How to Cheat the System and Get Away With It

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Published on Monday, 08 October 2012 14:57

Written by Bill Bonner, Founder and President, Agora Inc.

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The Dow hit a new nominal high on Friday. Money is what we use to measure past, present and future. It is what we have to show for our years of work. And it is what we need to pay for the things we want. It is how we measure what we're "worth."

You work all your life... and you're worth, say, $1 million. Then the Fed prints up $40,000 million... or more... just like that. It then gives it to the people who are close to the Fed -- the people it bail outs... the people who speculate in stocks... the people who make campaign contributions... and the people who make fighter jets.

Understanding the "Cantillon Effect"

Robert Cantillon discovered this effect -- of giving out the new money to the politically favored groups closest to the feds -- more than two centuries ago. It's known, natch, as the "Cantillon Effect."

It undermines faith in the entire system, past and present. Suddenly, people don't know what they're worth. The auto parts distributor who worked his whole life, saved a million dollars and put it in a savings account at the bank now finds his banker neighbors -- who speculated on banking shares -- are worth twice as much as he is. He looks ahead; he wonders what will happen next.

As The New York Times put it recently in a wonderfully succinct headline: "Bank Executives Cash in As Market Rises."

The feds bailed out the banks. Their rescue program, the TARP, included provisions limiting cash bonuses. So the bank execs took stock instead... then valued at low levels. According to The New York Times report, the bankers -- the five top execs at each of the 18 largest publicly traded financial institutions -- got $142 million worth of stock.

But wait. Even though they'd brought their companies to the brink of extinction, they didn't take a dime less in compensation. They simply switched the cash bonuses they were owed to stock options, valued at the low prices of the crash era.

Then the Fed went to work to make sure the banks made beaucoup bucks -- taking their bad investments off their hands... lending them cash at record low interest rates... thus tilting the playing field in their direction.

Four years later, that stock is now worth $457 million. Nice profit. But although the story is told by the NYT with all the numbers and details, the paper misses the plot. It says the bank execs were the beneficiaries of "lucky timing."

Ha ha ha... lucky? You call $1.2 trillion in Fed stimulus "luck"? You call the $700 billion TARP program "luck"?

Well, it's amazing how lucky you get when you have the Fed giving you money!

The Rich Get Richer

We call it what is really is: cheating. It's what happens when the feds fiddle the financial system. Money -- created, not made -- is up for grabs. And who grabs most? Those closest to the source: the insiders. The more loot the feds distribute, the more the insiders get. The rich get richer.

From SocGen strategist Dylan Grice:

The credit inflation analog to the Cantillon Effect has played out perfectly in recent decades.

Central banks provided cheap money to banks, the cheap money artificially inflated asset prices; artificially inflated asset prices made anyone connected to those assets rich. As we became a nation of speculators, those riches were achieved at everyone else's expense, and everyone else has now realized what has happened and is understandably enraged.

Everyone hates bankers. And for good reason: They're cheating. They're insiders who are benefiting most from the Fed's foolish money printing.

If the bankers had gotten what they deserved, instead of getting options and bonuses, they would have gone broke. Then we'd see what they were really worth. They could have picked up the pieces, creating new and better financial companies. And today, we'd have wiser -- more honest -- bankers... and better banks too.

We'd also have a more honest financial system.