We passed an interesting anniversary this week. It’s exactly 5 years since the collapse of Lehman Bros. in the US, and the date that the GFC went viral.
The GFC certainly shook things up a bit. And there was an expectation in the years that followed that we’d see a new economic order emerge from the rubble. There was a curious chorus, with angry US Senators joining with shaggy Occupy Wall Street protestors to demand that ‘the system must change!’
So has it?
Is the global economy safer and more secure? Do Aussie or even American investors face a radically different world?
If you ask me, I’d say the game hasn’t changed at all. And if anything, the system corrupt features that got us into the mess in the first place have only gotten worse.
This is not some conspiracy theory about our governments being controlled by reptiles from outer space. It’s just what happens when powerful self interest (and mountains of money) meet with a poorly defined and mis-informed public interest.
So what has changed? Well it’s true that there’s been a crack down on the dodgy mortgage-backed securities market. There’s much less room now for some of the dodgier practices that murkied those waters.
So, does that mean we’re safe? Well, maybe for now. But only until the next financial sector ‘innovation’ that allows banks to start recklessly throwing money all over the place again.
But the heart of the problem is with the financial sector itself (I’m talking about the US in particular here, but the same is true of Australia).
And the crux of it is just that we’ve allowed the banks to become so big.
In modern economies the supply of credit has become an essential service – on par with electricity and running water. Without credit, and therefore the banks, there is no economy. And in places like America, where the government is up to the eyeballs in debt, no public service either.
It’s an apocalyptic scenario.
But at the same time, we’ve allowed the provision of this service to become more and more concentrated in fewer and fewer hands. And those hands all have their hands in each other’s pockets.
Are they your car keys?
A complex web of refinancing and repackaged financial products means the banks are all tied up together – like mountain climbers up a cliff.
And this means that we now have banks that are ‘too big to fail.’ If one of them goes over then they all go over together.
And for government, total financial system collapse is a scarier scenario than outright war. Add altruistic desires to avoid social and economic ruin aside, no government would last the next election if they were seen to have ‘let it happen’.
And so what can a government do but throw money at the problem? Try to prop up the bank and hope that it gets its house in order.
And the scary truth of it is, that this is still as sophisticated a strategy we have for trouble in the financial sector. There is no clear strategy anywhere in the world for how you might take down a major financial institution in an orderly manner.
Say one of the big 4 here, ANZ, CBA, Westpac, NAB, found themselves in a mess of their own making. How would you let them face the consequences? How could you bring down a bank of this size in an orderly way with out devastating fall-out?
No one knows. And so the best strategy we’ve got is still to just throw money at it.
But can you see the problem here?
Imagine you ran a business where the government said no matter how badly you stuff it up, no matter what kind of foolish decisions you make, I’m not going to let you go to the wall. You’re too big to fail. Here’s a bag of cash.
Why wouldn’t you take risky gambles? If you win, you win big. If you lose, the government picks up the bill.
And so we’ve seen banks effectively hold governments to ransom. Like Allied Irish Bank, during the Irish banking Crisis. They just said, “We’re going under. What are you going to do about it?”
The government gave them a big bag of cash.
And so following the GFC, there were a lot of calls to break the strangle hold of the banks – to unwind the concentration and expose them to more competition.
But things have gone in exactly the opposite direction.
The big banks have gotten bigger (though in part this was due to people fleeing to the perceived safety of the big boys). But regulations have done nothing to bring us back from the brink.
And quantitative easing, which is effectively about force-feeding the banks with cheap credit in the hope that they’ll start lending it out, perversely only encourages exactly the kind of risky lending that started the crisis.
And at the same time, the rich have gotten richer. There was a lot of anger directed towards the Wall St fat cats, but they’re still laughing. Quantitative easing has pumped up asset prices, pumping up the wealth of the asset-rich elites.
The Bank of England calculates that 40 per cent of the QE benefit has gone to the top 5 per cent, including those bankers who started the trouble.
Not bad, hey?
Start a crisis because you know the government will clean up your mess. Direct a large share of the recovery money into your own pockets. Complain about red tape.
It is a sad state of affairs, and I have to believe that humans can do better, but maybe the best we can hope for is to muddle on through.
In the mean time, we need to know that the game is rigged, and see it for what it is.
Government instincts will always be to throw money at the problem, and ‘grow’ their way out of trouble. This is exactly the play-book that QE comes from.
Pump up asset prices. Make asset-owners wealthier. Hope that some of that wealth trickles down through the economy.
And so until the game changes, for my money the best strategy is to try to be one of the asset-rich, rather than one of those at the bottom getting trickled on.
The best wealth-protection strategy is wealth itself.
We’ve got to take the opportunities to build our wealth while we can, where we can. If your plan is to sit around and hope that the system takes care of you, you’re on a hiding to nothing.
When opportunities are ripe, like they are now, we need to act decisively.
It is a crazy old world. But disengagement is not an option. The last 5 year have taught us that.
Jeffery R Foley says
We are dealing with One Bank and 4 Trading Brand Names.
Top 100 are common to all.
Except Bank of Bendigo which has Fed Reserve Shareholding to stop Big 4 from making
a traditional Takeover.
I have printed money, qualified Chocolatier, sold Life Assurance, worked in Automotive,
Mining and Ragtrade. Saw the writing on the wall when Hong Kong millionaires came out
and pushed Port Melbourne, Doncaster and Inner Sydney Real Estate beyond the reach
of the children of Baby boomers. The next Market to collapse will be the Foreign Exchange
where Trillions are artificially rolled over. Last time I tried to fix this They set up the Bank of Bendigo with Reverse Mortgages. That market is now worth $530 Billion not including the rest of our
unencumbered Asset Base. My IT is worth. point 05% or 1% more than Jamie Packer.
