What is constraining consumer demand and preventing an economic recovery and thus causing unemployment to remain at high levels? Consumers have too much debt.
What is depressing the housing market in which approximately one third of homes in the US are worth less than the mortgage balance leading to increased foreclosures? Homeowners have too much debt.
What is the biggest problem with the global financial system? Banks have too much debt.
What is one big thing wrong with our federal government? It has too much debt.
What is wrong with our local and state governments? They have too much debt.
What is wrong with the governments of Greece, Ireland, Spain, Italy, Portugal, Japan, Iceland, Belgium, Singapore, France, the United Kingdom, Egypt, India, Hungary and Germany? They all have too much debt.
What are we doing to our young people who graduate college with enormous amounts of student loans and huge government liabilities facing them? They have too much debt.
When I say a person or a bank or a city or a country has too much debt I mean literally they have so much debt that it is unlikely they will be able to pay it all back from their expected future cash flows.
The sixty trillion dollar question, which is just about equal to the total debt in the world, is how did we get into this mess and whose fault is it.
Some economists argue that debt levels are not relevant to societal well being because for every borrower there is a lender, so with each loan made, no wealth is created and with each default, no wealth is lost. While intellectually pure, this line of reasoning does not hold if much of the lending is coming from outside your country (China) or if by lending the money to someone it increases the likelihood that they will piss it away. Think of Greece borrowing to pay its government workers to take eight weeks vacation, U.S. homeowners taking second mortgages against their houses to buy cars, boats and vacations or our government borrowing to finance two trillion dollar wars halfway around the world.
We have heard some espouse the theory that with regard to mortgage debt, the homeowner is just as guilty as the bank because he or she signed the mortgage note and agreed to pay it back.
But wait a second, when someone offers you $500,000 in low cost financing to buy a $500,000 house with no money down and gives you the contractual right to put the house back to them in foreclosure if things don't work out, how is this the homeowner's fault? This is free money. You should take as much of this as the bank is giving away, and that is pretty much what Americans did during the housing boom.
No, when loans go bad there is only one entity truly responsible: the lender. The borrower may have done some incredibly stupid things with the money, but it is up to the lender to anticipate and prevent these actions by conducting thorough due diligence, determining the credit quality of the borrower, judging his or her character and future earnings prospects, limiting the borrowing amount or by enacting tough restrictive covenants in the loan agreement.
When banks make bad loans, they don't fire the banking client who borrowed the money, they fire the banker who extended the funds on such loose terms.
So the answer to why all these entities; consumers, homeowners, financial institutions, local and sovereign governments and students have too much debt is because some stupid lender gave it to them. And in most circumstances the lender was a commercial bank.
I used to have a good friend back when I worked on Wall Street who went to cocktail parties with me and when asked what he did for a living said, "I am a commercial banker and I am sorry". I often think his greeting would be even more appropriate today.
To those of you who mistakenly believe that the government caused this crisis, you are partly right. They didn't do their job in properly regulating the banks. But they were paid by lobbyists of the banks and they garnered campaign contributions from the banks not to regulate. They in effect were, and still are, paid employees of the banks. Bankers make tens of millions a year, congressmen make a couple of hundred thousand. It was the banks who were successful in removing any meaningful regulation on their lending activities, their derivative activities and their balance sheet leverage. It is the banking lobby that is preventing any meaningful reform of our financial system. Heck, the Fed which is supposed to monitor the banks is owned and controlled completely by the banks.
To those of you who think Fannie and Freddie caused this crisis on their own, please realize that this is a global crisis brought on by banks worldwide even in countries that have never heard of Fannie and Freddie. Certainly they played a role, but it was because they were organized just like the banks as for profit companies with executives compensated with management stock options. They really are not part of the government but are stand alone entities that benefit from what were implied debt guarantees. Congress didn't tell Fannie and Freddie what to do, Fannie and Freddie told Congress what to do as they were the two biggest lobbyists in Washington D.C. Fannie and Freddie didn't go into subprime lending because Congress told them to because Congress was getting incredible lobbying pressure from poor people to increase home ownership rates (what a joke), they went into it because that is where the short term profits were. They begged Congress to throw them into that briar patch and then they giggled and ran away just like B'rer Rabbit. (By the way, poor people didn't cause this housing crisis as the biggest percentage of mortgage defaults were in our wealthiest cities of Los Angeles, San Diego, Phoenix, Las Vegas and Miami).
