The Endless Bailout
by John Young
EVERY ONCE IN A WHILE there is a confluence of events that conspire to allow the American people a glimpse of the sordid underbelly of our government, finance capitalism, and anti-European-American policies all at once. The bail-out of our banking system, jointly proposed by Treasury Secretary Paulson and Federal Reserve Chairman Bernanke, is just such a confluence.
Naturally, our corporate news media, which abandoned even the pretext of objectivity decades ago in service to international socialist and global corporatist causes, has failed to report the truth. After all, if people widely understood the truth, there would be a revolution in this country in which the authors of this disaster would be held to account.
But that’s why I’m here — and I’m going to tell you the truth about what is going on, and why. Then, I’m going to tell you what to do about it.
As part of that, I’m going to briefly explain how our monetary system works, how mortgages work, what went wrong with the mortgages, and what the proposed bailout will accomplish.
Back during Woodrow Wilson’s administration, the Federal Reserve Act was passed and signed into law. This legislation effectively put all of the management of America’s monetary system into the hands of a handful of giant private banks. The Federal Reserve is NOT a part of our government, and the only real control our Congress exercises in that regard is the token ability to appoint the chairman of their board. Of course, they can’t choose just anybody — they get to pick from a pool of people presented by this unaccountable and unelected board. Theoretically, this would free our monetary system from manipulation arising from partisan politics, and would ultimately make America stronger. At least, that’s how the idea was presented.
But since Wilson’s administration, we have shifted from a metal-backed currency to a faith-backed currency that is created out of thin air. While, ideally, the supply of money should only grow sufficiently to cover the value of the assets in an economy; the private bankers that control our money supply have never done it that way. Instead, every year — year after year, decade after decade — they have issued more money than we have assets to cover. This is the cause of inflation. As the number of dollars increase compared to the assets in the country, the value of those assets declines in dollar-denominated terms. Since 1913, the value of our money has been cut in half every 15 years. Thus, what you could buy for a quarter in 1978 costs at least a dollar today.
If this applied evenly across the economy — so that wages always advanced at the same pace as prices and the interest paid on a saving’s account always kept that money from losing value — the phenomenon would be harmless. But that isn’t what happens.
Even though our Bureau of Labor “cooks the books” so that wages always seem to grow at the same pace as inflation; anyone who pays attention realizes that living standards have been falling, and something shady is going on.
What really happens is simple. The inflation numbers used by the Bureau of Labor don’t count fundamental expenses pertaining to food, energy and housing. They also tolerate substitution such that if you could buy porterhouse steak yesterday for $5.00/lb, and it costs $6 today — but 20% fat ground beef costs $5.00/lb — then the fact that you can substitute ground beef for steak without paying any more is calculated as “0% inflation.” So the numbers for inflation are cooked. While they are consistently reported to be in the 2% to 3% range, the actual rate of inflation has averaged at about 8% annually for decades. When your boss gives you a standard yearly raise, she is basing the amount of the raise on the official 2 or 3 percent inflation number; but when you go out to spend the money, you have to pay the true 8-percent rise in prices, so every year your actual buying power declines by 6% even if nothing else (such as immigration) affects wages.
Meanwhile, with the value of money being cut in half every 15 years, programs like Social Security and Medicare are a disaster. Most people retire, or try to retire, about 45 years after they paid Social Security taxes on their first dollar of earnings. Social Security taxes are by no means small — when counting both the employee and employer’s contribution it runs about 15%. Obviously, any person provident enough to dollar-cost average 15% of his or her income into mutual funds every year for 45 years would retire pretty well-off. But that’s not what Social Security does — it just keeps the money static so that instead of gaining value year after year, it loses value. Thus, when hard working Americans retire, the money is inadequate to fund even a vagrant. As a result, the money to pay for current retirees comes — not from past enforced savings — but from current taxes.
Because of this, our economy is always in a race against time — it must constantly grow at a geometric pace of at least 8%/year to keep the wheels from coming off. It also must grow a population to pay taxes into the system geometrically. When this system falters because people are being taxed so heavily they can’t afford to reproduce because the value of their disposable income has declined, the system is endangered with collapse.
