Tuesday, October 25, 2011

The Interest Rate Game


Back from our semiannual resettlement frenzy.  My ruminations this week keep returning to the bad behavior of banks, everywhere and here, which are without a doubt gumming up the arteries of commerce world-wide.  Beneficiaries of the greatest public bailout so far, bankers at every level seem determined to avoid repeating the mistakes of the past by crippling the future.

The NY Times today -- October 25 -- points up the fact that banks all over the country, "flooded with cash," hate to lend it out, pay almost no interest, and indeed are talking about charging worried citizens for storing their savings. Easier for the bankers to park the cash in government securities, collect the difference, and spend the afternoon on the golf course.

That certainly reflects my experience recently.  Seven years ago I signed on to buy a house our son lives in.  My credit rating being top grade, I became the owner of record although he made the down payment and has been making the monthly payments without fail.  With interest rates down, this seemed like a good time to remortgage the property.  I went to our friendly neighborhood bank in rural New Hampshire and broached this possibility.  I had maintained and paid off several mortgages with this bank without incident. 

The portly local bank president heard me out and made a counterproposal.  If I would lock up an amount somewhat in excess of the mortgage I was requesting in a non-interest-bearing account only the bank could invade for the life of the new mortgage, I might secure a marginally reduced mortgage balance for my son.  These terms seemed preposterous -- there would be substantial closing fees and the rest rolled in -- and so I dropped the project, immediately.  During the next few months I discovered that several contacts -- one a recently retired senior executive with a Fortune 500 corporation, another a Houston oil billionaire -- had substantially the same experience with local bank officers.  Give me your watch and I'll tell you the time, as the Polish punch line goes.

We are a nation that has traditionally lubricated its economy with affordable credit. When credit dries up the economy implodes.  During the 1920s, as I pointed out in my CIA history The Old Boys, the determination in Germany by Hjalmar Schacht and his fellow wizards to outsmart the British and the French by making reparations payments in wildly inflated Marks led quickly to the impoverishment of the middle class and the takeover by Hitler.  Whether you hyperinflate an economy or starve it of ready capital, it is the productive, hard-working middle class that suffers first.  Start-ups never get started; promising youngsters never make it to college. Our collective future darkens.

Every new president makes mistakes, but let's review Barack Obama's inclination to protect his flank by positioning spokesmen for Wall Street at the top of his economic management team.  In the Oct. 31 issue of Time Joe Klein points out that Treasury Secretary Tim Geithner blocked the overdue effort to break up Citibank (where his Clinton-era predecessor and patron Bob Rubin had gotten a special sinecure with an astronomical paycheck for eliminating the Glass-Steagall provisions which had protected commercial banks from the opium dreams of investment banking since the New Deal).  Geithner stepped on the nomination of the reformist Elizabeth Warren to head the Consumer Financial Protection Bureau. Ex head of the National Economic Council, Larry Summers, had prevented the government from regulating the terrifyingly volatile multi-trillion-dollar derivatives market when he was Secretary of the Treasury late in the Clinton Administration.  With reformers like these in charge, it's really no wonder that the economy continues to ride the rollercoaster.

With clown after clown emerging from the jalopy of Republican politics, sane voters are going to have very little choice in 2012.  The best we can hope for is Obama Redux.  Let's hope enough lessons have been learned by then.

Burton Hersh

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