March 22, 2009
The General Theory of Employment, Interest and Money
by Mark Iocolano
The story of the credit crisis amounts to this: The banks have lost all their money. In fact, they have somehow managed to lose not only their own money, but all the money in the world. This is not good, because the world needs money, and the banks are the ones who under normal circumstances keep track of all the money.
Do you doubt that no one except the banks keeps track of all the money? Let me ask you: How do you know how much money you have? Do you actually count it? Do you even know where most of it is?
Wait, don’t tell me. I know your answers:
You know that you have x dollars. You never count it, though. The bank counts it for you and sends you a letter every month telling you the amount. The bank does this because they’re the ones who have your money. This division of labor is sensible, not to mention convenient.
Except for pocket change, when was the last time you ever actually saw any money?
Unless you are very, very elderly, the answer is probably “never.” When you get paid, someone sends the money directly to your bank. When you pay bills, you tell the bank to send the money to whomever you owe it, or you simply authorize your vendors to go and help themselves to the money. Once upon a time, there were things called “checks” (or “cheques,” if you were so inclined), which were sort of like money, but were really just pieces of paper telling your bank or your employer’s bank what to do with your money. You could touch them, write on them, and send them through the mail, but they weren’t actually money. You cold tear them up and no money would be lost, and now you rarely see checks.
In short, the banks had all the money, and were supposed to keep track of it, and now they have lost track of it and there is no more money. Because few people now living have ever seen money, it’s not surprising that it should be so easy to misplace.
Perhaps you thought that the government was keeping track of all the money. After all, it is constantly grabbing at our money—right out of our pay, before we even get at it. But the government is not any better at keeping track of money than you are. The people in the government never agree on what to do with it, and every day there is a story about how the government spent a lot of money on this or that and it turned out no one really knew about it until afterward.
What’s really disappointing about the government’s failure is that it has a lot of resources devoted toward keeping track of money. You probably have heard of a couple of them: the “Treasury,” and the “Fed.”
You’d think that if the government has something called a “Treasury,” that would be the first place to look for the government’s money. The Treasury is a huge building in Washington, and surely it contains a big room piled high with bulging canvas sacks with dollar signs on them, just like the one Scrooge McDuck has. The Treasury was built right next door to the White House, so that the president could walk over and check on the money every night before bedtime. In reality, though, the Treasury building is mostly empty. The sole employee is a new hire named Tim, and what with answering the phones, and talking to reporters, and getting yelled at by members of Congress all day, and trying to explain what happened to all the money, he hasn’t had time to go looking around for the money room.
It’s just as well, because there is no such place. The government does with its money what we all do: it puts it in the bank.
Which brings us to the Fed. That’s the government’s bank. When the government borrows money by selling bonds (which it needs to do because even after taking all that money from our pay, it requires even more), the Fed controls the rate of interest the government pays by buying up or selling off as much of the government’s bonds as it pleases, thereby controlling supply and demand for the bonds, and that is what determines the interest rates the government (and everyone else) pays.
The Fed can do this because it has unlimited access to an infinite amount of money.
So it should come as no surprise that now that all the money has gone missing, and that it’s been revealed that the Treasury doesn’t really have a Scrooge McDuck room, all eyes are on the Fed to replace this money.
Despite the stock footage on the news programs showing sheets of hundred-dollar bills flying off printing presses, the Fed actually prints relatively little money, and it’s mostly to replace old bills with new ones bearing Tim’s signature. Hundred-dollar bills are really nothing more than fancy checks. You can take your old, dirty, torn, worn-out bills to the Fed and exchange them for new ones. The Fed shreds your old bills into tiny pieces just large enough to be recognizable as shredded bills, and forms them into papier-mâché trinkets to sell to tourists.
It’s not the printing and arts-and-crafts business that allows the Fed to make so much money. The Fed creates money with a figurative stroke of a pen. If a bank needs, say, 100 billion dollars, the Fed simply says to the bank, “put a loan from us for $100,000,000,000 onto your books. Now go out and lend that money.”
Some naysayers say that this form of money isn’t real money, either. They disparagingly refer to this as “fiat money,” which suggests that Fed money is to real money what FIAT is to a real car company. To these people, gold is the only real money. The problem with gold is that if all the gold ever mined were to be combined in one place, it would fill a cube merely 58 feet on a side. That doesn’t seem like nearly enough money, although it would be hard to carry around.
Critics claim that despite all the money the Fed has been giving to banks, the banks aren’t lending it out. Perhaps the real issue is education. It’s widely known that most people don’t understand how to handle money, and the banks are finally taking steps to address this problem so that they can distribute the money as the Fed has asked.
