Friday April 3, 2009 (The Star Online)

Dr M: Don’t bail out failed banks

By CHOI TUCK WO

LONDON: Tun Dr Mahathir Mohamad has called for the closure of banks that caused the global financial crisis instead of bailing them out.

The former prime minister lambasted the West for pumping in billions of dollars to resuscitate these “failed institutions”.

He said they should be allowed to go under as bankers were rewarding themselves with fat bonuses rather than be punished for their inefficiencies.

“Let’s start new banks. We don’t need to have banks with those names anymore as they are a disgrace,” he said in his talk ‘The Alternative G20 Agenda: Real Financial Fairness’ at the Royal Commonwealth Society here on Wednesday.

More than 200 people attended the event on the eve of the G20 summit.

In his usual hard-hitting style, Dr Mahathir said there should be no attempt by governments to rebuild institutions which have failed.

“If they must dole out money, give it to the people who suffered actual losses due to the banks’ failure, but not to the bankers,” he said.

He questioned the logic of rewarding bankers who caused the economic crisis, saying those who created trouble were normally put in prison.

Dr Mahathir also took a dig at hedge funds, saying their borrowings should be limited and not be 20 or 30 times more than the investments.

“Imagine if a hedge fund were to borrow US$30mil and trades on US$20mil based on a US$1mil investment, the profits would be far bigger than that of the original investment,” he said.

He said a stop should be put in creating money out of nothing, adding everyone must come clean instead of obtaining false wealth through shuffling papers. “Most of the wealth comes from playing around with money. You can sell currencies and make tons of money,” he said, adding they were not derived solely from producing goods and services anymore.

He called for a review of the international monetary, financial and banking system which had suffered a systematic collapse due to gross abuses.

Dr Mahathir said the global community could elect people to represent the differing economies and work together in curbing financial abuses.

“If we’re going to be fair – real financial fairness – we should give everybody a say in the formulation of a new banking, financial and monetary system.”

Extreme situations call for extreme measures !?!  But it remains to be seen how willing the ailing patients are, to  follow the doctor's advice, to amputate the cancerous limb to save the patient or at best, to ingest  the bitter pill in order to get better !

And this is a bitter irony as well, as this was the same medicine once prescribed by the very people who are now the patients !

KISS THE BANKS GOODBYE

It's Time to Put a Stop to This Farce!

KISS THE  BANKS GOODBYE

By DAVE LINDORFF

The futility and stupidity of the Fed’s and the Obama administration’s policy of pumping ever more money into failing banks and insurance companies in a vain effort to get them lending again was demonstrated—if anyone was paying attention—by the collapse in auto sales this past month, with all the leading companies, Ford, GM and Toyota, reporting sales down by about 40%.

This fall off in car buying was despite record discounting by the auto industry, and offers of 0% financing.

Clearly, obtaining financing is not the reason people are not buying cars.

People are not buying cars because they are worried about having a job to enable them to pay back the loan.

It’s the same reason people aren’t buying houses. It’s not that you cannot get a mortgage. There are plenty of smaller banks that would be happy to lend money to buy a house these days. But who’s going to go out and buy a house in this economy? First of all, to buy a house, unless you are a first-time buyer, you have to sell your current house, but that would mean taking a huge loss. Indeed, one in five homes in America today is technically “underwater”—that is, it is worth less than the outstanding mortgage on the property. Probably another one in five are worth little more than the outstanding mortgage. No one would sell a house under either such circumstance.

The point here is that if people aren’t willing to spend money, then what good is it to give more money to banks and their shareholders, in hopes that they will start lending it? The lending business has two sides—those offering to make a loan, and those wanting to borrow. If there’s no borrower, no amount of money available for lending is going to change the fact that there will be no loans written.

Commercial lending is not that different in this regard. Companies generally borrow money to expand. You don’t need to borrow money when your business is shrinking, unless it is to try and stave off collapse. What a company does when its markets contract and its sales and earnings fall is it cuts back on production and lays off workers. It doesn’t need to borrow money to do this. Of course, if sales collapse too fast, the company could be caught owing back wages to workers. That’s true. And in that case, a company might want to borrow in order to meet its obligations, but that’s hardly the kind of loan a bank would want to make—to a dying enterprise unable to meet payroll.

Business borrows when it is expanding, because that’s a great investment. If you know that you can earn a 15% return on your investment in a period of economic growth, and you can borrow money for expanded production at 4%, that’s a great deal. It’s also a great deal for the bank, since lending to a company that is expanding is a pretty low-risk proposition. The central government wouldn’t have to press banks to lend to such companies. The banks would do it on their own.

