America's Founding Fathers were afraid of any concentration of power in the republic. They were particularly afraid that banking interests could hijack our fledgling democracy.
And yet today, 234 years later, our Founding Fathers' worst fears have come true. Wall Street's stranglehold on the economy threatens our very prosperity, and the future of a truly democratic republic.
It's high time we address the truth about Wall Street's tyranny and set a course for a more secure economic future - one that's anchored by a safe banking system, not a system rigged by banks.
And yet today, 234 years later, our Founding Fathers' worst fears have come true. Wall Street's stranglehold on the economy threatens our very prosperity, and the future of a truly democratic republic.
It's high time we address the truth about Wall Street's tyranny and set a course for a more secure economic future - one that's anchored by a safe banking system, not a system rigged by banks.
Banks Are the Gamblers ... But You're Taking the Risks
The credit crisis and Great Recession are the unintended consequences of Wall Street's greed. I say "unintended consequences" because - let's face it - Wall Street institutions tipped over their own money pot and bankrupted the public casino they had created to leverage bets with house money.It all started with the Community Reinvestment Act of 1977 (CRA). This piece of legislation was designed to prohibit discrimination on the basis of race, sex, or other characteristics in the credit and housing markets. Of course, this eventually led to lax mortgage underwriting standards in later decades.
But it wasn't just the Democrats or President Bill Clinton who pushed for an expansion of and greater reach for the CRA in 1999. It wasn't just the Republicans or President George W. Bush who advocated easier documentation terms for homebuyers in a 2002 speech. It wasn't just all the Democrats and Republicans who pushed for Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) to package and buy trillions of dollars of low-quality, mortgage-backed securities.
However misguided they might have been, these policies were all well intentioned. But each of these policies had unintended consequences. It was Wall Street that made sure these "consequences" could be shaped into a giant moneymaking scheme.
Consider, for example, the truth about the subprime mortgage mess.
Default rates on CRA-predicated mortgage loans were a lot lower than bankers had provisioned for. What the bankers realized was that even though they were pushed to make more of these types of loans than they wanted to, they actually made a good profit on them.
As long as housing markets were appreciating, CRA homeowners in distress could actually sell their properties and pay off their loans. Bankers sure weren't complaining then.
After Wall Street pumped and dumped tech stocks on an unsuspecting American public - resulting in the "tech wreck" of 2000 ... and after the horrific terrorist events of 9/11 ... the U.S. Federal Reserve sliced interest rates to record lows and kept them there, much too long.
That's when the subprime-mortgage and easy-credit games took off. Looking at the low default rates on CRA mortgages, bankers figured maybe loan standards were too high and there was room to lower them and still get paid in full. Standards were lowered across the board.
No Intention of Holding onto "Garbage"
Behind the scenes, the big public casino had been readied and the dice were starting to roll. Because Wall Street and its lobbying armies had gutted existing regulations and stifled all efforts to safeguard the public from new exotic derivatives products, there was nothing to stop the juggernaut.Banks had no intention of holding on to the garbage they were manufacturing. Wall Street securitized all the junk that it gathered together - and then sold it off to anyone who would buy it.
And because not everyone who would buy Wall Street's junk was stupid, the institutions reformulated new products from that junk. The new "collateralized" products were just reconstituted, repackaged loans that redirected internal cash flows from mortgage payers so that some "tranches" of the new collateralized pools looked safe and could get the top "AAA" ratings from rating agencies.
It didn't matter that rating agencies didn't understand the new math; they were in on the game and got rich, too.
To add insult to injury, Wall Street employed another newfangled product. These "credit default swaps" were insurance-type contracts that anyone could offer on anything. But the real beauty of credit default swaps is that these contracts let Wall Street play on every side of every deal: Wall Street profited once when it sold the junk, again when it sold "insurance" on those subprime securities, and over and over again as it traded both the junk pools and credit default swaps.
The best part about the whole scheme (which all the institutions were playing) was that the game was self-perpetuating. As long as finance companies, mortgage originators and banks were able to package and sell their pools of mortgages and other "leveraged loans," the money from the sale of them went back to the folks who originated the individual loans in the first place.
