Saturday, November 29, 2014

Calling the Big Banks’ Bluff

BERLIN – The G-20’s decision in November 2008 not to let any systemically relevant bank perish may have seemed wise at the time, given the threat of a global financial meltdown. But that decision, and bad policies by central banks and governments since then, has given over-indebted major banks the power to blackmail their rescuers – a power that they have used to create a financial system in which they are effectively exempt from liability.

Big banks’ ability to extort such an arrangement stems from an implicit threat: the financial sector – and with it the economy’s payment system – would collapse if a systemically important bank were ever pushed into insolvency. But it is time to call the bankers’ bluff: maintaining the payment system can and should be separated from the problem of bank insolvency.

Above all, the G-20’s decision to prop up systemically relevant banks must be revisited. And governments must respond to the banks’ threats by declaring their willingness to let insolvent banks be judged accordingly. A market economy must rest on the economic principle of profit and loss. An economy with neither bankruptcies nor a rule of law that applies equally to all is no market economy. The law that is valid for all other companies should apply to banks as well.

Moreover, governments should guarantee insolvent banks’ loans to non-financial companies, as well as private customers’ current, fixed-term, and savings deposits, by reforming insolvency laws. Certainly, governments should not guarantee interbank liabilities that do not affect customer deposits. An insolvency administrator would manage the bank and ensure that all payments for which a state guarantee is given are carried out properly, with refinancing of these payments continuing to take place via the central bank.

After taking these steps, the payments system would be safe. In case of insolvency, a bank’s computers would not be turned off, its employees would not instantly be dismissed, and payment transactions would not collapse. Nor would a run on savings deposits occur, given the official guarantees that they remain unaffected by a bank’s insolvency. After all, even a simple banknote is money only because the government says so, and thus is no different from savings deposits, which means that no saver has an advantage from holding cash. So there would be no need for bank runs.

Of course, the deliberate restriction of the effects of bankruptcy to accounts other than private current, savings, and fixed-term deposits means that the insolvency of bank A could lead to the insolvency of bank B. For bank B, too, the same liquidation scenario would apply: savings deposits would be safe, payments could be made from its customers’ current deposits, and loans that it granted to non-financial companies would not be revoked.

Obviously, the domino effect need not stop there: the insolvency of banks A and B could get a bank C – and additional banks – into trouble. Indeed, the entire over-indebted fractional reserve-banking subsystem might have to be liquidated. But the payment system would survive.

This might trigger a positive domino effect as well, as other states – on grounds of international financial integration – adopt similar procedures for controlled liquidation of their own insolvent banks. Zombie assets would be destroyed. A large part of the money and credit that was created out of nothing from former interbank transactions, now excluded from official guarantees, would return to nothing. Afterwards, the liquidated, formerly over-indebted banks could be sold.

We have it in our power to eliminate the financial system’s rapidly growing debt and to create a new monetary order that corresponds to free-enterprise principles and the rule of law, without risking a breakdown of the entire payment system. All that is required to revive effective bank regulation – in Europe and elsewhere – is the will to resist blackmail by the banks themselves.

  • Contact us to secure rights


  • Hide Comments Hide Comments Read Comments (12)

    Please login or register to post a comment

    1. CommentedPieter Keesen

      To simplify à problem is one thing. Yet this article is to extreme in its simplicity. Perhaps both authors should study what happend when banks go bust. Example; DSB in THE Netherlands. No bankrun because of garanteed saving deposits?!
      What both authors argue for is à European version of THE Glass-Seagall act. Which indeed is à smart idea.

    2. CommentedAlexandros Liakopoulos

      Mr Pitts, we managed to come to a conclusion: this is xactly what I am saying to. Banksters and corrupted politicians who corrupt the governments are co-conspirators in their vast majority. They used to be in a much more clear cooperation under the Bush junior administration. Obama seems to want to go after their scams and scandals, however not even his own powers against the World Markets (the "Misters Money of the World") are sufficient. Imagine what happens with the rest of the world leaders, who neither have the power, nor the will to resist to some millions, or even billions of dollars... Yes, Mr Pitts, Governments and Banksters do function as conspirators, creating a new framework of regional, national and international politics, where institutional power are primarily subjected to "market needs" (their own interests) and not any more to the rule of the democracy, where the "people needs" MUST be the first and most important target of any government...
      Banksters and current politicians seem to have had their own REVOLUTION against the rest of the citizens, claiming the whole world as their own territory, through world institutions with NO POLITICAL LEGITIMACY to act as (de)regulators... if you ask yourself about how many subjects each people is called to decide upon nowadays, and if you compare it with one, two, three and so on decades ago, you 'll manage to detect a specific trend: PEOPLE DECIDE ON LESS SUBJECTS DIRECTLY AFFECTING THEIR LIVES FROM DECADE TO DECADE, YEAR TO YEAR AND - CURRENTLY - MONTH TO MONTH... History teaches us that when that happens - when a bunch of people are claiming powers far beyond their collective representation as percentage of the population - everybody else gets against them... so, unavoidably, if we do not CHANGE direction, we will all fall into the "cliffs" of newly formed nationalisms, social clashes, new kinds of massacres, etc... "History repeats itself as a joke", as they say. So, what I am just saying is "let's look up on history and try to avoid the mistakes of the past, in order no to suffer the pains of the past"... Till now, the majority of the world leaders (the presidents of the world biggest banking institutions are also leaders of the current world - i hope we agree here) do the exact opposite, trying to maximize their respective gains, in an ongoing struggle for more power over the people they should protect, represent, express and govern. Is that not the sense of the conspiracy, according to the literature of the so rich Political History of the United States of America in conspiracies and political assassinations??? As far as I know, that's the very definition of the world!