So, with the economy still in free fall, with companies laying off American workers at a rate of over 20,000 per day, with real unemployment soaring past 18 percent—one in six American workers are now either out of work and looking for a job, out of work and giving up looking, or involuntarily working part-time—and with family wealth more than 50% eroded away, there is simply no way that Americans are going to turn around and start borrowing and spending again. And given that the American economy is 72% composed of consumer spending, there is no way that the economy is bouncing back anytime soon.

That means that the hundreds of billions of dollars that are being poured into the likes of Citibank and AIG are being completely wasted. It is simply a pointless and scandalous transfer or wealth from the American public to the shareholders of these companies—the very companies and people who caused this catastrophe in the first place.

If you wanted evidence of this futility, just check out the current market capitalization (the current value of all shares of a company) of Citigroup and AIG. Citigroup, despite having received $75 billion in taxpayer bailout money, is now worth $5.4 billion--which is less than Autozone, a chain of car parts stores, and less than H&R Block, the franchise chain of tax preparers. As for AIG, which has received an astonishing $180 billion in taxpayer bailout funds, its total market value today is less than $1 billion! All that bailout money has been lost into thin air, and the government today could buy both companies outright for about what it's blowing every month in Iraq.

It’s time to put a stop to this farce.

Restoring the American economy is not going to be a matter of simply jump-starting consumer spending, or even business investment. It’s going to take a long, hard, focused effort to move away from a parasitic consumer economy in which profits are largely made through speculation, and towards a real economy that actually makes things that people both here and around the world need.

The sooner this truth is recognized, the more resources the government will still have left to put into the kind of investments that can help make that happen—things like job creation, income supports, home refinancings and medical system reform that could help Americans get back on their feet. Of course, it would also be necessary to end the wars overseas and to dramatically slash military spending.

When former companies like Citicorp and AIG are history, and when former Lehman Brothers, Citibank and AIG managers, as well as most of the Pentagon Brass, are out working at civilian conservation corps camps helping to restore watersheds or replant forests, we will know that the government has finally “gotten” it.

Dave Lindorff  is a Philadelphia-based journalist and columnist. His latest book is “The Case for Impeachment” (St. Martin’s Press, 2006 and now available in paperback). He can be reached atdlindorff@mindspring.com

A DUMMY'S IDEA ON HOW TO SOLVE THE WORLD ECONOMY CRISIS

Since we were exposed for the whole miserable week to the nauseating spins and verve of paracetamol economists who could only offer us panadols like "only good governance can save the economy" - I have come up with this dummy's idea on how to save the world's economy ! :-) 

Here's my take :- 

So,the first world countries now know what it is like to be dumped with shit loads of national debts and to be overwhelmed by the sinking feeling that they may never be able to repay their debts! For years, social activists like Sir Bob Geldorf and U2 frontman, Bono had been pleading to deaf ears, with the G-8 nations to write off the national debts of the poorest third world nations in Africa but nobody listened !  

Perhaps, one way of solving the world's economic woes is to hold a Bretton Woods III Agreement to be participated by all the world's trading nations - principally, IMF, World Bank, U.N and all the Trade Blocs to :- 

- write off all national debts of all nations,to start afresh  

-work out a credit point system to be allotted to all nations to rebuild their economies,according to the size of their GNP's e.g.1 full credit point, half of a full credit point and a quarter of a full credit point 

- 1 point is equivalent to 1 trillion USD, 1/2 point = 1/2 trillion and 1/4 point =1/4 trillion . U.S. and E.U. will have 3 points each,Japan 1 point, China 1/2 point, ASEAN 1 point, India 1/4 point,etc ( the actual ratio and formula can be fine tuned later)  

-for developing economies,the countries have to earn their credit points based on how well they are rated in terms of accountability, good governance, democratic reforms and human rights track record ! 

-for the time being, allow the U.S. to continue to print more money to free up the credit squeeze in all the World's major Banks! [This is not such a crazy idea as one of the premises of the original Bretton Woods Agreement was to give the U.S the leeway to print more money, but pegged to the gold standard, to enable the U.S. to pump monetary aid to help rebuilt the ravaged economies of the war torn countries in Europe and Asia and besides, the U.S. have been effectively,printing banana bank notes ever since Nixon pulled the USD off the Gold Standard,to fund the Vietnam War,anyway]  

- on an agreed time frame, the USD will cease to be the World's single trading and reserve currency 

- the basket of currencies, notably the USD, Euro, Yen, Yuan and Sterling pegged to a Gold Standard (or another option) will be reintroduced. 

- introduce reforms to regulate the World Banking , Financial and Trading Systems ,to make banks and financial institutions accountable for its lending and investment practices, to regulate speculation on shares, commodities and currencies(also to prevent speculative manipulations and attacks on the basket of currencies),to enforce GATT to eliminate protectionism and monopolisation,etc to prevent the manipulation of the price/supply/demand mechanism that has given rise to phantom economies that had taken the wind out of real economies. :-)