Ben, hope is not a trading strategy.

And notice what isn’t there. The Fed is not charged with distorting natural market pricing mechanisms to the point of perverting risk. It is not asked to promote ever increasing stock prices. It does not have to guarantee that property prices are rising. It is not asked to manipulate bond, equity or commodity markets. It is not asked to seek the profitability of ‘too big to fail/prosecute’ firms on Wall Street, or to promote their interests. It is certainly not asked to indulge in secret and complex financial transactions with no clear benefit to the wider public.

Yet evidence that the Fed may have lost touch with its mandate are mounting. Sometimes it’s the little things. The Fed is reported to have leaked the minutes of its FOMC meeting to a number of major banks, including JP Morgan, Goldman Sachs, Citigroup, Barclays and others. Within hours of receiving the data, Goldman Sachs issued a research note suggesting that clients short gold. It remains to be seen whether that note was based on the leaked Fed information, but Congressmen Alan Grayson and Daryl Issa are rightly seeking immediate clarification of the issue. Whatever the outcome of those investigations – and frankly the Fed’s record in this respect does not generate much confidence – it’s astonishingly inappropriate for such data to be transmitted to major Wall Street firms ahead of the market more generally.

But it’s the bigger things too. I’ve talked about the matter before on these pages, but one of the biggest scandals in recent American history should have been the way that, during the most turbulent phase of the current financial crisis, the Fed – secretly and without the knowledge or consent of Congress – placed vast amounts of taxpayer money at risk in the support of numerous banks, many of them foreign. The idea that unelected officials should dispose of more than a trillion dollars of your money without Congress even knowing is, to my mind, a greater abuse of democracy than the Watergate scandal. Watergate was bad enough, but it didn’t involve a trillion dollars.

And yet, I suspect that there are worse things yet to be uncovered. Suspicious indicators abound.

For one thing, there’s the grotesque leverage being operated by the Federal Reserve Banks. The New York Fed has seen its leverage ratio rise in excess of 100:1. Those are the kind of numbers that make Lehman look prudent. Heck, those are the kind of numbers that make Greece look safe.

Then too, there’s the appalling conflicts of interest that are built into the system. The board of directors of the Federal Reserve banks are largely composed of officers of the very banks the Fed is there to supervise. So when crisis struck Wall Street, how was it a surprise that the Fed – supervised and directed by Wall Street bankers – was so fast to ride to the rescue?

And look too at the rise and rise of the stock market. Europe is in a slo-mo financial crisis. Japan (a country more highly indebted than Greece) has decided to devalue its currency and double up on its money supply in a massively risky gamble to get out of trouble. America is seeing weak growth and a rapid increase in the kind of toxic debt products that brought us to our knees five years back. Corporates are hoarding money instead of investing it. Jobs growth remains anemic.

So how come the stock market is rising? Who is the final buyer behind that rise if not those magic money-printing machines at the Fed? And if the Federal Reserve believes that rising financial markets are necessary to restore the country to health, we deserve an explanation of exactly how bubbling up financial assets to untenable levels is going to help with the things that actually strengthen economies: physical investment, innovation, new business formation, job growth.

It gets worse. The VIX is a measure of stock market volatility or simply put price movements up and down. It’s long been an interesting measure and has long had a part to play in financial markets. But it’s gone crazy recently. Trading in the VIX doubled from 2011 to 2012. The volume of futures contracts traded is up nearly 2000% since 2009.

I’m a hedge fund manager. I deal in these markets. And I have no idea which institution; private sector firm, sector or individual could be trading in these volumes due to the vast margin requirements (not least, because proprietary trading is now heavily restricted, at least in theory.) So could it be the Fed? And is its strategy to reduce price swings, influence and maintain the stock market’s otherwise inexplicable rise? I can’t be certain, but I think that the Fed should come out and publicly disclose any dealing or influence it has had in this area.

These questions go still. further What products and markets is the Fed trading in? The Fed has admitted to trading swaps with the ECB, which compels us to ask: which other off balance sheet derivatives is the Fed currently trading? Is the Fed active in gold swaps? Is it trading in gold, silver or other metals, futures and or options? Bear in mind, that the Fed’s leverage is so extreme that a small movement in prices could make them insolvent. And given that there’s no known exit strategy to their QE program, the risk of a disorderly exit with catastrophic losses is highly probable.

These are disturbing questions, and I’m not the only one asking them. David Stockman, Director of Management and Budget in the Reagan administration, looks at our current financial landscape and calls it ‘a giant Ponzi scheme’. He’s right. That’s why I wrote Planet Ponzi 2 years ago. Nobel Prize winner and former chief economist at the World Bank, Joseph Stiglitz, commented recently, ‘If we [at the World Bank] had seen a governance structure that corresponds to our Federal Reserve system, we would have been yelling and screaming and saying that country does not deserve any assistance, this is a corrupt governing structure.’ He’s right too.

All the evidence suggests that the Fed has turned into an entity which is too big to fail/jail/bail or prosecute, manages the financial system on behalf of Wall Street and is accountable to no one. That system delivered one huge financial crisis in 2008-09, but an even larger aftershock is brewing now. Isn’t it time we demanded some answers? Isn’t it time we demanded change?

But here’s the thing. Do you care to guess how much J&J lost thanks to that currency movement? Answer: a cool hundred million dollars. Johnson is a pretty large company, but even so. To lose a hundred million bucks? In Venezuela? That sounds a little disturbing, no? A bit like the start of one of those killer-virus horror flick, where the pretty teenager who comes down with a benign little illness ends up dying horribly as some unknown disease takes hold.

Central Planners Bernanke, Draghi & Merkel Hard at Work

Well, that is now the reality of the world economy. The loose money policies at the world’s leading central banks are beginning to broadcast that virus right across the globe. The vector of transmission isn’t just low interest rates. It’s money printing too. It’s the purchase of government bonds so that the long end of the yield curve is as manipulated as the low end.

Indeed, you simply can’t set a bound on how widespread and intensive the destruction of value has been, not merely in the U.S., but across the globe. Take, for example, the Fed’s willingness to purchase toxic real estate assets — using your money to acquire securities which are now shunned by the market. Or take the Bank of England’s efforts to shove easy money at banks making corporate loans. What happened to good old-fashioned faith in markets? The belief that transactions of commercial merit will be struck between a willing buyer and a willing seller … and that any other sort of transaction should be strongly discouraged?

The simple fact is that the world’s major central banks are indulging in a massive proprietary trading scheme placing your money at risk in support of poor quality assets. When I wrote Planet Ponzi, I argued that Wall Street and government between them had created the world’s biggest ever Ponzi scheme. Well, the central banks want to play at that table too — and right now they’re the ones with unlimited money and zero accountability.

