"Wake up, gentlemen." The tall prophet called out to the shocked onlookers. Rather than wearing the tunic and carrying a rod, like the biblical prophets of old, this prophet wore a business suit and carried the wisdom of years as a top economist. Paul Volcker, or "Tall Paul" as he is known, towered over many of the top bankers of the world this week. His booming voice spoke to them about their foolishness in defending their outrageous pay and many of their exotic financial "innovations." The only financial innovation in last twenty years has been the ATM machines, he claimed, poking a hole into their bubble belief of being innovators. The bankers innovated us right into the Great Recession. He then went on the attack on credit default swaps.
Credit default swaps, (CDSs) and many of the so-called innovations are the root of our current mess. Simply, CDSs are insurance on bonds and securities that financial institutions sell and buy with each other. The problem is that the CDS owner does not have to own what he is insuring. The owner can then both buy and sell CDSs on the same bond. CDSs became vehicles to speculate and in practice create money out of thin air, and became the world's biggest pyramid. It remains legal.
As an example to try to explain CDSs, suppose you have a bunch of bragging teenage boys. Boy A has a baseball card worth 10 dollars. He wants to make sure he can replace the card if he loses it. Boy B offers for one dollar, to cover the ten dollars in case it gets lost. It is all written down on paper and no money is actually exchanged. All okay so far, but now imagine Boy B gets a Boy C to cover the possible $10 loss of card for fifty cents. Now Boy B made 50 cents without any risk to himself. If the card is lost, he has to pay $10 to Boy A, but Boy C will have to pay him $10.00. All the boys thinks this is a good deal and start to buy and sell similar offers on the $10 card to other Boys D - Z.
Boys A-Z continue think it is good way of making money and start also start selling and buying coverage on that one $10 card, but only on paper. On paper they are all worth a lot of money, far more than the initial $10, and they brag to everyone about how rich and smart they are -- until the card is lost. Then Boy A demands his money from Boy B who then in turns demands his money from Boy C who demands his money from boy A and so on and so on. No boy A-Z has the ten dollars to cover the loss. It was all on paper, you remember. Their "profits" were an illusion. The whole scheme crumbles, and the house of cards collapses.
Last year, a much larger house of cards collapsed. Many of the claims of heavy losses in mortgage securities were actually CDS losses and not mortgages themselves. These bright people that created the house of CDS cards were geniuses in creating what on paper were no-risk profits. Now they claim they deserve the high bonuses for world they created. They are also trying to stop financial reform that would reign in CDSs. Why? To them it was the golden goose, and they can see a return to the days of easy money.
Paul Volcker reminded them their golden goose was a fable, an illusion. Greed is an illusion, and this illusion causes so much personal pain. Let us listen to the voice of this prophet and avoid the temptation of easy profits. It is time to wake up. Let us recognize the illusion of greed for what it is, an instrument of sorrows. St. Paul says it better than Mr. Volcker: "For the love of money is a root of all kinds of evil. Some people, eager for money, have wandered from the faith and pierced themselves with many sorrows" (1 Tim 6:10).
Ernesto Tinajero is a freelance writer in Spokane, Washington, who earned his master's degree in theology from Fuller Seminary. Visit his blog at beingandfaith.blogspot.com.