Early on in the financial crisis, economic opinion from the like of Krugman, Stiglitz et al. warned that the greatest danger of the bailouts was the creation of zombie banks. Essentially cadavers, near cadavers with a faint pulse in a coma: institutions kept on respirator by federal bailouts, but for all intensive purposes doomed to rot away of terminal illness. Jack Kevorkian should have been a government regulator and brought his mobile suicide machine to Wall Street. We don’t really know what will happen next; James Rickards has written an intriguing book on currency wars, basically promoting the gold-bug, Ron Paul shilling version of reality, but Occupy Wall Street continues to play Young Frankenstein with the dead, perhaps the whole exercise is a public mourning, a giant wake spread over months.
For a term as clever as Zombie Banks there is not a precise definition. Usually, it’s a shrinking bank: loans and gross margin on those loans expected to to decline until the financial institution is gone or almost wiped out. All in all, it’s the greatest show on earth, and the show must go on in one manner or another. This is the daily drama of the financial crisis. The world’s longest running soap opera of the bulls and bears, the mutual anatagonists going back to antiquity. The fallout of the 2008 crisis is still fresh, with new episodes being created as America has exported the problems to the Eurozone and China and the new bubbles seem ready to pop. More insidiously, we’re also witnessing zombie banks actively prey on the economic system through a foreclosure process, a kind of dirty war to prop up their balance sheets. As the OWS correctly asserts, banks are not just delinquent in failing to boost the economy, they’re intentionally sabotaging it. So, withdraw the cash and hide the stash? Go back to barter? Pack up a tent and live in the desert? Unfortunately, Zombie banking has become standard operating procedure for large Western debtor nations. They prop up failing institutions, print money, and procrastinate on financial corrections. But in an attempt to prolong the inevitable, after all the possible variations of denial are exhausted, the rotting carcass spreads sickness. The approach used now has not, has never, and will never work, in fact its exposure of how the system is “gamed” just leads to greater and often unreasonable opposition.
The take away from this current exercise in demonstration and dissent is the appalling realization as to what extent psychopathic behavior dominates the spheres of high finance and government. Maybe this is the “new normal” where at a certain level, its hip and cool to be totally out of empathy; a care about money and the quantification of life alone. Economic calculations as the basis of all decision making. Life is one giant commodity. Perhaps this mental disorder is the root of all evil; all the Blankfein’s, DSK’s et al. seem to exhibit behavior consistent with symptoms related to psychopathy: an exceptional level of superficial charm and intelligence, and personalities devoid of delusions or nervousness, and in terms of the public, an almost wanton willfulness to dominate and humiliate, to take the country down with them if need be, and sacrifice the lives of future generations. It would be fitting if they were all in Hitler’s bunker or like Goring at Nuremberg ready to swallow the poison.
HRN: Didn’t the bailouts and the Federal Reserve’s purchases of mortgage-backed securities clean up the bad assets?
Jim Rickards: The bad assets haven’t gone anywhere. They were identified in 2007, but they had been there all along. The bad loans were made in 2004, 2005 and 2006 because Greenspan and the Fed’s Board of Governors kept interest rates too low too long, so that’s when the bad loans were made. They were identified as such in 2007 and then we had the panic of 2008, but what’s important to understand is that the bad loans haven’t gone anywhere. It’s not as if they’ve been magically transformed into good loans, it’s not as if they’ve been marked down, it’s not as if they’ve moved from weak hands to strong hands. What’s happened is, they’ve basically been locked in amber, frozen on the balance sheets of the banks.
HRN: So, the Federal Reserve wants inflation to help banks that made bad loans?
Jim Rickards: The Fed is hoping for a couple of things. First of all, they’re hoping that inflation comes back so that, at least, the nominal values get back somewhere closer to where the loans were originated. Of course, the real value has all been eroded, but who cares? If you’re a bank, you just want that nominal value so you don’t have to take the loss and the hit to capital. Second, they’re hoping that, because of the steepness of the yield curve, the banks could eventually earn their way out of the problem and make provisions for the bad loans. Obviously, they’re going to the zero interest rate policy and so, with those two things in mind, the Fed wants the inflation to come and help the banks and give them time to recover.