    3. CommentedMark Pitts

      Financial mismanagement by banks is a drop in the ocean compared to governments’ mismanagement of public finances.

      Throughout the developed world governments have amassed enormous debts with little to show for the expense. Each year they increase our debt through continuing deficits. This is unsustainable and will lead to higher taxes on everyone in the future (not just the rich), fewer government services, and/or significant inflation (a tax on savers).

      Governments everywhere are rescinding actual and implied promises made to the public. If you were born after 1960, get ready, far worst is yet to come.

    4. CommentedMark Pitts

      How can the authors believe that more government is the solution when banks’ single biggest problem is that they bought bad debt issued by governments themselves?
      Government financial mismanagement costs the public a hundred times more than banks’ mismanagement.

        CommentedMark Pitts

        If banks are involved in so much criminal activity, governments must be a co-conspirators. Otherwise, why haven't the bankers been prosecuted?

        CommentedAlexandros Liakopoulos

        we obviously see things in much different perspective... i could also mention a couple of "well-documenters" of my opinion but obviously - again - I would never manage to convince you on the data... one thing you can never deny though is that your beloved banks have moved the world towards a really fragmented by the their own standards "open market" deregulated system, which within 12 years after its coming into action (WTO Summit 2000 and on) have the following results: explosion of public debt, explosion of private debt, collapsing economies due to mega-scandals, over-rich people getting away with scams and becoming over-richer while middle class and poor become a New Third World within the First World and poor nations become over-poor nations, over-poor nations become over-poorer nations and so on... the sustainability of the system and of the environment under your ideas have been proven a wrong assumption my friend... corporations and business units failed to prove themselves either more responsible with social, economic and environmental terms, or more promising as figures of leadership and inspiration... I do not claim that politicians and governments of nowadays do better as figures of public trust, as they also participated, orchestrated and created the current system of social injustice and irresponsibility of the "elite" towards the "crowds" (or should I say "masses"?), in most cases following the rules of the bribes, either legal and transparent (in the least occasions statistically), or completely illegally, as "corruption"... but while you would blame politicians for being corrupted - when and if they get caught and if also in the same time they lack the political power to "cut the news down before they make it to the screen, the net or the press" - I would also try to seek who corrupted them and why they got corrupted... cause when you see a so much spread social malaise which every day demonstrates itself with new specific scandals, treating the symptom (ex: according to the "war on corruption", all politicians should be counted accountable for accepting bribes to deliver political decisions, however this is the rule and not the exception - political funding in US is a system of public known bribing transfer and nothing more, you would agree I believe) could never treat the disease, so gradually the body looks more and more like a corps... as societies all around the world do today, due to neoliberal politics, human greed, banksters' scams and less and less inspirational political figures, leaders in every sense.
        Without any kind of criticism on your way of thinking, as I still am amazed with the passion you defend the interests of a bunch of criminals who act like their gains come from the land of no man and have not any cost for none, may I please ask you what you do for a leaving? Your stance would be much explained if you participate in this 1% of world over-rich, or you are around them, getting funded by them or connect your interests in any form with them. If not, I would strongly suggest to review your data, to look up on Mr Krugman's, Stiglitz, Mrs Klein and Wolf, etc writings and to start thinking outside the box of the propaganda, the World Media are delivering (or should I say "are bombing"?) the whole world every day, in order to defend their own interests, which are directly and/or indirectly interconnected with the Banksters-Gunsters and Poisson Masters of neoliberal corporatocracy...
        If you have a question on my current status and background which also explains in much my stance on the subject, I am a PhD "overqualified" 35 years old Greek European citizen, unemployed for 2 years and doomed to be in the next 10 except if I accept to go back working the land or leave abroad (where while everything is falling?)... and why did that happen? cause here in Greece we accepted as a state to buy the banking sector private debt, which explode the public debt and got us in a turmoil of destruction... corrupted politicians and corrupted bankers are still in place, after being backing up each other, one buying the debt of the other and the other funding the transaction with new public debts, while in common they deliver the cost to the general public, whose only fault is they did not revolt in the past to bring the common thieves in justice. But, however, if they have done exactly that, or if they do today in order to bring justice to the country (I say again: the main responsible are still in power, still making transactions, still getting richer by selling off public infrastructure, etc), you would be the first to accuse them in being terrorists, as not complying with the authorities (no matter what the authorities are doing), consist an act of terrorism, under the neoliberal agenda and the World US politics...
        So, how can one claims justice and the rule of law under a corrupted system, from corrupted politicians, who operate in corrupted manners due to an economic system which is predominantly based on all forms of corruption and of exploiting one another? "This is the question", as Shakespeare would have put it. Or else, one could also pose the question: "how the hell do we change it to create a better, more sustainable, more just and more promising future?" (I still tend to believe that: "YES, WE CAN!")

