Why are we bailing out the banks? Part One. The Simple Answer.

We’ve all seen the film ‘Groundhog Day’. Well, we’re in it.  Every morning the radio plays a song which has the chorus, “I rob you babe”.  And sure enough when the news comes on, they have. A full five years of pumping money in to the banks and still our leaders will not even consider that they might be wrong. They still insist, as they have from the start, that “There is no alternative’. Call it bail outs, call it QE, call it monetary policy, rescue or suicide, it doesn’t matter. What matters is we’re still doing it.

When our leaders embarked on their policy of bailing out the banks’ private debts, even those of us like me, who believed our rulers were hideously wrong to do so, still harboured a hope that they were at least sincere; that they really were, as they claimed, trying to fix things for all of us. I find this impossible to believe now. If any of the bankers, their experts and our politicians ever were sincere when they claimed we would all be in this together, it now seems terribly clear that none of them has any intention of being with us in what is being forced upon us now.

Just this morning George Osborne and his lick spittle coalition partners have agreed to another £10 billion in cuts to welfare, health, education and the rest while saying that imposing any further taxes on the wealthier will have to wait. They promise to look at that …soon. Promise.

The problem with discussing why we are bailing out the banks is that in the 5 years since the bank debt implosion began, ‘saving’ the banks has now become enmeshed in – and in the headlines replaced by – what the banks and our rulers absolutely insist is an entirely separate ‘crisis’.  The financial world and their political friends in all parties have spent two years trying to brainwash us, that the problem is no longer the banks but is a ‘crisis’ of public, sovereign overspend and indebtedness. Putting money in to the banks is now seen as a technical matter rather than anything the public should concern itself about. Indeed there is a desire to return to the idea that the public must stop feeling they should be entitled to have a ‘concern’ about things too technical for them to comprehend ‘in the right way’. The ‘right way’ is to understand that the proper concern of the public should be cutting what the financial experts tell us is the terrible debt problem caused by too much public spending.

The ‘right way’ makes no further mention of public money still supporting the banks nor of the billions more being printed up right now so yet more public money can be lent to them. In fact the right way insists there is no connection between the huge sums nations have pumped in to the banks and the sudden ballooning of sovereign debt in those nations.  The ‘right way’  means refusing to see any connection whatever between policies of  cutting public spending in the real economy and a shrinking of that economy. No connection at all…obviously.  Any economic Phd can see that.

5 years on and more people are more confused than ever. People cannot understand how the same politicians can insist it is essential to keep ‘helping’ the banks with ever larger sums (trillion is the new billion) regardless of what debt it incurs, while with equal fervor insisting it is absolutely imperative that we cut spending on anything other than the banks – because we are in debt. And so with their certainties chained to our legs, we are sinking in to a mire of suffocating confusion, lies and fraud.

Sometimes in a world of increasing confusion it is good to ask simple questions. Why are we bailing out the banks?

In the Beginning.

We have been given various answers in the years since the ‘save the banks’ policy began in 2007. Yes, the first one was back then. From the beginning of  The Debt Generation,

On July 19, 2007 the Dow Jones average closed the day at its highest point ever.

Three weeks later, on August 9, the huge French Bank PNB Paribas suddenly closed three very large subprime US mortgage funds. The European Central Bank (ECB) was forced to pump €95bn into the market to steady nerves, but the shockwaves had already spread and it wasn’t enough. The next day central banks around the globe were drawn in. The ECB pumped in a further €156bn, the US Federal Reserve, more commonly known as the Fed, put in $43bn and the Bank of Japan a trillion yen – all to try to steady global markets.  Those markets held their breath.

Just think about those numbers.  A quarter of a trillion in Euro liquidity pumped in to the banks from the ECB alone – on day one. And ever since, the torrent of liquidity and ‘investment’ provided to the banks has not ceased. The promise was that this was a crisis of bank funding not bank solvency and therefore the solution was not to wind them down in an orderly fashion but to pump money in to them. This would, we were assured, stabilize the banks, allow them to start lending again, first to each other and then later to the rest of the real economy.

