Government by IOU

May 14, 2010|By Ron Smith

By now it's apparent to anyone paying any attention at all that the political process here and abroad is a game fixed to favor big banks at the expense of ordinary citizens. The banksters take enormous risks. If everything falls their way, they pocket vast bonuses. If, as in the case of the subprime mortgages that cratered the world markets the last couple of years, their bets go sour, the losses are socialized — that is, absorbed by the nondifferentiated mass of taxpayers — and the banksters celebrate by further lining their pockets.

It was announced this week that the smart boys and girls at AIG were to collect $380 million this year in bonuses for the great job they've done in playing a major role in the world's credit meltdown. Heads, we win. Tails, you lose. What a game.

Monday, markets around the globe rose after the European Central Bank caved in to the demands of the Greek government and promised a nearly $1 trillion "rescue fund" for Eurozone nations with critical levels of debt. Lots of us wondered why this was viewed so positively, since the consensus of high-level economists and financial writers was that this credit extension virtually defines moral hazard, the economics term used to describe a situation in which borrowers are not in the end held responsible for their debts and therefore are encouraged to act recklessly. It's seen as a temporary fix for a problem that continues to worsen.

It's a global phenomenon now: a global banking system, global moral hazarding and another global economic meltdown waiting to happen. Or, maybe not. Maybe the powers-that-be, the ones that lie to us about everything, can keep this game going indefinitely. Maybe they can defer the long-awaited Great Reckoning to a time more distant than we think. Timing is everything when it comes to gambling. Uh, excuse me, investing.

Economics columnist Robert J. Samuelson was on my show this week, talking about what he called "the welfare state's death spiral." He argues that the Greek crisis is a harbinger of what faces all the developed nations, including us: "Countries cannot overspend and over-borrow forever," he says. "By delaying hard decisions about spending and taxes, governments maneuver themselves into a cul-de-sac."

Whatever governments decide to do in the face of their spiraling debt, whether raising taxes or cutting benefits, makes things worse by threatening a further slowdown in their still-faltering economies. Voters are getting alarmed in sufficient numbers now to have maneuvered England and Germany into political gridlock.

There is now a coalition government in the UK between the Tories and the Liberal Democrats, with the Labor Party out of power after 13 years, and ostensibly conservative David Cameron the new prime minister. In Germany last Sunday, German Prime Minister Angela Merkel's party lost a regional election and, as a result, control of the upper house. And back home, as you know, the tea partiers saw to it that Utah's three-term Republican Sen. Robert Bennett was denied renomination. The Brits are sick of their government, the Germans feel snookered by having to pay for the imprudent Greeks, and growing numbers of American voters are looking to punish incumbent officeholders.

Still, the arrangement continues for the time being. Here's how economist Gary North describes it:

"Government writes IOUs. Banks and insurance companies buy these IOUs. The government writes more IOUs. In a crisis, the central bank buys these IOUs. The voters grouse, but they do not revolt. Whenever the voters say no to bailouts, the politicians ignore them. They know that the voters do not really want to cut spending. Banks want more government debt to buy. Governments want more debt to buy more votes. The voters want to believe that the promises will be kept."

This is a system that cannot be continued indefinitely, but it has been kept in place for a long time, and so far, there are always buyers for government debt. It's a system that shows signs of great fatigue, like tired mountain climbers roped together and able so far to yank those who fall, like Greece, back to at least temporary safety. The rope is frayed. When will it break?

Ron Smith can be heard weekdays, 3 p.m. to 6 p.m., on 1090 WBAL-AM and WBAL.com. His column appears Fridays in The Baltimore Sun. His e-mail is rsmith@wbal.com.

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