Maybe you can help

Since the begging of this crisis I have been dealing with some questions. The main question I am asking myself is: why is capitalism abandoning its main characteristic? I am talking of course about bankruptcy.

I grew up in Romania and in 1991, two years after the Romanian Revolution, I left for the US to do my undergraduate and graduate studies. Throughout my time in the US, more than decade, I observed how well the institution of bankruptcy worked when applied to small businesses and individuals. I saw people that made an investment that did not work out were not ostracized and actually were given a second chance. I saw organizations that over-invested and became too rigid to compete with younger more flexible ones. Sometimes the big clumsy ones decided to break-up and sometimes they just went bankrupt.
My point is that when you made a bad decision you were made to pay for it but were also given a second chance. In the same time by going out of business you were freeing-up resources that were kept locked-up by your loss-making company.
This was a revelation for a guy that lived until 18 years old in a system were all the decisions were “good” and everyone was always a winner. The main difference was that, in communism you never felt like a winner.

Now I get to my issues. What has happened that we are scared to let go of those organizations that made bad decisions? They are not profitable, they are big and clumsy, they do not allow others to enter and they keep resources that could be used more efficiently by the economy.

One of my readers was asking me if I really meant when I said that it would have been better to let more big banks fail in 2008. I do believe that. The reason is that by doing that than we would have not had to do more today. A stitch in time saves nine is a great Anglo-Saxon saying. The world was given a disaster story and had to agree with a big bailout. Unfortunately, since September 2008 all the world is doing is bailing out someone. In fact this is not entirely true. Since 2008 the world is bailing out someone big, because capitalism works just fine for smaller companies and individuals. Both categories have plenty of members going bankrupt everyday but only in the US. In Europe this is not happening.

I do not want to fall into the conspiracy theory trap which says that one reason for lack of bankruptcy is that debt is a powerful weapon. Instead of allowing someone (individual, country, organization) to go bankrupt it might be better to keep them indebted to you (individual, country, organization) forever. Historically, this is how landlords kept control of their cities. I hope as civilizations we have moved past that.

So, what is going on? It is obvious that keeping alive Zombie institutions or forcing austerity measures on countries without real potential has not worked. Then why do the only solutions presented to the public are: bailout (i.e. more debt) and austerity measures?

41 thoughts on “Maybe you can help

  1. “Then why do the only solutions presented to the public are: bailout (i.e. more debt) and austerity measures?”
    What does bailouts accomplish? Answer: keeping banks in business.
    What does austerity measures accomplish? Answer: keeping the state alive and healthy

    More and more power is shifting away from the big institutions to the individual level. These institutions are like dinosaurs. They believe their own lies. They think that in trying to create a bigger state(European or global) they will be able to accomplish something they weren’t able to accomplish at the state level.

    In the next few decades, the economic power of the state will be reduced more and more. The same happened with the kings of Europe. Now, they have more political power than economic power.

    “Historically, this is how landlords kept control of their cities. I hope as civilizations we have moved past that.”
    I don’t think we have. It’s not a question of culture or civilization. It’s has more to do with personal self control. Plus, if we would have a free market no one will give loans to people who haven’t proved themselves of being able to save money.

    1. Adrian, a loan should be given because the bankers see an opportunity not because history shows that someone is a good saver. It would be the greatest scam, save for few years, get a loan and good bye.🙂 Well, if they let you go bankrupt and not make you sell a kidney.🙂

      Also, do you you see health and stability when you look at the Greek state?

      1. “a loan should be given because the bankers see an opportunity not because history shows that someone is a good saver.”
        And the opportunity doesn’t involve getting their money back + interest? If a person is not able to put aside at least 20.000 RON, he shouldn’t be able to receive a loan of more than 100.000.

        I don’t say that we should reinforce it by the power of the law. But the bankers will get to a similar percent(here 20%) when there will be no bailouts or money printing in excess. Their resources(bank deposits) will be scarce and they will think twice before giving loans.

        “do you you see health and stability when you look at the Greek state?”
        Look what I said: “What does austerity measures accomplish? Answer: keeping the state alive and healthy.
        I didn’t say stability – I said alive. Alive means that it should be dead by now without the austerity measures. By being dead I understand that its power would be reduced substantially.

