Thursday, February 05, 2009

Hoard cans?

Naked capitalism has an excellent post on the Obama bailout. The key understanding you should walk away from this article with is this quote from the recent IMF report into banking crises:

Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.

Look what the banks did after they got the first half of TARP, and in the UK when they were bailed out almost to the point of bankrupting the country: they started planning acquisitions and taking on more risk, which allowed them to pay themselves ever bigger bonuses. They just did business as usual.

But business as usual is what broke the financial system. What is almost incredible is that banks should never be unprofitable. They are able to create money! They are also able to borrow funds at extremely low interest rates and then lend it on at rates that can be as much as 15% higher. You'd think you can make good money on those terms. And banks did. But it wasn't enough. Here is one of the fundamental problems with capitalism: it is not geared to providing a service, creating goods or improving our lives; it's all about making profits. So in return for the easy money for their shareholders, while you'd think banks would accept that their role in our social structure demands prudence, they understood their role only to be to find creative ways to gamble.

But let me explain something about gambling, something I understand pretty well. It's usually zero sum. Someone gains and someone else loses. That someone should, of course, be the shareholders and the employees of the banks. This is how capitalism is supposed to work. You provide capital and you hope it is turned into huge profits. But your downside is losing your capital.

Not if you capitalised a bank.

The correct solution, imo, for the financial crisis would be to nationalise the banks, wiping out the shareholders, cramming down creditors where possible, wiping them out too if the banks are beyond rescue, sacking the management en masse and reconstituting the financial system within much more stringent regulatory limits. Banking should be boring and safe. No more helicopters and champagne.

It won't happen. The fear is that we will fall into a deflationary spiral that might tank our system altogether. Are we at "hoard cans" stage? I know it doesn't feel like it (the crisis seems to be happening to someone else while you still have a job and are actually better off because interest rates are so low), but we might be pretty close. Our governments have become hamstrung by factional interests, but my fear is that they actually cannot resolve the crisis at this point, and if they leave it much longer to change our financial system root and branch, we may be so far in the hole that even that will not help at all.


Meanwhile, the American "left" is chockers with idiots like this. Same old story. The right fucks the people, whether it's the far right in the Republicans, or the soft right in the Dems, and fellow travellers like this clown admonish the dirty fucking hippies for suggesting that maybe that just isn't working for most of us.

I'll tell you what's fucking "fail", Grand Moff BlueDog. Crippling your bill in the name of bipartisanship while you're aware that the other side is kicking you in the nuts, and believing that next time you need to stimulate the economy, they'll not kick you there even harder. Caving to the Republicans didn't make them more willing to share. It made them keener to fuck you harder. Parting your cheeks and yelling "yes please" are no road to salvation, son; rather, they're a motorway to you're fucked.


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