Bankers Take Money From the Government and Use it to Speculate

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Financiers have the world’s financial system in a “doom loop,” says the Bank of England. We’ve thought so ourselves. The bankers take money from the government and use it to speculate, not to lend. “Excess” reserves are at a record high as consumer credit continues to decline.

Most people find it both galling and absurd to see the bankers getting $10 million bonuses while there is 10% unemployment. Here at The Daily Reckoning, it’s just a matter of curiosity. You’d think there would be more wage competition to drive down bankers’ compensation. Why doesn’t Goldman go to an unemployment line and make an offer…

“Any of you guys want to earn a $9 million bonus?”

Surely there would be a few takers. And Goldman would save $1 million.

Of course, we’re joking. Banking is not a trade you can pick up just like that. Borrowing from the Fed at 1%…lending back to the Treasury at 4%…hey, it must take a few days of training to be able to turn around money like that.

On the other hand, there are periods when speculating for a big bank is a breeze. Over the last 7 months, for example, there was almost no way fed-financed traders could lose money. They borrowed dollars – the new carry-trade funding currency – at next to zero interest. It didn’t matter what they did with it…they could trade it for Brazilian reals…or buy stocks in Singapore…or buy gold. Almost everything went up against the dollar.

Institutional investors – such as those managing money for banks – are judged on how well they do against the benchmarks, the averages, not on how much money they make or how many losses they avoid. If their colleagues are making money, they have no choice. They have to get in the game too.

So, they’re in a “doom loop,” where they continue to bid up asset prices – even at the beginning of a depression.

Meanwhile, over in the real economy…the deflation continues. David Rosenberg:

“It is like a magic show – the US economy is somehow out of recession with both employment and consumer credit outstanding still in full- fledged contraction mode.

“In September, total consumer credit fell $14.8bln making it the eighth month in a row of debt repayment – an unprecedented string of declines. Over this period, the amount of consumer credit (not including mortgages) that has come out of the system has totaled $163bln at an annual rate (or -6.3% at an annual rate). Looking at the fact that total household debt still exceeds long-turn norms of 60% by a factor of more than two, we are still in the early stages of a secular credit contraction that could well end up seeing another $5 trillion of debt collapse. This is a highly deflationary process; it will take time; and while we are bullish on gold and commodities strictly on global supply- demand imbalances, bonds remain a very good place because deflationary episodes provide solid real yields to investors.”

Let’s see. We’ve tried several ways to gauge how long it will take to de-leverage the private sector (which is another way of figuring how long this depression will last). At 6% a year – assuming private sector has about 2 times as much debt as it should have – it will take about 7 years to get down to a more comfortable level?

Did we do the math right? Well, who knows? But every time we do it, we come up with about the same answer – 7 to 10 years, more or less.

But it’s not that simple. Because as the private sector de-leverages the feds try to prevent it…while they leverage up the public sector. This is bound to stretch the whole thing out…and bound to lead to some serious bust-ups.

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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Comments

  1. GS employees are some of the smartest and hardest working people in the world… they are a 24/7 organisation… those employees that don’t adopt that culture are moved out quick smart…. I couldn’t work for them and I dare say they wouldn’t want me anyway!

    Do they “deserve” the big bonuses? Well who knows, but GS make a shed load of money so surely the people who generate that money deserve their share?

    The real question is should GS be making that sort of money?

    Reply
  2. Nobody is arguing with GS’s ability to spin profits out of dung, and wipe the floor with their competition and tell the Pres what to say at his press conferences, but is it a fair and square company?

    http://www.fool.com/investing/general/2009/10/30/worlds-scariest-stocks-goldman-sachs.aspx

    Is it really hard work or just clever work. Is the culture like a germanic work-ethic, or is it one of secrecy and bribery/blackmail? I know, ordinary people like us are oh-so-burdened by moral scruples. But fundamentally, I don’t believe long term in a company that just deals in fake money.

