine human nature to be – no one, they think, would even turn up for work let alone do a good job unless rewarded more than anyone else – to justifying any and all fraud on the basis that if it makes a profit then who could blame you for trying. Be that as it may…
In part three I suggested that the official policy with its armature of ideological justifications and soundbite explanations was today’s Big Lie and looked at how and why Big Lies work.
In this last part, having looked at the origin and ideological justifications for the ‘bail the banks and cut everything else’ policy, I want to look at where the policy goes now. Because I believe the policies of the last four years have brought us to a critical and unstable juncture.
From crisis to opportunity - The top of the hill
For the last four years our Dear Leaders, political and financial, have been labouring to push everything back up the hill from which it slipped. As they have neared the top, however, I think they have come to see that the policies they have forced upon us can do much more for them than simply restore what they had before. Why stop there, they now wonder? The top of a hill is a place of fantastic opportunity. l think our leaders have come to see that shoved hard in the ‘right’ direction they could propell our societies in almost any direction they desired.
But this state of potential is also perilous. The top of a hill is the place and the moment when the forces are all finely balanced and almost any ‘unauthorized’ push could send the system off in a direction the Dear Leaders would not like. Victory for the powerful and wealthy seems so close at hand and yet the crisis, far from being over, is also at its most critical juncture. So many possibilities exist together, like overlaid quantum states, in this one moment.
Just as our rulers prepare for one last push, to enforce one more round of austerity and bank bail outs upon us, to propel us more firmly to their desired future, they find there is a building and spreading opposition to everything they are doing. I believe we are at, or very near, that place of maximum potential and maximum uncertainty where things could tumble down any number of quite different paths. Irreversible victory is within our leader’s reach. Yet at the same time they are only a stumble, a determined opposing push away, from irrevocable disaster.
This place we are almost in, echoes with triumphant proclamations of imminent success while also being full of suspicion, fear and coercion. It is a moment that speaks of victory and a better future while feeling like the cusp of repression and paranoia, where free speech becomes seen as subversion and disagreement as dangerous dissent. This is the fascination of the non-linear moment when the pencil that writes our history is balanced on its end.
Fire sales and fire storms
When a business is so short of operating cash that it must sell assets in order to raise cash just to stay alive, and buyers know it, then the buyers hold all the power and prices tend to plummet. This is called a fire sale. On the high-street we would call it a ‘Closing-Down’ or ‘Everything Must Go’ sale. It is a perfectly normal part of the workings of the ‘free-market which the banks profess to be so keen on. Keen when it doesn’t apply to them, that is.
One of the many things hanging in the balance right now, I think, is who is going to be forced to sell their assets in a fire sale – the banks or us? No prizes for guessing the bankers preference. More revealing is to ask yourself who our current political leaders think should have them.
During the first two years of the bank debt crisis it was the constant worry of the banks and our Dear Leaders that without large and on-going injections of public cash, the banks would become so short of operating cash, or assets they could use as collateral for loans, that it would be the banks who would be forced to sell their assets in fire sales, which would burn the banks. And as I discussed in part one whose wealth do you think would turn to dust with them? As this 2012 paper from the BIS (Bank for International Settlements the central bank’s central bank) notes,
At their peak, bank funding strains exacerbated fears of forced asset sales, … fears that funding strains and other pressures on European banks to deleverage could lead to forced asset sales,….
These fears were at crisis level globally in 09 and became a crisis again in Europe throughout ’11 and ’12. Each moment of renewed crisis resulted in our leaders releasing a flood of bail out money for the banks, so they did not have to sell their assets at any price, let alone at fire sale prices. On top of which the banks lobbied hard for and got two other measures both of which ‘protected’ the banks and the wealthy from having to sell anything at a price they did not like. Those measures were the suspension of mark to market accounting which they got in 2009 after some very heavy weight lobbying ( I wrote about it in Liar’s Lexicon – Mark to Market) and then being allowed to transfer all sorts of dodgy assets they had been holding in their Trading Books, where they have to be valued, to their Banking Books where they do not.
The amount of effort that has gone in to ‘protecting’ the banks from having to have fire-sales is a direct measure of the threat it posed and still posses to the banks and the wealthy. But that is only the first strand of the ‘bail and cut’ policy. While ‘bail’ is still very much on-going and about to be implemented again with another round of large bank bail outs, the second strand, ‘cutting’, is where we are now.
