I received a long e mail from Jesse from Montana, laying out what he described as a huge new economic conspiracy. I replied that his analysis is disturbing and disquieting, but not precisely conspiratorial, since the people who set most of the machinery in motion got blown up too. It’s more like a nightmare of unintended consequences–the butterfly effect run amok.
Of course people have looked for conspiracies behind every financial panic and contortion in the last century and a half–and often enough they’ve believed they found it, in an unholy confederation of billionaires and Bolsheviks, Jewish bankers and patrician One World government idealists. Debt and paper money are so abstract in principle, so difficult to wrap your mind around–and so devastating in practice. Some plutocrats go short, betting against the national weal, and make out like bandits; some, like the guys running AIG, go all in and fail so spectacularly that they get bailed out and make money too. The losers are the little guys–the day traders, the people who packed their 401Ks with their employer’s stock, the suckers who bought homes with ARMs that they couldnt’ begin to afford. I don’t see a conspiracy in any of that–just horrible politics: the nightmare of unregulated markets and unlimited corporate welfare.
I actually hope some Ron Paul types weigh in on this. I’m far from expert on economics or banking, but it seems to me that the biggest problem with the Fed is its quasi-public status–in other words, that it’s neither public enough nor central enough to serve the people’s interests, as opposed to those of organized wealth.
Here’s the e-mail:
The economy is the hottest conspiracy going, especially because multitudes of people are silently paying attention now. None of the talking heads are really confronting it. 9/11 was really a kicker. After everyone realized that mass hysteria was alive, well and able to function after Y2K some scattered people came to the same conclusions. There was the internet bubble. The promise of massive YOY gains. College kids becoming multi-millionaires with little effort, i.e. E-Z-Money. Enron and Worldcom tried it. Artificial gains via leverage. This opened the doors for Angelo Mozillo and oil men. Oil men are golfing buddies with car men. With the unions and with politicians. Both sides of the political aisle. 9/11 brought out a type of hysteria. Nationalism. “Let’s get America moving again. Support your economy by spending all you got!” We are all patriots(Jesus Christ, how Paul Revere would flip!), we have a right! Our nation of pirates, led by pirates… We, Hillary voted for it too, went to war. We brought the evil Taliban to its knees. Skunked the genocidal Hussein. Brought out food, water and provisions to the poor…and began setting the stage for plunder. Nobody cared and we are high on the hog. The financial world got on the bandwagon. “What if…what if each individual American was a CDO? If they bought a house, used credit to fix it, flipped it. Then bought a car and a boat. Bought another house, used credit to fix it. Flipped it. Bought some bling…All this economic volume…we scatter mortgage backed securities, show the world market these gains. Then they invest. Then we hand out more cash. They buy more. More jobs are created, on and on.”
It worked. Fuk-a-roni it worked. There are some fundamentals one has to understand. The power of polarization via mass hysteria. Mass media to get on board. Direction of heartstrings. The idea of “equality via material wealth”. The phenomena of minds in different locations arriving at the same conclusions spontaneously at the same time. Shared goals. Fiat currency and the idea that debt is money. A lot of people got super rich. Once again, everyone was a stockholder(401k). Many, many more people are screwed now. Including me. I beat the betting on real estate index stock but got killed when oil died after being 4.50 a gallon. My sister’s being foreclosed on. My parents had to reverse mortgage the house and their retirements are half what they were. My mom, “It wasn’t supposed to be this way. This isn’t what was supposed to happen 20 years ago.” I know they say it’s over but that is, once more, bullshit.
The last of the ARMs won’t rest until 2012. 5 year variable rate ARMs written in 2007+5yrs=2012. Now they have tried to hide it, make it go away. Ease the pain. Buy time for the major players to extract themselves(Portfolio with 50mil or more) by having taxpayers buy the assets then the fed sell debt to China is more like it. For them, the “recession” is over. Why does one think the top 10 percent bagged 49 percent of all wages paid last year? When it was so bad? Here is the conspiracy or veiled truth of our money. If the worst of the ARM loans reset in 2008, the 2yr. “liar loans” coupled with 5-year Arms written in 2003, how many more were written but have yet to implode for years 04-07? Each following was lambasted by the NAR as bigger and bigger. The debt monster got out of control. Recall the commercials bragging that buying a house was a smart “investment” because statistics had shown that the value had gone up 10% each year? Well how long is it possible to go up with wages staying outpaced? Hmm. Now they offer tax credits and shrilly pound the trees telling everyone “Prices have never been better and the selection superb”? It’s a “buyer’s market”. For starters, nobody is on your side when you buy a house but everybody wants you to sign on the line.
