Tuesday, April 12, 2011

Meritocracy... uh, yeah right

From Matt Taibbi over at Rolling Stone:

The Real Housewives of Wall Street

Here's the money shot:
It's hard to imagine a pair of people you would less want to hand a giant welfare check to — yet that's exactly what the Fed did. Just two months before the Macks bought their fancy carriage house in Manhattan, Christy and her pal Susan launched their investment initiative called Waterfall TALF. Neither seems to have any experience whatsoever in finance, beyond Susan's penchant for dabbling in thoroughbred racehorses. But with an upfront investment of $15 million, they quickly received $220 million in cash from the Fed, most of which they used to purchase student loans and commercial mortgages. The loans were set up so that Christy and Susan would keep 100 percent of any gains on the deals, while the Fed and the Treasury (read: the taxpayer) would eat 90 percent of the losses. Given out as part of a bailout program ostensibly designed to help ordinary people by kick-starting consumer lending, the deals were a classic heads-I-win, tails-you-lose investment.

This incident is emblematic of the governance of the U.S. financial system. As a U.S. citizen, if this doesn't get your blood boiling with regards to the handling of the financial crisis of 2008, then you must be part reptile. In order to avoid a short term destabilizing economic event, the fed throws money around indiscriminately in the hopes that some of it happens to land in the right place. It brings to mind the image of a firefighter trying to extinguish a fire by spinning around on a carousel while blindfolded. This is the dark side of having a fractional reserve lending system; our banking system is always a hair's width away from a major disruption. I'm not going to get into a full on discussion of the pros/cons of frac-res lending, but suffice it to say that with the small amount of reserves that banks keep on hand, it requires someone else to act as a very big backstop if there ever happens to be a run on deposits.

No comments:

Post a Comment