Catastrophe: 2008 Edition
Whether by sinister design or just by greed, delusion and incompetence, and certainly with a strong whiff of criminality and corruption, the financial services industry surfed on a torrent through the 00s, a tidal wave of money coated a deregulated world, financial products blasted in your face with bewildering arrays of apparently fantastic opportunities.
Here we rejoin our meandering ramble through a century or so of history, at the point where we had to break off for a look at the mostly unseen history of central banking. And it all merges now, because the modern era of financial turmoil and uncertainty begins, and the banking world vividly rears into view again, which led us off on that history of banking detour to get some background.
2008 began an age where the term banksters would become current. The term was originally coined in 1933 by Judge Ferdinand Pecora In the US. In the 00s, money had become hotter and hotter and faster and looser. Money was everywhere, it flashed from bank to bank and place to place in a perpetual firestorm. And debt kept on piling up, personal debt, national debt. It was a quiet and discreet elephant in the room at the time. Now and again someone might pipe up and say, hey, this is not really real, is it? But the moment would quickly pass and really there was a deep relaxation about huge debt, it was an indicator of success.
In 2008 we started hearing about these financial problems that were being discovered (and are still being discovered.) Banks all over the world were waking up to the fact that they’d bought loads of stuff from each other that was actually, as they call it, junk, and it wasn’t worth anything like what it was supposed to be worth.
And this had happened on a blistering scale (we’re running out of adjectives to describe scale.) Apparently, vastly rewarded people were incompetent enough to make such huge mistakes on such a huge scale for so long, that it had created a situation which could apparently bring down the whole global economic system. Meltdown, crash, Armageddon. The world’s economic system was going to collapse without urgent action. It was really hard to credit.
In October, 2008 British banks had short-term liabilities equal to 156% of the British GDP or 368% of the British national debt. The government announced a rescue package of around £500 billion. By the following March, the US Federal Reserve had committed $7.77 trillion to the stricken US banks.
And what had happened? It seems that it was just too easy to make unimaginable amounts of money, and banking finding new scale now in this age of turbocapitalism, it wanted to make even more money, because that’s what you do with money, make more money with it. And it seemed that what you made more money out of was just money, and for a while you do. And then, one day …
Had really nobody seen it coming? Wasn’t it becoming a somewhat worn plot, weary cliché? There were voices here and there.
Jan 20, 2008, in The Mail on Sunday, Ross Clark wrote an article about Fred Harrison (economic commentator and author, one who has seen the cat) as the man who predicted the 2008 subprime mortgage crisis ten years previously, and briefed the incoming New Labour government about what was coming. In 2005, he had published Boom Bust: House Prices, Banking and the Depression of 2010 and detailed the 2010 situation exactly.
Anyway, it was too late now …
Moral hazard is the inevitable tendency to take more risks with something if you’re not the one that’s going to get the consequences if it goes wrong. The moral hazard in banking was on a steep incline in these years, everything was so easy. So much easy money was being made from lending money to people that the traditional assurances were being relaxed, in fact, discarded. In the way things developed, the people selling loans and taking commissions for them, ceased being the people that needed to be paid back and thus taking on the risk of the loan.
A system had developed called the Securitization Food Chain, connecting investors and borrowers all over the world. Previously, the people lending you money to buy a house would be the same people relying on you to pay them back. Since paying them back would take decades, some care would obviously be taken in lending the money. This all went out of the window. In this securitization system, the people who made mortgage loans would bundle them up with lots of other loans, car loans, credit card loans, student loans, into complex derivatives called Collateralised Debt Obligations, or CDOs. These would be sold to investment banks who then sold them to their investors. Trillions of dollars’ worth of CDOs were passed around the world, mostly rated Triple A by the international ratings agencies.
Obviously, at the point the loan is made, no one cares anymore about any risk, because they were getting their commission and such a good price for passing the risk on to others. Obviously – it does seems very obvious – the drive was for riskier and riskier loans. The investment banks were doing a roaring trade in these CDOs, which could be sold on the basis of the apparent safety derived from their risk being spread over diverse portfolios.
