Crime and Punishment - Banking Style

Bill Bonner - Mon 14 Dec, 2009

The Financial Times calls it a “war on greed”. But it’s a bogus war

It’s open season on bankers. But the hunters are shooting blanks!

First, Britain said it would impose a 50% super-tax on their bonuses. Then, Sarkozy said he would do the same thing. Angela Merkel merely said that she found the idea ‘charming’.

As for the US, the argument goes on. Goldman has tried to head it off with various gestures.

Goldman’s top man said the firm wasn’t just trying to make money; it was doing “God’s work”. No kidding. We couldn’t make this stuff up.

How Mr. Blankfein knows what God wants him to do, we can’t tell you. But it was certainly a bold public relations move to suggest it.

More recently, top executives agreed not to take cash bonuses.

The Financial Times calls it a “war on greed”. But it’s a bogus war. What is really going on is that both sides are conspiring to share money that doesn’t belong to them.

The Wall Street Journal, for example, revealed more of the real dealings between AIG and Goldman.

AIG had guaranteed billions worth of Goldman’s dodgy mortgage deals. If AIG went down, Goldman would lose a lot of money. So, when the feds stepped in to “save western civilization as we know it”, they were really saving Goldman.

Western civilisation would have been better off if they had all taken their losses and gone to wherever willing investors and lenders sent them. Instead, the feds put up the taxpayers’ money... and the bankers got their bonuses.

The show must go on. And now, as the government pretends to punish the bankers, the bankers pretend to suffer.

In the first place, a 50% tax is not that extraordinary. The top marginal rate is nearly 50% in many places already – including the US. Add the local tax to the federal levy and you barely have half left.

In the second place, if the bankers don’t take big cash bonuses they’ll take their compensation in some other manner.

According to the Financial Times, rough handling by English tax collectors is causing many bankers to leave the country. But there’s more to it than just the taxes. Bankers are leaving the UK because the opportunities for them are better elsewhere.

Here we come to one of the world’s big trends – one that will have profound consequences for the entire world.

There may be a depression in the US and Britain... but it hasn’t slowed the movement of money and power from the mature, developed economies – notably the aforementioned Britain and America – in the direction of the emerging markets.

The emerging markets are growing faster; everybody knows that.

According to a Goldman study, nearly half the world’s economic growth is now occurring in just four countries. And neither the US nor Britain is on the list. Nor is any other developed country.

The four are the BRICs... Brazil, Russia, India and China. They were given a big boost by the Fed... which has kept the price of credit in the US artificially low for almost an entire generation. This increased consumer demand in the US for foreign products, indirectly transferring a substantial part of the US GDP to the emerging market exporters.

This year, nearly twice as many IPOs were completed in Hong Kong as in either New York or London. Why? Because there is more new economic activity in Asia than in the mature Anglo-Saxon markets. And because there is more money available in those emerging markets than there is in the West.

This trend could come to an end at any time. But it is unlikely.

The indus trial revolution favoured the West. The next phase of global development seems to favour the new, emerging markets.

They don’t have the legacy costs and corruptions of mature industrial societies. No giant military establishments. Minimal social security and public health care systems. Smaller welfare, education and health bureaucracies. Fewer lobbyists and entrenched special interests. Fewer retirees. In short, fewer parasites.

Emerging markets are now playing catch up. Sometime in the future, some of them may take the lead – surpassing the US and Europe in military power, national income, growth – even quality of life and income per capita.

Then, they too can begin ruining themselves. But that is still far, far in the future. We’ll have many a laugh between now and then...

More news... where to put your money in 2010…

So where’s the money to be made in 2010? You have to look a little harder, says Theo Casey, investment director of The Fleet Street Letter.

“Our broad view is that the easy money has been and gone. It’ll be harder to make money next year. Success in 2010 hinges on good managers doing clever things with their companies. In 2009, incompetence was hidden. No matter how shaky a business model, all stocks melted up together.

“This coming year will be different.

“Not to sound like the boy who cried wolf, but we really believe that this year will be “the year of the stock picker”. We cannot rely on market momentum to carry all investments higher, expect to see sector rotation.

“It’s the companies with the best fundamentals that will outperform.

“Following several months of a market wide climb, led by financial stocks, the dynamic is changing. Utility and healthcare stocks are beginning to take over in sector leadership.

“This doesn’t mean sell cyclicals and buy defensives per se. It means sell your FTSE trackers and buy fundamentals trackers instead. It is the discriminating investor that will continue to ride the bullish trend.”

