Banks: The Right Thing to Do

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When the US shutdown sent shivers and ripples through the financial markets in October with the fear that the federal government would end up defaulting on the repayment of its debts, the banks decided to set up contingency plans.

It turns out that JP Morgan and other banks decided that in the event of the default on payment then the bank would stand as guarantor to the federal government and end up forking out $5 billion so that its customers would not be at a loss. There are therefore two questions that arise immediately with this statement. First of all just how far can we believe what the banks are telling us and secondly shouldn’t we have let them dig deep into their pockets and pay some of the money back that they have been given since the financial crisis and are still getting to line their vaults from the state even today?

Playing Games

It has been reported that JP Morgan spent $100 million on contingency plans to deal with the growing crisis over the US budget and the federal government shutdown that ended on October 17th 2013. That’s just one of many banks that had $100 million to spend on the updating of computer systems that were intended to deal with fiscal emergencies. Consultants were taken on to create scenarios and hypothetical models to see how the markets would react and how they would deal with it.

They were playing games in the boardrooms, while the people were out of work for 16 days. They were playing at toy soldiers while the federal government was closed and reduced to essential departments and the policymakers and the politicians were chin-wagging over whether they could pass the budget or not and allow the Tea Party to gain a foothold on US politics (although the Tea Party is losing popularity in the US and has dropped since 2010). It comes to something when people are paid to squander money. They have far too much those banksters to know what to do with.

Still, one saving grace is that they will be able to put it to use again on January 15th when government spending comes to an end, unless it gets another green light from Congress. They will have a second shot too on February 7thwhen the easing of the enforcement of the debt limit will also be over in the US. Or probably, the banks will have to spend $100 million apiece again, because the data will be out of date by then and the parameters, coefficients and calculations will no longer hold.

The Right Thing to Do

Chief Executive of JP Morgan Chase & Co Jamie Damon stated “we’re going to fund. It’s the right thing to do”. The right thing to do? Since when did the banks in the US or in any other country do the right thing? Please! Pray do tell!

Bank: JP Morgan prepares for the worst

Are we to believe that the banks have turned over a new leaf and become morally unquestionable? Have the banks decided to do the ‘right thing’ because it’s good for society, or because they will get the benefit of doing so? I can’t see any bank anywhere in the world doing social-charity stunts for the public and the federal government. If they have paid out millions in contingency plans, then their hope is obviously that if they prop up the state, they will be able to demand a higher return on that investment and get ten times their money back through charging interest.

Calculations put the amount of money that JP Morgan would have had to pay out at roughly $5 billion per month. Of course that would be an advance on the federal government and so the latter would have to reimburse the sum plus interest. The US citizens that were being propped up would have nothing more than an advance (with interest because it boils down to a loan) on their salaries that had been cut by the federal government. That means that banks like JP Morgan would be earning on their investment twice. Of course that’s the right thing to do. John Pierpont would be proud of you! It’s hardly suprising that the banks were apparently on the phone every day to the federal government and despite the fact that the conversation was very one-sided, they were begging to negotiate around a table over who would get the best pickings of the US shutdown. It’s surprising that in a country that has no money left, the banks still have tons of it stockpiled somewhere ready to be used when the state collapses (if it hasn’t already).

Economists and bankers have never in the past been able to adequately prepare for the way the markets might react. They rarely see anything coming even when it’s standing there on the doorstep knocking on the door. If the markets were that easy to predict, we would all be rich, wouldn’t we?

October’s fight over the budget (which had nothing to do with the budget and everything to do with politics) is the third fight in the past two years in the US. Back in 2011, the US got downgraded by Standard & Poor’s. Then in 2013 the US budget sequestration took place, with automatic spending cuts (with cuts taking place from 2014 until 2021).