Bank and creditor extortion and hostage-taking is the real price of not reforming the financial system, as is so clear from the European debt crisis and the ongoing efforts to prevent a debt default by Greece.
Currently, banks and creditors have all the leverage (pun intended) and governments, taxpayers and public treasuries are at their mercy. But, that is only true because those very same governments refuse to enact strong and fundament financial reform which would take away their power – which is a key reason why Wall Street, the big banks and all their allies are fighting financial reform so hard.
This is not an opinion. It is a fact, as Neil Irwin (reporting from Zurich) spells out so clearly in his article in the Washington Post today. The article, “Fearing the Specter of Collapse: Ghost of Lehman Looms as European Leaders Confront Their Debt Crisis,” is about the unending frantic attempts by European governments to “solve” the debt crisis, which has Greece playing the role of Lehman Brothers. The real lesson of Lehman is discussed below, but the supposed lesson of Lehman is no one can afford to let even a relative small financial player go bankrupt (i.e., not Lehman and not Greece) because that will become the first domino to fall and take down all the other dominos in the financial system, which will then topple all the economies of the world. Pretty scary stuff.
Confirming the absolutely worst things that could possibly be said about banks and creditors, they have correctly perceived — and decided to ruthlessly use — the power this view gives them to literally cause the crash of the world’s financial systems and economies to make money.
How could that be? If no institution or country can be allowed to fail (i.e., default on its financial obligations) because banks and creditors will stop lending not only to that particular institution or country, but will also stop lending to similar and not-so-similar institutions and countries, then all debts of banks and creditors have to be guaranteed at 100% or pretty close to it. In plain English, banks/creditors are saying, if you don’t pay us (no matter how reckless our lending and investing was, by the way), then we’ll stop lending to lots, many, most companies and countries and, yes, unfortunately, the world’s financial system will crash and fail, but, gee, we need to have our loans and investments repaid in full………………or else.
Worst of all, they get taken care of either way: pay them now to stop them from crashing the financial system and the economy (the current European approach) or bail them out after the crash to prevent further destruction of the world’s financial systems and economies (the US post-Lehman approach).
This view not only empowers banks and creditors and enables their extortion and hostage taking, but also puts taxpayers and public treasuries worldwide at the mercy of those very same banks and creditors. As Irwin puts it:
“The recognition that an all-out Greek default must be avoided has, ironically, made it harder to rescue Greece. Investors in Greek bonds, which include major European banks, know that government officials in Germany, France and elsewhere are determined to avoid the kind of disorderly default that could cripple global markets and will ultimately have to bail Greece out. So the investors have less reason to make concessions of their own, for instance by agreeing to accept only a fraction of the payments they’re owed on the bonds. This has bogged down negotiations over a plan to resolve the Greek crisis.”
And, as one commentator quoted by Irwin stated so well, “'[t]he banks have every incentive to have German taxpayers take the loss, rather than themselves.'” Substitute your country for “German” in that sentence because that is the inevitable result of the current policy of the US and virtually every government in the world.
Remarkably, as bad as that is, it is still only half right. They don’t just have the “incentive.” They have the power to do so, but only because the Europeans, as pushed by the US (with Sect. Geithner leading the charge) have learned the wrong lesson from Lehman. The lesson is not that everything must be done to ensure that no institution or country fails to pay all their debts. The real lesson is that we cannot afford to have too-big-to-fail institutions or countries (remember, Lehman was only the 4th largest US investment bank and Greece has an economy the size of the state of Massachusetts as Irwin points out) and that requires strong financial reform and, most importantly, total transparency throughout the financial systems of the world.
Nothing would disempower the banks and creditors more. That transparency and reform would prevent them from robbing the taxpayers and the public treasuries. Bank and creditor extortion and hostage taking would end.
Why? If everyone knew the actual facts relating to European sovereign debt (including all lending, investments, and all associated derivatives), then dominos simply would not fall if only one did because everyone would know how any failure would actually affect any other institution. Right now, no one really knows the real financial condition of the banks or countries and that fear of the unknown financial implications of any failure causes lenders and creditors to flee from risk. That is, of course, assuming they are doing so in good faith rather than strategically to scare politicians into bailing them out at 100 cents on the dollar, euro or what-have-you.
Thus, the real downside of an unregulated and non-transparent financial system is to empower banks and creditors to continually raid the taxpayers’ pockets and the public treasuries. Until we learn the right lesson from the Lehman collapse and enact strong financial reform with total transparency, we will continue to be at the mercy of ruthless banks and creditors who will continue to take hostages and extort governments worldwide, as they are currently doing in connection with the European debt crisis right now.
(Yes. I know that banks and creditors through their international lobby organization, the innocuously named Institute of International Finance (“IIF”), negotiated with the European governments and institutions months ago regarding a rescue package for Greece and that those creditors did agree to take what has been referred to as a “haircut,” or less than 100% of what they ostensibly were owed on their debt. That doesn’t change anything stated above. A key to successful extortion and hostage taking is to not get caught, which, in this case, means to not appear to be causing the problems and to not get blamed. Looking reasonable and helpful is much more important than being reasonable or helpful. It is also a handy way to deflect blame and prevent governments from doing the real hard work of financial reform which would eliminate the need for governments to go hat-in-hand literally begging banks and creditors to please, please, please not crash the world’s financial system. Please, please, please can you give up just a little so our taxpayers don’t have to pay you 100% of what you say you are owed, no matter how reckless, stupid, unjustified or dubious your lending and investments were. Banks and creditors believe greed is good, although they also know that it is best dressed up as “God’s work,” helping the economy grow, reducing unemployment or some other non-selfish reason. They also well know that too much visible greed could cause a backlash and snatch defeat from the jaws of victory. Hence, a little concession here and there to prevent citizens, taxpayers and governments from doing what they should do to prevent those banks and creditors from having this power in the first place.)
Read Neil Irwin’s Washington Post article here.