Suddenly the game of loaning insane amounts of money to governments and corporations starts to make sense. Why should the bank care if the borrower is buried in debt? What difference does it make if the borrower’s revenue stream barely covers interest payments? Remember, those “really, really big loans” are protected. Once there is a system in place for shifting the loan obligations onto others, the only logical objective (from a profit standpoint) is to get the borrower “on the hook” for as much money as possible. When the inevitable happens (the borrower becomes unable or unwilling to make any more payments) it’s time for the final play: get the citizens to pick up the tab.
Consider this a simplified illustration of the process:
A “high-risk” loan of $250 million dollars is made to the government of a third-world country. The government spends the money and is soon unable to keep up with its multi-million dollar monthly payments. The bank (after “careful consideration”) decides to help the government by providing yet another loan. Once again, the payments resume and all is well. However, before long the new loan is exhausted and now the country is in even worse trouble. If it couldn’t make payments on the first loan, how can it make payments on the TWO loans it now has? Simple; the bank agrees to create even more money out of nothing and loans that to the country. This can go on for decades. With each new loan the bank increases both its “asset” (the amount of money it is owed) AND the profit it earns on the ever increasing interest payments.
Eventually, the borrower realizes that interest payments alone are eating up nearly all available revenue. There is no way the enormous debt will ever be repaid and bank offers for “helpful” new loans are rejected. What is the bank to do? If the loan goes into default, it stands to lose both the “loan asset” and the highly lucrative interest payments…
After intense negotiations, the bank kindly agrees to “reschedule” the loan. (That means reduce the interest rate and extend the loan period.) In reality, this is hardly a concession. Sure, by reducing the interest rate and extending the loan period the bank makes it easier for the borrower to pay, but it has only postponed the inevitable. Sooner or later, the day of reckoning will come. --But for now, this move keeps their asset on the books and keeps the interest rolling in.
At long last the day of reckoning does arrive. The borrower realizes he can never repay what is owed and flatly refuses to continue paying millions of dollars a month in interest to the bank. The jig is up. Or is it? –Time for the final play.
G. Edward Griffin explains:
“The president of the lending bank and the finance officer of the defaulting corporation or government will join together and approach Congress. They will explain that the borrower has exhausted his ability to service the loan and, without assistance from the federal government, there will be dire consequences for the American people. Not only will there be unemployment and hardship at home, there will be massive disruptions in the world markets. And, since we are now so dependent on those markets, our exports will drop, foreign capital will dry up, and we will suffer greatly. What is needed, they will say, is for Congress to allow him to continue to pay interest on the loan and to initiate new spending programs which will be so profitable he will soon be able to pay everyone back. --The bank…will agree to write off a small part of the loan as a gesture of its willingness to share the burden. (This however represents) …a small step backward to achieve a giant stride forward. …this modest write down is dwarfed by the amount to be gained through the restoration of the income stream…” (On money created out of nothing.) Text in parenthesis added.
This final play, the “bailout,” shifts the financial burden from its rightful owners (the borrower and the bank) onto the backs of the American people. Where there would have been consequences for recklessly loaning so much money, there are now billions of dollars to be made in interest payments on those “reckless” loans. Where the bank’s “mistakes” would have surely cost them, those same mistakes become an enormous stream of guaranteed profit. Thanks to the bailout, the “loan asset” will not be lost, the revenue stream will continue without further interruption, and it’s you and I who’ll pay for it all.
“Through a complex system of federal agencies, international agencies, foreign aid, and direct subsidies,” money extracted from the American people goes first to the borrower, and then is sent to the banks to service the loans. Most of this money does not come from taxes, but rather is “created out of thin air” by the Federal Reserve System. As the newly created money flows into the banks and then out into our economy, it dilutes the purchasing power of our money. Confiscation of our purchasing power (via inflation) is the result.
Even with this elaborate system standing by to bail out the banks, there is still plenty of opportunity for the banks to loan themselves into insolvency. For instance, bank runs are always a real threat because the banks keep only a small fraction of their customer’s deposits on hand. The bank not only loans out the money you’ve deposited with them, they also create more money (checkbook obligations to pay) out of thin air. If even a small percentage of the people get spooked and show up at the same time to withdraw their deposits…you know the rest. Sure, the Federal Reserve was created to help the bank in situations like this; but there are limits. If the bank has dug itself too big of a hole, it’s time for the FDIC play.
FDIC to the rescue:
FDIC stands for Federal Deposit Insurance Corporation. The concept behind this agency seems noble enough: If a bank presses its luck too far and ends up going broke, its customer’s deposits are insured up to $100,000 each. Given a choice, most people would rather do their banking at an FDIC insured bank. –Better to get your money back if the bank goes broke than not.
Banks that participate in the FDIC program must pay a fee that goes into the FDIC fund. The fee is calculated as a percentage of the money the bank owes its customers (a percentage of customer deposits.) So, for the purpose of example only, let’s assume each participating bank must pay 1% of its customer deposits into the fund. A bank that holds 10 million in deposits must pay $100,000 into the fund, a bank that holds 100 million must pay 1 million into the fund, a bank that holds 1 billion must pay 10 million in, etc.
The fact all banks must pay the same percentage rate (regardless of whether they are notoriously reckless or extremely responsible) is the first problem. Not only do reckless banks stand to earn more money (they loan larger amounts of money to questionable borrowers, often at higher interest rates, which leads to greater profits) they are also most likely to “get their money’s worth” from the FDIC fund. That is to say, they are most likely to get themselves into trouble and have their depositors paid off by the fund.
Responsible banks on the other hand (loaning smaller amounts of money and loaning more cautiously) are basically pouring their FDIC payments down the drain. Not only do they earn less because of their responsible practices, they’re least likely to ever collect a penny from the fund they’re paying into. In this way, conservative banking practices are penalized and reckless practices are encouraged. In the insurance business, this is what is known as a “moral hazard” and it’s an example of how a seemingly good idea (FDIC) actually increases the likelihood of bank failure.