Another Bailout for the Banks?

Posted by Jeff Rubin on October 6th, 2011 under SmallerWorldTags: , ,  • 20 Comments

You might have thought things had changed in world financial markets since the U.S. subprime mortgage disaster. After all, we were told at the time that if taxpayers didn’t open their wallets and bail out the banks, we could face a complete meltdown of the global financial system and an economic fate rivaling the Great Depression.

Funny that only three years later, the global financial system seems once again to be teetering on the brink, a prelude no doubt to another round of emergency demands for a massive taxpayer-funded rescue of European banks, and soon others as well. As we all know, contagion spreads quickly these days in the world’s banking circles.

The only thing that seems to have changed since the last recession is a defaulting Greek government has replaced defaulting U.S. subprime mortgage holders as the trigger for the next global collapse.

As a taxpayer who is once again going to be asked to foot this bill soon, you might be wondering how did Greece ever get that big to cause so much damage to the global economy? The answer is it is the same way depressed property markets in U.S. got big enough to do the same kind of damage to the global economy several years ago

Our highly interconnected, hugely leveraged, and largely deregulated global financial system delivered a piece of the collapsing U.S. subprime mortgage market to virtually every bank in the world, just like it is about to do with a Greek default.

Whether it was from counter party risk to another bank or discovering that those AAA-rated CDOs (Collateralized Debt Obligations) were chock full of dreck, financial institutions around the world took it on the chin or, more precisely on their balance sheets.

And it is happening all over again. Didn’t UBS just write down $2.3 billion of losses from its trading desk last month?

This leaves investors with very few places to hide.

Stock markets have already fallen into bear territory, and they are likely to see nothing from the global economy over the next year to halt a further slide.

Bonds yields are already ridiculously low, relative to both inflation and the fiscal risk that huge, and soon even larger, deficits bring with them.

And the U.S. dollar, the haven everyone seems running to these days, are rolling off the U.S. Federal Reserve’s printing presses like there is no tomorrow.

If it sounds like we have been here before, it is only because we have. This time, however, there is a whole lot less in taxpayers’ wallets to bail the banks out again.

Maybe it is time to try something else- like actually changing the ways banks do business in the future.

  • Amit

    The only weapon left with central banks is the printing press.  Too bad they cannot print any natural resources.  The only way out of this mess is to accept the reality and lower expectations and standard of living to match the reality. 

    The US’s medicine is now being prescribed to the European patient, what chance that it will resolve any of the real issues.  Seems like a recipe for more inflation..  Thanks for the post.

  • Jlow646

    So is Greece’s problem lending to us? Not collecting taxes? Pensions? Bye the way isn’t cutting taxes the same as not paying them. If not paying taxes worked the Greeks should be the richest people on the planet.

  • JB

    Jeff are you calling for the nationalization of banks?


  • Netcentric

    Geez talk about trying to put words into someone else’s mouth. Following along in the same theme, I think Jeff is really talking about the U.S. invading Canada and I feel he should explain that! Riiiight.

  • Netcentric

    I agree with Jeff that one major change needed in our
    obsolete economic model is the way banks do business. I believe bankers however
    will resist change till their last breath and any change they make will not be fundamental
    but merely an attempt to reach a deal with reality so that they can continue to have their
    cake and eat it too. Reality doesn’t deal. Due to this predictable behavior, there
    will be a downturn of historic proportions because that is the only thing that
    will change the system if we will not do it voluntarily.


    I am more historian than economist and take the view that
    there will be no “recovery”. The Roman empire never “recovered” and
    neither will the current system. The environment that gives rise to any system
    and sustains it changes over time and thus causes its demise. A new system
    arises from the ashes, one that is more suited to the new environment. Any hope
    or expectation of a recovery at this juncture is delusional; life simply does
    not work that way. The only thing that comes from a denial of reality is


    Rome wasn’t built in a day nor did it fall in a day. The
    fact that the collapse of our current system will happen like “falling
    down the stairs” will keep those who pray that “something, somehow” will
    save the current system struggling. As we land on each stair, and remain there
    briefly, they will choose to believe that we have reached the bottom of the
    staircase and that the “green shoots” will be showing up any day.They will be disappointed and their suffering will continue.


