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The Rumpelstiltskin Effect

the consequences of spinning straw into gold

Economic Crisis

“Rumpelstiltskin,” 1957

Once upon a time in a distant land, a miller boasted to his king that his daughter could spin straw into gold. Intrigued, the king locked her up in a roomful of straw and told her, “If you can spin this straw into gold by morning, you shall be my queen. If not, you shall die.”

The poor girl was at her wit’s end. She could barely spin wool, let alone straw, let alone into gold. Around midnight, a little man snuck into her room and asked, “What will you give me if I spin this straw into gold?” She gave him her necklace. By morning, when the king came to check on things, he found a room full of finely spun gold.

But, he didn’t get to be king by playing fair, so he locked the poor girl up a second night. Again the little man came and this time she gave him her ring. And again the little man spun a room-full of gold. And again, the greedy king locked her up for a third night.

This time, when the little man came around, the poor girl had nothing to give him. The little man said he would still help her—on the condition she swore to give him her first born child as a death pledge or, in the language of the land, a ‘mort-gage.’

She agreed and again the little man spun all the straw in the room into gold thread. The king took the gold as his dowry and made the girl his queen and they lived happily ever after—until the day of the birth of her first child.

The little man came back for the mort-gage. The queen wept and gnashed her teeth, but she could not persuade him to give up his claim. She carried on so that finally, he gave her three chances to guess his name. (He was actually a boggart or a hob—a mischievous, malevolent spirit.) He promised to release her from her pledge if she guessed correctly.

By sheer dumb luck, just before her third chance, she learned his name. In anguish, the little man stamped his foot into the earth and tore himself in two.

“Money, Power and Wall Street,” 2012 by PBS

Once upon a time (actually 1994), in a not so distant land (Wall Street, in fact), there lived a king (the CEO of JP Morgan) who sent his underlings down to a swanky resort in Florida to figure out how to make more money. It wasn’t that his bank didn’t have enough money, it was just that the king wanted more for himself.

But there were limits to what he could do, for this land was a Republic and the President was more powerful than the kings of Wall Street—or so the story goes. And the President’s law said the kings had to keep enough gold on hand to cover the debts they were financing. The kings of Wall Street owned banks-full of debt that, as far as they were concerned, only served to frustrate their ambition.

So, the king of JP Morgan locked up his bright young things in Boca Raton for three days. Amid the booze and the food and the fun in the sun, a little man paid a visit and showed them how to spin debt into gold. They called it the credit default swap. But it was pure gold, for not only did it allow the bank to free up capital by off-loading risk, but the king could make money by selling the risk to whomever wanted to bet that the borrower would make good on his pledge.

Not only that, but their magic spinning wheels (they called them derivatives) were invisible to the President and his men and so not subject to whatever rules remained after the great regulatory purge of the 1980s and 1990s.

Everyone at the bank made lots of gold by selling debt. Debt—other people’s debt—had magically become an asset. More bankers in the land of Wall Street started doing the same thing and pretty soon, the all the kings and queens, princes and princesses became very rich indeed.

But they wanted more, so they began spinning off more and more products: synthetic Collateralized Debt Obligations, tranches, CDOs squared and cubed until not even the kings and queens knew what was in them.

Then they spun the straw that broke the camel’s back (or in this case, that broke the banks)—the death pledges of common folk—sub-prime mortgages.

Their golden thread unravelled and it kept unravelling all around the world, and the kings and queens were chastened for a little while. But they never did name the malevolent, mischievous spirit of Wall Street, for to do so would be to name themselves.

So their first born are fated to live amongst the rabble of their kingdom. There they must roam the land of Wall Street in a kind of limbo, calling out to the President to force their parents to release them from the death pledge.

As for the king of JP Morgan Chase (his bank is even bigger now), one of his spinning wheels reversed itself and turned a roomful of $2 billion in gold back into straw. He and the other kings of Wall Street see nothing wrong with losing $2 billion and are fighting with the President who wants to take away their spinning wheels, or at least regulate them. “Trust us,” they say, “We know what we’re doing.”

And so the king of JP Morgan Chase spins and spins, and so do the bright young things who partied with Rumpelstiltskin.


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