Editor’s note: Theo Casey is the investment director of The Fleet Street Letter. The team’s latest recommendation to capitalize on “only the strong” individual share price performance in 2010 has just been released. Forget traditional index trackers. This is an investment that will track the most fundamentally strong companies in the UK. Access it now by taking a no obligation trial subscription to the UK’s longest-running investment newsletter.

And more thoughts...

*** Growth requires finance. Capital needs to be raised and allocated. Then, earnings must be distributed and invested. And, of course, consumers want credit too.

One sector that is growing particularly fast in the emerging markets is... you guessed it... finance.

You could say that the thing emerging markets most lack is a sophisticated financial industry. Until they get that, they’ll have to continue to earn their livings with honest work.

When people in Argentina buy houses, for example, they typically have to come up with a lot of cash... sometimes 100% cash. This means that they tend to have a lot in savings. It also means that there is a huge business waiting to be developed – helping the consumer get deeper into debt.

*** Stocks in the US went up 65 points on the Dow on Friday. Gold continued its correction, down $6.

*** We got a big dose of American culture this weekend. We went Christmas shopping in the Annapolis Mall.

It is the first time we’ve been in a mall for at least 15 years.

We’ve never seen so much junk in one place! Geegaws... gadgets... shoes... clothes... it is amazing what people will buy.

Anyhow, while were strolling through the mall, looking for presents for Elizabeth and the children, an idea occurred to us... about what this mall represented.

Was it not a consequence of 50-year trend towards consumerism? Was it not aided and abetted by artificial policies of the Fed and Keynesian economic delusions?

Is the mall not unsustainable economically... financially... and physically? Could the Chinese, the Indians, the Russians, the Brazilians and the Indonesians... or all nine billion people expected on the planet in 2050... ever hope to consume resources in such a manner?

Americans can only do so because of the willingness of the foreigners to ship their resources... and their finished products... to the US in return for pieces of paper with the dollar signs on them.

What will happen when the foreigners want to consume their own output? Will there be enough? Or will a new idea emerge with the new economies... a new idea about how to live... and what it means to be wealthy?

Maybe the ancients were right about it. A man’s wealth can be measured by what he has; but it can also be measured by what he doesn’t have and doesn’t want. When he wants little, he is a rich man.

But in the Annapolis Mall we saw no sign of Marcus Aurelius. This was a temple of the hedonists, not the ascetics. People were there to buy things... things they didn’t need and would be better off without, in our opinion.

But were they buying with money they didn’t have? Maybe not. Consumer debt is going down. That must mean they are borrowing less than they are paying back.

Well, not exactly. Debt is going down largely because households are defaulting. Floyd Norris reports in the New York Times:

“Figures released this week by the Federal Reserve showed that Americans owed $10.8 trillion on home mortgages at the end of the third quarter, down 2.2 percent from a year earlier and the lowest level since mid-2007.

“Similarly, the Fed said that outstanding credit card bills in October totaled $888 billion, down 8.5% from a year earlier. That number was the lowest since March 2007.

“Those trends do not, however, necessarily indicate that Americans have paid down their debts and are starting to lead the more frugal lives that some financial planners have been recommending for years.

“There has undoubtedly been some of that, but the declines also indicate that banks have been forced to write off a lot of bad debts and have grown more stingy in granting credit.

“As can be seen from the accompanying charts, banks’ credit card write-offs have soared, to an annual rate of 10.2% in the third quarter of this year.

“And the Mortgage Bankers Association reported that at the end of the third quarter, 4.5% of all mortgages were in foreclosure — one in 22 mortgages. It said another 6.1% — one in 16 — were at least two months overdue. Those figures are for all mortgages, not just subprime ones.

“The extent to which Americans are really cutting back may become clearer this holiday shopping season, when they decide how much money to spend. If what they tell pollsters can be trusted, they are going to cut back.

“A poll of 7,500 Americans in November, conducted for Alix Partners, a business consulting firm, found that people expected to save 15% of their income when the recession ended. That is about three times the current savings rate, as reflected in government figures. Asked what their largest personal financial concern was, 18% cited lowering their debt, more than any other choice.”

*** We sat in the business class lounge at Dulles Airport longer than we wanted to. The TV in the corner seemed to be tuned into a talk show.

As near as we could figure, people yelled at each other about things that didn’t concern any of them. Two subjects of conversation were addressed. The first was the case of a teenage girl who had murdered a child. The second was Tiger Woods’ private life.

More interesting were the advertisements. There must have been four different advertisers offering to help people get out of debt. In the past, the ads would have been for weight-loss programmes. Now, they are debt-loss programmes.

Until tomorrow,

Bill Bonner
The Daily Reckoning

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P.P.S. Click here to read Bill's short essay on The Retarded Recovery