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What Would Happen if Goldman Sachs Disappeared?

As Europe grinds out yet another doomed banking system rescue plan, it might be helpful to examine the underlying assumption, which is that we need these big banks.

Do we really? If Goldman Sachs, JP Morgan Chase, Deutsche Bank, Crédit Lyonnais and five or six of their peers ceased to exist tonight, what would happen? Would their absence change the number of factories, hospitals, farms, biotech research labs, oil wells, or gold mines? Would there be fewer houses or cars? Would computers get slower or TVs lower-def? No. The world of tomorrow morning would have exactly the same amount of real wealth and productive capacity as it does today. The main thing it wouldn’t have is a lot of arcane financial instruments that don’t produce anything edible, and a hundred thousand or so bankers making inordinate amounts of money moving this paper around. To the extent that those bankers would have to take jobs making real things, the post-Goldman world would arguably be richer and more productive.

The big banks’ disappearance might, admittedly, leave some ripples in the pond. Interest rates might rise and stock prices fall as countries like the US and Japan have to suddenly live within their means. Military budgets, public services and pensions would shrink dramatically. But there would be compensations. Where today’s low interest rate regime is devastating to retirees living on the proceeds of bank CDs and Treasury bonds, higher interest rates would give them back their personal incomes, probably more than offsetting lower Social Security and Medicare benefits. For young families, falling real estate prices (also due to higher interest rates) would bring starter homes within closer reach. And all those soldiers now occupying foreign countries, or training to, would be freed up to take real jobs alongside the ex-bankers.

People who have leveraged themselves to the hilt to buy various assets would have to sell, of course, but savers — especially those with a lot of precious metals — would snap up those assets and put them to productive use. Apple and Warren Buffett’s Berkshire Hathaway between them have over $100 billion of ready cash, which they’ll use to acquire and deploy cheap assets. Community banks that focus on mortgages, business loans, and customer service(!) will thrive as depositors abandon Bank of America for local institutions. Farmers markets and local farms will grow to replace a disrupted global agribusiness supply chain. Freed from all those financial sector campaign contributions, politics might even get a little cleaner.

Viewed this way, the process looks a lot less threatening, and might even be a path to the kind of world most rational people would prefer. So relax, let the big banks go, and let’s see what happens.

32 thoughts on "What Would Happen if Goldman Sachs Disappeared?"

  1. What did that guy on the moon say? Oh yeah…”That’s one small step for man, one giant leap for mankind.”

  2. “And all those soldiers now occupying foreign countries, or training to, would be freed up to take real jobs alongside the ex-bankers.”

    What exactly do you mean by real jobs? Doing what? Making what? Even if we eliminated outsourcing completely, and did all our manufacturing locally, there are not enough manufacturing jobs to occupy more than a small percent of the population.

    “Viewed this way, the process looks a lot less threatening, and might even be a path to the kind of world most rational people would prefer.”

    You have just given us a scenario of an ideal world without big banks, not a process or path to reach that world. Jason Emery and Jordan Dimov nailed it: there is no path from here to there.

  3. Congress get blackmailed into TARP with threats of depression. I think most of us believed that the world was on the verge of depression. It is strange that no strong action was taken to ensure the banks will not create a bigger problem in the future. It is strange that Glass-Stegall act was not reinstated and CDOs and CDSs are not disallowed. In Europe, the bankers are again using depression as a threat to Euro leaders to give away trillions of Euros to bail out bankrupt countries. I can understand that solving the problem would bring about a serious recession. But not solving the problem will result in a depression far worse than the last one. It was a combination of Reagan and Greepspan that had brought the world on this path of economic destruction – deficits and money printing. By sheer luck, this system had survived for so long is because of deregulation, tech boom, rise of China and finally the housing boom. The printed money was used productively and generated good returns to support asset accumulation and appreciation. Inflation figures, although manipulated, were manageable due to globalisation. So interest rates were kept low and this fueled dramatic asset inflation which benefitted the special class – the rich. We have now reach a point where more money printing will result in inflation as the money cannot find any huge industry for it to be productively used. In fact alot had made its way back to buying government bonds. More QE will result in higher oil and food prices.

