For our economy to recover we need higher interest rates. Low interest rates hurt savers and help bank speculators. Here’s how that happens.
In an economy where real inflation is 5%, grandma and grandpa are forced to put their savings in banks that are only paying them 1% interest. That means these old folks on a fixed income are losing 4% per year of the money that would normally be paid to them in a free market economy – one where interest rates keep pace with inflation. This amount has run into hundreds of billions of dollars, stolen from retirees and the the poor, to benefit whom?
Big Banks.
By keeping interest rates low Ben Bernake and the Fed are making huge amounts of money available for big banks to use in their speculations, betting on fluctuations in the British pound, or the price of oil, or utterly opaque derivatives like bets on fluctuations in some index like the Dow Jones.
So grandma and grandpa are being penalized so that big banks can speculate in oil, and drive gas prices up, burning us – the ones who bailed them out – all over again.
But what happens if we raise interest rates to say 5%. Grandma and grandpa and other savers start getting a fair return on their money, so savings increase and more money becomes available in small banks to lend to small businesses. At the same time speculations become less attractive to big banks. They can make so-called profit on money they borrowed for 1% when a price index rises or falls by 2%. But they can’t make money on a 2% fluctuation when they borrowed money at 5%. So with higher interest rates insane speculation dries up, and money gets reinvested in the real economy.
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Wash trading
Wash trading is illegal. Big banks use it to manipulate the market.
Say oil is trading at $90 a barrel and JP Morgan has a lot of it and the price is holding steady. So a devious JP Morgan trader tells JP Morgan “subsidiary A” to buy lots of oil at $95 a barrel, and then immediately sell it to JP Morgan “subsidiary B” at $95 a barrel. The money has just gone in a loop, from JP Morgan back to JP Morgan. But what market watchers see is that oil has just traded at $95 a barrel. They think a run or price spike may be in the making so they start trading oil furiously and by doing so they drive the price up to say $93 a barrel, at which point JP Morgan dumps all the oil it was sitting on and makes a huge profit. Egregious market manipulation.
JP Morgan made billions doing this a couple years ago. They were caught and fined $30,000. Fucking hell.
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More about oil speculation
A couple years ago oil had traded up to $145 a barrel and the buyers for companies that actually USE oil – airlines, plastics companies, utilities – completely stopped buying it because they knew the price was crazy/high, and none of the guys they had known for years were buying or selling. They knew there was a huge supply of oil at the time, and in a cratered world economy, very low actual demand. The pricing was being jiggered by speculators fueling a Ponzi scheme, until after a few months it crashed back down to $90. But before it did the fuel companies used the cooked numbers to murder us on gas prices.
