I am getting tired of politicians claiming that if we don't pass TARP, or if we let Goldman Sachs fail, or we allow Greece to default, or now, if we let the US default -- the result will be total global financial Armageddon. They are starting to sound like the type of threats that Dr. Evil might make to Austin Powers. You know, "Unless you pay me $1 million I will blow up the entire global financial system." (Place pinky against lips.)
Let's take these threats in order. Congress definitely got hoodwinked by Ben Bernanke and Hank Paulson, who threatened total global annihilation unless we passed TARP in three days. Somehow, Congress was led to believe that unless they gave Hank Paulson $700 billion to purchase bad loans from the banks and take them off their balance sheet, the entire financial system would collapse. Well, they gave Hank his $700 billion, but instead of using it to buy bad loans he took $130 billion of it and gave it to his old banking buddies. So the bad bank loans never were removed from the commercial and investment banks, and yet magically, we all survived. There was no financial meltdown and the banks still haven't dealt with the bad loans on their books.
Similarly, Hank Paulson and Tim Geithner warned of a nuclear winter if Hank's old firm (and mine) Goldman Sachs or Morgan Stanley were somehow allowed to fail. No one had ever imagined that the government would step in and save creditors to an investment bank that had no government-guaranteed depositors and were in the business of naked speculation, but when the dust cleared, that is exactly what they did. American taxpayers ended up contributing hundreds of billions of dollars in cash and subsidies so that debt investors in these highly leveraged investment banks would not lose a dime.
The EU, the ECB and the IMF have been screaming bloody murder lately that a debt default by Greece would lead to catastrophic consequences, not only within the European Union, but throughout the civilized world. A Greek default on its sovereign debt is a foregone conclusion. Greek families have something like $200,000 of their government debt per household. That is more than double the amount of mortgage debt the average American family has, and the Greeks have half our incomes and don't even have a house to show for it. The result of all the doomsday posturing is that the Greek default was postponed just long enough to allow the European banks to sell much of their Greek debt to the ECB and the IMF, thus shifting poorly performing and bad loans from the banks onto the backs of taxpayers. Once again, creditors to the banks who made poor investment decisions were bailed out with taxpayer money.
Now, US politicians are threatening to default on the US debt unless we cut funding to programs that care for our elderly, our sick and our poor. As usual, these politicians are claiming that a US default would be the equivalent of a financial tsunami wiping out all signs of intelligent life in its path.
Let's be real. Nobody wants to see the United States default on its debt obligations. But it really is a completely phony threat. All we are talking about is a bunch of wealthy bond investors missing an interest payment in the mail. If those making the threat believe the consequences could be much more serious, then by definition they have no business utilizing such a threat in negotiations. If they want to freeze out creditors to the United States, Obama should step out of the way and let them try. The mess they create will assure that no Republican will hold elective office again in our lifetime.
When a wealthy creditor misses an interest payment or takes a 5% or 10% haircut on his debt investment in a company or country, they call it an economic catastrophe. What do you call it when Americans who had nothing to do with the cause of this crisis end up losing their jobs, are evicted from their homes or lose their pensions and life savings? This is a much greater catastrophe to me.
I am no anarchist, but in a world where banks and governments have colluded to form a corrupt partnership that led to deregulation, fraudulent lending, over-leveraging and a global financial crisis and recession, if anybody has to suffer, I think it ought to be the creditors who financed these banks and governments. Too much money was loaned to these institutions and the only way to correct that is to restructure their debts. Once these debts are restructured, total global leverage will decline and economies can get back to growing and providing for their citizenry.
Some say that the banks are too big to fail. That because of their massive derivatives exposures and their acting as nodes of the credit default swap spiderweb they call a market, they are too interconnected to fail. Whose fault is that? Let them fail and then let's pass laws so we don't make the same mistake again in the future. Trust me, if we don't break up this unholy alliance between banks and governments and the IMF and the ECB and the Fed now, the problem will only get worse. We will stumble along with an anemic recovery, high unemployment and still be subject to massive financial crises in the future from an unregulated banking sector gone wild.
As we work through the enormous mess created by the overly aggressive lending of these banks and the governments that protected them, it is a certainty that someone is going to get hurt. It makes no sense to me that that 'someone' will be working men and women, our elderly parents, our sickly relatives, the disabled, the disenfranchised and our children who had absolutely nothing to do with the cause of any of these supposed Armageddons.
John R. Talbott is a best selling author and consultant. His new book is mandatory reading for anyone interested in learning the real reasons for this crisis and how to protect yourself going forward. You can read more about John and the new book at www.stopthelying.com or at amazon.com. Information for media contacts is available at www.stopthelying.com.
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