In recent months, the Japanese yen has plummeted 30 percent against the euro and some 20 percentagainst the U.S. dollar. Those figures are astounding enough in themselves, but get this: The euro currency probably won’t even exist in a few years’ time. The outcome of the Italian election gave a more than quarter of the vote to a comedian, Beppe Grillo. (He is literally a comedian; I’m not just using the term as a synonym for “Italian politician.”) Grillo wants to exit the euro and default on Italian debt. Other parties shared nearly all the remainder of the vote. The only politician to stand four-square behind Angela Merkel’s austerity ad infinitum plan was Mario Monti, who secured just one tenth of the vote.

Grillo’s plan, as it happens, isn’t dumb. The euro has been killing Italy, and though Italian debts are high, they are, for the most part, funded domestically and the national budget is not far from being in balance. So Grillo’s plan keeps it simple: quit the euro, self-fund the debt, go back to doing what Italian governments have always done. If that sounds nuts, bear in mind that Italy’s economy has been a post-war miracle — growing way faster than the U.S. economy, albeit from a lower base. Italy only really started to fail when it joined the euro: Meaningful growth has been absent ever since. Italy’s competitiveness — never so secure — has been systematically wiped out by its adventure with the euro.

If Italy follows a path that’s anything like the one Grillo has mapped out for it — or if civic unrest grows — or if some European bank found itself obliged to admit to the true value of some whole new pile of nasties on its balance sheet — then the euro is dead; but this is the currency against which the yen is devaluing.

The precise path of these currency wars is impossible to predict, but it’s not hard to predict the final outcome. First, there will be huge losses. Japan has an economy that’s almost twenty times larger than Venezuela’s. If Johnson & Johnson can lose $100 million in Venezuela, just how much more will be lost in the Far East and Europe, not just by that one company but by every other multinational one too?

Spain's civil disorder - A coup d'état in the air? Euro departure?

Secondly, civil unrest. We’ve seen bouts of unrest already surging across the world — from riots in Greece, to the Occupy movement, to the indignados in Spain — but these things are only going to get worse. Suppose, for example, that Italy does successfully quit the euro; what will that say to the Spaniards and Greeks and Portuguese and Irish who are currently suffering its death throes?

And thirdly: inflation. The trouble with currency wars is that they’re too easy to wage. You just have to print money. The mainstream media barely reports the ongoing activity and the Fed is either in denial or lying. It all sounds a little technical and dull. We assume that the people in charge of looking after our money supply are on our side, that they have our interests at heart.

But do they? Again and again, we see that central banks make the error of equating happy financial markets with strong economies — precisely the mistake that was made by central banks ever since the dot-com crash (and, indeed, before.) Here’s the simple truth. Financial markets prefer excessive valuations and excessive liquidity. Sure, they love it if the Fed prints a ton of new money. Obese kids would probably like it if McDonald’s gave away their stuff for free on street corners.

But the interests of Wall Street are not your interests. Global stock markets are making new record highs — on what? What’s so great about the world economy? The truth is that stock markets are up because of Fed-based ‘hopium’: the torrents of cash artificially manipulating prices. Yet whatever goes up must come down and no one at the Fed even pretends to have an exit strategy. The simple fact is that the Fed has created the mother of all asset bubbles, and the popping will be on a scale previously unknown.

Indeed, you only have to look at the personnel in key positions across the globe to understand how deeply Wall Street has penetrated institutions that were meant to be there for us.

Jon Corzine - What happened to MF Global's missing Billions? Who said there is no revolving door between Wall Street and Washington?

Mario Draghi, head of the European Central Bank is an ex-Goldman guy. So is William Dudley President of the New York Fed — who controls the FOMC. So is Mark Carney, soon to be Governor of the Bank of England, currently the Governor of the Bank of Canada as well as the Head of the Financial Stability Board in Switzerland. When you start to add in key politicians with affiliations to the same institution (Mario Monti, Hank Paulson, Robert Rubin, Gary Gensler, Jon Corzine), you start to realize that our entire political system has become heavily conflicted and corrupted. The interests of Wall Street have come to dominate the interests of ordinary citizens.

All Ponzi schemes must come to an end. They always bring disaster when they do — but that’s no reason to close them down, because the collapse only gets bigger the longer you leave them. We are in the end stages of a huge, global Ponzi scheme right now. The losses are rising, the risks are getting greater. And the worst disasters lie ahead.

Crimes committed: why are no bankers in jail?

How nice of you: that gift you just made to charity. No one asked you if you wanted to make the gift. No one asked you which charities you’d want to support. But still. You made it. So thanks. Well done.

 If you’re confused – if, by chance, you don’t remember authorising anyone to pick your pocket to give to charity – then welcome to the world of financial services. Here’s how it works. Greedy, irresponsible morons on huge salaries and inflated bonuses take RBS, one of Britain’s leading banks, and trash it to the point of insolvency.

Because Gordon Brown’s government forgot the first rule of capitalism – that lousy firms should be left to go bankrupt – you rescued RBS using your money, your savings, your taxes. You, along with your fellow British taxpayers, now own 82% of the bank. In a small way, you’re a world-record holder: the bailout of RBS was the world’s costliest bank bailout. Congratulations on that. (Though again, I’m not sure you had a choice.)

Now, unfortunately, it turns out that those same overpaid, irresponsible morons ran an institution in which the manipulation of interest rates was endemic. Manipulation which made money for them, the bankers, at the cost of ordinary members of the public. It’s pretty obvious what ought to happen. The people who manipulated rates should go to jail. The people who supervised them should either go to jail (because they too were conspirators in the fraud) or they should be disbarred from business forever (because they’re too stupid for anything complicated.)

But needless to say, that’s not what happens in Cameron-land, any more than it did in Brownania. No, what happens is this. RBS is fined. It’s paid £87.5 million to the Financial Services Authority and has made all the right noises about learning its lessons. (Fat hope.)

Lord Turner should resign immediately giving his pension to taxpayers who bailed out RBS !

But the thing is, you own the bank. So that fine hits you. It doesn’t hit the idiots who managed the bank. It doesn’t hit the fraudsters directly responsible for the manipulation. Now although that’s hardly good news, it would be almost OK, as long the FSA simply returned the money to the Treasury, so that in effect you’d have been paying the fine directly into your own pocket. But that kind of common sense offends those in government. So instead the FSA passed the fine – the one which you paid – to charity. So you now have the rare privilege of (i) having shelled out for the costliest bank bailout in history with no chance of ever being repaid, and (ii) having given £87.5 million to charity. Well done.

