Why are the Governments bailing out the banks with such vast amounts of money?

[Rajiv]

And why are they not allowing the banks -- other than the small ones to fail?

I think that these are questions that have deeply puzzled all of us here. Is it because of a deep corruption in the political system world wide? Is it because of the deep capture of the Governments by the FIRE industry?

The "Recession" is over they say -- so why are they still continuing to ply the banks with even more money?

What is the implication of all this?

There is a very good discussion of this by VK at the Automatic Earth - Death, Taxes and Mr. Market calling the bluff

VK: The persistent notion that there's only $1-2 trillion in losses remaining in the banking system, as some people conclude from what Roubini and others may have stated, is false; that would be peanuts. The Federal Reserve printed $1.55 trillion to buy up toxic MBS plus Treasury paper. But the problem has not been cured, in particular: most of the toxic debt still remains hidden through the application of shady accounting practices. There is no solution in sight in the current political paradigm.

Think about it this way: the US government has implicitly and explicitly guaranteed, loaned, subsidized and given away about $12.8 trillion to banks while these banks have only $10 trillion or so in real assets. Why is the government giving so much assistance, a sum far greater then all assets combined of the US banking system?

Simple really, the derivatives aka bets are far larger than global GDP, estimated to be between $500 trillion and $1,5 quadrillion. JP Morgan alone holds $90 trillion or so in derivatives while the entire US GDP per annum is no more than one-sixth of that, at $14-odd trillion.

So those bets have gone bad and gone wrong and they have been kept hidden in the broom cupboard thanks to creative fictional accounting practices, in level 3 assets on bank balance sheets, and in off balance sheet items.

The losses are real, the bets went bad, and Washington is attempting a show of CONfidence to prevent a systemic collapse. But when Mr. Market calls the government's bluff, and he will, then people will realize the US Government is the naked emperor, with no money to back up those guarantees for failed and long dead enterprises.

There are three things in life that man can't prevent - death, taxes and Mr. Market calling the bluff.

See, Mr. Market is a master illusionist, is he not? Evidence you say?!
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[don]

Re: Why are the Governments bailing out the banks with such vast amounts of money?

And among those derivatives are calls that must be taken. Sounds a bit like the mafia, doesn't it ;)

[grapejelly]

Re: Why are the Governments bailing out the banks with such vast amounts of money?

the deal is this:

The banks are run for the pleasure of the government. The banks exist to do two things. One, is to finance government spending and debt, and two is to create inflation so that the government's debt can be paid back in depreciated currency.

So the other side of the coin is that when the banks are threatened, government helps them out.

It's that simple in my mind.

[jimmygu3]

Re: Why are the Governments bailing out the banks with such vast amounts of money?

the deal is this:

The banks are run for the pleasure of the government. The banks exist to do two things. One, is to finance government spending and debt, and two is to create inflation so that the government's debt can be paid back in depreciated currency.

So the other side of the coin is that when the banks are threatened, government helps them out.

It's that simple in my mind.

Dead on. Add to that the goverment-banking revolving door that allows the fox to guard the henhouse.

The collapse of the banking system equals the collapse of the dollar equals the collapse of the US as we know it. Of course they're throwing the kitchen sink at the big banks. How could anyone have expected a different outcome?

-Jimmy

[Rajiv]

Re: Why are the Governments bailing out the banks with such vast amounts of money?

The question I am raising is "Why is the banking system in such a state of collapse that 15 trillion dollars is insufficient to bring it back to life?" and what are the implications of that answer?

[touchring]

Re: Why are the Governments bailing out the banks with such vast amounts of money?

Dead on. Add to that the goverment-banking revolving door that allows the fox to guard the henhouse.

The collapse of the banking system equals the collapse of the dollar equals the collapse of the US as we know it. Of course they're throwing the kitchen sink at the big banks. How could anyone have expected a different outcome?

-Jimmy

why would the us collapse if the dollar collapses? less imports and more exports is a good thing.

the real reason is the banks have paid money to government officials to be bailed out. money makes the world go round, so why so difficult to understand?

[ThePythonicCow]

Re: Why are the Governments bailing out the banks with such vast amounts of money?

the deal is this:

The banks are run for the pleasure of the government. ...

I thought it was the other way around, that the government is run for the pleasure of the banks :rolleyes::eek:.

[Diarmuid]

Re: Why are the Governments bailing out the banks with such vast amounts of money?

I thought it was the other way around, that the government is run for the pleasure of the banks :rolleyes::eek:.

You'd need to know where the one started and the other finished to determine which is which. I think this image is apt.

[c1ue]

Re: Why are the Governments bailing out the banks with such vast amounts of money?

the deal is this:

The banks are run for the pleasure of the government. The banks exist to do two things. One, is to finance government spending and debt, and two is to create inflation so that the government's debt can be paid back in depreciated currency.

So the other side of the coin is that when the banks are threatened, government helps them out.

It's that simple in my mind.

I don't agree with this.

The government doesn't need the banks to create inflation - it can do so by sending stimulus checks in ever increasing amounts directly to taxpayers.

Similarly depreciation of the dollar is easy: start (literally) printing money as opposed to creating reserves.

