TIME Economy

Banking Is for the 1%

Can’t get credit? You aren’t the only one. Why banks want to do business mainly with the rich

The rich are different, as F. Scott Fitzgerald famously wrote, and so are their banking services. While most of us struggle to keep our balances high enough to avoid a slew of extra fees for everything from writing checks to making ATM withdrawals, wealthy individuals enjoy the special extras provided by banks, which increasingly seem more like high-end concierges than financial institutions. If you are rich, your bank will happily arrange everything from Broadway tickets to spa trips.

Oh, and you’ll have an easier time getting a loan too. A recent report by the Goldman Sachs Global Markets Institute, the public-policy unit of the finance giant, found that while the rich have ample access to credit and banking services six years on from the financial crisis, low- and medium-income consumers do not. Instead, they pay more for everything from mortgages to credit cards, and generally, the majority of consumers have worse access to credit than they did before the crisis. As the Goldman report puts it, “For a near-minimum-wage worker who has maintained some access to bank credit (and it is important to note that many have not in the wake of the financial crisis), the added annual interest expenses associated with a typical level of debt would be roughly equivalent to one week’s wages.” Small and midsize businesses, meanwhile, have seen interest rates on their loans go up 1.75% relative to those for larger companies. This is a major problem because it dampens economic growth and slows job creation.

It’s Ironic (and admirable) that the report comes from Goldman Sachs, which like several other big banks–Morgan Stanley, UBS–is putting its future bets on wealth-management services catering to rich individuals rather than the masses. Banks would say this is because the cost of doing business with regular people has grown too high in the wake of Dodd-Frank regulation. It’s true that in one sense, new regulations dictating how much risk banks can take and how much capital they have to maintain make it easier to provide services to the rich. That’s one reason why, for example, the rates on jumbo mortgages–the kind the wealthy take out to buy expensive homes–have fallen relative to those of 30-year loans, which typically cater to the middle class. It also explains why access to credit cards is constrained for lower-income people compared with those higher up the economic ladder.

Regulation isn’t entirely to blame. For starters, banks are increasingly looking to wealthy individuals to make up for the profits they aren’t making by trading. Even without Dodd-Frank, it would have been difficult for banks to maintain their precrisis trading revenue in a market with the lowest volatility levels in decades. (Huge market shifts mean huge profits for banks on the right side of a trade.) The market calm is largely due to the Federal Reserve Bank’s unprecedented $4 trillion money dump, which is itself an effort to prop up an anemic recovery.

All of this leads to a self-perpetuating vicious cycle: the lack of access to banking services, loans and capital fuels America’s growing wealth divide, which is particularly stark when it comes to race. A May study by the Center for Global Policy Solutions, a Washington-based consultancy, and Duke University found that the median amount of liquid wealth (assets that can easily be turned into cash) held by African-American households was $200. For Latino households it was $340. The median for white households was $23,000. One reason for the difference is that a disproportionate number of minorities (along with women and younger workers of all races) have no access to formal retirement-savings plans. No surprise that asset management, the fastest-growing area of finance, is yet another area in which big banks focus mainly on serving the rich.

In lieu of forcing banks to lend to lower-income groups, something that’s being tried with mixed results in the U.K., what to do? Smarter housing policy would be a good place to start. The majority of Americans still keep most of their wealth in their homes. But so far, investors and rich buyers who can largely pay in cash have led the housing recovery. That’s partly why home sales are up but mortgage applications are down. Policymakers and banks need to rethink who is a “good” borrower. One 10-year study by the University of North Carolina, Chapel Hill, for example, found that poor buyers putting less than 5% down can be better-than-average credit risks if vetted by metrics aside from how much cash they have on hand. If banks won’t take the risk of lending to them, they may eventually find their own growth prospects in peril. After all, in a $17 trillion economy, catering to the 1% can take you only so far.

TIME Money

Bank of America To Pay a Record $16.65 Billion Fine

Bank Of America Reports Loss Due 6 Billion Dollar Legal Charge
Spencer Platt—Getty Images

$7 billion of it will go to consumers faced with financial hardship

Updated: 10:40 a.m.

The Justice Department announced on Thursday a $16.65 billion fine on Bank of America to settle allegations that it knowingly sold toxic mortgages to investors.