But the figure that really counts? The figure that really counts is zero: the number of bankers in jail as a result of all this mess. Oh, and curiously enough, that number is identical with the number of brain cells registering electrical activity at the FSA. It’s enough to make one weep.

My printing presses are operating 24/7!

On the first day of Christmas, my country gave to me

A debt bigger than GDP

Yep, that’s right. US Public debt stands at more than 100% of GDP. The last time debt was this high, we were fighting a World War across two continents and building a peaceful prosperous world, whose basic shape would endure for generations. That was money worth spending. On this occasion, however, we’ve run up the debt, in order to protect Wall Street bankers – yet the sebanks are still crammed full of unsustainable assets. It won’t be long before the Fed further loads its balance sheet with worthless toxic assets … thereby transferring liabilities from the reckless bankers to US citizens. Maybe not quite such a good buy, huh?

On the second day of Christmas, my country gave to me

Debt for the poorest

According to Nobel Prize-winning economist, Joseph Stiglitz, the share of American GDP going to wages and salaries has falled to about 43% since 1970. At the same time, the slice going to companies in after-tax profits has doubled since just 2005. How have the US middle classes even vaguely been able to sustain their living standards? Answer: by taking on unpayable debt that chokes the financial system and throttles economic growth. It’s an appalling situation and it’s not set to change.

On the third day of Christmas, my country gave to me

Bernanke trashing dollars

Impact of money printing and currency debasement

Ben Bernanke, Chairman of the Federal Reserve, is not an elected official. Prior to taking his current job, he was a classic ivory tower economist: a guy who couldn’t do any harm because no one was dumb enough to give him any power. Then he took control of the Fed: an organisation whose structure and oversight has barely been altered since 1913 when it was created, under vastly different conditions. Back then, GDP was just $40 billion. By contrast, in 2011, the interest on US debt was $454 billion despite interest rates at 200-year lows. Since taking charge of the Fed, Bernanke has printed trillions of dollars – a plan that trashes the value of the dollar in your pocket, and a plan with no plausible exit strategy. The plain fact is that pumping money into the economy does nothing to boost real growth or real output – it just inflates bubbles in property and stock, as has been shown repeatedly for thirty years and more now. If you’re not convinced, just check the graph.

On the fourth day of Christmas, my country gave to me

Overpriced healthcare

Good quality healthcare is, in my view, a human right and Obamacare, for all its faults, brings that right a little closer to millions of Americans. But the United States, under every administration and every Congress, has completely lost control of health costs. We currently pay about $8,000 per head in health costs. (That figure includes household, corporate and government spending.) Our major competitors spend between $2,900 per head (Japan) and $4,500 (Canada). And they have better healthcare. To find OECD countries with worse performance on ‘years of life lost’, you have to travel south to Mexico or east to Hungary. All other countries in the OECD fare better.

On the fifth day of Christmas, my country gave to me

Quarreling leaders

Iceland is no banana republic

We pay politicians to solve problems, right? We just had an election at which alternative views were put to the people, for their decisions on the way forward. And this country of ours has some fair-sized problems. So what happens? We have the ultimate This-Needs-A-Decision-Now situation in the fiscal cliff, and both sides cleave to their existing rigid positions until (wait for it) they come up with some dumb and unsustainable last minute compromise. That’s not what they’re paid to do. These same politicians think that raising the debt limit will stimulate the economy. Wrong! At a global level, the growth in credit instruments has outpaced growth in the real economy by a factor of around four times. That’s not healthy for the world, and it’s not healthy for the debt-dependent United States. I predict that the US will enter a recession in 2013.

On the sixth day of Christmas, my country gave to me

Corruption on Wall Street

You could have a whole 12 days song just for Wall Street corruption and its toothless regulators, so endemic is the problem. But let’s narrow the microscope, so we’re only looking at SEC enforcement

Zero high profile bankers in jail = 0 regulation

actions since 2009. Firms affected include: Citigroup (multiple times), Commonwealth Advisors, Goldman Sachs, ICP, JP Morgan (multiple times), Mizuho, Stifel Nicolaus, Wachovia, Wells Fargo, American Home Mortgage, Bank Atlantic, Countrywide, Credit Suisse (multiple times), Franklin, Fannie Mae, Freddie Mac, Indymac, New Century, Option One Mortgage, Thornburg, TierOne, Bear Stearns, Charles Schwab , Evergreen, Morgan Keegan, Oppenheimer, Reserve Fund, State Street, TD Ameritrade, Bank of America, Brooke Corp, Brookstreet, Colonial Bank, Taylor Bean & Whitaker, KCAP Financial, and UCBH. The list includes firms where executives from that firm were charged. In total, 133 entities and individuals have been charged. Total penalties and similar charges amount to $2.6 billion. Aside from the SEC, other regulators have been equally active. And has anything fundamental changed? Nope. Nothing at all. Wall Street is still rotten to its core. And why would it change? When these fines represent perhaps 10%, if that, of the ill-gotten gains why on earth would bankers change their business models? They just need to keep paying the toll.

On the seventh day of Christmas, my country gave to me

Despairing workers

This time its worse..

One of the big talking points ahead of the election was whether the jobless rate would come to Obama’s rescue. And sure, the rate has nudged down to below 8.0%, from closer to 10.0% three years ago. But that’s not the most striking piece of economic data to come out of the Bureau of Labor Statistics. The most striking – and saddening – data is that we now have, by far, the lowest civilian labor force participation rate for thirty years. Workers are leaving the labor force because the jobs aren’t there. It’s a waste of a generation. Meantime, we should use a new unemployment metric that reflects the true US jobless rate rather than a politically sanitized version. A little honestry, transparency and accountability can go a long way.

On the eighth day of Christmas, my country gave to me

Corporate tax scams

GE's CEO advises the Obama administration on economics, go figure!

In 2010, General Electric paid no corporation tax. None. Not even one miserable dollar. In the five years to 2010, GE accumulated $26 billion in US profits and do you want to guess how much of that was passed to the IRS? You’re guessing zero, right? Unfortunately, you’re wrong. The answer’s worse than that: they accumulated a net benefit of $4.1 billion. Oh, and though the firm is America’s biggest corporate lobbyist, the truth is that countless big firms are playing the same game – and the data shows that the more you lobby, the better your shareholders fare. I’m guessing that’s not quite the way the Founding Fathers intended things to work.