And here is where the mortgage mess comes to the fore. The only way the Federal Reserve can inject money into the system is through debt. In other words, new money comes into the system through borrowing. Our grandfathers were correct when they told us that you can’t borrow your way to prosperity; but the folks running things lack not just the wisdom of our grandfathers, but the integrity as well. Rather than admit that our Federal Reserve System was and is a colossal mistake and then set things right, our politicians instead devised a clever scheme that would always — at least in theory — keep the collapse of our Ponzi scheme economy one step behind us so it wouldn’t catch up. And mortgages were the secret.
Haven’t you ever wondered why our government created VA Loans as part of the G.I. Bill, HUD loans, Fannie Mae and Freddie Mac? On the surface, the purpose of these entities was to encourage home ownership; but underneath, these entities do little more than fund or guarantee loans for houses — a very strange role for government to say the least. So — how do these loans prop up the Federal Reserve Ponzi scheme?
A loan allows someone to purchase something they couldn’t otherwise afford. So it artificially increases the buying power of a citizen today, while having him pay it back tomorrow. This has a ripple effect throughout the economy, with taxes being grabbed every step along the way. When someone refinances his house and “converts some of his equity to cash” and then uses that cash to pay for a new addition or an upgraded kitchen; that money pays for products and wages of workmen all the way down the line. The same thing happens, though the effect isn’t quite as direct and obvious, when a person buys an existing home.
But here is where the scheme really takes off.
Imagine that a house is for sale in your town for $100,000, and mortgage loans don’t exist. The number of potential buyers for that home is limited to the number or people who want it AND can also produce $100,000 in cash. There aren’t many people who can write a check that size, so the price drops to the point that someone can actually write a check — say $70,000. So the house sells for $70,000.
Imagine, instead, that mortgage loans DO exist, but that they are only available for a value up to 70% of the price of the house. So the number of potential buyers is still limited to the number of people who want the house and can also write a check for $30,000. That’s a lot more people than the number who can write a check for the full $100,000; so demand for the house increases. As demand outstrips supply, the seller realizes that he can charge more than just $100,000 for the house. Because he knows that one of the buyers can write a check for $70,000, and that $70,000 is roughly 30% of $210,000. So he raises his price to $210,000. The buyer pays $70,000 and the bank writes a check for $140,000. The bank’s total exposed loss is only $140,000; so even if home prices drop a bit, the bank is confident of sufficient demand to cover that loss because all they need to find in order to unload the property is a buyer who can front $50,000 instead of the $70,000 fronted by the original buyer. Meanwhile, because of the magic of percentages, the real estate broker gets a $10,000 commission, the mortgage broker gets a $4,000 commission, the local town government gets to collect higher property taxes, and the bank gets to collect hundreds of thousands of dollars in interest over the next thirty years with hardly any risk. That’s a pretty good deal for everyone except the poor sucker who just had to pay $210,000 for a house whose intrinsic value is no more than $100,000.
While I have oversimplified a lot in order to make a point, this is how mortgage loans cause the prices of homes to rise much faster than incomes; and how the very existence of mortgages causes the economy to chug along at a level much higher than the actual wages that people earn would allow it to run.
Now, imagine that instead of requiring a 30% down payment, mortgage companies eliminate the requirement for a down payment altogether, and even agree to roll closing costs into the amount being borrowed so that anyone who can pass a credit check can borrow any amount so long as the total payment doesn’t exceed 1/3rd of their take-home pay. Suddenly, the number of people qualified to buy the house has multiplied several fold, and the demand has increased relative to supply, thereby forcing the price of the house up even further — perhaps even to $300,000.
Now, imagine that a person who wouldn’t qualify for the loan at an 8% interest rate because the resulting payment is too high, would qualify at a 5% rate. As a mortgage company, I can create a so-called “Adjustable Rate Mortgage” that will stay at 5% interest for the first three years, but then go up to 8%. The person buying the house expects that his income will increase over the next three years, so that by the time the payment goes up, he’ll be able to handle it. This is, of course, a bit of a gamble; especially if the buyer didn’t listen to Western Voices and learn that at some point over those three years the amount of money he’d have to spend on fuel would double. Either way, by pushing out an Adjustable Rate Mortgage product, the number of people who would qualify for mortgage loans at artificially low interest rates is even larger — making the demand for houses even greater — and raising the price of houses even higher.