The sum represents the largest settlement between the government and a private corporation in the United States’ history, coming at the end of a long controversy surrounding the bank’s role in the recent financial crisis. In issuing bad subprime loans, many say, the bank helped fuel a housing bubble that would ultimately burst in late 2007, devastating the national and global economy.

“We are here to announce a historic step forward in our ongoing effort to protect the American people from financial fraud – and to hold accountable those whose actions threatened the integrity of our financial markets and undermined the stability of our economy,” Attorney General Eric Holder said at a news conference announcing the settlement.

Since the end of the financial crisis, the bank has incurred more than $60 billion in losses and legal settlements.

Of the latest settlement, $7 billion will go to consumers faced with financial hardship. In turn, the bank largely exonerates itself from further federal scrutiny.

However, not all is forgotten. The New York Times reports that federal prosecutors are preparing a new case against Angelo Mozilo, the former chairman and chief executive officer of Countrywide Financial, which Bank of America acquired in mid-2008.

As the country’s largest lender of mortgages, Countrywide Financial purportedly played a large role in distributing the bad loans. Mozilo has already paid the Securities and Exchange Commission a record $67.5 million settlement.

 

TIME energy

Germans Happily Pay More for Renewable Energy. But Would Others?

Germany solar power
Germany has become a world leader in solar power Photo by Sean Gallup/Getty Images

Germany has embraced subsidies for renewable energy, but not every country is willing to bear the economic burden

This article originally appeared on OilPrice

While Germany is breaking world records for the amount of sustainable energy it uses every year, German energy customers are breaking European records for the amount they pay in monthly bills. Surprisingly, they don’t seem to mind.

In the first half of 2014, Germany drew 28 percent of its power generation from renewable energy sources. Wind and solar capacity were hugely boosted, now combining to generate 45 terawatt hours (TWh), or 17 percent of national demand, with another 11 percent coming from biomass and hydropower plants.

This proves that Germany’s controversial Energiewendepolicy is on target to meet highly ambitious goals by 2050 — as much as a 95 percent reduction in greenhouse gases, 60 percent of power generation from renewables, and a 50 percent increase in energy efficiency over 2010.

All well and good, but the economics of renewable energy don’t usually allow for such a smooth transition. As part of the Energiewende, the costs of associated subsidies have been passed on to German customers, who pay the highest power bills in Europe.

Fifty-two percent of the power bill for retail businesses in July 2014 is now made up of taxes and fees. The average bill for a household has reached 85 euros a month, 18 euros of which is the renewable energy levy. The reaction to such fees should have been furious.

It hasn’t been. A 2013 survey revealed that 84 percent of Germans would be happy to pay even more if the country could find a way to go 100 percent renewable.

So how can this model of high targets, high fees and high public support find traction in other countries? The answer is, with difficulty.

Germany’s national engagement toward renewable energy came after a period of prolonged public education, opening up to locally owned wind and solar infrastructure, and investment support. To be sure, other major countries are finding success in the renewable sphere, but not in quite the same way.

While renewable installations in the U.S. may account for 24 percent of the world’s total, they only accounted for 13 percent of the country’s power generation. This compares to Germany, which has more than 12 percent of global installed renewable capacity, but takes 28 percent of its power from it. Spain, China and Brazil trail behind, with 7.8 percent, 7.5 percent and 5 percent of global capacity respectively.

Brazil’s model has similarities to Germany’s, with the government carrying out public auctions for contracts and putting out favorable investment terms for foreign companies looking to set up renewable energy projects. Spain was doing well as wind became its largest source of power generation in April 2013, but economic woes have seen Madrid begin to double back on its commitments.

Political gridlock in Washington, D.C. means renewable energy in the U.S. has been boosted by state and private efforts. Arizona now has the biggest solar power plant in the world, while California has the largest geothermal plant in the country.

In Mexico, the country’s solar potential and the improving cost-effectiveness of PV technology has seen projects like the 30MW Aura Solar I crop up. But the national electricity regulator, CFE, has been slammed for taking up to six months to connect residential PV installations to the grid.

Perhaps the most ambitious plans come from China, which is busy working to transform its reputation from an energy pariah to a respected renewable leader. However, these are being mandated at a central level, with little to no attention being paid to the opinions of the Chinese public.

