Tuesday, October 30, 2012

Thurston Howell is alive and well

Banking is an odd creature when you think about it. Anyone with a vague knowledge of bookkeeping should know that. You debit your credits and credit your debits and somehow everything balances out in the end. For the consumer it's a different story. We borrow money from a bank that never existed and hope that we'll make enough to pay it back before the end of the loan. Banks on the other hand think in reverse terms. They see debt as an asset. They'd be delighted if the loan continued forever as long as the payments were made and the interest rates remain high. They win no matter what. If the loan defaults they get to write it off and then up the fees and interest rates on the next sucker. And unlike us deposits are viewed as a bad thing. They want the capital as low as possible and the leverage rate sky high. It's how they make their money. And they can't really lose because the spread between borrowed money and investments is always enough to cover the CEOs golden parachute should all go wrong. So who picks up the tab when all goes south? We have insurance called FDIC that covers the assets (that would be us the taxpayers) while we are also on the hook for the debt. And again it's all done with imaginary money that never existed. It's called the fractional reserve if you must know. And don't be fooled by the term Federal Reserve. It's no more part of the federal government than K-mart. It's only a body of rich guys creating money out of thin air.

But what sparked this little lesson on how our monetary system works? It was the announcement that USB the Swiss bank is about to lay off 10,000 workers mostly in the U.S and London. To most of us working stiffs that would sound like a very bad thing. Who'd want to hear of a factory laying off that many people here? But somebody always wins in these types of ventures and that would be the investors, the golden parachute boys, and the next crop of CEOs to grace the board room. They nearly always win no matter what happens.

So what's going on in Switzerland? It seems the value of their debt is not so valuable anymore or in this case they got piggish. Remember debt to them is an asset.

"Banks can post gains if the value of their debt falls, because it would theoretically become cheaper for the bank to repurchase that debt. But the rule also says that when a bank's debt increases, it must take a write-down because it would theoretically have to pay more to buy back its own debt on the open market."
A little too much leveraging here Mr. Banker? But shed no tear for Herr Gotrocks he gets a tidy sum for cleaning out his desk along with the prospect of starting his own investment scheme and life in the good old boys club goes on. For the rest of us we're too principled to play their little Ponzi scheme and we couldn't because they make the rules and we aren't included in their game. Nothing like being the low man on the totem pole when the budget axe is sharpened. Don't be too sympathetic for the 10.000 though. I hear they make a couple of hundred thousand a year on average. So in this case it's the wealthy eating the lesser wealthy.   


BBC said...

In recent years the only times I've charged large ticket items is if I was offered no interest for a year, and I make damn sure I get it paid up in time so they don't make any interest off of me.

In a few months my new riding mower will be paid off interest free, ha!!

If it wasn't raining I'd be outside, fucking rain.

S.W. Anderson said...

Demeur, you're making a good point overall but I have to nit-pick something.

The Federal Reserve System is "no more part of the federal government than K-mart."

It's true that Federal Reserve System operations are independent of direction and interference by the president and Congress. But while K Mart's trustees are elected by Sears stockholders, and its CEO is appointed by the trustees, the president of the U.S. appoints members of the FED Board of Governors and its chairman, and the Senate approves (or rejects) the appointees. That's a big difference.

Demeur said...

Oh come on SW it's just another good old boys network and you know it. Who's on the Fed boards? Former Goldman Sachs and Leamann cohorts that's who and if you're not part of the club they don't let you in the game.

Randal Graves said...

The whole thing's a scam, or possibly scamola.

Roger Owen Green said...

banks made sense when they weren't 'too big to fail', i.e., when they were local entities.