Banksters to Main Street: "I.B.G."

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machinehead's picture
machinehead
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Posts: 1077
Banksters to Main Street: "I.B.G."

Both Bloomberg and NYT are running articles about the dim chances of financial reform, such as procedures for closing "too big to fail" institutions. "Bailout first, reform later" is exactly analogous to the queen crying "verdict first, trial later" in Alice in Wonderland. Or "let horse escape, then close barn door," if you will. Beyond the dysfunctional political system on display, the issue lurks of a larger-scale replay. From the Times article:

Investors and economists who predicted ... the collapse last fall say the rescue has come at an extraordinary cost. They warn that if the industry’s systemic risks are not addressed, they could cause an even bigger crisis — in years, not decades. Next time, they say, the credit of the United States government may be at risk.

Simon Johnson, a professor at the Sloan School of Management at the Massachusetts Institute of Technology and former chief economist of the International Monetary Fund, said that the seeds of another collapse had already sprouted. If major banks are allowed to keep making bets that are ultimately backed by taxpayer guarantees, they will return to the practices that led them to underwrite trillions of dollars in bad loans, Professor Johnson said. “They will run up big risks, they will fail again, they will hit us for a big check,” he predicted.

Nassim Nicholas Taleb warns that the system has grown riskier since last fall. The extensive government support that began after Lehman collapsed will lead investors to assume that governments will always prevent major banks from collapsing, he said. So investors will lend money to the financial industry on easy terms. In turn, financial institutions will use that cheap money to make risky loans and trades. The banks will keep the profits when their bets pay off, while taxpayers will swallow the losses when the bets go bad and threaten the system.

Because the rewards are so rich, the banks will not change unless regulators and lawmakers force them, Mr. Taleb said. “I don’t know anyone on Wall Street who goes to work every day thinking of anything but how to increase their bonus,” he said.

Economists call the phenomenon moral hazard. Bankers have a different term: I.B.G. The phrase implies that by the time a deal goes sour, “I’ll be gone,” after having received a sizable bonus.

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"I.B.G.," huh? Or as the Terminator used to growl ... "Hasta la vista, baby!"

We have seen this movie before. Every time the Fed slashes short rates to 3% or less -- as in 1991, 2001, and again in 2008 -- investors deprived of adequate current income go to speculating to make up the difference.

Under our new government-sponsored cartelized banking structure, no one is going to speculate bigger than wounded insolvent dinosaurs such as Citibank and Bank of America. We've seen that movie, too -- the S&Ls in the 1980s. And in this decade, Congressionally-chartered Fannie and Freddie, who blew out all their capital and left a smoking black hole for the taxpayers to fill.

Karl Marx thought that 'capitalism' ultimately would sow the seeds of its own destruction. Of course, this is a mutant variety we groan under -- 'quasi-capitalism' at best. Marx only failed to foresee that banking would be the engine of destruction which took it down, by co-opting and corrupting government.

Taleb is absolutely right: this corrupt system is set up to fail again, on a larger scale. I have the next recession penciled in for 2013-2014. When it comes round, your wealth had better be in tangible form. Because the mountain of failed paper may overwhelm the U.S. Treasury as well. Guns, grub and gold, comrades! And save some rope for the banksters ...

DrKrbyLuv's picture
DrKrbyLuv
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Re: Banksters to Main Street: "I.B.G."

Machinehead wrote:

Karl Marx thought that 'capitalism' ultimately would sow the seeds of its own destruction. Of course, this is a mutant variety we groan under -- 'quasi-capitalism' at best. Marx only failed to foresee that banking would be the engine of destruction which took it down, by co-opting and corrupting government.

Hello machinehead.  I think you're right when you say we're practicing "quasi capitalism" at best.

I think that after we passed the federal reserve act, it was only a matter of time before government would yield to their growing power.  If the two greatest powers of a state are the power of the purse and the power of the sword.  In time, the power of the purse will rule over the power of the sword.

Larry

strabes's picture
strabes
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Re: Banksters to Main Street: "I.B.G."

Agreed it's quasi-capitalism at best.  But I think it's even more mutant than that.  It's financial monarchy...the Wall St / DC aristocracy which has nothing to do with "free" market.  

Machine, curious about your timing re 2013-14.  Where does that come from?  Any more thoughts or references on that?  Are you expecting credit inflation until then much like 2001-2007?  I don't see how the Fed's attempt to reinflate this time will work so I expect recession (actually beginning of depression) much sooner than 2013.  But I'm very interested in contrary opinion.

machinehead's picture
machinehead
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Posts: 1077
Re: Banksters to Main Street: "I.B.G."

strabes, the 2013-14 timing is very simplistic. It derives from only two inputs: (1) the typical 4 to 5-year business cycle; (2) the presidential election cycle, in which the last two years of the term (2011 and 2012) may feature politicized credit expansion.

It's not intended as a prediction, since business cycles vary a lot in length, and are nearly impossible to forecast years in advance. I simply use the 2013-2014 time slot for planning purposes.

For instance, those planning to "reach for yield" in junk bonds (which behave more like risky equities than fixed income) need to have an exit plan. If this recovery is real, junk bonds will do OK over the next 2-3 years. But if another unsound, credit-inflation-driven bubble builds up into 2012, junk bonds will be very much at risk when the next presidential term starts and it's time to pay the bills for the election campaign.

Cuz Jan. 2013 will feature what's become the standard speech of an incoming pretzeldent: "Folks, the situation is much worse than the previous administration led us to believe. The cupboard is empty, and we're flat broke. I'm sorry, but I can't give you the tax cut I promised. And everyone's going to have to pay more for the common good. WORK, comrades! Arbeit macht frei!"

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