And there’s the rub. The German public is a willing participant in the government’s efforts, happy to face higher bills in exchange for a cleaner and more energy-efficient future, paying an average of 90 euros a month in 2013. It is true that Germans’ power bills are the highest in Europe, but the trade-off is known, increases are announced and negotiated months in advance, and surprises are few.

In the UK, which was proud of having among the lowest electricity rates in the EU, the government has been hard-pressed to explain to customers just why Scottish Power, Southern Electric, and British Gas have all raised prices, while the Labour Party has promised a 20-month price freeze if it wins 2015 elections.

The UK has left its coal and nuclear infrastructure to stagnate, reversed Blair-era commitments to renewable sources and opened vast swathes of the country to fracking exploration.

Ask them, and Germans might tell you that a pricey electricity bill might actually save everyone from a few headaches down the line.

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TIME europe

Europe’s Economic Woes Require a Japanese Solution

Rome As Italy Returns To Recession In Second-Quarter
A pedestrian carries a plastic shopping bag as she passes a closed-down temporary outlet store in Rome, Italy, on Tuesday, Aug. 12, 2014. Italy's economy shrank 0.2 percent in the second quarter after contracting 0.1 percent in the previous three months. Bloomberg—Bloomberg via Getty Images

The region’s economy is starting to resemble Japan’s, and that threatens to condemn Europe to its own lost decades

No policymaker, anywhere in the world, wants his or her national economy to be compared to Japan’s. That’s because the Japanese economy, though still the world’s third-largest, has become a sad case-study in the long-term damage that can be inflicted by a financial crisis. It’s more than two decades since Japan’s financial sector melted down in a gargantuan property and stock market crash, but the economy has never fully recovered. Growth remains sluggish, the corporate sector struggles to compete, and the welfare of the average Japanese household has stagnated.

The stark reality facing Europe right now is that its post-crisis economy is looking more and more like Japan’s. And if I was Mario Draghi, Angela Merkel or Francois Hollande, that would have me very, very nervous that Europe is facing a Japanese future — a painful, multi-decade decline.

The anemic growth figures in post-crisis Europe suggest that the region is in the middle of a long-term slump much like post-crisis Japan. Euro zone GDP has contracted in three of the five years from 2009 and 2013, and the International Monetary Fund is forecasting growth of about 1.5% a year through 2019. Compare that to Japan. Between 1992 and 2002, Japan’s GDP grew more than 2% only twice, and contracted in two years. What Europe has to avoid is what happened next in Japan: There, the “lost decade” of slow growth turned into “lost decades.” A self-reinforcing cycle of low growth and meager demand became entrenched, leaving Japan almost entirely dependent on exports — in other words, on external demand — for even its modest rates of expansion.

It is easy to see Europe falling into the same trap. Low growth gives European consumers little incentive to spend, banks to lend, or companies to invest at home. Europe, in fact, has it worse than Japan in certain respects. High unemployment, never much of an issue in Japan, could suppress the spending power of the European middle class for years to come. Europe also can’t afford to rely on fiscal spending to pump up growth, as Japan has done. Pressure from bond markets and the euro zone’s leaders have forced European governments to scale back fiscal spending even as growth has stumbled. It is hard to see where Europe’s growth will come from – except for increasing exports, which, in a still-wobbly global economy, is far from a sure thing.

This slow-growth trap is showing up in Europe today as low inflation – something else that has plagued Japan for years on end. Deflation in Japan acted as a further brake on growth by constraining both consumption and investment. Now there are widespread worries that the euro zone is heading in a similar pattern. Inflation in the euro zone sunk to a mere 0.4% in July, the lowest since the depths of the Great Recession in October 2009.

Sadly, Europe and Japan also have something else in common. Their leaders have been far too complacent in tackling these problems. What really killed Japan was a diehard resistance to implementing the reforms that might spur new sources of growth. The economy has remained too tied up in the red tape and protection that stifles innovation and entrepreneurship. And aside from a burst of liberalization under Prime Minister Junichiro Koizumi in the early 2000s, Japan’s policymakers and politicians generally avoided the politically sensitive reforms that might have fixed the economy.

