Saturday, December 17, 2011

Doing the Right Thing

A guest speaker at my company's holiday party decided to quote one of my favorite characters in history - Winston Churchill. The quote: "You can always count on Americans to do the right thing - after they’ve tried everything else." While that quote was a not-so-subtle jab at the United States for their late entry into World War II, it applies universally, to humanity in general. The generic form of this quote is a motivational speech moniker: "Change will not occur, until the pain of not changing surpasses the pain of change itself".

As we get older, human beings tend to take fewer and fewer chances turning into conservative beings. As professional adults we have already established ourselves and want to preserve our current standing, often overlooking potential improvements to our lives that require significant change. In this stretch, we have forgotten what it was like to choose where to go to college, what to study, where to take your first professional job and where to live. As adolescents and young adults we make these choices without much to lose, because we are just starting out in life. Further down the line, we acquire a steady level of income, a circle of friends, a comfortable place to live, and a level of familiarity with our daily routine that makes us want to preserve the Status Quo.

Personal tendencies ultimately trickle down into professional behavior as well. Therefore, the fearless leaders of monetary policy at the Federal Reserve are not immune to doing what is the easiest, rather than doing the right thing. When the financial crisis hit our national economy in late 2008, the government and Federal Reserve had important decisions to make. Specifically, whether or not they would allow free market's natural selection kill the banks and corporations who were borrowing irresponsibly and leveraging their assets foolishly. On one hand, the officials could have elected to allow these institutions to fail - showing that there are consequences for being foolish and irresponsible, while plunging the economy into an immediate crash that would have been quite severe in the short term. On the other hand, the officials could save these institutions by using taxpayer money to create bailouts, and borrow money to provide means of further financing - the proverbial "kicking the can down the road" for future generations to deal with.

At first he government allowed Lehman Brothers, a financial institution with too many toxic mortgage-backed securities, file for bankruptcy and fail. The same fate awaited Bear Sterns. The stock market's initial reaction was positive, because everyone saw that the government will not protect failing businesses and believed that financial institutions will be held accountable for their transgressions. But in the long run, that was not the case. The government turned around and chose to provide large sums, many of which were undisclosed to the general public until very recently, to Citigroup, Bank of America, Goldman Sachs and countless others. The government chose to save their financial pillars of the status quo at taxpayers' expense.

The treasonous criminal nature of that act may not be evident to the naked eye at first. However, as you look closer you see how the government told the average Americans to pull down their pants and bend over so that they can service our accounts. We were all intentionally mislead to believe in 2008 that the initial bank bailout was in the amount of 700 billion dollars. At the end of November of 2011, we discovered that the initial amount was actually 7 trillion dollars. Just so that the average reader understands - the Federal Reserve intentionally mislead the American public, which is responsible for the bill of all government bailouts, that the amount of money being borrowed was 1/10th of the actual amount. When, in reality, the actual amount of $7,000,000,000,000 was slightly less than 1/2 of the entire Gross Domestic Product of the United States. If you, as an individual, take 10 times more money from your employer than you are supposed to, you will be in hand-cuffs facing prison time.

But there's more to this fraud against the American people. Imagine you have a mortgage with Bank of America which you have signed at the peak of the housing bubble in 2006. Bank of America has claimed profits from that transaction and truly appreciates your business. Usually, on a 30 year fixed rate conventional mortgage, the finance charge over the life of the loan will be a little over 105% of your home's face value at 5.25% interest rate.

Now, with that profit on the books Bank of America packages your projected profit value into an investment called a mortgage-backed security. This security amounts to nothing more than an IOU in the amount of projected profits from your loan's lifetime payments. It turns out that this projected profit security was packaged with some not-so-certain (sub-prime loans) projected profit securities, and now the bank is in trouble, because the investors can't get rid of these securities fast enough, even at discounted prices. As a result, Bank of America receives a bailout from the government, which taxpayers must pay. So, in addition to paying 105% of your home's value to Bank of America in finance charges, you are now shelling out your tax dollars to help the bank survive the consequences of acting irresponsibly with the 105% you paid initially.

But wait, there's more! As a result of the $7,000,000,000,000 bank bailout, the government must borrow and print more money. As I've discussed previously in 'Real Money' post, when the government prints money without real asset value to back that money, they are in effect devaluing (diluting the value of) existing money in circulation. So over the past three years, the Federal Reserve has more than tripled the amount of money in circulation without any real asset value to back that money (just the faith of the US Government). Therefore, doing the math, your $1.00 in 2008 is mathematically worth $0.33 today. The only reason why you didn't feel that is because deflationary forces kept the purchasing power at the same level over the same time span. In the short-term, there are more deflationary forces in play (European Crisis, Asian Crisis, etc.). So the dollar may get stronger, before the actual inflationary crash occurs. But when the inflation catches up to the reality of dollar devaluation, it will be lightning fast and severe.

To summarize, you have paid the Bank of America 105% of the face value of your home in finance charges, the tax dollars to save for its irresponsibility with the money you paid. And to thank you for all of this, the government has stolen two thirds of your lifetime savings and all the money you earn through devaluation of the dollar. The Banks made money, the Government made money, while the people were left bent over with their pants down... waiting for the banks and the government to double-team them.

The Federal Reserve has recently said that they will "Do the Right Thing" by not printing any more money - they are currently rejecting any notion of a Quantitative Easing 3 program. Which means, for the time being the amount of dollars in existence will remain unchanged (if you trust Bernanke). However, it remains to be seen whether or not the Federal Reserve and our government will stick to this position.

As I've alluded to in the beginning of this post, change will not occur until the pain of not changing becomes too great. For those who are in power and have nobody to hold them accountable for their actions, the pain cannot be too great until it is inflicted by the people whom they are meant to serve. Our forefathers understood this concept and created means to hold each other accountable. However, the government has corrupted these means over centuries to a point where an average American is ignorant, if not altogether indifferent, to the actions of people who are supposed to represent their best interests.

So I ask you, my fellow Americans, are you willing to wait until the pain of not changing becomes too great?

2 comments:

  1. Fantastic piece Simon. If you have a Twitter account I recommend you use it to get this information out there.

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  2. For folks who asked for reference on the 7.77 trillion claim, it is a Bloomberg story:
    http://www.bloomberg.com/news/2011-11-28/secret-fed-loans-undisclosed-to-congress-gave-banks-13-billion-in-income.html

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