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The Suicide Bank

“I’d throw dollars out of helicopters if I had to, to stimulate the economy.”

– Ben Bernanke, Chairman of the Federal Reserve 2006 to 2014

Travel back in time with me to September 15, 2008. The world had just wrapped up a truly remarkable Olympics. The US was gearing up for an Obama v. McCain showdown in November. I’d recently sold a VR company I founded for just over a billion dollars. I’d just met my girlfriend Connie at a rave or something.

Connie: I have to interject here. First, I should point out that, somehow, twelve years later, I’m still just his girlfriend. More importantly, though, we met in the library at Columbia University; I was a grad student at the time; Justin, being much older than me and in town to give a guest lecture, played the charmingly lame hand where he pretended to have forgotten his reading glasses and, “Young lady, could you by chance help me find the economics section?” Of course I was in love. The fact that he was famous for being one of the world’s youngest billionaires helped. But anyway, we met in a library. Justin Wolfe has never been to a rave in his life.

Justin: Thanks for that helpful interjection, my love.

Connie: Anytime. Here to help.

Justin: Anyway, back in 2008, I didn’t yet even know Evan White because he was still in short pants.

Evan: Is this an ageist thing we’re doing here? Because I have some thoughts on that…

Justin: If we’re through with the interruptions, whatever was happening on the global stage, in the library at Columbia, or in Evan’s boyhood wardrobe, the big thing everyone wanted to talk about was Lehman Brothers, and how well and truly screwed they’d gotten themselves. The Bear Stearns collapse had already been underway since March, and now suddenly this financial juggernaut was just closing up shop? Just like that? It was crazy. It was like a market-collapsing, economic tsunami that started by taking out the US economy before washing quickly over the rest of the world.

Laz: Hold on, boss. We’ve gotta remember that this book is going to be timeless. It could be twenty-some years from now when this particular reader is holding the thing and reading what you just wrote. They’ll be saying, “C’mon, man, it’s been X-number of years since the friggin’ Great Recession, and I’ve read about a million different postmortems of that situation already. Why would I want to do that again?

Justin: Good point, Laz. And you are certainly well-versed and well-read, my friend from the distant future. Also, I love that you use the word “friggin’,” as it’s one of my personal favorites.

Your point is well taken, Laz and my future reader. So let me make a promise here: I’m not going to do another postmortem on the Great Recession (or the GR for short). Instead, I’m going to use the GR as a backdrop for a story about something that occurred to me on September 15, 2008. Is that fair?

You look skeptical, Connie.

Connie: …

Justin: Okay, I guess we’ll see.

Jump (Or Don’t Jump)… It Doesn’t Really Matter

So here’s the story.

You probably won’t even believe it because it all just sounds so cliché. I happened to be walking through the financial district on that awful day in September—and let me tell you, what a weird time and place that was to find oneself in. I was still kind of getting used to my actual billionaire status, so I had this bounce in my step that can only come from becoming rich so recently. The timing couldn’t have been better for me, because I was suddenly in all cash right as the markets dived. This turned out to be a blessing, because talk about buying low!

Funny thing here is that the economic collapse wound up making cash incredibly valuable. It wasn’t that stocks were cheap; it was that there wasn’t enough money to go around, so everything became cheap compared to money. And it became cheap because of those weird rigors of the bank-loan story I took us through in the previous chapter. There suddenly wasn’t enough money in the economy, so how were these bankers supposed to keep making loans? The cash I had on hand was now just crazy, crazy valuable.

I’d also just met Connie. All was right with my world, is what I’m saying.

Connie: (Eyeroll.)

Anyway, since I was out wandering through the world and not paying attention to my brand-new iPhone 2, I hadn’t yet heard the news about the collapse of Lehman Brothers. I found out about it by way of the hubbub I bumped into up the street. A crowd had gathered, and everyone was craning their necks and sighing with concern at something happening about twenty stories up.

There stood a man in a fine suit. Right there on the window ledge. From the look of things, he’d had to shatter the thing to get out there, because it wasn’t the kind of window you could open. And yep, after surveying the ground outside the building, I found the spot where his desk chair had shattered into scattered nuts and bolts and fiberglass matchsticks.