Now, just one more example before I get down to the bottom line. Imagine that a creative mortgage company invents a loan that requires the borrower to pay none of the principle of the loan at all, and only a portion of the interest, and the portion of the interest that goes unpaid just keeps getting added to the principle. Lots and lots of people — practically anyone, in fact — can qualify for loans where the loan is never repaid. So more people qualify, demand for houses increases, and prices continue to explode. And this can be taken further with so-called “no-documentation” loans in which the borrower doesn’t even have to provide proof of income.
Each step along this path, from the existence of mortgage loans at all through the reduction in required down payments all the way to the no-documentation interest-only loan serves to increase the price of housing but to ALSO has the effect of growing the economy as though people’s income was actually rising at 8% or more per year; and thereby postpones the day when the bill for the Ponzi scheme comes due and the whole house of cards collapses. Meanwhile, our people are slaving away for the benefit of bankers, rather than themselves and their families.
The problem is that the mortgage scheme only serves to postpone the day of reckoning — it doesn’t cure the underlying cause. And the mortgage scheme also has practical limits.
The median wage in this country is less than $18/hour. When corrected for TRUE inflation, that wage is 30% lower than the median wage was 30 years ago. As the price of housing has doubled relative to incomes over the past 30 years and real wages have declined, the proportion of our population able to afford payments on these more expensive homes has also declined. In other words, no matter how widely you open the availability of mortgages, housing eventually reaches a price where potential home buyers can’t even afford the payments alone, even if down payments aren’t required.
The average working American family has about three weeks of slack in the budget. Because the same game that has been played with mortgages has also been played with car loans and so much more, the average American family is strangled with debt to the point that if an emergency arises requiring substantive expenditure or one of the parents is out of work for even a very short time, defaulting on debt is a certainty. Unemployment insurance and employment of both spouses rarely gives enough cushion, as the maximum unemployment benefit isn’t even a fraction of the cost of the monthly mortgage payment of an average home. So, at most, it can delay default for a few weeks. Meanwhile, because there is so little slack in the family budget, when the price of gasoline, natural gas and heating oil soared over the past 18 months, what little slack existed in the budget evaporated and families started going negative. At that point, the slightest little thing could cause mortgage delinquency — a necessary car repair, a medical bill not covered by insurance, or even an increase in property taxes. And, of course, the adjustment of adjustable rate mortgages to higher interest rates and larger payments would have the same effect.
This is, in large part, what we are seeing today with the mortgage market.
But, there is another factor that isn’t getting much publicity; and it is a much larger factor than the defaults of European-American borrowers: Equal Opportunity Lending.
Banks aren’t charitable institutions. If anything, they are — by their nature — some of the most ruthlessly brutal of all capitalist creations. When a banker lends you money, he expects it back on time, in full, with lots of interest for his trouble. If he doesn’t play a hard role, then the money he lent you — which comes from depositors — is at risk and he has the potential of shorting the money of his depositors. So, rather than take such a risk, he will run potential borrowers through the wringer. And he should. He wants all of his money back and then some because otherwise he’ll go out of business. I’m simplifying this a bit so we don’t get sidetracked into the ideas behind fractional reserve banking and so forth, but this is the gist of the matter.
Banks are also, at their core, racially ambivalent. They don’t care who gets the money they lend, as long as it is repaid on time. But just like an insurance company, they very carefully evaluate the risks of giving a loan. They look at factors such as income, employment history, how faithfully past debts have been repaid, and so forth. While careful examination of these factors doesn’t absolutely guarantee that a new borrower won’t default, it serves to minimize the bank’s exposure to risk. These factors have been applied by banks pretty much across the board, without regard to race, for decades. But, just as an insurance company will charge you more for insurance if you live in an area with a lot of thefts or where cars are routinely torched in riots; banks have historically taken the risk factors associated with a given locale into account as well. Again, this is a very sound practice.
Trouble is, certain groups of people in this country, so-called “preferred minorities” in particular, disproportionately have difficulty qualifying for a mortgage under the same rules that pertain to white folks or to minorities who aren’t “preferred.” Equal Opportunity Lending is an Orwellian term describing a circumstance under which the criteria for lending money to African-Americans and others (including illegal immigrants) are very relaxed compared to the criteria applied to white folks. What this means is that banks are required, by law, to provide loans to non-whites who are more likely to default on their loans; and to offset the cost of those defaults by charging higher rates and fees to white folks. In other words, Equal Opportunity Lending is a direct transfer of wealth from mostly European-Americans but also Asian-Americans to African-Americans and Mexican-Americans.
