Tuesday, December 14, 2010

Want To Ruin Your Own Country? Assume Your Banks’ Liabilities

Recently, I read up on how Iceland is doing—surprisingly well, actually. Unemployment is down, the Krona is going back up. Good balance of trade, good fiscal balance sheet. Quite the turnaround, after its troubles over the last couple of years—

—so then if Iceland is doing OK, why then are we in the hole that we’re in?

Why is the American economy slogging along? Why is Europe circling the drain? Why are the bond markets queasy as a patient with a low-grade malarial fever? Why is Ben Bernanke’s chin quivering and his voice quaking on 60 Minutes? (And by the way: Was that a terrifying spectacle or what?) Why has the conversation turned from bond market risk to sovereign debt risk? Why are commodities rising, equities moving jagged and irrational, and all of a sudden silver is now the new darling of the retail investor?

What the hell is going on? Why are things getting worse, instead of better? 

The answer is so simple, it hurts:

When the Global Financial Crisis hit in late 2008, the governments took over the liabilities of the financial sector—and in the two years since that terrible, terrible decision, that single move has turned what was once a problem of financial sector insolvency into a problem of sovereign nation insolvency: 

Europe and America are insolvent—they’re broke. They cannot pay the liabilities they have assumed.

That’s why we’re in the trouble we’re in. That’s why Ben Bernanke is crying himself to sleep every night. That’s why the world’s economies are slowly circling the drain—

—remember what happened, in the fall of 2008?

The Federal government bailed out the banks with the famed—not to say infamous—TARP: The Troubled Asset Relief Program, a $700 billion bailout of the banks by any other name.

For its part, in order to “save the financial sector”, the Federal Reserve expanded its balance sheet—that is, it printed money—to the tune of $3 trillion dollars, between Quantitative Easing in ‘08-‘09, QE-lite in early ‘10, and now QE2.

The Europeans made the same mistake as the Americans: They tried to save their banking system. They tried to get through the Global Financial Crisis without any pain.

The Germans bailed out their Landesbank, the UK took over Northern Rock. The Irish bankrolled Allied and Bank of Ireland, the Spanish propped up BBVA—in short, the European governments all assumed responsibility for all their failed banks. They all pretended that it was a liquidity crunch, when it was clearly a banking insolvency crisis.

They’re all paying for this sin today. We’re all paying for this sin today: The inherent instability in all of the markets today is a product of this decision back in 2008—the decision to socialize the financial sector’s losses, instead of letting the insolvent institutions fail.

That the Europeans would socialize the losses is understandable—they’re all a bunch of Socialist pinko-proto-Commie Euro-weenie fellow-travelling Reds: The children of Lenin and Mao, first cousins of Che and Fidel.

But America—what happened in America—land of the free, home of the brave—home of the creative destruction that is the lynchpin of capitalism?

In a word: Capitalism was short-circuited.

See, a bond is a loan—and what’s the underlying risk of lending money? That it won’t be paid back. The interest on a loan is supposed to represent the time-value of the money, plus the risk that the money will not be repaid.

Bond holders of all stripes were supposed to know this—that there was a chance that they would lose the money that they had lent out.

In the run-up to the Crisis in 2008, banks had lent money to dodgy investments—those investments in real estate and whatnot went sour in 2007 and ‘08—boom!: The banks had a loss on their bond portfolio.

The banks’ loss meant that they would default on other loans, to other creditors—usually other banks. So this round-robin of collapsing debt would affect all the banks—

—the banks that had been prudent would suffer losses on these bad loans—but they would likely survive. (Notice how none of the private banks of Europe got into any trouble? Like I said, prudent.)

—but the banks which had been imprudent? The ones which had over-extended themselves? Like all the big banks in America?

They would fail.

So they weren’t allowed to fail.

In 2008, the rationale was, If the banks are allowed to fail—then the entire U.S. economy will die! That was Hank Paulson’s dire warning, when he got on one knee in front of Speaker of the House Nancy Pelosi, and begged her for $700 billion for TARP—with no strings attached—in order to bail out the banks.

That’s what Ben Bernanke rationale, when he ordered the drones at the Fed to start buying up all those Mortgage Backed Security turds, printing up money in order to make the bailout happen. 

Capitalism’s creative destruction was not allowed to have its way with these banks. They were called “systemically important”. They were called “too big to fail”—

—but right away, you know this is bullshit: In capitalism, nothing is too big to fail. That’s the whole point of capitalism: There are no sacred cows.

But enough people in positions of leadership said that the economy would die, if the banks weren’t saved—so they were saved.

And what was the result of this lifeline to the banks?

You can look at it from all sorts of angles, but bottom line, the State assumed the losses of the banks. The banks’ liabilities became the government’s liabilities—and ultimately, the people’s liabilities. Because the people will wind up paying.

Some fools still believe that if the banks hadn’t been saved, then our economy would have died! Died dead! Died like the dodo!

Oh really . . .

Well, I disagree: I think it would have been better to let the chips fall where they may—give capitalism’s creative destruction free reign—let the virtuous be saved and the evil perish—

—in short, I think we would be better off today, if we’d let the banking system fail back in 2008.

And I have proof that it would have been better: I can prove that if we’d let the insolvent banks fail, the world’s economy would be better off today. We wouldn’t have the current uncertainty, and instability. 

My proof?

Compare-and-contrast the fates of Ireland and Iceland: 

Both had the same problem: Disproportionately large banks for the size of their respective economies. Both banking sectors of both countries had taken on liabilities which rendered them vulnerable as a baby’s belly to a falling knife. 

