There is no zombie free lunch

[Rajiv]

There is no zombie free lunch

Krzysztof Rybinski is a partner in Ernst & Young and assistant professor at the Warsaw School of Economics. He was deputy governor of the National Bank of Poland (March 2004-January 2008). His website is here

he financial plans of Barack Obama and Ben Bernanke will drain life and energy from the rest of the planet, says Krzysztof Rybinski. (This article was first published on 18 March 2009)
19 - 03 - 2009


It is a story that could make the Return of the Living Dead 6. A group of good people huddle on a roof, with a limited supply of raw meat. A crowd of zombies surrounds the house: hungry, mad, aggressive. Fear spreads and bodies collapse; the odour is terrible. The zombies smell blood and flesh on the roof; they scream and start climbing the walls.

The moment you stop feeding zombies they will come after you and we all turn into the living dead. So you keep feeding them in the hope that by the time the next night comes around, a new helicopter will arrive that - just in time - can drop new batches of zombie-food. It's the only way to survive. Attacking these creatures is very dangerous: when one zombie was destroyed a few months ago, the rest got so angry that they ate alive the entire nearby town.


This zombie danse macabre can be observed in real life. The people sitting on the roof are United States taxpayers; the zombies gathered around are bankers screaming for more and more support; the taxpayers' money is turning into zombie-food. The roof-commanders say: "We've got to feed them or they will come after us, shutting down credit to zero, selling all world assets, depressing prices to rock-bottom - and we all turn into financial zombies. There is no other option than to feed the zombies."
And the new supplies keep coming. Ben is a very skilful helicopter pilot; his master manoeuvres always drop new zombie-food suppies in the right place, at about the right time. Ben has recently taken on a new crew-member, Barack, who came with a fresh idea to keep zombie-bankers away from the house: "Let's feed them much more: maybe if they have lots of food, one by one they will transform back into humans".
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[Sharky]

Re: There is no zombie free lunch

I guess it's not too surprising that the purpose of the bank bailout funds is so poorly understood. I mean yes, the bank stock and bond holders should be wiped out. Yes, awarding bonuses to poorly-performing execs is an outrage. Yes, the amount of fraud in the industry is astounding. But all of those issues completely miss the point.

The money the government is pumping into the banking system isn't primarily benefiting the fraudsters, even though it is to some degree. The primary purpose of the bailout money is to save depositors. When banks go belly-up, guess who also loses?

The article in the OP talks about how it's such a waste that the money is being spent on the bailouts instead of on some worthy cause. Replenishing bank capital is not the same thing as vanilla deficit spending!

[GRG55]

Re: There is no zombie free lunch

I guess it's not too surprising that the purpose of the bank bailout funds is so poorly understood. I mean yes, the bank stock and bond holders should be wiped out. Yes, awarding bonuses to poorly-performing execs is an outrage. Yes, the amount of fraud in the industry is astounding. But all of those issues completely miss the point.

The money the government is pumping into the banking system isn't primarily benefiting the fraudsters, even though it is to some degree. The primary purpose of the bailout money is to save depositors. When banks go belly-up, guess who also loses?

The article in the OP talks about how it's such a waste that the money is being spent on the bailouts instead of on some worthy cause. Replenishing bank capital is not the same thing as vanilla deficit spending!

How many depositors does Goldman Sachs have?

[Rajiv]

Re: There is no zombie free lunch

Also, who are the depositors that are being saved?

Some links
Wealth in the United States



Wealth Distribution Statistics - 1999

• Adjusting for inflation, the net worth of the median American household fell 10 percent between 1989 and 1997, declining from $54,600 to $49,900. The net worth of the top one percent is now 2.4 times the combined wealth of the poorest 80 percent.
  
• The modest net worth of white families is 8 times that of African-Americans and 12 times that of Hispanics. The median financial wealth of African-Americans (net worth less home equity) is $200 (one percent of the $18,000 for whites) while that of Hispanics is zero.
  
• By 1995, the middle quintile of income-earners had only enough savings to maintain their current standard of living for 1.2 months (i.e., if they lost their jobs). That's down from 3.6 months in 1989.
  
• Though average household income rose 10 percent between 1979 and 1994, 97 percent of that gain was claimed by the most well-to-do 20 percent.
  
