Banking crisis: The new bailout strategy

by
Claudio Grass
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Part II of II

To be fair, it is true, this time is different. Indeed, this time the rescue plan for the bust banks is not comparable to what we saw in 2008. In the US, the guarantee for deposits up to $250.000 comes from funds that are maintained by participating banks and not from the taxpayer. The official answer to how they’re going to pay everyone back is also plausible and possible: Some, or even most, of the money can and will be recovered from winding down the failed bank’s operations and selling assets. And if all that is still not enough, then the Fed can basically just print some money to cover the difference. Obviously, that could be construed as ultimately costly to the taxpayer, due to the inflationary impact it would have. However, realistically, that impact would likely be negligible compared to what the more regular printing operations have unleashed or to what the “emergency” measures (“covid relief” monetary and fiscal policies) of the last three years have given rise to.

In the case of Credit Suisse, it’s even easier to defend the position that it’s not a bailout. A private lender bought out another one that was in trouble, end of story. Sure, the government and the Swiss central bank applied a lot of pressure and gave a lot of assurances and extraordinary terms to UBS to “sweeten the deal” and to ensure a swift rescue that would quiet down the markets, but in practice, no taxpayer money was directly used. 

Does that mean that the State has finally other ways to save failing private companies that are deemed essential (either for systemic reasons or for political ones), without making the citizens pay? Despite the superficially convincing, and conveniently packaged rhetoric, in reality, nothing could be further from the truth. This is because the cost to the citizen does not have to come in a direct, obvious way for it to be unfair and distortional of market forces. The bailout cost in this case is a lot more subtle and a lot harder to notice, at least in real time, and hence a lot harder to make a widely supported case against it. It is very well camouflaged and the financial impact it inevitably bears is so cunningly dispersed that most people, even when the time comes to actually pay for it, they will not recognize it.

The problem lies at the very core of the intervention: the idea of “saving” a failing private company itself. The majority of the clients of the failed banks had deposits exceeding the legally guaranteed amounts, $250K in the US and CHF100K in Switzerland, and they knew the limits of the deposit protection schemes in that jurisdiction. All these clients also chose these banks out of their own free will, nobody forced or coerced them, and they did so – it is safe to assume – because they saw some benefit or the potential for some relative advantage in their decision to choose this bank over another. Put simply, they freely selected one product over another, like we all do everyday, based on the available information at the time and driven by the desire to maximize their own profit.

 As is clear from the present perspective, they made a mistake. They bought a bad product. It happens to all of us. If the seller of said product defrauded, lied or ripped off the buyer, even without intending to, then it is universally accepted that the seller should be burdened with the obligation of paying damages in some way or another to the wronged party. But as we also all know, in the imperfect world we live in, that is not always possible. And that’s when the concept of counterparty risk comes in. Sometimes the other party in a transaction just fails to honor their obligations and what ordinary citizens usually do in that case is bite the bullet, take the loss and hopefully be more careful next time about whom they trust.

So in the case of these indirect bailouts, it doesn’t even matter where the rescue money comes from. What matters is the twisting of the free market dynamics. Why should those clients be exempt from the consequences of their decisions and from the risks they took? And if we accept this, then why shouldn’t everyone who bought a stock that eventually crashed also be recompensed? How about everyone who decided to speculate with junk debt to make a buck and then woke up to a default?

As a final thought, let us dismiss the argument that certain companies are “systemically important” or “too big to fail”, for simply moral reasons. The very idea that anyone, no matter how educated, how powerful or how popular, can determine who is worth saving and who is dispensable is anathema to everything that makes us human. That is painfully and apparently obvious when it comes to choosing politically useful corporations as worthy of rescuing and of “deleting” their mistakes, over small businesses that enable hard working people to put food on the table for their families. As abhorrent as this is, we see this to this day: The “free market rules” only apply for those that are deemed expendable. When they fail, there’s no help coming, because to intervene would be to distort the market forces. But for those lucky few, the well connected, those truly “essential”, there is no mistake too big and no wrong decision that can’t be undone.

Claudio Grass, Hünenberg See, Switzerland

This article has been published in the Newsroom of pro aurum, the leading precious metals company in Europe with an independent subsidiary in Switzerland. 

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