In 2008, the knife fell: A lot of the assets on the balance sheets of both banks were proven to be worth fractions on the Euro—if not worthless altogether. 

But in the fall of 2008, the two countries’ fates diverged:

On the one hand, Iceland’s people refused to have their government be saddled with the debt of their insolvent banks, Landsbanki and Kaupthing and the others. The Icelanders requested an IMF bailout to the tune of $2.1 billion (compared to their GDP of $12 billion). But they refused—vociferously—to be saddled with the debts of their banks.

Chilling in Iceland.
What were the consequences? The Krona suffered an 80% devaluation, interest rates went to the moon. Unemployment spiked from 6% to 9.3% in a month . . .

. . . but it wasn’t that bad. It wasn’t fun, but it wasn’t the end of the word, either. Even with severe austerity measures that included higher taxes on all sectors of the economy and severe cuts in public services, unemployment reached only 9.6% at its worst point, averaged 8.8% during 2009, and is now only 7.6%. Source is here.

On the other hand, what did Ireland do?

When it’s banks were shown to be insolvent in the fall of 2008, Prime Minister Brian Cowen went and guaranteed the Irish banks. In other words, he made the Irish government assume the debts of the banking sector.

Ireland hasn’t had a moment’s peace of mind ever since—for two years, the Irish have been stumbling about, trying to make good on their banks’ liabilities, while the country slowly sinks.

Finally, a couple of weeks ago after a bond market mini-panic, the Irish were bailed out by the ECB and the IMF—the Irish fought centuries of British rule, only to finally surrender their sovereignty to bureacrats from Brussels.

Drinking and crying in Ireland.
Will the Irish situation get any better?

In a word, no. The Irish are still saddled with the euro—they haven’t been able to devalue their currency, in order to restart their internal economy, and make themselves attractive to foreign capital. Coupled with that, they have had to take severe austerity measures and tax hikes, in order to make good on the bonds that the Irish banks owe.

That is to say: The Irish people are suffering, so that UK and German bankers don’t have to take any losses.

Meanwhile, in Iceland today, after seven consecutive quarters of negative growth, the Icelander economy is picking up. In 2011, the Icelander government will have a surplus; the balance of trade is already in surplus. With the devalued Krona, Iceland became a magnet for foreign investment. Unemployment is going down.

Things are good in Iceland.

In Ireland? Not so much—and they won’t be getting any better any time soon. The rosiest predictions have the Irish economy turning around in 2013, 2014 . . . maybe.

What lessons do these two countries teach us? 

The Icelanders recognized that their right hand—their banking sector—was gangrenous: So they cut it off. A lot of tears, a lot of short term agony—but the rot was cut off.

The Irish? They tried to save their gangrenous hand back in 2008—so then over the next two years, their whole arm has now turned gangrenous.

But instead of cutting it off, they’re trying to save the arm too—and they’re praying that the gangrene doesn’t get to the body and kill them.

These are just two small countries—Iceland and Ireland—and I’m sure a lot of critics will say, “These two countries have nothing in common with giant economies like the U.S. and the EU—nothing in common at all!

Oh, but that’s where they’re wrong: Economics is trigonometry—the ratio of a diagonal of a square is the same no matter the size of the square. Likewise with economies: The basic problem of any economy is the same, regardless of its size.

An overlarge economy—like the American and European economies—might be able to palliate the symptoms of the economic disease. They might even be able to hide the symptoms altogether, and make fools think for a little while that the disease is all gone—the patient all better.

But truth outs, one way or another.

The sin of the American and European economies was to guarantee the banks. Whether out of stupidity, blindness or corruption, America and Europe pretended the banking insolvency was merely a liquidity issue—

—so they socialized the banks’ losses.

That’s why the American economy is teetering, while Europe goes from crisis to crisis—Greece—Ireland—Spain next—Italy soon to be up.

Because of stupidity, blindness or corruption, the American and European leadership saddled their people with debts that cannot be paid.

I have argued in my hyperinflation pieces that the only way to get out of an unpayable debt is to either default on the debt, or inflate away the currency.

The Europeans are grimly trying to pay off all the debts while defending a strong euro—it’s an ugly sight.

The Americans are trying to inflate away their debt—the Federal Reserve is now fully monetizing the Federal government debt, conjuring money out of thin air and thereby covering the fiscal deficit.

In other words, in both cases, the gangrene has spread from the hand in 2008, to the limb in 2009 and 2010—and now as we welcome 2011, the gangrene has spread to the body.

All in all, I think we’re all going to wish we had done like Iceland. If we had, we’d be chillin’ like the Icelanders, instead of crying ourselves to sleep every night.

• To read my posts on hyperinflation, please click here. 
• To read my posts on the European situation, please click here.  

60 comments:

  1. Your post reminds me of something I read recently:

    “Money may no longer be physically printed and distributed in the voluminous quantities of 1923. However, ‘quantitative easing”, that modern euphemism for surreptitious deficit financing in an electronic era, can no less become an assault on monetary discipline. Whatever the reason for a country’s deficit – necessity or profligacy, unwillingness to tax or blindness to expenditure – it is beguiling to suppose that if the day of reckoning is postponed economic recovery will come in time to prevent higher unemployment or deeper recession. What if it does not? It is alarming that some respected bankers and economists today, in the US as in Britain, are still able to commend “the printing press” (in so many words) as a fail-safe, a last resort. A country’s budget can indeed be balanced in that way, but at the cost, to whatever degree, of its citizens’ savings and pensions, their confidence and trust, their morals and their moral.” (From Adam Fergusson "When Money Dies")

    The West is on a slippery slope.

