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America’s Financial Crisis 101

Say you have $10. You give it to someone. After a week, they give you $12 in return.

Welcome to lending.

Now, say you are the person who borrowed that original $10. What if you could give it to someone else and they’d pay you $14?

Welcome to the US Banking System. The Federal Reserve loans the money to the banks, who then loan it to the American people.

Before WW2, banks didn’t offer credit to the average American. Afterward, beginning with the GI Bill, lenders opened their coffers, provoking a rise in home ownership, as well general consumerism.

By allowing people to pay for items over time, they were able to afford more expensive purchases, and they had more disposable income. Consequently, demand for goods rose, and everyone made money.

In the past 20 plus years, ‘real’ wages have remained static while the cost of living has increased – a lot. Also, the top 5% of wage earners have gotten increasingly richer while the rest of America has stagnated or slid backward. This is not my opinion; this is fact.(consult the census data)

In summary: prices increase and wages don’t, so in order to maintain the same standard of living, more debt must be incurred.

In its most simple form, the financial crisis was created because borrowers can’t repay their loans, specifically mortgages.

Why does this effect the entire financial community, and ultimately, American citizens? Because banks got the brilliant idea to take the loans they’ve given to Americans, and instead of waiting for them to be repaid, they sell them to companies like AIG. This gave banks immediate money to loan out, while Lehman-Brothers,etc benefited from that $10=$12 equation I mentioned earlier.

The problem is that they bought the loans with our 401K or IRA money.

The other problem is that the investment companies assumed the loans were ‘good’, but in truth, banks gave loans to people they really shouldn’t have. They didn’t care if the loans would be repaid, because they were being reimbursed by companies like Merrill Lynch. And frankly, the executives at AIG/Lehman Bros et. al. didn’t look too closely at these loans because it wasn’t THEIR money at stake, it was ours.

Sounds like I’m making an argument for that $700B bailout, doesn’t it? Quite the contrary.

These companies are hurting because they need money. They need money because borrowers are not making their loan (house, car, credit card, student loan) payments. Will giving AIG etc. money – OUR money, TAXPAYER money – change that?

Will they lower the interest they charge on their loans to help people make their payments?

Will they convert variable loans to fixed loans rates so people can make their payments?

Will they ‘forgive’ any amount of unpaid debt?

Big fat NO.

I can just hear the chorus of “But, but, but….”

But nothing.

Give the money back to the American people. Not in the form of some bullshit ‘tax refund’ or blank check (like they want to offer the mega-corps), but in the form of debt relief.

Paying off a $20,000 car loan frees up over $300 a month. The lender (whether it’s the bank or an AIG-controlled mutual fund) gets their money AND the consumer has that cash to recirculate into the economy.

Extrapolate that to a $200,000 house.

Win. Win.

The only losers in this scenario are the greedy corporations who whine that instead of getting $12, they’re only receiving $11.

Last time I checked, $11 is still greater than $0.

Do the math.

2 replies on “America’s Financial Crisis 101”

Maybe you should run for office… You make more sense then the people in office or the ones running.

If the banks would reduce some of their fees that might help too. After all if you are just making your mortgage a $60 late charge isn’t going to help you.

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