Imagine if you fancied the roulette tables in Macau, but had a nasty habit of losing US$10,000 every time you landed there. Most sane people would get some kind of psychiatric treatment that prevented them from ever getting to Macau under those circumstances. Supposing though that a rich uncle compensated you for all your losses in Macau and also paid for your travel and hotel stay. Are you likely to return to Macau after losing a whopper this week, or not?
Sitting back and absorbing the sheer scale of fraud that was perpetuated on the global financial system last week in the name of a putative rescue of Bear Stearns, I wrote “When trust goes down the drain“, which laid out the sound principles of central banking as enunciated by Walter Bagehot that have been serially violated in this crisis. Even as most left-leaning commentators brush off the concerns of the so-called “moral hazard” crowd of which this author is a card-carrying member, the fact of the matter is that we are now in the middle of a transformation.
Ruminating a bit more in the morass though, especially after the eager buyer upped his price fivefold this week, it became apparent that the Ben Bernanke Fed has merely emulated its alleged bete noire, namely the Bank of Japan, whose failed policies in the 1990s caused a lost decade of growth for the country and more importantly ensured that its demographic nightmare simply accelerated.
So “kudos” indeed to the Fed for achieving in a couple of months what the Soviet Union could not muster in its seven decades of existence – namely to destroy global market capitalism, chiefly through the demise of the Anglo-Saxon system.
In rescuing Bear Stearns, the Fed was in good company, following the Bank of England and the European Central Bank (ECB) in bailing out large financial institution using taxpayers’ money that they strictly did not have to account for to anyone. Yes, the details are somewhat different, namely that shareholders got different outcomes in each case and the level of oversight responsibility was different, but the inescapable conclusion from all this is that Group of Seven (G7)central bankers are utterly corrupt besides being terrifyingly incompetent.
As I wrote in a previous article (“Euro-trash, Asia Times Online, March 11, 2008), the ECB sowed the seeds for its own policy inflexibility by blithely rescuing every bank that came begging on its knees. The fractured nature of the European economy, its lack of service and system integration and mind-numbing political details all allowed the mandarins of the ECB to quietly pass favors to their constituent banks.
While on the above-referenced article, a reader wrote in to complain that I had merely misunderstood the superiority of Europe, and invited me to Sweden, which is apparently the Mecca of something called market socialism. As it turns out, the region boasts the worst record of banking losses and subsequent taxpayer rescues, with an average of 18% of gross domestic product following the 1991-92 bust.
Since the government provided assistance without taking over equity capital, tax burdens needed to be higher for longer for these countries to pay for the mess. Thus, people’s natural tendency to grow and become richer was sacrificed at the altar of this demon called market socialism. The net result is that Scandinavia boasts the highest incidence of suicides in the Western world – yes, I am sure to tell the Asia Times Online reader to expect me to begin living in this paradise soon enough.
To think that the original models for the Fed actions from the middle of last year were set in the Scandinavian and Japanese crises of the last decade only makes us more puzzled, rather than less. The aftermath of those crises was to stunt the economic growth of both regions (Scandinavia and Japan) once specific extraneous influences are removed from the picture – for example, the rise in oil prices that benefited Norway and the technology bubble that helped a part of the Japanese economy in the 1990s.
The Japanese merged a bunch of banks together but refused to take the necessary steps that could have made the combined banks more efficient in terms of utilizing scarce resources such as capital and good people. Scandinavian banks attempted to split the “good” and “bad” banks, but eventually put everything back together without any serious change in industrial structure.
Meanwhile, to absorb the costs of the rescues, the governments had to issue billions in new debt, which had to be bought by the rescued banks at artificially low yields because the governments would have themselves been bankrupted by higher charges.
As the system’s decline was arrested with the strong government backing, banks found themselves in new problem areas – namely that they did not know what to do with the billions in deposits that were sitting in their books. In the case of Japan, this proved to be the main reason for a slew of misadventures ranging from copper trading to the current bout of CDO (collateralized debt obligations) investment losses.
For all the protests of the Fed and its lackeys on what was done last week, it seems unavoidable that banks will not emerge as protected species, a super-caste of companies, in the new economic environment. The Fed, along with other G7 central banks, has clearly demonstrated that it will not allow any financial company to go bust.
Having rescued a financial institution that was not even under its regulatory purview, it seems only a matter of time before global central banks start rescuing other frontiers of capitalism, namely finance companies, insurance firms and investment management outfits. Thus, everything in the financial world becomes superior to all else in the system, for the sake of national cohesion or any other communist-era slogan that you care to mumble.
The banks are in turn likely to take more risk with their capital going forward, not less, now that they know that the central banks can be counted on to write them checks in perpetuity. Indeed, as Bear was merged into a commercial bank, it stands to reason that the biggest risk-takers will feel emboldened to trade their way out of billions in losses by putting on exotic bets. Like the gambler in the first paragraph, today’s banks know that central banks are too afraid to call their bluff.
This super-caste of bankers get to lord it over the rest of Western capitalism for the foreseeable future. Companies will have to accept higher borrowing costs, individuals will see their credit cards shredded, all in order for society to continue paying for the sins of bankers.
In ancient India, a bunch of people pulled off very nearly the same trick. While the Brahmins of today’s India face wrenching socio-political changes that have helped to turn the clock back on their dominance and allowed greater opportunities to emerge for other groups, the very opposite event has taken place in G7 countries over the course of the past 12 months. Welcome then to the new caste system that appears set to take over the global economy, led by its new Brahmins – namely the bankers.