HRN: Wouldn’t inflation also reduce the real value of the U.S. federal government’s debt?
Jim Rickards: The United States has well over $100 trillion in obligations. Now, that’s not all bonded debt, the actual debt is significantly less than that, but when you throw in contingent obligation arising from Social Security, Medicare, Medicaid, Fannie Mae, Freddie Mac, Federal Housing Authority (FHA), Federal Home Loan Bank, student loans, etc., etc. The point is, you can just go on and on with these obligations. The number is well north of $100 trillion. Now, it’s not all due and payable in the next couple of years, these are 20 year obligations, but then you have to say where are we going to get growth for the next 20 years to meet these obligations? That’s very hard to see.
HRN: So, the U.S. economy can’t grow its way out of debt?
Jim Rickards: I don’t see any feasible combination of growth and taxes that will generate enough income to pay off the debt. People warn about the debt trap, to me it’s already too late. We’ve already fallen into a hole where, mathematically, it’s impossible to earn enough to pay off the debt. The debt is compounding faster than growth is being generated and raising taxes is not a solution because that will kill growth, so you just can’t get there….Read More:http://m.financialsense.com/contributors/ron-hera/interview-jim-rickards-on-inflation-and-currency-wars?device=mobile
…Jim Rickards: They’ve got to be looking down the road and saying, gee, we say we can get inflation under control, but the tools that we have to do that will basically be raising interest rates with 10% unemployment, which is not going to happen, or selling bonds and going broke, which is not going to happen. So, it’s all talk. The Fed won’t actually be able to keep inflation under control and it’s going to very quickly fly out of control.
HRN: Won’t rising prices make most Americans poorer?
Jim Rickards: The Fed doesn’t care about that. The Fed doesn’t care about people. They don’t care about workers. They don’t care about wages. They say they do, but the Fed only cares about banks.
HRN: Bernanke has been in the media, saying that inflation will stimulate the U.S. economy and help create jobs without causing prices to go up.
Jim Rickards: It’s propaganda. I had a discussion with former Fed governor, no reason to mention the name, who is a very well known economist, and what he said was that behind closed doors the Federal Open Market Committee spends about 10% of their time on policy and 90% of their time on communication. They very quickly arrive at what they’re going to do and then spend the vast majority of their time thinking about messaging and wordsmithing. Well, there’s a name for that. It’s called propaganda. Read More:http://m.financialsense.com/contributors/ron-hera/interview-jim-rickards-on-inflation-and-currency-wars?device=mobile a
America’s banking elite will cling on to the hard-fought dominance it attained during the Clinton—Bush era. And Europe’s working class, swelled by a new generation of disgruntled graduate youth, will not lightly give up the social gains that brought peace after the downfall of dictatorships.
Above all, any orderly rebalancing of the economy and re-regulation of the banking system must come through the multi-lateral forums. Once we are into serious unilateral re-regulation we are well down the route towards the breakup of the globalised economy. The danger is not, as the bank lobbyists often put it, that such action drives financial services elsewhere; it is that capital itself retreats to national and continental pools, permanently limiting the dynamism of the global economy.
The future, then, depends on the complex interplay between the interests of die-hard political elites and the interests of the salariat,the urban youth,the manual working class and the elderly.
For me, the abiding images of the months between Lehman and the euro crisis involve the forbearance shown by these plebeian social groups. The Chinese workers patiently transferring from factory to building site on the orders of macro-economic policy makers; the finance director of the Midlands component factory thin with worry; the autoworkers in Elkhart, Indiana; the dockers of Piraeus, Greece, who told me — despite the bloodcurdling Communist slogans on their canteen wall — ‘We’re family men, we don’t do social explosions.’
They have been patient. The question is, how long will their patience hold out? Read More:http://www.versobooks.com/blogs/737
But such failures don’t seem to matter. To borrow the title of a recent book by the Australian economist John Quiggin on doctrines that the crisis should have killed but didn’t, we’re still — perhaps more than ever — ruled by “zombie economics.” Why?