    Another point I want to make is that the elites are overpaid. Overpaid people are self serving and will do anything to safeguard their jobs like dancing until the music stops. After the next depression, we might go back to the old days when budgets are balanced, the rich are taxed more, elites are paid enough and not insanely, institutions act responsibly, bank deposits are protected by Glass-Stegall Act. History repeats itself. Hopefully, there is another Franklin Roosevelt who understand how destructive bankers can be and stand up to them.

  4. This is the way it was when I grew up. We shopped at locally owned food stores, we bought clothes at locally owned stores, there were farmers markets, the banks had to stay within their own state, there were regional investment banks to let local and regional companies access capital, etc. Each one of these local companies had to have their own finance departments, marketing heads, operation heads, etc. There were more middle class jobs. Big companies had the big banks in NY and local companies had the banks in their municipality or state. Things worked better. Life was better. I’m 56 this wasn’t that long ago. The problem is centralization and consolodation in almost every industry that allowed the takeover through finance by Wall Street. We would be better off it could be like this again.

  5. Agree Carter but o nut job will get re elected. MSM, banks, and is wroking on apying everyone else off. Reset will occur but under the 2 nd term of o nut case.

  6. Draken,

    I don’t think there can be an organized default en masse. However, there is a reason the Bible mentions a regular year of jubilee at 7 years and 50 years. The debt overhang in our debt-based, fiat system now overwhelms the average man’s ability to “pay your own GD loans.” An involuntary year of jubilee will occur in the not-to-distant future and wipe away much of the non-productive financial activity, God willing. This may well bring down GS. A global reset such as this would lead to a depression. However, with much of the debt washed away, a real recovery could occur as creative destruction runs its course. I don’t think the political will shall exist to bail out banks yet again once Obama is gone.

  7. Your arguments are sound, but you’re not making a point. I agree with most of what you’re saying. Removing these institutions with a magic wand will not disrupt the grand scheme of things to any significant effect. In fact, many people will probably find it pleasing, and it might even have certain positive effects on the economy overall.

    However, this sort of wishful thinking is not going to have much of an effect either. Goldman Sachs quite literally OWNS a good percentage of this world. They’re not going anywhere anytime soon.

    As long as there are financially illiterate people who don’t know or don’t care what happens to their money, the Goldman Sachses of this world will thrive and prosper. Which is to say, virtually forever. And I take my hat off to them for their smarts.

  8. If those banks fail in a disorderly fashion then:
    =>the governements will not be able to pay the deposits (too big to bailout) and people will lose all their money;
    =>all companies with a bank account (mainly small to medium) on those banks will lose all.
    =>by infection process (not knowing which bank is the next) as in 2008, no bank will lend to other bank and the financial system will collapse as a domino.
    =>Nobody will be able to get cash, pay bills, get private or buisness credit, pay customers and get paid by clients during many weeks and thus, there will be a major liquidity squeeze causing massive bankruptcy of business and people. For people this will be a difficult time if you did not store food.

    The key here is to make them fail in a orderly way, by dismantling them as they are to big to bailout.

  9. Draken Korin – “who’s fault is it?”

    I don’t believe you will find my signature on your loan application. Pay your own GD loans and bills.


  10. As a former finance profession­al, I tell you YES, the system is predatory, rigged against the middle and working classes, and the time is now to collapse it.

    Wide-scale DEBTORS’ REVOLT — DEFAULT-EN­-MASSE is the answer, or at least part of it.

    The fact remains that the black hole of debt will destroy the working and middle classes. These “contracts­” are not inviolable things; they were made during a *different era*, a *different economy*, and the ability to pay them back has evaporated­. Therefore, cancel student and other types of predatory debt, or the revolt en-masse will occur, and soon.

