The Weiner Component #144 – The Federal Reserve & the Rising Interest Rate

English: President George W. Bush and Presiden...

In late 2008 the major banking houses in the United States, like the Bank of America, Wells Fargo, JP Morgan Chase, and others by their reckless and irresponsible actions during the prior 28 years, virtually destroyed the Real Estate Industry bringing it to a giant crash.  Not only Real Estate but also the major banking houses themselves, like the like those already mentioned and numerous other banks stood upon the edge of total disaster.  Many of the banking houses were initially saved by President George W. Bush during his last year in office and then, with restrictions, by President Barack Obama.

 

(The CEO of Bank of America complained venomously about the restrictions, cutting executive salaries well below a million dollars.  He wanted to pay-off the government debt so executive salaries could get back to normal.)

 

For the first year of Obama’s Presidency the Fiscal Policy applied by the Democratic Congress dealt mostly with bailing out banks and other industries.  President Obama also saved the auto industry in the United States.  Ford was able to just make it without any government help but its stock tanked to under $5.00 a share for a period of time and then went up to over $14 a share.  General Motors took government loans and its stock, in a bankruptcy suite, was declared valueless by a judge.  Bail out funds and a new issue of stock saved the company.  The original stock holders lost their investment.  Chrysler was saved by a bail out.

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Household property values dropped like large bombs and exploded.  During 2008, when all the indicators foretold oncoming disaster, the bank executives were in denial, in order to continue, financing and refinancing, they raised loan values on properties to 125% of appraised value.  When the Crash came, in September of that year, a goodly percentage of the home mortgages were far above the newly appraised value of the homes.

 

Many of the banks were overextended, too much money had been invested in mortgages which had not yet been converted into fractional pieces and sold to hedge funds.  Many homeowners suddenly discovered that their homes carried greater loans than they were suddenly worth.  A number of them decided to start over and walked away from their properties, leaving empty houses behind.  Values dropped overnight; employment across the country fell significantly.  There was massive unemployment and it was continuing to decrease.  The nation was in a deep recession ready to continue falling into a deeper depression than that of 1929.  It would take at least a decade or more for the housing crisis to be resolved and for the banks to be willing to finance new construction again.

 

At first the banks generated documents on properties they administered but did not own, selling these houses, and keeping the profits for themselves.  This went on until the Courts realized or discovered what was happening; then the different banking houses stopped the illegal process.  The ownership of these homes had been so fractionalized that no one really owned them.  The records on these structures had been so sloppily put together by the banks that it was impossible to establish ownership on many of these structures.

 

The banks, in their rush to make profits, had been in such a hurry to finance and refinance their numerous deals that tracing the ownership of many of these houses was like going through an impossible maze.  They could not find fifty plus percent of the mortgage ownership.  These empty houses would be sold in a few years for back taxes.  The original hedge fund owners lost their investments as their hedge funds became valueless.

 

Many who were able to hold onto their homes would eventually see their properties rise in value.  And many who held on to their homes would eventually lose them by not being able to afford the monthly payments.  It was an impossible mess!

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From 2009 to 2010 the Federal Government had a Democratic majority in both Houses of Congress and was able to apply Fiscal Policy.  In those two years Congress with the aid of the President, Barack Obama, was able to pass Fiscal Polity bills and make executive decisions that slowed down the recession gradually turned the country in the direction of recovery.

 

After the 2010 Midterm Election the Republicans achieved a majority in the House of Representatives.  From 2011 on no Fiscal Policy Bills were passed by the House of Representatives.  In fact, at one point they refused to fund the government, effectively shutting it down for a period of time, and costing the taxpayers several billion dollars in this process.

 

The prospective of the Republicans tended to be and generally still is, what’s happening right now, this minute.  The future to them seems to be an abstraction that they do not deal with.  They seem to be penny wise and dollar stupid.  Immediate savings would be the limit of their understanding.

 

They have wasted millions on pointless hearings such as on investigating Benghazi and other causes which seem to be mainly political, attempting to embarrass a Democratic leader or cause.  And they seem to like to hold their government refinancing bills to the last moment where the bill must be passed or the government will face some sort of disaster.  In 2014 they spent over a trillion dollars financing the government for 2015 and including earmarks for every other cause they supported with friendly legislation all combined into one giant bill of over 1,000 pages that cost the government billions of dollars.  For 2016 they spent 1.25 trillion dollars effecting a 2,200 page compromise bill with the Democrats.  So much for fiscal responsibility!

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In dealing with the 2008 Real Estate Crash the Federal Reserve utilized Monetary Policy.  What happened with the Crash is that the value of a dollar dropped to five or ten cents virtually overnight.  Many people lost their employment.  Most people were also confused as to what was happening.