While so-called Equal Opportunity Lending has been around for a long time, the pressure was seriously put on the banks to lower standards for so-called minority borrowers starting early in the Clinton Administration. Peter Brimelow sounded the alarm back in 1993 when he said:
“Neosocialism just aims at political control. Socialism claimed to be more efficient. Neosocialism claims to be more equitable. Above all, neosocialism professes to combat ‘racism,’ since this magic word cows all opposition. Apparent neosocialist objective of the season: commandeering the banking system and forcing it to subsidize key client constituencies. … Neosocialism, however, is not science. What’s going on here is a witch-hunt, conducted by the religious Left and aided by key elements of the civil service. The innocent victims will be the banking system, the savers of America, the economy, and ultimately liberty itself.”(1)
A recent study stated quite plainly: “The subprime-mortgage crisis will cost black and Hispanic homeowners up to $256 billion – the worst financial hit for minorities in modern U.S. history …”(2)
Bankers from Wall Street didn’t run into black neighborhoods with machine guns and rob them at gun point, you know. The costs discussed in that study come from Equal Opportunity Lending in those neighborhoods. The trouble is, loans must be paid back because if you don’t, the banker DOES come, and he brings an armed sheriff, to remove you from the property. It’s called foreclosure, and it is a logical consequence to lending money to people who don’t meet usual standards for credit-worthiness.
Let me state this clearly, because it is a fact: “”Even a surface check of the demographics shows … that, in city after city, a solid majority of subprime loan recipients were people of color.”(3)
So, what we are seeing today on Wall Street has two primary causes:
One: The bankrupt Ponzi-scheme nature of our monetary system and policy.
Two: Idiotic requirements causing banks to lend money to people who weren’t credit-worthy on the basis of their race.
It’s that simple. That’s the cause.
Now let’s take a look at what is happening on Wall Street.
Money for mortgage loans doesn’t just fall out of the sky, it has to come from investors. Investors can buy loans individually, or they can buy loans grouped together into a package of loans. When a lender makes a mortgage loan, the lender almost always immediately sells it either individually or as part of a package of loans to an investor. The actual lender makes its money on closing costs and by being paid a premium over the principal balance of the loan. The lender usually retains what is called the servicing of the loan — the collection of payments and so forth — while the investor gets to keep the principle payments and most of the interest.
I’m simplifying a bit, but the Mortgage Backed Securities you may have heard about on the news are simply a package composed of a few hundred loans. The idea of a Mortgage Backed Security, or MBS, is that because there are so many loans in the package, if a small percentage of them happens to default, the overall value of that package is still strong and secure. So, historically, Mortgage Backed Securities have been a very safe investment.
A couple of things went wrong.
The first is that more of the loans than usual defaulted, due to economic chickens coming home to roost, economic stress from high oil prices and so-called Equal Opportunity Lending. So the total monthly income from a mortgage backed security was less than investors expected.
The second is that many of these loan packages were bought by investors who borrowed the money to buy them. On the surface, when you can borrow money at 3% from the Federal Reserve to invest in a Mortgage Backed Security that pays 8% and pocket the difference, this seems like a good idea. And, usually, it is. The trouble comes when there are enough defaults in a package of loans that the aggregate return drops to, say, 2%. Now, the investor is actually paying money in order to hold that MBS — so he tries to get rid of it.
And here is where the rubber hits the road. Just like anything else, the value of these Mortgage Backed Securities is based on supply and demand. The trouble is, investors have plenty of Mortgage Backed Securities to sell, and nobody wants to buy them even at face value, so their price is currently lower than that of the principal balances of the loans they contain. And that’s how a big investment house can go bankrupt.
This has two effects. One commentator described the first effect, and the one that really worries the big wigs:
“On Thursday morning, September 18, 2008 a tragedy almost befell the 450 billionaires and 3,000,000 millionaires that live in the United States. The billionaires were on their way to becoming millionaires and the millionaires were about to leave the club. Luckily, Hank Paulson, U.S. Treasury Secretary, felt their pain. His $700 million portfolio was probably taking a bit of a haircut too. There are 305 million people living in the United States. The net worth of all the households in the U.S as of June 30, 2008 was $56 trillion. The 450 billionaires have a net worth of approximately $1 trillion and the 3,000,000 millionaires have a net worth of approximately $11 trillion. So, 1% of the population currently owns 21% of the net worth in this country.