Europe, arguably, has been only slightly more active. Though some individual governments have made honorable efforts – such as Spain’s with its labor-law liberalization – for the most part reform has come slowly (as in Italy), or has barely begun (France). Nor have European leaders continued to pursue the euro zone-wide integration, such as removing remaining barriers to a common market, that could also help spur growth.

What all this adds up to is simple: If Europe wants to avoid becoming Japan, Europe’s leaders will have to avoid the mistakes Japan has made over the past 20 years. That requires a dramatic shift in the current direction of European economy policy.

First of all, the European Central Bank (ECB) has to take a page out of the Bank of Japan’s (BOJ) recent playbook and become much more aggressive in combating deflation. We can debate whether the BOJ’s massive and unorthodox stimulus policies are good or bad, but what is beyond argument at this point is that ECB president Draghi is not taking the threat of deflation seriously enough. Inflation is nowhere near the ECB’s preferred 2% and Draghi has run monetary policy much too tight. He should consider bringing down interest rates further, if necessary employing the “quantitative easing” used by the U.S. Federal Reserve.

But Japan’s case also shows that monetary policy alone can’t raise growth. The BOJ is currently injecting a torrent of cash into the Japanese economy, but still the economic recovery is weak. Prime Minister Shinzo Abe finally seems to have digested that fact and in recent months has announced some measures aimed at overhauling the structure of the Japanese economy, by, for instance, loosening labor markets, slicing through excessive regulation, and encouraging more women to join the workforce. Abe’s efforts may prove too little, too late, but European leaders must still follow in his footsteps by taking on unions, opening protected sectors and dropping barriers to trade and investment in order to enhance competitiveness and create jobs.

If Europe fails to act, it is not hard to foresee the region slipping hopelessly into a Japan-like downward spiral. This would prove disastrous for Europe’s young people — already suffering from incomprehensible levels of youth unemployment — and it would deny the world economy yet another pillar of growth.

MONEY Housing Market

POLL: What’s the Best Thing About Where You Live?

There are probably lots of great things about your town. But if you had to pick just one, what would it be?

 

MONEY Employment

Youth Employment Enjoys Summer Surge

Jason Priestley as "Brandon Walsh" working at The Beverly Hills Beach Club in 90210
A summer job at the beach club helped Jason Priestley's "90210" character save money for a new set of wheels. ©Aaron Spelling Productions—Courtesy Everett Collection

The number of employed youth increased by 2.1 million this summer, as many young people took summer jobs or began looking for full time work.

From April to July of this year, the number of employed youth between the ages of 16 and 24 increased by 2.1 million, according to a report released Wednesday by the Bureau of Labor Statistics. The total number of youth employed increased to 20.1 million.

July is usually peak employment time for young people, and the numbers reflect that. At the same time, as the number of 16- to 24-year-olds looking for work increases, so does their demographic’s unemployment rate. The number of unemployed youth also spiked from April to July, rising by 913,000 to 3.4 million, down from 3.8 million last summer.

Overall, youth unemployment declined year over year, but only slightly. Since last July, this group’s unemployment rate declined 2 percentage points, to 14.3%. The labor force participation among young people—the total number working or looking for work—was 60.5%, the same as the previous two summers.

As far as where these young people are working, traditional summer jobs remain the norm. One-quarter of employed youth worked in the leisure and hospitality industry, which includes food services, and another 19% worked in retail.

While summer jobs remain popular, they’re a lot less common than in previous generations. Prior to 1989, the July labor force participation rate for young men was in the 80% range, and the participation rate for young women peaked that year at 72.4%. Since then, however, the labor force participation rate among young people has drastically declined, decreasing by about 20% for men and roughly 15% for women.

 

TIME Economy

Last Tango in Buenos Aires

Argentina’s debt snarl tells us how risky the global financial system still is

There’s a legal adage that goes, “Hard cases make bad law.” A recent U.S. court ruling against Argentina, which pushed the country into a new technical default on its sovereign debt, is a case in point. In 2001, Argentina defaulted on $80 billion worth of sovereign debt, the bonds that a country issues to raise money. It had to restructure, just as Greece had to more recently, and over the years, some 93% of creditors went along with the cut-rate deals, taking “exchange” bonds that paid 30¢ on the dollar. But some, like Elliott Management, the hedge fund started by Wall Street titan Paul Singer, held out. Tens of millions of dollars in legal fees later, Elliott won its case.

