The Day of Reckoning for the West
When TBTF Meets TBTK
by Gary North
You probably know what TBTF stands for: too big to fail. We need a comparable acronym: TBTK. It stands for too big to kick, as in “kick the can.”
“Too big to fail” is such a common phrase these days that HBO chose it as the title for a movie on the big bank bailout of 2008. The context of TBTF is correct: the largest banks, all over the world.
FOLLOW THE MONEY
The famous phrase, “follow the money,” became famous because of All the President’s Men, the movie about the investigation of Watergate. No one knows where it came from. The book’s two authors don’t recall. The screenwriter is not sure. But it has become part of the American language.
When you want to discover who is making the decisions, follow the money. This applies in two ways to banking, which is the source of money, but in a banking crisis, becomes the recipient of money. No other industry enjoys the privilege of being at both ends of the flow of money in good times and bad.
So, let us follow the money.
More than any other industry, large banking has the guarantee of high profitability and success. The bankers know that the government will not allow their banks to fail. So, they can take enormous risks based on the discrepancy between short-term rates (at which they borrow) and long-term rates (at which they lend).
When the spread reverses, which it always does at some point, driving up short-term rates and driving down long-term rates, the result is a recession. If a very large bank faces bankruptcy, the central bank intervenes and lends to it at low rates until the old yield curve (spread) returns: low short rates and high long rates. If central bank intervention is not sufficient, then the government intervenes and uses tax revenues to offer more bailout money to the biggest banks.