“The damn bankers,” the lament goes. “We saved their collective ass and they won’t lend any money!”
Or, “I cannot believe it! We bail out the entire financial industry and they take the money and award themselves huge bonuses while the rest of us rot in recession.”
This kind of argument is worthy of the complete contempt Wall Street types have for it. First, if there was somebody out here to lend to who was credit worthy under the new economic conditions prevailing who would pay them enough to abandon the risk free carry trade in currency and bonds now working so well for them, the banks would loan them money. Second, it is the policy of the central banks around the world to keep limitless amounts of money and cheap credit available to the big money center banks and the big super regionals so liquidity is not a problem. Third, it is also the policy of the central banks to keep interest rates for these banks at close to zero — sometimes there are even effective negative interest rates — on the funds these big banks borrow from the central banks. Fourth, the governments themselves are issuing massive, unprecedented amounts of highly rated, risk free, general obligation bonds that the banks borrow with money on which they pay no interest.
The combination of all the above guarantees risk free profits in bond trading and currency trading. In such an environment, it is an irresponsible dereliction of fiduciary responsibility for the banks to do anything else.
Bernanke, Geithner, Paulson and all the rest may, and, indeed, seem to, understand everything there is to know about finance except one thing. Because they have never done anything but finance, they all believe finance is the beginning and the end of everything, the alpha and the omega, as the Bible says. They panicked, along with everybody else and formulated the bailout in the last months of the Bush administration when there was no one in charge of any domestic matter.
I don’t know, and no one can ever know, if what they formulated actually saved us from some far more dire economic fate. I don’t even know, nor does anyone else, if the formulary they devised will, in the long run, save the banks and the financial system. The formulary has a fatal flaw. It hinges entirely upon the government bonds being risk free and stable. That risklessness and stability is entirely dependent upon inflation remaining low. We don’t have to hit “hyperinflation” rates to blow the Paulson/Bernanke financial model all to hell. Just let inflation hit somewhere around ten percent and stay there for a while and the bond/currency shell game is dead.
We may not have to wait so very long before we know if my surmise is correct. Anybody who has gone to the grocery store on a regular basis over the past year knows the official government inflation figures are misleading, maybe just an outright lie. Prices are going up much faster than the government would have us believe.
This may not be an outright lie. Because the government includes the costs of some basic commodities and large durable goods in with the market basket of old, the inflation rates come off as stable. This apparent stability in the rates is because oil has fallen from a high of around $150 a barrel in the summer of 2008 to a range of $65 to $75 per barrel now. The collapse of the automobile market in late 2007 resulted in massive government subsidies and lower prices that offset market basket costs. Likewise, the collapse of the residential real estate market reduced the value of homes dramatically.
Meanwhile, like a bird dog in early fall, bankers have their noses in the wind. Unlike the bird dog, bankers don’t smell prey; I believe they smell real danger.
I hope I am wrong. I would like to believe my government when they tell me the recession is over. I would like to believe it when they tell me their programs are working and the residual pain I feel is nothing more than my being a little late to the party. I want to believe them when they tell me if I’ll just get dressed and come on, there will still be plenty of music and dancing left when I get there.
Unfortunately, I have recently lived through the Bush administration when the official policy was to lie about everything, even if the truth would do. I have now lived though a bit less than one year of the Obama administration and have seen, already, the virtual abandonment of any meaningful health care reform, because, among other things, the President doesn’t want to take on Joe Lieberman. We have seen him renege on virtually everything he said about the wars we are in, seen him endorse and expand the changes in Bush era extra-constitutional abuses, and his constant talking one way to the American people about domestic issues (“fat cat bankers,” health care, etc.) and another way to the power brokers in D.C.
All these things make me leery of government statistics that favor the government.
Now, what was that one thing that Paulson, Geithner and Bernanke do not understand about the financial industry? Simply this, finance is a service industry. Finance is not a basic industry. Finance is the storage of wealth, the movement of wealth, the management of wealth. Finance is not wealth. Finance does not create wealth. Oh, yes, finance can make bankers and financiers wealthy, if they play the game right. But, finance cannot create wealth for a nation or a people. Finance can only provide the people who actually do things that create wealth certain services to manage and safeguard any surplus wealth the creators of it manage to accumulate.
Never having been anything but money clerks, Paulson, Bernanke and Geithner simply do not comprehend that their program does nothing more than shuffle the proverbial chairs on the Titanic’s deck. I still do not believe this simple fact has sunk into the gold plated skulls of our national leaders. Everyday that goes by I become more convinced that they do not have any idea what is going on and they are constantly reading the equivalent of tea leaves in the bottom of the economic cup.
Again, I hope I am wrong about all this. I hope these men are the three wisest men since those who followed that star so many years ago. However, as much as I hope and pray I am wrong, I confess that if I had any money, I doubt I would bet on it. In this respect, at least, I am just like the Wall Street bankers. They don’t appear to be betting on it either.