Over the last decade the banks have been making a vast quantity of cash, or so they would have us believe. Actually what’s been happening is a sort of Enron style farce where poorly regulated investment banks have been bubbling up their profits and increasing their paper value. While this has all been happening the bankers themselves have been giving themselves huge bonus payments which have taken the real money (not the paper money) out of their banks. It’s a little confusing for the thickies out there so I shall simplify. If I ran a company that’s got assets worth $100 and then persuaded my 100 investors that their $1 shares were now worth $5 a pop the company would on paper be worth $500. As I have increased the value of the shares the investors would probably have no problems with me giving myself a $100 bonus because on paper the company is still worth $500. In order to raise the cash I would just borrow it from another bank but back the loan with my assets. The following term I persuade the shareholders that the company is doing so well that it is now worth $10 per share. They duly give me another bonus payment of $100 which I borrow from the bank against the $1000 company. When all’s said and done though I have got $200 in my pocket and a company that has $100 of assets and debt of $200 so if the banks stop lending me money I am fucked to high heaven and need to find some nice taxpayers to bail me out.
The only way the self created banking crisis is going to play out well is if they banks are allowed to fail. All that debt can’t be covered by the government printing more money and if we keep bailing the banks out then they will continue to live in this bubble where the money they have on paper is not backed by real money and is subject to the whims of market confidence.
Better regulation in the banking industry could have prevented this but it’s done now and the Prime Minsister of the United Kingdom and the President of the United States are both on their way out so it’s time to look forwards to what has to happen for this to fix itself.
Banks need to go bust, the ones with the most hot air on their balance sheets will be the ones hit hardest. Staff will be made redundant and people will lose their savings. It will cause a global recession but one that will be short lived because the system will reset itself and the markets will heal. People who bought their houses for $100,000 and now find them to be on paper worth $250,000 will find them back at around $100,000. A few people will do really well out of it and a few people will do really badly but the majority will end up back where they started. We got here through unbridaled capitalism and the only way out is through the same door.
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