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  2. Well, they did let Lehman fail. Everybody has seen the cost of that failure alone. Now think what the consequence of a Citibank and Bank of America failure would have been... The sudden run on the US banks and dumping of US dollars, world-wide... Would you care to consider that scenario in one of your articles?

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  3. The Swedes had a similar problem back in the 90s. They didn't let the banks outright fail but they sure did make the investors feel the pain. They nationalized the banks, screwed the investors, gave bondholders a hair cut, restructured and then, later on, put the banks up for sale and sold them.

    Sweden turned out AOK. But I like the Icelandic scenario better.

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  4. Well, anonymous, at least one fallout of letting Citi or BOA fail would be we wouldn't have to watch them trying to lure suckers into their web with credit card offers while watching football games on TV. GL is NOT saying there would not be pain, it's just that we'd get it over with before the infection spread. How much worse will the pain be when the entire government goes under???

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  5. let's get the smart guys and computers that model climate change to model what would happen if we let banks fail - both are highly complex interconnected systems that are extremely hard to model. but let's at least try. I also don't buy the argument that the world will end. I'd also love to be able to convince the world to take over my losses for fear of their world ending. it's akin to religious scaremongering. perhaps science will prove that the bankers are talking shit and we won't go to he'll after all.

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  6. I have to wonder about the foreclosures if the banks failed.

    From a manpower standpoint, how would banks actually be able to foreclose if they were no longer in existence or homeowners would have to wait for a bank buyout?

    Would the bank collapses have prevented blight and homelessness in this way? Conversely, would it have encouraged everyone to begin defaulting on loans because it was clear the banks could not keep up with foreclosures?

    Seems like that solution -- while I think a good one -- would have had tremendous ripple effects on an economy and population far larger than Iceland's.

    @Zyndryl
    Leave it to the Swedes to figure out a reasonable solution to this problem. The Swedes are beautiful and smart. We could learn a lot from them.

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  7. 500 years of Western global guidances has been surrendered by greedy Wall Street and City of London PIGS! Thanks to these traitors the Christian West will surrender to Asia in the 21st century.

    Greenspan, Rubin, Hank Paulson, Senator Gramn and Summers should be tried for treason and executed by firing squad. 200 Wall Street and City of London banksters should also be tried for treason and sentenced to 30 years of hard labor. The MSM must be broken up and placed in Christian hands.

    We have to accept that the greatest country in the history of mankind has been stabbed in the back. So so sad.

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  8. To Hugh Dubh O'Neill. Are you nuts? "The MSM must be broken up and placed in Christian hands." Who do you think all these people in power are? Forget about running for any office or holding any senior position in the wonderful U S of A unless you believe in make believe and talking snakes.Get your head out of your ass.

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  9. really nice article, gonzalo.

    this is what you are really great at, in my opinion; finding the essence of complicated situations and wording it clearly.

    thanks as always,
    pjv

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  10. Peter Schiff of Europac wrote about this in detail back in 2005 when he wrote the book "Crashproof".....

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  11. Here Is A List Of The Jews Who Own The Major Media In The US:

    Murray Rothstein: AKA “Sumner Redstone.” Owner of CBS, MTV, LOGO, (Homosexual TV), Blockbuster Videos, Paramount & DreamWorks Movie studios Here.


    Edgar Bronfman Jr: Principal holder of Time-Warner Corporation. Media venues include NBC Television, Turner Broadcasting, CNN, Warner/Chappell Music, AOL, & Time Magazine Here.


    Jeff Zucker: CEO of NBC Television Here.


    Michael Eisner: Former CEO of Walt Disney Company. Principal holder of Capital Cites which owns ABC Television. Present owner of The Tornante Company which develops companies in the Media sector Here.


    Rupert Murdoch: His mother, (by which Jews trace their racial designation), is the Jew, Elisabeth Joy Greene. Murdoch owns Fox Television, TV Guide, Twentieth Century Fox Studio, Wall Street Journal, New York Post, and The London Times Here.


    Peter Chernin: New York born Jew. CEO of Murdoch’s News Corporation & Corporate Director for American Express Here.


    Mortimer Zuckerman: Owner of US News & World Report and the New York Daily Here.


    Donald E Graham: CEO & Chairman of the Board of the Washington Post which owns Newsweek Magazine. He is the son of Katherine Meyer Graham, whose father, Eugene Meyer, a wealthy Jewish financier, purchased the Washington Post in 1933. Donald E Graham now oversees the Washington Post operation Sources: Here & Here.

    Source for the above: Brother Nathanael Kapner (Jewish himself) from http://www.realzionistnews.com/?p=194

    All Americans' should be alarmed that an oligopoly of seven mega-corporations owns the entire apparatus of the U.S. media whose owner's interests' are often alien to and hostile to our own.

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  12. The book "This Time is Different" shows that the standard pattern is:
    1) Banking crisis
    2) Government bails out banks
    3) Sovereign debt crisis
    4) Central bank bails out government
    5) Currency crisis

    Iceland is one of the few not to fall into the standard trap. The US is starting on step 3, with bond prices dropping fast.

