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 #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 #57 – The Rapaciousness of Banks, Solutions (Part 4 of 5)

In 1935, Cret designed the Seal of the Board o...

There is a basic contradiction in banking within capitalism in a Market Economy.  Adam Smith, in his classic work, speaks about the “invisible hand,” the motivating force of the market system.  This is the profit motif; people do things under capitalism because they come out ahead monetarily.  We work for pay; we create businesses to make profits.  Everything we do under this system increases our level of wealth.

This motive applies to banking as well as every other business enterprise.  In fact the major banking houses work toward phenomenal profits.  Yet the rules of the Free Market do not apply to banking.

There are different types of banks; the lines between them in recent years have become obscured.  Commercial banks take in deposits from their customers, pay a small amount of interest on these monies, and then use the money for all sorts of loans, private and commercial.  Since the Great Depression the Federal Deposit Insurance Corporation insured all bank deposits up to a certain amount that has been increased over the years.  Currently all bank deposits are insured up to $250,000.  For this the banks are required to pay a minimal premium.  In the event of a major economic collapse in which the banks fail the Federal Government or the taxpayer would be responsible for paying or repaying these funds.

Investment banks like Goldman Sachs have investors who put their money in these banks hoping to make a profit.  These funds are not insured by the Federal Government.  The investment bankers are supposed to be experts in financial management.  They make their money from assorted fees.  They also invest their own funds.

Today, with an easing of banking laws, the lines between the various banks are very gray.  At the tail end of 2008, with the Real Estate Debacle, the U.S. economy came very near almost total collapse.  Federal bailouts saved the banks and the economy.

The Financial Institutions have never accepted responsibility for their acts of economic mayhem.  They function like bodies of water always flowing downhill, except the banks are always flowing in the direction of the greatest profits.  In 1929, the ten percent margin investments stopped for a period of time, then began again, but by law, then, margin could not be less than 50% of the investment.  This is still true today.

After the Great Depression all sorts of banking regulations came into existence; and they persisted well into the second half of the 20th Century.  From the 1980s on, with Reaganism, where “the problem” in society “was the government,” which presumably held back progress in a free society, banking regulations began to disappear.  This attitude, combined with a need in the economy for a much greater flow of cash, brought the country to the disaster of 2008.  Paul Volcker, a former Federal Reserve Chairman, led a committee to come up with new regulations for the banks.  These new regulations were largely watered down by bank lobbyists and this brought us to the current situation.

The Volcker Rules are again being reconsidered.  Will they, if instituted, stop the current bank abuses?  They will certainly help do so for at least a period of time.  Of course the bank lobbyists will still be arguing to members of Congress against them.

Currently the Federal Government is not only financially penalizing a bank; it is also considering indicting one of its executives.  If it does so and this action becomes a common practice, then whether the man is found guilty or not by a jury, the illegal activities that the banks perform for profit will slow down.

Will these actions change bank policies?  Will the flow toward phenomenal profits cease?  The answer, at best, is temporarily.  Laws and government practices can be changed gradually.  The reform that came about after the Great Depression lasted for about half a century.  The same could be true of these reforms.  The nature of private banking is profit, the more the better.  What is needed is a new system of banking whose ultimate goal is to serve the public and the welfare of the overall society.

In essence the Commercial Banks are taking risks with other people’s money, the executives are making fabulous salaries, and they are calling on the Federal Government if their investments fail.  Also up until now there has been no chance of anyone being held liable for mistakes or for most criminal activities in which they may engage.  In fact outside of specific criminal acts like using insider information no one has been held criminally responsible even for narcotic money laundering or supporting terrorism.  The banks pay massive fines that represent a small percentage of what they have made and the executives apologize one or more times and promise not to do it again.  But from what I gather the profits are so great that most of these banks do perform these acts again.  One might say that all people are equal before the law but bankers consider themselves more equal than anyone else.

Where, then, is the Free Market when it comes to banking?  Obviously, there isn’t one.  Banking operates outside the Free Market System.  The big banks cannot lose, they are supported by the United States Government; which, in doing so, is protecting the small investor.

Banking, as we’ve seen, as it occurs in the United States, and for that matter in most European countries, is ridiculous.  It is government backed “so called” free enterprise – a contradiction of terms and concepts, a system of irresponsibility, supported by the government.  The way it functions allows all sorts of economic downturns and upturns that keep the assorted economies in a state of confusion or near-confusion and it exists mostly for the benefits of the profit-hungry banking executives.

What we need is a system of continual growth, a system where the government controls and can constantly fine-tune the economy of the nation.  The Federal Government does not operate for profit but, rather, for the benefit of the people, for the “common good.”

Can this be done?  The answer is, YES.  Not only can it be done but also the agency that can rectify the current situation exists.  It was created exactly one hundred years ago because of constantly occurring economic disasters, particularly then because of the Panic of 1907.  This agency is the Federal Reserve.  It, after the Midterm Elections of 2010, has not only kept the nation afloat but has also brought about economic growth despite a recalcitrant House of Representatives that has refused to utilize fiscal policy to bring about any economic recovery.

The Federal Reserve needs to have its powers expanded to the point where it can do away with the contradictions in the U.S. banking system.


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