SUPER BAAADDDD, by Bill Bonner

I don’t usually do posts that just say, “Hey, read this.”  But hey, read this.  It’s by Bill Bonner, who sells many of his insights but offers the ones below free on his Daily Reckoning site.  Finally, a proposal for helping clear the glut of bad novels.

by Bill Bonner

Bankers are idiots, sometimes

As a professional class, bankers are thought to be as immoral as Russian pimps and as incompetent as Renaissance electricians. Thanks to them, the banking system is in trouble. Thanks to the failure of the banking sector, the American and UK economies are in trouble. And thanks to the failure of the Anglo-American economy, the whole world is in trouble.

Everyone is on the bankers’ case. In France, even Jerome Kerviel is criticizing his bosses at Societe Generale for not preventing him from taking “crazy risks.” Meanwhile, in Britain, Sir Fred Goodwin, recently esteemed head of the Royal Bank of Scotland, is now said to be the “world’s worst banker,” according to the Times. Trevor Kavanagh, writing in the SUN, says he is “criminally incompetent.” His purchase of ABN Amro is said to be the “worst acquisition in history.” In the new world, meanwhile, ISI group figures that the top four US banks alone have $1.2 trillion in bad assets. The total market value of those four banks is only about half of that amount. The banks are ‘effectively insolvent,’ says Nouriel Roubini. So, the feds have taken them into their care, if not yet into their custody.

But the bankers are ingrates. They borrow, but they don’t lend. They take but they don’t give. They party ’til the wee hours…and then, when the bill is served, they play dead.

The New York Times reports: “At the Palm Beach Ritz-Carlton last November, John C. Hope III, the chairman of Whitney National Bank in New Orleans, stood before a ballroom full of Wall Street analysts and explained how his bank intended to use its $300 million in federal bailout money.

“Make more loans?” Are you kidding, Mr. Hope seemed to say: “We’re not going to change our business model or our credit policies to accommodate the needs of the public sector….”

Bankers don’t make loans in the hopes of getting ‘good citizenship’ awards. They lend money when they think they can make a buck. The remarkable thing is that they’re so bad at it. They lent recklessly when there was little hope of getting their money back. Now, with the widest spreads in history – the difference between their cost of money and their return on it – it’s easier to rob a bank than get a loan from one. There are two explanations for this anomaly – both of them wrong.

The first is that bankers are wicked. A report in the Daily Express, for example, tells us that RBS “bosses spend 50k pounds on champagne banquet” celebrating Burns Night on Friday, before announcing a 45 billion pound loss on Monday morning. Over in the United States, the Wall Street Journal gave out word on Tuesday that much of the $140 million donated to fund the biggest inauguration in history came from banks that had received bailouts.

But wait, say the bankers’ defenders; they’re not evil, they’re just incredibly stupid. Evil bankers might have sold sub-prime debt to widows and orphans, but they never would have kept it in their own accounts. At the end of 2007, for example, the aforementioned Sir Fred Goodwin had shares of RBS worth nearly 6 million pounds; now his pile will barely buy a mid-size apartment in a bad section of London.

We do not reject the ‘bankers are stupid’ hypothesis completely; we simply add an important nuance: they are not stupid permanently; they are – like the rest of us – only stupid episodically.

Among the queerest financial stories of the last week was the proposal to create a ‘bad bank.’ It hardly seemed necessary. There were already dozens of them. The idea is to transfer all the sins of the bubble era to the ‘bad bank’ – funded with public money. Then, the bad bank will be crucified so that the rest of us can have life, and have it more abundantly. We first saw the idea floated in the pages of the New York Times last week. Now, it has made its way to the Financial Times in London, gaining favor as the measure of sin increases. The SUN says British taxpayers are on the hook for as much as 2 trillion pounds. In America, the bankers face $3.5 trillion in losses, says Mr. Roubini.

