Lies being taught;
Bailouts are measures to save public from being unemployed and save economy from collapse.
Now the truth;
Bailouts and insolvency are means by which large banks shift their losses, real or managed from the owners of the large financial institutions to the public.
The game begins when the Federal Reserve System allows commercial banks to create checkbook money out of nothing. The banks derive profits from this easy money, not by spending it but by lending it to others and earning interest. When such loan is placed on the banks books, it is shown as an asset because it is earning interest and, presumably someday will be paid back. At the same time an equal entry is made on the liability side of the ledger. This is because the newly created checkbook money now in circulation, and most of it will end up in other banks which will return the cancelled checks to the issuing bank for payment. Individuals may also bring some of this checkbook money back to the bank and request cash. The issuing bank therefore, has a potential money payout liability equal to the loan asset.
When the borrower cannot repay and there are no assets which can be taken to compensate, the banks must write-off the loan as a loss. However since most of the money originally was created out of nothing, and cost the bank nothing except bookkeeping overhead, there is little of tangible value that is actually lost. It is primarily a bookkeeping entry.
A book keeping loss is still undesirable which means that loan (asset) has to be removed from the ledger as an asset without corresponding reduction on liability side. The difference must come from either stockholders equity or deduct the loss from Bank’s current profits. In other words owners of bank lose an equal amount as the defaulted loan. So, the los become really real. If the banks are forced to write-off large amount as bad loans, the amount can exceed the entire value of the owner’s equity. When that happens, the game is over and bank is insolvent.
This concern would be sufficient to motivate most bankers to be very conservative in their loan policy and most banks are very conservative while giving loans to individuals or small businesses. But the federal reserve system, the federal deposit insurance corporation and the federal deposit loan corporation now guarantee that massive or bigger loans made to large corporations will not be allowed to fall entirely on the owner’s of the banks. This is done under the argument that, if these corporations or banks are allowed to fail, the nation would suffer from vast unemployment and economic disruption.
THE PERPETUAL DEBT PLAY;
The end result of this policy is that, the banks have little or no motive to be cautious and are protected against the effect of their own folly. The larger the loan, the better it is, because it will provide the greatest amount of profit with least amount of effort.
An individual or small business or entrepreneur will find it difficult to borrow money at reasonable rates or with lesser available security because banks can make more money of corporate giants and secondly because the government will make good the larger loans even if they default. There is no such guarantee to smaller loans. The public will not swallow the line that bailing out the smaller guy is necessary to save system and inmost cases of small loans banks do take adequate security.
It is important to know that’s Banks do not really want to have their loans repaid. They make profit from interest on the loan and not on its repayment. If a loan is paid off, the bank has to find another borrower and that is a nuisance. It is much better that existing borrower makes payment of only the interest but never the loan itself.
FIRST STEP – ROLLING OVER;
Since the system makes its profitable for banks to make large, unsound loans, that is kind of loans that Banks will make. Further it will be predictable that most unsound loans will eventually go into default. When the borrower declares that he cannot pay, the Bank responds by rolling over the loan. This is stage managed to show that bank has given a consession but in reality it is another step forward towards further interest and ultimate default.
SECOND STEP; ADDITIONAL LOAN;
Next stage comes when borrower comes to a point when he cannot even pay the interest. Now the play becomes complex as bank does not want to loose the interest because that is its sole stream of income. It cannot also allow the borrower to go into default as that would lead to write-off of loan and thus wipe out the income or capital of the bank or owners equity, so the next step is give the borrower additional loan to tide over what is called interestingly a temporary crisis to enable the borrower to continue paying the interest not only on original loan but also on additional loan. What looked like a disaster is converted into a brilliant ploy. Now not only the original loan remains on the books as an asset but size of that asset is also increased resulting into a higher interest payout to banks thus greater profits.
THIRD STEP- STILL LARGER ADDITIONAL LOANS;
Sooner the borrower is fed up. He soon realizes that he is no longer working for himself but for the bank. Whatever he earns goes to interest payments which are now larger than ever. He is not interested in making the interest payments with nothing left for himself. The borrower simply cannot and will not pay. Collect if you can. The lender threatens to blackball the borrower to see to it that he will never be able to obtain a loan. Finally a compromise is worked as before., the bank agrees to create still more money out of nothing and lend that to the borrower to cover the interest on both the previous loans but this time they up the ante to provide still additional money for the borrower to spend on something other than interest. That is a perfect score. The borrower suddenly has a fresh supply of money for his purposes plus enough keep making those bothersome interest payments. The bank on the other hand, has now still larger assets, higher interest income and greater profits. What an exciting game.
The previous plays can be repeated several times until the reality finally dawns on the borrower that he is sinking deeper and deeper into the debt pit with no prospects on climbing out. This realization actually comes when the interest payments become so large, they represent as much as the entire corporate earnings or the countries total tax base. This time around rollovers with larger loans are rejected and default seems inevitable.
But wait. What’s this the players are back at the scrimmage line. There is a great confrontation. Referees are called in. too shrill blasts from the horn tell us a score has been made for both sides. A voice over the pubic address system announces. The loan has been rescheduled.
Rescheduling usually means a combination of low interest rates and a longer period of repayment. The effect is cosmetic. It reduces the monthly payment but extends the period further into the future. This makes the current burden to the borrower a little easier to carry but it also makes payment of capital even more unlikely. It post pones the day of reckoning but in the meantime, you guessed the loan remains as an assets and the interest payments continues.
BAILOUTS – PROTECT THE PUBLIC PLOY;
Eventually the day of reckoning arrives. The borrower realizes he can never repay the capital and flatly refuses to pay interest on it. It is time for final maneuver. The bans can absorb the losses of a bad loan but this would be a major loss to the stakeholders of the bank and officer who embarked upon such a bad loan would soon be out of job. This was never intended. Game can still be played, dead loans can be reactivated and interest income can still flow.
The bank and financial officer approach the government. Willing government ears are told that Corporates have exhausted its ability to repay or to service the loan. If corporate with such huge debt is allowed to go under it will have huge dire consequences for the public. Unemployment would follow, this would be followed by suicides and there would be riots on streets. Public faith in industry will plummet. There may be adverse reactions in financial markets etc etc. so to help tide up the problem money is needed from the government. This money which the government then gives to banks on behalf of corporate is called bailout.
Very little of this money actually comes from taxes. Almost all of it is newly created by book entry . when this new money enters the banks, it immediately moves out again into the economy where it mingles with and dilutes the value of the money already there. The result the appearance of rising prices but which, in reality, is a lowering the purchase value of currency.
The public have no idea that they are footing the bill of bailouts. They know that someone has stolen their hard earned money but think that it is greedy businessman who raised prices or selfish laborer who wants higher wages or unworthy farmer who demands too mush for his srop
Source ; The creature from Jekyll Island by G Edward Griffin.