The official justification for cutting everything, as I argued in part two of this series, is that they are only cutting non-profit making, therefore non-essential things like welfare, and we should see the pain of those cuts as ‘our’ contribution, our part, of being ‘all in this together’.
It may be that this was indeed how they justified it in their own minds…at the start. But things have moved on. Today, the situation is that national central banks and behind them the Fed and ECB have made sure the banks have cash to operate. The ECB paper on bank funding again,
Euro area banks raised large amounts of funding via the ECB’s three-year LTROs [Euro area bank bail outs in 2012] , covering much of their potential funding needs from maturing bonds over the next few years. Across both operations, they bid for slightly more than €1 trillion. This was equivalent to around 80% of their 2012–14 debt redemption, more than covering their uncollateralised redemptions.
The bail out has bought time. Time for the next part of the evolving plan to take its effect.
It is now nations that are short of cash and finding it hard to borrow. And who is now clamouring for nations to reduce their debts by selling assets, even above investing for growth? The banks.
The banks who refused to have their assets sold at recessionary prices in a fire sale are delighted at the prospect – which they have helped bring to fruition – of arranging a fire sale for ours. The banks who did not want to see their assets valued in the teeth of a recession are happy to value ours. No mark to model for our assets. They will go to the lowest bidder.
And who do you think that bidder will be? Yes you got it. The same financial class who own the banks. The banks will bid and so will the leveraged buyout businesses the banks lend to. And what money will the bank use for this? Right again. The bail out money.
Those who keep assuring us that if we give the banks enough money they will start to invest in the real economy again are lying. The banks are not here to invest. They are here to predate, to scavenge. And our leaders have given them our money with which to do it.
This crisis has seen the paper wealth of the banks and the wealthiest 10% imperiled. The securities, derivatives and shares that make up so much of what the wealthy own, have all lost a great deal of their worth. That has left the banks with large holes in their balance sheets and for the wealthy, whose assets they hold, large losses if ever they were forced to admit them. Let’s not forget, when the banks are allowed to not mark to market it is not just the banks whose wealth is protected. The top 10% of all our nations also own huge swathes of this paper wealth. If the ‘assets’ – were marked to market or forced in to the market to be sold then those people, the people who own and run the banks, insurance companies, accountancy firms, law firms, media companies, the Senators and Members of Parliament, the Cabinet Ministers, lobbyists and experts would also see their ‘wealth’ go up in smoke.
But then along came the story which says nations are now in terrible debt and these debts are so large they cannot be carried, are in fact stifling growth (though how is never made clear) and must be paid down even if it means not only taxing the middle classes and cutting benefits to the poorer, but also also – sad though it makes us to tell you – also selling state assets.
Austerity is a wonderful thing if you want to force a fire sale. And not just any old fire sale either. It will be, if the banks and our leaders get their way, a fire-sale fire-storm.
A fire storm is created when a fire becomes so hot that it creates a self sustaining feedback loop of in-rushing air which super-charges the original fire causing it to suck in even more air and so on. They have been known where brush fires have spread in tinder dry forests and famously in the carpet bombing of the German cities of Dresden and Hamburg in WWII.
If the banks had been forced to sell their assets, as each bank brought its assets to market they would have exposed the worthlessness of similar assets at other banks and the fire would have spread. An empire of debt backed wealth, that had long since ceased to be worth more than the paper upon which it was written, would have been lost. This did not happen.
Instead we now have banks who have secret losses; Vaults full of paper wealth whose value is still eroding. The question for the banks and our leaders has always been, not how to rescue us, but how to replace all that lost value?
The answer to start with was just to buy time. Give the banks cash flow with bail outs. They thought that might be enough. But the rot was too deep. The paper assets could not be re-animated. Four years in, a new answer has emerged – an epic-fire storm fire-sale of public wealth and assets. Such a fire sale, if it can be made to sweep from nation to nation, will allow the banks to buy up assets, real ones, electricity grids, power stations, ports, water companies, telecoms companies, airports and roads. Things which produce real wealth not just paper valuations of derelict properties and derivative claims on other people’s debts. The ‘cut everything’ austerity part of the official plan allows the banks to move from simply staving off admitting their losses to replacing their losses with real wealth producing assets. If the austerity plan can be maintained long enough, the fire will become self sustaining.