The upshot: Those folks could make more loans and start the entire process all over again.
The more money that was available, the lower rates went. The lower interest rates went, the cheaper it was to finance and hold a portfolio of assets. But because rates were so low, and the return on quality loans was correspondingly low, bankers needed higher-yielding assets to maximize the spread on their "cost of carrying" pools of assets. So what happened?
It became necessary to offer mortgages to lower-quality borrowers in order to charge a higher (and more-profitable) interest rate.
That's how the game snowballed. That's how it became a feeding frenzy.
Where Greed Takes Control
The idea for Wall Street's institutions was to "dance until the music stopped." They all knew they had engineered a housing bubble and that the insane appreciation rates on anything with a roof would eventually fall back to earth. By then, the big players expected they would have found a seat, leaving them to watch the other, less-nimble players stumble and take their lumps.There was one problem. Wall Street institutions were way too greedy and far too cocky. They believed that they were safe: In their view, they'd either be able to unload their holdings of the junk they'd created, or they had been clever enough to hedge away their risk with their own credit-default-swap-insurance schemes.
Because Wall Street believed it was safe, the institutions didn't see what was really happening. They were all in the same boat ... and that boat was sinking.
That boat happened to be the U.S. economy - and other top economies around the world. Because of their greed, banks actually made the boat and forced us into it. They sunk, along with us, but got bailed out while we were left to drown.
Here's Where Things Get Good
At this point, you might find yourself asking: So what? Most of the banks have repaid the Troubled Asset Relief Program (TARP) money that they so desperately needed. Most are returning to profitability, and some are even reporting record profits and paying out record bonuses to executives.Yes, some banks have gotten bigger, a lot bigger. Yes, there are more profits to be shared, because a couple of swaggering laggards of the old investment-banking mold - namely The Bear Stearns Cos. and Lehman Brothers Holdings (OTC: LEHMQ) - are gone. Is that so wrong? Isn't that part of financial Darwinism in our capitalist democracy?
The truth is not what it appears to be. Bear and Lehman were ruthlessly crushed by their competition so there would be more business to be had by fewer players.
It wasn't evolution. It was execution.
The bigger banks get, the more they rely on a de facto government guarantee. "Too big to fail" is a doctrine pushed by banks that want to be so big that they crush - or at least absorb - their smaller rivals.
Banks want to be a cartel and to be able to raise fees and the cost of money for their greater profitability, at will. Big banks are making money because the government is keeping interest rates low. Big banks are buying a huge portion of the U.S. Treasuries the government needs to sell to finance the deficit. And that deficit has reached its current size because the money was used to bail out the banks and to mitigate the collateral economic damage that Wall Street caused.
It's a financing game, another bubble to re-inflate bank balance sheets by allowing them to generate a virtually risk-free, high-net-interest margin.
We need to be afraid of what our Founding Fathers were afraid of, too much power concentrated in too few hands - especially banking-interest hands.
We need to break up all the big banks. And then we need to spread their pieces around the country, placing credit closer to Main Street. We need to end all proprietary bank trading ... to eliminate credit default swaps and collateralized debt obligations... and to instill transparency in all capital markets products, trading platforms, and risk-taking businesses that have any systemic impact.
We need a free market, not a free for all.
Competition and free enterprise are the hallmarks of our economic miracle. I'm for less government, less taxation and more power to the people. But this enormous concentration of power that Wall Street and the U.S. banking system have amassed is tantamount to an assault on our very freedom.
It's time to end the tyranny of the banks. And to once again enjoy the financial freedoms that the end of this tyranny will bring.
News and Related Story Links:
- Money Morning Market Commentary:
Fraud and Greed of Trusted Rating Agencies Helped Spread the Credit Crisis - Wikipedia:
The Gettysburg Address - Answers.com:
Community Reinvestment Act of 1977 - Money Morning Credit Crisis Investigative Series:
The Real Reason for the Global Financial Crisis...the Story No One's Talking About - Wikipedia:
Troubled Asset Relief Program - WhiteHouse.gov:
President Bill Clinton - Wikipedia:
Too Big To Fail - TheFreeDictionary:
Collateralized - WhiteHouse.gov:
President George W. Bush - Wikipedia:
Tranches
- Money Morning Credit Default Swap Investigative Series:
The Inside Story of the Collapse of AIG
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The government has no business telling the banks how much to pay employees. The government should insist on total transparency by the banks regarding all compensation. The government regulations should also insure that at least 50% of the voting on compensation be controlled by non-employees. If more then 50% ownership is held by employees they or their family should only be able to vote a percent of their shares (regarding compensation) that would give their aggregated vote no more than 50% or perhaps 45% of the votes cast.
