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Because They’ll Steal it Anyway, Just Give it to Them First?

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Friday morning I was parsing through tweets on my timeline and came across a link from Bloomberg BusinessWeek’s account (@BW) to a piece titled, “Yes, the Financial System Is Rigged. Why Shouldn’t You Profit From That Knowledge?” As a supporter of tougher financial regulation I was curious to see if the article would read as I expected it to and to make a long story short, it did. Roben Farzad, who wrote the piece, says,

Our system is rigged. Unfair, hopelessly neglectful of the little guy…you could shake your fist at all the bailouts; the record bank profits that are once again accruing to shareholders and executives; the asymmetry of rescuing now impossibly large institutions when so many individuals had to mail back the keys to their homes. But, in 20/20 hindsight, it was also smart to hedge that runaway cynicism with confidence that the system would take care of itself. In other words, you should have bought in.

Given Mr. Farzad’s history as a former Goldman employee, I wasn’t at all surprised to hear arguments of this type. But the idea that the average American taxpayer, making a living on unreasonably low wages, should willingly enter the nineteenth century gambling den our stock exchanges have become disturbs me greatly. This market dances on the puppet strings of six massive banking houses supported by the cadenced lumbering of a central bank determined to hand over countless trillions in tax dollars they no longer need. Combine that with the resurgence of Gilded Age market discipline, Wall Street is the last place anyone not already entangled in the briar patch should put their money. 

Why not you ask? Mr. Farzad provides us with the answer to that one; the system is rigged and unless you’re an employee of his former boss, it’s not rigged to benefit you. Consider that the primary impetus of the recovery in share prices (and by extension, stock indexes)  has been the almost $4 trillion in government cash provided nearly free of charge to financial institutions by the Federal Reserve. The Fed supplies capital at dizzyingly low rates, then the bankers use it to pad their investment portfolios and stock indices reach “record” highs thanks to the uptick in investment. But the only reason that the Fed starting giving banks big piles of cash in the first place was because those ticking time bombs, credit derivatives, that detonated and nearly took the financial system with them. We the people lost our houses and our jobs, but banks got trillions in exchange for, for — Bueller? 

If that’s not enough, ask yourself this question. What reason does the retail investor have to enter a marketplace built to serve the interests of America’s financial conglomerates and which operates to benefit those interests at your expense? Keep in mind that the five largest banks in the country combined are worth about 62 percent of the nation’s economy, and with interest rates can make the car you drive, that house you think you own, and your education extraordinarily expensive. Put that with the lack of real motivation from Congress or the White House to rein them in, the Federal Reserve guaranteeing their solvency regardless of balance sheet risk, and the absence of that safety net for you. That’s not the market you want to invest in.

I’m not saying that we should expect them to bequeath us with higher paying jobs, or paying jobs, or better terms on credit cards and mortgages, but there’s also no reason to think that they’re going to let you get a piece of their pie either. Retail investors don’t have the financial muscle to out punch these mammoth financial institutions driving this rally and that’s not just a function of the banks’ might. Outside of the economic snapshot that is Wall Street, unemployment still hangs around 7.5 – 8 percent, long-term joblessness is becoming a chronic condition, and the broader economy hasn’t got much more than a zephyr in the sails. The disproportionate assistance to Corporate America and that given to Working America has done little more than aggrandize a few at the expense of many and probably will only get worse before it gets better.

To argue that we should try to ride banking’s duplicitous wave to success because the system is so broken they can act as they please is ludicrous. Why participate in a scheme whose success is predicated on your failure? That doesn’t make good sense or financial sense. If anything, we need to reevaluate dramatically how our financial markets work and start electing some officials who will take a stand on our behalf. There’s no solid reason, after the housing collapse and four years of recession, that Americans should be so complacent about their financial futures. Trying to collect in this market is like playing blackjack against a house whose deck is fixed to beat every card in your hand and on the off chance you win, has a bouncer take your winnings anyway. Until the lords of finance are once again in check, keep your money in the one place where it’s safe: under the mattress.

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About Alexander J Smith III

  • pablo

    That’s a bit better than your past articles Alexander. Keep up the good work.

  • Dr Dreadful

    Farzad’s let-them-eat-cake advice is pretty obnoxious, yes, but many if not most of us are already invested in the market one way or another anyway through our bank accounts, retirement plans, loans, mortgages and so forth.

    Keeping your money under your mattress may guarantee you don’t lose (assuming you don’t get burgled), but other than peace of mind I’m not sure what the other advantages are. Surely the object isn’t to beat the big banks, but just to come out a bit ahead at your own game?

  • Igor

    Good article.

    Unfortunately, most of us have sufficient vanity to believe we can outplay the Wall Street experts. But they designed the game and they are the referees.

    That mattress looks better every day.

  • The Reaper

    “Keeping your money under your mattress may guarantee you don’t lose”

    Actually, quite the opposite. The government is continually printing money making any you have worth less while at the same time holding interest rates ridiculously low so that you can’t earn any money on your savings. It’s an alternate form of taxation to pay for all the benefits we keep asking for but refusing to pay for. See the other thread on inflation and commodity values. The $300 you stuck under your mattress in 2000 that would buy 280 gallons of gas, over an ounce of gold, 130 bushels of corn, or over 900 stamps will now buy 85 gallons of gas, under two tenths of an ounce of gold, 40 bushels of corn, or 650 stamps.

    Who stole your purchasing power? Look at your good uncle… Sam.

  • The Reaper

    And Igor, the inflation with low interest trap functions quite well to force you to hand over your money to Wall Street… as holding on to it is a sure loser. Unintended consequence? I think not. My advice: If you can afford it buy assets you control, not Ken Lay, Bernie Madoff, et al. Barring that, if you’re going to stuff you mattress do it with equal parts precious metals and handguns to hedge inflation.

  • Dr Dreadful

    In the event of a total economic collapse precious metals wouldn’t be much good to anyone, although handguns might conceivably be.

    Stockpiling canned goods might be a better idea.

  • The Reaper

    #6

    Some precious metal prices are supported well by industrial uses, others not so much… you might choose the former. Of course in a total collapse only food, water, shelter, and guns/ammo matter. Food is bulky and doesn’t hold it’s value outside of a collapse while guns/ammo do which is why I suggested it. I don’t think a societal collapse is likely or emminent, but I think there is good reason to believe that commodities, including precious metals, will continue to hedge against inflation in the face of massive dollar printing. I’d rather own silver/gold/platinum than have dollars in savings earning .1% right now. As it is, I’m fortunate to be able to own my own business and have assets where I can invest my money to keep it from inflating away.

  • Alexander J Smith III

    -The Reaper

    Next time I’m going to make a joke at the end of a piece more evident lol. I wasn’t trying to say that you should hide your money under a mattress, only that you shouldn’t try to invest it in a market driven by FED backed institutional investors.