Wednesday, September 2, 2009

Magical money game

Isn't it fascinating how the banks have suddenly turned "profitable" after nearly going bankrupt less than a year ago?

Would that the average human being be able to pull off such an amazing financial turnaround! What, we must now ask ourselves, marks the magical difference between a regular person who, after suffering such a severe financial setback, finds themselves in a perpetual struggle to recover; versus the way the banks have managed to bounce back so handily from the brink of utter disaster?

Perhaps it has something to do with the fact that we've treated our banks in ways they don't treat us. When we screw up it's "our fault." We've borrowed more than we could afford, failed to read the fine print, got too greedy too quickly, didn't plan or save well enough...the list of our human failings goes on and on. These are the harsh judgments our banks render to "punish" us when things turn south in our personal lives. They then jack up our interest rates, slash our lines of credit, demand payment in full for our outstanding debts and repossess our homes - and expect us to somehow pull ourselves back up by our bootstraps (assuming they've even allowed us to keep our boots) so we can get ourselves into debt all over again.

Meanwhile, back in banking wonderland, the federal government decreed last year that the banks - despite all their mistakes, their greed and their abuse of the trust of the American public - were "too big to fail." So we, the American people, were forced to lend those banks many billions of dollars and guarantee hundreds of billions more to enable them to get themselves back on track. (Wouldn't it be nice if our banks, as soon as they learned a customer was in trouble, slashed our interest rates to zero and lent us enough money so we could quickly get our families and our own lives "back on track?")

The worst part of our financial arrangement with the banks is we're lending them the very same money they're now lending back to us - the struggling American public. Only the money we're borrowing back from them is coming to us at a considerably higher interest rate than we're charging them to borrow it from us in the first place. Think about that for a minute - the American public is going deeply into debt to lend the banks money, so they can then lend it back to us at rates that put us deeper into debt. Then remind me again why we were so afraid for the banks to "fail?"

The details is where it starts to gets really fascinating. The Fed is lending our banks money at near 0% to "stimulate" credit and facilitate consumer borrowing. The banks however, are using much of the money they're borrowing from the Fed to purchase US Treasury bonds, which are guaranteed government investments that pay around 3.5% annual interest. That differential of 3.5% means a profit of $35 billion a year for every trillion dollars the banks borrow from the Fed - and by extension the American people, who are on the hook for that 3.5% interest - and lends back to the Fed through the purchase of government bonds.

How's that for one heck of a sweetheart investment deal? The banks take no risk, receive government guaranteed returns and bear no cost for the money they're borrowing to earn that guaranteed annual profit.

But wait - it gets even better! If you check your savings account or money market interest rate these days, you'll discover that the banks are paying us somewhere around .2% for the privilege of lending our hard-earned savings out to our friends and neighbors. At the same time, the interest rate on the average bank-issued credit card is pushing 17%, while the average home mortgage loan generates 5.5% interest for the banks. Those differentials amount to staggering profits for the banks' bottom lines, all coming courtesy of the general public - that's you and me.

Here's a thought: Why don't we just borrow all the money we need directly from the Fed at the same 0% sweetheart rate the big banks are getting from us? After all it's our money to begin with, since the money the Fed is lending out becomes a debt of the American people. If we bypassed the banks altogether and lent the money directly to ourselves, think how much money we'd collectively save in the way of annual interest payments! Plus, all those trillions the banks are investing in government bonds wouldn't need to be lent out in the first place, so that would save us billions upon billions in annual interest payments. That's more money we could use for our crumbling infrastructure, universal medical care, alternative energy exploration, education and a host of other real and pressing needs we face today.

Perhaps the "too big to fail" concept was flawed from the very beginning. Perhaps the real underlying issue we were terrified to face was what it would mean to our entire economic system if we actually had to do business directly with each other, without a mediator (a bank) to ensure we'd all play the game fairly. That's not a bad strategy, assuming we're still too afraid to trust each other and would rather put our faith in the integrity of a central mediator - at least until the mediator discovers the unfair advantage it holds by not playing fair itself, in order to turn a greater corporate profit.

When we see this, and transparency is becoming a blessing with the advent of the internet, we can perhaps begin to consider the value of remembering how to trust each other again. Certainly the placing of our faith in the integrity of our corporations hasn't benefited us overall. Can we stretch our comfort zones enough to consider helping each other without suspicion that we're being "taken advantage" of? Can we rise to the challenge and love each other enough to care less about the few bad apples we might encounter and focus more on the awesomeness of most people, when given half a chance to become the best they can be?

I suspect that's where the cosmos is pushing us, and it's where we need to go if we're to survive. Ultimately our elimination of both the mediator (the corporate institution) and the medium (money itself) would enable us to more freely exchange our infinite human creativity and advance our society in ways we've only dreamed possible. I'm cautiously optimistic that we'll head in that direction sooner or later. Here's hoping it happens before we all go broke!

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