Ray
The most important “truth” existing in our U.S. today is the irrefutable fact that we no longer have a Democracy. People are very angry because of our situation of taxation without representation resulting from powerful interests literally owning our Representatives in Congress and our U.S. Senate. Public Policy is not allowed to exist and has no force or effect.
The rich and powerful have fully implemented the Golden Rule; i.e., he who has the gold makes the rules. I have just learned that our United States current situation of unequal economic opportunity (whereby our middle class has finally been reduced to total apparent ineffectiveness) is no different than the rest of our real world. Bush Sr’s referral to Middle America/working class Americans as the “Tyranny of the Masses” in 1991 (or 1992) accurately predicted the eradication of our middle class that we experience today not only in America, but around the world. In 1999 a United Nations Development Program study showed that the world’s two hundred richest people had a combined wealth of over $1 trillion, equal to the combined annual income of 41 percent of the world’s people (2.5 billion)….the globe’s three richest people had assets that exceeded the combined GNP of all of the least developed countries put together. Global inequality has only increased. In the year 2001 85% of the world’s population earned 20% of gross world income, and 15% of the rich nations’ people made 80% of the gross world income, and the top 1% of the world had the same combined income as the bottom 57%. I see only one possible solution to our own national problem and that is to completely do away with all lobbying in Washington DC as it now exists because our current situation is government of the people by the lobbyists for the rich and powerful. I respectfully submit that nothing will change until we rid ourselves of the current system whereby the powerful few control our elected representatives in Washington DC.
Why is it that NO ONE appearing on television in the U.S. is willing to address the fact that we no longer have a Democracy in our American land of the free and brave? What we do have is government of the people by the lobbyists for the rich and powerful. I believe that there is no way to change our current national situation until we establish an all encompassing statutory law that absolutely forbids any monetary amount or any thing of any value that can be accepted by any elected individual or civil servant (national, state, county or city in the U.S.). That includes money heretofore contributed to election campaigns; for example, by way of very expensive television ads that tell people how to vote. I know some people will argue about the high expense of television air time when it comes to making available TV prime time to all candidates. This is not a problem since we already have a national Public Broadcasting System that would be only too happy to accommodate people running for office and would do it to cover only their actual costs. A small extra charge at federal tax time to be paid by everyone would easily cover the costs. No more TV ads on commercial TV telling people how they should vote. Individuals, Corporations, Small Businesses, Registered Organizations, etc. would still be able to lobby our elected individuals however no one would be permitted to contribute or offer ANYTHING in pursuit of their goals. When this becomes a reality, and only then, will we have government of the people by the people and for the people.
The foregoing needs to be addressed as soon as possible and therefore should be included in President Obama’s address on Wednesday, January 27, 2010.
OK, fifty-two cards face up: I read the caption to this article. Did a triple take. Could not believe my eyes as they say. Here? ——- such a headline?! So, I read it again and proceeded to read the first few lines —– the first five sentences.
Wow!! Are we at the embryonic stage of the formation of the critical mass which when gathered will result in the dog wagging the tail in lieu of vice versa: Clearly, as it currently stands, if we think make, mine, grow and provide productive services, the financial “industry” is to the real economy as is the tail wagging the dog.
The financial “industry” extracts far in excess of its productive contribution to the productivity gains of the real economy. Indeed, banking system or casino? ——- It has been proffered that, “By December 2007, an estimated $681 trillion were riding on complex, high-risk bets known as derivatives.” That’s more than 10 times the GDP of the world!
