First a disclaimer: Like you, most likely, I am an economic sucker, not an economic suckerer (definition: one who suckers others).
But in this era of derivatives, credit default swaps and other opaque mumbo-jumbo, my credentials actually aren’t that bad: I am not a crook; I’m reading “The Big Short,” by Michael Lewis; I saw the movie Inside Job; and … I went to the bank yesterday.
There, at Citizens Bank of Lexington, Mass., I learned that my money market account, with a reasonable five-figure sum invested, now earns the utterly absurd interest of .1 percent a year. That’s right, $1 per year for ever $1,000 invested. When I opened the account, about five years ago, shortly before the crash of ’07, I was earning about $40 for the same $1,000.
Stop and think about it, and you’ll recognize why: The Federal Reserve Bank, in an effort to stimulate job growth and housing sales, continues to keep interest rates near zero. After squeezing out its 1 or 2 percent profit, the banks give the consumer virtually zilch.
But that doesn’t explain the real why. Why the unemployment rate is stuck at about 9 percent. Why housing sales and prices remain anemic. Why the economy can’t seem to get a proper foothold.
That demands a more macro view than my piddling interest rate provides.
In the Big Short, Michael Lewis makes the collapse of the housing market crystal clear. In acts of what I would call criminal negligence, Big Banks were extending insane mortgages to people who had no chance of paying them off, creating a massive bubble that simply had to burst. Lewis gives the example of one migrant worker earning $14,000 a year who was given “every penny he needed to buy a house of $724,000.”
Banks would then bundle sure-to-fail mortgage loans like these and sell them on Wall Street with the blessing of rating agencies like Moody’s that somehow didn’t recognize that the whole package of mortgages was next to worthless.
Today the country is wading through a several year backlog of foreclosures and the housing market is going nowhere. It’s not surprising.
This corrupt system is also why all of us ended up backstopping federal bailouts of the “too-big-to-fail” insurer AIG. And it may be why stocks take another swoon should the Greek government default on its big debt.
The connection here has to do with the to-this-day unregulated practice of some big-time investors seeing through the charade and betting on failure — of the housing market and, perhaps, of the Greek government. As banks continue to play fast and loose with money, these other investors are making relatively modest investments (presumably in the millions) in the hope of getting payoffs in the billions or tens of billions. Such transactions are not only regulated. They’re arrived at out of sight and, for most of us, out of mind. No one who might be in a position to regulate knows who has bought and sold what.
If you don’t believe this sucker, listen to Louise Story, financial writer for The New York Times. Yesterday, she wrote:
It’s the $616 billion question: Does the euro crisis have a hidden AIG?
No one seems to be sre, in large part because the world of derivatives is so murky. But the possibility that some company out there may have insured billions of dollars of European debt has added a new tension to the sovereign default debate.
So why should you and I care? For one thing, worry already has stopped the stock market in its tracks — and with it everyone’s 401K retirement portfolios. For another, if there were another AIG, markets would crash again, the financial system would teeter and you can be sure that the honest taxpayer would once again take the hit for the all the shysters whose lobbyists line the pockets of politicians. The honest, in short, would once again pay for the white collar crooks who never get prosecuted.
In a sense, we are paying right now. Because the very fear of huge payouts to those betting on failure has the world’s democracies scrambling to prop up Greece no matter what. It didn’t used to be that way either.
In years past, when financial crises in Argentina and Russia left those countries unable to make good on their government debts, they simply defaulted. But this time around, swaps and other sorts of contracts have become so common and so intertwined in the financial markets hat there are fears among speculators and financial players about how a Greek default would play out….
Maybe we should all bet against the system. Or maybe, as a common sucker, I should find a bank that pays the princely sum of 1 percent instead of .1 percent so that my retirement nest egg, with inflation taken into account, erodes at a slightly slower rate.