The Weiner Component V.2 #49 – Cycles of National Wealth: Part 1

Homeowners could always raise money by getting second mortgages on their properties.  Sometime during the 1970s someone, probably in banking, came up with the idea of splitting these mortgages up into many different pieces and selling each piece to a different owner.  By the early 1980s, and this was the time of President Ronald Reagan and pure capitalism, Hedge Funds were set up which took fractional shares of each mortgage putting them into different Hedge Funds.  The point here was if some of the mortgages didn’t pay occasionally the dividends would still be large enough to justify the existence of the Hedge Fund.  These were considered absolutely safe investments.  American mortgages had become a form of massive investment securities.


Meanwhile executive pay rose into the multimillions and wages rose very slowly and very slightly, not even keeping up with increases in productivity.  Most banks, particularly the larger ones like Bank of America or Wells Fargo, encouraged their customers to finance and refinance their homes, to use their domiciles as bank accounts, in order to buy whatever they desired.  One of the arguments being that continued refinancing continually raised the value of the property, therefore what they withdrew was practically free money.  People were spending the ever increasing profit in their homes, not worrying about ever paying off their mortgages.  Consequently the continued fees in doing this were also absorbed by the continued increases in the value of the property.  Seemingly it was a no lose situation for both the banks and their customers.


In places like California people tended to move every five years, replacing their home with a larger more expensive abode.  A lot of individuals bought into this continual refinancing program.  Many of these people made up the group that the banks needed and wanted to carry out their programs.  The banks and many of their employees made fortunes in fees and refinancing.  The homeowners tended to live as though they were earning three or four times as much as they actually earned.  It created a housing fantasy or bubble that lasted until 2007.


Actually the crash did not come until 2008.  Most of the bankers were in denial that the system could fail; it had lasted for twenty-seven years, most if not all of their careers.  When the crash came many of the banks were suddenly at the point of bankruptcy.  President George W. Bush and his Secretary of the Treasury, Hank Paulson, lent money to the banks to keep them solvent.


Basically what happened was that the distribution of funds throughout the economy broke down; most of the wealth went to the upper few percent of the society; it was not shared.  More money was needed for the country to function properly.  Much more of the wealth produced should have been applied to wages.  In addition the Federal Reserve, which is a dynamic institution, should have supplied more cash to the economy but its longtime chairman, Alan Greenspan, did not believe in doing this, particularly since it had not been done earlier.  Also the increases in worker productivity should have been compensated in increased wages.  Instead they went into increased profits which ended up in greater compensation for executives and higher dividends for stockholders.


What occurred from the 1980s was a more rapid separation between worker salaries and executive compensation.  More and more of the wealth produced in dollars went to the upper few percent.  More and more inequities were being built into the society.  The general public were being compensated by the flow of cash being supplied by the banks in creating the housing bubble.  This would last until 2008 when it all came crashing down.


In 2008 practically overnight the value of the dollar dropped like a heavy lead weight.  Many people suddenly owed more on their homes than they were then worth.  A percentage of these homeowners just took off, deserting their domiciles, others stayed but could no longer afford to make the payments.  They were either unemployed or had lost a large percentage of their commissions.


The pattern many banks had followed was to issue mortgages, then sell the mortgages to Hedge Funds or set up their own Hedge Funds, retrieve the cash they had invested, and lend out the money again.  This pattern was repeated over and over again.  It was practically an endless process.  The banks got their initial cash back and administered the loans for an endless cycle of fees.


Since the banks believed in speed and efficiency they had set up their own recording concern.  Going through the traditional process of recording all these transactions was too slow.  The problem that came into being was that the endless recording that this agency did was fraught with errors so that when the time came to check out the ownership of the financing and continued refinancing, the records were worthless.  In actuality there were no real records.  Mortgages could have been split into a hundred pieces or more, each going to a different Hedge Fund.  In essence there were so many owners that no one owned enough of a mortgage to have any control of it.  Actually no one owned these mortgages.


