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.
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!
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!
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.
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?
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.
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.
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.
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.