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How Banks Trapped Americans Into A Life Of Debt Servitude

  • Written by Syndicated Publisher No Comments Comments
    July 7, 2010

    From www.mybudget360.com (view original article click here)

    People quickly forget about the nearly 1,000 point “flash crash” brought on by glitches in the Wall Street casino machinery.  Still no sensible explanation has been given but today the stock market now stands below the flash crash moment.  The middle class is witnessing the largest wealth transfer in history take place and it is all happening because of the Wall Street infrastructure and the government’s lack of respect for the working class of the United States.  Even last month as we lost 125,000 workers the unemployment rate actually went down because over 500,000 Americans simply dropped out of the workforce.  In other words people simply threw their hands up in exhaustion and gave up.  The government is literally not counting tens of thousands of Americans.  What does this tell you about how much they value the middle class?

    Let us break down some income data first:

    47 percent of American households make less than $50,000 a year.  66 percent make less than $75,000.  This should give you a sense of the household income in the U.S.  Only 4.3 percent of U.S. households make more than $200,000.  Income for working and middle class Americans has remained stagnant for one agonizing decade.  What has occurred over this time is the artifacts of a middle class lifestyle like a decent home and a college education have been juiced with massive amounts of banking debt.  As banks have tried to put their hands on every aspect of American life, prices have zoomed up in every industry they have jumped into.  Look at housing and higher education for dramatic examples.  50 years ago most middle class Americans could afford a college education and a starter home without sacrificing every single penny to servicing debt.

    Debt has engulfed our nation.  If we look at personal consumption as a percent of GDP we can start seeing where problems started:

    Personal consumption makes up over 70 percent of our GDP.  Banks love using this figure to beat on middle class Americans to blame them for the problems in the current recession.  Keep in mind that the above chart also includes giant increases in health care costs and also, large piles of cash going to service debt that banks are so happy to take.  Yet the above point of the chart does hold steady.  That is, we have gone from producing to spending too much as a nation.  It is fun while things are good but is definitely unsustainable.  And don’t think this spending came from actual savings:

    The drop in personal savings is incredible.  As we went negative for a short period of time, banks were capitalizing by allowing people to spend more money than they actually had.  If we look at the trillions of dollars given out to banks that made poor bets in the last decade, we’ll see that they are also the largest players in the credit card game:

    Source:  Reuters

    The above chart is basically the too big to fail.  They have fed massive amounts of credit cards into the system with little due diligence since they knew in the end, taxpayers would bail them out.  Now that things have gotten bad (not for too big to fail banks since they have gotten the ultimate gold plated bailouts) they are now crunching down on the middle class.  High interest charges, onerous fees, and other trickery are merely ways of sucking real wealth from those who work to a class that is largely unproductive and has led us into this economic predicament.  The government has worked hand in hand with the banks here.

    Credit card debt eats up a large portion of annual household income for millions:

    Much of what we consider to be middle class living has been kept on life support by banking debt.  Yet no system can go on forever with too much debt and too little production.  Banks have become a dangerously large part of our economy.  That is why so much focus is given to Wall Street and the banking sector.  It is a largely idle industry that merely attempts to suck off the wealth creation of actual real work.  The housing bubble was the pinnacle of banking neurosis.  The idea that you can simply repackage toxic mortgages into “sophisticated” debt products and sell them off as diamonds to unsuspecting fools is appalling.  Yet in most cases, all this was legal because our Senators write the laws that should be protecting us.  Instead, they have allowed Wall Street to control every aspect of finance and now here we are with 40 million Americans on food assistance and a close to 17 percent unemployment and underemployment rate.  Yet things are getting better for the middle class?

    The current system is not capitalism but a form of state sponsored cronyism for banks.  Most of us can understand that if you have a good product then by all means make a profit.  This is the essence of any small business and their survival.  But the banking system operates under perverse rules.  They created inordinate amounts of debt products that serve no purpose and assured destruction of those taking on the product.  Think of option ARMs that actually grew the balance of the mortgage!  Horrible products that have destroyed large portions of the real economy and have pushed many off the middle class path.  How many foreclosures could have been avoided over the past decade with more prudent banking?  Yet this isn’t what the system wants.  Banks wouldn’t mind if all you did was work and had to open your beat up leather wallet and pull out 99.99 percent of your net pay to service your debt.  In fact, this is probably their ultimate wish.

    Where do people spend their money?

    Source:  BLS

    Housing by far is the largest line item above.  Yet categories like medical care and education are growing at rates that outpace the overall rate of inflation.  Ironically these are areas that are favorites of Wall Street.  As long as you can slap a loan onto something, the big investment banks will be there drooling over every penny they can tack on.

    There was a time when paying off your mortgage was a good thing.  We have a good number of Americans who own their home mortgage free:

    Over 30 percent of homeowners in the U.S. own a home with no mortgage.  Yet these are typically people from an era that allowed them to pay down their mortgage even with a modest income.  How likely is it that someone in say a state like California who bought a home at $500,000 with a $70,000 income is going to pay off that home?  They’re not going to do it so that is why in the chart above you see distress levels off the charts.

    Even if we look at current metrics for 3 of the largest states, we find that debt is not necessarily a good thing:

    California and Florida both had major home price appreciation and relied heavily on the housing bubble.  Both areas have seen bubbles pop.  The difference however is that Florida prices have come down to more reasonable levels.  California prices are still too high.  A reasonable metric is 3 times annual household income for home prices (both Texas and Florida are close to that range).  California is still out of that range.  So why are economic problems still deep?  Because current income data will be lower when Census data comes out in September and that is not reflected above.

    The ability for Wall Street to turn many things into a commodity has allowed them to gamble and speculate on the well being of middle class Americans.  Housing prices would not have gone into a massive bubble without banks pushing other people’s money out the door.  Wall Street is good at taking risk when their money is not at stake.  They are fine taking the biggest risk since they know the U.S. taxpayer will be on the hook eventually for their irresponsible decisions with a large safety new.  Do you think banks would have loaned out of their own treasury like they did if it was their money on the table?  Of course not.  Yet if something isn’t changed then middle class Americans are going to find it harder and harder to stay afloat while debt starts coming down over them like a tsunami.

    It is time to break the chains from the Wall Street banks.  Split them up.  There is no need to have commercial and investment banking comingled.  The banking needs for most Americans are simple.  Why mix it up with banks that now operate like hedge funds and take needless risk?  If there is no change, people are going to start seeing more and more of their paycheck going to servicing debt and guess who ends up with that money in the end?