Wednesday, August 26, 2009

Banking: The Root of All Evil

I should have gone into banking. Think about what just happened in the banking sector. A few big banks printed worthless pieces of paper called mortgage-backed securities. This paper funny money and other securities are called derivatives because they derive their value from other pieces of worthless paper. In this case their value was based on US mortgages. How we let any banks or companies print their own money is beyond me. Next, these few banks convinced other banks that it would be a great idea for them to buy a bunch of these trash derivatives and trade real money for them. Then, when the housing market collapsed, all these banks who owned these derivatives lost all their capital reserves and could no longer lend. Many of these banks then went out of business or were purchased by the bigger banks that were too smart to buy these securities or who were selling them.

The next thing that happened is that the big banks not even hurt by the downturn or maybe only slightly hurt went to the US for help and got it. What did they get? Banks got free money from the government. Banks got zero- or near-zero interest loans. But its worse than that. Banks can operate on a system called fractional reserve banking. This means that for every $1 they barrow, they can lend $10 or even $50. Banks say fractional reserve lending makes it so that consumers won't have to pay for them to store money. But since money is all electric anyways, that kind of reasoning doesn't make any sense. What banks are doing is creating money out of thin air.

Then when banks lend us the money, they lend it to us together with an amortization schedule which requires the barrower to pay interest up front instead of principal. The result is a loan where the first 20 years of payment are just paying rent on the money, and the principle doesn't get paid until the last 10 years of the loan. On the other hand, when you save money with your bank, they only give a small rate of interest at first, and not until 20 years have past does that interest start to significantly capitalize. So, all of us average people making minimum house payments pay all the interest will those that inherited money earn all the interest. And we can't get past the first 10 years because that's about how often we get a stock market crash and our 401ks become 201ks.

The result of this system creates a gap in society between the have and the have-not's. Those that borrow money are paying 85% interest up front, and those that are saving money are only earning 5% interest. This is in contrast to the rich or the banks themselves who are earning the 85% interest and only paying the 5 % interest. Our lending system is a form of slavery or indentured servitude.

And when you can't pay and your house goes into foreclosure, the bank really doesn't loose much money. They have already collected a ton of rent money already. And then they repossess your house and sell it for 50c on the dollar. But don't feel bad, because remember that most all that money the bank lent you, was created by the bank itself. The only reason many banks were hurt by the housing collapse was because they had invested what little capital they did have into these worthless mortgage-backed derivatives. So, when they realized how worthless they were, they didn't have the money to pay regular customers, they became insolvent, and they were allowed to fail. Yet, other banks were given free money with which they could magically create more money to lend and enslave more and more people.

But enslaving individual homeowners isn't enough. Banks want to enslave businesses too. So, banks came up with plan. Since, businesses recognized it was a bad deal to borrow from banks, banks decided to offer only a slightly better deal. They convinced businesses to issue their own money in the form of stock. In this way, businesses could borrow money from the people at a better interest rate. The truth is that the people are too busy paying all their extra cash to the banks very few have the money to invest in business. So, the real people investing in business are the same people who own the banks. The result is that a majority of the profits of a company go to pay the shareholders. Year after year, shareholders skim off all the profits from a company and company employees become slaves to the shareholders.

The negative effects of fractional reserve banking are that it creates a glut of money in the system that drives inflation. The negative effects of banks lending money with an unfair amortization schedule is that borrowers are forced to pay rent first before they can pay back the loan, thus making homeowners slaves to the bank. This again drives up inflation and the cost of housing as the only way to gain equity in your home is for the price to go up because a home owner really doesn't gain principal until at least 20 years out. The negative effect of businesses issuing stocks is that businesses become slaves to the stockholders. Again, the pressure to pay dividends and maintain profits drives up costs. These influences are also the real reason healthcare costs are rising.

So, what should we do? Get rid of fractional reserve banking. Formulate another way to determine interest that is more fair. Or just charge a fee to borrow money and don;t charge any interest at all. The Federal Government should be the only agency allowed to print money. And since they print money, they could also lend it to banks who would lend it to businesses at a fair rate where the business could quickly pay the loan off with little penalty.

However, our government itself is stuck in debt just like the rest of us. And the only hope of the federal government is to hope for inflation, so that makes them interested in continuing these same banking practices hoping that inflation will somehow contract our overall debt burden. But right now, our federal government is enslaved to the world banks and foreign countries under enormous debt. We have become less self sufficient as a nation and depend on foreign companies for many necessities. Therefore, we are also dependent upon our dollar to be strong so that we can afford those necessities produced overseas. And since Nixon took our money off the gold standard, we are dependent upon foreign countries and the ultra rich to lend us money, buy bonds, and buy our excess dollars. Every year over 30% of our federal budget goes to pay rent on the national debt. None of this money goes to pay principle which itself is added to every years are our congress runs yearly budget deficits.

Imagine if our families, businesses, and country could spend its own money on its own needs. Imagine if money could be borrowed and easily repaid. It would be easy to do if we could only lend and borrow money in a more fair way.

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