After sub-prime mortgages, how ripped-off Europeans (including us Britons) are back on the hook for the bankers with Euro-bonds

Euro debt is being passed around like a ticking bomb wrapped in gilt edged paper. In this explosive game of pass-the-parcel, governments and banks are colluding in leaving the prize in the hands of ordinary ripped-off Europeans, including us Britons.

Greece, Spain, and even Germany are having trouble borrowing money. But, to be clear, they are not borrowing money to pay their running costs – keeping public services going – but to pay off their bankers. 

Governments borrow billions. To try and keep the costs down, they borrow money for different lengths of time, typically between 3 months and 30 years, so they can negotiate better terms with different types of investors. This means they have to continually re-finance their debt. As one loan becomes due, they borrow another chunk of money to pay it off. The Economist newspaper shows the gory details: figures for France, Italy and Spain show they need to borrow fresh € billions each week not to fund fresh spending but just to pay back their existing loans.

Sometimes a government may find itself a little financially embarrassed and ask for more time. The bankers will tweak up the cost, pocket some fees, buy everyone a good dinner, and roll the loan over. 

The Greek government has for some time been in a position where it can't pay. Money isn't there, it isn't approaching, it isn't anywhere in sight, not a sniff of it. This is when the bankers get worried. It is no different to the sub-prime mortgage crisis, except the banks can't foreclose on Greece. Nor on Spain, Italy, and certain other embarrassing states.

When a state says it can't pay, it is because new lenders aren't willing to loan money to pay off old lenders. Bankers are now left with two options:

a) Write off the loan, and take a whacking loss

b) Find a sucker on whom the loan can be palmed off (guess who)

Investment banks make billions. It is their custom to hand approximately 40%-50% of their annual revenues to their bankers as bonuses and pay. One of the main revenue generators is the “2 and 20” model, quite common in the industry, by which the bank charges investors 2% of the amount invested plus 20% of fund profits. This means that even if the bank loses all your money, it still takes 2% of the amount lost in fees. Invest £1billion, and the bank could flush £980million down the toilet, and pocket the remaining £20million in fees. This is precisely what banks were doing lending money to governments operating beyond their means. Bankers focussed on their bonuses didn’t care if the loans would be repaid – two percent of €billions is enough to get by on for a lifetime. Of course, given the choice, the bankers would rather get the loan repaid if at all possible. And this is how they are trying to unload the bad debts on ripped-off Europeans:

• Governments borrow chunks of money for fixed terms, ranging from 3 months to over 10 years.
• At the end of the term, the government is supposed to repay the loan. It does this by borrowing money from another bank.
• If it can’t borrow money to repay the loan, the investment bank loses money.
• Alternatively, the Germans or the ECB could step in, and loan the government money.
• Investment Bank is repaid.
• Germans/ECB left with the bad debt.

Where does the European Central Bank (ECB) get all this money? They are probably already stocking up with ink, ready to get the currency printing presses rolling once Merkel has extracted the concessions she really wants. Europe following a more Teutonic fiscal policy, with Berlin holding the purse-strings, enjoying the economic benefits that inevitably flow to a centre from its hinterlands. 

Printing money isn't free. Apart from the cost of all that ink (actually, not much as these days money is created electronically by the click of a keyboard). It is paid for by all of us in the form of inflation. We have the same number of pounds and euros we used to, but they buy less. It costs us more to buy our groceries, fill our petrol tanks, take the bus. When the ECB bails out the banks the bill is picked up by all us ripped-off Europeans. We toil longer to earn the wages to buy less stuff, so the banks can be bailed out.

From Adam Smith (capitalist icon) to Alan Greenspan (bankers’ icon), the assumption has been that through the selfishness of individuals and organisations, and in spite of even their spiteful intentions, the ‘invisible hand’ will work for the betterment of everybody. Greenspan, who spent a career carried on the shoulders of cheering bankers grateful for his strong advocacy of weak regulation, stated to a US Congressional committee in 2008:

"Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity -- myself especially -- are in a state of shocked disbelief"

Alan Greenspan, former chairmanof the US Federal Reserve

Being a humble cartoon-blogger I suppose I should hesitate to cast aspersions on these famous men of economics. Adam Smith can be excused to a degree, as he comes from another era. His conviction had truth in his time and for a century and a half after. Talking about the pile of wealth held by the rich:

"The rich only select from the heap what is most precious and agreeable. They consume little more [in volume] than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species."

Adam Smith, "The Theory of Moral Sentiments"

You need only visit some of the stately homes of England, or more conveniently from your own sofa watch an episode of “Downton Abbey”, an aristocratic version of the 1980’s US tv series “Dallas”, to see how extremely hard the rich strived to consume all they possibly could. As Adam Smith observed, their bellies had only so much capacity for food, and their bosoms only so much space for jewels. Until the middle of the 20^th century, the rich...

a)      Depended on the labour of thousands of ordinary people. They had to keep them fed, clothed, and housed so they could turn up to work.

b)      Depended on these ordinary people labouring next year and on into the future, to maintain the wealthy in their wealth.

In the world of Adam Smith, the prosperity of the wealthy depended on the continued existence of everyone else. The wealthy may have been in the driving seat, but at least they were on the same bus as everyone else. If the bus crashed, the rich man at the front would suffer with everyone else.

In the world of Greenspan that is no longer the case. Bankers in particular have the ability to thrive with nothing more than a computer networked to other bankers. They are not in the driving seat, they drive by remote control. Playing with other people's money, they ‘win’ themselves the big bonuses. Snatching a lifetime’s wages in a couple of years means they no longer need their bank, they no longer need customers, and they no longer need other people's money. If they crash the bus they look on ruefully from a distance, and retire on their previous years’ bonuses. The true reason for bankers' bonuses has nothing to do with ‘attracting the best of the best’. It is everything to do with protecting them from the results of their own actions.

Smith and Greenspan assumed that the rich had to provide for everyone else for the selfish reason of staying rich. Bankers’ bonuses broke that link. When the rich owned the means of production, they looked after it like the owners of a house maintain their home. Bankers are just passing through – like irresponsible tenants, they are happy to leave the place a wreck, burn cigarette holes in the sofas, and steal the cutlery and ornaments.

We are told by government ministers it is the shareholders’ responsibility to control the bankers. When the majority shareholder of RBS, the British Government, told the bank to hold back on bonuses the government was told to f*** off. Which it did when it used its (that's our) shares in favour of all pay resolutions at this year's AGM. There, in spite of the grace of god, go all of us.