Thomas Jefferson definitely got it right 200 years ago when he warned that banks are more dangerous than standing armies, and that if allowed to control the issue of currency they will “deprive the people of all property until their children wake up homeless”.
The first bit about banks and standing armies is definitely true and the people of Greece are no doubt quoting old Tom Jefferson in footpath cafes these days. But he may have gone a bit far bringing the kiddies into it: Australian banks, for example, have managed to enrich themselves and their shareholders without so far depriving “the people of all property”.
In Europe, the quote is more germane. Apart from the arcane internal politics of Slovakia, the European debt crisis has come down to an argument about how much of it should be worn by bank shareholders and how much by the people and their children. At this stage the banks appear to have the greatest artillery.
The political deal struck at the last summit, on July 21, gave the banks a 21% haircut but it now has to be redone because Greece hasn’t managed to keep its side of the bargain. As a result, “financial markets” (i.e. banks) have besieged European governments by raising their bond yields and threatening recession by depressing sharemarkets.
The reason global markets have been rallying hard in the past week is that German Chancellor Angela Merkel and French President Nicolas Sarkozy said they would recapitalise the banks.
If one were cynical, one could see the market gyrations as a grotesque manipulation of the European polity via a deliberate system of punishment and reward.
When the politicians misbehave they are put on the rack of rising bond yields and falling asset markets; business people and consumers panic that markets are falling; investment and consumer spending is threatened; recession looms; politicians are pressed to “do something”.
When they say, “OK, OK, we’ll pay the ransom” (give the banks money), markets surge, businesses and voters are relieved, and everyone congratulates the politicians for their wisdom and pragmatism.
Europe’s leaders are now bunkered, trying to come up with enough cash to recapitalise the banks after their colossal, foolish, venal mistakes in lending too much money to governments that were never going to be able to pay it back and, in Greece’s case, were actually cooking the books with the connivance of Goldman Sachs.
The Daily Telegraph in London, meanwhile, reports this morning that Germany is trying to put a price on this for the banks — that they must take a larger haircut than 21%.
Finance minister Wolfgang Schäuble apparently told the Frankfurter Allgemeine that the original haircuts were “probably” too low, saying banks must have “sufficient capital” to cover greater losses if need be. Estimates near 60% have been circulating in Berlin.
The politicians may need another smack — another market sell-off — to focus their minds.
Eventually the politicians will write out the correct-sized cheque and the siege will be called off.
In an interview with the German magazine Die Welt the other day, outgoing European Central Bank President Jean-Claude Trichet was asked: “How can it be prevented in future that taxpayers have to continuously save the banks?”
He replied: “The global financial system must be much more resilient. That is the reason we have to apply rigorously and fully the new Basel III rules, to be sure that systemically important financial institutions do not put the sector in danger. In this regard we have to be inflexible and oppose any pressure group.”
In other words: we have to stand up to the buggers. The Basel III rules refer to the attempt, vigorously opposed by the banks naturally, to require them to hold more capital, among other things.
Their lobby group, the Institute of International Finance, put out some research recently that predicted the additional $1300 billion in capital required by Basel III would push up lending rates by 3.5%, which would bring down global GDP by 3.2 percentage points and lead to 7.5 million fewer jobs being created.
Yesterday, the global regulators said that was rubbish. The Financial Stability Board and the Basel Committee on Banking Supervision said the reforms would only slow global GDP by 0.34% at its peak over eight years, and would settle back to a permanent negative of 0.3%. Meanwhile, Britain’s regulators are trying to turn back the disastrous repeal of the US Glass Steagall Act in 1999. The Vickers Commission on Banking has recommended that their core retail banking activities be “ring-fenced” from the riskier trading operations (vigorously opposed by the banks, naturally).
The US Banking Act of 1933, commonly called Glass-Steagall, enforced the separation of investment banking (the issuing of securities) and commercial banking (accepting deposits and making loans). It was repealed after Citibank, in flagrant contravention of the Act, announced the acquisition of the investment banking giant, Salomon Smith Barney, in 1998.
Alan Greenspan, then chairman of the Federal Reserve Board, colluded with the president of Citibank, Sandy Weill, by using an obscure provision of the Bank Holding Company Act that allowed the merger to go through temporarily — with two years grace to divest the investment bank operations.
Greenspan then pressured Congress throughout 1999 to repeal the Glass-Steagall provisions, which it eventually did in November that year with the Gramm-Leach-Bliley Act — a law that led directly to the global financial crisis of 2008.
Banks were able to use the privilege given to them to “issue currency”, as Jefferson put it, by leveraging their capital far more than any other company — 92 cents of every dollar deposited with a bank can be lent out as fresh money to someone else, thus creating money out of thin air.
After November 1999 the newly freed banks went berserk, leveraging their capital far more than the normal 12.5:1 by using financial engineering and by trading derivatives to increase profits and create huge bonuses for the executives, who rapidly became a kind of plutocracy, controlling vast wealth and running the country.
As we know, they got into trouble and had to be bailed out by US taxpayers.
And now the politicians in Europe at least are trying, feebly, to get back some of the control that was lost. In the US they’re not really even trying; cheque after cheque has simply been written to the banks, first TARP then QEs 1 and 2. The money went straight to executive bonuses — they didn’t even bother hiding it. Now the people themselves are rising up against the plutocracy, with protesters filling Wall Street.
The tussle in Europe over Greece is pivotal but it looks one-sided. The politicians simply cannot withstand another big market reversal and recession; the standing armies have them surrounded.
If the politicians decide to fight, your super will be a casualty of war.
*This article first appeared on Business Spectator