• Between 1970 and 1990, the typical American worked an additional 163 hours per year. That's equivalent to adding an additional month of work per year - for the same or less pay.
  
• Adjusting for inflation, the net worth of the median American household fell 10 percent between 1989 and 1997, declining from $54,600 to $49,900. The net worth of the top one percent is now 2.4 times the combined wealth of the poorest 80 percent.
  
• The modest net worth of white families is 8 times that of African-Americans and 12 times that of Hispanics. The median financial wealth of African-Americans (net worth less home equity) is $200 (one percent of the $18,000 for whites) while that of Hispanics is zero.

U.S. Wealth Distributions 1989-2001



The graph shows U.S. household net worth by various wealth levels for 1993. The 3.6% of households with wealth levels over $500,000 have almost 60% of the nation's household wealth. The "zero or negative" category has 10% of the white households and 25% of the black, while the $100,000 and above categories include 31% of the white households and 8% of the black households.

[Sharky]

Re: There is no zombie free lunch

How many depositors does Goldman Sachs have?

Goldman is a counterparty in many deals made by deposit-taking banks. If they go down, those assets are damaged and bank capital is further destroyed.

The graph shows U.S. household net worth by various wealth levels for 1993. The 3.6% of households with wealth levels over $500,000 have almost 60% of the nation's household wealth. The "zero or negative" category has 10% of the white households and 25% of the black, while the $100,000 and above categories include 31% of the white households and 8% of the black households.

Much of that wealth is also what drives the businesses -- small and large -- that employ America. J6P might not own it, but he sure as hell depends on it.

I'm not saying I agree with the bank bailouts. As far as I'm concerned, they should let the bad ones fail. Depositors should lose their shirts. "Natural consequences" are really the only way this can be prevented from happening again.

However, when most people disagree with the bailouts, they don't understand that if the banks were to fail, that they would personally be hurt as much or more than the bankers and their investors. Ref. the Great Depression as an example.

J6P today: Why are you wasting all of that money bailing out those rich banksters!?

J6P tomorrow: How could you let the banks fail? They took all of my money, and my employer can't pay me!

[Rajiv]

Re: There is no zombie free lunch

Yes what you say is likely quite true.

However, the way the current bailouts are being done is counterproductive -- it is a "lazy" way out -- with many long term repurcussions -- and possibly resulting in the demise of "Financial Capitalism"

[Sharky]

Re: There is no zombie free lunch

However, the way the current bailouts are being done is counterproductive -- it is a "lazy" way out -- with many long term repurcussions -- and possibly resulting in the demise of "Financial Capitalism"

Completely agree. It's not only lazy, it's criminal.

[Fiat Currency]

Re: There is no zombie free lunch

I'm not saying I agree with the bank bailouts. As far as I'm concerned, they should let the bad ones fail. Depositors should lose their shirts.

No way. You can bankrupt a bank mostly by wiping out the shareholders, and perhaps by making the bondholders take a restructuring hit. Recapitalization after that is simple.

Depositors should NOT lose their shirts! Fiat currencies are created by decree, and you are forced to use them by your Government.

In a proper system ALL deposits could be 100% guaranteed. It's the leveraged stuff with counterparty risk that should be allowed to fail.

[GRG55]

Re: There is no zombie free lunch

Goldman is a counterparty in many deals made by deposit-taking banks. If they go down, those assets are damaged and bank capital is further destroyed.



Much of that wealth is also what drives the businesses -- small and large -- that employ America. J6P might not own it, but he sure as hell depends on it.

I'm not saying I agree with the bank bailouts. As far as I'm concerned, they should let the bad ones fail. Depositors should lose their shirts. "Natural consequences" are really the only way this can be prevented from happening again.

However, when most people disagree with the bailouts, they don't understand that if the banks were to fail, that they would personally be hurt as much or more than the bankers and their investors. Ref. the Great Depression as an example.

J6P today: Why are you wasting all of that money bailing out those rich banksters!?

J6P tomorrow: How could you let the banks fail? They took all of my money, and my employer can't pay me!

When the FDIC takes over a bank the depositors are protected to the limit of deposit insurance levels.

There is no bloody way they are trying to protect the depositors. The only reason they give a shzt about the depositors is because people lined up around the block during a bank run makes for bad television for the politicians and their groupies. That is the only reason they raised the deposit insurance limits in the wake of the UK's Northern Rock debacle..."gotta keep the natives at home on the couch; don't want anything like that on this side of the pond now do we".

