How Brokers Became Bookies: The Insidious Transformation of Markets Into Casinos
by: Ellen Brown
“You all are the house, you’re the bookie. [Your clients] are booking their bets with you. I don’t know why we need to dress it up. It’s a bet.” – Sen. Claire McCaskill, Senate Subcommittee investigating Goldman Sachs (Washington Post, April 27, 2010)
Ever since December 2008, the Federal Reserve has held short-term interest rates near zero. This was not only to try to stimulate the housing and credit markets, but also to allow the federal government to increase its debt levels without increasing the interest tab picked up by the taxpayers. The total public US debt increased by nearly 50 percent from 2006 to the end of 2009 (from about $8.5 trillion to $12.3 trillion), but the interest bill on the debt actually dropped (from $406 billion to $383 billion), because of this reduction in interest rates.
One of the dire unintended consequences of that maneuver, however, was that municipal governments across the country have been saddled with very costly bad derivatives bets. They were persuaded by their Wall Street advisers to buy credit default swaps to protect their loans against interest rates shooting up. Instead, rates proceeded to drop through the floor, a wholly unforeseeable and unnatural market condition caused by rate manipulations by the Fed. Instead of the banks bearing the losses in return for premiums paid by municipal governments, the governments have had to pay massive sums to the banks – to the point of pushing at least one county to the brink of bankruptcy (Jefferson County, Alabama).