        CommentedMark Pitts

        Banks everywhere use leverage, and the allowable limit is set by their respective governments. Without leverage there would be inadequate money supply and credit to support the underlying economy.

        If governments cannot repaid what they borrowed, that is hardly the banks' fault.

        CommentedMark Pitts

        All bailouts to Merrill, Goldman, Citibank, Morgan Stanley, and JP Morgan were repaid in full. Lehman was never bailed out, and Enron was not a bank.

        Not only did it cost taxpayers nothing, the public earned a very good return on their investment.

        All this is well documented in the New York Times.

        CommentedAlexandros Liakopoulos

        Mr Pitts have you ever heard of Merill Lynch and Lehman Brothers scandals? those the american taxpayer roughly one trillion... the enron one more... your real-estate creditors, about 2,3 trillion so far... Goldman Sachs about 700 billion which she returned afterwards with a negative interest (you were paying them to get your money, in a sense)... currently, you have ongoing scandals from JP Morgan, Standard Chartered, Morgan Stanley, Royal Bank of Scotland, Citigroup, etc. for laundering the Iranian money and manipulating the LIBOR, during 10 years! the cost for the public cashiers of this manipulation is not possible to be figured out yet, however it is foreseen to set the number VERY HIGH... within all these years, governments were issuing public debt, banks bought and financed it, then they created a "leverage" and start betting among themselves on a World Casino Capitalism which only had in mind the maximizing of banksters' gains and the minimizing of publics' welfare and social status... I am really amazed for the very fact that there is even one person on this planet believing the economic crisis is primarily based on the governmental and not the private (banking mainly) side of the equation... really amazed!

    5. CommentedBertrand Groslambert

      Why not simply nationalizing the bank, firing the top management and wiping out the shareholders and possibly the bondholders? It was the way Sweden proceed successfully at the beginning of the 90s.

    6. CommentedAlexandros Liakopoulos

      excellent article, bringing into light the very fact that solutions do exist if politics prevail on economic preoccupations that have nothing to do with a healthy market economy and everything to do with a new kind of "centralized world economies", based on worldwide private interests, directly or indirectly connected with the banking sector... through the world financial crisis and the ongoing shocks for the local economies that face the results from the banksters' greed of the last years, these fully scandalous people who own the banking sector, found a way to claim political powers from the governments, infrastructure in a minimum prize and very cheap labor force. What they tend to forget is that whenever rich communities of people face destruction and poverty (as the North and the West does nowadays), world disasters tend to appear and these disasters make no exceptions according to income: rich people die quite as good as poor people within a world disaster as the one the banksters are preparing... some say this is they target in order to impose a world government and institutionalize their powers... it may be so, it may not... however, the banksters' bluff as exposed here and the different governments' reluctance to call the bluff on and address it accordingly, is a clear message to the world: either the banksters will destroy the world due to greed, social irresponsibility and criminal incentives, or the world will break their powers down, lock them in and use their wealth to create a more sustainable future... third case does not exist!

    7. CommentedProcyon Mukherjee

      A very central question is raised, whether or not moral hazard could be systemically eliminated from the financial system that currently is multiplied by a plethora of instruments, some orchestrated by central banks through open market operations and inflation targeting instead of growth that has taken the money supply to the hilt while doing precious little to the velocity of money; too much money moving to too few goods and opportunities is a prescription that has more than one down side.

      But where is the malaise, is it in the design of the current financial system or in the regulatory framework, which lacks the supervisory instincts that is devoid of the very purpose for its construct, which is providing an equal opportunity market mechanism where the greater good for all could be transacted. Unfortunately regulatory capture is almost complete.

      Perhaps the solution lies in creating afresh the institution of regulation that provides to the larger community a way to step back into the market while the body of regulation is not made an integral part of the market mechanism but completely separate and unambiguously independent from the vagaries of political and other interferences.

      Procyon Mukherjee