“Don’t jump!” everyone was hollering.

Curious, I started asking around. The incredulous crowd filled me in on what had happened with Lehman Brothers, and what the early word suggested it signified. Here we were staring at a full-blown economic collapse spurred on by the kinds of bad loans Bear Stearns and Lehman Brothers had been championing.

As it turned out, the man on the ledge, his tie flapping in the wind, his tortured screaming only just barely intelligible from twenty stories below, was a banker with Lehman Brothers. Apparently, he’d been in deep on subprime mortgages, and he was at that moment feeling like something similar to the Typhoid Mary of the coming recession—or for a more modern reference, whoever the Typhoid Mary of COVID happened to be. China, I guess, if you subscribe to the television channel on which Connie most frequently appears. Dude was maybe going to get pariah’d is what I’m saying.

At first glance, his reaction might seem somewhat reasonable. Guy builds his whole career around his skill with numbers and finance. He goes to a great school and lands his dream job in NYC, massive salary all but assured. He proves himself the kind of whiz-kid financial guy that climbs ladders and invents whole new junk funds for the rickety Bankism economy to prop itself up on. He had to have been an incredibly loaded young man. Now, suddenly, the system collapses, and he finds himself buried under a junk fund avalanche of his own making. Everything he thought he stood for and worked for? Gone in the blink of an eye.

I can kind of understand why he tossed that chair through the window, and why he stood there screaming about wanting to jump. It’s tough to lose everything.

(By the way, I’m going to withhold until the end of the chapter the truth about whether the guy jumped. My writing coach tells me this is called a cliffhanger. What matters at this moment is the epiphany I had while staring up at this extremely troubled banker.)

Here’s the epiphany: this banker guy only thought he’d lost everything. The truth is, there was something very wrong with this picture, the banker guy standing on the edge of death. That banker guy had no reason to jump. He would soon be just fine. The Fed would simply print more money, buy all the bank’s bad loans, and everyone would move on.

You know who did have plenty of reasons to jump? All those people who lost their houses after the system collapsed. These were everyday people just trying to work and make a better life for themselves. Who could have blamed them for taking that too-good-to-be-true mortgage deal? I’d’ve done the same thing. So would’ve Connie, no matter what she tells you.

Truth be told, in the debt-driven quagmire that is our reality, where savings accounts don’t yield a return, mortgages are not just necessary for home ownership for most people; they are a good idea.

Connie: I absolutely would not have taken a too-good-to-be-true mortgage deal. That is a fact.

Justin: Then you would have missed out on historically low rates that are outpaced by the increase in property values. Unless it’s 2008. In which case, all these everyday people were going about their lives; and the next day, they were losing their houses.

And bizarrely (or you could read it as despicably), the Federal Reserve took over these mortgages, which then allowed bankers like the will-he-or-won’t-he jumper to buy up all these properties at a massive discount. How do we know it was a discount? Because if money is printed just to buy the properties, there will always be more buyers than sellers. Any two-bit banker knows what happens next: property values start going up again.

Laz: As it happens, there are many who became very wealthy, and some even became billionaires on exactly this strategy.

Connie: Fake news. If wealthy capitalists hadn’t moved in and bought up these houses, the recovery would have been even slower.

Justin: At the risk of cutting through this tension, I think I’ll move on… Sure, that banker guy had lost his shirt on that one bad play, but in no time at all, he would be on top of the world again. Why? Because Bankism ensures that he is on the winning side of the banks. As a banker, as long as he doesn’t get scapegoated as one of the guys who “ruined things,” he’ll be fine.

Laz: Isn’t it interesting that there were a few scapegoats following this economic disaster, but almost no one went to jail?

Connie: It’s not that interesting. No one broke the law.

Evan: Technically, she’s right. Also, banks need to keep lending money even if it’s subprime. How else are they going to keep the economy “growing.”

Laz: Strong use of air quotes there, Ev.

Evan: I use them because “growing” is definitely a relative term. We’ll get into that later.

At the end of the day, what matters is that the banks run the Federal Reserve, who themselves control the money-printing presses, which means whenever the money runs out, they can just print more. Even an economic collapse wasn’t going to change that.