So, a smart reader like yourself would have to ask, why would a bank which is a for profit entity do something stupid and over-lend to almost every person, corporation, government entity and sovereign credit on the face of the earth? The banks have a number of unfair tax advantages and subsidies that lead them to do stupid things such as depositor insurance, tax deductibility of interest expense, low government mandated interest rates and the belief that they are too big to be allowed to fail.
But I think the greatest error made by bankers is in matching the silly lending terms of the aggressive banker across town because they know they must or they will go out of business. Unlike other industries, banks deal in such long maturity assets and liabilities that their mistakes are not revealed as bad loans for many years in the future, long after most of the current crop of bankers have retired and moved to the Hamptons. This long-lived nature of the bank's balance sheet is the primary reason the free market does such a poor job moderating their activities and why government regulation is required in banking, just like it is in the insurance industry, another long lived asset/liability business. The profits and bank fees happen up front in the short term, but the true costs of stupid lending don't show up until the next crisis or recession, and then they all show up at once. Collective action problems like this are never managed well by a completely free and unregulated market.
So how do we get rid of all this debt in the world? Well, we missed a perfect opportunity. We should have allowed these overleveraged banks to fail and then restructured them with new managements and much reduced levels of debts. As part of the restructuring, the banks would have set up reserve accounts to allow for the restructuring of all their bad loans, in effect they would have created a pocket to put all their bad loan losses in and thus would have been much more motivated to restructure troubled mortgages, underwater homes and even underwater nations' debts. They would have taken their lumps and moved on. It is crazy to insist that anyone who lends money to a bank deserves to be repaid at the rate of 100 cents on the dollar when the bank has invested the money in bad loans and has lost it.
By continuing to not recognize the bad loans, the banks limp along, restricting their new lending and assuring that the economy limps along with them. Consumers, governments and yes, even the banks stagger along under their crippling debt loads. And yes, I was a banker once, and I'm sorry.
John R. Talbott is a best selling author and consultant. His new book is mandatory reading for anyone interested in learning the real reasons for this crisis and how to protect yourself going forward. You can read more about John and the new book at www.stopthelying.com or at amazon.com.
It used to be a time when Americans were able to pay back what they owed. Now it has become far too difficult to do so. I can truly say that less Americans had become less afraid of borrowing because they were sure that they could pay back what they owed. Americans have had jobs and plenty of money in the past…even non college grads had jobs or trades that provided them with security. We knew what trades to go into, even when we did not have a college degree. Now college graduates with advanced degrees are feeling more insecure in our current financial market, more than ever.
Also, our CEOs of corporations are making these huge salaries…salaries that has a much larger scale in comparison to the cost of living, than 30 years ago. And employee wages are not going up. Current pay raises are almost offensive to employees. We have debt that we can not pay back because we no longer have the financial means to do so.
The culture of corruption and greed that has evolved in the U.S. and evolved very quickly since about 1980 is tied very closely to the money system, banking, and credit. The biggest political campaign contributors come from the financial sector. Politicians pay them back by giving them what they want, a free hand to extend credit any way they want, without regulation or restraint.
Debt is what crashed the economy. That is why people aren't being paid enough. The economy could not grow as fast as debt was growing, so debt became unsustainable, and defaults began to grow out of control. Once that happened, businesses failed, or they cut employment, or they froze or cut wages, etc. That last bit is the bit you understand; you just think of it as the cause of the whole problem when it it not. It is an effect of the debt load outstripping the ability of the economy to grow.
The overall problem boils down to a lack of responsibility and accountability. The banks and politicians who are responsible for the problem have not been held accountable. Banks have not been allowed to fail. Bankers who committed fraud have not been prosecuted. Politicians have not been voted out.
This whole culture of lack of responsibility and accountability has been growing for 30 years. That is why CEOs are getting away with outrageous pay increases while workers get nothing or get laid off, whether the business is successful or not. This is nothing but looting on a grand scale.
The cause of the financial crisis was CDO's, a new financial instrument dreamed up by banks. Banks bundled mortgages into CDOs and sold them off, thus getting their money back almost immediately to lend out again by writing more mortgages. Further, the banks didn't care whether people could or would pay back their mortgages since they didn't own them anymore.
