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The Faustian bargain between governments and banks - By Kitty Miv, Editor

Kitty Miv, Editor
03 May, 2012


'Neither a borrower nor a lender be; For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry.' (Polonius in Hamlet)

'Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.' (Mr Micawber in Dickens's David Copperfield)

Both Shakespeare and Dickens have anniversaries this year; another one with an anniversary is Rothschilds Bank (formed in Paris 200 years ago) which has been a major (happy) lender to (miserable) governments. Did you know that the US Federal Reserve Bank is owned by private commercial banks, with Rothschilds prominent among them?

All this to say that the awe-inspiring mountain of debt which is hobbling most of the world's larger countries (China being a shining exception) has resulted from a Faustian bargain between governments and banks. This is the only possible explanation for the passionate dedication of sovereign governments to saving their banks when they get into trouble, at such enormous cost to taxpayers. Take Ireland as an example: the government has spent round about EUR50bn recapitalizing its banks, with the more or less direct result that despite heavily increased taxes, it is going to have a deficit this year of 'only' 9%.

This is nothing short of madness: a collective hallucination on the part of politicians and their banker friends leading them to behave as if the continuance of bankrupt banks is a major policy goal. The result is a deflationary spiral of austerity which acts as a wet blanket extinguishing any hope of revival in the real economy.

It's easy to see why politicians behave in this way: they are already taxing people to the uttermost practicable limit, yet they are all in Micawberish deficit situations; if they allowed the banks to collapse, as they ought to, they would run out of money, and heaven forbid, they would have to stop spending the stuff. Well now, we can't have that, can we! What's a politician to do if she can't pass expensive laws and hire yet more fat-bottomed bureaucrats to implement them?

I don't know whether austerity will work or not. It's even possible that in the less terminal cases such as Ireland there could be a return to healthy growth after many years of misery, and I mean many. Not two or three or five, but ten or more years of rising unemployment, social unrest and human distress. And all the time there is the possibility that interest rates will rise sharply, which would push many basket-cases such as Greece and Portugal over the edge. Rates are being kept low at the moment by concerted action to print money by the central banks, masquerading under various fancy names like quantitative easing. Long-term, this will debase the currencies concerned, but it is thought worth doing in order to avoid complete melt-down.

From the beginning (2008) the banks should have been allowed to go under: sell them to healthy banks in other countries such as China, Russia and Canada; wind them up; compensate depositors if you must (to keep their votes!) but let the property developers (your friends and relations indeed) go bust themselves. Above all, stop spending money. It's simply a myth that governments are necessary to the operation of a healthy economy; they are the problem, not the solution. It will be messy for a while, no question, but the result will very soon be a recrudescence of private economic activity as human 'animal spirits' jump to fill the empty spaces left by the collapse.

But it's not my voice that is going to demolish the hallucination, I know. Events will do it, but in a way that no-one will like. Mr Micawber famously believed that 'something will turn up'. Unfortunately all that is going to turn up for most of us is misery.




About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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