U.S. federal judge Thomas Griesa ruled earlier this summer that unless Argentina paid creditors like Elliott and other holdouts 100% of their claims, it couldn’t pay anybody else either. Paying Elliott in full would mean that, contractually, the country would also have to pay everyone else in full too–a $29 billion commitment. The case is full of gnarly legal and financial issues. But what it tells us is dead simple: the world financial order is still far too complex and opaque.

It’s tough to cry for Argentina–or the hedge funds. Elliott says Argentina’s claim that it has been victimized by “vulture funds” is a populist political strategy to drum up support for President Cristina Fernández de Kirchner’s flagging party. “Argentina isn’t a poor country. It’s a G-20 nation,” says Jay Newman, Elliott’s Argentina-portfolio manager. “It’s chosen for political reasons not to negotiate a fair settlement with us or more than 61,000 other bondholders.” Certainly no one would argue that the Argentine government is a paragon of best practices; Argentina, which had the same per capita GDP as Switzerland in the 1950s, has defaulted eight times.

Then again, the vultures haven’t done so badly either. Many bought bonds postdefault for pennies on the dollar. Now they are eschewing an already rich return for a regal one, while setting a precedent that could make creditors reluctant to cooperate when nations default in the future. “This has become a morality play which has given rise to a host of new legal problems,” says Jonathan Blackman, the Cleary Gottlieb partner defending Argentina. Both sides are waging an ugly media war complete with ad campaigns, as thousands of other creditors and financial institutions around the world nervously await the final result.

The Argentine crisis says three important things about the global economy. First, the balance between creditors and debtors has shifted. As data from the McKinsey Global Institute (MGI) show, there’s more debt globally than there was before the 2008 financial crisis. But now, the largest portion of it consists of public-sector debt. “Debt in the economy is like a balloon,” explains Susan Lund, a partner at MGI. “When you squeeze it out of one place, it grows in another.” With the rise in public debt comes a greater risk of sovereign defaults, which can wreak havoc on the global economy. (Remember the euro crisis?)

Second, the global economy is becoming more fragmented. The fact that a federal court in New York City ruled in favor of the holdouts is a sign that the global economy is splitting along national and ideological lines: British courts tend to go with majority rule in sovereign cases, and local markets have any number of other ways of handling sovereign-debt deals. The BRIC nations, aside from increasingly cutting their own trade deals, have set up a new development bank, which may become a source of capital for countries like Argentina if they remain shut out of the Western credit markets. That could give Russia and China more leverage over, for example, Argentina’s natural resources. (The country has the world’s second largest shale-gas deposit.)

Finally, the case shows how much work remains to be done in making our financial system more transparent. In addition to establishing a single standard for sovereign default, we desperately need to make complex security holdings more visible. Academics like Joseph Stiglitz say Elliott Management actually stands to benefit from an Argentine default, since nearly $1 billion worth of credit-default swaps exist on the country; that’s insurance that will pay out now that Argentina has defaulted. While the Elliott subsidiary that went to court against Buenos Aires says it holds no such swaps, the hedge-fund firm as a whole doesn’t disclose trading positions, and the swaps holdings of individual companies aren’t public record. They should be. Knowing exactly who stands to gain–or lose–from fiscal turmoil that can affect all of us could help make the right fixes at least a little more apparent.

TO READ MORE BY RANA FOROOHAR, GO TO time.com/foroohar

TIME cities

Trump Isn’t the Only Loser in Atlantic City

Revel Closing
People walk past the Revel Casino Hotel in Atlantic City, N.J. on July 23, 2014. Mel Evans—AP

Four casinos are expected to close this year in the New Jersey gambling destination

How big a loser is Atlantic City? So big that Donald Trump sued to have his name removed from two casinos he no longer controls. He may have to amend the suit, since one of them, Trump Plaza plans to shut down next month. And it will have company. The two-year old, twice-bankrupt, $2.4 billion Revel casino will also close after its owners failed to find a buyer, company officials announced Tuesday. As the saying goes, you don’t throw good money after bad.