Why is the housing market so special? 2/3 of the economy is run by Joe Sixpack spending his paycheck. The biggest purchases? House and cars. Virtually all of these purchases are financed. So what is the debt monster? The point where the maximum payment possible for a consumer is smaller than the minimum interest on his debt. Historically it has been kept in control with Usury laws. Those, along with the term, are viewed as archaic. That we have progressed somehow. Our ancestors never foresaw credit cards and HELOC cards. A FICO system that is completely automated. If they did, Andrew Jackson would look like a nice guy. Banking laws have crossed all codes, creeds, religions and races. But we will focus on us. Why save when you can buy now? Lets look at consolidating debt.
Leroy leaves home at 18. Fresh credit score. He gets a credit card to “build credit”. He buys a little furniture for his apartment. He gets clothes for work. Maybe a night out when he gets his first job. It’s okay, he can make payments. 5% of his monthly income goes to debt. He gets sick of riding the bus. Buys a car. No down, no problem. We finance anybody! 20% of his income tenders debt. He’s good and responsible. He uses his card for “emergencies”. Washers, electricians, car problems, etc. 5% keeps going to the card. Leroy is 21. He can go to clubs and serious dating. His finances look like this. 10% to retirement. 30% food and utilities. 30% for rent. 20% to debt. 90% of his income is gone. He makes average wage. 15/hr nationally. 10 after taxes. 1600 a month, let’s say. $160 retirement. $480 food and utilities. $480 rent. $320 on debt. That leaves Leroy with about $40 a week fun money. Yeah, Mr. Cool.
Leroy has had his job for over 2 years. A magical time. His FICO increases. Too bad he has spent that time watching advertisements and goggling the walking corporate sponsor slaves we call celebrities. Don’t forget the damn holidays! It doesn’t matter what religion or race you are, your money is green! Yeah! He chases girls, buys drinks, buys presents for his family. His debt goes up 5%. He knows his car sucks. Buys an Escalade. He is financed because he has a trade and he has extra money(401k). The new car payment is 550/month. Now his finances are: 10% card, 35% car, 30% rent, 30% food and utilities. He scraps his retirement. Uh, oh. 105% of his income goes away each month. The debt monster is here. Leroy looks for a new job. Eats less food. Becomes more environmentalist. He barely makes it each month. Sometimes he goes into the hole and has to use the card to pay bills. After a year he lands a job that pays $20/hr. He falls in love with Tina. They get married. But birds of a feather, they are both still strapped. They move in together and consolidate, er, consummate.
Finances: Combined income= 36/hr or $24 after taxes. Escalade and a Honda= $750 month. Rent $480. Food/utilities goes up $640. $160 on Leroy’s card, $160 on hers. Grand total: $2190. Uh, oh! They only bring in $1920 after taxes! $210 in the hole each month. No fun money and no savings. Debt tendering is now $1070 a month. Or 55% debt to income. Guess what? The FICO goes down automatically. Interest rates go to 23% on the cards. Yeah! So the young couple cut back. Never go out to eat. The power bill is make it or break it. No presents for family. Each month, a tank of gas, the cell phone bill, a little food, goes on the cards. The clothes they left home with wear out. Maybe family can help, maybe not. Tina gets a promotion to $20 an hour. They are 25yrs old.
Income is now 36/hr after taxes. $2840/month. $2190 going to bills. They are flush with an extra $650/month disposable income even though it is only 22% of their income. Along comes NAR. “You deserve a house! Buy now! Consolidate your debt! E-Z financing! No Down!” Leroy and Tina want to have a baby. They are sick of living in the trailer/complex/projects. They don’t qualify for any federal aid. They go house shopping! Why save and continue suffering for another decade. It’s not fair. Their FICO automatically shifts upward but the interest on the debt stays the same. This whole time banks have been silently reaping a harvest of high interest. For every ten dollars they make, they can create 100-200 dollars of “credit” or leverage. This in turn makes more money available for loans or investing. It’s okay because Leroy and Tina are a stable Collateralized Debt Obligation. They pay their bills. This in turn has made credit easy to make mortgages, etc. Laws have changed for the couple. You can finance a house so long as the payments do not exceed 30% of combined pre-tax income. What a deal! When their parents bought it was 20% down, 25% after tax income. But hey, interest is low(Greenspan), plenty of credit(Lehman was leveraged around 25:1 I think), so they go to Countrywide Home Loans. They get approved on a loan payment up to $1920/month. Pre-tax, mmm-love it! Of course they can’t pay that much but that is the max payment before the mortgage backed security their loan will become falls into “high risk”. They calculate rent+ the 650. $1130/month. Excited with helpful people making their dreams come true, they close on a beautiful 3br, 2ba w/dbl garage in a new subdivision. The payment is $1130, what a miracle! The builder even covers closing costs. Back in the day, that payment meant the house costs around 150k. But the actual price they signed for was 328k. How? 5yr ARM. Interest differed. Who cares! They know they can sell for more, get better jobs or re-fi. It has worked before. Just look at the lawn!