    The momentum grows. Join us. Walk away from your debt instruments and help speed up the desirable collapse of the predatory banking system. Rebuild from there, under fair rules – responsible capitalism that recognizes the need for a economically strong workforce and middle class.

    DEBTORS’ REVOLT – DEFAULT EN MASSE. The critical mass is closer than you think.

    …And to the folks who will immediatel­y answer with “pay what you owe. end of story!”, let me just preempt by answering that the analysis is more structural and macro in scope than that. It’s not just a matter of whose “fault” it is – regardless of that, it’s become a macroscale systemic distortion that, if allowed to continue, will prevent any sort of mobility in the long term. We, as a nation, need to simply suck it up, recognize that these contracts were made in what is essentiall­y a different economic era, and recognize that they are incompatib­le with the new situation. It has to simply be zeroed.

    And yes, it will cause widespread systemic collapse, but this will be temporary, we will adjust and rebuild, and will have cleansed out the massive DISTORTIONS that currently plague the system.

    DEBTORS’ REVOLT — DEFAULT EN MASSE. The critical mass approaches.

  11. I see a repeat of 2008 but this time the damage is worse. Derivatives and SIV caused the near death of the financial system. The bankers used some academics to show that derivatives had made the financial system more stable but in 2008, they were proven wrong. This coming disaster will be brought about by the bond market as bonds are considered risk free which means that you can borrow to infinity and make vast amount of money. At the same time you can insure against the default (CDS) on bonds by paying 0.5% of the insured amount as bonds are considered risk free just like CDOs before 2008. When are the authorities going to stop pretending they are unaware of these complicated products. They are gambling products with taxpayers being the suckers.

    1. Good analysis, Chris. Jason Hommell and others have covered this ground many times, but it bears repeating. In a pure fiat system, such as the present one, a bond is an absurd construction. The originator of the bond promises to pay the purchaser of the bond some fiat money (plus interest) at a specific point in the future.

      So a bond is a piece of paper that entitles the holder the right to acquire another form of paper at a future date. What are the risks?
      1.The issuer of the bond decides not to pay, or can’t pay.
      2. The counter party to your bond insurance (if any) can’t pay.
      3.The currency in which the bond is denominated loses value.
      4. Governments confiscate your interest receipts via high taxes.

  12. I appreciate the question, but it is a bit both self-evident and rhetorical at the same time. Kind of like asking ‘what if they did away with war, found abundant new sources of food, everybody respected others and themselves, etc.’. Well, just like the GS question, it is quite obvious that he world would be a better place.

    My question in this area is: ‘what is the least disruptive way to get from here to a society along the lines of the one envisioned by the founding fathers of the USA?’ Sorry, but I don’t see an easy path. Either L. V. Mises is clueless, or there is some hell to pay.

    So, to answer your question, I would guess that the chain of events that would topple GS will feature economic ruin, not prosperity. But sticking with these crony capitalists will lead to economic ruin as well, so I guess you could say I’m a pessimist.

  13. The longer they
    Are allowed to keep doing business. The less faith I have in the US system. Bad compines fail, that is their punishment. When the goverment steps in to save them from their own undoing. That is colusion. That is corupption, that is the death of librty based on a moral code. That is the death of freedom. So here we are at deaths doorstep. What are americians going to do? That is the question.

  14. What Would Happen if Goldman Sachs Disappeared?

    Happiness and Joy would return to earth again. The birds would sing triumphantly, the sun would come out and stay out forever with nary a cloudy sky ever to be seen again. Children would return to the playgrounds once more joyfully confident in the knowledge that EVIL no longer lurks in the sidewings waiting to pounce upon them. Justice would return too, along with Accountability and Rule of Law. The oceans would automatically purify themselves and global warming would cease instantaneously.

    That’s why I propose we tie Lloyd Blankfein to the hood of a SUV and BEAT THE SHYT OUT OF HIM like they did with Kadhafi! And if there’s room left on the hood for OBAMA … we should bludgeon HIM to death TOO!

