This post grew out of a reply to a question put to me by Jim in the comments section of the post befire thi one. The reply got too long and I thought might be of broader interest.See his comment for the reference to the article. But you don’t need to have read it to follow this post…..
I have long argued that this crisis is because the banks created their own unregulated debt-backed currency. And then debased it. In the terms of the article, that is, that the banks created Fractional IOU’s plus a promise to repay and then debased the promise.
Also in terms of the article, where the author says the danger is when the IOU’s from different banks become seen as interchangeable then the spread of these IOU’s being seen as money, takes off and becomes dangerous. This is PRECISELY what the ratings agencies and CDO insurance did. You take any old IOU from any old bank, buy insurance for it and get it rated by the ‘independent’ agencies as AAA. Suddenly its interchangeable with any other AAA security.
That is what happened. Then, again because of the insurence and AAA ratings, these fractional IOU’s were seen and used by the banks as well as everybody else as the same as money.
The situation we have now is one where there is a truely vast amount of Fractional bank-IOU’s based on debts, wrapped in largely worthless insurance, and labelled fraudulently as AAA at which ‘value’ it is still held by the banks in whose vaults it resides,
Those IOU’s CANNOT ever be redeemed for the face value for two reasons. First the underlying assets themselves are no longer worth anything like what was claimed for them at the time the paper was printed up. Second, because once we ascend to the level of derivatives based on the underlying securities and then synthetic derivative and CDS bets based on the performance of those securities – we are in to a realm of fractional banking where only a very small amount of redeemable value underlies the total pool of potential claimants and paper IOU’s.
This is a situation of total anihilation for the banks. The ONLY salvation for the banks is for National paper currency, so called ‘real money’ issuers – made real because taxation backs it up – for them to iussue new ‘real’ money – new promises to extract labour/tax from people – and GIVE this money to the banks for them to use in place of their own IOU’s which NO ONE including ALL THE BANKS THEMSELVES will accept as payment.
This is what the bail outs are and have been about. NOT about helping the broader economy nor helping people. There is only the vaguest hope/theoretical possiblity that saving the banks may then ‘help’ the broader economy. But only if the bail outs ever got to the situation where the banks were prioftable, this profitability had started a new wave of lending into the real economy and this in turn created jobs, buying and borrowing. ONLY at the end of this chain of ‘recoveries’ could any help be said to have come to ordinary people from the bail outs.
But before that ‘possible’ outcome, we WILL HAVE a vast amount of misery and deprivation coming to people from the bail-outs. In the form of cut-backs, job losses and higher taxation and spiralling national borrwoing costs.
We may well also see the back-fire of the attemtp to replace worhtless abnk IOU’s with new paper currency because the worthlessness of the IOU’s may simply overwhelm the ability of governemtn’s to print new tax-based promises. This would result in the destruction of the national currencies.
We are already on the road to this outcome. The governemtn’s know it. That is why we are, at the same time as printing, borrowing and giving to the banks, trying to ALSO cut back on printing by cutting expenditure everywhere else.
The cuts to public spending are the banks preferred alternative to de-leveraging themselves. Rather than the banks deleverage to reduce debt over money on the banks books. We are being forced to make the reduction of debt/money in the public sector. Thus we can say that every opund and euro cut from public expenditure is a DIRECT and NECESSARY consequences of the bankers refusing to cut that pound or Euro from their own detbts abd profits.
In short I believe those who claim the bail out is to help the economy and to help people are knowingly lying for their own profit.