Then, I read this sentence, “It all started with the Community Reinvestment Act of 1977 (CRA).” So, while I concur with the article’s caption and, indeed, the article in general, I think one must go back at least as far as the Federal Reserve Act of 1913 and the Sixteenth Amendment which was introduced to Congress as a package deal along with it. This was the opening step to the introduction of the Federal income tax (Fit). The specific purpose of the Fit was to have taxpayers pay the interest due to the banks on the federal debt.
The point(s) here is/are that the Fed is a private corporation owned by large private banks. The bulk of the money supply is created by private banks making loans with “new” money (not money from pre-existing deposits). In other words, it is money created out of thin air and is “concretized” by accounting entries. Note: the banks/Fed do not explicitly create/print the money required to pay the interest on the loans. Indeed, this money is “provided” by other loans —— a veritable pyramid scheme. The fractional reserve banking system has a multiplicative effect on the extent of the increase in the money supply resulting from loans. In deference now to being succinct, the Fed, if it is to be, should be a federal agency.
Further, whatever the government quantitatively, qualitatively it should be the entity printing the legal tender ——- debt free money to jump start real economic activity. Hence no inflation, particularly if the economy —- the real economy —– is in the doldrums. This is distinct from the situation where huge debts are owed to the essentially predator/parasite banks and inflation occurs because the currency is devalued to produce the dollars (no real economic activity involved here) —— come what may, the banks must prosper. Let others eat cake and choke on it.
This is a lot of bunk. This is just another profiteer to try to get ahead by bashing banks. Bankers want to make money and protect their investors. What a revelation! I guess it’s not so on main street, in the bureaucracies, or with self-appointed financial gurus promising fantastic returns with little risk. I bet the people who are working in blue collar jobs don’t try to get the best deal.
Contrary to popular belief, banks definately did not welcome the Community Reinvestment Act. As a bank officer in Chicago, I can tell you that there was considerable pressure from regulators and community organizers to make bad loans. If the author was forced to take risky loans what would he do? Be altruistic and swallow the loss? I think not.
The root of the problem is Fannie and Freddie (and FHA and FHLB, etc) that handed out over $6 trillion of taxpayer money. This was a far greater mistake than anything Wall Street ever did. It’s only surprising it took them 60 years to figure out how to tap the flow. As for regulations, they address only the symptoms of the problem, and usually just make things worse. Keep in mind that the same people who are responsible for regulating fraudulent mortgages were also pushing for higher lending at F&F – the Demopublican Congress and presidents. Regulation is a political game in which the taxpayer always loses, even if it takes 60 years.
To make matters worse, we bailed out the failed banks (BofA, Citi, GS, etc) and now we are the ward of huge zombies. Under these conditions (along with an artificially inflated housing market and artificially low interest rates) our economy will remain fundamentally unsound. We should have just let them fail. That’s how the free market works. Yes it would have been more painful at the time but today we’d be much healthier. No big banks – problem solved.
The solution is to let the free market function, and most of all, End the Bailouts!
http://decouple.org
Shah Gilani is truly wise. His wisdom cuts across party lines and cuts through the haze. I hope Barack Obama, folks in the Senate & Congress read this and act fast. Truly democracy and free market are under threat.
Extreme Overbuilding has been a major cause in setting off our economic collapse.
Beginning late 2005 the hype over new homes and extreme oversupply devastated the existing real estate market. The extreme negative equity situation prevented re-financing and sale of existing homes.
Much misinformation has been propagated regarding “sub prime”. Many claim low down payments are a large part of the problem. Since the 1940’s, millions of zero down VA loans were created each year with no negative consequence. Areas with extremely high default rates have loans which are mostly based on documented (w-2) income. Individuals who mismanage their finances are always likely to default.