On the ninth day of Christmas, my country gave to me

A huge Farcebook rip-off

Morgan Stanley banked profits on this IPO

Just in case anyone needed proof that Wall Street has absolutely no ethics at all, the Facebook IPO popped up to remind us. Extravagant valuations on launch led to an intra-day high of $45.00, before reality set in and the stock plunged to a way more realistic $17.55. The winners: company insiders and Wall Street. The losers: the retail investors who believed the hype. (Oh, and since we’re talking about hype, then Apple at its current $500 a share is way more reasonable than it was at closer to $700. It’s a wonderful firm, but it’s in a commodity business where the competition, finally, is catching up.) On Facebook, meantime Morgan Stanley has just been fined $1.5 million for an operation whose profits were well in excess of that sum. Again: why change a business model if the fines are mere pinpricks?

On the tenth day of Christmas, my country gave to me

The power to hope

Ho HO HOPE

This is America. However bad things get, we can still believe in the possibility of improvement. We can believe that our leaders will find the ability to be responsible, to think about the good of the country before the good of their parties. We can believe that the media and regulators can find their teeth. Can demand transparency and enforce accountability. Above all, we can believe in the power of the American people to demand change. To slash debt, return to honest money, to speak truth in politics. And perhaps, who knows, we can return to the old ways of making money: by making stuff and selling it instead of through ever more opaque financial dealings based upon fictional future value, a mountain of debt, and way over-leveraged derivative products.

A merry Christmas to you all.

Over the coming weeks, we’re going to be hearing a lot about the ‘fiscal cliff’: the threat that some 5% of GDP is going to be ripped out of the economy in a combination of tax hikes and spending cuts. A fiscal slow-down on that scale will almost certainly trigger recession. The CBO thinks so, though their numbers look optimistic to me. (If you cut demand by 5%, more or less overnight, then you shouldn’t expect the economy to grow by more than 1% in the year following.)

The Feds solution to debt: more debt

Because the process of fiscal compromise acts itself out on the political stage – all big personalities and high drama – the media loves to report it. Loves to imply that vast questions are at stake, that political careers will stand or fall by the outcome.

But they’re not. Not really. This so-called ‘cliff’ is really just the first in a series of steps. The US budget is arguably the most distorted in the Western world. Greece and Japan may have higher debts, Italy and Portugal may have worse growth prospects – but for sheer budgetary insanity, the US is probably the world leader, combining huge current deficits with vast unfunded promises to retirees, and welfare entitlement program recipients. You don’t need to take my word for this. The IMF states, ‘under our baseline scenario, a full elimination of the fiscal and generational imbalances would require all taxes to go up and all transfers to be cut immediately and permanently by 35 percent. A delay in the adjustment makes it more costly.’

The political ructions of the next few weeks will simply constitute the first scenes in a drama that will run for the next ten or fifteen years. And what’s more, this is a play where we already know the ending. Taxes will have to go up. Spending will have to come down. No other outcome is available: just ask the Greeks.

And meantime, there is a monetary time-bomb charged and ticking. A bomb which is being constantly primed with further explosive, further destructive force. Remember that the economic catastrophe of 2008 was created by loose monetary policy, the indisciplined expansion of credit and a market where increasingly shoddy securities were sold as investment grade assets. You might think that a logical reaction would be the steady tightening of policy and encouraging a climate of credit discipline.

Alas, however, such logic has no place at the Fed. Interest rates are on the floor, and have been for four years now. Because four years of loose money isn’t enough for the ivory-tower academics in charge of monetary policy, the Fed has explicitly committed to keep rates low indefinitely.

Loose money in the past, loose money guaranteed into the future … but that’s still not enough. The Fed has enlarged its balance sheet by $2 trillion since the crisis began to unfold. But that doesn’t even say it. The unelected officials at the Fed handed out an extraordinary $16 trillion in secret loans to bail out banks and businesses in the 2008-10 period. Those loans were not known to, or authorized by, Congress and many of the recipients were firms owned and headquarter abroad. Sen. Bernie Sanders, who has much to call attention to these issues, comments, ‘No agency of the United States government should be allowed to bailout a foreign bank or corporation without the direct approval of Congress and the president.’ Well, duh! It’s frankly extraordinary that there should be any question about this.

As Sanders also points out, the actual operation of the bailouts was largely outsourced in large part to investment banking firms on Wall Street who benefitted directly from the bailout. According to the Government Accountability Office, some two-thirds of such outsourcing contracts were awarded on a no-bid basis, an extraordinary failure. And meantime in a ‘money-laundering‘ style operation, the Fed is acquiring $40 billion of low-quality mortgage backed securities – in many cases from the firms that created and missold them – thereby cleaning corrupt balance sheets at the risk of the US taxpayer.

The problems created by this unconstitutional misconduct go far beyond the mere trillions of dollars involved. The US Treasury market is being currently manipulated on a heroic scale. At times we’ve seen the Fed buying as much as 70% of US government bond issuance. Worse still, it’s effectively told the market that it intends to continue supporting the market as much as necessary for as long as necessary. In effect, we have a tiny group of unelected officials pursuing a set of radical and experimental policies – QE infinity, money-printing, unlimited bond buying, call it what you will.

The impact of money printing and the value of the US dollar

And the theory behind this activity is simply crazy. When have price controls and state intervention ever worked? I don’t just mean for the US Treasuries market, but for any major market at any time? State intervention always fails. The Fed is simply setting up what looks set to be the largest Ponzi Scheme in history.

What’s more, because financial markets are interlinked, indiscipline in one market soon ripples through the system and unintended consequences impact many other markets. Wall Street traders, both currently and historically, price junk bonds off the US ten year treasury, which currently trades at an implausible 1.61%. But since the US Treasury market is flawed, every related market is too. As the Economist notes, a bubble is being inflated in government bonds, quality corporate bonds, junk bonds, and (I would add) global equities. As that newspaper comments, ‘When the market does turn everyone will want to head for the exit at once, as was the case with mortgage-related bonds in 2007. That might turn a retreat into a rout.’ I’d agree, except that the word might ought to be will.

The Feds exit strategy: Pray

And all this wouldn’t be so bad, except for one thing. What’s the exit strategy? Could it be hope-based by any chance? How do you climb down from these heights? Who will buy these bonds when the Fed stops? Who absorbs the losses? What exactly happens to the economy when interest rates normalize and bond prices collapse back to normal levels? Indeed, what happens to the banks when they can no longer sell their lousy assets to the Fed, can’t bump up their profits by selling no-bid services to the dumbest buyer in town? Too big to fail is still getting bigger.

The fiscal cliff is scary, because an abrupt one-off change in fiscal posture is a dumb way to do something that needs doing. But still, it needs doing. If a temporary economic slowdown is the price we pay for that, too bad. We’ll still be in better shape for taking the hit.

