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.
RESCHEDULING PLAY;
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.
EFFECT;
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.
Kaps
No comments:
Post a Comment