Revel’s shutdown brings A.C.’s losing streak to four properties that announced a closing this year. The Atlantic Club was taken out earlier this year and Showboat, owned by Caesars Entertainment, locks down at the end of the month. Through June, revenues at the casinos are down 6.3%, continuing a long-term trend. The city’s casinos brought in $2.86 billion last year compared with $5.2 billion in 2006.

Atlantic City is a victim of the saturated mid-Atlantic casino market, and nearly 8,000 workers are slated to lose their jobs as the price to pay. There will be more closings, and not just in the mid-Atlantic states. In Tunica, Miss., Harrah’s (also part of Caesars) is closing a casino, citing declining gaming revenues due to higher competition.

In Atlantic City, some of those displaced workers will be able to catch on at the city’s remaining seven casinos—who will no doubt see an uptick in business—but the losses and closures are indications that the runaway growth days of gaming are over. Any new casino built in the region—indeed, just about anywhere– will have to take business away from somebody else.

And that’s exactly what’s been happening to Atlantic City– a municipality that never blossomed into the revived seaside resort envisioned when New Jersey opened its first legalized casino in 1978. It has remained mostly a weekend gambling jaunt for many punters, and they have since found other places to play. Oddly enough, north of Atlantic City, from Asbury Park to Long Branch, Jersey’s casino-less shore towns have revitalized and grown, despite taking a hit from Hurricane Sandy.

What’s grown around Atlantic City is competition. Just to the south in Delaware, three casinos are now operating. But one of them, Dover Downs, showed a 10% drop in revenues its first quarter. In Pennsylvania, there are 12 casinos in Philadelphia, Bethlehem, in the Poconos and near Pittsburgh. And revenues in that state have begun to slide in part because of competition from Ohio. The Buckeye state is about to open its 11th gambling den with the debut of the Hollywood Gaming at Mahoning Valley Race Course.

Americans threw down nearly $39 billion in gaming halls last year, according to the University of Nevada at Las Vegas, but that amount is flat with 2012. Meanwhile, the number of gambling locations continues to rise. As a result, says UNLV, 10 out of the 22 states with gaming in 2007 have seen declines since then. That would include Connecticut. Revenues from Foxwoods and Mohegan Sun peaked at $1.7 billion in 2006; they dropped to $1.17 billion last year according to UNLV. Pieces of the pie will only get smaller now that Massachusetts is planning to join the game.

It’s still possible that someone could buy the closed Revel and reopen it as a casino. “We hope that Revel can be a successful and vital component of Atlantic City under a proper ownership and reorganized expense structure,” the company said in a statement. But that doesn’t make much economic sense. Neither does building another casino anywhere in the region, but don’t bet against it. Plans are being hatched for a betting fortress in Jersey City, where the population density might favor the house a little more. And across the border in New York, Gov. Andrew M. Cuomo is planning to add four casino destinations in the upstate region to the nine racinos and five casinos already operating. The promise is jobs and more tax revenue, but New York may eventually discover what New Jersey did: that it had four more casinos than it actually needs.

TIME Security

The Government Is Trying To Explain Bitcoin to Normal People

US Government Issues Bitcoin Warning
A customer purchases bitcoins from the BMEX bitcoin exchange's Robocoin-branded ATM in Tokyo, Japan, on Wednesday, June 18, 2014. Bloomberg via Getty Images

Stepping into the Bitcoin market is like "stepping into the Wild West"

An independent government agency issued an exhaustive warning Monday about the risks of virtual currencies like bitcoin in an attempt to explain cryptocurrencies to the uninitiated.

The 6-page walkthrough from the U.S. Consumer Financial Protection Bureau outlined several of bitcoin’s potential dangers, including vulnerability to hackers, limited security, excessive costs and scams. It also announced a system that accepts virtual currency complaints. Though virtual currencies have become increasingly integrated into society, with states, companies, political organizations and even schools approving their use, the Internal Revenue Service has not granted it legal tender status in any U.S. jurisdiction.

“Virtual currencies are not backed by any government or central bank, and at this point consumers are stepping into the Wild West when they engage in the market,” CFPB Director Richard Cordray said in the statement.