    You can count on a banking crisis in western banks because they take in "demand deposits" that they say they will pay back anytime and then loan the money out for decades. If too many people want their money at the same time, you get a "bank run" and "bank failure". Banks should only be allowed to loan out money for 10 years if they have 10 year deposits, not demand deposits.

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  13. All in all, I think we’re all going to wish we had done like Iceland. If we had, we’d be chillin’ like the Icelanders, instead of crying ourselves to sleep every night.

    Love your perspective however I have to disagree with you on this last bit... Bailing out the banks was a blessing in disguise. Instead of removing the banks and being left with corrupt politicians and gov't. we will now remove inept governments around the world with one foul swoop and humanity will finally get a taste of freedom.

    "We wont get fooled again."

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  14. Whatever happens during the unfolding economic hurricane we must remember not to hurt innocent people.

    Share your bread with the poor. LOVE as Jesus prayed it.

    THIS is the solution - NOT the "Rothchild-Jewish-NWO-socialistic - fiat money - bankster-financial terror system" the hidden elite want to install.

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  15. Great minds think alike.. my last post on my blog was about just that:

    http://themeanoldinvestor.blogspot.com/2010/12/icelands-temptation.html

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  16. I know people are watching Munis and TBs, but what I am watching is the pending collapse of Corp. bonds. Like the Elliot Wave analysis of this pending doom. GL love the format.

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  17. Saving the big banks was a choice, not a mistake.
    If GM and Chrysler could go through bankruptcy, so could the banks.
    But political leaders chose to protect their friends rather than their citizens, knowing what the price to pay would be: permanent high unemployment.

    Ultra-socialist European countries, as rightly described by GL, had already made this choice long ago and were living with 10% "official" unemployment. In the early 90s, France had already bailed out its biggest bank, Credit Lyonnais, to the tune of 30 billion euros.

    US politicians had the advantage of having a "model" to observe and they could see that a country could perfectly survive with a permanent high unemployment rate. They then decided that 10 to 20% unemployment was better, for their interests, than letting the big banks, and their big campaign contributions, fail.

    So, in fact, it is not everyone who has to pay for the bailouts, it is the 5 to 10% who won't ever work again, because they have been sacrified for the greater good of the nation!


    Click on my name to visit my blog.

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  18. I first became aware that the game was being changed in 1987. During the stock market crash of that year, the Federal government let the NYSE specialists know that as long as they kept prices reasonably up, they could borrow indefinitely. In other words, while a particular investor could lose, investors as a class could not lose. There may have been earlier instances of this sort of thing, but that's the first case I know of.

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  19. Hugh Dubh O'Neill, with the "stab in the back" phrase, in his context of Jew-bashing, is oh so reminiscent of German excuses for their war reparation mess and resulting hyper-inflation.
    What are you, Hugh, some Neo-Nazi jackass?
    Yeah, right, it's all a big ol' conspiracy of the Jooo's.
    Firing squads you say? I would think more drastic action would come from your lips, like camps and gas chambers.
    What a fucking creep.

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  20. I won't dare to compare countries, or societies. After all "Every people have the governments that they deserve"
    In America is happening a similar situation like in the 20s and 30s in Germany, with the difference that the scoundrels got catch in the act; And after few generation with same "mind-set" they find heavens in america, and Not only that they run the country as they please..but also they have the Americans by their balls, and the average-joe loves and protect them as their treasure.
    So the conclussion is. That one type-group have the ideology of avarice and greed.
    And the citizenry have the ideology based on ignorance.

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  21. I love how some of the comments and GL claim that the ultra-socialist countries are going under because of SOCIALISM. That is completely FALSE!!!

    Ireland had a HOUSING BUBBLE, just like the USA. Spain had a HOUSING BUBBLE, just like the USA.
    Iceland was victim to some greedy banks, just like the USA.

    That is not socialism, folks. That is the self-destruction of capitalism. In other words, Capitalism has a tendency to implode.

    Also, the population of Ireland and Iceland are TINY compared to the EU and the USA. The implications of an entire financial system collapse in either the USA and EU would have had SEVERE civil unrest and social issues just because of the huge population and the magnitude and suddenness of the crisis. Can you say RIOTS, TEARGAS, TROOPS???? I mean, you saw how angry the teabaggers were, and they were old people. Just wait til the kiddos start getting pissed.

    Regardless, capitalism has a self-destruct mechanism in it. We are going to be experiencing the full brunt of that mechanism here soon. It started in 2007 and has not stopped yet. Everything in between is just smoke and mirrors. Iceland will not have any economic activity once the USA and EU both go under. They will go broke again, just like they did a few years ago......

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  22. Your criticism of the US, calling it socialistic, is off the mark. It is fascism- the blending of the state with large business interests.
    If we had socialism the banks would be nationalized, not subsidized.

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  23. The economy of Iceland in no way resembles the economy of the FSofA. the Icelandic Krona is not/was not the World Reserve Currency. Although not simple, Iceland not paying back its debts could be papered over by further liquidity injections from Da Fed.

    I agree of course that the TBTF Banks should be allowed to fail, but letting the behemoths like the Squid and JPMC and BofA fail? That results in complete worldwide currency collapse in a virtual instant. This is what they have been avoiding by turning on the printing press full blast.

    It will happen anyway eventually, what we are watching now is a sad form of Kabuki Theatre, but each day they keep it running the Elite can sequester away a bit more wealth and leave a few million more J6Ps hung out to dry. It will keep working also, until it doesn't anymore. When will that day come? When the cascade collapse of the smaller economies and smaller players is complete, and the cascade works its way into the center of the economic system, through Da Fed and the BIS.