        The greek state is still going strong. Most of the suckers still get their paychecks. They didn’t actually implement the required reforms, I’m not talking about austerity measures, that would increase prosperity for all.

        On the other hand, you are giving the example of the Greek state. That’s the worst possible example. Most states in Europe did austerity measures. And these measures didn’t benefit the real economy, it just kept their own system on the floating line.

        And it’s laughable what they are doing right now. The are all broke and they all try to bail each out.

      2. Interest is there to cover the risk of not getting back their money. And I am sorry I have to disagree with you but past saving behavior says nothing about future saving and investment behavior. If that were true, then a bank should not charge an interest as it will only give loans to those that can save and sure enough those guys will pay back.
        For banks giving loan is a decision that looks into the future. Of course, it helps to have history of good behavior but mostly in poor and undeveloped countries.
        I do not want to digress but to me history is not a benchmark just a starting point.

      3. These states are like alcohol buddies, They swear to each other that they will quit tomorrow. Yet they congratulate for the things they will accomplish tomorrow by drinking one more shot.

      4. “And I am sorry I have to disagree with you but past saving behavior says nothing about future saving and investment behavior.”
        Of course. But it says something about your ability to save.

        Most people I know who are in debt want to forget about it. They push it aside. They don’t actually focus all of their energies on paying back their loans.

        This also involves cutting on their spending. Because when you spend something while you are in debt, it’s like paying the actual price of the product + the interest. The interest comes from not taking that money and paying back the principal of the loan.

      5. “For banks giving loan is a decision that looks into the future. Of course, it helps to have history of good behavior but mostly in poor and undeveloped countries.”
        The future doesn’t come out of thin air. It’s based on the past. This is even more true at the individual level where the belief systems and behavior patterns of the individual are built upon the old ones.

        I don’t buy the idea that in developed countries people are better able to pay their debts. The ease of getting into debt has only made things worse in the long run.

        “I do not want to digress but to me history is not a benchmark just a starting point.”
        Saving is the opposite of spending money on things to impress others.(keeping up with the Jones) Overspending is like an addiction.

        Most people don’t change easily. They are stuck in their habits for years. Their past behavior says a lot about their future behavior. This is true in the case of most people.

  2. To me it’s all about lobby groups, both in the US and the EU. Major companies (including banks) spend billions of USD/EUR for lobby and this has led to a situation in which a company is seen as “vital” to the economy, and thus included in the privileged “too big to fail group”.

    I think the Romanian equivalent for this situation would be “capitalism de cumetrie”.

  3. Florin I’ve written a bit about this post on business777.wordpress.com. One idea is clear, it is almost obvious the fact that individuals started to gain as much adversity to corporations and to their causes.

    The guys that do this, from my point of view, are certain frustrated guys that blame it on the system just by reflex. Many of the young smart guys do work for the biggest players in the world and still the biggest players seen as systems hire the smartest of us, and pay them good in order to satisfy them and in a way to shut their very possible very powerful message.

    If I may bring an idea to your topic, from my point of you MAYBE the system of corporations, and specially the big web build by ‘them’ and their relations and influences got to much attached by itself as a system that cannot sacrifice pieces of its own in order to grow or develop in a healthier way.

    They got Attached – in the let’s say the Buddhist sense of view. So, it’s like having a small boy playing with LEGO cubes and building whatever he thought at the beginning possible, when the parent comes and tries to convince the baby that some LEGO structures are not nice or correct even if the baby has also nice Lego designs, being so attached by his former toys he doesn’t want them rebuilt. So when the little cousin comes and asks to play with the Lego cubes, the parents have only one thing to do: BUY NEW LEGO KITS – similar to – access more credit to pay the old bad business and bad investments.

  4. @Florin Citu
    “Interest is there to cover the risk of not getting back their money.”

    If you give money to people who haven’t learned how to save, it doesn’t matter what interest you set. You will not get even your principal. And they will not learn it by giving them credit.

    And the interest doesn’t include just the added risk. It also includes the interest paid to get the money in the first place + wages + taxes + other things.

    I agree that when you give out loans to millions, the risk spreads. Even only a part of the population pay back their loans and you are still doing fine.

    But the bailouts were required simply because bankers didn’t think hard enough about who were the recipients of the loans. They had too much credit on their hands at a very low rates. And they basically gambled and gave credit to anyone.

