Playing Big Banks: Smart Money Works within the System

Unless you have been living under a rock since 2007, I believe you know the story…

The smartest financial brains in the world, the people we look to for financial wisdom, the men and women who went to the best schools in the world, supposedly receiving the best financial education in the world, caused the biggest financial crisis in world history.

There was a lot of blame thrown around during that time. The subprime mortgage companies were vilified. The Center for Public Integrity found that U.S. and European investment banks invested enormous sums in subprime lending due to unceasing demand for high-yield, high-risk bonds backed by home mortgages.  Subprime lenders charge rates that are higher than prime—the rate offered to a bank’s most creditworthy customers.

Subprime lenders say they serve an important function—offering credit to people who have been snubbed by traditional mortgage lenders.

Borrowers, on the other hand took advantage of the subprime lenders offer and were spending a much higher percentage of their income on housing during the subprime lending boom.

But who is really responsible for such a financial crisis?

The former economic adviser to President Trump, Gary Cohn, defended Wall Street Bankers, saying the borrowers were just as responsible for the 2007-2009 financial crisis as lenders.

“Who broke the law? I just want to know who you think broke the law,” said Cohn. “Was the waitress in Las Vegas who had six houses leveraged at 100 percent with no income, was she reckless and stupid? Or was the banker reckless and stupid?”

Could the real problem be the lack of financial education of the masses?

I’m sure you could guess that my answer is yes. But not only for that waitress in Las Vegas, but also the leaders of our financial institutions.

Why the Banks Got Bigger Post-Crisis

As the news of the subprime crisis spread, old investors and new investors panicked and wanted their money back. Savers also wanted their money back, and the world economy, a massive Ponzi scheme, nearly collapsed. When people stopped sending in their money and began demanding, “Show me my money,” the global markets crashed. Millions of ordinary people lost trillions.

To save the world economy, central banks and governments of the world were forced to step in and promise savers and investors that their money was safe.

The problem is that millions are still wiped out and millions more do not trust the government and financial systems. They shouldn’t. The entire global financial system is a government-sponsored Ponzi scheme. It works as long as you and I keep sending our money to people we hope are trustworthy.

Imagine what would happen if young American workers said, “We will not donate any more to Social Security.” Not only would the U.S. economy go into chaos, but the world economy would probably collapse.

President Bush signed into law the $700 billion Emergency Economic Stabilization Act of 2008 on October 3, 2008 in hopes of putting a tourniquet on the bleeding economy.

That legislation created TARP (Troubled Asset Relief Program) to buy mortgage-backed securities and hold them until they recovered some of their value and could be auctioned.

The name of the game was bailouts for institutions that were too big to fail.

Also, the Federal Reserve began committing hundreds of billions of dollars to guarantee against losses on failing mortgage assets of AIG, Citigroup, and Bank of America. While the government was trying to save banks through bailouts, legislation was put into place creating regulations and oversight.

“We haven’t ended ‘too big to fail,’” Cohn said. “We made rules and regulations that made (the big banks) bigger. Congratulations.”

It’s my opinion that the Fed exists to protect big and powerful banks. The big got bigger.

Cohn left a long career at Goldman to join the Trump administration because he “worried that regulation and taxes were constricting growth in the united states.”

“We needed to get competitive with the rest of the world,” Cohn said. He spent a little over a year in the White House and left after pushing through a major tax overhaul Trump signed in December. “We now have taxes to a point where we are globally competitive at 21 percent.”

Why Training and Educating Are Different

Back to the Las Vegas waitress. Are people like her really to blame? One argument could be made that she was doing exactly what the government and banks allowed her to do. After all, regulation was loose then. Banks handed out loans to everyone.

On the other hand, like the question that Gary Cohn posed, “Was she reckless and stupid?”

The answer is both are correct. Banks were reckless, and the waitress was stupid.

The solution lies in financial education.

If you want to avoid getting wiped out by the next financial crisis you must get educated. But most people don’t know the difference between education and training.

In the real world, people toilet-train their children. They do not toilet educate their children. People train their dogs. They do not educate their dogs.

The term “Pavlov’s dog” has come to signify the difference between education and training. In simple terms, ring a bell and Pavlov’s dogs salivated and got hungry, even if there was not any food around.

For those not familiar with the term “Pavlov’s dog,” the term is derived from the famed Russian physiologist and Nobel Laureate Ivan Pavlov (1849–1936), who was recognized for his research on the digestive system of dogs. He is credited with the term “conditioned reflex.” Pavlov’s dog is used to describe someone who merely reacts to a situation automatically instead of using critical thinking.

In many schools, school administrators are proud to say they have financial education in their schools. In reality, it is financial training, not financial education. Just as Pavlov trained his dogs to salivate even if there was nothing to salivate about, millions of highly educated people are trained rather than educated when it comes to the subject of money.

You must know by now that the rich take care of the rich and grow richer. The poor and middle class grow poorer. And the people who understand that they must increase their financial education, save themselves and not rely on the rich, or the government, survive and thrive in times of crisis.


Robert Kiyosaki

The Daily Reckoning