But if the ‘bad bank’ idea could work, why not create a super baaaddd bank? We could use it to get rid of all our mistakes. Writers could unload their bad novels. Businessmen could sweep their errors under its broad carpet. What the heck, let people get out of bad marriages without penalty; the super baaaddd bank could pay the alimony and divorce costs.

The hitch with the bad bank idea is so obvious even a banker could spot it. If the cost of mistakes is reduced, people might make more of them. Like the rest of us, bankers are neither good nor bad, but subject to influence. Unlike metallurgy or particle physics, banking does not have a rising learning curve. It’s not science. Instead, it’s more like love and gambling…with a circular learning pattern. They learn…and then they forget. They get carried away in the boom upswing; then they get whacked when it turns down.

So let them have a good beating. It will give them of a lesson that will last a lifetime…and give the next generation a solid banking sector.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

Editor’s Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.

Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now by clicking here:

Mobs, Messiahs and Markets

8 Responses to “SUPER BAAADDDD, by Bill Bonner”

  1. jim walsh Says:

    Note, in Bonner’s paragraph 11, the reminiscences of John 10:10 and Romans 5:20.

  2. Timothy Peach Says:

    Yeah, um, I guess it’s bad form to mention that The Daily Reckoning is another gold bug website…

    You know, once you’ve decided that gold is money and the only real “store of value” (whatever the freak that means), and you’ve used the phrase “barbarous yellow metal” ironically like 400 times, and you own lots of gold coins, and you have a framed picture of Richard Daughty on your wall, and you only think of the Dow in terms of its price in an ounce of gold instead of dollars, and you get angry every time gold doesn’t go up when the market goes down because dang it, that’s where the flight to quality is supposed to land….. man o’ man, isn’t there a cry for help in there somewhere?

    You only need one coin for the boatman at the crossing, guys. Beyond that, you can’t take it with you.

  3. Mark Grannis Says:

    It’s not bad form to say it’s a “gold bug website,” but it’s also not an argument against what Bonner is saying.

    You apparently agree that inflation is inevitable. So do I. In fact, I’ve stopped getting angry about the bailouts because I perceive their inevitability. Our national debts are too heavy for us to carry, let alone to increase. We could try to produce more, but that would take longer than our elected leaders can wait without becoming ex-leaders. So we’ll inflate our way out. That mortgage payment I’d like to reduce? I figure that over the next few years Helicopter Ben has a huge chunk of that covered for me.

    Of course, if all your savings are in dollars, this will have its drawbacks. I think gold will perform better, and I could be wrong about that, but even if I am wrong I promise my mistake won’t cost you anything.

    I must protest your boatman allusion, though. There certainly may come a time when we have to start thinking about hiring private carriage across the water to other countries, but it’s just irresponsible of you to speculate about that at this point. And really, you have no idea how much the boatman will charge for that crossing. My hope is that prudent asset management between now and then (e.g., building assets that are not denominated in dollars) will enable enough Americans to accumulate the capital we’ll need to invest in new productive capacity, so that as a nation we will once again produce things people need, instead of just selling each other the stuff those clever and hard-working Asians produce.

  4. [Name Withheld by Request] Says:

    Tim, Tim, Tim…

    Having read and followed the paths of many Gold Bugs over the past quarter of a century, I can safely say that Bill Bonner is not a Gold Bug and the Daily Reckoning not a Gold Bug website. Bonner merely came in with Agora’s Daily Reckoning when the now-unreported U.S. M3 took off during the late 90s, partly/mostly in preparation for the not-to-occur end of the world of Y2K problem. Just so happens the “” bubble was massively inflating. Bonner preached economic common sense and noted something was seriously wrong. When that bubble burst in ’00, the government continued to provide massive liquidity, only to be followed by yet another surge to deal with 9/11. Money then flew into real estate. Hedge funds multiplied and new instruments came into being that had little to no real economic basis. Bonner and his crew simply pointed out then what everyone knows in their hearts but can’t always get into their heads–you can’t continue to print massive amounts of pieces of paper and expect that it won’t eventually reach its intrinsic value.