  5. “In fact this is not entirely true. Since 2008 the world is bailing out someone big, because capitalism works just fine for smaller companies and individuals. Both categories have plenty of members going bankrupt everyday but only in the US. In Europe this is not happening.”
    Indeed, there are plenty of small banks filing for bankruptcy in the US. But the main difference between Europe and US is that Europe have to bailout countries instead of big banks. In 2008 Lehman Brothers collapsed sending shockwaves through the world economy. Also remember the equities meltdown and the credit market freeze. Another big banks, Bear Stearns (before Lehman), Merrill Lynch, Washington Mutual, Wachovia, AIG, have been bought by another big banks in a bailout process well-handled by FED and Treasury. The systemic risk was close and more banks going bankrupt would have meant the end of financial markets. So I think the aftermath of this scenario would have been more expansive than the entire bailout. At that time, Europa feared about “zeee price stabeeeleeteee” and the bad influence of US’s problems. Neither Greece, nor sovereign debts! Therefore I doubt that more bank failures would have been a better solution for the current european debt crisis.

    1. Come on Sergiu. Do you really believe that “The systemic risk was close and more banks going bankrupt would have meant the end of financial markets.” ? The end?? Isn’t that too strong? The financial markets have survived bigger crisis in history not to mention wars. Maybe we would have witnessed a deeper recession but maybe that would have been followed by stronger economic growth. Instead, the world is in worse shape than it was in 2008. Something will have to give, I am not sure what but we will see soon.

      1. Florin, of course “the end” have a figurative sense, I forgot the quotation marks😛 . I agree with you, the financial markets are strong enough to resist any type of crisis. And I am very confident in economy’s ability to regenerate. Maybe in the US this would have happened even though more banks were allowed to go bankrupt. But this is a long discussion and we will never know how deep the recession could turn. Anyway my main issue is that I think the US managed the challenges very well and what is happening now in Europe is beyond the 2008 financial crisis.

  6. I like your praise of Bankruptcy. But the Americans, who got so far by inforcing The Free Market, were the same ones who gave this huge blow to Captalism, back in 2007 – 2008 when they started making biased descisions on who should go bankrupt(Lehman), who should be bailed out(AIG) or who should be restructed.

  7. The first mistake is that we compare the banks with a business. Let’s just look at their operational activity, and make some really simple ratios on their financial statements.

    Small businesses you talk about work on their owners money. The big bank is working using the people’s money. They don ‘t actually exist. Whatever they loose, in any operation, including bankruptcy, is your money, not their money, as they have no money, as they don’t even exist. Except for cashing in really big wages, compared to the rest. You can’t loose something you don’t own. The capital is a lower part of their assets, 10% if you take it mot-a-mot, this in good times, but they are not the sort of business to use the capital to do business. They don;t use capital to buy assets in order to finance their activity, like a business. They are not companies-businesses. This is what we refuse to accept and understand about these banks, and this is the reason why they got into a very privileged position, actually. So that now we consider them zombies.

    They use people’s money to do business. They don’t have nothing of their own. Just to understand, interest bearing deposits is financing at least 80% of BAC loans, I don;t even take the non-interest bearing ones into account, and, still, the payment for interest for those deposits is nothing compared to their personnel wages. The personnel wages means over 90% from the difference they make from cashing in 80% of loans interest and paying for the source of the money, the interest-bearing deposits. Of course, you can’t say nothing to them, they are a company, a profit maker, a risk taker, is their right to make business in their own way :))) Right. How the hack can you be a risk taker on my money? Bring your own money from home and lend it, if you wanna have a business.

    So if we want the big banks to fail, we are also supposed to accept our own losses. At that time the big banks had some trillions in people deposits. The difference between the big banks and the small banking system is quite large. So allowing their bankruptcy is like accepting that part of our money are gone. They loose nothing from the bankruptcy, except their jobs. That’s it. And this is why capitalism don’t work. And even bankruptcy don’t work, and it is not a solution.

    The problem is the entire system, which exists solely for their employees, hiding under the title of: PROFIT MAKER, using exclusively people’s money. The entire L&ShE is people’s money. The banking system is a social system, improperly designed and managed, because it’s improperly thought of from the very first beginning.

