Walking Time Bombs Zombie Banks
June 21st, 2009
Samah El-Shahat, Al Jazeera’s resident economist, has written a series of insightful articles about the ongoing worldwide financial crisis. Al Jazeera has become, believe it or not, one of the world’s leading hard news organizations, and has hired first class talent from around the world. Al Jazeera presents the news in an old fashioned way, the way the American major networks used to do before the age of spin set in.
Samah El-Shahat is astonished, as I am, that the goal of the Obama administration, and indeed the entire Western world governments, seems to be to turn back the clock to 2006 instead of actually fixing the structural problems that got us into this financial mess in the first place.
She also believes that much of the “green shoot” talk, at least at this stage, is just so much nonsense. The actions being taken by the US and other governments is actually setting the stage for another meltdown. How can anyone believe that problems caused by too much debt and leverage can be fixed by adding more debt and leverage to the system and raping the taxpayers along the way to the benefit of the bankers and elites?
Now for Ms Samah El-Shahat’s take on the issue.
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Business as Usual
So I am still astonished that that governments are still hell-bent on maintaining the status quo, the business as usual approach that got us into this mess in the first place.
Has a single bank management been made to change despite being the source of the mess? Has a single bank been truly nationalised in the real sense of the word? Has any real clean audit of a bank happened? And please let’s not bring up stress tests that were made to make sure everyone passes…
For every one of those questions the answer is a loud and resounding NO.
Some of the banks are now being allowed to payback some bailout money – banks such State Street and JP Morgan Chase. But they are being allowed to do so without revealing the extent of the toxic assets on their balance sheets.
“I fear these banks are walking time bombs… freed from any noose or hold the government had over them because they have paid back their bailout”
We are none the wiser than we were at the start of this crisis as to how truly ‘insolvent’ they are.
Yes, I hate to bring up that word but just because they are paying back some Treasury Asset Relief Program money doesn’t make them healthy. Remember, they are using taxpayer money to pay the taxpayer back.
The Obama administration had a plan to get rid of these toxic assets called the Public Private Partnership Investment Partnership – the PPIP.
And even though the PPIP gave investors and Wall Street incredible inducements, and huge taxpayer subsidies to buy and sell these toxic assets, the banks did not play ball.
The plan was laid to rest last week, which is extraordinary because it was the central plank of the Obama administration’s plan to rescue the banks.
I think this is disastrous. Not because I liked the PPIP, I thought it was grossly unfair and I agree with the economists Paul Krugman and Joseph Stiglitz when they said it transferred taxpayers money to the banks.
But at least the PPIP tried to deal with the toxic assets that got us into this mess in the first place.
Now I fear that these banks are walking time bombs, which are now walking away, freed from any noose or hold the government had over them because they have paid back their bailout.
And if we do not get an economic recovery soon, the toxic assets on the banks’ balance sheets will detonate and bring us all down with them.
The banks are gambling on the green shoots of a miraculous economic recovery, which I think is delusional and shame on those in power for allowing them yet another chance to gamble with our economic futures.
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For the complete article visit the Al Jazeera website.
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Posted in Financial Meltdown | 
Tags: Al Jazeera, bank bailout, financial bailout, green shoots, zombie banks
When trends last long enough, people begin to think they permanent, like the law of gravity. College courses spring up to teach new crops of dull minds the new catechism.
Jean Baptiste Say formulated what is known (and universally mis-taught) as Say’s Law. It basically reveals a stark axiom: In order to consume, first you must produce.
Banking today (and for 100+ years) assumes the opposite: In order to consume, you can first borrow. Banking lives this lie first and foremost via the fractional reserve system. When it was small and limited to the cozy cartel of the Federal Reserve System this “free lunch” generally didn’t cause enough trouble to threaten its own existence. Decade after decade the bubble of credit grew, mostly at the Federal government level where political promises were made (ever more generous entitlement payments, etc.) and where pork barrel spending was just layered on previous borrowing. Only the stupid and naive think that political calculation is about one bit more than the next election.
Since the government produces NOTHING it must take every value it spends from some productive person; borrowing or taxing it matters not. Say’s Law could not be violated, so all consumption consumed current production. A cottage industry grew to obscure this fact, and eventually we developed a society where people could borrow and consume without producing anything (enjoying the benefits of that which was produced) and others could lend, believing that they would be able to consume that value in the future.
The future is here…and the value is gone. It was in overbuilt houses and it’s in used Harley Davidson hogs and used Jet Skis and in digested restaurant food. It’s in all the things consumers consumed…and once consumed, rendered valueless.
The bust we’re experiencing is simply a process of revelation. As the manic optimism of the long bull market fades, it is like waking up after the party to discover the person next to you is 1) not your spouse and 2) hideously ugly.
I have to laugh at those who think “the government” is going to “fix” this. As others have written, government is the ultimate “crowd.” It is always the last to book passage on any sinking ship of theory, and because it never faces bankruptcy its managers never face the music for the failure of their policies. Its managers rule by coercion and threat…and anyone who believes that is a successful means of improving humanity’s lot is a moron (and hopefully never has children on whom to practice their beliefs).
Hello David C.
Thanks for your insightful comments. You are among the few who realize that the system is broken and that the government is the problem, not the solution. There will be no good way out of this mess as the politicians will keep trying to transport us all back to 2006 rather than fix structural problems.