 

The Chairman of the Federal Reserve at this time was Ben Bernanke.  He had been originally appointed by President George W. Bush.  One of the first things he did was to lower interest rates that the FED charges banks to 0%.  The current Chairperson is Janet Yellen.  On December 16, 2015 she and her Board, which consists of the Presidents of the twelve regional Banks, raised the interest rate from 0 to ¼ of 1%.  They had held it at zero for about seven years.  The average bank account in the U.S. was receiving interest at the rate of 1/10th of 1% per year.  Generally that is not even enough yearly interest to have taxes paid on it.  Most accounts received under $10 a year.  This amount was too small to be reported to the IRS which requires a ten dollar minimum.

 

The object of this move, after the 2008 Real Estate Crash, was to make money very inexpensive to borrow.  Theoretically it was to encourage the banks to loosen their lending policies and encourage economic expansion and thus reverse the Great Recession.  That didn’t happen.  Suddenly the banks became super cautious with their lending policies.  What the banks seemed to go into at this time was investing in the futures market.  This is buying items like food crops that are still growing and assorted raw materials that have not yet been mined months in advance of their coming on the market for sale and then selling these items when they came on the market with a goodly amount of profit added to them.  Here the virtually free money lent by the Federal Reserve to the banks, actually by the taxpayer indirectly, allowed them, the banks, to raise prices on much of the goods the public needed to survive and make a goodly profit on it.

 

It should also be noted that during this period the banks were also paying millions in fines for illegal practices they were and had been engaging in.  I don’t think any of the major banking houses escaped paying numerous multimillion dollar fines.  In all, these fined added up to billions of dollars; but no one went to jail for these breaches of the laws.

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Both Bernanke and Obama had tried to get the Republican House of Representatives to pass Fiscal Policy, laws that would create jobs.  President Obama had presented them with a plan for infrastructure improvement which would create jobs and Chairman Bernanke had stated the need in numerous Congressional hearings and public speeches.  Congress not only ignored them, it passed various measures shrinking the Federal Government and actually exacerbating the recession by causing more unemployment.

 

As the cheap money policy wasn’t working on a large enough scale to noticeably affect the overall economy what was needed was a new plan to encourage economic growth. This was a new creative use of Monetary Policy and the FED came up with one that would loosen currency in the economy and end the “Housing Mess” created by the banks.  This was Creative Monetary Policy.

 

We don’t know who deserves credit for it, whether it was the President, the Chairman of the Federal Reserve, or members of his Board, or for that matter a combination of the three.  But we do know that it worked.  What they did for a period of well over two years was to add 85 billion dollars each month to the National Cash Flow or the available amount of currency in the entire economy, ending the process in 2015 by decreasing the amount by 10 billion monthly until it reached 0.  Of this money 45 billion was used to buy mortgage paper and 40 billion was just added to the existing currency in circulation.

 

In all the Federal Reserve spent over 2 trillion 7 hundred billion dollars in getting rid of the “Housing Mess” created recklessly by all the major banking houses.  If we add to that another 2 trillion dollars we get an image of what the Federal Government spent through the Federal Reserve turning the country around toward economic recovery.  These are the profits the banks and their executives made from the 1980s to late 2008.

 

Somehow I don’t remember anyone in the banking industry publically expressing any remorse.  Particularly I don’t remember any banking executive being sorry about the 2.7 trillion dollars that the public paid indirectly to end the Housing Disaster in a relatively short time.  The only public complaints that came from banking executives was that, under President Obama, they had to take enormous cuts in their million or multimillion dollar compensation packages.  The fact that millions lost their homes and savings was immaterial to them.

 

The weakening of the Dodd-Frank Bill that was passed in 2009-2010 to do away with the causes that had brought about the 2008 Real Estate Crash was going to be done away with when Mitt Romney became President in 2013.  Romney lost that election.  When the Republican dominated House of Representatives passed the bill in 2014 funding the government for the oncoming year on December 11, the Thursday before the yearly Congressional session ended, one of the measures added to the Bill slightly weakened the Dodd-Frank Law.  I suspect they had originally hoped to do completely away with the legislation in 2015 with the last minute Finance Bill that year but it got dropped at some point in the negotiations between the two political parties.

 

Why is it that I feel like a victim from both the banks and Congress?

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In all the Federal Government added trillions of dollars to the currency in circulation and rather rapidly, in a little over two years resolved the “Housing Mess” created by the banks.  By 2015 there were very few houses empty houses in the country and new construction was occurring within all 50 states.  Conditions had moved in the direction of normalization and unemployment had dropped to 5% in the United States.

 

Of the 45 billion dollars that was spent buying up fractional pieces of mortgages throughout the fifty states each month there was no direct way for the Federal Government to ever directly recoup this money.

 

Originally the banks did not like having the properties having to be registered in the counties where they were situated; it was too slow a process.  They set up their own registration agency to handle all these exchanges and were able to get the Congress to pass the legislation that they needed in order to do this.  Their major problem was that the agency was not large enough to handle all these transactions throughout the fifty states.  There had to be at least a 20% error margin; it was probably much higher.  Either the agency was too small to properly record everything or it was too understaffed to properly do this and the assorted banks were not paying enough to fund it properly, or it was a combination of these.  In any event the records were rife with inaccuracies.  It would have taken an incalculable amount of time to straighten out the mess.