Bitcoin risks, the CFPB said, include hackers who steal users’ private keys—the password to your digital wallet—using viruses and other malware. Unlike banks or credit unions, in which deposits are protected by federal agencies in case of failure, bitcoin isn’t insured by any government agency. If you lose your bitcoin stash, then “you are own your own,” the CFPB warns, and “there is no other party to help you.” Some digital wallet companies promise reimbursements for fraudulent transactions, but if there’s a widespread fraud event, it would probably be hard for most of these firms to come through on that promise. So what’s a bitcoin user to do?

“Read your agreement with your wallet provider carefully,” the report states. “Really, read your agreement with your wallet provider carefully.”

The report also tries to clarify bitcoin ATMs, which the CFPB points out don’t actually spew out bitcoin. Rather, the ATMs allow you to insert cash to be transferred into bitcoin to be moved into your digital wallet. The ATMs’ transaction fees may run as high as 7% and exchange fees $50 more than what you’d get elsewhere — and perhaps even more given bitcoin’s high volatility, the warning said.

The CFPB additionally warned customers of scams enticing users to invest bitcoin on the promise of high interest rates and no risk. In actuality, their bitcoin may be funneled into something else entirely, like someone’s food, shopping and gambling habits. The U.S. Securities and Exchange Commission previously warned of these so-called Ponzi schemes involving virtual currencies, and noted that such “fraudsters are not beyond the reach of the SEC just because they use bitcoin or another virtual currency.” And while the SEC’s authority provides some comfort, there’s generally few safeguards for average folks who step into the so-called Wild West without their guns and bugles.

Moral of the story? Using bitcoin may have its benefits, but don’t let it be your fool’s gold. Because “if it’s too good to be true,” the report said, “it just may be.”

 

TIME Economy

A Global Financial Guru Who Predicted the Crisis of 2008 Says More Turmoil May Be Coming

Reserve Bank of India Governor Rajan Unveils Interest-Rate Decision And Images Of Market Reactions
Raghuram Rajan, governor of the Reserve Bank of India, speaks during a news conference at the central bank's headquarters in Mumbai on August 5, 2014 Bloomberg/Getty Images

Raghuram Rajan, the governor of India's central bank, fears supereasy money from the world’s central banks is inflating assets and encouraging bad investments

Back in 2005, Raghuram Rajan, then economic counselor at the International Monetary Fund, stood up in front of the annual meeting of prominent economists and bankers at Jackson Hole, Wyo., and gave a presentation that his listeners could never have expected. The U.S. investor community was reveling in the high growth and stable financial conditions then prevalent around the world, but Rajan had examined global financial markets and come to a very different opinion. He argued that increasingly complex markets, which spewed out complicated instruments like credit-default swaps and mortgage-backed securities in ever greater quantities, had made the global financial system a riskier place, not less so as many believed. Such comments were considered near blasphemy at the time, and Rajan’s audience didn’t take him very seriously.

Three years later in 2008, however, his views proved prophetic. Rajan had generally predicted the sources of the worst financial collapse since the Great Depression of the 1930s.

Today, Rajan, now governor of the Reserve Bank of India, the country’s central bank, is worried again. This time, he’s fretting about the impact of the superloose monetary policies pursued by the U.S. Federal Reserve and other central banks to combat the financial crisis and resulting recession. Long-term low interest rates and unorthodox programs to stimulate economies — like quantitative easing, or QE — could be laying the groundwork for more turmoil in financial markets, he argues.

“My sense is that monetary policy can only do so much and beyond a certain point if you try to use monetary policy it does more damage than good,” Rajan tells TIME in his Mumbai office. “A number of years over which we, as central bankers, have convinced markets that we continuously come to their rescue and that we will keep rates really low for long — that we do all kinds of ways of infusing liquidity into the markets — has created markets that tend to push asset prices probably significantly beyond fundamentals, in some cases, and make markets much more vulnerable to adverse news. My worry is that, with inflation not being strong, this can continue for some time until things are so stretched that any signs of inflation, and a rise in interest rates, could precipitate a fairly strong market reaction. Certainly that volatility hurts across the world.”

