A Crisis Veiled in Public Spectacle

by Bill Bonner.

You can’t help but feel sorry for the bankers. Yesterday, one of them was so upset and humiliated he tended his resignation — at a Senate hearing.

One after another the bankers mount the scaffold. Goldman, JP Morgan, Barclays…and now HSBC. One loses money. Another rigs LIBOR rates.

One fiddles an entire nation’s books. And another helps terrorists, drug dealers and money launderers with their banking needs.

That last charge is the one leveled against HSBC yesterday, causing the bank’s chief of compliance to quit, on the spot. Here’s the accusation:

…using a global network of branches and a US affiliate to create a gateway into the American financial system that led to more than $30bn in suspect transactions linked to drugs, terrorism and business for sanctioned companies in Iran, North Korea and Burma.

This spectacle may be entertaining, but in our view, it is fundamentally meaningless.

Here’s what really happened:

The feds created a funny money, back in the early ’70s. Unlike the gold-backed dollar, this one was almost infinitely flexible. It would allow the financial system to create trillions-worth of new cash and credit, vastly expanding the amount of debt in the system…and greatly increasing the profits of the banking sector.

The financial industry — the dispenser of the need money — set to work, creating fancy new ways to move the new money around. Each time it closed a deal, it made a profit. Naturally, it was encouraged to find all manner of clever ways to make deals.

Then, when the credit bubble blew up in ’08-’09 many of these tricks of the trade didn’t look so clever. They looked sinister. Stupid. Or crooked.

“When the tide goes out,” says Warren Buffett, “you see who’s been swimming naked.”

It is not a pretty sight.

Billions of dollars were lent to people who shouldn’t have been allowed to borrow lunch money. And now, there are losses — trillions worth.

The real question — the only question of great significance since the blow-up — is: who will take the losses? Or, to put it another way: How will the system be cleaned up? Who will decide who wins and who loses?

Mr. Market or Mr. Politician?

Let investors and speculators take the losses…or put them on savers and taxpayers?

Who will lose? The rich? Or the rest?

We’ve given you our answer many times: let Mr. Market sort it out. He’s completely impartial. He’s honest. He’s fast. And he works cheap.

In a flash, back in September-December of ’08, he probably would have wiped up the floor with the bankers. In a real crash, few of the big banks would have remained standing. Investors and lenders who had put their money in them…and who had invested in the things their phony credits supported…would have lost trillions. The rich wouldn’t be so rich anymore. And we’d now be in some phase of real recovery with many new financial institutions.

But we’re not in a position to impose our will on the world. And the politicians are. So, they’ve decided to do it another way. Instead of allowing Mr. Market to do his work they make their own choices…generally trying to direct the losses towards groups of people who don’t make campaign contributions…and don’t know what is going on. That is, towards the masses…and the unborn…

The idea has been to kick the can as far down the road as possible…borrowing and printing trillions more dollars to prop up the financial system…while also parading a few bankers through the streets with nooses around their necks. The press insults them. The mob spits upon them. The public spectacle continues…

…and nothing really changes.

Regards,

Bill Bonner,
for The Daily Reckoning

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

  • Ben the layabout

    Thinking about Buffet’s saying. It’s summer vacation in Europe. Among the many delights are the barely- (sometimes completely-) unclad bodies of women near bodies of water. On the flip side, is the pudgy middle-aged man in a Speedo. ugh.

  • Boris

    Let’s hope that when change comes it won’t take the world by surprise.

  • Longnine009

    They could always put a diving board at the 100th floor for bankers who don’t
    want to be humiliated. Make that the 50th floor. Hundredth floor takes too long.

  • gman

    “The real question — the only question of great significance since the blow-up — is: who will take the losses?”

    oh harf. the system has been imposing losses from the beginning. that’s the entire point of the entire system. consider: does a central bank that prints fiat debt paper money lose anything at all if the borrower defaults? once that question is answered then it should be clear what was going on all along, what is going on now, and what will be going on in the future.

  • Wags

    Here’s what really happened:

    Back in 1787, after fighting off an oppressive government, a bunch of wannabe rulers got together and decided to create a new oppressive government that would grow like cancer over the next 225 years…

  • S W

    “While also parading a few bankers through the streets with nooses around their necks. The press insults them. The mob spits upon them. The public spectacle continues”

    Bill be glad you don’t live (permanently) in Ireland. Our Bankers get away scot free – they even attend Irish soccer team matches & live it up at five star hotels.
    But hey a “broke” Irish banker is entitled to some fun too right?
    Boobus Hibernicus.
    http://www.independent.ie/national-news/euro-2012-seanie-fitzpatrick-joins-fans-in-poznan-from-550anight-hotel-3134076.html

  • Rusty Fish

    Slaughtering a goat to prepare a palatable dish is what people crave when in hunger. When natural goats are in shortage they will look for substitute, the scapegoat. With the current climatic conditions most of the scapegoats could be found in the banking arena. Bankers are advised to parachute from their low-fuel wobbling jet soonest possible.

  • http://www.investorsfriend.com The InvestorsFriend

    Debt is good because it allows the poor to borrow from the rich. This is how a modern economy shares things.

    Default can be good too, it redistributes wealth from the rich savers and investors to the poor borrowers.

    It’s all good clean entertainment.

  • Barter is Future

    The real problem of come toa new era are the bankers not the politics. Bankers try to live at the cost of rest of people, that is the real problem!

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