One week into the new home they get a new kind of credit offer. FICO has gone up. Why? They can afford more. Remember that $1920 pre-tax payment? 1920-1130=790/mo “disposable income”. This theoretical number or credit allowance increases because it is a HELOC card tied to their home value. Up 10% a year, yeah! Leroy and Tina pay their old debts off and consolidate everything on the HELOC. Tina has a baby. They buy new furniture. They trade in the Honda for a new minivan(Swapping payments because it was technically “paid-off”). Leroy trades in the old Escalade for a new one…or a Hummer. New clothes, a lawn tractor, a long overdue second honeymoon, plasma tv, etc. All of a sudden, this is our finances.
House $1130, Food and Utilities $640, ½ old zombie debt and HELOC $535, New car payments sans trade-in $450. $2755 out the door on bills. After tax income still at $2840. Take home is $85 a month. Shoot! You know what we forgot? Retirement. We haven’t saved a penny since we were 21 and single. Before the baby. Now we are 30. Still broke, but looking good, the clock is ticking on the 5yr reset. That house payment will then balloon to 2800 a month. Things go good for a while for Leroy, Tiny and little Buddha. They are sure something good will happen. Things always have their whole lives. That $30-40/hr job is surely around the corner. They can always sell and re-fi. They can get another HELOC to send Buddha to college.
Then gas prices spike to $4.50. Then Countrywide goes bust. The nation runs out of buyers. Loans begin to sour. The value of their home plummets, FICO goes down and their HELOC interest skyrockets the payment. Leroy gets hurt and misses too much work. They get behind on a payment. Tina gets laid off. Sure she gets 60% of her income but recall they only had $85 to spare? Bill collectors start calling. Things begin to grow dark as the debt monster eats them alive. But they had a few sunshine years! And everybody at the top of the ladder has made enormous bonuses, the largest in human history! Yeah!
So how does everything blow up? Leroy and Tina foolishly, selfishly, buy food and diapers instead of paying on the house, HELOC or cars. Remember the leverage? Investing in Americans? Well, Ponzi scheme as it is, when you run out of buyers all sorts of things happen. Leroy skips a house payment at $1130 the bank or institution paying interest to the fund that owns the loan must shit out the reverse of 20:1. The bank has to prove it has $22,600 of tangible wealth. That’s how big banks worth hundreds of millions go billions in the hole. So the banks start getting mean. The investors are dying off. Funds go negative. People’s 401k’s tank. Dogs and cats sleeping together, mass chaos! So what does the government do? Slow it down with moratoriums. Nobody buys anything(they already bought on credit) so there’s mass layoffs. More money(debt) goes poof! The government does bailouts to stabilize lenders(Screw Leroy and Tina!). They foot the difference or a percentage of that imaginary 20:1. They use gimmicks(Tax credit! Buy now! Cash for clunkers! Buy now!) to try and get more blood from the turnip. “You can now get a loan because Fannie Mae has been rescued. The fed has pumped money back into the system.” “Another loan? Thank you helicopter Ben! I’m so privileged! Where do I sign?” But if taxpayers are buying “toxic assets” where does that money come from? Deficit spending. You can print more money but that inflates prices by reducing the value of a dollar. Inflate prices too much you kill more Joe Sixpacks off. So you sell debt to another nation. A credit card, albeit a giant one, so to speak. Like China buys our debt so we can suck up toxic assets created by private sector usurers without raising taxes and killing off more Joe Sixpacks. We could cut government programs, but that is politically incorrect. Then you have more dead Joe Sixpacks because of Usurers. We could let things fail and have our money go poof! But then we will really be paying national debt forever and ever. More Joe Sixpacks will die and it will be Grapes of Wrath. So, what do we do with the debt monster? The conspiracy or truth nobody wants to deal with is this, our monetary system is junk. Eventually the interest payment on our national debt will be so large that we cannot ignore the monster. Do we tell China we won’t pay? Will there be war? Does our currency implode? When? It is not a question of if but when. 2034 or so, social security is broke. What about healthcare? Hmm.
How do we deal with this national debt monster? It looks as though, once more, we are going to feed it and hope it goes away. Maybe good news is just around the corner. Maybe we can hold the world hostage with a cure for cancer. Ransom away our debt. Otherwise, whenever our national debt bubble pops, it is going to be really, really nasty. Debt is the reason we cannot go to an Amero. If the dollar loses value too much our lienholders may just come over and get GNP by force. A repossession so to speak.