The Greek people already rejected the terms of the Austerity programme being force upon them once. This week their rulers will try to vote it through anyway. The plan whose details you can read here is to sell off Greece’s main airports and ports, its Gas company, Nickle industry, Phone company and mobile phone company, its water companies, its power company, Post system and motorways, plus sundry state owned properties, land and investments.
If the Greek fire-sale goes ahead it will set a bench mark, a low one, and a pressure, for similar sales in Portugal, Italy and Spain. And it will not stop there. The fire will be spread, welcomed, enforced, in Britain and France and Belgium and Holland. Only Germany may escape. For a while.
A fire will have started and the banks will fan its flames. If the banks can force a fire sale they will have created a buying opportunity the likes of which only Russia has seen when it it was looted by the Oligarchs. And our banks and their owners will become the Oligarchs of the fading twilight of our democracy.
This is the bank’s chance to replace the shrinking value of their paper assets with new, ‘real’ assets that produce real wealth. With these assets they can rebuild their paper world of virtual assets and start their game over. All they need is for austerity to reach critical so that the fire storm takes hold.
Could they have acted differently?
I think they could. Still could. They could have put money in to the economy without using the banks. For example the UK has put up £1.4 trillion. There are about 70 million people in the UK. The government could have ‘given’ £20K to every person earmarked to pay off their debts, with any remaining to be used as the person saw fit. Or if you balk at funding for large families, and prefer something more modest how about £20K for each adult. My family would have got 40K. That would have paid off our mortgage. I would then have had more of my income to spend on other things. I would have bought double-glazing for my house. The result would have been the banks having 40K paid off most household’s mortgage debt. That is 40K going in to the banks. So the banks would have still got their pound of flesh. But this way round would also have help the ordinary citizen. I think it was Steven Keen who first suggested this idea and it could still be done.
How different such a scheme would be. Giving money to the banks to lend means if we borrow it we owe them. If the money was given to us and we deposited any of it in the banks, then they would owe us.
“Moral hazard!” I hear someone crying. Why should we bail out the feckless who got themselves in to debt? Yet our leaders are happy we should reward the reckless and feckless banks. Moreover we apparently do not worry about the moral hazard of making those who did not create this mess pay to clean it up. What about those of us who did not partake of the orgy of credit and debt? What about those who saved and now see those savings and pensions being eroded? Apparently the banks and our rulers are sensitive to the moral hazard of giving to us but not of taking.
Had we used stimulus money to pay off peoples’ debts, rather than the banks’ debts, that money would have still made its way to the banks. It would have shrunk their balance sheets, reduced their risk and made them safer – for us. They would not have had the chance to divert the money to use it for speculating on food and currencies. All good so far. It would have left ordinary people with fewer debts and with more money to spend. This would have helped industry and therefore employment.
….But it would have come from the bottom up. People, ordinary people, would have decided what to do with whatever part of their bail out they had left. That, to me, IS the market deciding. It is as Free Market as it comes. Financial decisions by the people for the people. Giving the money to the banks and asking them to lend to us, is letting them – just a few huge corporations and the handful of billionaires who own and run them – decide. That is NOT free market. It is banana republic cronyism.
In our present policy of bailing out the banks, they can then lend to us and we owe them interest. In the bottom up bail out we would be lending to the banks. Remember putting money in to the bank is lending it to them. They would therefore pay interest to us. Funny how the banks and the wealthy, rentier class who own them prefer the present arrangement where they get the money for cheap and IF they lend it to us, we owe them. In the other version, the heretical version, they would be paying us.
Wealth management and Povert management
The future our leaders see from the hill top is one where banks are there to manage the wealth of the wealthy and governments are there to manage the poverty of the rest. Wealth Investment and Austerity Enforcement – a perfect division of power. IF we let it happen.
The Moving Finger writes; and, having writ,
Moves on: nor all thy Piety nor Wit
Shall lure it back to cancel half a Line,
Nor all thy Tears wash out a Word of it.
From the Rubáiyát of Omar Khayyám