Rajan, 51, would not pinpoint specifically where the most dangerous spots in global finance may be, but he did say that he believed assets of all sorts have become inflated. “I don’t know what the right level of the market is,” he says. “But I do know that, when I look at my portfolio and try to figure out where to invest, I can’t think of what I think is fairly valued.”

On top of his worries about market volatility, Rajan is also concerned that supereasy money is causing the misallocation of capital in the global economy, with potentially huge consequences down the road. “My greater worry is that by altering the price of capital for a substantial period of time, are we also, in a sense, distorting investment decisions and the nature of the economy we will have,” Rajan says. “Have we artificially kept the real rate of interest somehow below what should be the appropriate natural rate of interest today and created bad investment that is not the most appropriate for the economy?”

Still, Rajan agrees with Federal Reserve chairwoman Janet Yellen in her policy of slowly withdrawing stimulus measures and reintroducing higher interest rates. “We’re in the hole we are in. To reverse it by changing abruptly would create substantial amounts of damage. So I’m with Fed officials in saying that as we get out of this, let’s get out of this in a predictable and careful way, rather than in one go,” Rajan says.

Rajan has had to confront fallout from Fed policy personally. When he took the helm at India’s central bank in 2013, India was suffering as one of the “fragile five” — the emerging markets deemed most vulnerable to the winding down of Fed stimulus. India’s currency, the rupee, tumbled in value as investors fled, fearful that the curtailing of dollars in the world economy would strain the country’s ability to finance its large current-account deficit. In a series of deft and quick steps, Rajan stabilized the currency and wooed back investors, earning him breathless praise in the Indian media. Newspapers dubbed him a rock-star banker and even compared him to James Bond.

Now India, he says, is “absolutely” out of the “fragile five” stage. With narrowing fiscal and current account deficits, falling inflation and rising currency reserves, India’s fundamentals, he argues, are much improved and the country is less vulnerable. However, he sees the turmoil India experienced as part of a larger problem: a lack of coordination between the Federal Reserve and other central banks around the world. The actions the Fed takes are based mainly on U.S. domestic economic factors, but because of the unique position of the U.S. in the world economy, those decisions ripple through dollar-dominated financial markets in ways the Fed leadership does not take into account.

The results, Rajan argues, can ultimately be detrimental to the world economy. He points to a rise in increase in reserves in India and other emerging markets – built up as a cushion against potential fallout from the Fed’s tapering of stimulus – as one of those negatives. By topping up reserves, these emerging markets are in effect decreasing their demand for goods from the U.S. and elsewhere, and that is in the end bad for global growth.

“The U.S. should recognize that the actions we have to take to protect ourselves long run come back to effect the U.S.,” he says. “Therefore there is room for greater dialogue on how these policies should be conducted, not just to be nice, but because in the medium run it is in [America’s] own self-interest. If you are not careful about the volatility you are creating, the others have to respond and everybody is worse off.”

Ironically, Rajan has faced some criticism at home for doing just the opposite of the Fed — keeping interest rates high. Unlike most of the world, where bankers worry about low inflation or even deflation, India has been an outpost where inflation has been running too high, and Rajan took steps to bring the rate down — with some success. Some critics, however, complained that Rajan’s high-rate policy was acting as a drag on growth, and there was much press speculation when newly elected Prime Minister Narendra Modi took office in May that Rajan would come under pressure to cut rates to aid the administration’s promise to get the Indian economy back on track.

Rajan, though, says the central bank and the Modi Administration “are completely on the same page” when it comes to fighting inflation. “I have said repeatedly that the way to sustainable growth is to bring down inflation to much more reasonable levels,” Rajan explains. “That message is something the government is completely on board with. Once we do bring it down then we will have the opportunity to cut interest rates.”

Rajan also seems to be on the same page as Modi on economic reform. He expressed confidence that the new government is taking the initial steps necessary to set the sluggish Indian economy on its way to recovery. Growth rates can be restored to 6% to 7%, from current levels under 5%, Rajan believes, by making the government more efficient in implementing policies — unlocking badly needed but stalled investments in the process.

“Those are the things that are really needed to get the economy back to reasonable growth,” Rajan says. “This government has set about the implementation in a steady way and I am hopeful that we will see the fruits of that in the months to come.” Maybe Rajan will prove prescient this time around too.

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