And you know what? My epiphany was right. Not even an economic collapse changed that.

Yes, Lehman Brothers went the way of the dodo, along with Bear Stearns and some others. But Bankism remains alive and well thanks to Quantitative Easing.

In my experience, whenever someone uses the words “Quantitative Easing,” people start to get all tense and terse. So instead of letting the three of you get after each other, you know what might be a good idea? It might be a good idea to turn it over for a full section from one of our genuinely remarkable ideological thinkers, the love of my life, the woman with three first names, Connie Anne Kelly.

The Great Sham of Quantitative Easing

It’s introductions like these that should make it clear why Justin has such a hard time finding someone to marry him.

Anyway, let’s get ideological. Let’s discuss the perspective on all this from the right.

If banks are indeed the source of all the world’s problems, then the Great Recession is the catalyst to our story.

Once, I got a little too drunk on Wall Street and I fell and broke my nose against the sidewalk.

Justin: It’s true! I was there. The ride to the hospital was like a slasher film. I didn’t even bother trying to clean and sell that car. I just wheeled it over to the scrap yard.

Connie: I was wearing these ridiculous heels at the time, and they… Anyway, that doesn’t matter. Point is, if you fall and break your face, sometimes it’s better to just stay down instead of getting back up and trying to keep walking.

Justin: I can vouch for this piece of wisdom too. She should not have kept trying to walk.

If Justin would stop interrupting the section I’m supposed to have all to myself, I’d say this: Banks are not too big to fail. One could fail and we’d all be perfectly fine. The reason Quantitative Easing happened is because the banking system, which my boyfriend cleverly calls Bankism, has taken over the world and will not allow itself to fail.

It’s like that forward-thinking numbers guy from Justin’s analogy in the previous chapter. Bankism is a debt-driven, loan-dependent system that often has to tell little lies just to keep itself running. (And quite frankly, no one is alive today that has any experience with a world that is not debt-driven). Here’s the lie in this case: If we want to prevent the economy from disintegrating and the whole of the civilized world from collapsing into a Mad-Max-style hellscape, then we have no other option but to bail out these massive banks.

But here’s the truth: The trillions of dollars we wound up using to bail out those too-big-to-fail banks was a number designed to ensure liquidity so that banks had cash. Resulting from this flood of cash was a lowering of the value of the dollar. That’s right! Following the economic collapse, money became too valuable. That’s why Justin was so damn lucky to be standing on a pile of cash at the time. Banks had too little money on hand to go around, so they simply injected more of it into the system, lowering the value and replenishing their loan-giving coffers.

But the big question is, why did banks not have enough money on hand to go around? Because banks lend the same money out over and over again. No one should be surprised that an institution that engages in that kind of practice would run out of money. There used to be a thing called a ‘run on banks’ because people used to fear that banks would run out of cash because there was no way for the banks to pay back all the money that was held in savings.

But then in 1933 FDIC was created which insured accounts of Federal Reserve Member Banks, which basically means that the Fed can print money to replace the money banks had lent out from their customers’ savings. Put another way, The Federal Reserve Act basically handed the management of the money supply over to the banks (all at the hands of the biggest banker in history, JP Morgan). Banks, the creators of the quagmire that is Bankism, were given the keys to bail themselves out. Pretty nice little trick, huh?

Quick recap: Banks created these portfolios of junk loans called subprime mortgages. These assets wound up well underwater. So when that tanked the banking system, the Fed just invented new money out of the sky and used this new sky-money to create Quantitative Easing to buy back those portfolios full of junk loans. And here’s the worst part: Quantitative Easing is a Pandora’s box we’ll never get shut again. People paid close attention to it in the year or two following the GR, but it has been used time and time again in the decade since—and it’s been used in spades during the COVID pandemic.

However you look at it, here’s the reality: Politicians and financial regulators bailed out the system that created the financial crisis, mostly because it was the only thing they knew how to do. They never bothered questioning whether the banking system itself needed fixing. No one ever legitimately pushed the question, “Should we really be going back to a system that creates these kinds of problems every few years?”

And here’s the funny part! Bankism also has led to a situation where politicians can now say anything they want about how to make the economy better. One can say “raise taxes,” while the other can say “lower taxes,” in an effort to create jobs or pay down the debt and they can’t both be right and both be wrong.

