HEIDI'S BAR, THE ECONOMY & OTHER FANTASIES

By Dan Rattiner

When mortgage rates began to fall several months ago, I thought I ought to look into getting a new mortgage. I called the bank that holds my mortgage and asked them about this. They said I had a 7 1/2% mortgage, and I said no, I think it's a 7 1/4% mortgage. The loan was made 10 years ago, I said, and I couldn't be exactly sure of the rate. Could they look and see what it says on my mortgage document?

"Oh no, we couldn't do that," my banker said. I asked why not. "Because we don't have the mortgage anymore. We sold it. And I am sure whoever we sold it to sold it again. It's been 10 years. Heaven knows who has your mortgage now."

I was really offended to learn this. How come nobody asked me? It's my mortgage. I've gotten lots of bank loans in the past. You sign papers with the banker and shake hands after signing the agreement. The bank lends the money that depositors put into it. The mortgage rate is higher than the bank interest paid to the depositors. And the difference is their profit.

What happened to my mortgage really explains why so many more people work in the banking business than should. And it also explains the economic mess we've gotten ourselves into.

In the old days, what with actuarial computations and bookkeeping and billing and customer relations, you might need five employees at the bank earning their living attending to my mortgage at the bank. But for the last 10 years, until the crash came last year, a banking transaction such as my mortgage would require an ever increasing army of people, now up to a thousand. And all of them would be making their living because I took a mortgage. There was the loan on the table originally. But then my loan doubled and tripled and quadrupled into new monetary instruments, each of which was a new asset in need of attending for the banking industry. Yet, actually, nothing new had really happened.

Thirty years ago, about 2% of the salaries paid in America were paid to people in the banking business. Ten years ago it had risen to 4%. By the end of 2007, the total had risen to 8%. Practically $1 in every $10 paid out in America went to somebody in the banking business. Amazing!

Of course, the more money made, the more money trickled down into the economy from the bearers of this largess. Much of it drove the housing prices in the Hamptons through the roof.

Thought of another way, this was the Republican version of spend and spend. The Democratic way is out front. You just print money and put it out there. The Republican way is secret. The result was identical. But with the Republican way, the general public was fooled into thinking the assets were based on actual goods when they were not.

The sudden loss of all this money, trillions and trillions of dollars, is reflected in the fall in stock market prices. The market reflects the net worth of the country. And the stock market is the way ordinary citizens share in business successes.

Well, the Dow peaked at 14,000. It is now around 8,000. The average American investor in the stock market each now has about 60 cents for every dollar he put in one year ago. The money has vanished.

Looked at it from still another way, the Republicans put $10 trillion based on nothing on top of the $18 trillion based on reality. And now, with the $10 trillion gone, Obama has pumped $2 trillion back in the old fashioned way favored by the Democrats. It's pumping back up the balloon, but just a little.

I also think through all this, the bankers are getting a bum rap. They ran things fine until, unregulated, they created fake stuff that jammed up the works. Now, nobody can tell the real from the fake. But the truth is that the bankers who run Wall Street, by making loans, solid or risky, are at the heart of western civilization. They must be intelligent, daring, imaginative, gregarious, and yes, even greedy. Their decisions affect the future of everyone, and they should be well rewarded for what they do.

I think it is terrible that so many Wall Street bankers lost their jobs. But you don't need 1,000 bankers involved in my mortgage loan (which is, by the way, at 7 1/2%.)

And so yes, we're coming back. But probably not as the center of the banking world. We'll come back as one of the centers of the banking world. Others are nearly as powerful as we are now.

Obama put it best himself at the G-20 conference: "There was a time when the economic future of the world could be decided by Churchill and Roosevelt sitting down and having a brandy together. That time has passed. As it should. Decisions now have to be made by everybody, and we all have to have a voice."

Two days ago, some people sent me a story called Heidi's Bar, which explains in laymen's terms about what caused the air to come out of the balloon. I think it is worth passing on.

Heidi owns this bar in Detroit. One day, she decides on a new policy. In the future, the people drinking at her bar will no longer have to pay for the drinks as they drink them. They will be allowed to drink now, but pay later. She keeps a tally sheet of who drank what and what they owe. Basically, she is making a loan to her customers, to be paid back at a later date.

Since her customers were nearly all unemployed alcoholics, they were enthusiastic about this new policy. Heidi's Bar, in a very short time, became the most popular bar for unemployed alcoholics in Detroit.

One day, Heidi's loan came to the attention of a banker in Detroit. He thought that if the bank took a position with this loan it would be a good idea. Heidi thought it was a good idea too. Pretty soon, the banker - at banks a loan is considered an asset - sold Heidi's loan to another bank. And then that bank bundled Heidi's loan into several new instruments which were called HEIDIDRINK and HEIDIBARF, which were listed on the exchange as HDK and HDF with AAA ratings. They, and other instruments based on Heidi's loan, were sold to the public.

One day, a new banker on the scene said he thought that the Heidi loans ought to be called in because they seemed to him to be a bit risky. He was fired. In the end, of course, the price of HDK collapsed by 80% and the price of HDF did a little better, which is to say it only lost 70%.

After that, the bankers who had created HDK and HDF and who had put much of their money into the stock, had to be bailed out by the government, which got the money by raising taxes on employed middle class working class people who don't drink.

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