And, to follow up on the title of this post, why does government abet the banks bad behavior?
It is, IMHO, a crucial piece of the understanding the politics-today puzzle.
A senator recently said of the Wall St. banks, "they own the place." He was speaking of Congress. Congress, we know by now, is bought and sold by special interests. Banks, who lobby hard, are second only to the health care industry as lobbyists who bring buckets full of money to the whores who we elect to make our laws.
But if they're number two, how are they so much powerful than any other lobby?
Because they make money.
No, I don't mean they EARN money, they literally MAKE it. Banks literally conjure the money we use into existence out of thin air. Or, to be more accurate, out of YOUR commitment to pay back a loan.
Banks create money from your debt.
Let's say that you want to buy a house. You could save up say, $300,000, and purchase the house outright. For most of us, that means we would buy our first houses when we were around 75 years old. So instead, we go to a bank to borrow the money for the house. The bank does some due diligence, like checking our credit, and agrees to loan us the money for the house.
Now, does the banker shake our hand and go to the vault, and pull out $300,000 in bills and but it in a sack with dollar signs printed on the sides? No!
Does he issue us a check? No, not any more. He simply types some numbers into his/her computer and the 300 grand goes to the home-seller's bank. Now, here's a key part of this puzzle - does the banker even have $300,000 in his vault? NO! When he typed in his computer, he created that $300,000, simply by you agreeing to pay it back over time.
But wait, you say...the US Mint prints all that money. Surely this is the actual money that backs up all of those loans? Nope, those fives, tens and twenties are merely symbols, physical representations of this debt. There is no pile of gold, or silver, or jewels or pearls in any vault that represents the value of all the debt, or even of all of the added up coins and bills produced by the US Mint.
Am I simplifying this? Hell yes, I'm not an economist. But I think that this points to why banks are so effective at holding our government hostage, while robbing us with impunity.
And, I also am not saying that this alchemist system of finance is all bad. Without this system, I would have not owned the several lovely homes I have lived in, and still live in. I'm not with Ron Paul and his desire to return to the gold standard. I believe that the ability to issue credit is important. It is just that we need to regulate, and regulate hard upon those who have the ability to create debt. Creating money at will is a tremendous power - and power corrupts. And when power corrupts the government, we get screwed.
Such as, when the Fed issues TRILLIONS of dollars at near zero interest to the banks, they are simply allowing the banks to issue trillions in new debt to consumers, and take a profit at the margins (interest). One thing they have done is to loan the money right back to the government by purchasing bonds. Once they do that, WE THE TAXPAYER now owe the banks the same money that we "lent" them (although we really just gave them permission to issue the debt - they just turned around and stuck us with some of it - thanks big banks!). I'm not sure this makes sense - for the banks to be able to conjure into existence money that I suddenly owe them via the government.
Another problem with banks is leverage. That is, just how much money should banks be able to create through the magic of debt? We saw in 2008 that the banks created too much debt, and when houses went under water (an estimated one third of ALL US homes are "under water," that is, worth less on the current market than what is owed on them), the debt exceeded the value of the actual property. Further, the banks created yet more debt (and collected fees and bonuses) by packaging the initial debt, and selling it as an investment. When the market fell, these financial instruments, essentially bets on the debt (the "bets," of course, also debt), also fell. Bad debt on top of bad debt. The banks did not have the paper markers, the tens and twenties, on hand to cover all of the debt they had issued. Essentially, the banks are broke. This is why the renowned economist Bill Maher (snark!) calls them "zombie banks."
They are zombies because in late 2007, they were dead. All except maybe JP Morgan would not have been able to cover the debt they had issued. Not even close. They were over-leveraged. That means, they had not loaned out twice the money in their vaults, not three times, not ten times! In some cases the large banks had loaned out 30, and even 60 times what they had on hand. If you are leveraged at sixty to one, only a few percent of creditors need to ask for their money at the same time to break the bank.
Since the killing of meaningful banking regulation in 1999 and 2000 (thanks President Clinton!), the banks way over-leveraged themselves, AND grew bigger and bigger. Banking represents a huge portion of our national financial holdings (albeit "holdings" that are conjured out of consumer debt). If the banks had failed, as some conservatives suggested they should have, the 2008 crash would have been devastating - way more than it was. That's why we bailed them out. That's why we loan them money at almost 0% interest. WE the People are the hedge, the finger in the financial dike. We have raised the banks from the dead.