Part of the answer, surely, is that people who should have been trying to slay zombie ideas have tried to compromise with them instead. And this is especially, though not only, true of the president.
People tend to forget that Ronald Reagan often gave ground on policy substance — most notably, he ended up enacting multiple tax increases. But he never wavered on ideas, never backed down from the position that his ideology was right and his opponents were wrong.
President Obama, by contrast, has consistently tried to reach across the aisle by lending cover to right-wing myths. He has praised Reagan for restoring American dynamism (when was the last time you heard a Republican praising F.D.R.?), adopted G.O.P. rhetoric about the need for the government to tighten its belt even in the face of recession, offered symbolic freezes on spending and federal wages. None of this stopped the right from denouncing him as a socialist. But it helped empower bad ideas, in ways that can do quite immediate harm. Right now Mr. Obama is hailing the tax-cut deal as a boost to the economy — but Republicans are already talking about spending cuts that would offset any positive effects from the deal. And how effectively can he oppose these demands, when he himself has embraced the rhetoric of belt-tightening?
Yes, politics is the art of the possible. We all understand the need to deal with one’s political enemies. But it’s one thing to make deals to advance your goals; it’s another to open the door to zombie ideas. When you do that, the zombies end up eating your brain — and quite possibly your economy too. Read More:http://economistsview.typepad.com/economistsview/2010/12/paul-krugman-when-zombies-win.html
Charming, materialistic, aggressive, self-centred, Machiavellian, thrill-seeking alpha males with little respect for rules who eat stress for breakfast – sound like a banker you know? If so, think again: it is a summary of the traits of psychopaths.
The characteristics that make for good traders and investment bankers are pretty much the same as those that define psychopaths, according to Michael Price, co-director of the Centre for Culture and Evolutionary Psychology at Brunel University in London. Indeed, Wall Street’s Gordon Gekko has clear psychopathic tendencies, he says….
But don’t think of Alfred Hitchcock’s villains or Thomas Harris’s Hannibal Lecter. While academics believe psychopaths are responsible for a large proportion of serious crime, that does not mean they all want to eat your liver with fava beans and a nice Chianti. Instead, they might have infiltrated the financial system. Surely only someone with a serious personality disorder could have thought it was a good idea to sell a highly risky financial instrument like a CDO-squared to a naive investor who clearly did not understand the risks? Or would react with anger when told that they would not be paid multimillion-pound bonuses, because their previous bets had gone so badly wrong that their employer had to be bailed out by the taxpayer?
Robert Hare, a leading specialist in the disorder, has estimated that about 1 per cent of the US population are psychopaths. Most live non-violent lives, but scheme their way through damaging careers and dysfunctional marriages.
What James is thinking…
Sovereign defaults tend to go in waves. History is littered with examples of lending booms followed by busts. Greece, Portugal and Ireland are now teetering. If they go down, history suggests more will follow.
After the accounting scandals that followed the dotcom busts, Prof Hare and Paul Babiak, another psychologist, launched a test designed to spot psychopaths among the workforce.
Unfortunately, if banks were to use the test, they would probably want to hire the people it identified: psychopaths might well make the best traders. Self-centred and motivated by money, charismatic and unafraid to take risks – they fit the stereotype perfectly. “The banking industry is an ideal target for psychopaths,” Prof Hare told me recently. The ructions of the past few years will only have helped their rise. “These areas are tailor-made for the psychopath. Where things become chaotic and the normal rules don’t apply, enter stage right the psychopath.” But while they may be good for short-term profits, they are also likely to bend, or break, the rules. This helps their bonuses, of course. As bank shareholders have discovered since 2008, working in a moral vacuum does immense damage to the corporate image, while fines can hurt the bottom line. Read More:http://www.ft.com/cms/s/0/41fe2882-9cbe-11e0-bf57-00144feabdc0.html#axzz1eH77jhyq