 

What the government bought for its 45 billion dollars in mortgage paper a month was billions of fractional pieces of mortgages that were virtually impossible to sort.  Further these came from houses situated throughout the entire United States and its territories.  There was no way sense could have been made out of these.  What the government was doing was buying up the “Housing Mess” that the banks had created and removing “the Mess” from the market where the banks had dumped it.  They were removing “the Mess” from the society and absorbing the loss.

 

The former owners of these houses who were still living in them and paying their property taxes but making no mortgage payments were living in houses that nobody owned and upon which nobody could legally foreclose.  They were, in essence, living for free in these homes that they had formally owned.  They could keep the house for the rest of their lives.  They could even sell the property if they could find a bank that would put a mortgage on the house.  Basically they could spend the rest of their lives in these houses without paying another cent on the original mortgage as long as they paid their taxes.

 

The problem here was that no one knew who really owned those houses.  It could be the Federal Government or it could be a mortgage company or, for that matter, it could be a bank.  It could also be an individual who had purchased the full mortgage from a bank.  If an individual or a mortgage company owned the entire property they would eventually make their presence known and resolve the ownership problem.  But if the mortgage had been fractionalized it was either the government or a defunct hedge fund and impossible to determine ownership.

 

Generally the behavior of these people, who were making no more mortgage payments, was to live well.  Suddenly they had more disposable income and they tended to spent much or all of it.  The result was that this money added significantly to the amount of currency in circulation and helped to eradicate much of the results of the 2008 Real Estate Crash.  It can also be stated that these people who were paying no mortgage could no longer deduct the interest on their housing loans.  Consequently nationally the IRS collected additional billions in taxes from these people across the nation.

 

This was the creative Monetary Policy that the Federal Reserve and its Chairman, Ben Bernanke, came up with.  It worked and with some Fiscal Policy applied by Congress could have totally returned this nation to full economic health.

 

Instead the nation is still at 5% unemployment.  The Republican candidates, like Jed Bush talk about doing away with the Environmental Protection Agency (EPA) as a mean of increasing employment in the United States.  It would seem that they would like to see parts of the U.S. look like some of the Chinese cities, dark with smog at noon, filled with unbreathable air.  But they believe this would increase employment in the country, even if it does shorten lives.

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It should also be noted that the interest rate that the Federal Reserve charged banks was at 0%.  In December of 2015 the new Chairperson, Janet Yellen, announced that they were raising it to ¼ of 1% that is .025%.  That will mean that the banks will raise the interest they pay on bank deposits from 1/10th of 1% to possibly 3/10th of 1%.  For the last seven or so years the public has been funding the banks practically for free.  With this increase the interest paid by the banks might rise enough so that some people, but not too many, will have to pay the IRS a few dollars in taxes on their bank deposits in 2016.

 

We, the public, have been funding the banks with our funds, checks and so forth, practically for nothing.  These monies, up to ½ million dollars per account are guaranteed by the Federal Government through the FDIC, but the banks can and do use the money they continually receive from us in almost any way they see fit for their own profit.  In 2015 the banks are reporting significant profits.  Their executive salaries are in the millions and multi millions.  And for contributing these monies the public ends up not only paying endless fees to the banks but also considerable amounts as middle men in the Futures Market.  The banks freely take a share of the money you earn and spend for your food and other necessary products as the Middle Men in the sale of many of the items people need to survive.

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It should also be noted that with 0% interest paid by the banks mortgage rates dropped to, in some cases, below 3%.  With the Federal Reserve’s action of raising the interest rate charged banks a fraction mortgage rates still dropped.  The amount the banks now pay to the FED is minuscule.  I would assume that they will continue to rise, at least, at the same rate as the first increase.  The public does deserve some return for letting the banks use their monies.

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As a sort of footnote we should remember that the banks are necessary for the national and international economies to properly work.  But we should also note that the major reason for all the banks is to serve the public.  Today it would seem that the major banking houses of the United States and much of the Industrial World serve mainly themselves.  The public seems to be exploited for the benefit of their self-interest, profit.  We, as a nation, might be better off if there was an alternative to the current privately run banking houses in this country.  If nothing else giving the public an alternative to the current banking situation might generate a certain amount of humility in the current banking houses.

 

An alternative does exist; and that is the Federal Reserve.  All the Congress has to do is extend their powers so that they can also deal directly with the public.  They are a government agency that was created in on December 23, 1913 as a result of numerous financial panics.  Their major objective is to serve the public; that is still their major purpose.  The FED has undergone an evolution, particularly in the 1930s after the Great Depression.  If the Congress were to extend their powers they could easily take on the same functions as the private banking houses and allow the public to have a positive banking experience that would operate for the benefit of the public.