The result? Well, 5 years on and the banks are stabilized in the sense that they are still alive but not stabilized in any meaningful sense. They are only alive because they continue to rely on massive injections of cheap loans from the public purse, they still rely on  state guarantees/insurance for  vast amounts of their rotten and valueless assets/loans and would not survive a day without the continuation of the policy of nearly zero percent interest rates which gives the banks cheap loans from the Treasury but is killing savings and pensions. So by any measure at all the policy, followed for 5 years, has not done what it was claimed it would. It has not worked.

And yet our leaders refuse to change. 5 years on and instead of trying a different policy, the Fed is now looking at an open ended QE 3 in order to pump  yet more money in to the banks(read – canular now stitched to your bruised and bleeding vein), the ECB/EU is in the midst of widespread calls for LTRO3 (LTRO is euro speak for QE – cheap lending to the banks) to follow the trillion Euros worth of LTRO 1 and 2 already pumped in, the BoE is sticking at a mere £345 billion in bond buying and £1.4 trillion committed over all to the financial system (Gov.’s own figures) and finally The Bank of Japan just a week ago squeezed out another ¥10 Trillion. That brings Japan’s bank stimulus ‘policy’ to over ¥80 trillion which is about $1 trillion which is about a fifth of Japan’s GDP. And then just to round out the policy triumph, just a few days ago a Bank of Japan Board member, Mr Sato, was reported as saying, that because the global crisis is, quite inexplicably, still not fixed,

We [The Bank of Japan] won’t hesitate in taking additional monetary easing steps….

Which eerily echoes both Mr Draghi’s now infamous ‘Whatever it takes’ pronouncement from the ECB and the Fed saying it could ‘do more’ if necessary. More of what? The same? In 2008 sub-prime was contained, in 2009  the crisis would be over by Christmas. The actions taken were ‘emergency’ and ‘temporary’. Except that now, those temporary, ‘extraordinary government measures’ have been so ‘successful’ that now they have to be open ended. Does this sound like a disease responding to the appropriate treatment?

Whatever your view the fact remains that we are now in a world where we simultaneously have money being printed by all the central banks, so that it can be put in to the private banks, while also being told we must cut spending in the public sector in order to reduce ‘public’/state debts. 5 years on we have confusion being heaped upon failure. We are told the cuts are necessary because we must bring down sovereign debts, while also being told we must continue to bail out the banks even if doing so increases sovereign debt.

I am aware that MMT takes a radically different view of  sovereign debts and the mainstream’s insistant belief that nations must borrow to repay them. I will come to that later.

To most people, however, especially those facing the cuts, the seeming paradox of cutting spending to reduce debt while bailing out banks which increases it, seems to be a straightforward case of bail out the banks, AKA the wealthy who own them and work in them, while impoverishing the poor. Seen that way  the answer to why we are bailing out the banks is simple – we are bailing out the banks because it suits the wealthy. In which case something is very, very wrong, with our our political system as well as the economic theories that seeks to justify it. Is it right to see it that way? Is this why we are bailing out the banks?

Well I think there are good reasons for thinking this simple view is actually correct. Lets quote some well known figures and then look a little closer.

In the UK , according to the Office for National Statistics’s wealth survey, the top 10% own 46% of the total privately held wealth; £4.5 trillion out of the total of £10.3 Trillion. And they have actually increased their share and the rate at which they are aquiring it since the bank crisis began. In contrast the bottom 50% of GB households have only 10%  of the nation’s private wealth. In the US the disparity between rich and poor is even starker. In America the top single one percent own 35% of all the wealth. The top 5% own 63.5%. Of the rest, the vast majority of americans, 80% of them own just 12% of all of America’s wealth.

And it gets worse for Americans. A very good article in The National Journal points out that from the 90′s onwards,

“It wasn’t just that the top was doing better than the rest, but that the very top was    absorbing most of the economy’s growth. This was a more extreme and dynamic  kind of inequality than the country was accustomed to.

According to a recent Congressional Budget Office report, those in the top 1  percent of households doubled their share of pretax income from 1979 to 2007; the  bottom 80 percent saw their share fall. Worse, while the average income for the  top 1 percent more than tripled (after inflation), the bottom 80 percent saw only  feeble income growth, on the order of just 20 percent over nearly 30 years. The  rising tide was raising a few boats hugely and most other boats not very much.”