For many years, more and more money was pumped into the economy in this way, the rate of mortgage and other loans paid out skyrocketed, quadrupling in one year, 2002-3, in the USA. Vast apparent value was being created. In the UK, presenters on breakfast television would greet you in the morning with a sunny smile because house prices had risen in value again. They’d sometimes have a little giggle about it, could it really be true we’re getting so rich? And maybe there would be just a hint of incredulity, that they didn’t quite understand where it was coming from.
What a wizard wheeze the Securitization Food Chain was if there was an intention to create vast amounts of debt. Some fleeting familiarity with history might have brought suspicions that something wasn’t quite right about this. But it was an age of hyper-confidence, the party couldn’t end. And for some, it never did.
Banking was no longer the safe, staid idea of our imaginations, branch managers knowing all the local businesses and the names of farmers’ cows; that sort of thing disappeared as systems were mechanised and digitised and formularised, and decisions weren’t made locally, they were made centrally by algorithm. Bankers were no longer sober clerks, they were high rollin’ gamblers, the biggest in history. And they’re so good at it, they do it with other people’s money.
It was commonplace for decades for retired politicians to take positions on the boards of banks, but that was when we thought banks were boring and staid institutions. They don't look staid and sober now, they’re very powerful organisations with astonishing reach and influence, operating far above the understanding of mortal minds.
Post bail-outs, what became very noticeable, a little disturbing, is how certain people seemed to hop from senior positions in banks, to become banking regulators, then move back to banks again, and sometimes to the top job. It’s shocking to contemplate how far reaching some of these companies are.
In Europe, the same international bankers that had been actively advising governments to sink into unsustainable debt, started taking over the technocrat political leadership of the most debt-distressed nations. It has been noted in media that it is as if international banking creates crises, and are then the obvious experts to come and sort it out. Naturally, people are incredulous at this.
It’s almost like banks are the real government, and even more blatantly so in the aftermath of a crisis which their activities had caused. The whole crisis just seems to have nourished the banksters, as if they’ve sucked up wealth from the people and inflated their wings.
After one outrageous revelation in a US congressional hearing, where massive bailouts of a gigantic insurance group were shown to have been made – in preference to another which wasn’t rescued - so that this group could cover the debts they owned to a massively influential bank that had been buying junk stock – mostly deliberately - and then insuring it with this group; and the decision to bail out was made including people with connections to this very same bank. (We just didn’t feel like naming all these, because the actual names of banks don’t mean anything and it makes it all even more boring.) This has been called a backdoor bail-out for the bank. It was astonishing to people that taxpayers’ money can be used to reward what’s described as economy-wrecking behaviour, and do so in secret session.
Following this hearing, David Reilly from Bloomberg News mused:
The idea of secret banking cabals that control the country and global economy are a given among conspiracy theorists who stockpile ammo, bottled water and peanut butter. After this week’s congressional hearing into the bailout . . . you have to wonder if those folks are crazy after all.
Wednesday’s hearing described a secretive group deploying billions of dollars to favored banks, operating with little oversight by the public or elected officials.
Naturally, he pours some ridicule on conspiracy theorists before openly wondering whether they have a point. Yet it’s not just stockpilers of peanut butter, it is the corollary of what many of the most revered presidents and public figures have been warning about since America’s birth and all through its first century and a half.
It really is all a nest of vipers, as President Jackson might have said. The whole thing really does stink if your nose is in that direction. Following this absolute calamity, which is having a major material effect on the lives of many millions of people, there’s been hardly any change in regulation of banks. It was such an earth-shattering thing – it still is - it felt like a lot of things were going to have to change. But nothing really has. Nobody, amidst the most pungent fumes of fraud, has ever been tried for anything (except in Iceland.) In fact, they’re given lots more people-backed money, and their executives are asked to govern debt-stressed nations.
