Rolling Loans

Does our government own America’s biggest banks?  Certainly not; after all, they are publicly traded, private enterprises aren’t they?  Still, we did see the biggest ones come under intense government scrutiny in the depths of the Lehman/AIG crises a few years back.  And legislators do redefine the bank’s operating parameters from time to time.  Also, the Federal Reserve has much to say about their daily activities (although the Fed operates in parallel but outside of our government).  Further, many of the world’s largest banks or their subsidiaries are qualified as “primary dealers” by the N.Y. Fed, which, according to that august body, means they are “required to participate in all auctions of U.S. government debt and to make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account-holders.”

This points to an interesting world-wide phenomenon.  Governments borrow money by selling their bonds and some of their biggest banks are obligated to act as buyers of last resort, using these bonds in part to bolster legislated reserve requirements.  With the deepening fiscal problems seen here, in Europe, Japan, and elsewhere, governments continue borrowing by selling ever more bonds to banks.  In turn these banks are using them as collateral to borrow from their own central bank equivalents to our Fed.  Are sovereign governments essentially borrowing from banks via bond auctions while banks are borrowing from the same governments to remain solvent?

Deficits continue to grow in most developed nations, suggesting the answer to this last question is yes.  With no money to pay off their bonds at maturity, governments roll the principle and interest over into a new series of the same.  This smacks of a Ponzi scheme in which our banks are complicit following the adage, “a rolling loan gathers no loss.”

J Paul Getty has been quoted as saying, “If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.”  I would suggest that when the figure reaches $100 billion governments have, at the very least, become partners with these institutions deemed too big to fail.  Certainly, as is now the case, any amount north of that confuses the issue as to who owns whom even more.  Resolving this conundrum could lead us to conclude the same banks have also become too big to bail.