 

There are twelve Federal Reserve Districts covering the entire United States.  They can easily establish banking facilities throughout the nation.  This would also give them more ability to positively control the economy.  And they need not totally replace the current private banking houses; they could function alongside them giving the public a choice of where they want to do their banking.  Their existence in this fashion would also insure that the public gets a reasonable return on their banking accounts and it would force the private banks to stay honest.

 

It should also be noted that finances in most industrial nations are run by state owned public banks, like the bank of England or France.

The Weiner Component #73 – The Problem of the Distribution of the National Income

Manhattan Panoramic View, NYC

One of the greatest misnomers to come out of the 2008 Real Estate Debacle was that the CEOs’ large compensation packages and the massive spending by the general public were closely interrelated.  The spending affected the extent of the salaries but it was separate from them.  The bundling of mortgages caused the Real Estate Bubble.  Going back to the last two decades of the 20th Century many individuals and families began to add their home equity to their incomes in order to enjoy all the comforts possible.  With the continual rise of real estate values over a thirty plus year period this seemed infinitely possible.  With the ever-growing demand for major and minor items by the general property owning public the country was in a period of immense profit for all types of retail concerns.  People bought cars, boats, bigger houses in better neighborhoods.  They frequented restaurants, bought new clothing, TVs, almost anything.  As corporate profits increased CEOs demanded and got greater and greater bonuses and overall compensation packages.  There was full employment; banks were earning greater and greater profits.  The country, the world was living in a sort of fairyland that would presumably go on forever.

And then, at the tail end of 2008, the bubble burst and hard reality set in.  Property values dropped, in many cases, well over fifty percent.  Demand for products fell and there was massive unemployment.  People could not meet their bills.  Many owed far more on their homes than they were worth.  Everyone, including the CEOs faced disaster.  Then the government jumped in with $900 billion worth of loans and saved both the banking industry and the country from a massive depression.

The CEOs were very frustrated.  They had gotten these phenomenal salaries and now they were gone or practically gone.  For some bonuses had been cut in half.  The CEO of Bank of America was very upset particularly after President Obama had insisted that no bailout money be used to pay bonuses.

In addition corporate profits dropped significantly at the end of 2008.  The country was in unbelievable economic pain.  By 2010 the economy was expanding again.  This continued through 2011, 2012, 2013, and 2014.  During 2011 Congress slowed growth with the Debt Ceiling crises.  The next year the fiscal cliff held the economy hostage, again reducing job growth.  By 2013 many workers had left the labor force, because of constant inability to find almost any kind of work, supposedly reducing the unemployment rate.

In 2008, with the crash, the Gross Domestic Product was $14,720.3 trillion.  The GDP per capita was $48,951.  The following year it dropped to $14,417.9 trillion with the per capita level at $47,041.  In 2010 it slightly exceeded the 2008 level and in 2011 it was $15,533.8 trillion with the per capita rate at $48,282.  By 2012 the country was in the $16 trillion level and by 2914 it has reached $17 trillion with the per capita level also rising.

The unemployment level increased significantly from the end of 2008 on rising to 9.9% of the workforce and then gradually dropping by 2013 to about 6.7%.  Keep in mind that this percentage does not include those that are underemployed or who have given up looking for work.  We can only guess at these numbers.

Of course the irony of all this is the level of the per capita income which would give a family of four if it existed in real life a little under two hundred thousand dollars a year.  What exists is a wide distribution of incomes with the bulk of the $17 trillion going to a very small percentage of the population.  For example a person working at Wal-Mart for $7.25 an hour with a family of four would have to apply for food stamps and other government aid in order to survive while the CEO of any giant corporation would be earning about a million dollars a month or more.  If I remember correctly the CEO of Hewlett Packard received about $15 million in 2013.  The general compensation for CEOs could be more or slightly less.

Interestingly in cases like that of Wal-Mart it is the taxpayer, who generally is earning a lot less than the per capita level of income, that pick up the difference needed for the Wal-Mart worker’s family to survive through the various entitlement programs the federal and state governments provide.

Wages, salaries, compensation packages vary greatly.  Only a very small percentage would reach the actual level of the per capita income.  And a much smaller percentage would be above it.  And still a much smaller number, perhaps a hand-full, would have their income in the millions of dollars.  There are even a few in the billion dollar category.

President Franklin Delano Roosevelt, during the Great Depression and again during World War II, stated that a person could only spend so much during a year or during a lifetime.  There was no need for them to earn that much more.  He wanted to tax excess profits.  Congress in neither case would go completely along with him.