    So he, like many others, looked at several thousand years of human history and noted that every time similar schemes had been tried, they always ended up the same way. And what was there as real money–gold. So he recommended NOT that you put all of your money in gold, but that the trade of this decade (which he began recommending at least by ’99) was sell the market during upswings and buy gold during downswings. Anyone who’s followed that advice has done VERY, VERY well through the fiasco we find ourselves now in. While not a lover of gold for its own sake, he like many others, recognizes that it does maintain value far better than fiat currency. That’s why governments despise it. Freed from its controls, fiscal responsibility can fly out the window–needing only to be based on the full faith and credit of some government(s).

    And while he does continue to make the same trade recommendation (though nowhere near as adamantly as the many true Gold Bugs out there), he does so because rather than improve, the fiat currency situation has gotten far worse. It will only be a matter of time–and relatively short at that–before the masses of paper/digital money distributed to the masses of people will lead to masses of inflation. When that time comes, while it may not be gold, people will want anyTHING rather than the paper. It’s happened before to other “first world” countries (e.g., Germany). It’s happening to laughable (though sad) levels in 3rd world countries now (e.g., Zimbabwe).

    A person who truly understands what gold has been and remains doesn’t look at it as a speculation. We don’t care when it goes down (except that it gives one a chance to acquire more for less paper). Gold is “money insurance”. And just like you buy fire insurance on your home, hoping you never need it, one should buy gold with SOME percentage of ones overall portfolio to insure the spending power of the unbacked paper one holds. If you don’t know now what a “store of value” is, I suggest you learn mighty quick.

    Now, of course, I could be all wrong about gold. I could be completely nuts. But as I tell anyone who will listen, are you willing to just say there’s a 20% chance I’m not? A 10%? Put that much in gold. You’ll sleep better and it won’t go to zero. The list of hundreds of dead currencies in our past shows that paper can and has many times over. There is a cry for help in all of this–to help thyself…

    And as for the “one coin for the boatman” stuff–well, of course that’s true, but irrelevant in one regard and at least seemingly selfish in another. Irrelevant because the fact that we can’t take it with us is true whether we’re accumulating paper dollars or any other asset. We should let accumulation of neither dollars nor gold be our end all be all.
    But the selfish part seems to me to be to think we have no obligation to others–e.g., our family. When we do pay our coin at the end and make the crossing, most of us will leave behind obligations and people who took on the responsibility to care for and who rely on us. All’s we should be discussing here is whether, when we make that crossing, though we can’t take it with us, what have we left behind. Will promise-backed paper cut it? 50 ozs of gold today will buy a year at your son’s private college (congrats to him and you by the way). So will $50,000 $1bills. I’m willing to bet you (you can name the amount) that the 50 ozs of gold will cover the annual tuition going forward far better than the paper.

    It’s been a long-time building up and coming, but the probablility is high that the world is going to see some very interesting times as we find ourselves having to pay the incredibly massive debts we have incurred in living the fantasy of the free lunch…

  5. Timothy Peach Says:

    What vexes me is the silly notion that gold is THE object to have when the paper gets sloppy. There is nothing magical about gold. It is no longer a “store of value”. It’s a commodity like any other. It’s value is determined by supply and demand, neither of which is fixed or predictable. And in fact, amongst the commodity complex, it enjoyed much less of a runup than many others.

    We look back in history and see gold at various junctures serving as a universal backup currency. We also see people worshipping animals, bleeding the sick or covering them with leeches, and we see them explaining flammability with reference to a substance called “phologiston”. Aluminum was once considered a superior metal to gold due to its rareness; royalty drank out of aluminum cups (and may have gotten Alzheimer’s from it).