Many of these billionaires and millionaires have accumulated their wealth by managing other people’s money. The customers never have the yachts. The money managers have the yachts. The .1% ruling elite are deciding the fate of your grandchildren in Washington D.C. this week out of public view. The ruling elite have the most to lose. Whose best interest do you think they are looking out for?”(4)
In essence, the assets of people who make their money just by shuffling paper around and have probably not undertaken a single honest day’s work in their lives are crying into their hankies and coming to you and I looking for a bailout.
Of course, these very same people are a lot more shrewd than they look on TV, and they never miss an opportunity to turn potential hardship into potential profit. The U.S. Treasury Department describes Secretary Paulson’s resume this way:
“Before coming to Treasury, Paulson was Chairman and Chief Executive Officer of Goldman Sachs since the firm’s initial public offering in 1999. He joined Goldman Sachs Chicago Office in 1974 and rose through the ranks holding several positions including, Managing Partner of the firm’s Chicago office, Co-head of the firm’s investment Banking Division, President and Chief Operating Officer, and Co-Senior partner.”
Perhaps, understanding his background, you can understand why the following phrase was included in section 8 of the bailout proposal:
“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”
Wow! That’s more power than the President.
Rest assured, if this bailout passes, Bernanke and Paulson will use our money, borrowed against our children’s futures, to further enrich themselves and their cronies. They will use it as a giant stick to re-orient the monetary and investment system of the United States in whatever fashion serves their interests — not ours.
The second effect is, for all practical purposes, a threat. According to Paulson and President Bush, if we don’t hurry up and buy this horse for $700B without even looking at its teeth, our economy will be destroyed.
They’ve been telling us this now for 8 days — about some sort of immediate and inescapable implosion. The stock market is rising. We’re still getting pre-approved credit offers in the mail. Some mortgage broker who never seems to get the message keeps calling my house asking if I want to refinance.
Don’t believe them.
There will still be mortgages, only under slightly more sane guidelines. A bunch of bigwigs on Wall Street have leveraged themselves to the point that only ridiculous levels of growth that would be stimulated by that sort of investment — or the government coming to the rescue — could ever bail them out. And they expect you and I and our future generations to foot the bill.
Think about it this way. Every day we are struggling just to make ends meet, only three weeks’ pay away from bankruptcy. Meanwhile, Richard Fuld of Lehman Brothers stashed away $250M as his pay for destroying the company, John Mack of Morgan Stanley took $54M, Lloyd Blankfein of Goldman Sachs got $270M and the CEO’s at Merrill Lynch walked away with $300M.(5) This was not payment for a job well done, or well-deserved compensation for building a better mousetrap. Rather, it was the result of the sort of Crony Capitalism where a bunch of corrupt insiders sit on each others boards of directors and vote each other huge pay packages. When it comes time to reap unimaginable profits, they are big-time capitalists who want no intervention in the system. But when it comes time to take losses, they suddenly become big-time socialists who want to distribute the responsibility for their losses even to impoverished Americans who are barely making ends meet.
All of them — all of them — are parasites on the body politic to start with, as they have never added a dollar of value to our economy; but merely derived benefit from being in a position to take a “little of the top” of millions of transactions — like Richard Pryor’s scheme to steal the half-pennies in a Superman movie.
Yes, it’s true: ultimately, this economy will stutter and fall. But now is not that time, and this bailout won’t make that time come any later. This is just welfare for parasites on both ends of the economic scale, and it would behoove us to shut it down. Practically everyone listening to me has had the experience of a credit card issued at a certain rate of interest, and then discovered that because they were one day late on one bill one time, the new interest rate is 30% or more. These are not nice people. They deserve nothing less than banishment from our nation.
Representative Ron Paul also spelled out the consequences of this bailout when he wrote: “Using trillions of dollars of taxpayer money to purchase illusory short-term security, the government is actually ensuring even greater instability in the financial system in the long term.”
A little pain now could prevent a lot of pain later.
(1) Peter Brimelow, National Review, April 12, 1993
(3) Foreclosed: State of the Dream, 2008 http://www.blackagendareport.com/index.php?option=com_content&task=view&…