Endagering the rest of US

Lately I've been reading a book that came out earlier in the year called "Wreckless Endangerment" (Morgenson and Rosner) that was released earlier this year.  The book is a detailed account of how America managed to incur the largest economic crisis since the great depression.  Starting with the Community Reinvestment Act (CRA) during the Carter years through George W. Bush's home ownership initiative and beyond the tome lays out in specific detail how our system failed.  The book details the growth of an industry that, under the auspices of providing "painless" housing to the lower and middle classes managed to suck resources of the middle class dry until the entire system imploded upon itself.  Make no mistake, we all participated in one form or another in what would become our biggest crisis in my lifetime, so far.  If their were only a way to translate this book into common parlance.  The crux of the message this book offers is a scathing argument against corporate corruption and political corporate cronyism that, in hindsight, is obvious from both sides of the political isle.  I have heard it said that no one has been prosecuted at the highest levels of these organizations because while there was much morally or ethically wrong with what was being done, there was nothing legally wrong with the process in place.  I can't understand how it can be legal for an organization the size of Countrywide, the largest mortgage company in the country at the time (now defunct) to package mortgages that were clearly non-compliant and then forward them to Fannie Mae, who would presumably have systems in place to check for compliance, but then maintain the loans or allow them to be packaged and sold to investors as AAA investments.  Even describing the process, however, one senses the ambiguity that affords legal protection.  The lesson is that the corporate world and the public world have become so homogenized and are playing the game together - to their own self interest.  This is a very informative, ultimately frustrating read.  In the end the question remains:  What do we do about this system? 

 

What's wrong with the Banks?

Capitalism combined with our American representative democracy has provided a social system that facilitates the wealthiest economic system in the history of the world.  So what is going on with our banking system?  Should we regulate it?  Should we bail it out?  The banking system is in place to act as a savings (thrift) and distribution point for capital and to the economy.  One of the confusing things about this is that when the Glass Steagall act was repealed back in the 90's it meant that banks could begin to deal in equity markets in order to gather a return on the deposits which they held.  So, here is how it works.  The bank invests money that you or I deposit OR money that they "borrow" from the federal reserve at interest rates significantly less than you or I could borrow - they also have access to lots more money from other banks and the federal reserve that you or I could not acquire. 

Our concern with the banks should be limited to what they are doing with private funds acquired from the government and how they meddle in the equity/commoditities markets.  Many banks are "trading on their own account", meaning that instead of trading equities (stocks/commodities/bonds) on money from their investors or depositors, they are borrowing money from the government, using it for operations and then investing what they call their "own money" in the equity markets.  Because they have access to so much money for so little cost, they will often continue to pour "good money after bad" until the market turns around.  Let me give you a sort of example.  Let's say that I am in Vegas playing the 25 cent slots.  And I know that my slot machine will pay at least 1 - $1,000,000 pay out every year.  If I had $50,000 to spend, a lot of money for some of us - I could spend the first 138 days of the year (a little over 4 months) trying to win that million dollar pot.  If I could get $221,400 in cash available what would I do?  I would borrow $221,400.  Why?  Because then I could hire my "investment advisors" who would sit at the slots doing two things, retaining my "position" at the guaranteed payout and placing my "bets".  I would pay 3  individuals (8 hr shifts) $30,000 ($90,000) to make the investments each day.  At a rate of 25 cents per minute it would cost me no more than $131,400 each year to retain my position at the slot and make the investment.  It could be even less because, their is nothing that says that my investors have to put a quarter in every minute.  I simply know that the slot will pay out at least 1 time per year.  When the time comes that the slot pays out I pay back my investment of  $221,400 and my profit becomes $778,600. (1 million minus $221,400)  I can take the rest of the year off or start the process all over again.  If I had unlimited amounts of cash available I could play the slots even if I didn't didn't have a guaranteed payout - so long as statistically the slots I were playing were strong bets.  If on the off chance I was statistically incorrect - the government to would bail me out - then guess what - I have no reason not to play and every reason to play.  This is where we find ourselves now.      

This is understating the complexity to be sure.  But the fact remains that big banks have access to unbelievable amounts of capital and they aren't using all of that capital to finance big and small business.  Some of it is being to bet on the equities markets and sometimes, when they find themselves in a losing position, they will simply hold that position until the down cycle reverses.  Worse yet they will sometimes flush massive amounts of capital into the position persuading the market to buy - at which point - they begin to sell their position to get out.  The unfair advantage here is that unlike a typical investor - the banks have enough capital to continue to fund a bad postion until it is good or influence the market itself.  This isn't right.  It gives the banks an unfair advantage over the standard investor that should not be allowed.

At the same time, part of what banks offer is a valuable service to the market.  And many individuals within our banking institutions are providing necessary and vital services to our economy.  It is a very dangerous thing when the government comes in, even if it is providing capital, and mandates what a banker should or should not be paid.  It is even more significant when the government takes away or taxes away a bonus that an individual banker has contractually agreed.  If the governement will nullify that THAT contract, they will usurp the power to nullify any contract deemed not in "the people's" best interest.  This issue relates to a point of law and contracts which, given the power, the government would just as soon do away with.  May it never be.

This is a good read on the matter:  Liar's Poker