Yes, the Financial System Is Rigged. Why Shouldn't You Profit From That Knowledge?by
Our system is rigged. Unfair. Hopelessly neglectful of the little guy.
All true. But do you really have a better choice? Did you honestly think Washington was going to let it all fail—and for good? After all, who’s backing Fannie Mae and Freddie Mac, which are almost single-handedly backing the resurgent mortgage market? Who pumped more than $2 trillion into suppressing interest rates to record lows?
This is the lesson we should all be taking as the Dow Jones Industrial average closes at yet another record. It’s the lesson of how Wall Street traversed the Great Recession, after it survived (and thrived) past Washington-ameliorated crises such as the collapse of Long Term Capital Management and the Savings & Loan imbroglio. You could—should—shake your fist at all the bailouts; the record bank profits that are once again accruing to shareholders and executives; the asymmetry of rescuing now impossibly large institutions when so many individuals had to mail back the keys to their homes. But, in 20/20 hindsight, it was also smart to hedge that runaway cynicism with confidence that the system would take care of itself. In other words, you should have bought in, literally.
Yes, food stamp use is also at a record high. Chronic unemployment borders on permanence. Real medium household wealth is at a decade low. Equity abandonment hit historic levels well into last year. Even with this week’s market milestone, nearly six out of 10 Americans still think the country is in recession. So what, signal the largest banks. After the Big Six’s second-most-profitable year on the books, their investors are primed to enjoy more than $40 billion in dividend increases, Federal Reserve preferences be damned.
You pretty much knew this swagger was back a whole year ago, when JPMorgan Chase, the biggest U.S. bank, blindsided the Fed by announcing its dividend hike two days before Ben Bernanke & Co. thought the news would go out. Never mind the fact that the London Whale was at the time blowing a hole in the bank’s income statement; the real statement here was Morgan declaring to the Fed, “You’re not the boss of me anymore.”
In retrospect, Wall Street has disproportionately benefited from the largesse of economic policymakers, from easy TARP terms to a long-stretch of largely free consumer deposits. But you knew it would, didn’t you? And you had the power to profit off of that knowledge—assuming, of course, that you had the money and the stomach lining to survive the meltdown. Cut-rate exchange-traded funds, after all, are not just the province of the ultra-rich. You could have set aside some indignation and bought a simple bank ETF that has tripled in four years. Too many of us were able to make such a bet but couldn’t quite bring ourselves to stop worrying and trust the system, however unfair it seemed.
Now, we see housing ascendant again. Corporate profits are breaking records, thanks in no small part to a Federal Reserve—the wealthiest bank in the world—hell-bent on seeing both things happen. “At least the first part of this rally is a rock solid foundation,” remarked financial blogger Barry Ritholtz. “The second half, the argument goes, is built on inorganic matter, primarily Fed liquidity and generosity.” By his estimate, the Dow would be 20 percent to 30 percent lower, absent the Fed’s finger on the scale. “You cannot,” he said, “understate its impact on corporate earnings.”
March 9, 2009, was, it seems, that once- or twice-a-generation moment when the market completely capitulates. I remember it well because it was the same week that a pair of BusinessWeek staffers summoned me to their stretch of the newsroom to ponder the new Great Depression and all the damage it would exact. One liquidated her 401(k). The other somehow kept the faith, and she and I have since been revisiting that moment of truth every week—the better to navigate the next one.