Good Banker, Bad Banker

It's important to draw a line between two very different flavors of banker: "restrained" (Dr. Jekyll) and "unrestrained" (Mr. Hyde).

Those who read The Proper Use of Credit (April 4, 2013) know that I see a vital role for credit and yes, banks, in a sustainable economy. But as many observers have pointed out, banks must be controlled lest the predatory, parasitic Mr. Hyde replaces the proper Dr. Jekyll role of providing capital to worthy enterprises and households.

In response to Debt = Serfdom (April 2, 2013), longtime correspondent Jeff W. delineated the difference between Good Banker (restrained) and Bad Banker (unrestrained). Unfortunately, as Jeff explains, it is Mr. Hyde (unrestrained banker) who has captured the political and regulatory machinery of governance.

Here is Jeff's commentary:

"I distinguish in my mind two different kinds of bankers: I'll call them "restrained" and "unrestrained."

The restrained banker loads up the debt serfs with debt up to their Plimsoll Lines or credit limits. Then he stops. He knows that if he keeps loading more debt onto them, they may go bankrupt, and he wants to avoid the mess and losses that come with that.

The unrestrained banker has a completely different skill set. He will make high-interest loans (Payday Loans) to insolvent borrowers. He is not afraid of bankruptcies; bankruptcies are part of his business model. He knows how to take advantage of borrowers who are desperate, ignorant, or impulsive (or all three). He knows all about asset stripping. He knows how to unload bad loan paper on suckers. He thrives in an environment of chaos and desperation, where his customers are often at the end of their ropes.

In the old days, the restrained bankers and community-minded Americans used to put controls on the unrestrained bankers. There were usury laws that made it illegal to charge interest above a certain rate, such as 15%. Unrestrained bankers were not welcomed into polite society, and people were warned against doing business with them.

Which of the two kinds of bankers operate the Federal Reserve and have seized control of the Federal government? I say it is the unrestrained variety. I say that the securitization of mortgages was, all along, a scheme to unload bad mortgage paper on suckers, such as pension funds and the U.S. taxpayer.

Obama's stimulus was the work of unrestrained bankers. The Obama deficits have been the work of unrestrained bankers. The Simpson-Bowles Commission was an effort by the restrained bankers to keep the U.S. debt below its Plimsoll Line, which Reinhart and Rogoff have put at 80% of GDP. But the unrestrained bankers have not hesitated to blow right past that.

If my observation is correct that the U.S. government has now been subverted by unrestrained bankers, it means that:

- Our nation's fiscal policy is being dictated by people who are not afraid of the chaos of bankruptcy, but who thrive in that environment.

- Federal policies are being dictated by people who like to deal with debtors who are desperate and at the end of their ropes.

- Federal policies are being dictated with a view of future asset stripping.

- With this group in power it means that In a future bankruptcy scenario, everyone is going to come out a loser except the unrestrained bankers.

Where restrained bankers might be compared with bloodsucking fleas or lice, who are parasites on healthy bodies, the unrestrained bankers can be more aptly compared with maggots, who feast on the bodies of the dead.

So I say it is important to know what kind of bankers you are dealing with. If you are dealing with unrestrained bankers, it can bring nothing but bad luck."

Thank you, Jeff. As correspondent Lew G. noted, the key feature of a sustainable, non-parasitic banking sector is that banks and bankers have "skin in the game," i.e. they personally suffer losses when their loans and bets go bad.

This is the essence of moral hazard: the separation of risk from consequence. Put another way, those who are insulated from risk will have an insatiable appetite for risky bets because any gains will be theirs to keep but any losses will be covered by the central bank or government: this is known as "privatizing profits and socializing losses."

As Lew G. also observed, if players (in this case, bankers, legislators and regulators) "have a choice of games, they will play the one with the best payoff," i.e. the one in which they have no skin in the game and the Central State/bank will backstop/ socialize their losses to the Tax Donkeys (taxpayers) while they keep the ill-gotten gains.

The Federal Reserve, the Obama Administration, the housing agencies and the U.S. Treasury are all offering bankers and financiers high-payoff tables that require no skin in the game. No wonder our system is dominated by the unrestrained bankers, sociopathological Mr. Hydes who offer a few coins in compensation for running down the nation.

For more on these topics, please read:

Inevitable Catastrophe: The Fruits of Moral Hazard on a Global Scale (June 24, 2011)

Feedback, Unintended Consequences and Global Markets (May 21, 2012)

The Dangerous Blindspots of Clueless Keynesians (January 2, 2013)

The Great Reset (July 7, 2011)

---

Special "the end of the world as we know it" sale on seeds from our longtime supplier Everlasting Seeds:TEOTWAWKI SALE! 20% OFF!
In light of the calamitous predictions regarding the Global Coastal Event [Clif High], Korean Nuclear tensions, and Solar/EMPs “Kill Shot” {Ed Dames}, we thought we'd offer folks the largest discount we've ever given. We're not 'fortune tellers' here, or Seers, or 'Intuitives': but if even ONE of these predictions come to pass, it'll definitely make for a 'bad hair day' {week/month/year...} for all of us... 

---

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Kindle edition: $9.95       print edition: $24 on Amazon.com
To receive a 20% discount on the print edition: $19.20 (retail $24), follow the link, open a Createspace account and enter discount code SJRGPLAB. (This is the only way I can offer a discount.)

Thank you, Charles C. ($200), for your stupendously generous contribution to this site -- I am greatly honored by your steadfast support and readership.

Thank you, W. Thomas D. ($55), for your superlatively generous contribution to this site -- I am greatly honored by your support and readership.