    My advice is to let go of any idea about the economy other
    than the fact that it will slowly but surely devolve and stay that way for the
    foreseeable future. Consider what system must replace the current one, what the
    transitional period (decades at least) will be like and where the opportunities
    will be in that process. Clue: your world is about to get a whole lot smaller. As
    for me, I’m starting a new magazine about local food.

  • Smokey

    Maybe your new magazine will be among the new green shoots and part of a new ascending staircase.
    Your competition will come from those out of work from radically downsized governments that cannot increase taxes any further.

    With descending energy prices don’t look for de-globalization any time soon.
    It is interesting to be a part of the evolution of the world. Pain is regrettably always a component as well as people who don’t do their fair share to create employment.
    We need more capitalism.

  • Smokey

    Demographics are indicating more university spaces becoming avaialble over next 8 years (already started in eastern Canada) as well as labour shortages for younger people (Foote) and generally better things ahead using same arguments by looks like we are headed for BOOM times which will really get going by 2020.Also planet is cooling and green/warmist drag on moving ahead will have been exposed as a big fib by then.
    Get ready to rock.

  • Anonymous

    The losses in the system will require the haircuts to be taken, there are a number of ways this can happen. The limit of can kicking has been reached.

    1) Depositors in Banks/Superannuation(401k accounts in US) can loose their money when the Banks/Default swaps are wound up. This will result in the loss of a large percentage of peoples retirement savings worldwide. Living standards will certainly fall savagely.
    2) Governments assuming responsibilty for the losses and raising taxes to pay them.The scale of the losses require the taxation to be very high and fall on all taxpayers. Living standards will certainly fall savagely.
    3) Governments can pay out the losses with printed money, will reduce the value of money by x% whether that’s 50%, 30% or 85% is unknown and debateable. Livng standards will certainly fall savagely.

    Doesn’t matter which of the alternatives is taken the end result is the same, Everybody’s Broke!

    Credit Default Swaps are fraud, they should never have been allowed to exsist in the first place. It’s quite clear that if there is systemic failure that default swaps also fail. They are not issued generally by professional insurers but by other types of finanancial institutions that were very lax in acutairial supervision and don’t have the funding set aside to pay out the swaps as insurers generally do for their insured items. It’s allowed banks to lend whatever they want to who ever they want without regard the borrowers ability to pay, but now it’s clear that CDS as loan isurance
    has failed.

    The only effective loan isurance is for banks to very conservatively value the property underpining the loan and only lending maybe 60% of the valuation, to ensure on default loans will be repaid.

    What is going to happen is living standards are going to fall substatially, it doesn’t matter who is in power whether arch conservative or trendy lefty. Loans are going to be much harder to get without substantial security and consumer finance for consumer items like cars (which depreciate quickly) are going to be unavailable and credit card finance is likely to be ended.

  • Rojelio

    Is another bailout even possible? What wealth is there left to loot? Maybe the big banks have to start cannibalizing each other now until there’s nothing left but one world bank? How does this play out?

  • Smokey

    They’ll be after higher profile wealthier people probably such as yourself.

  • Instincts

    Netcentric — Great post and I fully agree, and would add that what’s needed (and perhaps what Jeff alluded to at the end of his column above) is nothing less than a complete global monetary reform, one that scraps the current one that relies on creation of debt to create money.  But of course that won’t happen as the majority continues to deny where things are inevitably headed, until things get really bad, when the energy to fuel this flawed system nears its end.  Those of us who know, the best thing is to prepare and work together and increase our numbers through knowledge exchange and getting the word out.

    I’d be extremely pleased to assist and contribute to your effort to launch a local food magazine, including article contributions.  We’ve been spending a lot of time and effort doing this ourselves.  I’ll email you if you let me know how I can reach you.

  • Instincts

    Right…   things are just booming in eastern Canada.  Since you’re so ‘up to par’ on the demographics thing, its interesting that you fail to mention the unprecedented burden that the aging baby-boomer generation will have on following generations, economically, socially, etc, — the younger generation which you aptly acknowledge are far fewer in numbers, meaning fewer resources, tax base, etc.

    You and so many other can keep trying to deny the fundamental laws of finite resources, artificially induced & unchecked population growth, and that rapid use and depletion of finite hydrocarbon energy is the only reason that humanity has been able to get to the mess it is in right now, but it won’t change the realities, no matter how far you stick your head into the sand.  All of us would love there to be the brightest, most optimistic future, but the generations before us and among us have got us all into this mess, and the solutions won’t be as easy as ‘waiting for the recession to wane, then back to infinite growth’.