So, instead of challenging the status quo, from 2007 to 2008, the Fed did nearly everything in its power to revive the lending markets, including lowering the interest rate from 5% to zero (literally the lowest possible rate it could give) and buying up over $300 trillion in agency debt from mortgage-backed securities that were precariously invested.

The Fed wasn’t alone either. In 2009, as one of the first major acts of his presidency, Barack Obama signed a bill allocating a $787 billion stimulus package aimed at the financial markets, an act that contributed to a $1.26 trillion government debt by 2012. Ask me how I feel about that… Okay, don’t.

In any case, this debt sounds completely awful, but it pales in comparison to the pandemic response, which basically gave people more money than they earned in the jobs they’d lost, essentially allowing them to live on their couches for months, all at a staggering cost of $6 trillion.

“We base all our experiments on the capacity of mankind for self-government.”

--James Madison – Quoted in The Nonviolent Right To Vote Movement Almanac

That quote from Madison has me all aflutter, so if I may go off on a brief tangent…

As the government decides whether millions of people have enough money to eat and afford a home, at what point do we realize that the government has taken sovereignty from its people? At what point does Mitch McConnel’s debating whether to vote or not to vote, yes or no, on whether people live or die from famine and homelessness, when is this not a dictatorship? The idea is supposed to be that the government is beholden to the people and it had no other source of power except the sovereign people.

For two and a half centuries, we’ve proven man’s ability to self-govern, but today, we watch as the government is beholden to the debt collectors while the sovereignty of the people has been lost to the same banking system.

It’s like Plutarch warned: “The real destroyer of the liberties of the people is he who spreads among them bounties, donations, and benefits.” Bankism spreads these bounties, donations, and benefits, and the true freedom for Americans has been lost.

But if I can get past my feelings about the loss of our liberty, I can see that what is even worse is how the system creates scarcity of money and therefore a scarcity of everything else. The Federal Reserve is responsible for keeping the credit markets working properly. And since the commercial banks own the Federal Reserve, it should be no surprise that they were the ones to receive the bailout.

So when it comes time to save the economy, nobody even thinks about doing something different instead of immediately scrambling to repair the old, broken system. Sure, Quantitative Easing was a new idea, but only as a means to keep the old, broken system going.

At the end of the day, the politicians, in their naiveté, got their action steps from the very people who needed to be bailed out. And the only institution that could readily remedy the situation was the Federal Reserve.

The Great Recession of 2009 proved that the banking system isn’t just based on credit, as JP Morgan famously said. Rather, money could also be had through Quantitative Easing, which is the purchase of debt assets like bonds and mortgages. It basically takes all the risk out of owning debt, which is great for banks, corporations, and the government, but it comes at the price of sovereignty and liberty.

Bankism robs us of sovereignty and liberty because the government claims it can simply refinance a debt it will never be able to pay back. This is only true as long as other countries are willing to supply us with the same priced goods and services in addition to buying our debt, aka treasury bills. If their prices go up, then the bill is due, and America will have lost its ability to refinance the debt.

However, it is worse for the individual, who is forced into debt by the high cost of living. They can be placed in jail for not paying their bills, not to mention homelessness, starvation, and desperation. Goodbye liberty.

Evan Brings the Water

Okay, okay. Things are getting a little finger-pointy around here. Take a deep breath, everyone. Again, we’re not out to blame the bankers or the big banks, but rather, the system they operate in. Banks and bankers are just doing their jobs and trying to make money, after all.

So, hey? How about we turn it over to an apolitical actor named Evan for a bit and see if maybe cooler heads will prevail?

Hello! Evan White here again. And I’m bringing another analogy.

Imagine a pond full of water.

Justin: What else would a pond be full of? Toxic waste?

Evan: Well…sometimes, yes, a pond is full of toxic waste.

Justin: Man, you’re right. (Shudder.)

The water in this pond represents all the money the Federal Reserve has loaned out to banks or otherwise printed for distribution.