    In the past, the bankers were something different. There were guys having money and lending them on their own risk and expense, in an organized manner. But ever since the banks are lending deposits, this system chased to exist. We are sleeping with a ghost today. Today the whole society bears the risk for their loans, not them, They have nothing, anyway. They are nobody. They just loose their jobs.

    If we want to stop talking about zombie banks, the first step is to realize that the banking system is not a company or a profit maker, but a social system which exist as an intermediary in the society. A system designed to drain liquidity inside the society. This should not disappear, is only the system which should be redesigned.

    Another way to see they are not businesses, is by looking at their personnel expenses. In any business the intermediary takes like the maximum 2% from the profits. This is how big commercial contracts are designed. Their employees take 90% from the profit, not 2%, although the bank is just an intermediary in the society, between people having resources and people needing them. The banking system is the hugest scam, the hugest lie, the hugest aberration, and the most inefficient system that was ever invented.

    I know you worked for a bank and you like the banks, you are convinced that they are profit makers, and anything alike, But the objective, real, truth, is not what you like to see, believe, and imagine, but what it actually looks like on their financial statements. This is why we have zombie banks. Your rationing was valid for the Venice bankers, or others alike, but not for the system we have today.

    Is not bankruptcy the solution, as eventually we can change their law a bit and left them without a job even without loosing our deposits and creating a real hazard in the society, but a complete re-think upon the system and it’s design.

    1. @Lavinia, I am not going to read all this. It is too much, maybe you can think of using bullet points.🙂
      One thing that caught my eye though: “Their employees take 90% from the profit, not 2%”. This is not true. The profit goes to shareholders.

      Also, I am a little offended by this: know you worked for a bank and you like the banks, you are convinced that they are profit makers, and anything alike. not about what you say, it just shows that you have not read my blog at all.

      1. You should search for the financial statements, and then tell me how much of the money they are doing using deposits go to personnel, and how much to the shareholders. In the last years deposits+interest paid on long term debt(bonds mostly)+dividends were less than personnel :)))))

      2. In the last two years yes. But before for decades the cost income ratio was close to 50% or below. I have plenty of problems with the banking sector, but the cost with my team for example was just 3% or revenues. while We managed to double revenues during the crisis period and be the only profitable department in the bank my salary was kept flat.
        I do think that banks made terrible investment decisions and shareholders should have either sold their shares or trust the message from the management. But it is utterly insane to imagine a monetary system without institutions that look a lot like banks.
        I will write more about this as I do have a problem with one myth presented by my colleagues on the Friday show.

      3. “But it is utterly insane to imagine a monetary system without institutions that look a lot like banks.”

        Don’t image a monetary system. Imagine people that become richer with each day. Do they need something like banks in order to increase their wealth? Answer: not necessarily.

        They just need to create something of value. And they invest in better technologies as they save their money.

        Banks are like fast food. They offer instant money. For most people, it’s too hard to resist the temptation of getting the money and buying what they want.

      4. @Adrian T. “Imagine people that become richer with each day. Do they need something like banks in order to increase their wealth? Answer: not necessarily.” Banks are not there to make anyone richer. Their purpose is similar to the one of the energy, water or gas distributor. Of course if they are efficient and do a good job they should be able to charge a fee for their services.

      5. As with fast food, you can make your own food or order a healthier food. You don’t need to eat fast food.

      6. @Florin Citu

        You: “But it is utterly insane to imagine a monetary system without institutions that look a lot like banks.”

        Me: “Don’t image a monetary system. Imagine people that become richer with each day. Do they need something like banks in order to increase their wealth? Answer: not necessarily.”

        You: “Banks are not there to make anyone richer.”

        Me: I didn’t mean it like that. The purpose of any economy is to create higher standards of living and not to keep a monetary system alive. Otherwise, people wouldn’t have to cooperate. They could do it by themselves.

        Higher standards of living = becoming richer

        The necessary part in the economy is the standard of living and not the monetary system. Today’s monetary system could collapse and this wouldn’t imply that people will have to be poor their whole lives.

        From your replies you seem to believe that an economy can’t really exist without banks and the financial system. My point is that it can. That the real economy(free market + private property) is what really matters.

      7. Also, Adrian, I do not care if banks exist or not. I think that capital needs to be channeled from one country to the next in the most efficient and transparent way. So far the financial sector (which includes banks) did this job. IF something were to take its place so be it, but it will not happen over night. And we need to move on with the current tools, not all of them but at least the design.

