Today we will learn further details of what could turn out to be the greatest act of grand larceny in history: the US treasury secretary, Henry Paulson’s, trillion dollar bailout of the US banks. Following last week’s crash, the US government has decided to use taxpayers money to buy up all the bad mortgage debts of the banks and investment houses and insurance companies and let them start again with a clean sheet. In other words, save them from the consequences of their own folly. Nothing similar is yet proposed here, but it will.
The Bad Bank bailout is a bad idea. If the bankers get away with this we really will be one step from serfdom. I’m someone who has always tended to the left of the political spectrum, but on this issue I side with the American conservatives, like Republican Congressman John Culberson, who are saying that this is socialism for the rich. That Congress has no right bailing out private investors with money pledged in advance from the children and grandchildren of American citizens.
Advocates of the Bad Bank fund cite the success of the Resolution Trust Corporation which sorted out the wreckage from the US savings and loans bust in 1989. But the RTC was very different from this Bad Bank. It collected and eventually sold off loans made by banks that had already gone bust; what is being proposed now is to buy loans BEFORE the lenders go under. In other words create an artificial market with artificial prices to perpetuate the bankers’ delusion that they are not actually bankrupt.
Still less is Paulson’s bail out any kind of legitimate descendant of the Reconstruction Finance Corporation set up by Roosevelt in 1933 to cope with the last comparable banking crisis during the Great Depression. The first thing FDR did was shut the banks down, throw out their managements and halt all dividend payments. He then reopened the banks under new management and under US Treasury supervision, giving federal loans to banks prepared to behave.
Couldn’t happen today? Well, why not? There were a lot more banks in the 1930s. Today the key ones are mostly concentrated in Wall Street within walking distance of each other. The Feds could move in tomorrow, lock up the CEOs and reconfigure the entire system. Enron executives were jailed for less egregious accounting practices than the banksters of Wall Street have been getting away with.
What FDR did not do is simply bail out the banks - use public money to save them from insolvency by buying their bad debts. Why should the taxpayer fund the salvation of Wall Street’s lame ducks? Many of these are bankrupt institutions which have lent themselves into insolvency through criminal irresponsibility and should be allowed to die quietly. The only role for the state should be to come in after the event to ensure an orderly disposal of their assets to new companies prepared to act with greater responsibility.
I take profound exception to hearing erstwhile advocates of the free market,who were content to see entire communities destroyed in the 1980s when heavy industry was allowed to expire, now saying that the taxpayer must preserve another loss-making industry because it is too big to fail. Well, so is Ford, so is General Motors, who are now asking to be bailed out too. Where does this end? Will every homeowner who took on a mortgage they couldn’t afford now be compensated by the government?
We’re told that the taxpayer will benefit in future when the value of the “distressed assets” recovers. But the hundreds of billions of toxic mortgage bonds which are about to land on the US Treasury books are ‘hard to value’ because there is no market in them. The fact that no one is buying them at any price, not even the Chinese sovereign wealth fund, is kind of a clue their true worth. They are based on inflated house prices - values which are the product of a speculative boom. Are taxpayers, who have been paying excessive mortgages, now expected to compensate the banks for the fall in the value of their own homes? What kind of a new deal is that?
We are also told that the world financial system would grind to a halt if the Wall Street behemoths are not fed billions from the taxpayer’s purse. Well I don’t buy it. America is being held to ransom here by people who are highly adept at blinding politicians and regulators with financial ‘science’. Of course credit markets are essential for capitalism to survive, for companies to invest and for economies to grow. But this does not have to be provided by companies who have turned banking into a sophisticated Ponzi scheme.
Providing credit on fair terms to businesses and home-buyers does not require “financial weapons of mass destruction” as the celebrated US investor Warren Buffett called the inscrutable derivatives invented by the banks over the last decade. We do not need a 62 trillion dollar market in credit default swaps ( a kind of insurance contract that allows speculators to bet on the default of company bonds) . We do not need collateralised debt obligations, which were a form of junk bond designed to package up good assets with dodgy ones to “spread risk’. These were instruments of calculated deception, and the sellers should be investigated for fraud.
Nor do we need structured investment vehicles, a massive unregulated shadow banking system, sub-prime mortgages to people with no jobs, and a lunatic housing boom which turned our homes into instruments of financial speculation. We can do without all these things. Homes need not be so expensive that families cannot afford to buy them without chaining themselves to crippling mortgages. It would be an outrage to allow the corporate culture of Wall St and the City of London to be perpetuated at public expense. Predatory lending, short selling scams, pension misselling, endowment policies, ‘with profits’ polices, excessive commission and all the other iniquitous practices of the debt age should be regulated out of existence Selling people insurance policies they don’t need is not essential to the functioning of the economy.
Now, we will be told, of course, that most of our pensions are invested in the financial services industry and we can’t afford to endanger them. Indeed not, which is why they should be protected entirely from the banks and insurance companies. When the UK government introduces its new pension saving scheme in 2012, it must ensure that it does not fall into the hands of the people who have been running things up to now. We need a financial services industry which is very much smaller, founded on integrity where people do not earn ludicrous bonuses for taking risks with other peoples’ money, and where the process of lending and borrowing is conducted according to transparent and simple rules. Good old fashioned banking, as the Chancellor, Alistair Darling called it. And if the banks won’t accept the new rules, then be off with them.