Currently the tax system is set up so that anyone earning over $140,000 a year pays a fixed rate on everything earned over this amount.  The more he earns over this the smaller is the percentage of his income that he pays in taxes.  This means that the average family earning under $140,000 a year, which is most of us, pays a greater percentage of their income in federal taxes.  In essence the rich can store endless barrels of money for countless future generations or use some of the money to buy elections while everyone else can do without and just generally survive, with some people not even really surviving.  In the case of corporate subsidies, this money can be used for lobbying and political campaigns to buy influence in the federal and state governments even though it is indirectly paid by the taxpayer.

Obviously there is something wrong with this system.  Something in the way of reform has to be brought about or eventually tragedy will occur.  People will accept a lot of inequities but eventually these inequities become so blatant and their misery so great that they will violently be objected to.

The rich seemingly have endless amounts of money.  They are using some of it to influence the general public in elections.  In essence they are buying influence in government which is being used for their own benefits.

 

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The Weiner Component #57D – The Federal Reserve (Part 5 of 5)

English: A map of the 12 districts of the Unit...

English: A map of the 12 districts of the United States Federal Reserve system. (Photo credit: Wikipedia)

It became obvious during the Panic of 1907 that the Federal Government had no controls over banking practices in the United States.  The Panic was caused by speculators attempting to corner the market on United Copper Company stock.  Failure to do this led to the collapse of the Knickerbockers Trust Company, New York City’s third largest trust.  The failure spread fear throughout the City’s Trusts.  Panic extended across the nation as large numbers of people withdrew their deposits from regional banks.  At the time the United States did not have a central bank to inject liquidity back into the market.  The following year a Senate commission investigated the crisis and proposed future solutions, leading to the creation of the Federal Reserve System in 1913.

The Federal Reserve (FED) is the central banking system of the United States.  It was created in December of 1913 by the passing of the Federal Reserve Act.  This was largely in response to a series of financial panics, particularly the Panic of 1907.  It consists of twelve regional Federal Reserve Banks located throughout the United States, with the main branch in Washington, D.C.  The chairman of the Federal Reserve heads this bank.  Over time the roles and responsibilities of the FED have expanded and its structure has evolved.  It is still in this process of evolution as new financial crises occur.

It was through the Federal Reserve and the Treasury, with the compliance of Presidents Bush and Obama that the nation was saved from total economic disaster caused by the Real Estate Debacle of 2008 that was brought about by the Financial Institutions within the United States.  The assorted banking houses had been bundling and selling mortgages for about the last thirty years; maintaining control over these mortgages with no cash investment in them and then continually using the funds from the sales to issue new mortgages. The banks made fat profits from continually handling all this paper.

There had been a need for more funds in the National Cash Flow and, in this manner; the banks kept adding money to the economy.  By 2007 the level of money creation reach a point of insanity with a larger and larger percentage going to the banks.  At this point most bankers were in denial that the system could crash and the insanity continued until the crash came toward the end of 2008.

The problem that existed from the 1970s on was a great need for a continual increase in currency in the National Cash Flow to keep up with needed economic growth.  The FED was not in a position to fulfill this need; the banks did so; and the process became a way of life until it was abused and over-abused and the bubble burst to the point of destroying the economy, if the Federal Government had not interceded and saved it.

Paul Volcker headed a committee that proposed new laws that would reign in bank excesses and put the country on a solid financial footing again but bank lobbyists got these proposals watered down and since 2009 the major banking houses have again endangered the economy by their excesses.  This does not even consider the damage that has been done to a multitude of individual households where, in many cases, the homeowners have lost their homes through bank foreclosures, a number of which were illegal.  The Federal Government has responded with massive fines for malfeasance but with no criminal cases against any banks or individuals who have brought these abuses into being.  It is time for a change in the situation. For one or many forms of reform to bring these banks into line with the needs of the American public.

The only way this can be done is to upgrade the powers of the Federal Reserve so they can fully and effectively carry out their function of keeping the public safe from the excesses of the financial institutions and also keep the economy at a healthy level.

How can this be done?  The major banking houses must once again become institutions that deal specifically with people and businesses.  They must become either commercial banks or investment banks; they can no longer be both.  And if some or many continue as investment banks then the FDIC (Federal Deposit Insurance Corporation) must no longer insure their deposits.

Also the Federal Reserve must have its power extended to be able to instantly add or subtract currency from or to the National Cash Flow.  In addition Congress needs to take a revolutionary step, it has to increase the power of the FED so that it is able to lend money directly to homeowners and small businesses.  Each of the Twelve Federal Reserve Banks must also get the power to set up their own lending banks within each of the Twelve FED Zones.

After the 2008 & 2009 Bailouts the banks did not function as they had before the crash.  They hoarded their funds and looked for investments that would give them large returns; these were largely in the futures market.  In essence from 2009 on the major banks, which had been saved by the Federal Government and indirectly the taxpayers, found ways to exploit the general public for their own benefit.  They actually worked against economic recovery.  The contention at that point in 2009 that once the Financial  Institutions were saved they would return to their traditional roll was a myth since the large banks were solely motivated by the profit motif and could care less about the welfare of the individual worker and homeowner, or for that matter, the welfare of the country.

