Debt = profit so inflated homes = more profit
Lose a home, suffer; lose billions, get a bailout
| We trim, blend, and append two 2008 articles, “The Fed and Crony Capitalism: the Fed's decision to grant Wall Street access to special borrowing facilities constitutes a massive subsidy to the irresponsible” by Thomas Palley, founder of the Economics for Democratic & Open Societies Project, posted on AlterNet on March 25; and “The Destructive Rise of Big Finance: the unfettered expansion of the finance industry has led to debt, inflation, the oil crisis, and an eroding dollar -- and there may be no way out” by Kevin Phillips, a former speechwriter for President Richard Nixon, posted on Huffington Post on April 4. Both miss that all that cash flow begins with paying for land. |
by Jeffery J. Smith, April 2008
Palley: At a time of market uncertainty and liquidity shortage (banks refusing to lend to each other when one temporarily needs more cash), while other market participants are being forced to unload at fire-sale prices, the Fed's friends are being given near-free government money to snap up assets; that confers a significant subsidy.The Federal Reserve decided to grant Wall Street investment banks access to discount window borrowing. Previously, banks could borrow at the discount window only to cover seasonal shortfalls or dire emergency needs, and any borrowing was subject to regulatory disapproval. This decision means the Fed is providing risk capital to the likes of Goldman Sachs at paltry interest rates.
In four days, Wall Street borrowing reached $29 billion.
The Fed claims it had to institute these measures to calm Wall Street. That is nonsense. The fair and efficient way to deliver emergency liquidity to Wall Street is through an auction that is open to all financial firms, in which participants supply good collateral. Those who need the funds most will bid the highest. That way, taxpayers get properly paid for their support, and the funds go to those who need them most.
Goldman Sachs, Lehman Brothers, and Morgan Stanley are extraordinarily profitable companies. They have also been the drivers of the worst trends in the American economy over the past generation, pushing excessive CEO pay that has spread like a cancer throughout corporate America, even reaching into universities and non-profits. Additionally, they have pushed companies to emphasize short-term gain over long-term investment and promoted speculation that is behind repeated asset and commodity price bubbles.
Many families are losing their homes, but they can’t refinance at 2.5%.
Phillips: Today's financial services sector is a grasping, gargantuan combination of banks, stockbrokers, insurance men, loan sharks, credit-card issuers, hedge fund speculators, securitization mavens, and mortgage operators. Over the last five years, financial services has reached 20-21% of US GDP -- the largest sector of the private economy.
Back in the 1970s, manufacturing led financial services by 2:1, but by 2006 it had shrunk to just 12% of GDP.
The two most important underpinnings of financialization lay in the rise of public and private debt. From 1987-2005, during Alan Greenspan's tenure at the Federal Reserve Board, the sum of public and private debt in the United States quadrupled from just over $10 trillion to $43 trillion.
Phony Washington statistics and warped market measurements make it doubly hard to know what’s happening. The federal Consumer Price Index shows inflation is 2-4% but may really be 6-9% a year. If you measure the Dow Jones Industrial Average in Swiss francs or euros, two strong currencies, it has already lost some forty percent of its 2000 value.
This country faces an unprecedented convergence of problems: unprecedented debt, tumbling home prices, reckless money supply expansion, growing inflation, insufficient and expensive oil, and an eroding dollar. Sadly, there may no longer be a plausible way out.
JJS: Actually, “tumbling home prices”, which is actually tumbling land (or location) prices, is the way out. Once land and locations get affordable again, rebound follows. That’s always been the pattern.
That’s why any attempt to prop up home, er, land prices is counterproductive, delaying economic recovery. And high priced homes mean more debt while low priced homes mean less debt. Owners are better off with uninflated assets and affordable mortgages.
If government wants to help poor borrowers facing foreclosure, just give them -- and everyone -- a Citizens Dividend, raising the revenue for the dividend by taxing land. Charge the tax to whoever holds an interest on the land. So, if the borrower’s equity is 20%, he’d pay 20% of the tax; if the lender’s is 80%, they’d pay 80% of the tax. Thus, who gets bailed out would be those genuinely in need, not lenders who consciously worked the system into its present state.
Getting the extra income, people could use it on mortgages or even sell the place and move to a more affordable home. Increasing the number of expensive homes on the market would lower their price, as would taxing the land beneath homes (and everywhere else). And lowering the price of land to where producers can afford is the only way to restart the economy.
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Jeffery J. Smith runs the Forum on Geonomics.
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Also see: Subprime Loans, Subsidized Land, and Manipulated Money
Part III, The Trouble With Money and its Cure
Billionaire Gets Handout from Taxpayers! |
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