Farewell, Sheila Bair, and thank you (and FU Paulson, Bernanke & Geithner)

Excellent interview here in the Times with this most decent of bureaucrats. She understood why the bailouts were not just wrong but unnecessary:

As she thinks back on it, Bair views her disagreements with her fellow regulators as a kind of high-stakes philosophical debate about the role of bondholders. Her perspective is that bondholders should take losses when an institution fails. When the F.D.I.C. shuts down a failing bank, the unsecured bondholders always absorb some of the losses. That is the essence of market discipline: if shareholders and bondholders know they are on the hook, they are far more likely to keep a close watch on management’s risk-taking.

During the crisis, however, Treasury and the Fed were adamant about protecting debt holders, fearing that if they had to absorb losses, the markets would be destabilized and a bad situation would get even worse. “What was it James Carville used to say?” Bair said. “ ‘When I die I want to come back as the bond market.’ ”

“Why did we do the bailouts?” she went on. “It was all about the bondholders,” she said. “They did not want to impose losses on bondholders, and we did. We kept saying: ‘There is no insurance premium on bondholders,’ you know? For the little guy on Main Street who has bank deposits, we charge the banks a premium for that, and it gets passed on to the customer. We don’t have the same thing for bondholders. They’re supposed to take losses.” (Treasury’s response is that spooking the bond markets would have made the crisis much worse and that ultimately taxpayers have made out extremely well as a consequence of the government’s actions during the crisis.)

She had a second problem with the way the government went about saving the system. It acted as if no one were at fault — that it was all just an unfortunate matter of “a system come undone,” as she put it.

“I hate that,” she said. “Because it doesn’t impose accountability where it should be. A.I.G. was badly managed. Lehman Brothers and Bear Stearns were badly managed. And not everyone was as badly managed as they were.”

Paulson, Bernanke and Geithner come across as callous SOBs when it comes to taxpayer funds, whose only concerns are for their friends in banking.

This next bit I do not agree with:

Grudgingly, Bair acknowledged that some of the bailouts were necessary. There was no way, under prevailing law, to wind down the systemically important bank-holding companies that were at risk of failing. The same was true of a nonbank like A.I.G., which the government wound up bailing out just two days after allowing Lehman Brothers to fail. An A.I.G. bankruptcy would have been disastrous, damaging money-market funds, rendering giant banks insolvent and wreaking panic and chaos. Its credit-default swaps could have brought down much of the Western banking system.

“Yes, that was necessary,” Bair said. “But they certainly could have been less generous. I’ve always wondered why none of A.I.G.’s counterparties didn’t have to take any haircuts. There’s no reason in the world why those swap counterparties couldn’t have taken a 10 percent haircut. There could have at least been a little pain for them.” (All of A.I.G.’s counterparties received 100 cents on the dollar after the government pumped billions into A.I.G. There was a huge outcry when it was revealed that Goldman Sachs received more than $12 billion as a counterparty to A.I.G. swaps.)

Bair continued: “They didn’t even engage in conversation about that. You know, Wall Street barely missed a beat with their bonuses.”

“Isn’t that ridiculous?” she said.

Yes, there would have been additional pain and panic had there been no bailouts at all, but we would also have cleared the banking system of bad debt and well into a real recovery by now, instead of this jobless GDP/QE faux recovery. When banks fail en masse, it’s not the end of the world – assets just move from weak to more competent hands. There were plenty of strong banks that were gyped of well-deserved deposits that should have fled crappy behemoths. The pre-Fed, pre-FDIC era saw the fastest growth and improvement in living standards of modern history because of this creative destruction, so it is a sign of the times that the most conservative, taxpayer-freindly politician or bureacrat with any significant power (unlike Ron Paul) is still in favor of bailouts.

Here’s a bit from a post I made in October 2008, when this was all going down:

What will happen if government doesn’t lift a finger?

The owners of McMansions will lose them to the banks or other mortgage holders, and those mortgage holders, if they bought the paper with loans of their own, will lose them to others, and so on. Almost every bank in the world will fail. They have all come to depend on deposit insurance and central banks to cover for the fact that they have been reckless and insolvent from nearly day one. There will be no bank lending at all.

What will happen to the depositors? Well, almost all of their money will be lost.

So, that is what we are looking at: every bank failing, zero bank lending, almost all the money in the world going to heaven. How is that not the end of the world? Simple: It is a reverse split. In 2006, let’s say, there was a million dollars in total bank deposits. Then in 2008 all the banks go under. All that is left is the cold cash in people’s pockets, let’s say $100,000 in all.

That remaining cash becomes extremely valuable. It has to work where one million did before. If you had $10 in your pocket and $90 in the bank, you now treat each dollar as if it were ten. The key is that so does everyone else. The world still has its unit of account and medium of exchange, we have just moved the decimal point over on all prices. (Note: gold and silver would rapidly re-enter circulation and quickly become the preferred money, as they always do until government outlaws them).

