Safe Harbors

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I don’t really understand economics. I’m pretty hazy on finance and monetarism too. So today I’m going to write about them. In college one of the most valuable lessons I learned is how to learn. Study and research will give you a pile of information about a subject, but to truly understand and retain it the most effective way I’ve found is to teach it or at least write about it. That’s how I became a teaching assistant and a tutor in the history department throughout my undergrad years at Ohio State.  It wasn’t enough to take it all in. I had to spit it back out too in order to really become conversant in a subject. So today I’m going to be spitting at the rich…again!

 The rich are different. They don’t work for a living. Their money does. Hedge-funds, derivatives, repos, hypothecations; these are the names of the games they play, quite often with our money! Thanks to the repeal of the Glass-Steagall Act near the end of the Clinton presidency deposit banks are no longer restricted from engaging in the broadly speculative activities that used to be the province of investment banks and Wall Street financial institutions. In short, the money we (who actually work!) deposit in the bank is no longer invested exclusively in safe, carefully regulated markets like government securities, money-markets and mortgage-lending. It can now be used by bankers to gamble in complex speculative financial schemes which don’t invest in anything productive like industrial expansion or entrepreneurial start-ups, but instead enters what has been called the shadow-banking system where money is loaned and leveraged to the hilt and the rules are rigged by the biggest and baddest financial players. If you are filthy rich, the beauty of dealing in derivatives, a vast and nearly incomprehensible market that is estimated to total between 600 trillion and 1.2 quadrillion dollars is that it is all but unregulated except for one cleverly-crafted provision of the Bankruptcy Reform Act of 2005, pushed secretly through Congress by Wall Street which gives derivatives and repos (repurchasing agreements) a distinct advantage over the equity of other investors and creditors… instant liquidity!

 Your bank account is insured by the government which guarantees its liquidity. Even if your bank fails, the government will ensure that your deposits (up to a quarter of a million dollars) can be safely recovered. That is liquidity. It comes with the safest of investments, those which yield the lowest returns. When you want to get higher returns on your investments, you have historically been exposed to higher risks. This is how capitalism used to work. The risk of losing your principle always came with the chance to gain higher returns… no pain, no gain! Wall Street decided it wanted the gain without the pain, so in 2005 it got Congress to change the rules. Derivatives, repos, credit default swaps are all inherently risky, but when everything goes right, boy do they make a lot of money! So the big bankers on Wall Street got Congress to attach a little-known provision to the Bankruptcy Reform Act of 2005 called the ‘Safe Harbor’ exemption which gives derivatives the privileged status of being exempt from mandatory stays on bankruptcy assets. This means that holders of derivatives get unquestioned first priority to grab their assets out of a failing institution, bond, fund, or financial instrument, essentially looting it before any other creditor can get their equity that is owed to them. In the 2008 collapse of the world economy, not everyone was hurt by the secondary mortgage market bubble popping. In fact, what made it pop so catastrophically was derivatives seizing equity out of toxic assets before they defaulted completely. Many billionaires walked away from the 2008 debacle vastly wealthier because the Safe Harbor provision enabled them to loot collateralized debt obligations in the mortgage-securities market before they were frozen by bankruptcy courts. Those who grabbed first made off with all the money, leaving everyone else on the hook! AIG which insured so many of these mortgaged-based securities was so leveraged it did not have enough funds to cover the margins after the derivatives looted all the value out of them, so it was either watch all the major banks of the world fail triggering a worldwide monetary collapse or pump taxpayers’ money into the big banks to prop them up.

 No one went to jail (except in Iceland where many big bankers were convicted of malfeasance and sent to prison). Every other major industrialized country bailed out the rich and left the poor and middle-class to fend for themselves. Despite Dodd-Frank, nothing structurally has changed in the legal code to prevent this same disaster from happening again, and since the derivatives market still has the liquidity guaranteed by the Safe Harbor provision, they are incentivized to loot the economy again in the event another bubble threatens to burst. We have come to an economy where the gains reaped by the rich from high-risk speculation are privatized while the losses are socialized. We have virtually guaranteed the rich can’t fail, while pushing the bill for their success on the backs of everyone else. Its not exactly capitalism, but since it works so well for the 1%, that hardly matters.

 (c) October 15, 2013  Bethany Ariel Frasier

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2 thoughts on “Safe Harbors

  1. Isn’t it amazing that Eugene Fama, Lars Peter Hansen und Robert Shiller won the Nobel price?

    “There is no way to predict the price of stocks and bonds over the next few days or weeks.” They said.

    Yes, we know. But who pays the loss?

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  2. Maybe Americans keep winning the Nobel Economics laurels for the past 15 years because Americans are the ones rigging the markets so only the 1% can win and everyone else loses.

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