    I might as well invest in rare baseball cards, which have appreciated more because their individual supply is fixed, unlike gold. Both rare baseball cards and gold depend on mentally unbalanced people to provide durable demand, but there has been a steady supply of such people through time. I’ll take the fixed supply play all day long.

    My obligation to my children isn’t to leave them a bloated inheritance so they can all turn into Robert Downey, Jr. It’s to get them out of the house alive and well-educated… you seem to concur, but given the inflated concern, I’m wondering if you know that college is only a four-year gig. And if I were really worried about the escalating cost of a college education, I could do one of those deals now where, if you pay a sum today, you’re paid up for 4 years in some group of colleges, regardless of where the price of college goes.

    Gold is dumb. You can’t eat it, fire it out of a gun, or make furniture out it, and it’s essential to no industrial process or product I know of. It faciliates vanity and gives lunatics something to talk about.

    There are plenty of assets that track inflation over time, and have tons more utility and upside potential. I’ll focus on those. I have no problem with the things vs. paper argument in long-term investment planning, I just hate the myopic gold view. It’s like a guy who correctly identifies termites as a threat to his home, and then insists that the only way to deal with the threat is to fill his house to the roof with turpentine. That is one approach, but it ain’t the best one.

    I do miss you, Ken, and hope to see you soon. It’s been way too long. I will make fun of you when I see you, and I expect no less back from you.

  6. Timothy Peach Says:

    Oh, one more thing. That silly “10% to 20%” argument…’s a fallacy.

    It’s like saying I only have a 10% chance of dying early, so I only need 10% of the insurance I think I need. Whatever the odds are, I’m either dead or I’m not. I need all the insurance, the percentages be damned.

    If we’re headed for a world where you have to have gold, having 10% to 20% of my assets in it won’t matter. I’ll have only a fraction of the “store of value” I need in that world. A world where some bunch of a-holes with guns will take away whatever gold I have anyhow.

    The more I think and write about this colossal lunacy, the angrier I get. Which is stupid. If it’s ok to spend $100k on a car, or dress up like Elvis, or get in a fistfight over whether Pinot or Cabernet is better, it’s ok to love gold. Go ahead, Elvis, make a pile.

  7. [Name Withheld by Request] Says:

    Hardly silly, Tim…

    I’m assuming you mean 10% to 20% in gold as opposed to 10% to 20% chance that I’m nuts… :-)

    If so, anyone who is smart enough to insure their money by purchasing gold for 10 to 20% of their portfolio is far better off in a monetary inflationary environment, in my opinion, than those that don’t. There’s a long way between the destruction of a fiat currency to the armageddon you’re envisioning and there are myriad people who have done very well betting on the fact that printing more paper makes it all the printed paper worth less.

    I’ve never said that gold is the end all be all, and believe in investing in lots of inflation hedges, but none of them has a significant history as functioning as money. (Plus you can’t rip off a piece of a baseball card to buy a loaf of bread.)

    So don’t blow a gasket about gold. You don’t have to use it as your store of value in an inflationary environment. Buy rare coins, stamps, artwork, baseball cards–anything that’ll rise in value when the dollars you hold lose theirs. But lose that value those dollars will. And there gold DOES fill a role that none of those other things reasonably do. It has been recognized by mankind for thousands of years as real money–a real medium of exchange. Its highly unique properties (covered in detail in one of my earlier posts and far different from virtually all other commodities or even elements on the periodic table) make it obvious why that is the case.

    When you mention multi-million ounce mines being discovered in Alaska, etc., of course, that happens all the time, all over the world. But it’s incredibly difficult getting that gold out of the ground and refined, taking extensive time and labor. That can’t be said about the paper bills coming off the printing presses. Gold’s particularly unique properties and its history is what makes people attracted to it. As a die-hard and devout libertarian, I’ve been immersed in the arena of gold for a long, long time. In all that time, I can’t think of one person who recommended investing only in gold. But gold gets the attention from the media as the commodity of the lunatic fringe. I believe that the main reason for that is that governments HATE it (and therefore the mainstream press does too). It would cause governments to be fiscally responsible and that is petrifying, not to mention stifling of their ability to exercise limitless power. And those same governments control the educational system that has long now taught that gold is an archaic relic and anyone who owns it or tells you to own it is nuts.