From my view, the reason for what we're seeing is:

1) The government knows the economy runs on credit
2) The banks collectively provide this credit
3) The big banks are effectively presenting themselves (via lobbyists and ex-executives in government) as being able to provide this credit as well as having systemic shock impact if they fail, thus are 'saved'
4) The small banks cannot equally make this argument, thus are being allowed to fail/get eaten up

[Quincy K]

Re: Why are the Governments bailing out the banks with such vast amounts of money?

I don't agree with this.

The government doesn't need the banks to create inflation - it can do so by sending stimulus checks in ever increasing amounts directly to taxpayers.

Similarly depreciation of the dollar is easy: start (literally) printing money as opposed to creating reserves.

From my view, the reason for what we're seeing is:

1) The government knows the economy runs on credit
2) The banks collectively provide this credit
3) The big banks are effectively presenting themselves (via lobbyists and ex-executives in government) as being able to provide this credit as well as having systemic shock impact if they fail, thus are 'saved'
4) The small banks cannot equally make this argument, thus are being allowed to fail/get eaten up

Agreed. A good example of this is the continued extension of UE benefits. However, printing can only buy you so much time unless productivity eventually takes over.

[grapejelly]

Re: Why are the Governments bailing out the banks with such vast amounts of money?

The system works as follows. "Country banks" have their money in big city banks. It all ends up in New York "money center" banks.

The money center banks buy massive amounts of government debt. That is why they are given a monopoly on money creation.

The government could create all the money it wanted to without the banks, so why doesn't it? Because that would give away the game. Inflation must never be *perceived*. The Mishes of the world must be continually misled with deflation scares. The banks lend money into existence which is not perceived to be "printing money".

[oddlots]

Re: Why are the Governments bailing out the banks with such vast amounts of money?

The question I am raising is "Why is the banking system in such a state of collapse that 15 trillion dollars is insufficient to bring it back to life?" and what are the implications of that answer?

Why has the derivative market exploded? It's rise is the elephant in the room. Nominal value of, I believe, 10 times world GDP. Kind of makes the property bubble look like a pimple. When trades are netted out it's much less (in other words, many of these positions are offset by positions in the reference entity so that as one goes up the other goes down and it's only the difference that is at risk, in theory.) But the thing that disturbs me most is I've yet to see someone explain why it is so resilient and relentless in its rise.

Its the stuff that people ignore because it appears arcane that ends up on the front page 3 years later.

I suspect it's because 1) derivatives offer new, opaque opportunities for increasing leverage 2) the monetary system requires increasing leverage in ever more urgent ways: debt money systems simply cannot tolerate deflation. So the bankers are indulged in the belief that increasing "efficient" use of capital is in the public's best interest. Reserve requirements stand in the way? Out they go. Need to lever up to show a positive return? Gear up.

So the very rough "squinty" answer to your question Rajiv is: 1) 15 trillion didn't revive the banking sector because they are far more exposed than they say 2) because their leverage magnified the (disclosed and undisclosed) losses 3) the system requires a positive nominal return for the debt (money supply) to be plausibly worth something so 4) "money" (that is, promissory notes based on the taxing powers of governments) will be shovelled into the furnace to keep the FIRE going.

The implications to me are: rolling sovereign defaults. Never mind that these defaults were triggered by private "contracts" that could never have paid off based on the private assets backing them.

When failure in private enterprise cannot be tolerated there's likely nothing enterprising or meaningfully private about it.

[Rajiv]

Re: Why are the Governments bailing out the banks with such vast amounts of money?

Oddlots,

Thanks -- that was the reply I was looking for. If what you have stated is correct, and I have all the reasons in the world to think that it is indeed the case. Then Steve Keen's models may have pointed a way out

At the end of his last presentation, he stated that the way to solve the issue of the excessive leverage and credit was not to throw more money at the banks, but rather to resolve it at the debtor level. That is the place with the least leverage.

Thus for example in the sub pime fiasco the best solution may in fact have been prevention of default by the debtors -- either through direct subsidies, or by offering them low interest (zero interest) loans -- or the Government to act as the insurer of last resort on those.

I know that there is "moral hazard" there and much heartburn for people with prudent financial habits -- but no less so than the path we have followed with throwing Trillions of dollars at the banks resulting in multi billion dollar bonuses etc. etc.

[oddlots]

Re: Why are the Governments bailing out the banks with such vast amounts of money?

Yeah the perversity of this system never ceases to amaze me. But I suppose rewarding people who are thick enough to believe that upgrading their kitchen was an "investment" is a small price to pay for turning the screws on the government sponsored loan sharks that really profited from the deal. After all they bought those houses on the assumption that they would have a job (probably selling real estate); since the job's gone it's only fair to reduce the debt. Screwing the banks is the upside. (After all they never suffered: they passed all the downside onto our pension plans long ago.)

And since, as Steve Keen points out, There Is No Alternative, the bankers should actually really like it.

Let's see whether this will get past Obama's handler Rahm Immanuel (the democratic version of Cheney.) Errr... cough.

[mesyn191]

Re: Why are the Governments bailing out the banks with such vast amounts of money?

why would the us collapse if the dollar collapses? less imports and more exports is a good thing.

We can't export things as cheaply as other countries can due to the cost of labor here among other things. You'd have to bring wages in line with what others are being paid around the world first, and that means drastically reducing the standard of living in the US to 3rd world levels.

the real reason is the banks have paid money to government officials to be bailed out. money makes the world go round, so why so difficult to understand?

Yes, I agree with this.