Since private enterprise, particularly private enterprise backed economically by the Federal Government cannot be trusted with the welfare of the nation it has become necessary for the Government to insure that welfare and that can only be done by the Government taking over the financial structure of the nation in the name of the “People” for the “Common Good” and not for profit.

There will be problems in establishing this system but they can gradually be resolved.  There are the smaller banking houses and the Credit Unions that have generally functioned for the welfare of the general public.  Should they continue to be part of the system?  Do they continue to have FDIC insurance?  These questions will be answered as we go along.

The major banks in the United States, JP Morgan Chase, the Bank of America, Wells Fargo, to cite a few examples, have grown in size since the 2008 Disaster.  They are today too big to fail.  Their demise could bring down the economy of the United States and possibly also some of the European nations.  In essence they hold the world prisoner while they act making all sort of economic decisions for their own benefits using public funds.

We need, at this point, to take a closer look at the banks and their ownership and control.  The stockholders obviously own the financial institutions but the people who control these companies and make all the decisions would be the CEO and all the upper management.  The actual owners of the banking concerns have almost no say in what happens in these companies.

The compensation packages of the upper echelon runs into the multi-millions of dollars. The stock dividends of a company like the Bank of America runs into the pennies.  The Bank of America pays one cent per share per quarter or four cents per share of stock each year.  One hundred shares of stock that cost anything from $14 to $17 per share pay four dollars a year.  For an investment of $1,500 the shareholder earns $4.00 per year.  For an investment of $15,000 he earns $40.00 a year.  That is a return of .0027%, twenty-seven thousands of one percent.  By putting that much money in a commercial bank the return is at least one tenth of one percent.  So much for owning stock in The Bank of America!  The other major banks pay more but not significantly more in dividends.

What happens to all the fabulous profits that the Bank of America makes?  Most of it goes to management as salaries, compensation, and bonuses.  If the Bank of America is a true example of American banking then the financial institutions are making money for the sake of making money.

It is a sad commentary if one remembers President Franklin D. Roosevelt’s comment that he made once during the Great Depression and again later during World War II that an individual can only spend so much during a year, that to earn far more is a total waste in terms of society and that this excess should be taxed.

The heads of the various banks earn more, in many cases, in one year than they can reasonably spend in a lifetime.  Jamie Dimon, the CEO of JP Morgan Chase had his yearly compensation package cut, after bank losses, from 22 million to only 11 million a year.  This, then, becomes the function of banks in the United States and beyond.  It is a silly or stupid reason for running the finances of a nation.

The American economy deals with the needs of over 350 million people.  This is a complex issue.  The large banking houses have failed the public.  To what extent should they be allowed to continue to exploit them?  Or should these major Financial Institutions go off on their own in a Free Market System, functioning within the law and succeeding or failing without protection from the Federal Government and the taxpayers?

Taken together all the games, illegal and otherwise, that the banks have played have been in the trillions of dollars, the fines that the banks have paid have been in the billions of dollars.  How many trillions have the banks extorted; how many average Americans have the banks ruined; and how many additional trillions will they extort before this current system is changed?  Even with new Volcker rules the current system is bankrupt, incapable of working for the welfare of the people.

It is time for a basic, realistic change in the way finance works within the nation.  The needs of the people are far more important than the quirks of the modern day bankers.

 

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The Weiner Component #57C – The Business Community and the Function of Government (Part 3 of 5)

Pelli's Wells Fargo Center, Minneapolis, Minne...

Pelli’s Wells Fargo Center, Minneapolis, Minnesota, 1989. Jon Davis (Photo credit: Wikipedia)

 

A map of states and cities where Wells Fargo o...

A map of states and cities where Wells Fargo operates retail banks. (Photo credit: Wikipedia)

The argument has been given mostly by Republicans over the years that under Adam Smith’s Free Enterprise Capitalistic System (the Market Economy) the nation functions best with private enterprise freely running the commercial aspects of the country.  It can also be stated that what the business community wants from the government is “laissez faire,” complete hands off any of their machinations.

It has also been stated innumerable times that government agencies are both inefficient and inept because they are run by bureaucrats who have no real knowledge of what they’re doing, that government gets in the way of business development and doesn’t allow real growth to occur.

These statements are generally self-aggrandizement by the different levels of the business communities stating what they have a vested interest in attempting to attain.  The statements are nonsense.  If we look at the TVA (Tennessee Valley Authority), Social Security, Medicare or any other major Government agency we find these statements untrue.  Practically every single economic disaster that the nation has faced over its entire history has been brought about by the excesses of the business communities.  Most of the laws limiting business activity have been brought about by economic disasters that have been engendered by these business communities.