They have closed ranks in order to protect themselves...the politicians, the regulators, the executives and Board members of the banks, every last incompetent and corrupt one of them.

Why aren't the automakers and the financial companies being treated on an even playing field? Why must contracts for retroactive AIG executive bonuses be upheld, while UAW contracts are fair game for the Administration and Congress? Why is Rick Wagoner expendable, while Ken Lewis is untouchable? Listen to what EJ is trying to tell you. Go have a look at the interview that Bill Moyer did with William Black this week.

This isn't the Titanic...because on the Titanic some of the women and children were saved. I doubt there will be any space for them in the life boats this time.

[Sharky]

Re: There is no zombie free lunch

No way. You can bankrupt a bank mostly by wiping out the shareholders, and perhaps by making the bondholders take a restructuring hit. Recapitalization after that is simple.

Simple? Bank capital is already complete gone. Shareholders and bondholders wouldn't even make a small dent in the amount of capital that has been lost.

The only possible source of additional capital at the moment is the taxpayer. So, two options: spread the losses out among all holders of dollars via inflation, in proportion to the amount they hold. Or, allow bank customers to carry part of the losses.

Why should someone who has never done business with a bank be made to pay for something they had no part in?

Depositors should NOT lose their shirts! Fiat currencies are created by decree, and you are forced to use them by your Government.

In a proper system ALL deposits could be 100% guaranteed. It's the leveraged stuff with counterparty risk that should be allowed to fail.

We'll just have to agree to disagree on that.

In my view, FDIC and similar government guarantees are the cause of the problem, not the cure. The banks were encouraged by government policies to take high risks, since they knew they were backstopped by the government in case of failure. The only way the system will change is if those guarantees are exposed for what they are: unkeepable promises.

If depositors lost money, they would learn that all banks aren't the same. Without failure and loss, the free market can't operate, and nothing will ever improve.

[Sharky]

Re: There is no zombie free lunch

When the FDIC takes over a bank the depositors are protected to the limit of deposit insurance levels.

Historically, for large banks the FDIC usually covers all depositors, even above the official insurance level. That's not the point.

When the FDIC takes over a bank, it takes weeks for depositors to be paid. Given their current staffing, how long would it take if thousands of banks were to fail?

There is no bloody way they are trying to protect the depositors. The only reason they give a shzt about the depositors is because people lined up around the block during a bank run makes for bad television for the politicians and their groupies. That is the only reason they raised the deposit insurance limits in the wake of the UK's Northern Rock debacle..."gotta keep the natives at home on the couch; don't want anything like that on this side of the pond now do we".

I didn't say their interests were altruistic. They are protecting themselves by protecting depositors. They know that riots, etc would not be good for them or for anyone else.

They have closed ranks in order to protect themselves...the politicians, the regulators, the executives and Board members of the banks, every last incompetent and corrupt one of them.

I agree that they're incompetent and corrupt. No argument there.

Look, I'm not trying to argue motivation on the part of the bankers or the gov. All I'm saying is that if the banks were to fail, J6P would be in a lot more pain than he is today, even with the FDIC -- and that stopping the bailouts would cause those failures.

Of course whether the bailouts can actually save the banks in the end is an entirely different question (they can't).

[GRG55]

Re: There is no zombie free lunch

...In my view, FDIC and similar government guarantees are the cause of the problem, not the cure. The banks were encouraged by government policies to take high risks, since they knew they were backstopped by the government in case of failure. The only way the system will change is if those guarantees are exposed for what they are: unkeepable promises.

If depositors lost money, they would learn that all banks aren't the same. Without failure and loss, the free market can't operate, and nothing will ever improve.

I will violently disagree with you on that statement.

I defy you to examine the financial statements of ANY bank or financial institution in the USA and determine with any degree of confidence exactly how sound it is. The banks and financial institutions can bugger around with their earnings numbers with complete impunity and their financials are absolutely the most opaque of any [legal] sector of the economy. And this is nothing new. How do you think GE's Neutron Jack Welch was able to manage a huge, complex industrial conglomerate's earnings to "beat by a penny" each and every quarter? It was the ability to manipulate the books of the financial division, GE Capital.