  8. You can say: let Nutu Camataru go bankrupt, to teach him a lesson. You teach him a lesson on his money. Nutu Camataru is lending his own resources, so he will indeed record a loss. How can you say let the banks go bankrupt to teach them a lesson? You teach them a lesson on nothing, on our own resources? Why not firing them? Anyway, loosing their jobs would be the one and only lesson they can take from the bankruptcy, as they have nothing to loose. This is why capitalism don’t work for them, as they are part of the social system, not part of the capitalistic system. :))

  9. @lavinia:

    No guys like N C..aru are making huge (or let’s hope were making) profits on their immoral interests. Did you know that guys like these charge over 500% interest a year, and these on loans covered at the Notary with houses or other goods. So these guys lend from the money they have been profiting from very very immoral business.

  10. 1. Nobody oblige you to take their loans.
    2. Those guyz are doing a very immoral business using their own resources, while the banks are doing immoral business using our own resources. They actually re-lend us our own money, on a much higher interest. Even if you are not a borrower and a lender, in the same time, you get to the same point. Somebody makes huge payments using your money, much better than they pay you for your money. And that much higher interest don’t even go to the shareholders or re-lending, but to their wages.

    What is more immoral? You getting a really high wage, compared to me, using my money? Or Nutu Camataru making a huge profit using his own money and your availability to take his loan?

  11. But it’s our fault because we make deposits. We shouldn’t do it anymore, and then we will better understand their shinny moral business🙂.

    1. I think we should all take a loan and then bet it all on some stock. If it pays off great if not just declare bankruptcy. I think this should be done by the occupy wall street guys. It will have a bigger impact than what they are doing now.

      1. But I suggest to wait until Facebook will go public, then buy FB shares and transform “Occupy Wall Street” in “Occupy my FB wall”.🙂

  12. I think the answer to your question (“why is capitalism abandoning its main characteristic”) is not fear, but panic of total financial and economic collapse.

    Here is a link where Rep. Paul Kanjorski of Pennsylvania in February 2009 explains how the Federal Reserve told Congress members about a “tremendous draw-down of money market accounts in the United States, to the tune of $550 billion dollars.” According to Kanjorski, this electronic transfer occurred over the period of an hour and threatened a further $5 trillion to be drawn out triggering a total collapse of the Financial System, which prompted Hank Paulson’s emergency $700 billion TARP bailout action (at 2:20 it becomes very interesting):

    1. @sorin.macavei
      I think Peter Theil is great visionary, although had made some bad bets (actually he was too stubborn and waited too long to take his profits). I put the article on the blog when it appeared, very insightful.

      On your second point I agree, nothing but the threat of total destruction will make otherwise freedom loving men run for help to their governments. The oldest scam in the book but it works every time.

      1. “although had made some bad bets”
        He’s a billionaire. He shouldn’t be blamed for not being worth $1 trillion .😀

      2. As I said he is a great visionary, not that great as a hedge fund manager.🙂 He made his money investing in two ideas but lost a lot making some bad bets (gambling)🙂

    2. @sorin
      “is not fear, but panic of total financial and economic collapse.”
      The panic was a reaction to the massive money withdrawal. Why would a money withdrawal be a problem in the first place? After all, people put their own money in the banks in the first place. The problem is that the fractional reserve banking system who keeps very little as collateral.

      The guy in the video also says: “If you don’t have a banking system, you don’t have an economy.” That’s the assumption. And it’s the other way around. If you don’t have an economy, you don’t have a banking system.

      The financial system will have to be changed from the groun-up anyway. It can’t last the way it’s leveraged right now.

  13. Something to add:
    In my opinion, the current model of economic growth based on technology is coming to an end and there is no other model to replace it (yet) (see the Peter Thiel’s article – “The End of the Future”). That’s why politicians will do everything to keep the current model alive (bailouts, print money, zero rates to help the credit market etc.). Even so, these politicians will do very little to help the current system (not to mention changing it) until the system reaches on the verge of collapse. Then, in a matter of hours they’ll do everything they can to maintain the system (and they didn’t do in a time span of months or years).

    1. I agree, they will resist changing their system even though it can’t continue the way it is right now.

      Thanks for the Peter Thiel’s article. He’s a really smart guy.

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