The underlying reason for the financial crisis and subsequent recession was the seperation of the banks issuing the mortgages from the actual performance of the mortgages. Since banks no longer cared whether borrowers repaid the loans, they lent out more and more money to less and less qualified people. Borrowers didn't care because with no money down, they weren't risking anything either.
And no way should the banks have been allowed to fail. That would have led to a soup-line depression type of event. Pure capitalism can be brutal and it is governments role to regulate it and mitigate some of it's most harmful effects. The collapse of the banking system would have been horrible and people who argue for it are inhumane.
When that limit is approached, the quality of the loans begins to suffer, because the banks cannot find enough qualified borrowers. Lending standards are dropped. Loans are sold to bag-holders, because the banks know they can never be repaid. Garbage investment vehicles, such as CDOs are invented simply to get rid of "toxic" loans.
The author did a pretty good job of explaining the cause in broad terms. He described the forest, not the trees, while you are looking at one tree - the CDO.
And, without getting into a whole other discussion, there were more options than just letting the entire banking system fail, nor was it even certain that would've happened.
Also, urge your Congressman/woman to press for application of the "anti-trusts" laws against the top 5-10 U.S. Banks, esp., BofA, Morgan Stanley, Goldman-Sachs, Wells-Fargo, and Chase.....; they should be split into, at least, nineteen.....
In all communications with Congressmen, research their 'campaign contributors,' i.e., PATRONS, through www.opensecrets.org and OTHERS and MENTION your "unease" with the connexion...... Election campaigns in the U.S. are TOO COSTLY, but it is delusionary to believe that large contributors do NOT buy access, yea, compliant behaviour from those they sponsor....
SWAPS and banking deregulation caused the crash. The home loans were just the horses at the tack. The 600 Tillion dollar elephant is the still leag SWAPS direvatives gamlbing that is financed by free .004% FED loan and garanteed in an eemergency with TARP.
The Banksters robbed us again. FDR shut the bank his first day. The ploitted to assasinate him.
Getting it yet?
James Madison
"History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and it's issuance."
"I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a monied aristocracy that has set the government at defiance. The issuing power (of money) should be taken away from the banks and restored to the people to whom it properly belongs."
- Thomas Jefferson
I have two great enemies, the Southern Army in front of me and the Bankers in the rear. Of the two, the one at my rear is my greatest foe.. corporations have been enthroned and an era of corruption in high places will follow, and the money powers of the country will endeavor to prolong its reign by working upon the prejudices of the people until the wealth is aggregated in the hands of a few, and the Republic is destroyed. Abraham Lincoln
http://en.m.wikipedia.org/wiki/Business_Plot
The author described what caused the problem - too much debt - not straws.
The Banksters robbed you, then got you to blame you lazy and irresponsible fellow citizens. Wow.
Is it because we have a uncontrollable dollar? Ever since the 1980s the amount of debt owed has grown exponentially, until recently.
Let those who screwed up fail. That's a good policy.
Not because the author wrote it but because some of us are independent thinkers who read all we can on a topic....all the viewpoints....and come to a hopefully reasonable conclusion.
Too bad too many Americans can't think for themselves and are only as reasonable as their talking heads and news sites allow.
Not in their interest to give up this free usury.
A lender lends to hundreds or thousands of people.....while a borrower borrows for himself and maybe his family.
It is not much different with a pusher and druggie.
One sells to hundreds or thousands of people and the other harms himself and maybe his family.
That is why selling drugs gets more jail time than just using.
Our politicians are bought and paid for by the banks, Wall Street, oligarchs, and big corporations....and THAT is why our economy is going straight to blazes!
We need regulation of our banks and Wall Street, something they won't allow the politicians to do........until it gets so bad they will have no choice.
After the stock market crash and Great Depression, even the high and mighty were more than willing to be regulated.
And at the rate we are going, America and the world are already entering the Great Depression II.
The bankster then went to the government and said "please protect us no matter how incompetent we are". (Actually, they said "please enrich us ...") Thus we have modern "banking" ... socialized banking. We have to do what's right for bankers ... but we'll say it's for the "people"! Obama among others have signed up for this.
Actually, this theme is repeated throughout ... "please take care of us". Our Banking / Stimulus / Unemployment / Food Stamp president and dems and reps ... but most of all ... you and me ... did this.
We done it ... we know it ... it's time to fix.