So if I can't figure out which is a sound bank because of the governments own accounting regulations [note how the politicians bullied FASB into backing off on the mark-to-market rules this week], how am I supposed to decide which bank is safe to put my deposit funds into?

Deposit insurance is a trivial side show to the securitized toxic crap and outright fraudulent practises that are bringing down the financial system

[Fiat Currency]

Re: There is no zombie free lunch

Let's dissect ...

Simple? Bank capital is already complete gone. Shareholders and bondholders wouldn't even make a small dent in the amount of capital that has been lost.

The only possible source of additional capital at the moment is the taxpayer.

So on #1 we agree. It is simple. You print more money - they are very good at that, right? BTW - I agree with you ... bank capital is completely gone. However, my point is that the shareholders and the bondholders are part owners of this mess and the bank. They have to be hit first.

So, two options: spread the losses out among all holders of dollars via inflation, in proportion to the amount they hold. Or, allow bank customers to carry part of the losses.

Why should someone who has never done business with a bank be made to pay for something they had no part in?

Why should the depositor be hit? He's a saver. Something the system needs more of. He is forced by Gov't law to use both their currency, and their regulated banking system. He has no choice. They won't even allow him to pay his taxes with gold or silver.

We'll just have to agree to disagree on that.

In my view, FDIC and similar government guarantees are the cause of the problem, not the cure. The banks were encouraged by government policies to take high risks, since they knew they were backstopped by the government in case of failure. The only way the system will change is if those guarantees are exposed for what they are: unkeepable promises.

We mostly agree again. It's the policy and the Gov't that needs to change. The Gov't works for the people.

If depositors lost money, they would learn that all banks aren't the same. Without failure and loss, the free market can't operate, and nothing will ever improve.

2 different issues here. Yes - failure and loss are necessary for capitalism.

Where we disagree is regarding banking. Banking is Gov't controlled and regulation needs to separate banking and investing again. A dollar earned and saved in a BANK must stay alive in the system. A dollar lost on an asset or investment is OK to lose.

[Sharky]

Re: There is no zombie free lunch

I defy you to examine the financial statements of ANY bank or financial institution in the USA and determine with any degree of confidence exactly how sound it is. The banks and financial institutions can bugger around with their earnings numbers with complete impunity and their financials are absolutely the most opaque of any [legal] sector of the economy.

Yes, exactly! The market forces to produce sound, understandable, non-fraudulent financial statements (and businesses!) have been removed. Ask most people why they bank with any particular bank. "It's convenient," or "Free checking," "They pay high rates," etc. I've never heard "Because they're financially sound." No one seems to know or care about that.

So if I can't figure out which is a sound bank because of the governments own accounting regulations [note how the politicians bullied FASB into backing off on the mark-to-market rules this week], how am I supposed to decide which bank is safe to put my deposit funds into?

So, you're saying that without FDIC insurance, that you currently wouldn't be comfortable putting money in a bank? If so, you've made my point for me. Without insurance, the risk would be too high. So removing or downgrading the insurance is exactly the kind of free market force that's required to make the banks change.

Deposit insurance is a trivial side show to the securitized toxic crap and outright fraudulent practises that are bringing down the financial system

Do you think banks would have been willing (or able) to pursue the securitized crap even if they didn't have government guarantees like FDIC, Fannie Mae, Freddie Mac, etc? If so, we'll just have to agree to disagree on that one.

[Sharky]

Re: There is no zombie free lunch

However, my point is that the shareholders and the bondholders are part owners of this mess and the bank. They have to be hit first.

Agree. My point there was only that the amount of capital those parties have to contribute is a drop in the bucket.

Why should the depositor be hit? He's a saver. Something the system needs more of. He is forced by Gov't law to use both their currency, and their regulated banking system. He has no choice. They won't even allow him to pay his taxes with gold or silver.

Savers should be hit because they are the enablers of the bankers, and because making a deposit should not be a risk-free decision. Depositors are loaning their deposits to banks, and getting some value in return: interest, safe-keeping, checking, etc. Without deposits, banks would be unable to make loans, unable to create toxic crap, etc.

Where we disagree is regarding banking. Banking is Gov't controlled and regulation needs to separate banking and investing again. A dollar earned and saved in a BANK must stay alive in the system. A dollar lost on an asset or investment is OK to lose.

My point is that making a deposit IS an investment.