  15. By all means, let the insolvent banks go down, but if the Fed continues to control the money, new, equally evil banks will sprout up in their stead.

    We have a three-headed monster that’s sucking the world dry. The three heads are the Federal Reserve, the TBTF banks, and the Treasury.

    As long as “the big three” work in collusion, we won’t have true liberty, because the people won’t control the money system. So, even if some of the big banks disappear, we’re still stuck.

    1. Well, that’s only true if no other boundary conditions change. If, on the other hand, a critical mass of the only population on earth that is truly sovereign over its government according to its highest law, will begin to enforce the ‘disabilities’ and strictures contained in the U.S. Constitution — in other words, enforce the Tenth Amendment and Sections 8 and 10 of Article I of the Constitution (only gold and silver are lawful U.S. money, and ONLY Congress can coin the same) — then all bets are off.

      Will there be a ‘reset cycle’ wiping out probably 80% of today’s banks? Yes, if ‘fractional reserve lending’ is simultaneously outlawed (the other half of restoration, according to the Austrian School economists, who are spot-on correct). As John suggests in this monograph, a huge cadre of paper speculators will be out of work until they learn to actually produce something of intrinsic value; or they can stay in paper-trading, but no longer dealing with U.S.-based banks and securities outfits.

      Functional fascism is simply running its course, as are a dozen flavors of Marxism, all now clearly bankrupt. The Information Revolution will now pit the force-massing power of individuals in thematic (or policy) phalanx, aqginst politicians and the mercantilists that have owned them since time-out-of-mind.

      In the Chinese-proverb sense, we are headed for interesting times; but those of us who produce and own things of actual worth, have nothing to fear.

  16. I don’t know enough about it.

    But what about the companies that rely on these banks to pay their employees wages ?

    I just think banks should be separated into trading banks that provide day to day banking and merchant banks that do these big deals etc etc.

  17. Governments need banks to debt-finance their spending programs and wars. Not just any banks. A small cartel with a cozy quid pro quo relationship is necessary. In return banks get guaranteed profits, bails outs when speculations go wrong, and strict regulations that stifle competition so others don’t try to ascend to the ranks of elite institutions.

    Fascist regimes like the US and European states require cartelization, a small number of coddled but regimented players in all major industries and workers in tidy unions with lots of rules. Society and industry are socialized so they can be called upon to serve the nationalist agenda when needed.

    In the US, our nationalist agenda is American exceptionalism, our willingness to sacrifice to force the world into our mold of freedom and democracy. We cartelize large industries that are more easily regulated and unionized. We have three major cellphone carriers, three car companies, etc. We form public/private partnerships that demolish smaller competitors.

    Governments have no interest in living within their means. They will keep the banks alive as long as possible to warehouse their debt with help from the central bank. Yes, it is all coming unraveled now, but there’s no quit in these fascists.

  18. Paulson couldn’t convince the US Senate otherwise behind closed doors in 2008. He could only get a fully larded bill through, whereas no-one would have dared lard 9/11 or Pearl Harbor or anything else real.

    We _do_ need a payments / clearing system and the basic accounts behind them. Otherwise, credit and debit cards stop working. But I presume the FDIC has contingency plans.

  19. Certain banks may be allowed to fail, rather be sacrificed in the interest of maintaining a proper impression of fair treatment for all incumbents. However, the banking industry will continue to maintan its trajectory of influence over political policy, power and wealth – it’s the only way for America to remain a directing influence of world affairs in the long term given that America is the largest debtor and the effectiveness of military dominance and might has been shown to be much less influential in directing world affairs, except among the very weak nations. If securing and maintaining that financial influence results in the failure of certain country economies, or the effective enslavement of some populations, or sacrifing the environment or environmental assets, that would be considered and communicated as an acceptible cost for the benefit of defending American interests in the world.

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