Wednesday, October 15, 2008

Slavering at the Public Coffers

In the latest twist to the sordid saga of hat-in-hand bankers slavering at the public coffers, central banks in England, France and Germany, for starters, are now guaranteeing loans between banks. According to conventional economic wisdom - the very same ‘wisdom’ that got us into this mess, I might add – if banks can’t lend to each other, they won’t have the money to lend to Average Joe, or his corner candy store, so he and small business, will, in turn, suffer.

There’s good reason they won’t lend to each other; they’re deathly afraid of not getting paid back since they know how many of their compatriots are teetering at the brink of the chasm. If that’s the case, and we undoubtedly know it is, then the governments involved may be liable for immense losses. This also may encourage the banks - not noted for being prudent or responsible - to borrow recklessly, knowing Joe will foot the bill in case of default.

This all brings me back to the question: Then what the hell are they doing with my deposits? That isn’t money to lend? Well, best I can make of it, econ 101 style, is that to maximize profits money has to be constantly in use; no idle times are allowed. As a result, capital needs are calculated down to the minute, so they essentially need emergency loans the get through many a day. They may also have more business than they have capital for so borrow from other banks to maximize their portfolios.

So what if they can’t lend to each other. That will not have any impact on their solvency, only their profitability. They simply won’t have as much to lend and people will have to wait a bit or defer their borrowing. All of which brings this down to the second question: What’s the big deal if Joe has to save the money to buy that 60” digital TV? Or wait till he has a substantial down payment before he can buy a new car? Is that suffering? He’s already drowning in tidal waves of high interest, credit card debt. And it does, after all, cost a lot more when bought on credit.

As for small business, banks are not the only source of working capital. It would seem to me that anyone with a viable company ought to be able to get private short-term money to tide them over cash flow problems. If they have to cut back temporarily, well, nearly everybody will so no great hardship.

The endless growth machine is not going to be jump-started or even restarted and besides, it is long past time for a paradigm shift. The world is drowning in pollution from excessive consumption. It wouldn’t hurt a bit for Americans, for only one nation of many, to retrench and start saving for the things they want.

Ah but the frantic scrambling on the part of governments to bail the banks is also designed to “calm” and “provide stability” to the markets. Now that a majority of Americans, when Investment Retirement Accounts are included, own stocks, it becomes a government priority to prop up the stock markets.

But stock markets, however much we hope and pray and cross our fingers that they will always go up, are not supposed to be propped up. They are supposed to represent true value. In an overpriced market we should be applauding, and playing happy music when markets go down, not when they go up.

Latest word is the US treasury is going to take stakes in nine major US banks including the likes of Citibank and Bank of America. The list also includes Morgan Stanley, et al, latter day Mom and Pop banks which in their previous incarnation were investment banks designed exclusively to help the wealthy play with their money. Once they realized how bankrupt they were they begged the Fed to make them just like your average, corner, small town bank and thus be able to join the banker bread line when the public money started to flow.

It should be mentioned that banks were not allowed to cross state borders as late as the sixties. Moreover, banks in Manhattan were not even allowed in other parts of New York state. It was a mistake to let banks expand so exponentially and become so large. Local banks will survive this crisis in far better shape than their multinational counterparts. Maybe once those giant banks are nationalized they should be broken up into smaller units; in this case, able to serve the real needs of the economy rather than concentrate on lascivious speculation.

Once you go down the path of nationalizing banks you also own the bank’s bad debts. In this case, we could be talking about liabilities of catastrophic proportions. As mentioned previously, while the total housing market totals about 10 trillion dollars, the market in derivatives based on that market is 45 trillion dollars. Derivates have no direct connection to the real world they are based on, they are simply bets on what the real world will do. And housing is only a small part of the derivatives market.

Liabilities to the public could be nation bankrupting, as is happening in Iceland, whose banks brought in large amounts of money from around the world to bet on these toxic and inscrutable financial instruments.

There is one good that can come of public ownership of the banks: The public can dictate lending policy. If it deems low income housing important, it’ll get built. Today that money may well go to financing sweat shops in China.

The silver lining, however, will come at a very high price.

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