The monetary neutron bomb is worse. We’re still building it. No one’s talking about it. And the amounts are colossal.

Four More Years

Obama’s an accomplished individual. Smart, cool, in control. But his standout quality is probably his ability to create euphoria. Create it, sustain it, ride it. Watch the people celebrating with him at his victory rally in Chicago and you could easily believe that the USA had just won a war or beaten a recession.

Unfortunately for Obama, reality doesn’t have much time for speeches. The economy was dire going into the election. Coming out of it, you can almost hear the engine failing.

Let’s take the first indicator of failure – the stock market. The market mood darkened in September and October, then dropped abruptly as news of Obama’s victory sank in. I don’t actually think that’s because Wall Street hates Obama. I think it’s more that as the election hoopla dies away, investors realise how little they can expect from the government, how bad the economic situation really is. And, for that matter, how bad the political situation is. The House remains solidly Republican, the Senate comfortably Democrat – and the whole divisive status quo guaranteeing gridlock for another four years.

Over the next few weeks, you’re going to hear a lot about the fiscal cliff. In January 2013, a whole lot of things happen together. George W. Bush’s tax cuts expire. A payroll credit expires too. Some automatic spending cuts are imposed across the board. (These last cuts, of course, aren’t thanks to some outbreak of sanity in Washington, but a bad compromise cobbled together in the course of 2011’s debt ceiling crisis.)

The fiscal cliff is huge, and real. Its impact is potentially around 5% of American GDP. By contrast, George Osborne’s fiscal tightening amounts to little more than 1% a year. If you want to get your head round what a comparable tightening would imply in the British context, then just imagine that the basic rate of tax increases by 10 pence in the pound overnight. Or that spending in the NHS is halved, again overnight.

No economy is strong enough to take that kind of punishment. The British economy is struggling to come out of a double-dip recession even with its own weak-as-milk pace of tightening – and, indeed, I think a triple-dip recession is highly probable. The fundamentals of the US economy are in some ways better than ours (less reliance on the finance sector, less proximity to European travails) but a 5% cut in economic demand overnight? The result will be crippling.

Although the US jobless rate has improved slightly in recent months, that’s only because dispirited workers have left the jobs market altogether. The US employment rate is a horror story. Piling a massive fiscal shop on top of those weak fundamentals, and you’re going to see a massive rise in unemployment. (If you look at U6 unemployment data for the US it’s hovering close to 15%, a shocking stat.)

You might think that the solution is obvious. If the fiscal cliff is so bad, then simply decrease the slope. Go for a slow-but-sure Osborne-style tightening so the budget deficit floats gently lower. And sure enough, there are plenty of economists, living comfortably in their ivory towers, who suggest just such a solution.

But that solution is not available. The IMF – hardly a sensationalist organisation – says that the elimination of America’s long run fiscal gap requires both a 35% increase in all taxes and a 35% cut in all entitlements. The fiscal gap is heinous, but it’s only the first step. It doesn’t even take America where it needs to go.

It gets worse. If fiscal policy can’t save America, how about monetary policy? Alas, and just like in Britain, monetary policy is all out of gas. Interest rates can’t go any lower. quantitative easing (QE) has reached its limits. (And, in any case, QE is little more than a way to rescue Wall Street at the cost of inflation for the rest of us.) The worst thing that could happen to America is that Ben Bernanke, the unelected Chairman of the Federal Reserve, tries to rescue things. The best thing that could happen is that he goes on holiday for four years, having left his Blackberry in the office.

The Princeton Professors Economic Experiment

In short, America’s problems are profound and there is no way to deal with them except one that imposes huge short-term costs on the economy and the people. I don’t think it’ll get quite as bad as it has done in Greece – the US economy has a lot, lot more about it than that – but most of the pain still lies ahead.

And in matters of finance, everything is circular. So the government needs to raise taxes and slash spending to sort out its debt problems. The result: a huge reduction in demand and heavy job losses. The result: countless homeowners being unable to service their mortgages and a huge rise in ‘jingle mail’, as homeowners send their house keys to the foreclosing banks. The result: an already weakened banking system sinking further under a tide of ill-advised boom era lending. And of course, as all this happens, the economy will shrink, which means that the US government has to slash spending yet further in a desperate effort to keep its deficit reduction efforts on track.

These words might seem apocalyptic, but I’ve been saying these things for a while. (My book, Planet Ponzi, has the whole story, and it’s out in paperback now.) What’s more, we’ve already seen disaster scenarios such as these come true in well-managed countries of the developed West. Spain had a much lower debt to GDP ratio than the US. It had better supervised banks and less casino-banking. But we all know the state that Spain is in: a death-spiral that even Germany may not be able to help with.

And the signs are everywhere in America. Go-go stocks have lost their lustre. Facebook trades at little more than half its IPO price. Apple, for so long a do-no-wrong stock market darling, is down more than 20% from its recent highs. Businesses are hoarding cash, because they don’t dare invest it, don’t dare return it to shareholders.

I don’t suppose Mitt Romney thinks of it like this, but you could argue that the 2012 election was a heck of a good one to lose. America has outrun financial reality for decades now. Debt-fuelled, government-funded. The future bought on the never-never.

But the debts are falling due. Reality is knocking at the door. And the fiscal cliff is only the start.

The British calling in the calvary

A hundred years ago, a generation of men – many of them volunteers – fought an unprecedently bloody war for almost invisible gains. The men were heroes, but the generals commanding them were too often blunderers, too little conscious of the ever-mounting casualties. David Cameron is right to demand that our schoolchildren are reminded of the Great War and the vast sacrifices involved.

He’s right, but he’s also showing some chutzpah. History remembers those men as ‘lions led by donkeys’. Heroes betrayed by blundering and unimaginative leaders. We are not – thank God – at war on that scale now, but in economic terms we are deep in our own version of trench warfare and David Cameron has too little idea how to lead us out.

The current recession is the longest and (almost) the deepest in modern British history. Its costs are borne, primarily, by those least able to afford them. Those responsible for the damage – the bankers, the regulators, the New Labour generation of politicians – have been largely untouched. The fraudsters who manipulated LIBOR, who missold subprime assets, and so much else, are sitting in Monaco, instead of in jail. The politicians in charge now too often rely on soundbite and deflection; there’s still a shocking lack of transparency and accountability.

The British people bear all this with a huge amount of dignity. High inflation, stagnant wages, crazy property prices, an economy that seems only ever to move sideways? ah well, could be worse. Mustn’t grumble. We’re lions, led by donkeys.

