Ben Stein How Not to Ruin Your Life

Just in case your blood pressure is not high enough today, here are a few news bulletins on how the world works. Generally, these bulletins all come under the heading of, "The Golden Rule: He Who Has the Gold, Makes the Rules."

You will recall that a few years ago the banks and investment banks of this great land were making money hand over fist by making loans that, even at the time, gave off the powerful aroma of danger and recklessness. The fees for those loans were immense though, and so the banks made them -- for mortgages, for private equity deals, for mergers, for refinancings, for anything where they could employ the vast pools of liquidity Uncle Sugar was throwing onto their laps.

As bank profits skyrocketed, the pay of bankers reached unbelievably high levels, with immense percentages of the national wealth being paid to a few thousand bankers in New York City.

Then, as happens with Towers of Babel, it got so high it simply fell down with a resounding crash. Since the major banks had borrowed many times their equity capital, pretty much all of them -- with a few exceptions -- were in danger of failing. The government allowed one of them, Lehman Brothers, to fail, and the results were catastrophic in terms of lending and consumer and business confidence.

So, the government decided to take heroic measures to keep any other big banks from failing. The government bought immense amounts of stock in the banks. That raised their levels of equity capital. The government guaranteed the banks' borrowings. That allowed the banks to stay afloat. The government greatly lowered the banks' cost of borrowing by lending directly to the banks at levels far less than normal, levels approaching zero percent.

All of this was done in the name of creating a far sounder national banking system and one that would resume lending, especially to consumers and home buyers, to "hit the reset button" as President Obama likes to say, on previous obscenely selfish behavior by bankers. The bankers promised they would be a whole new kind of banker and would act in the unselfish public interest.

The government completed the circle of bank rescue by not only letting the banks borrow at almost zero, but then by allowing the banks to invest the money they borrowed in totally risk free Treasuries at roughly 3.6 percent. It was shooting fish in a barrel for the banks and for the investment banks, which were allowed to call themselves banks.

The very predictable result: The banks started making staggering profits again. With free money furnished to them by the Federal Reserve, and the taxpayers paying them hefty interest on the money they got for free, how could the banks lose?

A Little Help Here?

So, what has the banking sector done with the profits and their new found health? For one thing, they have not loaned to home buyers. Just try to get a home loan today on the security of the home. It hardly can be done.

Yes, you can get one on your whole portfolio of assets, but not on the "security" of a home. (As one banker told me, "After what we've seen in the past two years, we just don't know what the value of real estate is.")

But the hoped for -- and lavishly paid for -- boom in real estate lending has not happened. It will, but not so far.

Guess what has boomed? No, exploded. Bankers' pay and bonuses. At some big banks, these are back to pre-crash levels. Bankers now -- again -- routinely take home $5 million to $10 million bonuses just for doing an ordinary job. That's while we in California have an almost 12 percent unemployment rate and the national rate hovers near 10 percent. At Goldman Sachs, bailed out by the taxpayers a scant few months ago, secretaries and bookkeepers are making hundreds of thousands in bonus.

The beautiful part, if you follow this, is that these bonuses are often (not always) being paid directly by the taxpayers. The taxpayers pay the interest on the trillions (yes, trillions) in Treasury bonds that allows the banks to make the lollapalooza profits they are making on their free money.

So, what do we have right now? A banking sector looking out entirely for itself, bailed out by all of us, at wild expense, and not lifting a finger to help end the mortgage and housing crises. Secretary of the Treasury Timothy Geithner was recently quoted as saying that for all of the taxpayers' blood, we now had a functioning banking sector again.

Yes, indeed. But functioning for whom?