Antecedent of the Bank Bailout: The Hunt Brothers

The current $700 billion subsidy to poorly run banks, insurance companies and Wall Street firms is not the first of its kind. Economists call incentives that encourage perverse behavior "moral hazard". As incompetent and reckless lending practices are subsidized, they generate even greater incompetence and more reckless lending practices.

America's financial system, led by the Federal Reserve Bank, is broken. The past year's inflation of 5.4% is inexcusably high. This inflation is the penalty that Americans pay for allowing the Federal Reserve Bank to create monetary credit which it has deposited in the hands of commercial banks, hedge fund managers and Wall Street investment bankers.

The late 1970s saw similar kinds of failures that were also met with bailouts, although of a smaller scale. In other words, the financial system has been sucking wealth out of the productive economy for decades, and Americans have naively applauded this process.

In the late 1970s the Hunt brothers attempted to corner the silver market. In 1979 Jimmy Carter implemented credit controls that precipitated a considerable recession, a recession that also reflected rising interest rates needed to quell high inflation that was approaching 20% per year for a couple of months. The Hunt brothers had been borrowing large sums from a number of banks, who as in the real estate bubble of the past few years, were recklessly lending the money to them. The Hunts drove the price of silver from below $5 per ounce to over $50 per ounce, then defaulted on the large loans. According to William Greider in his book Secrets of the Temple (p. 190):

"All told, twelve US banks, the American branches of four foreign banks and five brokerage houses had provided the Hunts' silver-buying venture with more than $800 million in loans--equivalent to almost 10 percent of all the bank lending in the country during the previous two months...

"The Federal Reserve's admonitions against speculative lending had been ignored...The new question was whether a further slide in silver prices would bring down any major banks. First National of Chicago, ninth-largest in the country, was most vulnerable, having lent the Hunts a total of $175 million either directly or indirectly. If silver prices fell to as low as $7 an ounce, the value of the collateral held by the banks would be worth less than the loans they had made....

"...the Hunts had bought futures contracts for silver totaling 19 million ounces from Engelhard, the giant international minerals firm...The Hunts lost their bet. Delivery was due on Monday, March 31, and Engelhard was demanding cash for its silver--$665 million.

"If the Hunts defaulted on Monday, the price of silver would fall drastically again and the entire accumulation of speculative bank loans would doubtless crash with it. While $800 million was a lot of money, the dozen major banks and the foreign ones were large enough to survive a loss of that magnitude...

"The neogitations led ultimately to the terms for a private bailout--a new loan of $1.1 billion from thirteen banks which would extinguish the Hunts' old debts, given them the means to settle with Engelard and stretch out their obligations over ten years.

"In the end, with certain provisos, he blessed the transaction--a crucial assurance for the banks. If Volcker had not consented, the major banks would have found it difficult to participate, perhaps impossible. After all, the Fed had just imposed new credit controls on the nation and the new loan package for the Hunts directly violated at least the spirit of that program...

"As details of the silver bailout became public, Volker was grilled again and again at hostile congressional inquiries...Why had the Fed been so blind to what was going on? And why had it rushed to the rescue?"

It would seem that the public rejected Jimmy Carter in part because of this boondoggle. But the Republicans proved just as bad, even worse, with three decades of monetary expansion, subsidies to hedge fund and private equity operators and to Wall Street as well as commercial banking. Now, the public is asked to subsidize the failures of these corrupt institutions to an even greater extent than in the 1970s. Yet, the Democrats have nothing to offer but the same regulatory regime that led to the 1970s inflation, and the Republicans have nothing to offer other than perpetuation of the same inflationist "supply side" Keynesianism. What moral hazards are the new round of bailouts generating? Will Americans choose to become slaves to masters in the financial industry? Will emotional fear of the word (not the reality of) "DEPRESSION" turn Americans into slaves?