If the World was a Bank it had been rescued

The ‘Bad Bank’ – principle Amid social unrest spreading that followed the collapse of our economic system our leaders were eager to fight the symptoms by stimulus packages and ‘bad banks’, by tax incentives and by easing accountancy standards. None of the above remedies will work. The financial capitalistic model is as dead as the East European Socialism in 1989 has been. Like 20 years ago there are some ideologists who do not understand that their time was up and that the rest of us were moving on. The capitalistic system can not be fixed. One can, of course, prolong it’s decline and make it more painful for everyone. It is like an avalanche of stones and rocks going downhill. A clever leader would not try to stem against the rock from underneath it but would rather step aside and give it a kick so that it goes down quicker and in a straight way causing as little damage as possible after which one could start to rebuild society and establish a sound economic model. But, what President Obama and many other leaders are up to is to check the seatbelts and to cling onto the handbrakes while we are driven over the cliff. The absurdity comes to a climax when one imagines someone to find any kind of a safe place inside that particular vehicle. Not long ago, I came across the following little story a colleague told me: It is August. In a small town on the South Coast of France, holiday season is in full swing, but it is raining so there is not too much business happening. Everyone is heavily in debt. Luckily, a rich Russian tourist arrives in the foyer of the small local hotel. He asks for a room and puts a 100 Euro note on the reception counter, takes a key and goes to inspect the room located up the stairs on the third floor. The hotel owner takes the banknote in hurry and rushes to his meat supplier to whom he owes 100 Euros. The butcher takes the money and races to his supplier to pay his debt. The wholesaler rushes to the farmer to pay 100 Euros for pigs he purchased some time ago. The farmer triumphantly gives the 100 Euro note to a local prostitute who gave him her services on credit. The prostitute goes quickly to the hotel, as she owed the hotel 100 Euros for her hourly room use to entertain clients. At that moment, the rich Russian is coming down to reception and informs the hotel owner that the proposed room is unsatisfactory and takes his 100 Euros back and departs. There was neither any profit nor any income. But everyone no longer had any debt and the small town people looked optimistically towards their future. Could this be the solution to the global financial crisis, or is there a catch here? Closer scrutiny reveals why ’Bad Bank’ is not a solution at all. In the theory underlying this short story the Russian tourist would be the state. But, the state would, other than the Russian tourist, never demand his money back. Too much depends on how long the Russian guest needs to decide whether he likes to stay in the room or not and if so, for how long. That’s how the theory would go. The economy would be kept going by the state taking on the bad debt. But in real life it doesn’t stop with the Russian tourist coming down the stairs and not demanding his money back. In real life, the state would not be the Russian tourist. The story would rather be as follows: The banker in the local branch of the country’s major bank who had intercepted the money by promising the hotel owner an astronomical return on investment for the 100 € the hotel owner had received back from the prostitute, covered only the losses he had made with previous speculations. Now, as the Russian tourist comes down the stairs demanding the 100 € deposit back, the hotel owner only shrugs his shoulders and writes a bad check hoping that the Russian tourist won’t have time to go to the cashier’s desk as it was closed for a long lunch break leaving the impatient Russian tourist with no option but to post the check for collection when he is back at home in Moscow. This can take for ages, but ultimately the check will hit the account and the hotel owner, if he is still not in funds because the local banker has still not doubled his investment citing a ‘bad market’, defaults the check might already pack his bags to go to prison or the Russian tourist might generously forget about the 100 € and move on with his life prompting the banker to think the system should be patented as it was kind of re-inventing the license for printing money. For his continued gambling the banker would look forward to more indecisive Russian tourists to come and visit the town even if they decide not to stay in the hotel and consume nothing. In the real world, the state would neither bail out the hotel owner nor the Russian tourist but the banker. Transferred to the global crisis this should not mean that we all go to prostitutes but rather to eliminate all debt since it is the debt-bubble that is hanging over us like the sword of Damocles. Debit on one side of the balance sheet means Credit on the other side. Someone holds all those debts and wants to present those sooner or later at the cashier’s desk. Usually, those who own debts have become rich through theft, gambling or speculation, not hard work. A few exceptions only prove this rule to be right. Now, as the party comes to an end the butler is asked to pay for it. Literally, one could say, that those who had 2-3% annual pay-increase if they were lucky, are now rescuing those who only made 40% or a bit less when they had a bad year. Those banks (and their shareholders) who lent ridiculous amounts to mortgage-borrowers who were seeking to finance their over-priced family homes made fortunes over the years and traded such debts although they knew it would turn soar one day. The over-indebtedness the capitalistic economy created trillion-fold by handing out loans and credit cards secured by mortgages instead of allowing the working population to participate in economic booms by fair wage increases had led into an absolutely foreseeable disaster. Now the banks and their shareholders are in difficulties because their system of debt-financed profit maximization became unreal. One cold say, the assassin mutated into a suicide-bomber who is being rescued by his victims and rushed to the emergency room. And, as the patient is on life support machines remedy is sought in nationalization but the patient hallucinates of the privatization of the nation-state once he sprung from the devil’s shuffle. That’s why we are hardly in a credit crisis but rather a DEBT CRISIS. Those institutional investors, banks as well as rich private individuals who by creating debt bubbles by means of hedging and trading of otherwise useless financial instruments are about to drive us over the cliff, should come to terms with the fact that the debts won’t be paid back ever. Not today and not in a generation’s time. It will be painful for all those who hold the debt titles but they will recover from the shock one day. The have made hundreds of per cent in the years before and can afford the loss of future earnings. Let’s not start with a Socialism of the Billionaires by cutting back on the poor, sick and old, by denying our children good education, a peaceful world and ecologic society, and by cementing a dreadful mechanism of debt-bubble building based on an unjust distribution of wealth from bottom to top of society.. Elimination of debt inevitably results in repossession of wealth accumulated by creating bubbles. The owners and shareholders of investment banks, hedge funds and private equity firms won’t like that idea but who says they will be asked for their opinion? The ‘Bad-Bank’ - principle instead must have been invented in a nightclub! It has been particularly invented by those who benefit from it as it allows the same hedge fund junkies and private equity sharks to start anew by the public supplying them with fresh liquidity while eating their bad debts. L