I cannot use my knowledge. I can turn this Country around in 2 weeks. NO MORE DEBT. NO MORE BOND MARKETS. JUST PURELY IN THE BLACK.
WE TRIED TO PUT THINGS IN PLACE AND HAD A NUMBER OF TRILLIONS LOCKED IN AND WERE STOPPED. NO NAMES NO PACK DRILL AS I POSSESS VERY SPECIALIZED KNOWLEDGE.
Cheers Jeff Foley CFTP (Snr) FTA, Member ICC, Member Gold Institute.
Sigmund Taubert says
Hi Jeffrey. Your comments aroused my curiosity about how Australia could be turned around. We know the existing system is well past its use-by date! Also interested in your quantum mechanics article on Linedin.
Gary Powell says
No website as such guys, but excellent last email. I want to be involved directly STEPHEN in staffing future functions around AUSTRALIA. Gary 042120014 Or to work in your offices sometime in near future. Marketing or IT support, customer support.
Andrew says
Doing HSC economics in1980 I often argued with the teacher that money could be just printed- “bank”notes or figures on a computer. He always said I was wrong. But this is just what has been happening since the GFC.
During the recent quantitive easing program, many 000’s of millions of $ have just been printed in many countries. Some as figures on a computer screen, some as bank notes. The SMH last week reported the Aust Fed Reserve had 24,000,000 extra $100 notes printed to make sure there was enough cash to meet the demand, as Gail Kelly head of Westpac Bank said people turned up at her branches with suitcases to withdraw their money as cash.
The problem with just printing more money is that it is always issued as debt, ie it will need even more new debt money in the future just to pay the interest. The only solution is the solution that the American govt used for many decades after their war of Independence from the British in the 1770’s. Money is printed and issued debt free by the government, not issued as a debt by a bank. The economy is then allowed to grow steadily debt free and the wealth of a whole nation grows. The USA used this policy to settle and develop a whole continent and emerge during WWI as one of the strongest economies in the world, despite their crippling Civil war in the 1860’s.
The Aust Govt has also done this in the past. The Aust govt issued money debt free before WWI. It 1st created the Commonwealth bank and the govt instructed the bank to print (wrote the figures in a book) and pay out the money to build the railway line all the way across Aust to Perth. To build this rail line cost the Aust govt and tax payer only 0.25 % of the building cost. The money was created as a figure in a book as a credit. The money issued to pay for the materials and labor and the line was built. The money figures in the book were then later cancelled.
The current policy of quantitative easing will never solve the worlds financial problems, only delay the inevitable crunch/crash. The only possible solution is to issue the money debt free.eg the Federal govt issues a sum of money and pays it out as say pensions or to build a needed road.
Jorge Roshkov says
People, the answer is truly simple and begs the question of “WHY ARE WE RUNNING AROUND LIKE HEADLESS CHOOKS WITH SCENARIOS AND EXCUSES, AND NOT IMPLEMENTING IT?”
The solution is to re-instate the Glass-Steagall Act which was implemented by Roosevelt, effectively curtailing the banks from mixing depositor’s funds and their gambling lines [ derivatives].
Once this is implemented, the investment banks can go and play their derivatives, make up more of the same as they see fit, and sink or swim on their own merits and see how long they can hold their heads under water.
The Commercial banks on the other hand will only be involved in the banking of deposits, loans and repayments for viable securities.
What is clearer than that? The kicker is that the Investment arm of the bank CANNOT use the Commercial side of itself and the depositor’s monies to gamble with … hence, due to the delineation, they are required to deal with depositor’s as depositor’s NO BAIL_IN … which is already on the books for introduction into Australia, so kiss your hard earned savings good-bye.
Simple, straightforward and with the establishment of a NATIONAL BANK … NOT a privately run “Reserve” which tells our government what to do….
Also, Read the story of the foundation of the BIS .. Bank for International Settlements .. established in 1930, and with more power and immunity granted to it than a Nation of people!!! ..then tell me as politicians have explained […] that the Australian banking is NOT SUBJECT to their rulings!!
THIS is where we need to start .. then get onto the pollies, and explain to them … but first, do some homework, and recall Einstein’s definition of ‘insanity’.
Tom says
Wow Jon, You’ve hit a funny-bone this time. Some wonderful comments!!!
Instead of printing money and ‘giving’ it to the banks which have caused the crisis in the first place, why not return to having a ‘People’s Bank’ in each country? That way you can lend all the required newly printed money direct to small business and individuals, at VERY low rates – well below market rates. This would get industry employing and money circulating, repeatedly providing Tax income for the Government, just like Palmer explained. Let the People own that bank, like the original Commonwealth Bank. But this time, do not let the international bankers get their hands on it, corrupting the whole concept of a nationally owned entity which can compete independently with the commercial banks. Keep the bastards honest. What do the Singapore and Beijing Government Banks do with their profits? In bad times they pour out cash. In good times, they haul in big profits, recovering their earlier outlays. Look at the growth rate of China!!! Separate the Financial and speculative functions of commercial banks into different companies, without cross-dependency. Let the ‘too big to fail’ banks rot in their own greed and stupidity, while responsible action would reap benefits.
Eric Mc Colough says
A peoples bank that did not lend to investors but to owner occupiers and charged interest at the”cash rate”. To get the money you need a job and a savings history. Just too simple really, it would never be allowed to happen. Love the comments above, theres no doubt we’ve been stooged when the banks make millions a day but our kids can’t buy a home.
So will governments ever govern or just continue digging us a bigger hole?