Article 17 of the U.S. Constitution was passed in 1913 having the Senators in each state directly elected by the People of the United States.  Prior to that the Senators were elected by the State Legislatures, and their purpose, as set up by the founders, was to represent the interests of the states.  What happened during the late 19th and early 20th Centuries was that through bribery the large corporations and monopolies were putting their own people into the Senate to represent them, the companies.  The 17th Amendment, as part of the Progressive Movement, ended this practice and made the Senators responsible to the people of their respective states.

In addition to the fraud and chicanery which the banks have systematically practiced the new Consumer Financial Protection Bureau, that the banks fought vigorously against and the Senate Republicans filibustered the appointing of a head to the department, the agency is up and running.  From July 21, 2011 through June 30, 2013 the Bureau received about 176,700 consumer complaints.  These include about 85,200 mortgage complaints, 36,300 credit card complaints, 25,700 complaints about bank accounts and services, 14,200 complaints about credit reporting companies, and 6,000 complaints about private student loans, 5,700 loans about student loans, and 300 complaints about money transfers.

More than 80% of the total complaints have been dealt with.  The rest have been passed along to other regulators or have been incomplete.  In June the Bureau ordered U.S. Bank and one of its affiliates to return about $6.5 million to more than 50,000 members of the U.S. military who have been duped by the terms and costs of subprime auto loans.  The companies failed to properly disclose finance charges, interest rates, payment schedules and total payments for loans provided near military bases.  In April the Bureau handed down $15.4 million in fines to four private mortgage insurers that were accused of paying illegal kickbacks to lenders for steering business their way.  The practice had lasted for more than a decade.

The reforms being developed by the CFPB are badly needed considering the groups that have been perennially abused.

According to a December 31, 2013 article in the Los Angeles Times, Wells Fargo & Co. has agreed to pay 591 million dollars to resolve claims that it misled Fannie Mae and Freddie Mac about risky mortgage securities it sold them before the housing collapse of 2008.  Banks have agreed in 2013 to pay Fannie Mae about $12.7 billion dollars to resolve disputes over bad mortgages.  The largest repayment was a $10.3 billion settlement with the Bank of America Corporation.

In 2012 a number of large banks paid a fine of 25 billion dollars, to 49 states and the federal Departments of Housing and Justice, so that no one in any of the banking houses would go to jail for illegal activities related to the 2008 Real Estate Debacle.  They agreed to mortgage modifications and other changes in the way they treat their customers, the homeowners.  The New York Attorney General, Eric Schneiderman, brought suit in the Washington Federal Court in late September of 2013 to force Wells Fargo to comply with the agreement it made a year prior.  It alleges that the bank on at least 210 occasions violated timelines imposed by the settlement and mistreated the property owners to the point of, in some instances, illegally foreclosing on their loans.

In late September of 2013 J.P. Morgan Chase admitted that it broke the security laws and agreed to pay fines of 920 million dollars in penalties in the “London Whale” case.

In October of 2013 J.P. Morgan Chase reached a tentative 13 billion dollar deal with the Justice Department to settle a number of outstanding probes of its residential mortgage-backed securities business.  If finalized this deal would be the largest settlement the U.S. government has reached with a single company.

Keep in mind that none of these banks have stopped paying their stockholders’ dividends or seen their stocks decrease in value.  These payments are merely a repayment of monies that were held interest free by the financial institutions that had gotten them illegally or extra-legally and used those funds for a number of years.  With the return of these mortgages there will be many thousands of foreclosures and short sales, and the banks might even eventually show a profit at the end.

Despite all this the big banks continue with their nefarious practices.  Even though some fines are in the billions of dollars these practices will continue since they represent only a small portion of the profits made.  As we’ve seen the bank stocks have maintained their values regardless of these fines.  Isn’t it time for these financial marauders to also go to prison for their crimes.  That would stop or at least considerably decrease the abuses.

 

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The Weiner Component #57A – The Rapacious Banks (Part 1 of 5)

Photo of Bank of America ATM Machine by Brian ...

Perhaps the most predatory group of institutions within the United States are the major banking houses.  They are rapacious, grasping, taking, plundering and in many cases outright dishonest.  These financial institutions place themselves between the general public and all the goods and services they need to live, using the money put into the banks by businesses and the general public to game the public and force up the prices of all the goods and services they need.  When caught in illegal acts by the government these banks pay large fines that represent a small percentage of what they have made from these activities.

We have in earlier articles discussed the Great Depression of 1929 and the Real Estate Debacle of 2008.  To review briefly prior to 1929 the banks created hundreds of billions of dollars through the use of ten percent margin stock purchases, that continually kept inflating the stock market over a period of many years, until through exaggerated excess it crashed and over a relatively short period of time the overall value of all stocks dropped from about 86 billion to about 19 billion dollars, and the entire economy collapsed, reaching about 25% unemployment.  (Keep in mind that gold, which was money at the time, was worth $16 an ounce in 1929.)

