Monday, January 21, 2008

Why Banks Suck

The Church of the Orange Sky wholly denounces and decries the following post and urges all adherents to take advantage of any easy financing options available to purchase SUVs and other godly luxuries fast, fast, fast, to help prop up the flailing North American economy.

I know I'm getting into this whole subprime/recession/banks-going-bust shit a few months late, in part because once upon a time I said Jesus Drives an SUV would not be political. It's unbecoming of myself as a reverend and I know my coauthor tries to deal with political commentary as a separate side project. But reading the business pages of the newspapers for the last few days - something I normally try to avoid, for precisely this reason - has caused my latent Marxism to bubble to the surface. I apologize to those who came here for religious inspiration. Today you get political ranting instead.

There's a saying I ran into as an undergrad: "When you owe the bank a thousand dollars, you have a problem. When you owe the bank ten million dollars, the bank has a problem." It's time we rephrased this from the bank's perspective: "When they owe us a billion dollars, we have a problem. When they owe us ten billion dollars, the government has a problem." Everyone knows the Canadian government would never really let CIBC get into serious trouble, even after it's apparently blown several billion dollars and symbolizes the creeping spread of America's present economic troubles north into Canada. The Big Five are too big, at least in the Canadian context, for the government to let any of them turn into another NetBank. Actually, there just aren't a lot of dead banks in Canada, period: none since 1996, and virtually all the insured bankruptcies before that are mortgage and trust companies.

Here's a concept that works: you have a pile of money, you decide to invest it in the markets, and so you take risks. When you take high risks, either it pays off pretty well and you get another pile of money, or it doesn't pay off and you lose your money. When you loan out most of your money to people you know don't really have the means to repay you, you're quite likely to be completely fucked at some point in the future when the adjustable interest rates go up and these people can't pay you. I'm not much of a capitalist, but even I get that that's how the "free market" is supposed to function.

That's how the free market works - that vague and nonexistent abstract creation we learned about as undergrads. Ironically, the people at the centre of the monetary system have less real contact with the alleged "free market" than almost any other sector except the defence complex. The reality, of course, is that when you're a big bank in trouble, you still have the option of asking the government to help you engage in all kinds of fun alternative activities, including grand theft on a scale far beyond anything the "law" is calculated to prevent. Last week President Bush announces $145 billion fucking dollars in tax cuts, basically 1% of the GDP in free cash given his country's existing staggering deficit, and investors who spent the last five years clamoring for more "deregulation" and less government intervention in the economy are all of a sudden whining about how this is "not enough" and they need more government welfare to dig them out of the hole they've dug for themselves. Government has apparently become the Jesus Christ of the financial industry.

When you're big and do something stupid, you force the government to introduce interest rate cuts and tax breaks to "correct" your misdeeds. This is the latest in a series of "unsuccessful" measures, such as central banks "increasing liquidity" via low-interest loans to the private banks as well as various other so-called "injections" of cash into the banks. If necessary, presumably, the governments are prepared to bail out the banks with even more severe measures, like they did during the savings and loan crises, the Asian market crisis, the Third World debt crises, etc. In Canada, at some point someone's going to raise the question of bank mergers again, which is a scheme the big five banks have been sitting on for some time now, waiting for another window of opportunity to con the public into supporting a national oligopoly in the name of "international competitiveness." (You may recall this being raised several years ago, at which time the "big six" became the "big five" with the merger of TD and Canada Trust.) Then heads will nod sagely and say this is indeed a good time to act, deliberately ignoring the fact that being bigger didn't protect any of the big American banks from being stupid about subprime mortgages, either.

Let's be clear, very few banks and even fewer other investors are actually making bundles of money in this process, so much as cutting their losses; and the higher-ups at Royal Bank, CIBC, etc. have probably lost a fair amount of sleep in the process. Nevertheless, the "free market" is clearly an antidemocratic farce when the people are expected to pay for the missteps of the wealthy, who in turn demand lower taxes for themselves and less government intervention on behalf of others with less material means. Next time banks need financial help from the feds, they should do what they do with the other potential creditors they approach: offer stock at a discount rate. No one seems to want to talk about nationalization of the banking system anymore, and I'm not suggesting it be taken that far either, but it's better than bailouts, and it might cause the banks to think twice in the future about whether leaning on the public for charity is an appropriate way to deal with risk.

Most of this situation, of course, could also have been avoided by proper financial planning by the people who took out these ridiculous mortgages in the first place. Attacking the banks is kind of like shooting drug or arms dealers - it's a somewhat easier option for law enforcement, with the convenient bonus of not having to solve the flaws on the demand side of the economic equation. These people on the ground may well be suffering a lot more than the executives of the banks, and in fairness some of the American public's money is also being splashed around for the borrowers' sakes through various refinancing programs. Surprising how helpful the welfare state suddenly becomes when the free market fails to live up to the promises of affluence we were hearing about a couple years ago.

On the other hand, "accepting responsibility" is a word not normally associated with political economy. Instead we have a system designed to dilute and pipe away responsibility through an intricate network of public relations experts, mid-level scapegoats, and docile corporate media. Occasionally even the elites supposedly get fooled in the process: thus the present crisis began when a number of middlemen and mortgage lenders were facing bankruptcy, before the losses from that sector started getting the big banks "concerned" about where they'd been lending money. At the political level, the federal and provincial governments that proudly sold us down the river on raw log exports, protection rackets which overruled NAFTA on softwood lumber exports, etc. presumably aren't going to offer any mea culpas for the fact that increasing our dependence on American markets also increases our vulnerability to the fallout when those markets inevitably contract. The situation is somewhat different in Canada, where subprime mortgages are only a direct, serious problem for creditors who thought jumping into the American market was a fast way to make some extra cash.

One thing's for sure: whatever new measures are trotted out will be advertised as the best deal possible for some variation of the "average working family." Everything's done for the average working family these days, which ought to be a great comfort to social democrats and Christian conservatives alike. Chief flimflam man Stephen Harper even justified this month's GST cut as a benefit for the poor and the working classes to the tune of "hundreds of dollars per year," a blatant lie given that the poor already get refunds for average GST payments and that you're not going to save "hundreds of dollars per year" on a 1% GST cut unless you're spending at least a few tens of thousands of dollars on non-exempt goods and services. Some particularly stingy people are actually going to lose money as a result of the GST cut for this reason.

If we had a political and economic system where people were generally open and supportive of government as an active player in people's personal and economic lives, where these roles were genuinely determined by an informed, thinking public, then expecting the central banks to be the saviours of the frequently troubled banks would be less of a problem. But what we actually have is a system where we get a few years of pious rhetorical flapdoodle about "small government," "freedom and choice," etc., followed by an orgy of multibillion-dollar "emergency measures" and "helpful" regulations, followed by another five years of deregulation, privatization, and the resurrection of "small government." It seems, to borrow some cynicism from Wendell Barry in Sex, Economy, Freedom and Community, that the appropriate size for government is that size at which it can destroy other nations (all of them, if necessary); spy on its citizens and those of other governments; and maintain the health of its largest corporations. Such a government will be "too small to notice and will require almost no taxes and spend almost no money."