Monday, February 23, 2009

Chickens Come Home to Roost

Awhile back, the question was raised as to what would be the effect of allowing banks to assume the losses of other banks which they had bought out in figuring income taxes, thereby reducing their tax burden. The roundabout (and poorly handled) answer from myself was: that it was an effort by the government to encourage consolidation within the banking industry, rather than having failing institutions become wards of the FDIC and the Fed. On the margin, more failing banks would be bought out than would otherwise have been the case, thanks to this tax incentive. Now we are seeing the fallout of such policies:
In a five-day period last week shares of two of the biggest and most vulnerable banks, Citigroup and Bank of America (BoA), fell by 44% and 32% respectively. Those of better capitalised institutions, such as JPMorgan Chase, fell by less.
Bank of America was not always a "vulnerable" bank. It had steered mostly clear of the mortgage and mortgage-derivatives insanity that had done in Lehman Bros. and Bear-Stearns. But then, once the whole meltdown had gotten fairly well underway, it decided to swallow up two particularly bad offenders who were already on the ropes: Merrill Lynch and Countrywide Financial. Now, with their bad numbers on the books, B of A looks to be in a world of hurt. This was completely avoidable. Of course, I'm sure the tax write-off was not the deal maker in every case, but by intervening in the economy and bailing out the losers with policies like this one, the government encourages this sort of behavior. Banks can afford to be overly aggressive in their lending and acquisitions; if it turns out well for them, they make a killing. If it turns out poorly, everybody foots the bill. Without intervention, the shareholders of several banks would have seen their holdings become worthless. Some other "bad stuff" would've happened, but then that would have been that. Those folks could've dusted themselves off, gotten back on their feet, and found a new place for themselves in an economy that still functioned, looking to get back in the game. Now there is no game to return to. We are all losers. Instead of shares and commercial paper taking the hit, its going to be the US dollar. Nobody can avoid this. Thanks to our fascist government-banking system, now we are all in for a world of hurt. And it will be much, much more hurt, since these actions will not only have placed one finite burden on all, they will have undermined the very foundations of our economy by destroying trust in our currency, property rights, and market ethics. As for the debts presently being run up, one shouldn't think that all this debt is a "burden that will be passed on to our children and grandchildren." I keep intending to write a post on this. This is a tremendous fallacy, and incredibly naive. Suffice it to say: those kids aren't fools, and they probably won't be nearly that honest; they'll simply pay back their debts in inflated money, stiffing their creditors, just as we are right now. It'll be no problem for them! Nope, I'm afraid that most of that burden will be falling right on top of all of us. In fact, it will probably be what does us in in the next few years, not the next 20. So they wouldn't have to pay the debt anyway! Deficits aren't about the future, they're about today. Here and now. The new money that enters the economy has its effects immediately. Government consumption competes with the private market, driving up prices for those unlucky enough not to have a money-printing press, and expanding the state's share of wealth at the expense of the private sphere. Real capital and resources are diverted from productive private enterprise to destructive consumption by state. Today. The state is expanded today. The economy contracts today. It is not stealing from our children, it is simply expanding the footprint of the state, without the need for pesky and politically unpopular tax increases. So don't worry, you can have a clean conscience about voting for the politicians who are now passing out bailouts like candy; our children won't have to pay for them. We will!

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