James Clay Fuller

Things We're Not Supposed to Say

Monday, May 10, 2010

Banks and markets now just shearing pens

The shocking May 6 stock market meltdown has lessons for We the Suckers that go far beyond the obvious and considerably beyond what corporate news outlets will say.

For the first time in the 50-plus years I've been paying close attention to the securities markets and banking and looser attention to commodities markets -- most of those years covering such businesses for newspapers and magazines -- I am close to concluding that the only place for the modest savings of the average Jane or Joe is a tightly sealed jar buried in the garden or an envelope under a mattress.

Maybe in a mixture of currencies.

In simplest terms, what I'm going to do over the next few days is something I began to do some time ago: Get the hell out of the markets, get out of mutual funds, avoid most banks and stop even thinking about gold, silver or other commodities. Being involved in any of those things, or any combination thereof, could cost me most or all of what I have left.

That is not advice for you; just what I plan.

Smart economists would tell you that “our economy is basically sound” -- it's what they said in 2007 and it's what they say now. They also would tell you that a complete withdrawal from markets and financial institutions, if done by many people, is akin to a run on a bank – self fulfilling: A mass withdrawal of deposits will take down a bank, and mass withdrawal from investments will bring ruin to the investment markets.

Don't worry about it. Most people won't change a thing that they're doing now.

(Quick aside: If you are one of the up-to-now lucky minority to have a real pension plan, be prepared to kiss your pension goodbye. It won't necessarily disappear entirely, but it may. Best to be mentally prepared.)

You don't need to understand every detail of what happened May 6, or the finer points of the Greek economic meltdown, to grasp what those events mean for you.

Consequences of the May 6 refusal of the “Democrat-controlled” Senate to reign in this country's giant banks -- there's an awful irony in that vote on that date -- are easy to grasp.

It undoubtedly is true that fear of a Greek default on debts played a part in the crazy roller coaster ride of May 6. Banks and governments all over the world are jumpy about that possibility and the further possibility that such a default will start knocking over other economies, notably those of Portugal and Spain, Brazil, and from there on to Ireland and England and, and, and....

It also obviously is true that a mishandled, or misapplied, misdirected or mistakenly entered computer sell order triggered the big selloff of May 6.

A May 8 article by Julie Creswell on the front page of the New York Times business section noted that some people – no one knows who or how many – made enormous fortunes May 6 by buying stocks at the bottom of that day's market plunge, just before they shot back up to something within smelling range of their starting prices for the day.

The “blogosphere,” Creswell noted, now is aglow with conspiracy theories and suspicions that someone, perhaps a big bank or a hedge fund deliberately set off the debacle in order to make just such a killing. The Times writer characterized such theories as “outlandish.”

Personally, I think they're unlikely to be true, but I certainly would not say it is impossible that the events were deliberately created. (Do you believe no one on Wall Street would be so dishonest?)

Probably, the jackasses who pay themselves millions and billions of dollars a year in reward for their self-assessed brilliance just screwed up big time. Again.

I guarantee that it will not be the last time. There's a very good chance it won't even be the last time this year. They'll say it all boils down to some easily fixable glitch which now has been repaired. Except that there are a hundred more glitches out there waiting to be set off.

The people in charge don't have the slightest idea what is in the computer programs through which a majority of securities trades now take place. Computer trades happen at a speed that is far beyond the comprehension, let alone control, of the guys in the $15,000 suits, or their flunkies in the cheap $2,000 suits.

Recall all those bankers sitting before Congressional committees and allowing as how they never really understood workings of the “derivatives” that suddenly collapsed under their institutions?

You can be sure they understand much less about the mechanics, or electronics, of today's trading process. Computer hotshots don't make it to the top levels of financial businesses.

If you hear a bankster talking about “fail safe” devices built into their programs, think off shore drilling rigs. That's how fail safe those programs are likely to be.

The boss banksters and top-level government people ain't so hot at figuring out and dealing with international economic problems, either. That's a complicated issue, but in simplest terms, those people generally can't see beyond next week or what they often mistakenly think is in their own short term interest.

If anyone had been exercising the mental powers of the average person on the street, the Greek economic mess and its impending fallout would not be anything close to as bad as it is. Of course, such nonexistent thinking people would have had to possess a modicum of guts, too. Intelligence and courage tend not to coexist in today's governments or business world.

It should be obvious to every non-rich American by now that, whatever they do and whatever they say to whomever, the banks, brokers, big-buck lawyers and their employees in Congress regard us as nothing more than wool bearing animals. Anyone who hasn't recognized that fact deserves to lose whatever he or she has left in the way of a personal safety net.

What the early May meltdown does, for most of us, is make inescapable the fact that we should not, cannot, entrust any portion of what financial assets we have left to those people or their institutions. What happened in 2008 inevitably will happen again, and probably soon. And probably worse.

Those among us who have built up some financial assets have no place, or very few places, to turn to protect our modest funds and make them grow. The whole system has been jiggered to benefit only the rich.

Some people familiar with stock and bond markets – or familiar with the way they used to work – have played those markets in a modest way, mostly buying and selling stocks, even taking an occasional gamble of a few hundred or a few thousand dollars on a long shot. Now and then, those used to pay off if the buyer was smart enough to learn something about the companies before placing the bets.

These days, that's an almost sure way to lose whatever you toss into the pot. The way electronic trading works, the big guys are going to suck all the money out of the pot before the individual knows anything is happening. That is literally true.

Most of us have given over to mutual funds, and in recent years that's been so even of the majority of people who used to think they could make a bit of money by investing some of their modest stakes individually. The game became far too complicated for most people, and was too obviously stacked against individual players. The banksters start each hand holding all of the aces and face cards.