    At that time, what has been avoided to date will finally occur. A complete collapse of this monetary system, complete with a full on trade collapse and a descent into World War that will make WWII look like a Sunday Picnic. Just be a bit patient here, it will come, and don't worry about the Taxpayers here getting saddled with the bill, for the most part they will be quite dead and unable to pay back any loans. Coming Soon to a Theatre Near You.

    RE

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  24. "The Europeans are grimly trying to pay off all the debts while defending a strong euro—it’s an ugly sight."

    It's a downright hilarious sight. It's so half-assed that it's amazing they're even trying. It's like watching a man cut a hole in the bottom of a boat to let the water out.

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  25. Ireland, the country that redefined the words 'speculative bubble'. Being in Australia myself I can see there are many similarities between Ireland and Australia, yet many differences too. The similarities include high population growth (and that surely didn't save Ireland's bacon), credit driven housing mania, an ingrained belief that you 'can't go wrong' with property, and a predominantly services based economy (services that can easily move offshore to more competitive countries). Differences include an insane building frenzy in Ireland at the height of the boom, and interest rates kept artificially low by Europe, far below the appropriate interest rate for such an overheating economy. The question remains to be seen, will those differences outweigh the similarities, or will Australia (like Ireland) discover that 'it's not different here'. Only time will tell!

    Alex
    Zetaboards Aussie Real Estate Blog

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  26. First, to the dingbat with the blood libel bit, give it a rest. Swap out 'jews' and shove in 'speculators' and you'll have covered every excuse ever given for the misery that comes from govt. interference in the free market.

    Second, yes, the banks should have been allowed to fail. And why the wacko-left of the U.S. didn't push harder for this eludes me. It would have served the very goals they've been seeking for 20+ years; we'd all be living in conditions similar to a slum in India right now. Oil consumption would be nil, saving the planet from becoming a slow cooker, the uberrich would still be sorta rich, but a lot of the just barely rich would be pushing to get a place to sleep under the bridge with the rest of us. Forget the violence that likely would have followed, we'll get there eventually anyways as the cancer that is unpayable debt spreads fully through the body politic.

    Yes, yes, it would have been a very un-pretty picture. But it's still going to be. The only advantage we've gotten from transferring the insolvency from the private sector to the public sector is a little extra time to prepare. I sincerely hope each and every one of us has the wisdom to take advantage of that.
    K

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  27. Gonzo you are brilliant but a voice in the wilderness. The people of the USA are headed for an inflationary train wreck while the gutless brainless community of economists such as Bernanke, Geithner, Summers etc etc all sucking up to the bankers and wall street have our numbskull gutless president spellbound.

    I am sure we are headed for a crackup which isnt going to be pretty but keep on plugging Gonzo maybe the message will get through before it is too late.

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  28. Investing is a risk/reward proposition in a free society. People are free to invest in whatever markets they choose, and they assume the risks associated with that freely-made decision. Disaster usually strikes when people get greedy or stupid or lazy. In the case of the bailouts, it was a function of all three failures. The banks were greedy, stupid, and lazy. They figured they had a great scam going and that it would run forever. THEY ASSUMED THE RISKS when they made their investments. If they are not allowed to fail, then the government has eliminated the risks. As a result, the government ensured that the markets are not free. Why? Because while these yahoos were making poor investment decisions that should have led to their demise, others made considered decisions that failed, nonetheless, and THEY WERE NOT BAILED OUT. Heck, if you want to bail out these investors, bail me out of my tech stock losses from 2002. I never asked for it because I ACCEPTED RESPONSIBILITY FOR MY INVESTMENT DECISIONS. But here, the government has de-leveled the playing field, favoring some investors over others by protecting the losses of those well-connected investors. It stinks. It's crooked. If it is not, it should be criminal.

    What is it all about? FREEDOM AND RESPONSIBILITY. Adults want freedom--they must accept responsibility for their freely-made decisions.

    Capitalism, free enterprise, private property, finance, investment--an economy--cannot work unless WE ACCEPT RESPONSIBILITY FOR OUR DECISIONS.

    The pathetic wimps who sought and accepted bailouts are gutless drones--they would not want liberty if it came within 100 feet of them. They hate liberty, in fact, because in a free society, they would have to accept responsibility for themselves and they know they are incapable of profiting in that case.

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  29. In business, there's a concept called "scalability." You see, strategies that work on a miniature scale often fail on a grand scale, no matter how many times you declare that the gods of trigonometry are actually on the side of you, you, you!

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  30. Haha we took everything you owned! We have made you work for nothing :D and now we've only left you with a little box to live in and no way to survive except by what we produce LOL

    You are all so stupid. You still can't understand our trick. LOL

    Here I will give you a hint bc you are so pathetic.
    Unscrabble these if you can fools

    Find him for assistance: lanDie remmAnam
    fact: lal teld si hetft
    fact: apper si ton yonem doogs era yonem

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  31. Gonzalo, you are of my four favorite things Chilean, including Pinochet, for the way he guided Chile into capitalism, Conca y Toro wines, and Cote de Pablo, the beautiful star of N.C.I.S.

    I thoroughly enjoy your well-thought-out and researched commentary. While I like the potential of reading your thoughts many times a day, I hope your in-depth blogs will not suffer from neglect. I've forwarded your blog to many friends and associates. Keep up the great work.

