So, the economy has been in the news a LOT lately--surprisingly enough (to me, at least) the mainstream media is actually covering the issue. However, I don't think they're really reporting what we need to know. Now, I don't really watch the mainstream news--I read some of it online, CNN.com, Drudge Rep/tort, WaPo, AP, and a few others, but mostly I get my news from alt news sources like Democracy Now and Bill Moyers (not the other PBS news shows, however).
Most of these guys are getting pretty in-depth, but they're still not quite getting to the meat of what I think we really need to know.
We've all heard about Fannie Mae and Freddie Mac getting bailed out by the USG (followed by two more banks in California) but no one is pointing out some very interesting details.
So, it's all because of the sub-prime mortgage scandal, right?
Banks went hog-wild handing out loans/cash to people who couldn't pay them back.
Think about that for a moment.
Cash was handed to people with bad credit or no credit, without a job, or without obvious means to pay the cash back with interest.
Several things bother me about this equation:
1) Who was dumb enough to let banks regulate themselves? This can't be "a few bad apples" if
trillions of USD are at risk.
2) Why is the news not talking about WHY these people are not suitable to loan money to in the first place? What did these people do wrong? Shouldn't we be working to solve the problems of these people having bad credit or crappy paying jobs?
3) Where the hell did the banks get all this mad money to give to people? Seriously--from investors? TRILLIONS of dollars ALL from investors who were too stupid to research where their money would go?
Think about this now:
a) You get a job. You receive your first paycheck of (a purely hypothetical) $100.
b) You go to the bank and deposit it.
c) The bank then loans your $100 to Person B so they can start a business.
d) Person B hires Person C, who then gets his first paycheck of $100. He deposits it in the bank.
e)The bank then loans out $100 to Person D who is starting a business.
Do you see the problem here? The money just goes in circles and each time it makes the cycle we pretend the $100 is a brand new $100. So, just in the five steps above, a mythical $200 is created from nothing and inserted into the economy.
Your original $100 is still there, in the bank, but really, it isn't. It's been loaned out. Sure, if you withdraw it, you can get it back, but it's really not yours, it's someone else's money that hasn't been loaned out yet. If that other person comes looking to withdraw their $100, that's when you have some problems.
We saw these problems recently in California and what most of the press I've seen hasn't reported is that we saw all of this happen before in the UK when, last December, there was a run on Northern Rock, the UK's fifth biggest bank. It had succumbed to its own sub-prime mortgage choices and its customers panicked.
This is a screencap of a Telegraph article dated December 23, 2007, essentially predicting tough times ahead (click to enlarge). So, Ambrose Evans-Pritchard could see the future--why didn't someone do something to help us avoid it? |
See, so it's a trend--things were bad in the UK, but if you were looking, you saw the signs. You could then take those signs and look for trouble here in the US and guess what--you'd find it.
But why were the banks so eager to give money to people who couldn't pay it back? Why were they so blind to the problems that would obviously be caused by the practice?
The answer is profits--they wanted them. As much as possible. In the case of sub-primes, the interest rates were hiked so that the banks could make more money in the short term, while betting that in the long term, the borrowers would be able to pay the money back.
What if they couldn't?
Good question.
The good answer is that the bankers had a plan. The plan was to sell the debts to other people as investment opportunities.
"See Person F? He owes us $100. He bought a house and he's paying twenty-percent interest on the loan each year. You pay me $110 now and all of his interest payments are yours."
I'm simplifying, of course, but the basic plan was just like that. Investors pay bankers and the bankers make that money plus any payments they've already gotten from the borrower. Meanwhile, the risk is now transfered to investors and away from the bankers. Good plan, huh? Of course it was--and it worked--for a while. Ultimately, however, it led to disaster.
But let's jump back to my little 5-step model.
When you got paid that first $100, that money was worth $100. Then, two steps later, with two new sets of $100 injected into the economy, the supply of dollars is now larger, in theory. Under the law of supply and demand, more supply equals lower price. So, the same $100 you still have in the bank is worth less than it was when you were paid it because the other two sets of $100es now exist, as well.
This is what I'm wrestling with.
All of these $100es need to be paid back to the bank with interest, right? Even that first $100 you got from your boss he got as a loan the bank gave him (or perhaps it was from "profits" he got from selling products and services--that money, in turn coming from customers who got loans or payments from bosses, etc, etc).
So, here's where I am right now:
1) How does the interest ever get paid back?
2) Where do profits come from?
3) With every loan that is given in the real world, it seems like every dollar should drop in value.
Think about how much it would have cost to buy a house in the 1930s. According to the dollar amount, alone, it would have been insanely cheaper than it is today. Yet, aside from technological and safety advances, a house is largely built the same way now, in 2008 as it was in 1938.
This difference is explained away by the term "inflation" and "inflation" describes exactly this process--Webster's defines the word this way: " a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services." (source: http://www.merriam-webster.com/dictionary/inflation )
Yet, inflation never goes down. If you think it does, I'm afraid you're mistaken--it's the
rate of inflation that can go down.
Essentially, the way our banking system is designed, the dollar will go down in value forever, endlessly. There may be brief rises in comparison to other currencies, but as far as I can tell, the dollar is doomed to drop--forever.
So, here we are in August of 2008, and just in the past few weeks we've seen five of the biggest banks in the US get bailed-out by the USG. Just two days ago, King George "quietly" signed a mortgage bill that would help the little people (the borrowers) keep their homes (source: http://is.gd/1biO ). According to the above-linked article: "The measure includes $300 billion in new loan authority for the government to back cheaper mortgages for troubled homeowners; $3.9 billion for communities to fix up foreclosed properties causing blight in neighborhoods; and $15 billion in tax cuts, including an expanded low-income housing tax credit and a credit of up to $7,500, to be repaid, for some first-time home buyers."
The article also states that George was originally going to veto the thing.
Yep, it's just that bad. Even the Decider has to change his mind.
The thing is, by saving banks that screwed the pooch and handing cash to homeowners who are short on it, are any problems really being solved here?
If my basic understanding about how banking works is accurate, aren't these just Band-Aids on a dying man?
Isn't our basic system just a bad idea from the beginning?
Think about it--where does profit come from?
It MUST come from one of two places:
1) Somewhere else--your pocket or someone else's.
2) It is created from nothing--and when this happens, the value of all other money goes down.
So, in the end, just what the fuck is going on here?
Now, I know that there are all sorts of excuses out there to wish away what I'm talking about. There are quite literally money magicians who talk about stocks, bonds, treasury bills, investments, futures, and about a thousand other obscure-sounding concepts. We've got foreign investors who spend their own mystery money to buy
our money. We've got entire nations "loaning" our economy money.
And I've tried to get my brain around a good number of these ideas and I'm afraid I just couldn't see how any of them would change the complete and utter fallibility of my little 5-Step model, above.
Whether it's countries loaning countries money or people loaning it to people, the structure is still propping up the same, horribly flawed system--at least, to my eyes.
My ears, on the other hand, are open if anyone can explain this to me in a way that makes sense.