This week’s mail brought from banks no fewer than three helpful missives designed to fill the education and money gaps.
The first is from Citibank, or rather, CitiGroup, although in order to seem friendly, or at least frugal, they signed the letter as “citi” (avoiding even the extravagant use of upper-case). To show how hard they are working, “Citi never sleeps” is printed in red in the upper-left corner.
Attached to the letter are four anachronistic blank checks. But these are no ordinary checks. Emblazoned at the top, in large type, is the slogan, “It’s not just a check. It’s whatever you want it to be.” This has an Aladdin’s-lamp quality to it, but if you glance at the sidebar they get more mundane: “It’s paying your bills”; “It’s doing more on vacation”; It’s a night on the town”; “It’s extra cash in the bank.”
Extra cash in the bank? That does not inspire confidence. Another suggestion, in the body of the letter, is “Make that final payment.” Doesn’t citi realize than many people have already made the final payment they will ever make on their mortgages, car loans, and credit card bills? Wasn’t that one of the causes of this crisis? And does this imply that we can take citi’s cash, pay off someone else, and not make a final payment to citi?
Citi earns a “C” (upper-case). A so-so first attempt, but vague and sometimes misleading.
A similar letter-with-checks from Chase is better, although the slogan above the checks, “It’s your choice. Use these checks however you want” is short on specifics. Fortunately, the attached letter spells it all out:
“Write a check now. Pay it off later” reads the headline. Succinct and to the point. But it gets even better, with step-by-step instructions:
“Here’s how it works:
Choose the low APR that’s right for you: 0.99% or 6.99%”
(It would have been better if Chase had just said outright that the correct answer, unless you are the government and need to give extra money to Chase, is 0.99%)
Next, Chase provides specific instructions for the money:
“USE THESE CHECKS TO: Purchase office supplies; Manage cash flow; Create marketing materials; Get a new computer; Manage expenses; Do whatever you choose.” The last two suggestions are not very helpful. If you know how to manage expenses, why do you need to borrow money from Chase? And “Do whatever you choose” sounds like an invitation to abscond with the proceeds.
The letter closes with some common-sense suggestions:
“When calling, we ask that you call from the telephone number associated with the account. Be prepared to give us your full name, address, and amount for each transfer.” (If you call from a pay phone, refuse to identify yourself, and simply demand an unspecified sum, Chase might mistake you for a particularly inept bank robber.)
Chase’s attempt is clearly superior to citi’s. Grade: B-minus.
The final offer, from Discover, is an unmitigated mess. Unlike the other two offers, which are checks physically attached to a single-page letter, Discover’s envelope contains five pieces of paper of various sizes: a letter, an application, a multi-folded pamphlet entirely in small print titled “Important Information,” a post-it sized scrap entitled “Case Study #32776,” and a postage-paid return envelope.
Discover’s offer is an old-fashioned loan in the most archaic format imaginable: you fill out a lot of paperwork, mail it in, and maybe Discover will send you money. If that happens, they probably will drive up to your house in an armored truck and hand over canvas sacks. Why would you bother with that when Chase and citi have already sent you the money?
The letter is printed to simulate the effect of someone having stamped IMPORTANT across the top with a rubber stamp. This is invitation # 7067352643003. With more than 7 trillion invitations outstanding, at least you can’t accuse Discover of being lax in the handing-out-money department.
The offer opens with this: “Based on the results of a recent analysis, your status has been reviewed and your file awarded a rating of ‘5.0 Superior.’” (According to the ads that appear on Facebook, a good credit rating is a score of 700 or more, so this must be either insincere flattery or the result of a proprietary analysis method.)
You are invited to apply for a “debt consolidation loan,” and an accompanying graphic explains how easily this works: A circle enclosing the words “$15,000 DEBT” has an arrow pointing to a dollar sign labeled “one low monthly payment,” which leads to “ZERO debt and ZERO payments.”
As if any further explanation were required, the second page of the letter states unequivocally, “At the end of the loan term, your balance will be eliminated.”
For all the paper involved, there’s scant information about the interest rate. All it says in the letter is “Interest rates starting at 7.99% APR*. This is not a teaser rate.” Except that the asterisk leads to fine print that says that your APR will be between 7.99% and 18.99% based on “creditworthiness.” Nevertheless, this is billed as a “safe, simple way to pay down your debt.” As opposed to borrowing from loan sharks. At least Discover is not likely to make you whack someone to satisfy your debt if you have trouble paying.
Discover earns a D. So far, Chase, which lets you choose your own interest rate and basically sends you a blank check ready for use, looks like the leader in getting us out of this credit mess.
Or is that how we got here in the first place?