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  32. Great article thanks!!
    Read "Human Race Get Off Your Knees" (The Lion Sleeps No More) by David Icke, if you want the truth about all the global shit that's going on? Remember the saying, "The Truth Shall Set You Free" (Not getting religious on you... Not at all), just the fact's... in one great book!
    RB

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  33. the united states can't go broke because it prints its own money / is not revenue constrained

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  34. I have been reading like a mad man about the economy - You GL have written the Best articles including this one on it.

    Someone please, get this man to main stream media on it...oops, the lame stream media is up to their necks also with this looting.

    So, where does this leave ordinary citizens on it? To the streets if we must, protest Peacefully, demonstrate Peacefully, Not Quietly exactly like Iceland!!!

    Thanx GL you are the best!

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  35. While I agree that the best posture for future growth and eventual economic health is to allow bad debt to default, thus penalizing imprudent lenders, in what parallel universe can you say that "life is good" in a nation whose currency has collapsed by more than half, causing a very large decline in the standard of living, including a vastly higher cost of buying anything from anyone outside the country. Were they living in dreamland before the adjustment ... without a doubt ... but life good in Iceland ... hardly.

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  36. Let’s assume there are approximately 150 million taxpayers in the USA, i.e. those who have actually filed a tax return: link here: http://www.irs.gov/pub/irs-soi/05inrate.pdf
    Instead of bailing out all those insolvent banks and businesses, they divvied up those 2 trillion dollars amongst the 150 million taxpayers.
    Each individual taxpayer would have got about $13000 each, less tax.
    That money would have found its way back to the banks and businesses, granted, there would have been significant amount of banks and businesses that would have failed, and they should be allowed to fail as per Capitalism principles.
    Capitalism needs to function like a game of tug-of-war. Two opposing sides need to continually struggle for dominance, but at no time can either side be permitted to walk away with the rope.
    It’s time that taxpayers are allowed to walk away with the rope, and use that rope to hang the bankers, inept CEOs, and all those other financial wizards that played any part in fucking up World finances.

    “Capitalism without bankruptcy is like Christianity without hell.”

    The USA is going to Hell…

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  37. Congrats on 1 million + views on your blog.

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  38. I agree the TBTF banks (B of A, Wells, City et al.) should have been allowed to fail and the bondholders taken a bath. But, as an earlier commenter stated, what happens to the money the "average Joe" has in these banks? would the FDIC insure it all? Another bank take them over? I would imagine it would have caused the mother of all bank runs.

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  39. To the putz who blames our current situation on "capitalism" - you obviously don't know (or don't care to see) that in capitalism these banks would have been let go to fail, so quite clearly this is not a capitalistic situation...nor was the run-up because they knew they had the safety net of the gubmint behind their gambling...no risk, only potential reward, and stick the stupid taxpayers with the mess if we screw up. That ain't capitalism dude...it is more accurately a fascism or perhaps just corporatism. Just sayin'...

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  40. GL,
    Another home run - possibly even a grand slam. For me a bonus was that the saltiest words were "turd" and "bullshit."

    I do not have issues with salty language, but there are many who do. I would never presume to tell you or anyone else how to write or what words to use. One of the very attractive features of your writing is that you write from the heart as the words come out. Since you dialed down the salinity in this one, I can forward a link to those for whom a high degree of salinity would preclude them from reading it at all.

    Your assessment will now be read, contemplated, and understood by a much wider audience. I do not know if your choice of words was intentional or not. Whatever the impetus, I am glad it came out like it did.

    KS

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  41. Im not 100% sure about the parallel with Iceland. Its not only because of only 300k population (but it also counts because everyone knows everyone), but because of reserved mentality of the people and social and national homogeinity they can go for solutions that USA or EU cannot. There will never be any social unrest in Iceland, never gonna be any REAL political turmoil. But it can surely be in Europe, thats why they're so desperate in trying to bail everyone out. But I agree that we look like cousins of Fidel lol

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  42. Allow me to introduce you to UN Agenda 21, in detail: http://www.green-agenda.com

    You wanted to know why. There it is, in all its glory.

    You can handle the well-documented, obvious truth, can't you?

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  43. Of course, there's still the €5b (more than 50% of Iceland's GDP by PPP) that may or may not be owed to the UK and Netherlands due to the Icesave dispute:

    http://en.wikipedia.org/wiki/Icesave_dispute

    Too soon to call on the extent of Iceland's recovery, IMO.

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  44. Great article! Another that cuts to the heart of why the banks were saved is one by Darryl Robert Schoon called "The Fed's Final Days--The Temple of Paper Money is under Seige" at 321gold.com. The short piece says that for the US to unseat the heart of the problem--the Federal Reserve--will take a political undertaking like the American Revolution to overcome the
    "powerful elites that will seek to maintain the status quo. Special interests
    in both parties have a vested interest in the present monetary system and will do everything possible to save the Federal Reserve". Gonzalo find out who exactly these powerful elites are. I have heard that
    now that these powerful elites have collapsed the system some like
    the English Rothchilds are/will have to assist the UK govt
    to right itself so that the beasts (my word) have a host to feed off of.
    As Rand Paul (Ron Paul's son) said when he won a seat in the US Senate: "WE HAVE COME TO TAKE BACK OUR GOVERNMENT". Caroline

