Ignorance Gone to Seed

Well, as promised I am opining with respect to the so called “bailout” that we have witnessed this week. Recent reports indicated that 85% of those who contacted their Congresspersons and Senators were against this welfare handout, yet our elected leaders voted for the measure anyway. Doesn’t that make you proud to be an American? You will not find a finer example of how well our system works than this particular issue. The “will of the people” (i.e. the consent of the governed) is ignored. Our rulers act with impunity.

The current financial “crisis” that we are witnessing is not a new phenomenon. At the core, it is the logical and natural result of business practices predicated on the concept by amortizing debt, while booking revenue as “profit” as a result of normal business operations and acquisitions. This model rewards those who go deeper into debt, while punishing those who do not. Debt does not equate to “assets” no matter what the media and our government claims. As a result, we have a “debt-based consumer” economy instead of an economy based on sound business practices.

Think about this for a second. How many times have you heard our elected officials or the media state that your home is the “biggest investment” you’ll ever make? Well boys and girls, your home is not an investment. It is a liability. If it were an investment, it would be a piss-poor one which represented a substantial loss. Paying three times the value for an “asset” is not a sound investment.

Cause and Effect

With respect to “the housing bubble” that we see in a current state of collapse, there are a few things that we should consider. I see three different factors that are driving current events.

The Community Reinvestment Act of 1977 pressured lending institutions to provide loans to those with less than credit-worthy histories (sub-prime borrowers). Though the goals of the act may have been noble, the result was a distorted credit market and lead to unsound lending practices. Perhaps more disturbing is that in 1995 community activist groups were allowed to interject comments in yearly bank reviews which allowed these groups to extort lending institutions if they did not comply with their demands. As a result, lending institutions abandoned their “outdated” methods of lending money (income, credit history, savings history and income verification, etc) and acquiesced to the demands of these groups to offer 100% financing, no credit scores and the use of undocumented (not on your tax return) income.

Economist Stan Liebowits, (1) Professor of Economics for University of Texas, wrote of this shift in his New York Post article (2) in February of 2008. UT is hardly considered a bastion of “conservative” thinking, so hopefully my “liberal minded” readers will take note of his analysis.

Predatory Lending Practices are an issue as well. These vehicles include adjustable rate (3), graduated payment (4), balloon payment (5) negative amortization (6) and interest only mortgages (7). Those of us old enough to remember should recall the destructive power of these financial vehicles. They were quite popular in the late 70’s and when the housing market plummeted in Texas in the early 80’s people found themselves owing more on their homes than they could ever repay. As a result of the use of these vehicles, people abandoned their homes favoring bankruptcy instead. Sounds familiar doesn’t it?

Whenever loans are made to where principle is never reduced, or increases over time, or where interest will eventually overwhelm the borrower by design, they should be viewed as a form of fraud, either against the consumer or the stock-holder who desires to have profit for their investment. Yet lending institutions, surely as a payoff to provide “sub-prime” loans, are allowed to engage in such activity. These types of financial vehicles almost guarantee that the borrower will default at some point in time unless a fixed-rate mortgage can be obtained.

Fiat Currency is perhaps the biggest culprit of the housing bubble. Artificially driving up the “value” of housing by deflating the value of our currency (inflation) is in actuality a hidden tax we all pay. The Federal Reserve, since it was established in 1913, has utilized inflation as a vehicle to transfer wealth from the middle class to the gilded class of the international banking community. Sold to our elected leaders as a method to “stabilize” the currency, it has proven to be the bane of the American people.

Additionally, the concept of fractional reserve banking which creates “commercial money” out of thin air by allowing banks to loan out money (capital) it does not “own” itself is akin to me renting out your house while you asked me to watch the place when you went on vacation. It is immoral to allow someone to borrow something that is not yours to begin with. I view this practice as a form of fraud as well.

Logic, and indeed historical economics, dictates that as you increase the supply of a given commodity, its intrinsic value will decrease. Such holds true with the value of the dollar as well. The more dollars in circulation, the less they are worth.

Since the inception of the Federal Reserve, a concerted effort has been made to devalue the buying power of the consumer (in relative terms). When we look at commodities that can be examined, such as precious metals or consumer goods with equitable counterparts in modern society (food, clothing, and basic living necessities) a disturbing trend emerges. According to the Bureau of Labor Statistics, the CPI (consumer price index) in 1913 averaged 9.9. Today, the CPI average is 207.342.(8) In layman’s terms, this means that your dollar is worth $.047 today. Yep, it would appear that the Federal Reserve has a good handle on maintaining the value of the dollar, does it not?

A History Lesson

The “roaring 20’s” was accompanied by massive consumer and commercial debt which lead to the unsustainable credit-driven boom. In a knee jerk reaction to stave off a massive increases in the interest rate, the Federal reserve contracted credit liquidity in 1928 and the money supply from 1929-1933 (by about one third).

In February 1929, Austrian economist Friedrich Hayek predicted that “the boom will collapse within the next few months” in his Austrian Institute of Economic Research Report. Additionally, when turning down a job at the Kreditanstalt Bank in early 1929, Ludwig von Mises is noted as stating “A great crash is coming, and I don’t want my name in any way connected with it.” These Austrian School economists predicted the great crash. No one listened.

Instead, many in government blamed the “failure of the free market.” Silence was the rule with the respect of governmental manipulation of the money supply or the “credit-based” economy in general.

Today, Austrian School economists have been screaming from the rooftops that the same conditions that lead to the great depression have been established by the government yet again. We have a government induced credit-based economy, rampant inflation of the money supply and artificial interference in the economy. Yet no one is listening.

It appears that we are being led down the same path of destruction. We are being asked to “bail out” those who could not simply say no to bad business decisions be they banks, or individuals. Those of us who constrain our spending practices are being forced to prop up those entities that are unwilling to follow suit.

Reality Check

Conservative estimates that I have seen will place the actual cost of the bailout, not at $700 billion, but at $3.9 trillion. The net effect will be hyper-inflation yet do not expect the government to bail you out. No, the government does not represent our interest. They represent the interest of the Bentley driving, country club jet setters who feed off of the tax burden of the citizens.

What we are witnessing is the biggest transfer of wealth from the middle class to the wealthiest people on the planet. When will enough be enough? I suppose it will take bread lines and soup kitchens before the people actually wake up and smell the coffee.

Forgive me my indignation. However, I am pretty damn sick and tired of my tax dollars providing wealth and comfort to the most despicable people on the globe. The likely outcome of this travesty of justice will be hardship and further degradation, if not complete collapse, of the middle class in our lifetime. I’ll be damn lucky to be able to retire at the same age, relative comfort and security of my grandparents. Our children and grandchildren will be damn lucky if they are not reduced to wage-slave chattel, existing at the whim of corporate overlords. Corporatism is fascism. We exist in what can only be described as Mussolini’s wet dream—soften at your discretion.

1) Liebowits
2) NY Post
3) Adjustable Rate Mortgage
4) Graduated Payment Mortgage
5) Balloon Mortgage
6) Negative Amortization
7) Interest Only
8) CPI Index