Shock and awe and bank deregulation
Amid the boom and flash of the spectacular political theatre going on right now, you may not have noticed the announcements in a single utterance on television or in columns in the back pages of your local newspaper—“banks need to start lending money again,” (Trump on CNN), “President Donald Trump promised a meeting of community bankers to strip away some Dodd-Frank financial regulations” (B3 Globe and Mail 10 March 2017) and White House fires Preet Bharara “the high-profile Manhattan prosecutor known for his pursuit of public corruption and Wall Street crime” (A18 Globe and Mail 11 March 2017)—bank deregulation is back! “Bank deregulation” was the precursor to the financial collapse of 2008 causing banks and financial institutions to go bankrupt, individuals to lose homes, jobs and pensions, and triggering the government bailouts of the banks costing taxpayers what is now estimated to be a trillion dollars. (Historically the British and Americans defined “billion” and “trillion” differently, but these days the American definition seems to prevail. In the American system, a “billion” is a thousand million and a “trillion” is a thousand billion. Here is a more visual and visceral sense of how much a trillion is.) The “Dodd-Frank regulations,” about to be "stripped away," were the rules put in place to prevent the collapse of 2008 from happening again.
Saint Mathew, the patron saint of bankers and accountants
Saint Mathew was an apostle of that Jesus the Anointed (who was voted “God” by the Council of Nicaea in 325). Mathew is the alleged evangelical author of the first gospel of the New Testament (although his name was not attributed to the text until after he was long gone, and oddly, in the gospel, he refers to himself in the third person--but then again so do I sometimes), and the patron saint of bankers and tax collectors (these days we might suggest that he choose a side), of accountants and money in general He has a lot to answer for. Even though I have graduated from agnosticism to atheism since beginning this blog, I’m recommending prayer in this case, because there really don’t seem to be any other options. Bank deregulation isn’t just on the agenda, it seems a foregone conclusion.
Bank regulation, bank-robbery deregulation; tomato, tomaato
I have to confess that I broke my pedagogical rule of Do No Harm Part II: Avoid Irony in my last post on bank robbery, but the point I wanted to make is that the next time you hear someone talking about “deregulating banks,” you can substitute “deregulating bank robbery” and discover that the arguments, the logic and justifications turn out to be the same. So what? We may be living in a global oligarchy these days with wealth dictating government policy and the law, but perhaps there is some measure of solace in being able to say, “I know you are going to screw us because you have that power, but forget being smug and self-righteous because we know what you’re doing.”
Step one of being un-fooled is to understand what the expression “bank deregulation” means. Here are three words that you need to know in order to know what "bank deregulation" is all about: "derivatives," "leverage," and "rent-seeking."
- Derivatives. I may have talked “derivatives” to death in my earlier post, but basically what you need to understand is that “derivative” means that banks and financial institutions can “bet” on the stock and bond markets. “Bet” is the important word here. As described in The Big Short (both book and film), these “derivatives” are not investments in companies or products or services, they are simply companies and individuals betting that a stock will go up or down without actually investing in the company they are betting on or against. Finance people make “derivatives” sound reasonable by describing them as “insurance”; as in you buy an insurance policy on your house to protect yourself against the possibility that it might burn down. However, a derivative is more like buying an insurance policy on your cigar-smoking, alcoholic neighbour’s house in the hopes that his house will burn down—so why not buy him a bottle of vodka and a box of cigars for Christmas, his birthday, etc? In the film version of The Big Short derivatives are shown as being like following your neighbour to the casino and when he bets two dollars on the roulette table, you bet 10,000 dollars with someone else that he is going to lose his two dollars, and someone else bets 100,000 dollars that you are going to lose your 10,000—that’s the derivatives market. The derivatives market is estimated to be between between 710 trillion and 1.2 quadrillion US dollars. (see "The Size of the Derivatives Bubble"). Just to put those numbers in perspective once again the total GDP of the USA is 17 trillion.
- Leverage. How are these crazy numbers possible? How is it possible that so much money—40 to 70 times the total wealth of the USA, 700 to 1000 times the amount of US paper currency which actually exists in circulation—is being gambled? The answer is “leverage” (that’s chapter six in The Art of the Deal, the book which Trump’s ghost writer, who wrote the book, called “a tissue of lies”). “Leverage” is what “bank deregulation” is all about. If a bank has assets worth one million dollars, the average person might imagine that a bank can therefore lend out to clients up to one million dollars. Under current US banking regulations the leverage ratio is 4%, which translates as a ratio of 1 to 25. In other words, if the bank has 1 million dollars, they can lend 25 million dollars. That’s right; for your mortgage or your car or your kid’s education, they can lend you 24 million dollars that they don’t have—but you, of course, must repay in money that you actually have. (By the way, the mortgage that you owe to the bank is considered one of the bank's assets. If you owe the bank $200,000, by regulation the bank is considered to have that money within its assets.) The current "leverage ratio" (1 to 25) is the key regulation that banks find too onerous, limiting and difficult to comply with. They want to change the leverage ratio so they can lend you even more money that they don’t have.
- Rent-seeking. This is the concept that we really need to watch out for. The idea has been around since the 1970s, and is being much discussed in financial circles. I found out about it reading Christia Freeland's Plutocrats: The Rise of the New Super-Rich and the Fall of Everyone Else. You might imagine that with all this money floating around it should be easy to cure cancer, end world hunger and poverty, offer everyone daycare and free education from kindergarten to PhD, but as the operations of rent-seeking become more obvious, it is becoming apparent that all this fabulous wealth doesn't actually produce anything, and it isn't the result of anything being produced. Monumental wealth is being produced simply through the manipulation of government regulations, in particular the laws govern finance and banking. "Money" has become like Tinkerbell's pixie dust, not tied to anything of value, but available to the super rich to sprinkle on politicians, and for politicians to sprinkle back in greater measure on the super rich by adjusting the regulations for banking and finance to their whims and favour. The disappearing middle class can look back on "trickle-down economics" and crumbs from the big table as "the good old days" because pixie dust may float in cosmic clouds above but the .1% are exceptional at keeping it afloat and have little motivation to let it fall on the rest of us.