    Please tell us, do you think that infinite growth is possible or sustainable, economically or biologically?  If so, please tell us what will fuel that infinite growth AND maintain a stable, sustainable steady-state that won’t lead to destruction of the biological, chemical and physical aspects of this contained world that supports all life, including human life.  If you have the real answer(s) to that, you’ll be the wealthiest person in the world.

  • Instincts

    Or maybe Netcentric’s magazine will be a part of exposing how so many people like yourself continue to live in a mindless trance and illusion that somehow, majically, human beings might just be immune to the simple laws of finite energy sources (and everything related and dependent on those), and continue to persist in a self-just capitalist way, upon our almighty throne of humanity, forever thrust forward into the paradise of infinite economic growth and prosperity, above all else organically and inorganically around us.

    …oh, but wait, real life things don’t register with the capitalist economists ways that continue to blind humanity.  But those days are coming to an end.

  • Smokey

    Having exposed yourself as a petulant popinjay it would be instructive to stick to the facts. At least 20 generations of abundant energy can be found in the oil sands and coal beds of America, not to mention possibly as much in the Bakken. Natural shale gas is another contributor. Your problem is your mentors the buffoons Holdren, Erlich, Hansen etc have been as misguided as the Club of Rome and other alarmist doomsayers.
    Poltroons such as yourself decline to meet life’s challenges head on and instead cringe under a turnip leaf in your fantasy gardens.

  • localyokel

    Jeff, I’ve been following your insights related to peak oil for a few years now.  I really respect your opinions and have a few questions I hope you don’t mind answering.

    1)  The situation with the PIIGS and European banks doesn’t look good and as you say, the links to other world banks will likely cause problems in North America.  Where do you see all this leading and when?

    2) On Energy Bulletin there was an article about Mondragon, a coopertive started in the poverty stricken area of Spain in the 1950′s where people pooled their money and existing business expertise to fund local entrepreneural ventures with equity instead of debt.  The way it is set up, everyone has a stake in the funded companies success — there’s no reliance on collateral. Therefore, schools were started to teach trades and business skills.  I’ve read that today they are the eighth largest business in Spain.  Michael Shuman also wrote about Mondragon in his book, Going Local.  What do you think of this strategy as a way to get money back into the hands of really creative people who have small financial needs than the big banks want to fund?  The times seem to be bringing a lot of great ideas to the surface, but the existing financial apparatus would probably find funding these ideas, especially in the current economic climate, too risky.

    3)  Given your experience, I’m really curious where someone with your insights would consider investing their money now.  Would you invest in your own community in something like a Mondragon, railroads, gold or silver, downtown properties, farmland, farms, local food processors, etc.?

  • hosbytes

    I see one person liked this.  Well make that two persons.  I absolutely love it. Too bad that it is total bullshit. Look around you.  Western economies are already far past the event horizon and accelerating into the black hole of a new dark age.  Plant a garden.  Learn to love your neighbor.

  • Anonymous

    I don’t see any alternative in the medium term than state capitalism. Governments will have to take ownership of a significant part of the economy because (democratic) governments are the only entities with the legitimate right to use force. At the end of the day, somebody has to force the (our) money from the guys with all the (our) money (we know who they are). Too many people can’t even participate in he economy while a few have all this cash that’s not being used to do anything productive like hiring able bodied people to build useful infrastructure or similar types of enterprise.

    In 1939 the world chose war as a way to ramp up industrial production and kill excess labour. Hopefully it won’t literally come to that — but war profits are really good…so tempting.

  • Bob madden

    screwjob screwjob  screwjob for the american people. If the banks get another bailout.

  • Smokey

    Financial recessions take a long time to resolve. The turn will come when the welfare/nanny state is largely dismantled. In 3 or 4 years we will emerge in the new galaxy of prosperity at the otherside  of the black hole. The US will lead the way. Enjoy the trip as much as possible.
    Local gardening won’t solve anything but is only a nice hobby.

  • Smokey

    To believe in a cause is in a large part not to believe in yourself. If only people, who would to save the world, would  save themselves and thus in so doing save the world, So quit worrying about that imperfect but most desirable system called capitalism and refrain from insulting anyone who disagrees with your narrowminded socialist/finite vision of the world.