Banker's Bailout

How do we fix the banks?  Set them free 

 I normally frown upon blog posts consisting of large chunks of direct quotes, but John Tamney has hit a home run.

Deregulation and free markets didn't wreck the world economy--Government protections did. Bad banksters and the governments who love them are the Bonnie and Clyde of global monetary scams.
 
Governments have shielded banking from market forces, and we're all now paying the price:  

it's apparent from the myriad bailouts of banks within it in modern times that, absent government protection, the financial world would look quite a bit different. Put simply, political unwillingness to apply market forces to the business of finance means that its long-term health and dynamism is in fact reduced.

Government intervention distorts markets and creates perverse incentives

The better, more realistic, explanation for the paralyzed credit situation in the aftermath of Lehman actually goes back to the spring of 2008. It was then that the Fed and Treasury, fearing "contagion" relating to Bear's demise, saved its creditors through a deal in which the Fed took Bear's debased assets on its balance sheet.

Then J.P. Morgan was offered the still-functioning bank on the relative cheap, its downside covered by the federal government. As Wallison put it, "I see the market meltdown that followed the Lehman bankruptcy as a result of the moral hazard created by the rescue of Bear Stearns six months before."

Your government took the toxic assets off of the banksters's accounts and put them on YOURS

Other accounts of the time in question support Wallison's view. The fact that the federal government subsidized J.P. Morgan's acquisition of Bear Stearns created an expectation among healthy financial institutions that they too should have their downside protected in snapping up insolvent firms. 

As Andrew Ross Sorkin put it in his 2009 book, Too Big To Fail, acquirers wanted "Jamie" (J.P. Morgan CEO Jamie Dimon) deals whereby the government would guarantee the most toxic assets of companies being purchased. Absent the subsidized buyout of Bear, there would have been no presumption of a government role as savior of any financial institutions, thus a more realistically priced market for banks in trouble.

What the episode teaches us is that while markets can ably prepare for and weather all manner of calamities, what they handle badly are opaque government policy stances whose changing nature causes information vacuums and panics like that of October 2008.

I'd love to see the US Government finally give free market capitalism a try... Source for all Quotes:  Global Economy Held Hostage by Lehman

Where did all the Money Go?

Everybody is broke, including whole countries. I heard somewhere that total global debt is over 100 trillion! Simply put, progressive government programs were built with borrowed money, and they are not self-sustaining, they are draining. China holds the mortgage note, and the progressive version of the American Dream has turned into a nightmare.

So, Where did all the Money Go?

In the throes of the 2008 crisis, the money didn’t disappear. President Bush explained that it was "stuck," and "clogging the system." Not the disaster he made it out to be, but not good either.

Finance and the banking system facilitates business transactions that power our economy. Think of the truck that regularly delivers goods to your grocery store. The store manager doesn’t stand on the loading dock and write a check in order to get the driver to unload. No, the driver unloads and presses on. Revolving credit accounts facilitate this and millions of other daily transactions. If the financial system locks up, so do these accounts, freezing economic activity.

Making a Bad Situation Worse

Tarp favored large institutions over smaller ones, and our banking system is in even worse shape because of it. Wall Street is gambling bigger than ever, and Uncle Sam is behind them with promises of credit if they shoot craps again, which they will indeed.

community banks have given way to big banks and excessive industry concentration; profits are increasingly driven by risky trading; leverage is taking precedence over prudent lending; compensation is out of control. This toxic combination leads to continued taxpayer risk and threatens long- term U.S. prosperity. (Bloomberg)

Still Too Big to Fail

Fortune Magazine explains that the Dodd-Frank Banking Scam made provisions for too big to fail institutions to have "living wills," which are agreements on how to break them up if another crisis happens.  This is folly:

These "wills," which banks are currently discussing informally with regulators, are a weak, pathetic substitute for what Washington should have really done: that is, break up "systemically important financial institutions" into much smaller pieces. Or segregate their federally-insured-deposit parts from risky things like creating and trading derivatives. (Fortune)

The Fortune writer has nailed it, but alas, it will never happen because it curtails the profits of the banking giants and politicians can't extract bribes from them with such a simple plan.

International Banking:  A Multi-Tentacled Monster

One ugly scene that some analysts are imagining involves a default by Greece leading to losses inflicted on banks in other European countries that own large amounts of Greek debt. [...]

Those losses could then cascade to the United States because the American and European banking systems are so interlocked, lending billions of dollars to each other every day.

American banks and insurance companies may also be liable for the biggest share of default insurance payments to European institutions if Greece or other countries fail. And the trillion-dollar money market fund industry could also suffer.

About 44.3 percent of money-market fund assets are European bank debt... (NY Times - Worries Grow)

The Gig is Up

The beast is strangling us, and we've done it to ourselves.  If our progressive governments had not gone into hock to the tune of tens of trillions, these international Snidely Whiplashes would not now be tweedling the ends of their pointy mustaches and threatening us with foreclosure.  Our politicians, paralyzed with fear and cowering like the trapped rats they are, don't know what to do other than borrow even more.

It has sent the message that we have hit the moment of demosclerosis. Washington is home to a vertiginous tangle of industry associations, activist groups, think tanks and communications shops. These forces have overwhelmed the government that was originally conceived by the founders. (David Brooks - Who is James Johnson)

The solution is clear but impossible:  Get out of debt and disentangle the federal government from its sweaty pornographic embrace with high finance and big business.  The federal government should not be Wall Street's drinking buddy.  It needs to be the cop with the nightstick who cracks the big banksters over the head when they reel out of the saloon drunk and begin marauding and threatening innocent citizens.

The answer to the question, of "Where did the money go?" 

The answer is that it never existed in the first place.  The money was conjured out of thin air.  That's what credit is, and it must be paid back.