What time is Murray Playing?

But it’s not just in Britain where an economic Great War is laying waste to lives and savings.

In the US, a presidential election is unfolding that will do nothing to solve the fiscal crisis that is engulfing the country of my birth. The fiscal problem has become so bad, the politicians can’t even talk about it. Republicans won’t raise taxes. Democrats won’t cut benefits. The result is a fiscal jam so bad that serious economists estimate true US indebtedness at over $200 trillion. That’s more than three times the total GDP of Planet Earth. And virtually no one talks about the issue.

In Europe, meantime, the latest rescue of the latest crisis is beginning to fail. Again. Spanish bond yields have fallen from their high of nearly 8.00%, but they’re still glued close to the 6.00% mark. And a country in deep financial crisis, mounting debt and deepening recession cannot fund itself at that rate for long. Meanwhile, the wealthy Catalans are beginning to reconsider their ties to the rest of Spain. The ratings agencies are cutting their ratings, again. Italy is in pretty much the same position, only a step or two behind. Germany is beginning to backtrack on the deals that averted the crisis that loomed earlier this summer. The slow-mo European crisis is getting ready for the next hideous encore.

Welcome to Spain - nearly 60% youth unemployment - this will not end well

 

 

You might think that nothing changes, but you’d be wrong. A year or two back, the IMF believed that a £1.00 cut in government spending would only reduce economic activity by £0.50, as new private sector growth surged into the gaps created. That clearly hasn’t happened. We’ve had the exact reverse pattern where increasing austerity has led to increasing recession… and an increased deterioration of government finances. The IMF now estimates that the same £1.00 cut actually depletes the economy by £1.30. The task ahead of us is getting worse.

It’s the same with the banks. Forget the pre-Thatcher miners or the teaching unions under Labour – if you want real government largesse, the financial sector still outshines the rest. When you hear of the Bank of England ‘pumping money into the economy’, what it is actually doing is propping up the trading profits of the same handful of bloated institutions that created this mess in the first place. And those self-same institutions are still not lending, the economy still not moving. Meantime, the stock of dubious debts and inflated assets rises just that little bit more. A burden that the rest of us will have to pay for: through absent growth, stagnant wages, high inflation, and a hopelessly unsustainable property bubble.

Amidst such confusion, it would be easy to think that there’s no fix out there. Easy and wrong. We don’t need rocket-science, we need common sense.

Although I don’t like a lot about what the current government is doing, I do like its approach to the deficit. Under George Osborne, the government is still borrowing 8p in every £1.00 generated by the economy. So when you earn £100 at work, the government has just borrowed £8. Since that’s obviously nuts, government borrowing needs to come down. At least Osborne has got that part right.

But then consider monetary policy. The Bank of England is widely expected to announce an expansion of its quantitative easing programme to £425 billion. Which is just a fancy way to say it’s printing £425 billion of new money, which is a sure fire way to create inflation. (Just ask Zimbabwe.) It’s craziness – or, in fact, craziness doubled, given that the intended effects of the policy (boost lending and encourage investment) have clearly not happened.

Or take the banks. It’s pretty obvious that bankers don’t need our sympathy. (Many of them, in fact, need jail terms.) Far from coddling the banks any further, we should force them to play by the same rules that all the rest of us have to live by. If a bank goes bust, it should be left to fail. Small depositors should be protected. Everyone else should get no sympathy. Instead, we pump money into the system and pretend we’re helping the broader economy. It’s insanity squared.

I wrote a book about these matters: Planet Ponzi, which is out now in paperback. That book tells you in detail, and in easy, everyday language, just how bad the problems are – and what we need to do to fix them.

I didn’t write the book because I wanted to make money, but out of belief – even passion. I’ve been involved in the financial markets for thirty years. Over that time I’ve seen a kind of sickness take hold. A belief in the power of debt. A belief that any problem is OK, so long as you can defer the reckoning. The sickness isn’t confined to Britain (though we are now the world’s most indebted country). The problem is equally bad in Europe, maybe worst of all in the United States.

The cure for this disease is, in essence, simple. It’s total transparency, total accountability. That needs to apply to politicians: no more false promises, no more evasions of responsibility. But the same magic formula needs to apply to banking and the media. And we, the voters, need to retain our sense of anger. When we hear politicians evading an important question, we need to demand a real answer. When we see bankers grossly manipulate the financial markets, we need to reject any outcome that does not end up with one or more bankers doing some serious jail time.

I first conceived of writing Planet Ponzi, when the first tremors of the financial quake were starting to strike. I thought the issues covered in the book were the most urgent matters facing the Western world since the end of the Second World War. I still do. It’s not too late to turn things around – but we can’t delay our actions any further. Planet Ponzi has got to stop. We still need our lions, but it’s time to lose the donkeys.

QE has created the worlds biggest housing and equities bubbles in the UK markets

Last week, the Bank of England declared its intention to print another £50 billion. Hardly anyone noticed. That £50 billion will bring the Bank’s total money printing to around £425 billion, or about one quarter of British GDP. No one cares. This evening, the U.S. Federal Reserve will announce its own plans for another round of “quantitative easing” aka QE infinity – a euphemistic term for “destroying the currency.” Not to be left out, the ECB has announced plans for unlimited bond buying (though Germany has, thank goodness, set some limits.) Given that the bonds the ECB wants to buy are issued by increasingly bankrupt Mediterranean governments, the ECB too is doing what it can to wreck the currency it’s charged to protect.

Given such public sector diligence, it’s hardly surprising that the private sector is getting creative all over again. And while creativity is normally thought of as a good thing, the same ingenuity in the hands of Wall Street is always a disaster. Take one recent news story. New rules, due to come in place next year, will force derivatives-traders to post collateral for their risky bets. Proper collateral. You know: U.S. Treasury bonds and the like, stuff you can rely on. Trouble is, the derivatives market is huge and good quality collateral is scarce. (Which is a good outcome, right? It would mean that only the most necessary derivatives trades get done.)

QE1 a failure, QE2 a failure, QE3 ??, money printing is all Bernanke knows...

Only that’s not how Wall Street sees these things. When they see the phrase “good quality collateral,” they instantly think, ‘how can we fake things so that crappy collateral manages to sneak through anyway?” And, what do you know, they’ve come up with a solution called collateral transformation. That solution is twisted enough that I won’t even describe it here — but suffice to say that it’s like the subprime markets all over again. It’s worse than that, actually, because at least with subprime there was a house at the end of the chain. Here, there’s dodgy collateral supporting a derivatives trade backed by a financial security backed by something else altogether. It’s subprime squared or subprime cubed.

