Well that produced a furor ("Stop Paying Your Mortgage")
For those who haven't followed The Market Ticker for the last year and a half, explanation may be in order.
Most of the pique, where it was expressed, came down to "you gave your word when you signed the documents."
But you were defrauded. The entities on the other side of the table were engaged in counterfeiting of the money (credit) supply.
Literally, for the last 20 years, and most specifically, for the last five.
So the obvious question arises - if you go to the bank and get a loan but they give you fake dollars they printed on their color copier, are you then obligated to pay them back with real dollars you earn by working your fingers to the bone?
I argue the answer is not "no" - it's "HELL NO!"
Let me explain.
Let's start with monetary basics. We will assume there is only one bank in the world, and some number of people. We will also assume the world begins with $100, which is in possession of one of the individuals. The other persons in the world have goods (e.g. food), but no money.
The person with the $100 goes and spends it on a basket of groceries. The grocer deposits the $100 into the bank. The bank must hold back the reserve ratio (10% in this simple case, or $10.)
Now some other person comes into the bank and wants a loan. The bank can lend out $90, the deposit less the reserves. That person gets his loan and goes to the store, spending the $90 there.
That merchant deposits the $90 in the bank, which now can loan out $81. And so it goes, until the cycle exhausts.
Note that no money was created, as some people claim. Money was, however, recycled with each "turn" (that is, as a consequence of velocity), each time with the fraction required being reserved.
There is of course more to the system than this. Among other things the amount of money must be increased at a rate that roughly corresponds to the increase in the total output of goods and services in the economy. If it is less, you get deflation (fewer dollars in total for a given amount of good or service), if it is more, you get inflation (more dollars for a given amount of good or service), but this will do to explain how it is that credit is granted - and regulated - in the banking system.
But in the real world it's not quite so simple, you see, because in the real world banks don't just make loans - they also buy and sell loans that both they and other people have made, either "whole" or bundled up into complicated securities of various sorts (the infamous "subprime" mortgage-backed securities, or MBSs.) Each of these types of investment that a bank might hold has a reserve requirement because there is always some risk (however small) of default, and the amount of reserves that must be held depend on the quality of the asset. So for a Treasury Bond a bank might be required to hold no money in reserve, since there is assumed to be zero risk of default. But against a mortgage security that has "ho-hum" credit quality, the bank may be required to hold quite a bit of reserves, because if something goes wrong the losses could be significant.
And here is where the problem begins.
The "shadow banking system", including ratings agencies, investment banks and hedge funds, were engaged for years in the intentional misrepresentation of credit quality. In conjunction with those who were bought and paid for to provide these grossly-inflated "ratings" (the famous "we'll rate a deal securitized by cows" quote in sworn testimony before Congress), the banks, issuers and traders of this debt gamed the ratings (and reserve) system so they would not have to hold back as much in reserves as would have been required on the actual underlying credit quality. That is, they said that there was less risk in these loans than really existed.
Why is this important?
Because by under-reserving on purpose these entities obtained a capacity to loan (and for you to borrow) that did not exist, and as a result, there was more money available to lend - lots more and at a much cheaper interest rate - than should have been the case.
In addition this deception radically accelerated the velocity of money (credit) in circulation, which in combination with the fraudulently-created credit created a classic asset inflation.
Since money and credit are fungible - that is, they both spend exactly the same (your credit card and $100 in 20 dollar bills spend the same way at the store; they both buy exactly the same amount of goods or services) this had precisely the same effect in the economy - and on you as a consumer - as the banker literally walking over to his color copier and running off $100 bills by the truckload.
Now if you see "money" flying around the economy and it looks easy to access, you'll be inclined to go after it with far less concern than if there is little money (or it is expensive), right?
Let's take an analogy - a corn silo.
You're a farmer and you rely on the corn to get you through the winter. You have a silo on your property with sight glasses on the side, so you can easily see how much corn is in there.
Unknown to you, the guys filling your silo (your workers) claim that you have had a "bumper crop" when in fact this is not true. To complete the deception they tampered with the sight glasses so they show "full" when in fact there's no corn behind them!
Fall turns to winter and you've been eating it up, quite sure you have plenty of food. Until one day you pull the chute and nothing comes out - in February
This is, effectively, what has happened here. The so-called "credit" ("money" to you, as they both spend the same) available was a chimera and a fraud. You believed that it was plentiful and would continue to be so, because the ratings of these securities, improperly inflated, allowed the bankers to hold artificially low amounts of reserve against their credit book.
In order to properly leverage against risk you must be required to hold commensurately more reserves against higher risk instruments otherwise the effect of your operation is to allow you to create credit without a proper capital backing, and when the bet goes wrong, you (and potentially the entire banking system!) blow up.
This not only was not a mistake it is still going on:
"In essence, then, Goldman thinks it could lower its overall leverage without having to significantly reduce risk (and the prospects of high returns) from its investments. That’s because the government’s gross leverage calculation does not discriminate between low-risk and high-risk leverage."
There is the essence of what was done, in two sentences: The government explicitly has not and still isn't requiring more reserves to be held against high-risk leverage.
