Wednesday, June 13, 2012

Spain As Microcosm

The Spanish prime minister defends his bank bailout.  The problem is that Spanish banks made bad real estate loans.  I suddenly have this weird sense of deja vu.  So why don't they just let the banks suffer the consequences of their stupidity?  Ahhh ...

There has been growing concern that as the country finds fewer and fewer international buyers for its bonds, an increasingly large amount of Spanish government debt is being bought by its banks. As Spain's banks continue to struggle, weighed down by their toxic property loans and assets, the government is finding it harder to sell its bonds.

One hope among eurozone politicians is that the (EURO)100 billion loan facility will help shore up Spanish banks' balance sheets, giving them back the freedom to loan out money to businesses and individuals - and also buy more government debt. (Emphasis added by me)

Because, you know, this worked so well the first time, and the answer to debt is more debt.  Hair of the dog.  This is not the case in Spain only.  This is also why I call the current situations in most western nations -- including the U.S., fascist economies.

The truth sometimes comes out.  Fiat currency, whether dollars, euros, yen, renminbi, or loonies is backed by the ability of the government to pay back its debts.  A dollar -- that is, a Federal Reserve Note, is a debt instrument when it is issued.  Note.  Get it?  When you have a central bank acting in collusion with the central government or governments, the system is not only subject to manipulation, it is manipulated.  If the banks get into trouble, the government has to do whatever it can to bail them out because they are financing the government's appetite for programs in its quest to have more and more subjects dependent upon it, thereby increasing its power.

I re-read that paragraph, and it sounds like I believe that people in government and finance are doing this with a particular end in view -- saying that they are colluding kind of implies a conspiracy, like one-world government or something.  For the most part, I don't think that is the case.  The financial sector is trying to make money.  The politicians are trying to get re-elected.  The bureaucrats are trying to grow their bureaus and keep the funding coming.  Public-sector unions are trying to enhance pay and benefits for their members.  It just happens that those interests intersect in a way that appears to be optimized in the centralization of power and control of the economy.   

This has happened in Europe, and the consequences of such a system are becoming painfully obvious.  It is happening in the U.S., and we are about to pass the point of no return.  The answer to this situation is not additional government regulation of the financial sector.  It should be obvious from the quote above that such regulation is merely a pretext for the furthering of quid pro quo "arrangements" between government and the banks.

Governments around the world looked the other way when they did not -- as here in the U.S. -- actively encourage banks to make loans that were unlikely to be repaid.  The banks could reap the benefit of higher interest rates on sub-prime borrowers while governments could have enhanced tax revenues from the housing bubble plus lower rates on bonds.  Unemployment was down.  Consumers were spending lavishly with money borrowed on second mortgages, sporting zero-down real estate loans on properties that were skyrocketing in value.   

The real remedy is quite unpleasant.  Everyone -- banks, governments, businesses, and individuals must all accept the consequences of bad choices.  Banks should be allowed to go bankrupt.  No business of any kind is too big to fail.  General Motors is not a trophy of government-private cooperation but a travesty that used taxpayer dollars to continue to bankroll the ridiculous benefit and pension packages of union members.  If GM had gone bankrupt and been allowed to reorganize in a healthy way it would have emerged stronger and more viable, but the unions would have lost their priority in the creditor queue.  Politicians, especially Democrat politicians, who owe their positions to union money, refused to allow the market to take its course.  We will pay for this criminal behavior for a long time.  That is just one example. 

Whether we go into a reset voluntarily or whether we are forced into one determines if we will emerge from the ashes like Iceland or Estonia or stumble along in the garbage heap like Argentina.  If we are looking for a political solution, in America, it is in a libertarian approach to governance and in decentralizing power.  

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