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A crisis veiled in public spectacle

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Haraz N. Ghanbari/AP

(Read caption) Paul Thurston, chief executive of Retail Banking and Wealth Management HSBC Holdings plc, reviews documents while testifying before the permanent Subcommittee on Investigations hearing, "US Vulnerabilities to Money Laundering, Drugs, and Terrorist Financing: HSBC Case History," Tuesday, July 17, 2012, on Capitol Hill in Washington.

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You can’t help but feel sorry for the bankers. Yesterday, one of them was so upset and humiliated he tended his resignation — at a Senate hearing.

One after another the bankers mount the scaffold. Goldman, JP Morgan, Barclays…and now HSBC. One loses money. Another rigs LIBOR rates.

One fiddles an entire nation’s books. And another helps terrorists, drug dealers and money launderers with their banking needs.

That last charge is the one leveled against HSBC yesterday, causing the bank’s chief of compliance to quit, on the spot. Here’s the accusation:

…using a global network of branches and a US affiliate to create a gateway into the American financial system that led to more than $30bn in suspect transactions linked to drugs, terrorism and business for sanctioned companies in Iran, North Korea and Burma.

This spectacle may be entertaining, but in our view, it is fundamentally meaningless.

Here’s what really happened:

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The feds created a funny money, back in the early ’70s. Unlike the gold-backed dollar, this one was almost infinitely flexible. It would allow the financial system to create trillions-worth of new cash and credit, vastly expanding the amount of debt in the system…and greatly increasing the profits of the banking sector.

The financial industry — the dispenser of the need money — set to work, creating fancy new ways to move the new money around. Each time it closed a deal, it made a profit. Naturally, it was encouraged to find all manner of clever ways to make deals.

Then, when the credit bubble blew up in ’08-’09 many of these tricks of the trade didn’t look so clever. They looked sinister. Stupid. Or crooked.

“When the tide goes out,” says Warren Buffett, “you see who’s been swimming naked.”

It is not a pretty sight.

Billions of dollars were lent to people who shouldn’t have been allowed to borrow lunch money. And now, there are losses — trillions worth.

The real question — the only question of great significance since the blow-up — is: who will take the losses? Or, to put it another way: How will the system be cleaned up? Who will decide who wins and who loses?

Mr. Market or Mr. Politician?

Let investors and speculators take the losses…or put them on savers and taxpayers?

Who will lose? The rich? Or the rest?

We’ve given you our answer many times: let Mr. Market sort it out. He’s completely impartial. He’s honest. He’s fast. And he works cheap.

In a flash, back in September-December of ’08, he probably would have wiped up the floor with the bankers. In a real crash, few of the big banks would have remained standing. Investors and lenders who had put their money in them…and who had invested in the things their phony credits supported…would have lost trillions. The rich wouldn’t be so rich anymore. And we’d now be in some phase of real recovery with many new financial institutions.

But we’re not in a position to impose our will on the world. And the politicians are. So, they’ve decided to do it another way. Instead of allowing Mr. Market to do his work they make their own choices…generally trying to direct the losses towards groups of people who don’t make campaign contributions…and don’t know what is going on. That is, towards the masses…and the unborn…

The idea has been to kick the can as far down the road as possible…borrowing and printing trillions more dollars to prop up the financial system…while also parading a few bankers through the streets with nooses around their necks. The press insults them. The mob spits upon them. The public spectacle continues…

…and nothing really changes.

Regards,

Bill Bonner,
 for The Daily Reckoning

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