Tag: Interest rates

Why is this news to anyone?

Here comes the BOOM!

Us Debt Interest vs. Defense & Non-Defense discretionary spending

Take a good look at that graph above. The WSJ created that graph to show how interest payments on US debt will balloon as interest rates finally adjust. The fact of the matter is that our government has kept interest rates artificially low, through a slew of costly tricks, schemes, and scams, in order to keep interest payments low. And their success is debatable. They had to right the interest index, by removing the cost of fuel and food, while throwing billions at the problem in the form of QE and other such stupid schemes, to prevent the interest payment from going over $200 billion a year.

These government games have wrecked the economy and caused serious harm to the middle class, which has been punished for doing the right things. This all has happened while these programs have made the already rich richer and transferred a ton of wealth from the middle class to those that vote for a living. There is a class war going on in the US, but the left has targeted the middle class in order to expand their voter base: the non-productive. But let them keep borrowing despite the fact they are expecting an unprecedented windfall.

Our problem is twofold. First off, we have a shitty economy. Despite whatever they tell you that the numbers represent, the truth is that most new jobs are going to illegals, with over 18 million illegals now flooding our job market, and the 5.6% unemployment rate is a gross exaggeration that masks how bad things really are. If there was any reality to the claim of steady job growth and low unemployment, consumer spending wouldn’t be at its lowest since 2009 and there wouldn’t be a gloomy view of the future. But them is the facts.

Secondly, we fucking spend too much, mostly because the political class wants to buy votes from people impacted by the damage caused by the legislation enacted as a result of the vote buying agenda. Socialist paradises always end up with the same play book and results, and we are heading that way. We need to get spending under control, and the only way that happens is if we cock-block the vote buying schemes. Time is running out on us, and we have a choice between the people that think the answer is a bigger economy and less government spending, especially to improve the quality of life of people not working in the first place at the expense of the middleclass and those working, and those that feel the problem is government and government spending isn’t big enough because people are keeping too much of the government’s money.

Libor

I’ve been lazy on the Libor scandal because it made my head spin. It seemed like an obscure financial scandal confined to the UK. But I was wrong not to pay attention. As Matt Yglesias explains, this scandal — involving interbank loan rates — isn’t some obscure financial bullshittery:

Even though the typical American is never going to seek an interbank loan in London, the number is used as a benchmark for a wide range of other financial instruments. Credit instruments with variable interest rates—private student loans, auto loans, adjustable-rate mortgages, credit cards, etc.—need to be indexed to some underlying marker of the overall cost of funds within the financial system. Often that’s something called the “prime rate” set here in the United States, but it’s also frequently the Libor. So growing evidence that Libor numbers have been deliberately manipulated by banks for years means that millions of people have been paying the wrong interest rate on all manner of financial products. Vast sums of money have been wrongly snatched from innocent people and created equally vast undeserved windfalls for others.

Essentially, Libor is an estimate of what it costs for banks to lend each other money. Those interest rates feed … everything. They are based on banks reporting data on borrowing. And it turns out that banks tailored their reports to under- or over-estimate Libor so that their financial arms could make huge profits on the information asymmetry. The banks knew what the real libor was but made sure a bogus libor was put out so that they could make millions. Then, when the financial crisis hit, both the banks and the regulators conspired to keep the rates low so the economy and the banks would seem healthier than they actually were.

A few heads have started rolling — put a pin in that for a second — but I think people are missing the forest for the trees. The corruption of Libor was inevitable. An informal system like this may have worked when all the bankers knew each other and agreed not to manipulate the system. But as Mark Calabria notes, it was never going to be as good as a system based on actual market performance. It was precisely the sort of cosy insider bullshit that has been exploding in our faces for the past five years.

And this is bigger than the billions or maybe trillions these guys ripped out of our pockets. What this really is, when you think about it, is a suicidal attack on the financial system itself. The financial system functions on trust. If we come to believe the game is rigged, we might as well just rename ourselves New Zimbabwe. So far, Barclay’s is the only bank implicated, but that’s because they’re cooperating (sorta). This will spread and spread until banks across the world are engulfed.

Now, returning to the head rolling: I’ve frankly lost patience with these fuckers in the banking industry. When they make me agree with an op-ed by Robert “The Littlest Communist on Slate” Reich, they’ve gone too far. Rolling out the heads of a few mid-level executive is simply not going to cut it this time. Entire boards need to be fired. People need to be jailed. This business of shrugging shoulders and offering a few ritual sacrifices is insufficient for this crisis.

Let’s be clear: we don’t need some new huge slate of regulations and capital restrictions. Stephen Baindbridge points out how often these crises result in bad laws that hurt the economy and do nothing to prevent further scandals. No, what we need to do is enforce the laws we have to the fullest extent. What these guys did was fraudulent. We’ve had laws against that for centuries.