Of course, deflation on this scale makes debts unpayable, so essentially all debt is defaulted upon, but of course most creditors are bankrupt too. Contracts have to be renegotiated or annulled. No big deal, really. The assets are all still there, just the same as before. Nothing has burned down. A car bought on credit still gets the same mileage as before its loan went bad, a house keeps you just as dry.

Trust the prudent and smart, not bankers and politicians.

Such an event brings about a massive transfer of wealth from the reckless to the prudent and farsighted, who are exactly the people you want making the decisions about what to do with money and assets after the crash. They are statistically and philosophically the best equipped to decide what will generate the highest returns with the lowest risk. Life goes on. There is nothing to rebuild because nothing was destroyed. It is all just reordered in a more sensible fashion. The house in the desert is scrapped for materials. The Lehman mortgage traders find something productive to do, like drive cabs.

But that outcome is so quaint, so 1800s, so gold standard. We’re more scientific today. Bernanke is a wise economist. Congress is benevolent. War is peace, and lies are truth.

Greenspan was Framed! Blame bankers’ moral hazard, not their lackey.

Source: The Johnsville News

Source: The Johnsville News

The Cover Story

It has become commonplace to lay blame for the greatest of asset bubbles on the inflationary policies of Sir Allen Greenspan and his employer. A typical critique goes something like this: For the last 20 years, every time the market started to liquidate bad debts and malinvestments (the junk bond bust, the crash of ’87, the early ’90s recession, the LTCM blowup, and dot-com crash), Greenspan just turned on the money spigot and made it all better again with lower rates. Because he so encouraged borrowers and lowered or eliminated reserve limits for lenders, we avoided the necessary catharsis and let bad investment pile upon bad investment, with ever increasing asset prices and debt levels, until we reached the stratosphere last year. By then the system had become so saturated with debt, and asset prices so high, that mass bankruptcy and liquidation was inevitable.

The Real Killers

This history is correct, but not complete, and it lays no blame on the true evil at the heart of the age-old problem of the credit cycle. In any analysis of historical events, one must sift through dunes of BS, and the best way to do that is to ask, Qui Bono? (“as a benefit to whom?”). The answer of course, is bankers and their perennial sidekicks, politicians. The latter designation includes the ‘Maestro,’ whom, while valuable for his mastery of obfuscation, could have easily been replaced had he not played ball. Bankers have no qualms about overextending credit, because they, more than any other party, control the government. Politicians and the bureaucracies they create have always worked for money, and bankers have always been the highest bidders.

The Means

The primary mechanism by which bankers steal from the public is fractional reserve lending, which is enabled by the socialization of losses through FDIC insurance and the Federal Reserve’s monopoly over currency.  FDIC absolves commercial bankers from responsibility for their client’s deposits, and the Fed and Treasury lock the public into the rigged system.

The Motive

Within FDIC limits, depositors have no incentive to seek out banks that employ sound lending standards. Because banks are all equally safe from the depositor’s point of view, bankers have no incentive to be cautious. They have a strong disincentive to be so, because the more credit banks extend (the higher their leverage), and the shakier the enterprises to which they lend (at higher interest), the higher their rate of return during the credit expansion (inflation) phase of the cycle. The name of the game is to grow your balance sheet as fast as possible, with little concern as to reserve ratios or collateralization.

The Opportunity

Once the bust arrives, bank executives have already collected so much in salary and bonuses and sold so much stock to an ever-credulous public, that it isn’t very painful for them if their bank fails, since they have become rich. But once a bank gets big enough (remember, the name of the game is to expand your balance sheet), it is easy for its now powerful executives to ‘convince’ politicians that failure would be so damaging that the Treasury (i.e., public) must assume its debts for the greater good.  At critical times, it may be desirable to cut out the middle man and place a trusted member of the cartel directly in the federal executive.

The Fed is Just an Accomplice

In the meantime, the Federal Reserve is called upon to extend cheap credit to banks in general, which often entails the printing of new paper or digital money. The lower base rates that ensue help banks to get off their feet again by encouraging the public to borrow more than is warranted by economic conditions. (Note: The above is how things worked before we reached Peak Credit last year, and the bankers and Fed are trying with all their might to inflate again, but they will be continually confounded. The game is now over, because nobody wants or can afford any more debt, and banks are finally so impaired by defaults that they cannot lend. Also, at $50 trillion in total private debt, the entire mess is now too big to bail, given the Fed’s mere $900 billion balance sheet.)

A Long History of Offense

So that is it in a nutshell: a completely corrupt monetary system. It is nothing new. We have had episodes like this since before Andrew Jackson abolished the first national bank. So long as a national bank has a monopoly on money creation and legal tender laws obligate the public to use fiat currency and not an alternative such as gold, bankers will retain a lock on the economy and the boom-bust cycle will continue, at great expense to our security and quality of life.

Can They Help it? Isn’t it Just Human Nature?

The credit cycle is a natural phenomenon, yes, but so is war. And just as right-thinking people oppose that other means by which the public is exploited by the oligarchy, so they should oppose fractional reserve lending and the institutions that support it: the Federal Reserve system, the FDIC, and legal tender laws.