Oh to be so Lucky to Get Free Money from the Financial System

The Dow hit a new nominal high on Friday.

Money is what we use to measure past, present and future. It is what we have to show for our years of work. And it is what we need to pay for the things we want in the future. It is how we measure what we’re ‘worth’.

You work all your life and you’re worth say $1m. And then, the feds just print up $40bn… or more… just like that. They then give it to the people who are close to them… the people they bail out… the people who speculate in stocks… people who make campaign contributions… and people who make fighter jets.

This effect – of giving out the new money to the politically-favoured groups closest to the feds – was discovered more than two centuries ago by Richard Cantillon. It’s known, natch, as the ‘Cantillon Effect’.

It undermines faith in the whole financial system, past and present. Suddenly people don’t know what they’re worth. The auto parts distributor who worked his whole life, saved a million dollars, and put it in a saving account at the bank, now finds his banker neighbours – who speculated on banking shares – are worth twice as much as he is. He looks ahead; he wonders what will happen next.

And here’s the latest report on how it works in the New York Times:

‘Some four years after the financial crisis, many are still feeling the ill effects. But big bank executives are not among this unfortunate group, compensation data shows.’

The banks were bailed out by the feds. The rescue programme, TARP, included provisions limiting cash bonuses. So the bank execs took stock instead then, valued at low levels. According to the report, the bankers – the five top execs at each of the 18 largest publicly traded financial institutions – got $142m worth of stock.

But wait. Even though they’d brought their companies to the brink of extinction, they didn’t actually take a dime less in compensation. They simply switched the cash bonuses they were owed to stock options, valued at the low prices of the crash era.

Then, the Fed also went to work to make sure the banks made beaucoup money – taking their bad investments off their hands at par… lending them cash at record low interest rates and generally tilting the playing field in their direction.

Four years later, that stock is now worth $457m. Nice profit, heh? But while the story is told in the NYT with all the numbers and details, the writer misses the plot. He says the bank execs were the beneficiaries of “lucky timing”.

Ha, ha, ha… lucky? You call $1.2trn in Fed stimulus “luck”? You call the $700bn TARP programme “luck”?

Well, it’s amazing how lucky you get when you have the Fed giving you money!

We call it what it really is – cheating. It’s what happens when the feds fiddle the financial system. Money – created not made – is up for grabs. And who grabs most? Those closest to the source – the insiders. The more loot the feds distribute, the more the insiders get. The rich get richer.

Dylan Grice:

‘The credit inflation analog to the Cantillon effect has played out perfectly in recent decades. Central banks provided cheap money to banks, the cheap money artificially inflated asset prices, artificially inflated asset prices made anyone connected to those assets rich. As we became a nation of speculators, those riches were achieved at everyone else’s expense, and everyone else has now realised what has happened and is understandably enraged. As Keynes explained, Those to whom the system brings windfalls… are the object of the hatred.’

Everyone hates bankers. And for good reason. They’re cheating. They’re insiders who are benefiting most from the feds’ foolish money-printing.

If the bankers had got what they deserved, instead of getting options and bonuses, they would have gone broke. Then, we’d see what they were really worth. They could have picked up the pieces, creating new and better financial companies. And today, we’d have wiser… more honest bankers… and better banks too. We’d also have a more honest financial system.


Bill Bonner
for Markets and Money

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Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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2 Comments on "Oh to be so Lucky to Get Free Money from the Financial System"

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The difference between the 1890’s bust and the 2008 bust was a thing called capital calls that really did send the 1890’s bankers broke. “Limited liability” was the answer they said supposedly when few would take risks as a result. But what they gave us (especially the non executive directors without skin in the game in essence was almost “unlimited non liability”. Time for a rebalancing and this curious things called moral suasion missing from executive government, finance, and the military industrial estate in equal measures. Unfortunately this looks like coming in the form a rising Lucas Cornelius Sulla prototype.… Read more »
zane zeehan

great article

I’d really like to see a homeless banker lining up at a soup kitchen.

That’ll be the day.

let’s not forget the overcompensated CEOs who really create nothing of any true value. What Eisner took out of Disney, as just one example, makes any bank robber look like a small-time fool.

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