Now, let’s imagine that surrounding the pond are the banks themselves. Picture big, square-shouldered buildings with some columns out front, but otherwise they’re completely uninspired architecturally. Banks are boring. But for this analogy, they’re drawing water from the pond, temporarily borrowing it. These banks then loan this water to each other and to their customers, who are grateful to have some water to drink and use to water their crops.

The more the banks take out of the pond, the more water they have to put back in. Banks make money by borrowing and lending from this same pond of water over and over again. If one of these banks makes a bad loan with their water, then not only does that bank not get its payment, but the bank itself will not be able to make its payment on the water it borrowed, which means that the water starts disappearing and the pond starts drying up. In the past, there would be a panic and people would worry that the banks would run out of cash. Now, the Fed responds by creating more water and putting it into the pond. This sometimes leads to the overflowing of the pond—which in this analogy equates to inflation.

Like the water in a pond, there is only so much money to go around. But the banks have discovered a remarkable system for loaning out water and then recycling it so they can loan it out again—eighty times and counting!

Think about that for a second. Loaning the same dollar eighty times is like juggling eighty balls at once…and with only one hand. No wonder Quantitative Easing wound up looking super necessary in 2009 and is even more necessary during the COVID pandemic.

What happened during the Great Recession? The pond dried up. And how did they fix the problem? They poured four and a half times more water into the pond than existed there before. Four and a half times! How did they manage to fit this much water into that same space?

Quantitative Easing. Think of QE like a giant hole in the ground at the base of the pond. It just sucks all the extra water down and away. Where does it all go? Ha! That’s the funny part. All the banks, those clever, boring-looking institutions, have built reservoirs under their foundations, and it is into these reservoirs that all the QE-hole-water gets drained.

In the real world, the banks call these reservoirs “reserves.” Following the GR, these reserves had to grow by law. Decision-makers looked at the problems following the GR and said, “What we really need is to create a system that ensures our banks never run out of money/water again. We’ve got to make damn certain the banks always remain liquid, or the whole system will collapse…again.”

Justin: If you’re a discerning reader, which I know you are, you’ll want to put a pin in this idea of bank reserves, since it’s particularly useful for controlling the money supply and inflation. For now, what this says about money is interesting; these reserves are simply money for the banks to sit on so they don’t run out. The only reserves they used to have came from people’s savings, but now it’s just money that was printed from thin air.

And let this brew in your mind until the latter pages of this book: once bankers decided to lend out money from savings, over and over again, money stopped being tied to the value of gold and became something else entirely, since gold can only exist once, and definitely not 80 times. When we switched from the gold standard to this fiat money, it was almost like you could hear the sound of a big gong echoing in the sky to signify a major dent/shift in the fabric of the universe.

Evan: Oh, a gong! Fun! In the end, it’s quite simple: Prior to the GR, all the money in the world used to come from a pond full of a finite amount of water called asset-based lending. After the GR, thanks to the birth of QE, banks got to benefit from always having that reserve in their sub-basement, along with their ability to sell bad debt whenever they got into trouble. Banks dried up the pond by creating junk assets based on bad loans, and the response was for the Fed to buy up those junk assets and trade them for more water to fill up the banks’ reserves—except that water is real, while printing money is not; it’s just a number in an account.

Justin: For all you readers who are not bankers, pay attention. What he’s saying here is that the Fed bought all the bad loans—which, by the way, a bad loan is defined as money that is not going to be paid back. This essentially means that the Fed printed money to buy something that was utterly worthless. I bet you could make money this way too. So could I. Hell, I know of several things in my attic that could be described as priceless, if you know what I mean.

Laz: Or hey, I was a homeless guy back in 2009. Maybe the Fed should’ve bought my shopping cart full of junk that I pushed around everywhere. Same thing, right?

Evan: Exactly the same thing.

Justin: What a system! It’s so remarkable that I feel compelled to over-explain what’s happening here.

Banks started off by simply offering a safe place to keep money. They took that money and lent it out safely so they would get paid back. As the number of loans increased, society slowly became dependent on banks making loans. We have named this Bankism.

As time passed, the banks needed to come up with new ways to pump more money into the economy or the economy would fail to pay back the earlier loans. In this way, a debt-driven spiral of ever greater debt was created. It has become increasingly difficult and frankly unwise to live without debt. Today, debt financing costs much less than expected asset appreciation. Therefore, not using debt is not smart.