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  45. @Anonymous @ 10.09,

    I was initially concerned your citings re: UN were just more propoganda but after a quick search of but one related to AGW, maybe not. Here is another:

    http://dmarkloyd.blogspot.com/2010/10/acclaimed-scientist-hal-lewis-resigns.html


    If you are truly interested in Intellectual Honesty, as everyone on the planet should be, at this late-stage in what will likely affect everyone due to the rotting financial frauds spread thruout the world by the US Financial system and FED, please read:

    http://dmarkloyd.blogspot.com/2010/11/warren-buffet-and-bailouts.html

    What we here in the US are experiencing is not failure of Capitalism but rather a subversion of our Rules of Law and the principles of Capitalism. Our Politicos have prevented their Banksters Buddies from experiencing their self-inflicted losses and bankruptcies (that Capitalism Demands) and in so doing have forced those conservative amongst us do pay for it thru theft from our savings, unemployment, etc. They will also force everyone to experinece it all thru continuing devaluation of the $US until its' day of total collapse. It has occured over 2,000 years in this very way - read: Niall Fergusons' "The Ascent of Money".

    I read last nite where Lloyd Blankfein was about to get another huge bonus of $24 Million. He and his other banksters have gone from BK, to Bailed out 100 Cents on the Dollar by the US Taxpayer via the FED and US Treasury, to now richer than they were prior to engaging in what I believe was a criminal enterprise - see here

    http://dmarkloyd.blogspot.com/2010/12/all-hail-ye-citizens.html.

    Forget about any indictments or REAL investigations.

    Best....

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  46. The invisible hand giveth and the invisible hand taketh away...

    Best regards,

    Econolicious

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  47. Very interesting article. We need to get off the "everybody knows" ideas about how finance works.

    One question I don't see asked: OK, if the population are heavily in debt, and the banks are too, and the other financial institutions and manufacturers AND the governments are as well . . . that doesn't add up! Either a huge swathe of this debt cancels out, or there's someone else running this whole charade for personal enrichment, and laughing his cap off at the stupidity of governments and the success of the scam.

    So, WHO should we really all be angry at?

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  48. Mr. Lira, I love a good rant as much as anyone, but you should learn to rant and make sense at the same time. You lost me with the paragraph that read

    "That the Europeans would socialize the losses is understandable—they’re all a bunch of Socialist pinko-proto-Commie Euro-weenie fellow-travelling Reds: The children of Lenin and Mao, first cousins of Che and Fidel."

    Not only do you demean socialism (which isn't all bad) but you conflate it with communism and totalitarianism. If you were more precise and used less ideological phrases, you would have my positive vote.

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  49. "Of course, there's still the €5b that may or may not be owed to the UK and Netherlands due to the Icesave dispute. Too soon to call on the extent of Iceland's recovery, IMO." - Ross

    How can the jury be out on Iceland when the alternative is Ireland? If Iceland decided tomorrow to use fish heads as currency and settle it's outstanding debts with Bjork mix tapes it still wouldn't make the Irish solution any less insane.

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  50. Anyone see Ted Turner say that in 30 years the earth would be eight degrees warmer, the crops would fail and we'd all become cannibals.

    What a nut!

    And don't bother with the knee jerk to defend the guy. Just admit it. The earth is going about it's normal gyrations, and the guys a nut.

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  51. GL,

    Cross posted and linked at thebonnieblueblog.blogspot.com

    Thank you for your important work spreading the word of sane economics.

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  52. Anonymous said...
    Hugh Dubh O'Neill, with the "stab in the back" phrase, in his context of Jew-bashing, is oh so reminiscent of German excuses for their war reparation mess and resulting hyper-inflation.
    What are you, Hugh, some Neo-Nazi jackass?
    Yeah, right, it's all a big ol' conspiracy of the Jooo's.
    Firing squads you say? I would think more drastic action would come from your lips, like camps and gas chambers.
    What a fucking creep.

    The world must be changing when a defender of the Jooz posts anonymously.

    December 15, 2010 12:01 AM

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  53. Eventually the US will default on foreign creditors. Then send in an aircraft carrier or three if there are any problems with it. Hyperinflation carriers with it too many domestic risks, and the U.S. is all about off loading its problems onto others.

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  54. Points to make:

    0) GL is a brilliant writer. Period.

    1) Contrary to what mainstream pundits say, bank spreads did NOT peak in October/November 2008, and were "saved" by TARP, rather, spreads peaked in early 2009! Click on my name and see by blog post that shows a graphic (from Forbes print edition) that proves this.

    2) There is no three. One point is sufficient. You've been lied to if you believe the bailouts helped. In fact, they just were a Keynesian waste of money, that, like GL points out (and this is a Austrian economics theme I think) delays necessary 'creative destruction'.

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  55. Jewish ownership informativeif true. No action should be tolerated by the government however. It is not race that matters though. It is religion that speaks an agenda. If all our news is filtered through one agenda, our societies attitude will be predictable.

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  56. "they’re all a bunch of Socialist reds": Please keep some nuance Gonzalo! Socialism is not very popular (anymore) in Europe. Governments over here just want to save their buyers of souvereign debt (for their own sake), just like in the USA: Kicking the can down the road, keeping the status quo alive at the expense of the tax payers...

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  57. "In a word: Capitalism was short-circuited."

    Banksterism was made king. In reality, there is no such thing as capitalism, or more correctly the term should be entrepreneurialism, at the level of the Fortune 500 Companies. More on this distinction at the end.

