The Problem with Banking

News reaches us today of the UK government increasing its stake in Lloyds/HBOS bank from a 43% to a 77% holding.
http://www.ft.com/cms/s/0/4c0c968e-0a8e-11de-95ed-0000779fd2ac.html?nclick_check=1
In return for this holding in Lloyds HBOS the government is under pinning the value of up to 258 billion pounds in losses in its quaintly named “Asset protection scheme”. The sweetener is a 16 billion premium SHOULD these toxic assets recover in value. The Government (Labour Treasury representative Steven Timms on the BBC Today Programme 7th March) refused to even confirm what the total losses could be.

Lord Mandelson in reference to this latest bailout deal said: “the government was not prepared to sign up to anything unless we can be sure that there really will be benefits and gains for the country as a whole”.
Yet the whole deal is predicated on optimistic assumptions that the assets will come good and the government (public’s money) will see a profit. To date the only consistent thing with the crisis of capitalism has been the wildly optimistic projections of the government and its main advisers. The mainstream press has been happy to go along with it as well, prefering to ask when it will be ‘business as usual’ again rather than exposing the failures in the core of system itself.

The “toxic” assets are by and large relatively new derivative and loan products, difficult to value and in the current recession/depression highly dubious in value. This is why they have been dramatically marked down in value by the market, they cannot be sold except at massive losses. Rather than accept defeat and sell for whatever can be raised we now have an elaborate charade where the government is underwriting an expected “return to full value” for this toxic junk. Is it prudent for a government to bail out a private corporation that has gambled massively and lost? It amounts to theft on a grand scale.

The incestuous relationship between western governments and the banking system is nothing new, but the current fiasco has taken it to unprecedented heights. Not only do banks get away with fractional reserve banking (the ability to literally print money – for every pound deposited they can create new money in multiples based on the ‘reserve’ – a 10% reserve means 10 times the amount of the deposits held can be created). In addition to this license to print money, they also earn from interest (money charged on money). Even this is not enough, during the capitalist bust and boom cycles, banks are given the real levers to create growth or reign back (deleverage) or call back in the loans, which has disastrous consequences for the economy. Hence the government mantra of “this measure will get the banks lending again”. But the fact is that in this massive downturn the banks will not be lending again soon as they are firmly in the camp of gaining whatever cash they can to cover their losses (many of which are in derivatives). Furthermore with business in decline and a general distrust and fear of being caught with the next failing business, the banks and governments cannot kick start the economy.

For the government ministers to say that bailouts are to get lending moving again is disingenuous, they know it will not happen. And to underwrite 100’s of billions of pounds worth of junk as a price to do that is madness. It would be far easier for them to do it themselves directly.

So, in good times the banks literally print money and charge interest (usury) on it. In the bad times they confiscate your house or business assets. Now in the really bad times the government is promising to cover their gambling and assorted losses. How rotten to the very core capitalism is.