    Reply
  3. Dan,
    I have no doubt Goldman Sachs are not always playing by the rules. There are many documented cases.

    I’ve posted about one here how they drove OIL to 147 in order to bankrupt SEMGROUP.

    There are many cases where their favoured customers get told in advance about stock upgrades – whilst GS analysts re-iterate their nuetral position to the market – a few days later changing to a BUY… after GS and favoured customers have loaded up a few days previous obviously.

    My point was…… if the regulators let GS make their money that way then the employees deserve their share for their soul.

    Here is an article from the Sunday Times. Interview with GS CEO – “doing god’s work”.

    http://www.timesonline.co.uk/tol/news/world/us_and_americas/article6907681.ece

    Reply
  4. They don’t have souls prozak – If they ever did, they forfeited them – A truly kind man might hope they might find them back someday? (I’m still trying to decide if I am a kind man or a hard one – Or can those stances be reconciled?) But either way, the all encompassing word for it is “grubs”!

    Reply
  5. You relate way better to the spiritual side of all of this than me Dan – So a thought – Lots of people (both poor and rich and in between) just mightn’t have “souls” at all – More like cockroaches I suspect? If any actually do.

    Reply
  6. Nice thoughts Ned. Okay a bit of the ol’ deep and meaningful now. Well whatever a soul is – perhaps we can call it the substance of a person – some people are like the walking dead, for they will never go anywhere good in the end. Cockroaches have little souls .. have you ever sat in a cheap bedsit and watched the little buggers? They are rather cute actually, and they don’t eat each other up, remarkably.

    But I think when we talk of a personal deity, by whatever name (even Economic Rationalism, or Science), some people have an inverted definition of ‘good’ to what others have. It’s a very important distinction. So to me, GS is following the rules of the exact opposite of what I would consider wholesome and good, or even sustainable and practical. People think they will get on nicely by being corrupt, dishonest, hedonistic, sneaky and selfish (and intelligent people doing this will get on very nicely indeed for a time), but these are the sorts of traits that lead a society ultimately to poverty and misery. It’s anti-civilisation.

    It’s like Bill Bonner said in another article (today) – in the end the whole system based on debt, derivation, speculation and money printing does nothing and _is_ nothing – it’s all lies. Real things matter. The truth remains, all else is washed away. People who don’t realize this are simply fools.

    Reply
  7. Ned/Dan,

    Well the theory for GS people is to give up your life to GS until your 40 and retire rich.

    Are they evil? Have the committed crimes or evil acts?

    Crimes maybe……. morally objectionable.. most certainly.

    However.

    Very good people sometimes do very bad things.

    Are they then very bad? Or Evil?

    Perhaps we should look for the dailyphilosphy.com.au to discuss such matters? :)

    Reply
  8. The question for me is whether to contemplate supporting such causes with my money – so what if they boast profits? People invested in Madoff, even though they knew something was very fishy about his endless horizons of continuous profit. It happened because people didn’t care about whether what they were doing was right or wrong – they don’t give a rat’s as long as they get money. It works for a while but the devil’s job is not to help man but make a fool of him. Unless it is sound investment it will unravel.

    Reply
  9. prozak it would be brave for any of us to label anyone at GS evil. I wonder what I would do if we faced similar challenges? How would I deal with the opportunity to get rich quick?

    I have watched how people behave in corporate restructures outside the finance sector and when push comes to shove, colleagues will knife each other in the back to get that promotion or gain power. What else would they be willing to do to score a large bonus?

    So we all need to be careful before passing judgement on others in my view. We may just find we are no better ourselves. As I wrote a while back, pinning all the blame on bankers just hides the truth. http://www.shareswatch.com.au/blog/opinion/blaming-the-bankers-only-hides-the-truth/

    Greg Atkinson
    November 14, 2009
    Reply
  10. Things that aren’t sound investments unravelling – Roubini explains it pretty clearly here:
    http://www.ft.com/cms/s/0/9a5b3216-c70b-11de-bb6f-00144feab49a.html

    Reply

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