Now, as zombies are in the movies, bank executives stagger through the world gobbling up debt. Since they know that we HAVE to backstop them, they show no restraint. They speculate in markets all over the world. They have added almost 60 cents to the price of every gallon of gas. They have doubled, and in some countries even tripled the price of food, with no regard to the malnutrition and starvation that result. They bribe politicians, and in the case of Greece, have brought financial ruin to entire nations. They show all the care, caution and compassion of the living dead in a brain-eating frenzy.
And how are they robbing us? Well, besides creating debt with our treasury, and then charging us interest on that debt, they also committed massive fraud with mortgages. When they gave out mortgages that they shouldn't have, they took fees and then sold that mortgage to investors who were also defrauded, and many of them were institutional investors. If you have a mutual fund, pension or 401K, you have almost certainly been robbed by this fraud. If you were a mortgage holder (like I am), and suffered from this fraud-created housing bubble, you have lost equity. Now, markets go up and down, but some of the lost equity is a result of this massive fraud that inflated the market. I lost about $100,000 in this way. And how many of these criminals who, again, committed FRAUD on a massive scale have been brought to justice. One. And the statute of limitations is almost up. It has already passed on everything before 2007. And what about the justice department? What about the President and his historic financial reform?
The "historic" financial reform brought to you by President Obama and congressional Dems was a joke. Banks are still largely unregulated. I don't mean to say that there are no rules, just that the rules don't come close to restraining the brain-hunger like lust that these zombie bankers have for creating money out of debt - and taking fees and bonuses on the margins. Our own politicians are bribed legally and in the open, not like in Greece. They simply contribute to candidates themselves, or to PACs (or super PACs). Then, after a well-paid career in government, these politicians and their staffers go on to lavishly paid stints at the same banks. Or, more often, as fee-based consultants to the banks.
But, you say, ALL industry groups engage in this type of bribery! And you are right. The banks have an extra hold on our government. The real Sword of Damocles that the banks wield is the true nature of how dead they are. Through corruption (and honestly, some good intent by our leaders to offer homes to the average American, and of late, to keep America from financial Armageddon), we have become the creditor of last resort. The zombies know that we will bail them out again, so they continue to take risk. I think that our government leaders are terrified of the bankers opening the vaults, and showing the public a bunch of moths and cobwebs. This would bring about a financial collapse, and end all of their political careers. The zombies tell our leaders: "cross us, and we will fuck you. Now here's some money, go do what we say!" It's like a scene out of a gangster movie, only with zombies.
It is also unsustainable. Goldman Sachs has a hand in 40 TRILLION dollars worth of derivative bets currently. 40 TRILLION! And they are only one of the large banks. (BTW - for comparison's sake, the GDP of the US last year was 16 trillion). Were the treasury to print 40 trillion dollars to actually cover Goldman's bets, our money would be worthless, not that we could actually PRINT that much money anyway. And there is no "if" involved, only "when." The system is too badly corrupted to last. When it crashes again, we won't have the ability to create enough debt to get out of it.
Without courage in our political leadership, the arbitrary symbols of debt our nation uses will become worthless. Nobody will let us trade real stuff that we need for our debt. Regulation of the banking system is desperately needed. Leverage must be brought down to reasonable levels. There's a fair argument to be had on leverage - should it be five to one, ten to one? But it sure as shit should not be 30 or 60 to one. And much stronger regulation of the derivatives markets are needed immediately. Look, in the previous example, Goldman's 40 trillion in derivatives bets, they aren't going to lose all of it in a day, or even a month (we hope!). And they say that much of it is their client's debt, and that they are on both sides of these bets. Hooray, they are such smart zombies. But if their calculations go wrong, even slightly, on 40 TRILLION dollars, then they're fucked. A fraction of a percent of 40 trillion is in the hundreds of billions. Can the zombie bankers come up with hundreds of billions at the end of a day of trading? I doubt it. Then, not only are they fucked, but so are we, and fucked hard.
So why do bankers behave so badly? Because they are zombies, of course. They have risen from the dead with the power they've always had, go create money through debt alchemy, and the recently consolidated power to bend governments to their will by bribery and intimidation.
How do we stop them? Like in the zombie movies, with a (FIGURATIVE) head-shot. We need a president who will use the justice department and the bully pulpit to defend the financial interests of the American people. It is unfortunate that we don't have that president. If we did, he'd order the Attorney General to perp-walk the bank executives who engaged in mortgage fraud, and investor fraud leading up to the mortgage crisis, and then prosecute them. He'd do it before the statute of limitations runs out. He'd order the SEC to enforce regulations agressively, and then press Congress for sensible caps on leverage. By the way, he'd do this while running against mister Wall Street Mitt Romney, and the people would love him for it.
Again, it is unfortunate that we don't have that president.