It does bewilder people. It’s not a revenge-lust, it just seems bizarre that no one has been made to account for it at all, quite the opposite. But the reason why there weren’t trials and convictions is that, generally, the economy-wrecking behaviour which occurred isn’t actually illegal; the banks operate within the legal parameters they’re allowed to operate in. Of course they stretch these limits and loophole them, but it’s all legal within the government Acts that have established banking rights and wrongs.
It’s governments that allow banking practices, and these powers have apparently taken themselves beyond law and regulation and any accountability to anyone.
They’re too big to fail and too big to gaol. And certainly too big to govern and regulate. Are they the governors? That’s a crazy idea, of course.
For banks, it would seem fairly much business as normal, and massive profits are being made again by banks which would have collapsed but for the bailout of the banks they had exposure to. We were told that the world would come crashing down. So, at massive sacrifice, the rest of us have saved it. And it’s changed nothing, this crisis has only nourished and bolstered the system which created the problem and reinforced its rationale. Perhaps it all represents the latest great advance in a system whose inescapable, inexorable logic is to keep going and consolidate and own everything, as quickly as possible.
Very interestingly, (for novices) a lot of the blame – not that there was much blame bandied around - for the mistakes that the international banking community at large had made, these misjudgements and misevaluations, was that a lot of the stock that was later revealed to have been junk stock, as they passed through the international market, were graded as AAA, the highest possibly credit rating, by the international (American) ratings agencies. And these are the very same ratings agencies that now terrorise governments of the countries that have been economically crippled by this financial crisis, when they start to mutter that they might lower their credit rating, thus making it more expensive for these countries to borrow the money that they need to service the debts that they now have taken on because of the financial crisis which these agencies played a central role in creating.
As mentioned, pension funds are legally obliged to buy AAA stock, and innocently ended up with a lot of junk on their hands, thus obliging governments to bail out banks for this stock, because this was people’s pensions and savings. From a certain angle, this really looks like entrapment, the snaring of the wealth of nations. It is astonishing that, given the blinding scale, that no one really seems to have taken responsibility for anything, and nothing really has changed. The whole thing is so brazen and bold. Well, that’s how it looks.
It’s a weird thing that puzzles us no end – we’re certainly in some turmoil - nobody mainstream seems to ever even whisper that maybe these rating agencies were at fault. If they were at fault that spectacularly, how can they actually retain a shred of credibility? How did they get the job? How did they come to be trusted? Why are they so absolutely trusted still, in light of apparent enormous incompetence?
In any other walk of life, such incompetence would have some consequences. It’s almost as if they actually did a really good job? Of course, we wearily came to discover that, obviously, these ratings agencies exist because they are funded by the banks themselves, it is they that they have to be credible to. They carry no liability for their decisions, and apparently suffer no loss of credibility for crass incompetency - even when it wrecks the world economy.
How masterful to make a killing by insuring themselves against rating agencies’ ratings being massively and utterly wrong. There always seem to be people in the know. It has been noted by others how, in the autobiographies of several prominent persons around the time of the Wall Street Crash, how astonishingly lucky they all claimed they had been that they decided to get out of the market and convert all their assets to gold, just before the crash, just in time. Nothing is without precedent here.
It is a strange pickle we’ve got ourselves into.
It’s been hard for people to watch as the people who have been so remiss in losing so much money that we had to rescue them – and save us all, apparently, from dire consequences - now being given another load of our money? No wonder they’re so well rewarded if they can pull off scams like that. But it’s really the continuation of a scam that was pulled off a long time ago, centuries ago. This is simplistic, of course, but it’s just how it seems to us. We keep on having to say that, because it seems incredible that it could be so.
We’re still in shock, seven years after it started, and have to look at it again to get our heads around it. The UK had only recently paid off its WWII debt to the USA and now gets into another debt straightjacket.
