Financial Facts

It is difficult to see what central bankers and politicians would have done differently if they had purposely gone out to try and destroy baby boomer generations wealth. They have decimated pensions, property values, savings rates, annuity rates and equity portfolios all at the same time, all over the West, all stemming from the same basic mistakes.
The basic mistakes included lending money to people who couldn’t afford it, refusing to allow the economies of the world to cleanse themselves after the tech boom with a recession and interfering in the price discovery mechanism.
Many people today point to the fact that capitalism has failed. Capitalism is working absolutely fine!
It is because of the capitalist markets that no one will buy the toxic debt that the banks have on their balance sheet! The banks refuse to sell at the rate that the market is willing to buy. If the banks were forced to go bust or sell their bad debts to the market, then the situation surrounding the financial crisis would have been solved months ago.
However, governments have signalled to banks that they will not let them fail. This began with long-term capital management in the late 1990s and has continued today. In the capitalist, organisations which do stupid things go bankrupt. Their remaining assets are then sold to companies which didn’t do anything stupid and those companies that those assets to work producing wealth for society.
The unwillingless of governments to allow the large financial institutions (who are also large political donors) to go bust has meant that the banks have been able to take a risk free bets. The people at the top of the banks and the people are making the bets don’t particularly care what the share price of the bank is. Neither do they care about the bondholders in the banks.
All they care about is making as many large bets as possible and collecting bonuses based on those bets. If their bets failed, they were already told in advance that the governments would not let them go to the wall. Even if companies did go to the wall, why would the bankers care? The bankers salaries and bonus culture made this situation a near certainty. This part of bankers remuneration plans certainly needs to be addressed.
If you tell someone you will cover all their bets at the racetrack if they lose and allow them to keep all their winnings if they win, if they are smart, they are going to borrow as much money as possible and take massive risks. It’s the smart thing to do.
What has happened in our banking system proves that the people who run banks are smart, optimal players….not stupid. Their incomes were derived from salaries and bonuses, not share prices. In any case, when they realised the wheels were coming off the share prices, they probably made a fortune from shorting the shares of their own banks. They all walked away rich.
This money they would never have made if the government didn’t promise taxpayer funds to bail them out if all went wrong and if they properly regulated the remuneration of bankers. It’s the governments fault and it is quickly cured if the banks are allowed to go bust.
If that happened, capital would form from investors to establish new banks and a competitive market place for the consumer. That’s how capitalism has always worked. Until recently, it was doing a great job of raising living standards. Government intervention is about to destroy a lot of the growth of capitalism gave to us. What comes next is anyone’s guess, but I won’t be capitalism.