    You do buy 100% of the life insurance you think you need now, but that insurance (any normal policy anyway) pays you off in a sum certain in U.S. dollars. Your loved ones will be far better off if you back that up with another 20% in gold.

    And why, pray tell, is your obligation to accumulate real wealth only to your children (and wife, I assume)?? Why isn’t Tim Peach “obligated” to use his mind and talents to produce and accumulate assets/wealth for mankind, as well? If you WANT to give it to your kids fine, but there are other choices. And either way, that wealth can do tremendous good beyond your lifetime, whether it’s feeding the hungry through charity or doing the same thing because somebody buys “stuff” with it after you’re gone–stuff that needs to be produced by people who make their livings producing it. Do not be short-sighted about the future value of a lifetime’s worth of physical, mental and serendipitous production.

    And while I assume, based on the above, that you’re not taking me up on the bet of the ozs of gold vs fiat dollars for your son’s tuition, you can’t equate a binding (and bounding) pre-pay program with a protection of the currency used to pay for what you (and he) want or MAY want at some future time. You can, of course pre-pay for “some group of colleges”–kind of hedge on the currency devaluation problem. BUT, even if it’s honored in a truly high inflationary period, that takes away one of your most precious gifts–the FREEDOM to choose. Maybe another reason governments hate it, gold gives you that freedom.

    And all the things you say you CAN’T do with gold (e.g., eat it) are true of many, many other things we have and want in our lives.

    You can spend $100K on a car (it’ll depreciate when you drive it off the lot), you can dress up like Elvis (maybe current satisfaction/entertainment value, but certainly no equal to protecting all you’ve worked for) and you can fight over wine (some of which may appreciate over time–but not as long as gold), but in the end, it doesn’t make sense to compare any of those to allowing a person to try to maintain the value of what he/she has spent a lifetime working for, so the comparisons are lost on me…

    Lastly, you seem to equate the accumulation of gold with a world of anarchy. Here again, not only does history prove that wrong, BUT even if true, even if we are headed towards at least a period of such times, there are many, relatively easy ways to protect yourselves and your loved ones. Everyone should consider at least some of them–and moreso by far when he/she has others for which they are responsible…

    In the end, I promise you I won’t ever get the least bit upset if you don’t own gold or guns or have any backup plans whatsoever to protect your self or your loved ones or your wealth. So if you get yourself worked up over any of this (e.g., “the angrier I get”, above), you’re taking it way too seriously. You’ve GOT to relax…

    (oh, and once you’ve relaxed, buy some gold :-)

  8. George Peacock Says:

    I think that Niall Ferguson makes a very good case for gold as the once and future money in his recent book, “The Ascent of Money.” His reasoning ends up dissing silver a bit (as money) because it would really not be needed since our current technology allows us to divide “stored gold” through accounting, thereby rendering unneeded the lighter metal.

    It’s also quite clear that Feguson is no “gold bug.” In fact, his writing about gold as money is a mere side comment in the overall story of the history of money.

    And while I can easily envision our fragile democratic experiment dissolving to a Mad Max world of go-carts, I find it more likely that we would have a currency collapse or debasement of some sort without such overall desparate chaos.

    Finally, whence do you all see the commodity play? Inflation itself or world demand on the back side of this crisis? Or both? Is options on commodity futures our Texas Hedge a waitin’? Harry Dent, the demographer/economist seems to think commodities are about to go nuts due to some technical cyclical thingy. On the other hand, a long-term global depression doesn’t scream “commodities now” to me.

    Any thoughts while I find my shovel and metal detector?

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