US banks were returning to their old ways within months of their bailout by the US government.
This is a reprint of my article from 25 June, 2009.
So the bankers are back to their old ways. The financial reforms, that three months ago politicians told us were urgent, are rusting by the roadside.
Regulation of derivatives, moral hazard, regulatory reform.. barely a single meaningful step has been taken in the US, UK or Europe.
The US banks claim they are repaying the government bailout money (their accounting is fraudlulent as ever) and bankers are toying with mergers, acquisitions and.. bonuses.
GIVING IN TO THE BANKS
Why did the governments give in to the banks? How did a small group, mostly politicians and bankers, convince their nations that saving the banks was so important that they could ignore the real economy?
Indeed, the real economy didn't just get ignored. It has to pay for the bank bailout. Industries, exporters, small businesses and the people who work for them, now face an even longer recession because of the cost of government borrowing – mostly to bail out the banks.
BUYING A LIFESTYLE
Why is the UK so obsessed with remaining a financial centre? Does it replace manufacturing? No. As we're discovering, a bloated financial sector makes for an unbalanced economy, as well as a distorted society. However it does boost the inflows of foreign capital that pump up the pound, with the result that sterling buys a better lifestyle than it ought to (based on what the UK produces).
The reason UK and US government statistics excluded housing costs to make inflation look low; The reason monetary policy on both sides of the pond encouraged corporate and consumer borrowing; The reason the UK and US pursued a strong pound/dollar policy... was to give their citizens a higher living standard than they deserved based on their work outupt or earnings.
The US does this by borrowing from Asia so it can import more than it exports, so that its currency remains overvalued and so that Americans can afford to buy the dream.
Ask yourself, why is the US dollar a "better" currency, one that buys more, than other currencies? Because the US makes more? Nope. Apply the same questions to the UK.
Can you imagine a government having to tell its people that they actually don't have the birthright to be richer than Portuguese or Finns or Canadians. What if Britons had to stop flying around Europe in huge numbers or buying up entire villages on the continent? What if they still could, but they had to work a lot harder to do it?
That's not a message any politician would like to deliver.
A PRICK, POSTPONED
That's why those governments cannot reduce the government-corporate-personal debt binge. Their lifestyle is built on it.
The UK and US governments would have to sanction a fall in the buying power of their currencies and a big adjustment in their citizens' living standards.
No politician would do that. So they'll continue to live beyond their means. The governments will pay off the old debt, allowing the banks to focus on creating new debt. And the prick of the bubble will be postponed.