Definition of Casino capitalism:
The kind of high-risk- high-reward behaviour indulged in by former high street bankers and many others which helped lead to the ongoing economic crisis
This week the government announced that they planned to issue “Social impact” bonds to pay for mental health care. While they present this as a way to be able to afford mental healthcare what will happen is something entirely different which I wrote about in this post. What I didn’t discus was what happens to the bonds after they have been issued.
What not many people understand is what happens with bonds (Social or otherwise) after they have been issued and received by the buyers and this is arguable the most serious part of why it is so wrong to privatize mental health care through the issuance of bonds.
First of all you have to understand that the entities who will be buying the bonds will be huge international financial institutions. Big banks (JP Morgan opened a bank here a year before John Key was elected), Big hedge funds, Big international operating individuals such as Soros and his ilk.
They do this not because they want people to have mental healthcare but because to them, bonds are the starting point of a very lucrative monetization process.
If you read my previous post you will remember that these bonds will only yield a profit if there are positive results i.e. if the “service” “helps” mentally disabled people back to work and out of disability benefits. This is of course a recipe for disaster for the patients, the people hiring them if there are jobs available at all and the investors if the results turn out not to be so positive.
So why issue bonds at all and not stay with the tried and tested public service? How can these bonds ever become lucrative?
Let’s revisit a relatively recent set of events in the financial world. in 2007- 2008 a series of insurance companies and banking institutions either collapsed completely or had to be bailed out to the tune of $ 700 billion (It was actually way more but that is the official figure) and the entire financial world lost trillions of dollars almost overnight after it became clear that big investment banks had been playing fast and loose with criteria on which to issue mortgages. The crisis came to a head when people started to lose homes as the economy started to tank and it turned out that banks had been giving mortgages to millions of people not based on sound assessment of their economic situation but on the bases of what they could do with the mortgage contracts after they issued them.
You see, mortgages like bonds represent real value (Unlike the fiat money banks print out of thin air). They represent in the case of the mortgages the real word value of the property people bought with the loan and their willingness to work very hard to hold on to that property and repay the debt plus interest. Bonds represent value because they are guaranteed in one form or another by our government to be paid back out of our tax dollars.
What all these big investors do is bundle these mortgages or bonds and resell the right to receive the earnings over these products. They are being sold to institutions who are looking for long term safe investments such as pension funds and national saving funds such as Kiwi saver (Which is why they stopped incentivising people and working towards making in compulsory). They are also being used as a basis for another layer of monetisation, namely the derivatives or hedging trade.
So in order for a bank to be reimbursed if mortgages or bonds don’t pay out as much as they hoped they would or if the investments go bankrupt or fail otherwise banks and other big institutions will earn big dollars when they cash in the hedges/bets they made against them. In fact often they make more money if these investments go belly up and in many instances banks have been known to bet against their own investments and those they sold to their clients to actually destroy them in order to cash in.
One such case was Goldman Sachs betting against the entire Greek economy and succeeding in bringing it down to the detriment of the Greek people.
Now let’s get back to the Social bonds our government wants to issue. Here is what will happen. Big international institutions will buy the bonds and they will bundle them up and sell tranches of the expected profit to pension funds all around the world. They will hedge their own and their clients risks and they will start playing Casino with all that wonderful loot derived off that first investment into our vulnerable mental health patients. Whether they receive care or not is not important to those investors, in fact if the whole sector goes bankrupt it might mean they are making out like bandits. They will make money on the way up and on the way down while mentally ill people will be forced into non-existent jobs by callous assessment agencies while the fat cats who bought the bonds will be laughing all the way to their own bank, making money off misery and money off the money they make off the misery of people who need help and care.