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Politically Incorrect

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Politically Incorrect

When the Red Queen does money

Did you know that computers will take over the world this year? Yep, at 10:10 am on 10/10/10 (that’s October 10 of this year for those of you who have to count the months on your fingers), computers will demonstrate their mastery over their makers, and we know this because we know that ones and zeros are the foundation of binary code.

Actually, that’s total bullshit but I could make up an email along those lines, send it out, and I bet within two weeks half a billion people would be emailing that apocalyptic warning out to everyone in their email address book.

That’s because we’re stupid.

Want another example? Bill Maher ‘reported’ on his season opener of “Real Time” about teabaggers—those folks who are always in the news hatin’ on guvmint, mostly about taxes. Maher pointed out that in a survey, only two percent of teabaggers believed that taxes, under President Obama, had gone down… which they have. “Think about that,” he said. “Only two percent of the people in a movement about taxes, named after a tax revolt, have the slightest idea what’s going on (pregnant pause) with taxes.”

I did a little bit of quick fact-checking, because that sounded rather monumentally stupid even to me, but sure enough, it was a real poll, undertaken by CBS News (you can see it here).

Now before you start thinkin’ I’m writing a column making fun of stupid people in the world, let me share with you that I’m just as stupid as everyone else, which is not a way I typically think of myself. But it was brought home to me just this week that I am.

Here’s what happened. I was scrolling through the Internet on one of those “initially looking up something legitimate but getting distracted by links that lead to links that lead to links” kind of things and ended up on an article in a European newspaper about the elephant in the living room when it comes to economics. That’s when I discovered I apparently, for my entire adult life, have refused to understand a basic fact of monetary policy.

So here’s how I thought things worked. Myself and nine of my friends all have ten dollars that we don’t need for our immediate gratification, so we give that money to you to hold for us and keep safe—after all, we might not want to spend it right away, but we don’t want someone to break into our house and steal it from us, either. That leaves you (you’re a bank now, by the way) in possession of one hundred smackaroos.

Your security is a little better than ours, but a hundred bucks doesn’t do much just sitting in a vault, so you, in turn, are going to loan that money out to other people who might need it, and you’ll make some money in the process by charging interest, which gives you incentive to hold our money in the first place. But some of us might need some of our money in the meantime for some unexpected expense, so you can’t loan all of that money out—you have to keep ten percent of it on hand.

Are you with me so far? If you are, can you tell me what’s wrong with that scenario? Because at the level where I don’t think at all, that’s how I thought the banking system worked. But it’s not.

You see, if we give the bank $100, they don’t loan out $90 of those dollars—they can loan out one thousand dollars, in effect creating $900 out of thin air. True, that $900 created disappears once the loan is repaid—but the money the bank earns in interest on those loans is not destroyed and, if you follow that ability to use fake money to produce real money to its logical conclusion, the rich guys (the ones who get to create fake money) end up with all the real money. And that, at a very basic level, is our fractional-reserve banking system. (It’s more complicated than that, of course, because banks loan each other money, and long-term deposits they hold, like CDs, for instance, can be loaned out with zero reserve, and boy, then there’s the freewheeling orgy you get into as soon as you step beyond the simple savings and loans part of banking, but when you get into the complications it’s actually even worse than the basic premise.)

This is a system that relies on continual growth (think cancer, another system of continual growth) in order for it to continue to work which, if you and I tried it, would be called a Ponzi scheme. The problem with Ponzi schemes is that eventually, the cancer goes into remission.

All this thinking got started by an article I read written by some bank swindler (Darius Guppy in the Telegraph, for those who want to know), and he said, “The consequences of that swindle, in particular the desperate need for economic growth, the consumption, wastage, and the environmental and cultural despoliation which it engenders, together with some possible antidotes worthy of consideration, must be dealt with separately.”

It gave me a headache, and that’s before you even get into the things that contributed to our current financial woes, things like credit default swaps, buying on margin, laddering, spinning, the oxymoron of underwriting standards, and the iTraxx SovX Western European index (which may be contributing to the trashing of Greece—an entire country—even as you read). If fractional-reserve banking sounds a little bit like the Emperor having no clothes, the part of the iceberg of monetary policy you can’t see is like the Emperor on steroids, with a serious meth habit and jonesing for a fix.

If forced to, I can understand numbers and what’s done with them, but it’s just about as enjoyable for me as having a root canal, which is why I became a writer and not a banker—obviously, reading this, not the smartest of career moves. And the sad thing about what I’ve written here is that, at some level, I already knew all this. I just didn’t think it all the way through. I suspect that most of us, when we cross through the looking glass, still expect there to be something real that everything is based on.

Which may be why we can’t seem to get a handle on what’s going on.

In an article for Rolling Stone (“Wall Street’s Bailout Hustle”), writer Matt Taibbi pointed out this chimera (emphasis mine). “This may sound far-fetched, but the financial crisis of 2008 was very much caused by a perverse series of legal incentives that often made failed investments worth more than thriving ones. Our economy was like a town where everyone has juicy insurance policies on their neighbors’ cars and houses. In such a town, the driving will be suspiciously bad, and there will be a lot of fires.” Which helps to explain why your too-big-to-fail bank has jacked up the rates on your credit card by 200 or 300 percent, and doesn’t seem to give a flying fart whether you can make the resulting payments.

Our inability to come to terms with the essential notion that much of what takes place with money occurs in a fantasyland where actual money itself has no admission ticket, might explain why a bunch of people can get so pissed off because their taxes went down, but don’t seem at all concerned about getting together and demanding change from our current system of monetary policy. Hell, most of the people whining and complaining are still depositing their weekly paycheck into those institutions “too big to fail,” which helped create this mess to begin with.

The pessimistic part of me would lead me to suggest that given all this, we’re totally screwed. But the optimist in me can’t help but hope that if we can recognize the areas where our thinking is stupid, and apply a little logic, we might just pull ourselves out of this mess at some point in time. And if we can’t do that, then we can always hope that come October, computers will take over the world.

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Landon Otis

Tagged as:

Red Queen, finance, banking

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