Initially the banks had shredded their mortgages once they had been sold to the various Hedge Funds.  After the crash a number of banks printed up new documents of ownership to the homes they processed but did not own and then began a process of foreclosure and resale of these homes, keeping the money they made from this process.  The entire transaction was illegal.


Seemingly there was no objection on homes that had been deserted.  But where people continued to reside many were illegally pushed out of their homes by banks that didn’t really own the mortgages on these houses.  Cases came up and were heard at the local courts.


Interestingly a number of lawyers were disbarred for daring to suggest that the banks were dishonest.  It seemed that many judges could not believe that banks would forge documents.  I would assume that when this was later proven many former lawyers got their licenses back.  The banks were heavily fined in the hundreds of thousands of dollars and some homeowners did collect some money for having lost their homes; no one went to jail for the fraud committed.


What happened, when Barack Obama became President in 2009, the country was on the edge of going into a depression that could have been far worse than the Great Depression of 1929.  The entire economy of the United States could have totally collapsed.  It was, after all, based upon the use of the banks.  This could have spread to Europe and Asia bringing about a massive world depression.


If the U.S. banks had been allowed to go bankrupt the entire movement of money in the country would have practically stopped.  The collapse of businesses would have accelerated as massive funding would have disappeared.  Unemployment could have reached 75% or higher.  There would have been starvation and riots as the economic system disintegrated.  It would have taken years both in property ownership and bank usage for the country to work its way out of the disaster caused by the banks.


Instead President Obama and his administration took control of the situation and changed what could have been a massive depression into the Great Recession.  Unemployment which could have been unimaginably high in 2007 was at 4+%.  By 2009, President Obama’s first year in office, it reached 8%.  In 2010 it rose to 10%.  Thereafter if gradually dropped to 5% by 2016.  Through the use of money a potential massive depression was changed into the Great Recession which returned the economy to essentially normal conditions by the end of President Obama’s second term in office.


The period was known as the Great Recession.  By, among other things, lending massive amounts of money with interest charges to the banks and the American automobile industry the President brought the country out of imminent disaster and back to recovery over his two terms in office.


In addition for a little over two years during his second term in office President Obama and his Chairman of the Federal Reserve, Ben Bernanke, bought back 50 billion dollars’ worth of housing loans pieces monthly and shredded them while adding another 50 billion dollars to the economy.  By the end of this period, when Janet Yellen became Chair of the Federal Reserve the amounts were reduced 10 billion monthly until they reached zero.


This process supplied money to the economy.  A goodly percentage of people, for one reason or another, had stopped making mortgage payments on their homes.  Some had lost their jobs and didn’t have money, others had reduced funds, and still others had retirement funds dry up.  For whatever reason payments were no longer being made and people were not being dispossessed.  Generally there was money available which should have been allocated to home payments but was being kept by some of the homeowners.  Much of this money was being spent on other things like restaurant dinners and entertainment.  There was quite a bit of money out in the society which the Federal Government was indirectly supplying.


No one, not even the government, knew specifically which homes the Federal Government owned.  People were able to live in these houses without making any payments.  Those that had money largely spent it.  As long as property taxes were paid on these homes the people could freely live in them.  Where property taxes were not paid the houses were picked-up by wealthy retailers for payments of back taxes, generally fixed up, and rented out or sold.


Some rich people got much richer in this process.  No doubt these people started out in that condition.  A percentage of the homes ended in their possession as rentals.  They could also sell the houses.  The process helped to rebalance wealth in the hands of the few and further reduce the middle class.


In any event largely in a decade or less it would solve the ownership problem for most of these unowned homes.  Without this solution the problem could have dragged on for thirty or forty years or longer.  The banks did a fantastic job of fouling everything up.  President Obama solved the problem and brought order to the economy.  The price of doing this was indirectly paid by the taxpayers.  A relatively small group within the country made billions of dollars.  It was expensive but it avoided a depression greater than that of 1929.

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.


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.