The major banks that had been bundling mortgages for decades also brought about the Real Estate Debacle of 2008, selling the bundles, and reinvesting the original funds into new mortgages, which were subsequently bundled and sold again.  This process continued infinitely creating multi-trillions of dollars in new revenue, a good percentage of which went to the banks as profits and fees.  The process continued until the bubble burst toward the end of 2008.  If not for government bailouts the entire economy would have collapsed.  With the bailouts unemployment hit about 12%.  Here in late 2013 we still have only partial recovery with both the Republicans in Congress and the Republican dominated states holding it back.  Unemployment is currently hovering at about 7%.

Since the bank bailouts these institutions have looked for and found innumerable other ways to up their profits and compensation packages.  None of these methods have had anything to do with serving the general public, whose insured money they use for their machinations.

As a footnote, consider that if the banks had been allowed to fail in 2008 the Federal Government through the Federal Insurance Deposit Corporation (FDIC) would have been responsible for paying all deposits in these banks up to $250,000, a quarter of a million dollars.  The money the government spent on the bailout was probably less than this amount would have been and it has since been paid back with interest.

Banking foreclosures from 2009 on, after the Real Estate Bubble burst, and housing prices dropping rapidly and significantly caused a large number of homeowners to be far underwater on the amount of money they owed on their property.  The banks had encouraged them to use their homes as bank accounts and continually refinance, even toward the end refinancing in many cases up to 125 percent of the appraised value of the property.

As we’ve seen the banks did not hold the mortgages on a large number of these properties.  The paper had been divided into fractional pieces and become part of innumerable hedge funds.  The banks had formerly issued and sold the paper but still serviced these loans.  Non-ownership of these mortgages did not stop many of the large banking houses from foreclosing on these properties they did not own.  Any money they made on the foreclosure was pure profit.

The banks computers generated the papers they needed for foreclosures and they used robo-signers to foreclose on these properties.  Interestingly for a while the courts considered the bank’s papers and efforts sacrosanct, even to the point of holding many attorneys, who represented homeowners, in contempt for questioning bank documents.  Eventually the evidence came out about the false documentation and the robo-signing of multi-thousands of these foreclosures.  At this point virtually all the major banking houses stopped foreclosing.  The banks were fined in the millions of dollars but these amounts were a fraction of what they had made from their illegal activities.  No one in the banking industry went to jail for any of the illegal activities they committed.  Eventually the Federal Government began buying up the mortgage paper.

Under the Obama Administration the main executives of the banks that accepted bailout money could not receive multi-million dollar compensation packages.  The CEO from the Bank of America complained about this and stated that the B of A would pay off its loan as quickly as possible so they could resume proper pay packages.

After the bailout the banks became very cautious with their funds.  It became difficult for ordinary consumers to receive loans.  In order to purchase a house they had to have a significant down payment.  Small business entrepreneurs found it impossible to borrow money for almost any purpose.  The banks had essentially stopped serving the public; they were looking for ways to make large profits.  One of the areas they moved into was the futures market.

Almost all commodities, be they necessary food items such as beef or wheat and corn, lumber, financial currencies, oil, or electricity, are sold on the Futures Exchange.  The futures market is a central financial exchange where banks or individuals can buy specific quantities of a commodity or financial instrumens at a specified price with delivery set at a specified time in the future.

Since the Real Estate Debacle of 2008 the large banks in the United States have gone into this in a large way.  J. P. Morgan Chase stated, when they were accused of lying to a U.S. Government investigative committee, that the eight or ten million dollars a month that they would lose from selling electricity in California was insignificant.  Someone from Goldman Sacs said about a year or so ago that they made forty-nine dollars from every barrel of oil sold in the United States.  And this does not include beef, pork, or any other products sold on the future markets.  Somehow I get a rather sick feeling when I think that the major banks are using the money we deposit in them to squeeze dollars out of us for all the products we need to live.

Toward the end of 2013 the city of Los Angeles accused banking giants Wells Fargo & Co, and Citigroup Inc. of a “continuous pattern and practice” of mortgage discrimination that led to a wave of foreclosures, reduced property tax revenue, and increased costs for city services.  The two lawsuits accused both banks of engaging in predatory lending and saddling minorities with loans they couldn’t afford and resulted in a high percentage of foreclosures, The suits cited reports for low income and minority neighborhoods that claimed the mortgage crisis resulted in more than 200,000 foreclosures in LA from 2008 through 2012 and depressed property values, leading to an estimated loss of 48 million dollars in tax revenue for the city.  The suit alleges that the banks predatory lending started in 2004 and still continues.  What will happen here should be very interesting.

Also a federal judge is currently considering a possible 165.8 million dollar penalty against Bank of America Corporation after a jury found its Countrywide Unit fold defective loans to Fannie Mae and Freddie Mac.  U.S. lawyers requested that the bank pay 863.8 million dollars, which is as much as the government agencies lost in the loans.

The banks do not serve us instead they use us, squeezing every possible dime they can out of the public and the Federal Government.

 

 

 

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