    What the Banksters are doing to Ireland, Greece, etc., THEY did to Argentina in 2001. THEY crashed the Argentina financial system through the IMF/World Bank and thereby accomplished the two things: (1) the PRIVATIZATION of profits (pension plans, etc.) and (2) SOCIALIZED all the Banksters' debts onto the shoulders of the people.

    This Bankster Model is being played out throughout Europe and soon to appear in the U.S.

    Most people associate and assume these two concepts of capitalism and entrepreneurialism to be the same and equal. In practice and in reality, they are totally different.

    A book by the late financier and monopolist Frederick Clemson Howe called "Confessions of a Monopolist" explains in plain English what is real capitalism:

    “These are the rules of big business. They have superseded the teachings of our parents and are reducible to a simple maxim: Get a monopoly; let Society work for you; and remember that the best of all business is politics, for a legislative grant, franchise, subsidy or tax exemption is worth more than a Kimberley or Comstock [these were fabulously rich diamond and silver mining lodes] since it does not require any labor, either mental or physical, for its exploitation. . . . Mr. [John D.] Rockefeller may think he made his hundreds of millions by economy, by saving on his gas bills, but he didn’t. He managed to let [the U.S. government and] the people of the globe to work for him.”

    Mr. John D. Rockefeller never for a single second thought that he made his billions by being a good entrepreneur or by being thrift! He did so by playing knuckleball and by killing off his competition, viz. his $4 million sponsorship of the Women's Temperance Society to get Prohibition passed so that he could kill alcohol (production) as a car fuel and make the waste product from his kerosene business, gasoline, king.

    What we are witnessing on Wall Street and in Washington, DC today is the exact out-picturing of the above quote written back in 1906.

    What we were taught in school--about capitalism--is utter and absolute garbage!

    BTW, there is one more bubble left: it's called war nuclear. When empires suffer economic and financial collapses, they always wage wars.

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  58. As far as I am concerned let them all fail. Wells Fargo, Bank of America, everyone of them. Why? Because they have already taken everything from me so they can live in poverty too.

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  59. Financial Interests Dictate Sovereign Policy
    (Part 1)
    December 18, 2010
    By Michael Hudson

    Interview with Michael Hudson,
    Eleftherotypia, Sunday December 12, 2010.

    1. A recent article of yours, “Schemes of the Rich and Greedy,” cites the bailouts in Europe among such schemes. What are the main faults with bailouts, and for whom are they designed?

    The financial sector is trying to get politicians to siphon off money from labor and industry to pay bankers. This will impede capital formation and living standards.

    The banks misrepresented the real value of balance sheet and hence what they really were owed under actual market conditions. Now that they have taken the money and run, the «real» economy is being told to pay the off their bad loans. The arrogance of this demand prompted Angela Merkel to ask why governments – meaning «taxpayers» – should pay for bad bank loans and corrupt financial dealing.

    Nice try if bankers can get away with it! But I’m glad to see Germany opposing the EU proposal to double its bailout fund.

    2. You have written that “Latvia has become a testing ground for how far living standards can be depressed, how steeply an economy can be taxed while removing public social support in the face of a wealthy kleptocratic class at the top.” Do you think the same is intended for Greece, Ireland and any other “PIG” that may see its fiscal affairs fall into the control of the EU and IMF?

    Foreign bankers are urging Greece “Why can’t you be like Latvia and sacrifice your economy for our benefit?” The reality is that paying creditors under these conditions is like paying tribute to a power that has conquered you militarily.

    Fortunately, labor in most of Europe is much less passive than in Latvia. The post-Soviet economies have little labor union tradition, and politics are largely ethnic. As a result of the oppressive Stalinist era bringing in Russians to replace local middle class professionals in the 1950s, the ruling neoliberals have been able to turn the frustration of voters mainly against Russian-speakers rather than at what is the most anti-labor, pro-property tax regime in history.

    The rest of Europe now has the bad tax and financial policy of Latvia and the Baltics before its eyes as an object lesson in what to avoid. When the neoliberal bubble burst, Latvia’s government borrowed from the EU and IMF on terms that impose such deep austerity that the economy has plunged by over 20% and unemployment is rising, while the flat-tax rake-off on wages and salaries has now been jacked up to 68%. Over 12% of the population is now working abroad. They send home what they can to help their families survive.

    So rather than being a model to emulate, Latvia shows what is wrong with the neoliberal policy that bankers are telling other countries to adopt. It’s not a bailout of the economy, but of an economic strategy that threatens to make economies poorer.

    3. How do you explain the IMF’s role in Europe’s debt crisis? Is it that the EU lacks the technical expertise to deal with sovereign debt issues, as some have suggested, or because it is a junior partner of multinational finance capital?

    What passes for ‘expertise’ is political, not objective and neutral. At the hands of neoliberals, ‘financial expertise’ means calculating how much taxable surplus, disposable personal income, rental income and profits the financial sector can grab for itself.

    [...]

    The EU and IMF ‘Washington Consensus’ policy was applied to Third World dictatorships in the 1960s, ‘70s and ‘80s under gunpoint, but Europe is freer to choose. To follow ‘expert’ advice as Iceland and Ireland have done quickly turns into an exercise in asset stripping, replacing social democratic government with an extractive financial oligarchy.

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  60. "Not only do you demean socialism (which isn't all bad) but you conflate it with communism and totalitarianism."

    The only difference is socialists aren't yet willing to kill directly--either they quite being socialist or they get there. He wasn't demeaning socialism at all; it demeans itself.

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If you have a question or a private comment, do feel free to e-mail me at my address expat229@gmail.com.

GL