But the 2008 market collapse brought on by the inevitable crumbling of the bank-constructed house of cards did enormous damage to mutual funds, and pension funds, and all of the kinds of funds that held the money of middle class citizens hoping to see their savings grow.

Almost all of those funds remain at levels considerably below where they were in 2007. Far from seeing modest gains, average citizens who had some savings now have less, or much less, than they had three years ago.

There is no reason at all to think mutual funds – stock funds or bond funds – are going to make anything for us in the foreseeable future. My own prediction is for further substantial losses in the next couple of years. Very big losses, actually. Governments and bankers almost surely are going to push Greece into bankruptcy, and that's going to have serious consequences for other countries, for the euro, for banks. And there's a strong possibility that the recent social turmoil in Greece is going to grow and cross borders.

I'd be surprised if several governments don't find themselves at real, armed, war with substantial numbers of their citizens within the next two or three years.

And don't forget that the financial hotshots already are back to their games with fancy “investment instruments,” like the real estate derivatives.

You maybe shouldn't take me seriously on any of that, of course. I'm just a rube sitting in Minneapolis. The fact remains that even without another major upheaval, the outlook for securities markets is lousy.

So maybe the thing to do is pull everything out of your mutual funds and stash your few thousand dollars in a bank CD or savings account, huh?


Banks, including the giants saved by our tax dollars, are paying so little on the average person's savings that money stashed there barely earns the country's current, very modest, 1.2 to 1.3 percent rate of inflation.

The national average interest rate on straight (passbooks) savings as of May 7 was about 1.3 percent.

Of course, if you put your money in a one-year certificate of deposit, you might earn 1.4 percent or, if you get on the Internet and look hard, as much as 1.8 percent. Be very sure you won't need your money in the year before the CD matures, though, or you will suffer an over-all loss. Penalties for early withdrawal, doncha know.

In truth, by searching the Net, I found a few banks neither you nor I ever heard of paying as high as 4 percent (Wow!) on CDs.

Of course, it wasn't very long ago that quite a few institutions paying notably more than market rates – obscure banks often in small towns – went belly up. The top officers of some of those banks sort of...uh...disappeared with substantial hunks of the deposits before the legal authorities got there.

Not to say that all, or any, of the current above-market-rate institutions are crooked. Just pointing out an historical fact. An interest rate of 4 percent doesn't seem worth the gamble.

Gold or silver? Sure way to get burned. Even if you have enough money – Fixed News's Weeping Glenn Beck, the present top gold hustler, to the contrary -- the smart guys will know when that market is going to fall apart long before you've had even a tiny hint that anything is up (or down). We're the people they sell to when collapse is imminent.

Banks, by the way, are doing fine, thank you, unless their management was drooling stupid. Big banks, the ones that caused all the problems, the ones we bailed out, are doing considerably better than fine. What the hell; they can borrow from the gummint at almost 0 percent interest.

They're charging We the Suckers – those of us with the very best credit ratings -- 6 or 7 percent interest on car loans (a few are cheaper because auto makers are desperate), 5 percent on 30-year mortgages, an average of 12 percent or more on credit card debt (20 percent or even more if you take a cash advance on your credit card). And they're back to laying on “fees” for issuing you a card and for a wide assortment of “services” that would seem to an ordinary customer as simply parts of doing their jobs. They learned from the airlines.

One thing they're not doing is making loans to small businesses.

Another thing they and their employees in federal and state governments have jiggered, to their own benefit and our certain loss, is the entire system of handling retirement money. And they're rapidly fixing our health-care system so that we get even more entirely screwed on those – aside from and in addition to the obvious big screwing by insurance companies.

Plain old pensions are disappearing at a rapid rate, and only a small minority of people working now can expect to be paid a fixed monthly sum every month from their present employers after they retire. Most people now rely on 401K and/or IRA plans to save for retirement.

And what happens to the money people have deducted from their pay to be put into those plans? Right. Most people have some choice among mutual funds, but no choice about whether or not to trust their retirement savings to some mutual fund, or funds.

Health care? Increasingly, employers, including state governments, are cutting their contributions to employee health insurance and, in many instances, requiring their employees to pay into some sort of health savings account. Money is deducted from salary and paid into an account; the employee uses money from the account to pay medical bills. And where does the money sit, in many cases, until the employee needs it? Right. It is in some sort of investment fund run by a bank or brokerage or insurance company. The employee has no voice in who gets to hold, and play with, the money.

One more thing:

The May 6 action/inaction of the U.S. Senate in refusing by a vote of 33 to 61 to pass the SAFE Banking Act, which would have required the breakup of the six biggest banks in the United States, received far less than it deserved. What coverage it got was presented in such a way as to discourage the attention of the average citizen.

The bill, which would have gone a useful way toward reducing the political power of the country's financial elite, obviously was rejected by a lot of politicians who call themselves Democrats. People need to know about this, and to see how their senators voted. Use this link to see a good story on what happened and a list showing how each senator voted: http://www.truthout.org/congress-backs-wall-street-rejects-big-bank-break-up59269

Personal opinion: The best thing we can do right now is cut as many ties to big banks and investment brokers as possible. Almost everyone can join a credit union these days, and if you can't do that, there still are some decent, relatively safe community banks around. Give your savings to those folks for safekeeping. They generally put it to good use. Pay off credit card and other debt as quickly as possible, and get credit cards issued by your credit union or a small bank. Shift the balances from the big mobs... sorry, banks...to smaller institutions. That will be good not only for you, but for the country. It's a way to cut the big guys down a tiny bit, one account at a time.