Banks & bonds: the Rip-Off

Germany is being urged to support the creation of Eurobonds in the next futile phase of propping-up the eurozone. The Eurobond plan is yet another exercise in self-deception. It would shift a greater financial burden on Germany without solving the flawed foundations of the single currency.

The rip-off began after the 2008 credit crunch. Banks were bankrupt because of their reckless lending to land speculators. But governments were not willing to address the root cause of the crisis. Instead, they resorted to a bail-out strategy. They printed hundreds of billions of euros, dollars and pounds and shovelled the money into the banks.

The banks were supposed to shore up their assets and return to business as usual, extending credit to their private sector customers. That didn’t happen. Viable commercial enterprises that rely on credit to maintain their activities found that the credit had dried up.

Governments complained, and urged bankers to lend more money to private enterprises. That would make it possible for firms to hire workers. Consumption would increase, justifying new rounds of capital formation. Instead, the bankers found there was an easier way to make a profit. They bought government bonds.

Bankrupt Governments

The untold story of the past 40 years is the bankruptcy of western sovereign nations. They could not balance their books, so they kept borrowing. That worked, for as long as investors were willing to lend money to fund public projects that governments could not really afford.

That routine continues to this day. Governments urge banks to lend to the private sector, but they suck out the funds by selling bonds. This enables them to continue spending without raising the revenue to match the costs of public expenditures. So commercial enterprises are being squeezed by their own governments.

The double speak covers up the dishonesty in High Finance. Bankers borrow at 1% from central banks and re-lend the money to governments for 4-5% . This gives them a handsome return without having to worry about the credit-worthiness of private clients. So when bankers claim that they cannot lend to firms because they are essentially bankrupt (as in Spain), what they don’t say is that, by starving firms of credit, they are rendering viable businesses bankrupt.

It’s all a rip-off, and you the taxpayers are the losers.

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