Bank Bailout Risks Default
The UK has launched its second bank bailout, tipping another 50 Bln GBP into the vaults, along with 450 Bln GBP in loan guarantees. The new US administration has yet to show it has a better idea.
If the UK government does assume responsibility for bank debts, it could push the entire country close to default.
The US and UK administrations are still fighting a liquidity crisis (meaning a blockage in the veins of the financial system) when the real problem is insolvency (cardiac arrest).
By diverting all available funds to prop up the walking dead, the governments are sucking up money from the rest of the economy.
The bailout is quite simply making the crisis worse. The cost will push economies which are already deep in recession, into the industrial equivalent of famine.
Western politicians who want bankers to apologise for their role in the financial crisis are Wall Street's equivalent of Lenin's “useful idiots”.
More important than saying sorry, the banks have not even owned up to how much money they lost, how they lost it and where it went.
Governments pretend they are giving banks money to pay off their debts. They are not. They are giving the banks capital, which they lock in their vaults.
Worse still, governments are taking on responsibility for repaying huge debts, which in the UK run to four times the annual total national output.
This is happening through debt guarantees, promises of further loans (sometimes in return for worthless assets) and taking banks into state ownership.
It would be great if governments could pay off those debts. The fact is the debt is now so big that even governments don't have enough money to settle the bill.
Transferring bank debt from bank to government does not eliminate it. It will be paid for by higher taxes, poorer services, slower growth and lower incomes.
The burden of the dead banks' debt will bring the UK government's solvency into question.
Don't worry; the UK government is taking steps to avoid default.
It's decided to use inflation to eat up the debt or, in other words, to print money. The UK Treasury has authorised the Bank of England to buy debt or bonds with printed money.
Inflation is the cruelest tax but a favourite of politicians. There's no vote and it devalues the money right out of your pay cheque without you noticing.
Politicians know it's a crime. That's why the UK Treasury is also debating whether to use the law to restrict what journalists can print.
So what's the alternative?
Bankruptcy. It hits investors and it hurts. But it puts the pain closest to those responsible, as quickly as possible. We know what it costs. Oh, and we lose some banks.
Excuse me, but I don't see banks making the slightest positive contribution to the economy now – or for a long time to come.
The better banks will survive. A clear message of the boom and bust is that the UK and the US was over–banked. We didn't need all those goons, sheep and goats.
The banks and their cheerleaders among politicians and commentators wrongly think that banks are the economy. They warn that bankruptcy would present a huge systemic risk.
However the financial systems of the United States and the United Kingdom are already facing systemic collapse.
The few economists who have proved reliable forecasters of this crisis have dramatically upped their estimates of just how bankrupt are the US and the UK.
Nouriel Roubini, the most accurate sage of this catastrophe, estimates the US financial system will lose $3.6 trillion, half of that from banks and brokers. As the US bank's entire capital amounts to $1.4 trillion, they are already “effectively insolvent”.
By bailing out the dead banks, the US and UK are sleep walking into the largest default crisis in history.
By Mark Gay for RT