Over the past few months since our banking crisis began we have been hearing a lot about nationalizing our banking system.
The government has repeatedly said that it does not want to go down that road, yet with the infusion of TARP dollars into selected banks the possibility of nationalizing a few of them now seems like a reality. Once the TARP funds move out of preferred stock into common stock then the nationalization of those selected banks will be complete.
Here is another way to look at it… once they government owns the common stock they then have voting rights in those corporations. The difference between them owning stock and you and I owning stock is that when you infuse billions of dollars into common stock you have lots and lots of votes. In other words you basically have the control of that bank.
But are we not in a banking crisis? Shouldn’t someone take control?
The government has two choices with unstable banks they can go the FDIC method which has been our traditional route since the 1930s or they can do a new method which is recapitalization.
The FDIC method of handling a failed bank basically pays off the depositors and then sells whatever is left to whoever will buy it. The control of the institution goes to another bank that steps in to purchase the assets.
The 2nd and newer method is called ”recapitalization.” Our new method began last fall with the Trouble Asset Relief Program or TARP. This new method of giving selected banks more capital to shore up their balance sheets kept some of these institutions from failing. I said “some” because some banks didn’t want the new capital but were persuaded to take it anyways.
I don’t think that during the crisis last fall the object was to ultimately purchase the common stock of these selected banks - but wouldn’t you know, once the Democrats were taught what this could actually mean to them they jumped at the chance to gain control. By buying the common stock and gaining control our government is now in the banking business.
Now why is that bad? If you trust your government then this should be no big deal. Get in, get out. Stabilize the institution, earn a few dollars in dividends while you’re at and then get out of the banking business.
But if the government has control why not stay in the business? After all isn’t government good?
Here is my take on this: Government Is Good- Politics Are Bad!
The politics of the situation can and will lead to very bad government. The fraud that can and will happen will outpace anything we have seen in the past.
Why? How can I be so sure? Let’s take a look at exactly what a bank does for a living.
A bank lends money. Not only do they lend money but they lend more than they take in. So if you deposit $1 into a savings account the bank will take that $1 and make $4, $6, or even $32 dollars worth of loans. Depending on the banking regulations at the time the bank actually CREATES money. They CREATE money by taking $1 and turning it into $4! Government regulators tell them how much risk they can take on. It is the government that tells them “today you can take $1 and lend out $4.”
Can you see why your congressman, why any congressman would want control over a money machine? Currently your government takes in a tremendous amount of tax dollars. Literally trillions of dollars but they can only SPEND what they take in and then they BORROW additional money to cover the government’s expenses.
But a bank, oh a big beautiful bank. You could take the $3 trillion dollars and turn it into $12 trillion dollars just by depositing that money into a bank that you happen to own.
Now for the politics: Let’s say that the New York Congressional Delegation needs $100 million for new schools for it’s cities. Because of the recession the cities have no additional tax revenues to pay for the schools and they can’t float new bonds due to their own crappy credit rating. So the school district asks their congressional delegation for help.
The next step is Congress will give whichever bank will help the school district in question an additional $25 million. The bank can then loan that $25 million dollars to whoever they want, many times over. Naturally they will loan it to the local school district. Who cares if the school district defaults on the $100 million it borrowed, it only cost the taxpayer $25 million.
Oh what a mess.
So what is the chance this scenario doesn’t happen? What is the chance that these money making machines don’t stay nationalized with the Democrats in charge? What is the chance the bank presidents don’t make the loans to the risky school district or to whomever the congress wants them to lend?
If you saw the Congressional hearing over the past few weeks, those hearing where the bank presidents were beat to a pulp for the whole world to see… what is the chance those presidents don’t make those bad loans?
Welcome to the nationalization of our banking system. You don’t have to nationalize all of the banks to create a money machine. You just need a few big ones.
Can anyone tell me what the inflation rate in Zimbabwe is today?