One of the old cliché jokes on Wall Street is, "at the end of the day, everyone is a Keynesian," alluding to the 1930s era British economist John Maynard Keynes. Keynes' theory held that the government is ultimately responsible for full employment. The world of economic thought has been split in two ever since; the Keynesians vs. the free market champions. Will the cure be worse than the disease?
Brother – can you spare $800 Billion?
The $800 billion bailout of banks in the United States could prove to be treating the symptom of the disease rather than the cure. In any event, this is one epidemic that may have global consequences.
No other industry, save banks, have the luxury of government guaranteed funding such as the Federal Deposit Insurance Corporation (FDIC) in the United States. Born out of the great depression of the 1930s bank failures, these insured liabilities have become a major contributing factor to our current banking crisis; in particular when coupled with other factors.
Most of the public in any country do not have the ability to read a balance sheet and evaluate the credit worthiness of a bank. It is a fair bet that if government guaranteed deposits were taken away and banks had to fund their operations on their own, the public would no doubt make their business to learn to evaluate just how solid a bank was.
Greed and Arrogance
It is a sad circumstance that education is no substitute for common sense. Perhaps our financial meltdown is a by-product of the greed and arrogance inadvertantly fostered at the world's business schools. When combined with government insured deposits, this is a recipe for disaster.
During the past 30 years, investment and commercial banks have hired thousands of people from the world’s most prestigious business schools. The end result is that now we have "Joe the Plumber" bailing out the Ivy League's greed and arrogance.
Lack of Accountability
Much has been written regarding derivatives. The press of course, focuses on the illegitimate abuse of them rather than on their legitimate use. One need only remember the much publicized chronicles of Long Term Capital Management, Enron and so forth. The greed and arrogance of investment and commercial banks has once again proved a valuable lesson; leverage works both ways.
Politicians of every persuasion are equally as guilty for their lack of oversight and regulation; in particular, dealer traded, over-the-counter derivatives. The lack of regulation and transperancy of this market has been sighted time and again by such consulting firms as Greenwich Associates when interviewing "buy-side" market participants. The outstanding notional amount of these interest rate and credit derivatives is staggering and represents a potential significant risk to our global banking system.
"It was just a bad business decision." An all too familiar excuse when banking executives are seeking a handout. Perhaps the thinking is, if government guaranteed funding doesn’t work then a government handout will.
This isn’t Over
Our political leaders are going to have their hands full. One can only hope that they have an appreciation for just how serious this situation is and will treat the disease after they address the symptoms.
At the end of the day, everyone is a Keynesian