Land of the shat upon and home of the craven or blind.

These figures are for total wealth and income.If, however, we look at financial wealth the disparity grows even larger. These pie graphs are taken from an article by Prof. Domhoff of UC Santa Cruz.

Think of your own situation. How much of your wealth is held in the value of your house and how much in stocks and bonds? Almost all my wealth is contained in my  house.  The super rich, the top 1-10% hold much, much more of their wealth, vast bulk of it, in financial form. That huge increase  from the 90′s onwards was concentrated in financial wealth. That is the kind of wealth that made and still makes the super rich, super rich.

What these two graphs tell us is that if the big banks had been wound up 80% of Americans would have lost almost nothing. Whereas the top 5% would have lost the vast bulk of their wealth and therefore their power.

It will be countered that we would have all lost  from the decline in our pensions. True, there is no getting away from the above charts. The wealthy have most of the pensions. In fact they own most of the pension companies. That is what these charts say.

But wait, as the saying goes, there is more. In America there is about $1.6 trillion in printed dollars and deposits for which currency backing exists. That is state printed, state backed money. This is the stuff that you and I get paid in and have in our bank account.  However there is another $5.4 trillion in unbacked ‘money substitutes’ and somewhere around $53 Trillion in credit. For credit read debt backed assets and derivatives of all sorts. These are the forms of ‘money’, electronic, banking money in which the wealthy have most of their wealth. These are also what would be wiped out if the banks were not continually bailed out but were to be wound down instead.

This is what frightens them and what has dictated that the banks be bailed out. Unlike us in the 80%, the financial class hold most of their wealth in financial and ‘paper’ debt-backed form. If the present crop of huge banks were to be wound up, what would virtually disappear would be that thunder cloud of debt/credit-held, derivative wealth.

This is the size of that credit/debt and derivative cloud relative to the real economy. The black line is the total credit/debt and derivative cloud. The red line is GDP.

Your wealth is tied to your house and your job They are both part of GDP. But the total ‘wealth’ now based upon, I would say parasitic upon your house and in fact the entire real economy of stuff and jobs, is far greater than you will ever know. Your mortgage was securitized and sold to a bank somewhere that now owns the security on your house. But the bank long ago hypothecated that security to another bank as collateral for a loan. And that bank re-hypothecated it to another bank and so on 40 times over. Along the way other banks created derivatives  based on the security in which your mortgage was packaged and sold. The derivatives do not produce employment nor add to the world”s stock of food or shelter. They are a form of paper wealth much like a betting stub on a horse race is wealth. If a punter losses his betting stub it does nothing to the health of the horse. Our present policy is to starve the horse in order to protect the value of the betting stubs and the business and wealth of those who trade in those stubs.

If the phantom economy were to be wound up, there would still be factories, people to work in them and even people with dollars, euros and pounds to spend. Our nations would still have the means of producing goods and services. It has been argued that if the banks went down it would destroy our currencies. But is this threat real? I think it is not. In a world where credit backed assets are worthless, state printed money becomes more not less desirable. Just take a look at how the banks are desperate for nations to print more of their state backed money.

If the banks were to be wound up it is their credit/debt backed ‘money and the assets held in it, which would burn to ash. not our state backed currency.  The $53 trillion in credit/debt backed wealth would largely dissapear, not the 5 trillion in state backed money. The super rich would be the massively disproportionate losers.  This they would not and never will countenance. Instead they have engineered the saving of the form of ‘money’ in which their wealth is held and the institutions which control it, and done so at your expense rather than theirs.

So the simple reason our rulers insist on bailing out the banks is that by doing so the wealthy and the powerful are simply bailing out themselves and guaranteeing the continuation of a system which suits them perfectly.

So is that it? Just selfishness? Actually no. While I believe this simple reason is true , such naked selfishness could never have survived for 5 years were there not a covering of legitimating  theory to confuse critics and lull the unwary.  That is what we will look at in part 2.