By Bob Moriarty
In late 2008 during what is now referred to as the Great Financial Crisis, government and financial managers had an opportunity to reset a badly out of balance dysfunctional banking system. It would have required pain from bank bondholders, shareholders and taxpayers in general. Everyone recognized the banks were burning down, seemingly out of control.
We should have let them burn down.
What we have done in the decade past that point is going to make the problem an order of magnitude greater. The next time we see the banks burning down we need to let them.
It’s a self-evident axiom that all debt gets paid. If not by the borrower, then the lender must pay. Obvious but often ignored.
All money is loaned into existence. When the banks create money by means of making loans and then they charge interest there is always more debt than assets. The debt will continue to grow until the financial system explodes one day. It has to happen mathematically no matter what governments and central bankers may say. There is no way around the simple math of the equation.
No one ever dares mention this but basically debt is slavery. The borrower is the slave to the lender unless and until the debt is satisfied either by repayment or by default. The banks certainly know that even if borrowers don’t.
If your neighborhood dry cleaners has made bad decisions and goes out of business, some other better-run company picks up the slack. If a manufacturer of toys cannot compete against lower price and higher quality Chinese or Japanese goods, we let them go bankrupt. Then we sell off whatever assets remain.
It really doesn’t matter who owns and runs the dry cleaner or makes toys, when one company fails if the demand for the product still exists, someone else steps in to provide the supply. This is both true and obvious.
Except in the example of banks. If a bank or other financial institution is on the edge of burning down the Fed steps in, pours money into the corpse and often forces a merger with another entity.
This was true in 2008 when the Fed dumped $182 billion of taxpayers'money to prevent insurance giant AIG from collapsing in spite of their entire condition being a function of criminal behavior on their part. Then the Fed poured trillions into the banking system both domestically and worldwide. For the banks it was a license to steal.
That was pretty stupid. If financial institutions make poor financial decisions or engage in criminal activity, why don’t we let them fail? Why would anyone not bribed believe that criminal activity on the part of banks should be rewarded at taxpayers' expense? There is no shortage of well-run banks or insurance companies to service the customers of failed companies.
The reason we don’t let the criminal banks collapse is because they have bribed Congress. The largest financial contribution to reelection campaigns comes from the banking industry and insurance companies. The best example is the totally financially and morally corrupt student loan program.
Twenty percent of Americans, over forty-four million citizens, owe student debt. Average debt is $29,650; total student debt approaches $1.6 trillion, higher than credit card debt or automobile loans. Seventeen percent of borrowers are in default. Fifty-one percent of those in default have a dependent child. Graduates of the class of 2017 left college owing $39,400 in debt. That debt is a set of handcuffs that will restrain graduates for a long time.
In 2005 Congress passed the quaintly titled Bankruptcy Abuse Prevention and Consumer Protection Act, which exempted federal and private students loans from discharge through bankruptcy. The act created a monster as both colleges and lenders realized they gained an unlimited ability to steal.
From 1987 until 2017 tuition at public four-year colleges increased by 219% due to the difficulty in discharging student loans in bankruptcy. This increase is almost double the nominal inflation of 116% in the same period and is largely a function of the inability of students to write off student debt. Congress handed colleges a license to steal.
But the real winners were the banks. In theory banks charge borrowers interest to offset the risk they take in making the loan. But if a bank makes a loan that cannot be discharged in bankruptcy, there is no risk. It’s free money for the banks.
So when Joe Numbnuts wants to study underwater basket weaving for ten years so he doesn’t have to actually work for a living, the banks are free to make that loan with no risk. They don’t care if Numbnuts is a deadbeat or there is really no demand for those good at underwater basket weaving. When he defaults, as he most certainly will, they have just gained a slave they can hound until the day he dies or pays up.
Stung by a massive increase in student loan defaults banks have begun to demand parents or grandparents to co-sign the student loans. So when the student realizes there is no future for his worthless degree, now the parent or grandparents are on the hook. In the last decade the number of borrowers or co-signers over sixty has doubled.
The Gang of Twenty Fools, otherwise known as Democrat candidates for president in the 2020 election have jumped on the student loan issue like a starving wolf on a steak bone.
“Why not just let the students default?” is the cry. But there is no free lunch. They aren’t talking about taking the handcuffs off the former students; they are really talking about putting handcuffs on the innocent taxpayers. By removing the handcuffs from the students, these fools want to turn all taxpayers into slaves. All so the criminal banks and greedy universities can feed at the public trough.
Since debt continues to rise anytime interest is charged on loans, eventually the system must fail. We are very near that point. Frankly I see evidence of the massive distortion in the world’s financial system right now. We are in the midst of the crash that can only lead to The Great Reset. Must we continue to reward failure and criminal behavior?
Part of that Great Reset is a debt jubilee where debts are forgiven and we start all over. Having balanced budgets and honest money would help a lot. Don’t even think that it’s possible to change the system through voting for the candidate of your choice; Google and the FBI are now in charge of selecting the president.
But when you see the banks burning down…
Bring some long sticks, a few hot dogs and marshmallows.