Editor’s note: This article was first published in May 2013 in the middle of Spain’s banking crisis and after the 2012 European bank rescue. The references to “this crisis”, the cuts imposed by Germany and the 15-M protests reflect that moment.
Many people criticize capitalism. I’m not one of them: I believe capitalism is a system that works, creates jobs, generates wealth, rewards effort and also punishes bad management. Capitalism may have caused this huge bubble, but what happened once we entered the crisis, the way the recession itself has been handled, was no longer capitalism. It was a historically shameless display in which those at the top have consciously and deliberately robbed those at the bottom.
Capitalism doesn’t bail out banks. It liquidates them and punishes bad management
However many economists we have to argue with to make this claim, if every badly managed financial institution in the world had been liquidated, we would already be out of this crisis. Of course, doing that would mean the middle class would not be so impoverished, while many of the rich would now be less rich. If you look closely, the exact opposite has happened: the rich are now richer.
It is cheaper to liquidate institutions than to bail them out, but it has to be done all over the world at the same time, so that the financial systems of some countries don’t raise more doubts than others.
I insist: if any economist disagrees with this statement (that liquidating is cheaper than bailing out), maybe they should take up gardening, DIY or whatever else they are good at.
Don’t be fooled: bank losses should be paid only by investors
As shareholders, and with what might be called a capitalist mindset, if we invest in a bank and it goes bust because it was badly managed, tough luck, and next time we choose more carefully where we put our money. That is capitalism. If you own shares in a bank, before using public money, which will bring tax rises, cuts and therefore more recession, the bank should be liquidated and the losses passed on, in this order, to:
- Shareholders.
- Subordinated debt.
- Unsecured bonds.
And as a last resort, secured bonds and depositors. But with the shareholders’ money alone, at least in Spain, not a single fixed-term deposit or secured bond would have had to be touched. It is estimated that the Spanish financial system could have absorbed losses of more than 600,000 million euros using only shareholders’ and bondholders’ money before it needed to touch fixed-term deposits.
There would have been no need for the bank bailout, and so we would not have had to suffer the cuts Germany was imposing. Consumption in our country might already have stabilized, and the banking sector would be completely cleaned up, because we would only have healthy banks.
Moral hazard
What kind of crappy capitalism is it in which the manager of a bankrupt bank is rewarded instead of being sent to prison, and on top of that gets a seat at a company listed on the Ibex (Spain’s benchmark stock index)? If a bank does badly and gets bailed out, what happens to moral hazard? If a shareholder invests in a sh***y bank and, instead of losing all their money, the bad investment is cleaned up with public money, what lesson does that shareholder learn? None.
Why hasn’t it been done?
There are many explanations, which we could divide into false, totally false and completely false. There is only one explanation: if financial institutions had been liquidated and their shareholders had lost their shirts, every last bit of dirty laundry belonging to the politicians of the left, the right and the trade unions would have come out, along with many other things the major media ought to be investigating.
We sometimes hear the 15-M protesters (Spain’s 2011 anti-austerity movement) or similar groups say that it’s not a crisis, it’s a robbery, and the truth is that the population has literally been mugged. Remember that every time you pay for a tax rise, it is literally a robbery to charge you for something they themselves stole. In the old days, for far less than what our political representatives have done, they would have been given a punishment I wouldn’t wish on a dying dog. Today, it looks like they are going to get off scot-free.
Featured image: NeilK, CC BY-SA 3.0, via Wikimedia Commons.
