Tuesday, May 5, 2009

Explaining the economic meltdown to my bank.

This is an actual conversation I had with a bank representative. I’d like to think he wasn’t a representative sample of the people who work in the banking industry, unfortunately I know that he is.

I have changed the names of the bank and the representative, edited out the irrelevant parts of the conversation, and of course added links so that the reader doesn’t have to just rely on my word and degree in economics but the conversation was real.

“Mr Nelson, This is Mike from Big ol’ Bank.” The voice on phone said after I identified myself. “I’m calling about your Mastercard account which is about to go into charge off status.”

“Well that sucks.” I responded.

“Um, yes it does.” Mike replied. “You borrowed $1,000 of the bank’s money and we would like it back.”

“It wasn’t the bank’s money.” I stated.

“Yes it was!” Mike replied indignantly.

“No it wasn’t.” Giving him a rebuttal I had learned in kindergarten before continuing. “You see when I deposit $1,000 dollars of actual cash into your bank, you turn around and lend $900 of that money to borrowers in secured loans. You know, loans backed up by tangible goods like cars and homes.

“The sellers of these goods then deposit the money in your bank or others like it and the process is repeated. So my $1,000 then becomes $10,000 as it goes through other people’s hands. This process is called the Money Multiplier.

“Having created $10,000 in new money that is backed by real goods, your bank goes through and looks at the value of those goods and issues credit cards and unsecured loans based on how much stuff people have bought with borrowed money. This new money isn’t based on anything in reality so the bank charges more for it.

“It goes through the same Money Multiplier and becomes $100,000 in new money. The bank is relying on enough of the people taking out credit to continue to expand the money supply so that enough new money comes back to them to continue to write unsecured loans based on future money.

“Unfortunately, even though this new money isn’t backed by anything tangible, it is still based on people’s tangible assets and for the last 10 years the United States has not only not been creating more real wealth, you know tangible items that will be around for a while like cars and planes based on new types of designs, infrastructure programs like renewable energy projects, and new transportation systems, but the pool of money at the bottom has been shrinking. With public investment in Research and Development in relation to GDP (Gross Domestic Product) slashed to half its rate as it was in the 1960s. With no new sources of wealth have being created, banks like yours needed to find a new way to expand the Money Supply.

“Naturally, they could have lent money to innovative companies that were developing new products so that more real wealth was created making a larger pie for everyone, but they couldn’t be sure how much of the bigger pie they would get. So instead they created a new market that was one-step father away from reality with Mortgage Backed Securities.

“These securities, are not backed on the actual physical property, but on the future payments made by the borrower. The curious property of these securities is that they promise to pay back the money based on the idea that in the future (which is now) mortgages will be riskier so the payments will be higher, but were promised to have the security of a market that is expanding. In reality it was the opposite, they paid at the lower rate of interest of a growing market and had the risk of a down turned market.

“Using this new form of imaginary money banks like yours were able to run this through the Money Multiplier and turn the $100,000 that is based on my original $1,000 into $1,000,000.

“As this whole house of cards began groaning under the weight of having $1,000,000 being propped up by only $1,000, banks like yours started having people take out more and more of their savings, the bottom of this inverted pyramid, to make payments on their loans, the top of this structure.

“A responsible money manager would consider it part of their fiduciary duty to look at this trend and stop putting investors money into these schemes, but instead banks like yours treated it as an opportunity to get short term growth at the expense of the people’s whose money they were managing by creating Default Credit Swaps.

“This created more money by gambling on bad debt. Banks like yours tried to grow the original $1,000 dollars I put into your bank into $10,000,000 that was based on basically thin air.

“Playing with someone else’s money like that is being negligent in your Fiduciary responsibility at best, criminal at worst. But people like you created their own delusional reality and said ‘hey, its our money we can do whatever we want to with it.’

“Taking this idea one step further Bernie Madoff and others like him simply skipped the idea of even loosely basing their money creation schemes on real tangible assets and just made stuff up. Since money managers like your bank stopped looking out for the people who entrusted you with their money a long time ago no one bothered to look over their schemes, banks like yours figured it was a way to grow that $1,000 into $100,000,000.