But enough of all that. The Bank of England (and the Fed and the ECB) are all thrilled to the bottom of their inflation-creating hearts because the financial markets are boosted by all these interventions. The German stock market index, the DAX, is up 46 percent in the past twelve months and has almost doubled from its 2009 lows. Doubled. Would you like to write down on a sheet of paper all the good things that have happened to the German economy since 2009? If you do, you can use a very small sheet and still have room for plenty of doodles. The simple fact is that these financial market interventions have almost nothing to do with the real economy.

That same basic point is obvious in a million different ways. The London property market is hitting new heights — just when the British economy is spluttering to get out of its double-dip recession. The FTSE index is romping away — but George Osborne is hastily rewriting his budget projections as corporate tax revenues fall far short of what was expected. In the U.S., Apple, Inc. is hitting new extraordinary heights, even as the latest U.S. jobless figures show that people are quitting the labor force on a historically unprecedented scale.

That’s not to say that monetary expansion has no effect, just that the effects are almost entirely destructive. So property inflation is bad (that’s part of what got us into this mess), but it’s one of the most obvious symptoms of Mervyn King’s policies. Bubbliness in the financial markets is also terrible (that’s the other major part of what caused this mess), yet there they are once again, bubbling away, utterly disconnected from the brutal truth of the real economy. And of course as the major currencies fight each other in a race to the bottom, the commodities produced by the rest of the world, with their strengthening currencies, becomes more expensive too. Inflation starts to get baked in.

Inflation, and also indebtedness. The ECB wants to protect Europe by buying up ever larger chunks of poor-quality debt. But who are they kidding? Next year, Spain and Italy alone have to refinance more than €600 billion. The same again, give or take, the year after. And those numbers are as nothing compared with the amounts of private sector (mostly financial) debt that has to be refinanced. A trillion euros next year, €1.2 trillion the year after. These numbers can’t be rolled over by more smoke-and-mirrors. They can only be funded by sound public finance and strong private sector business growth. Needless to say, we don’t have either.

In truth, the lessons aren’t difficult to see. We need sound money and an end to financial engineering. If the rules say that derivatives trades need sound collateral, then any scheme which looks to evade those rules needs to get kicked into touch. (Or more. Rules need to be enforced or there’s no point in having them. In a sane world, the banks and bankers currently busy on ‘collateral transformation’ need to be stopped and held accountable.) Central banks need to forget about the ‘health’ of the financial markets altogether. It’s not their health that matters, it’s ours.

People will say — correctly — that coming off these drugs will produce one hell of a withdrawal period. That’s true, but it’s not a reason to keep someone on heroin. Quite the opposite. The Western world needs to relearn some simple lessons. If you make a bad loan, you’ll lose money. (You won’t get rescued by the taxpayer.) Investment banks are there to deliver useful services to real companies. (Anything else is yet another Ponzi scheme, and probably fraud.) Businesses will succeed by making and marketing fantastic products at competitive prices. (Financial engineering is meaningless and will always destroy value in the end.)

QE addicted market participants line up for another central bank fix

These lessons are obvious, but our policy-makers don’t hear them. Maybe George Osborne does to some extent, and Vince Cable too. But they’re swimming against a tide of denial. That tide is running as high as the global equities and fixed income markets. One day soon, the tide will drown us.

Accountable: A letter in the Sunday Times called for Osborne to begin spending cuts a year earlier than planned

In February 2010, twenty economists published a letter in the Sunday Times calling on George Osborne to begin spending cuts a year earlier than planned. The key sentence of that letter stated that, ‘In order to be credible, the government’s goal should be to eliminate the structural current budget deficit over the course of a parliament.’

The logic was clear. If you say you’re going to do something hard but essential, you need to do it at a credible pace. Saying you’re aiming to do something in five years time and after a general election is rather like admitting that you’ve no intention of doing it at all.

You probably agree with that logic. If you are in charge of your household budget and you notice that your expenditures are running ahead of your income, you’ll almost certainly want to address that gap right now this minute. It’s not pleasant doing it, but you do it anyway. Businesses think the same way.

What’s strange then is why those same economists have now reversed themselves. Just three of the original twenty economists are thought to stand by their original view. The Daily Telegraph will this week print opinion pieces from a range of other economists all calling upon the Chancellor to reverse course, slow down the fiscal tightening. Spend more, tax less.

Some of the specific ideas have real merit. Britain has an acute shortage of good affordable housing. Plenty of people would seek to buy a house if suitable properties were available at a vaguely sane price. Yet, as things stand, planning restrictions artificially restrict supply while the construction industry is staggering under its post-Olympic hangover. In principle, therefore, you could release demand and reignite an industry by changing planning laws so as to enable the provision of new homes.

Another good idea is widespread tax reform. The British tax system is too complicated and tax rates are too high. Simpler, broader taxes would allow tax rates to be lowered without any overall loss of revenue. The economy would surely benefit from such a reform. There would also be a huge boost to fairness, as the super-wealthy would find themselves having to pay tax instead of dodging it.

Bad plan: Certain other plans for spending cuts are just bananas, such as cutting stamp duty. Britain has long suffered from a huge property bubble, which is at its worst in London
So some of the ideas floating around at the moment are entirely valid. Some of the reforms mooted are obvious and overdue. But certain other ideas are just bananas. Cut stamp duty? Really? Britain has long suffered from a huge property bubble, which is at its worst in London.

A valid alternative? Alistair Darling wants new investment in power stations, airports and railways

Stamp duty is a tax that’s hard to evade and which keeps some kind of lid on prices. Abolishing the tax will just encourage prices upwards: a disastrous step backwards to the bubble economy of 1997-2008.

And higher prices will of course make it even harder for ordinary people to own their own homes, which should be a perfectly reasonable aspiration for working families in a twenty-first century democracy.

Other ideas are more marginal. Alistair Darling wants new investment in power stations, airports and railways.

He’s right, of course, that Britain’s infrastructure does look ragged compared with that of our European competitors. New investment makes good sense, in principle. But why should we expect the government to fund that investment? If there’s a market demand for new airport capacity, the private sector should be able to fund it. If planning restrictions get in the way, Osborne needs to look at the planning laws – he shouldn’t just pull his chequebook out. Same with the railways. Same with power. Those services need to exist, but they need to be funded by the people who use them. Any other approach is a reversion to the jam-today, pay-tomorrow culture of the previous decade.