At least one comment included overbuilding, thankfully. But the role of homebuilders in this crash is almost always neglected or understated, and I’d like to point out more about how they were involved. First, overbuilding as somneone said, was part of it. The demand was artificially created by the builders and others in the housing and finanance industries, and uninformed home buyers rushed like lemmings to shoddily built, overly price inflated houses in areas that were ridiculously far from centers of employment, shopping, etc. The houses were typically also oversized energy hogs with high property taxes. And, builders opened up their own mortgage co’s, something even many educated buyers are still unaware of despite numerous cases of predatory and illegal lending that went along with the “convenience” of using the builder’s lender. It is no surprise, then, that many of the new homes went into default rather quickly. When builders began to shut down for lack of lemmings to sell to anymore, some developments were not finished, with their amenities and even streets going unfinished, too. The value was never real, and prices quickly dropped, leaving many owners upside down in their already toxic loans. So whether voluntary or forced, many defaulted. Now many are voluntarily walking away simply because they see it as foolish to keep making big payments on a junky house that isn’t worth what they owe on it. Builders are a big part of what happened and it’s obscene that this industry paints itself as a victim. Some small potatoes players have been tried for mortgage fraud but the big ones just pay a fine and go on. Google builder mortgage fraud. Look at the latest FBI mortgage fraud reports. Builders figure heavily in this, and mainstream media has glossed over it or ignored it altogether. Washington is giving them corporate welfare. Many in this industry should be going to jail not getting rewarded.
This was an EXCELLENT essay! Well laid out, easy to understand and the truth – whole and unvarnished… Bravo!!!
All of us that are aware should send out a concerted message as to what the heart of all this crap is, The Private Central Bank of the USA, the Federal Reserve. It is Federal in name only.? The US government borrows money from these thugs and pays interest on it. What a racket, sit back print money and collect interest. The government used to print its own money. The income tax for the most part was enacted to pay this interest. Perhaps the sheeple will understand this since it is so simple.
“Wall Street`s stranglehold…” .
This is the most interesting statement I have noticed from the US for decades.
But you have to dig much deeper into US Megalomania, US Arrogance, US incombrehensible GREED,US asocial behavior.
You have to dig into your blunted definitions of personal succes,which means the readyness of walking over all others dead bodies.
I am not a young left-teenager. I am a 65 year old lawyer who has changed from admiring USA into a feeling of disgust.
Didn’t Rosevelt tell the big bank’s after the depression, that if they didn’t start loaning
money out he would print new money and theirs would not be worth anything.
It’s the same old story now, the Banks are sitting their waiting for some other bank
to go under so they can step in and pick it up for twenty cent’s on the doller.
Not one of them give a damn about this country as long as they can make more money.
It’s too bad that the basic innate / intrinsic human characteristic is at play.
Some call it greed. But that has an almost premeditated or conspiratorial
connotation. I prefer to call it gluttony. It is it just simple human behaviour
that we will over indulge ourselves – it is a trait that almost all children has.
Give any child too much candy and they will stuff themselves until they vomit.
We are all like this – bankers being no different. However, over time as we
mature, we try to condition ourselves to control this behavior. Sadly,
bankers have not figured this one out yet.
Only when all federal and state elections are paid for by a public election fund, will this Nation be able to have fair elections, and politicians who are not the shills of corporations.
Unfortunately, trying to get Congress to pass this type of legislation, is like finding a publisher who will publish an expose’ on the publishing industry.
The debt;and nothing but the debt.You are not supposed to pay down ANY debt;you arec supposed to SERVICE the debt.The principal never really goes down much .Dump credit,quit shopping at the company store;or they will surely own your soul.Better to live in a trailer and be free than in a mansionwhere you are enslaved to a master who attaches the chains to you;while pulling them when it’s time to kneel.WELCOME TO THE RETURN OF MONARCHY;MAN’S OLDEST FORM OF GOVERNMENT.
Looking in from the outside, it seems to me that USA is a country where the left hand does not know what the right hand is doing. It is a country that is dysfunctional at every level. A time bomb that if not dismantled will implode and explode to the detriment of many.
Ooooh!! my God never belived our banks can get so corrupt. Big Banks as we all know are killing the society by bringing about ghostly figures whicw are not in existence.
* Finding a way to mop out truants who try finding shortcuts in the finacial service industries.
* Leaving on credit as plunged us into recession(Meltdown).
In Nigeria things we had experiece is not because it was meant to happen, but it was due to our overdependance on OIL SALES. Hence, i would say let us practice governance the way it should be and effective focus on diversification. LETS ALL GIVE A DAME ABOUT OUR COUNTRIES.