“Unfortunately, you can only deny reality for so long, and this whole house of cards started falling down. When it did people lost their jobs and started using their money – and it was their money, not yours like you claim – to buy things like food. This removed the part of your whole scheme that actually had some basis in reality, so suddenly the real wealth that the $100,000,000 was based on was pulled out and banks like yours started scrambling to grab the one millionth of a percent of the real money that economy had been based on for the last ten years.

“So you can claim that that money was yours until you are blue in the face, the reality is that the money never existed, it was figment based on your banks word that if something happened you would use the money that people trusted you with, to make good on it.”

“But you borrowed the money,” Mike told me. “The bank was counting on you to pay it back.”

“Maybe in the fantasyland that you live in, Mike.” I corrected him again. “But in the real world things work a little different.

“I gambled that money. I took the risk that my economic condition would stay the same or get better. I was wrong. It got a lot worse.

“Now if my gamble had paid off, I would have been more than happy to share the rewards with your bank, but since it didn’t I’m asking you to share the pain.”

“The bank didn’t give you that money to gamble with.” Mike said.

“Of course it did.” I countered. “If the bank wasn’t prepared to lose the money they wouldn’t charge interest. The high interest payments on the unsecured loans reflect the fact that some of them are going to go into default and the bank will never see that money again. I accepted that if I used that money and my gamble paid off, I’d have to give the bank a large share of the reward, I have done that in the past and your bank gladly took the money. This time it didn’t pan out that way and the bank needs to accept the loss.

“To expect to share in the reward if something goes well, and share no part of the loss if it doesn’t, isn’t banking its highway robbery.

“So Mike, are you saying that you are just some common thug who goes around stealing from people?”

“But the bank lent you that money.” Mike said ignoring my question. “How would you feel if someone took $1,000 of your money and didn’t pay you back?”

“Well, from the perspective of the strange alternate reality that you live in, Mike.” I answered trying to put things in terms he would understand. “I lent you several million dollars that never got paid back to me.”

“You did not!” Mike exclaimed defensively.

“Did too, too, too, too, too.” I said, countering his kindergarten level rebuttal with a rebuttal I learned in 1st grade, before explaining. “I’m sure you are aware of the TARP or Troubled Asset Relief Program,your bank gladly took hundreds of millions of taxpayer dollars. Money that I will be paying in taxes for decades.

“The idea behind TARP was that your bank, and others like it would use that money to replace the money at the bottom that people are taking out now to use to feed themselves. That money was entrusted with you so that you could lend it out and start the money creation process up again, not at the level it was with people trying to turn $1,000 into $100,000,000 but at least to give people confidence back in your bank after you screwed people over acting like their money was your own personal play money.

“Instead of your bank using that money in a responsible way, it took a large share of it and gave it to the very people who started this mess as bonuses for doing such a great job in screwing the country over. The rest of it you hoarded in low rate of return investments. So your bank had no problem giving money to wildest hare-brained schemes imaginable when they were using other peoples money, when they got a gift of a truckload of money and told to risk it, they suddenly got conservative and put it into investments that pay out so slowly my grandchildren won’t be seeing a return on the money.

“And you have the gall to sit there and brag about how all that money is yours when it comes from hard working people who build things of value trying to create some wealth in this country, while you play games and destroy everything that we have built in this country.

“Shame on you Mike. I don’t know how you sleep at night.”

“Mr. Nelson.” Mike shouted. “Are you going to pay this money back or not?”

“Listen Mike I don’t appreciate you taking that tone with me.” I scolded him. “You called my house, and have been taking up my time with your delusional ranting, I demand that you be at least a little respectful.

“To answer your question. In your little bizarre alternate reality, where up is down and right is left, how would someone pay anything?”

“We can do a check by phone.” Mike said happily.

“How can we do that?” I asked. “In your warped reality any money I put in a bank is the bank’s money. So according to you, if I put the $1,000 into a checking account and did a check by phone you wouldn’t get the money because it stopped being my money as soon as the bank got their hands on it.

“You see how reality starts getting in the way of your delusions, Mike.

“I tell you what, Why don’t we do this? Since you are clearly working in make believe land why don’t I give you an imaginary $1,000 that you can put in your imaginary account. Then everyone will be happy, I imagine.”

Next week I will post the second part of my conversation with my bank where we discuss the difference between real laws and imaginary laws.

1 comment:

Morbida said...

Slap me when part two of this is posted, cuz I think I'm fallin' in love!