This debate is going to rumble away for some time to come. Osborne will face a thousand calls from a thousand directions to reverse course, to back off, to ease the pain. But before you join that chorus, please just remember the position we’re in. According to the IMF’s data, the British government will this year borrow 8% of GDP. That’s £124 billion. Of every £1 that the government spends, about 18p is borrowed money. That’s plainly unsustainable.  If you look at all debt in the economy – household, government, corporate, banking – then our debt to GDP ratio is a terrifying 500%.

Those numbers were produced in April. Since then, the economy has deteriorated, the outlook darkened. That doesn’t make is less needful to get the finances in order, but more needful. This entire crisis – from the collapse of Northern Rock to the travails of the Eurozone – arose because of too much debt. Too much stupid debt. Urging George Osborne to borrow more for longer is like telling an alcoholic to use cider as a way to get through his whisky withdrawal pangs.

For the same reason, it’s sheer madness for the Bank of England to cast around for new ways to loosen policy. The IMF’s commodity price index has almost doubled from its early-2009 lows. London house prices are crazy. The financial markets are also at unsupportable levels. These things are certain harbingers of inflation – and sure enough, last month, the RPI inflation index rose again, to 3.2% and it won’t stop there.

You would think these things would act like a cold shower on policy-makers. That they would remind them of basic truths: that debt is bad, that fiscal responsibility matters, that money-printing is destructive. Instead, though, it sometimes seems that those in charge of policy will do anything but face the facts. There’s talk about changing the way inflation is calculated – the classic government dodge: if the facts don’t change, fiddle the numbers. Meanwhile, the IMF wants the Bank of England to cut the base rate from 0.5% to 0.0%, as though current rates aren’t already absurd. The lunatics are trying to take over the asylum.

But personally, I think George Osborne understands all this. He’s not a dummy. He gets that you can’t cut expenditure without causing pain. He understands that too many people are still hooked on the Ponzi-ish belief that we can enjoy things today and pay for them tomorrow. Over the next few years, George Osborne might not be Mr Popular. He may yet prove to be Mr Right.

Solution? Business secretary Vince Cable has said he wants to nationalise the 18pc of RBS that isn’t already owned by the taxpayer

Vince Cable wants to nationalise RBS. You can see his logic. The taxpayer owns 82% of the firm already. Nationalisation is hardly such a radical idea; it’s more the logical completion of a process.

It’s true that full nationalisation was never the advertised outcome. We were promised that these part-nationalised banks would be rapidly strengthened and restored to full private ownership.There were even muttered suggestions that the government could end up making a profit on its stake.

But it would be daft to make policy on the basis on what bankers and governments choose to tell us. In 2007, the US Treasury Secretary, Hank Paulson, told the world that he didn’t see the subprime mortgage market as ‘imposing a serious problem. I think it’s going to it’s going to be largely contained.’ Sure, Hank. We know how that prediction worked out.

That same year, the head of financial insurance giant AIG’s financial products division said ‘it is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of these [credit default swap] transactions.’ He was almost right – he was off target by just $183 billion, the amount the US government ended up spending on AIG’s bailout.

It’s the same in Europe. Greece has missed 210 of 300 economic targets given it during the course of its extended bailout misery. More recently, the Spanish government of Mariano Rajoy promised financial markets that it would meet its deficit targets and that a bailout was out of the question… until of course it missed those targets and the only bailout question remaining is how many hundreds of billions of euros are required. It was much the same thing in Ireland and Portugal. It will be much the same in Italy too.

So let’s set intentions and promises to one side and look at the facts. First of all, it’s clear that RBS is not about to return to the private sector. The company has just made a six-monthly loss of £1.5 billion. Its computer systems are clearly dysfunctional. It seems certain to get hit with major fines for its role in the LIBOR fixing scandal. The bank’s core business of lending to British companies is gummed up and directionless. The bank’s size makes proper management difficult and restricts competition both on the high street and in business lending.

Struggling: RBS has been dogged by technical problems and poor management, running up a £1.5bn first half loss

And if private ownership remains a pipe-dream, the current arrangement seems like the worst of all worlds. The principal shareholders (you and me) can’t take effective operating decisions because of the private minority. Meanwhile the entire country suffers from a failing banking system. So nationalisation is the first part of the answer – and Vince Cable is brave and right to suggest it.

But nationalisation is only the first step of a long and difficult journey. The next step – the tough one – involves utter honesty about the balance sheet. European sovereign bonds need to be valued at their actual market value. That’ll imply huge losses. Loans backed by British real estate also need to be fiercely written down. Outside a developing property bubble in London and surrounding areas, UK property prices are nosing down. That’s not surprising. In a world where real wages are decreasing, and after a decade long property bubble, prices have nowhere to go but down. That means RBS’s property book is softer than a baby’s bottom.

So government auditors need to bring reality to these accounts. No soft-soaping for the stockmarket. No desperate excuses about ‘trading out of trouble’. (You can’t trade out of trouble if you make losses of £1.5 billion in half a year. That’s trading into trouble, right?)

My own suspicion is that if RBS’s assets were properly valued, it would not be solvent. (I don’t think RBS is alone there, by the way. I think most European banks are insolvent: a belief that others, including the head of Deutsche Bank, share with me.) The traditional government response to financial distress is to pour your money into the stricken institution. It’s what Gordon Brown did like crazy in 2008-09. It’s what countless other governments did too.

And it’s the wrong way. Funnily enough, capitalism already has a solution to insolvency, and it’s called bankruptcy. Bankruptcy is a wonderful thing. In most cases, bankruptcy doesn’t mean the death of a company. If a company is a going concern – that is, if its core business is fundamentally OK, just encumbered by too much debt and too much bad management – bankruptcy is the place to clean it up. Shareholders lose their money (but it’s already lost anyway). Creditors lose a slice of theirs (and it’s already gone too, just slowly and painfully.)

But that’s good. Those losses are good. They’re good for two reasons. One, if creditors make bad loans, they need a reminder to do their due diligence. That’s the only way to avoid the same mistakes in the future. Secondly, as creditors take their losses, RBS can emerge from the ashes with a strong balance sheet, and a sense of confidence. It can start to invest again: in computer systems, in business lending, in all that bread and butter stuff that the firm has neglected so long.

Bankruptcy would help for a third reason too. RBS is too big, too bloated. It needs to be broken up into smaller, nimbler firms that can reintroduce competition to our dysfunctional industry. That can’t be done with a firm that’s already struggling for financial solvency. It needs to be done on the back of a new, strong balance sheet. And it needs to be done without taxpayers contributing a single penny more to the process. We’ve done enough already. It’s time for a new start. It’s over to you, Vince.

Mitch Feierstein is CEO of Glacier Environmental Fund and author of Planet Ponzi: How Politicians and Bankers Stole Your Future