When there is lots of money (credit) in a monetary system, the equilibrium (or "fair") price for an asset is much higher than it is when money (credit) in a monetary system is in short supply. Further, when you deceive people as to credit quality and thus inflate the amount of credit (money) available you increase the velocity (turnover) of that credit (money); since banks and other merchants of money derive a lot of their revenue from fees, they get a disproportionate benefit from this deception. You (and every other consumer/buyer of those assets and items), on the other hand, get screwed.
But like all deceptions this one cannot go on forever. Eventually these bad loans begin to default, just like the farmer who pulls the handle and nothing comes out. You are now finding that it is difficult to get credit to buy a house, a car, or for business purposes. The reason for this is simple - everyone from homeowners to the banks themselves have too much debt (credit) outstanding compared to the maximum amount that would be allowed under reasonable standards of safety as a result of the previous distortion.
Banks and other institutions know this; they are akin to the workers on your farm that intentionally tampered with the sight glass on your silo.
You are the farmer who is now starving, its February, and your remaining tools are a BBQ Grill, some wood, matches and an axe. Oh, and you know where your "workers" live. What did you say you were going to eat again, now that you figured out what happened and who did it?
Your 201k (formerly a 401k) shrunk as a direct and proximate cause of this deception, which has now been discovered. Note that your 401k also inflated as a direct and proximate cause of this deception too, causing you to rely on perceived wealth that did not exist, and if you paid up for those assets (stocks, etc) during the bubble years, this deception caused you to overpay.
Ditto for the price of your house. You had every reason to believe that price in 2005 was reasonable because of the supply of cheap and easy money (credit), but in fact that credit was literally counterfeited into existence by the people who gave you the loan!
This, by the way, was NOT a "zero sum" game. You paid (and still are if you're paying your credit cards and mortgage bills) for those inflated assets with real money (NOT credit) - money that you brought into existence with your blood, sweat and tears. Your purchase of these assets (or debt payments) were not made with counterfeit money (credit); they were made with real funds generated from real work on your part.
But the price you paid was jacked up as a consequence of all the counterfeit credit (money) flying around in the economy.
Counterfeiting $100 bills is a serious federal offense. The US Secret Service will come haul you off and toss you in the hoosegow for cranking up your color copier and printing off a truckload or three of fake Benjamins.
Remember - credit and money are fungible - they spend identically in the economy.
You cannot tell the difference between $100 of credit and a paper $100 bill at the store. That's because a $100 bill is in fact credit (debt); it is a bond of indefinite duration carrying zero interest written against the aggregate wealth and production of The United States.
So if counterfeiting paper money (which is in fact credit) results in a 20 year date with Bubba, why aren't the bankers, ratings agencies and even government officials involved in counterfeiting credit in the economy wearing orange jumpsuits, picking up trash alongside the road, and concerned about dropping the soap in the shower?
Instead these same folks got a bailout from your REAL money (future tax receipts) via the Treasury - more than $163 billion so far - and are going to pay more than half of that out in dividends to shareholders.
There is some notice (finally) being paid to this swindle by Paulson and friends, as shown in this article in The Nation:
"The swindle of American taxpayers is proceeding more or less in broad daylight, as the unwitting voters are preoccupied with the national election. Treasury Secretary Hank Paulson agreed to invest $125 billion in the nine largest banks, including $10 billion for Goldman Sachs, his old firm. But, if you look more closely at Paulson's transaction, the taxpayers were taken for a ride--a very expensive ride. They paid $125 billion for bank stock that a private investor could purchase for $62.5 billion. That means half of the public's money was a straight-out gift to Wall Street, for which taxpayers got nothing in return.
These are dynamite facts that demand immediate action to halt the bailout deal and correct its giveaway terms. Stop payment on the Treasury checks before the bankers can cash them."
That's a good start.
But it belies the underlying reality of the swindle; from the get-go the entire credit bubble was an outrageous and intentionally engineered counterfeiting operation that should have long ago landed all of the participants a nice long prison sentence.
Worse, instead of forcing all those who committed these acts into the open and thereby causing the default of the bad debt (resulting in both consumers and lenders who did imprudent things going bankrupt) we continue to try to "hide the problem" by transferring the risk (leverage) to The Fed! As of the latest data release this evening The Fed is now running roughly a 50:1 leverage ratio, and its leverage is increasing at an astronomical rate (it was 40:1 just a couple of weeks ago!) as Bernanke furiously attempts to hide both the fact that all this counterfeiting of credit took place and prevent the impact of same from being fully recognized on the economy.
Should Bernanke's gambit fail the consequence could be the failure of the United States monetary system and government.
All this to prevent having to admit the truth, force the guilty into bankruptcy and, where applicable, punish them under the law.
Until "we the people" understand how money and credit work (they don't teach this in "government schools" - gee, I wonder why not?) we will get upset over the Treasury-backed bailout, but we will also continue to ask the wrong questions and only jail a small fraction of those who deserve to spend the rest of their days in orange jumpsuits picking up trash and being afraid of what goes "bump" in the shower.
Where We Are, Where We're Heading (2013) - The annual 2013 Ticker
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