Friday, November 26, 2010

Wall Street and Washington

Whenever the politicians create a scapegoat, you can guess one thing. The scapegoat isn't to blame. It's the politicians.

So when the politicians blamed greedy bankers for the mortgage meltdown, you had to know that the bankers were at worst the willing accomplices of the real greedy crooks. And they had to be the politicians.

So when you read about Charles Gasparino's Bought and Paid For: The Unholy Alliance Between Barack Obama and Wall Street you know the real story.

There's only one thing to remember when it comes to figuring out Wall Street. It's the old, old line from Jesse Unruh, once Speaker of the California Assembly. "Money is the mother's milk of politics," he said. Unruh was talking about campaign contributions, but the same applies to government finance, only in spades. If money is the mother's milk of elective politics, then money is the very red blood corpuscles in the blood stream of government. Here's a story that tells it all. I got from The Merchant Bankers by Joseph Weschsberg.

After the Napoleonic Wars, in 1815, the Allies demanded an indemnity of 700,000,000 francs from the defeated French. How on earth would the French come up with that kind of money? Perfectly simple, said French merchant banker Gabriel-Julien Ouvrard. Don't borrow from the rich in France with a compulsory loan. Don't raise taxes. Float a bond issue in London. Everyone thought the guy was crazy. Why would the Goddamns pay for the indemnity? But it worked! Ouvrard got permission from the Duke of Wellington, the general of the Allied occupying army in France. He got merchant bankers Barings and Hope & Co to syndicate the loan and in 1817 the French sold a 350,000,000 franc bond issue in London. So they got Brit investors to cough up the money to pay the indemnity and got to pay back the Brits in installments.

This little story illustrates the reality of government finance. Governments need the bankers more than they need the armed forces, more than they need their supporters. Because it is the bankers, more than anyone, that keep them in business.

If you don't like the idea of Wall Street and Washington in bed together, then make the bed smaller. Cut the size of government. At least you'll know then that neither Wall Street nor government is comfortable.

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