The problem: Debt has to be paid back. When banks wind up making bad loans, which is inevitable, the Federal Reserve is forced to buy these bad loans because they don’t want the economy and the banking system to fail. When the Federal Reserve creates new minted money, it winds up flooding the owners of the bad debt with cash, causing assets like stocks to surge in price, just like it did during the economic collapse that followed the COVID crisis. It also replaces the money that was supposed to be earned but no longer is because the economy has failed, again. So, while banks are sitting on a massive cushion of cash ensuring their sovereignty, the people of this country that they are supposed to serve are pushed into a life of indebted servitude. As Connie said, we have therefore lost sovereignty on the national level and liberty on the individual level.

A System Based on Debt Cannot Survive

My friend, there are too many things wrong with a banking system that is supposedly independent of the government and the economy while also controlling both of those things.

As long as this debt-driven economy exists, greater and greater amounts of credit will be necessary to fuel growth. The problem with debt and credit is that they have to be paid back, which means less spending power and more work to make up the difference in the future (for everyone). Unless, of course, there’s more debt. And round and round we go!

The other problem with needing more and more debt is that eventually bad loans not only start looking attractive to bankers, but they start looking essential. And because of QE, bad loans are without risk. In other words, some marginal bank somewhere is incentivized to start fudging its principles for making a good loan, because if it doesn’t make the loan, then it can’t pay its bills and it will go out of business. Put another way, the banks are always getting pushed toward making bad loans. Think about it: they can either fail now or fail later, so they choose to fail later by making bad loans now.

Put yet another way, it’s like the whole system is designed to kill itself. And here we all stand, the rest of us, making all these sacrifices just to keep it alive.

The Great Recession’s most significant revelation was this: The banking industry operates under a huge conflict of interest. Many say that the actions taken in the aftermath of the Great Recession saved the economy and returned the world to “normal.” But is this a good or sustainable version of “normal”?

Commercial banks owning and operating the Federal Reserve is like private prisons owning and operating the legal system. The conflict between the business interest of banks and a moral, reasonable society are staggering. That conflict led directly to the GR. And yet we’ve learned in the years since—and especially during the pandemic—that the GR only scratches the surface. The Banking System may very well be responsible for the imminent demise of humanity.

And so it was with that fluffy thought in mind that I stared up at that banker/jumper on the day the banking system died (temporarily). Here this gentleman was very seriously pondering whether to make himself dead (permanently).

There’s a certain energy that comes with watching a living being stand on the precipice of death. The only other time I’d experienced this sensation was during a bull fight in Sevilla, Spain. Barbaric as that tradition can seem to some, there is no denying the rush of adrenaline and the almost inherent thrill that comes from watching something die.

That same feeling rippled through the crowd below the jumper’s building. By now, the police had arrived and had cordoned off a wide perimeter behind which everyone was forced to stand. Of course this action was absolutely necessary, so as to prevent the jumper from crashing into anyone else on the street below and ending more than one life in the process; but it also struck me as an odd sort of action, in that it must have looked to the banker/jumper as if the police had just cleared him a nice landing pad to splatter into.

So there I was, a newly minted billionaire surrounded by energized and terrified and overwhelmingly curious onlookers—and there we all were, surrounded by a new reality that promised a nearly decade-long recession and a brand-new form and use of money from the banking system—and there stood the jumper, tears flowing down his cheeks, his lips moving desperately as he shouted into the sky, a banker too high above the ground for any of us to hear.

Here was a man who needed saving. He represented a banking system that absolutely did not need saving. In the end, that tragic day took the life of the former and not the latter. I will spare you the gruesome details, but I just have to say that witnessing a man jumping to his death is in no way something I would recommend. The sight still haunts me, every time I think about it.

But the sight also instilled in me a new perspective about the world in which we live. Any system that could create this level of sheer desperation could not possibly be a healthy, functioning system. Bankism would pull the rug out from under the fortunes of many people, cause billions more to suffer deeply through the Great Recession, and even cause some to take their own lives.

It was then that I realized the problem: a debt-driven world is fundamentally flawed. How fundamentally flawed? I’m glad you asked…