Then, because there was recession in the economy, even more massive amounts of money are created, of our currency, making us all poorer, and is put in the vaults of the banks! And because they are banks, they then just sat on it, because they didn’t feel confident. And, maybe because they’ve got more profitable things to do with the money than invest in the home economy, or maybe the host economy.
The next new term that came to people’s ears was quantitative easing, begetting money, thus lowering the value of the money we have, and increasing the national debt, which we have to pay, and keep on paying in every way, on every front, forever. Quantitative easing, injecting a lot of money into the banks so that they perform their presumed function and lend it out to the people, at interest, and it trickles through the economy at large. And then they don’t even do that with it.
It seems screamingly obvious that the quantitative easing required is the issuance of a huge amount of debt-free money direct from the Treasury, then there really would be money injected into the economy, which is apparently what the government was trying to do. Unless we’ve completely misunderstood.
Why can’t it be spent by the government directly into the economy? Is it that the banks own the printing presses and they won’t let anyone else use them? Sort of. It’s not so much printing banknotes anymore, it’s just ghostly numbers, tied to no mass, a cascade of electronic digits called into existence. And it all flashes around and then they calculate how much you now owe them. Governments have forgotten that they can issue money directly, it's just a given that it is only the bank(s) that money comes from, only in this arcane temple lies the stupendous magic to create something out of nothing, and then sell it. We can’t always defend ourselves against the notion that we are paying for our own slavery, twice over at least.
The possibility of the government issuing money directly is never raised by anyone in politics or in the media. It’s been completely submerged as an idea. It’s been this way in Britain for over 350 years.
In 2011, there was a proposal from the Bank of England that, effectively, the government should bribe banks to lend money into the economy. This was the central bank’s proposal to stimulate the economy.
We have to repeat that to ourselves. There was a plan – from the central bank – that our government, using our money, should bribe banks to lend us our money! And they would do this in broad daylight. It remains breath-taking to contemplate the absurdities accepted in this age we’re in, in the light of the history we’ve crammed.
And it really does start to make stories and explanations on the Web more and more believable. Because it’s hard to credit what is happening, it’s hard to find an explanation for the things that happen.
In 2011, President Obama’s government came up with the idea of the Trillion Dollar Coin. That is, the US Treasury would directly issue money, and not borrow it from the Federal Reserve. Beautiful platinum coins, they’d have been a real collector’s item. What a revolutionary idea. The idea emerged during one of the annual budgetary paralyses which are becoming part of the political calendar in the USA. The last heard of the coins was January, 2013, when the idea was rejected by the Federal Reserve and the Treasury. Surprising that the Federal Reserve should reject the idea, but at least the US government have remembered that they can actually just do that, they can issue money, they don’t need any help in this regard. It is hard not to entertain fanciful notions about things that happen.
On the whole issue of money issuance, we’ve really enjoyed Bill Still’s documentary films on the Net; a couple of iffy quotes used, to be sure, but actually a fascinating and informative film with very good leads to follow. The Money Masters
We really haven’t looked at the money thing properly but briefly, in passing, we’ll mention Still’s proposals about money.
What Bill proposes is that his government directly issue a wadge of interest-free money, billions of greenbacks, say. Issuing all this money directly from the Treasury would cause hyperinflation, but this would be counteracted by gradually increasing the fraction which the banks must keep in reserve, keeping the money supply constant, until full reserve banking is reached. And banks would then just lend out the money deposited with them, which most people thought was what they did anyway. The idea of full reserve banking has also been proposed by Milton Friedman and was a central consideration of the Chicago Plan in the early 30s.
Maybe the issuance of money should be through an institute of state that is set apart from the legislature, as the law is. Then again, aside from state issued money, some people have some intriguing experiments with currency going on. In the end, we’re persuaded that money always needs credibility to be stable, but it’s definitely all interesting.
The claim persistently made is that banks and fractional reserve banking are actually the cause of inflation. We’ll come back to this. Maybe Obama’s team will beat us to it. Probably not.