MUST BORROWING MAKE THE WORLD GO ROUND?

'Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.'*


Revolutions bring revelations, and the first revelation which the current financial revolution brought to me was that the United States economic system is based on borrowing money.

As we've watched the economic system collapse, and heard of failing banks and panic selling of company shares, we've repeatedly been told that without a healthy banking system we, the people, could essentially do nothing: We could not go to college because we couldn't borrow the money to go. We couldn't buy a house because we couldn't borrow the money for a mortgage. We couldn't buy a car because we couldn't “finance” it. We might not even be able to buy clothes if things got so bad that banks wouldn't lend us money via our credit cards. And if business owners couldn't borrow payroll money, their employees would go unpaid.

I got the impression that few Americans have actual money and pay for things. All most people have are debts -- and their right to borrow money from “lending institutions” was equal to their right to life and liberty. The most drastic emergency actions were needed to preserve the right not to live within one's means!

I oversimplify, but simplicity is needed here. A secret of control of societies by huge financial institutions interwoven internationally is a camouflage of complexity which gives most people the helpless feeling that there is no possible way they can understand the system. For many intelligent people I've talked to, the mysteries of quantum physics are at least as fathomable as the workings of monetary and financial machinery.


Banks Hide Reality Not Only Behind Impressive Facades, but Also Behind a Smokescreen of Complexity

Here's one simple question: Is it really to the advantage of society to encourage everybody to live on borrowed money? Can the answer be anything but “no” in light of the crash brought on by U.S. banks lending mortgage money to “subprime” borrowers (people with such bad “credit histories” that the odds were against their paying the money back)?

Why did banks loan massive amounts of money to “subprime” people who predictably might not repay it? A major reason is that America was excitedly inflating a housing bubble in which real estate rose in price weekly, and a house bought for $120,000 in March would sell for $200,000 a year later. Thus the banks enabled a subprime person to “buy” a house which the bank could take and sell at a profit if the mortgage payments weren't made. Meanwhile the bank could collect fancy fees as well as interest payments.

If a society based on borrowing is bad for society, then who benefits from it? The banks, of course. Never forget that your local banks make their living from renting out money at “interest”, plus various “costs”. The picture of a lady saying gleefully, “I'm so lucky! I got the loan! The bank gave me a loan!” should instead be the banker saying gleefully, “I sold a loan! I sold a loan!”

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*Shakespeare, Hamlet. “Husbandry” in Shakespeare's time meant domestic management, thrift, or frugality.

OF BUBBLES AND BAILOUTS

In the cacophony of a collapsing economy we're hearing from Republicans the perennial cry of the guilty: “This is not a time for finger pointing!”

Well, it is a time for finger pointing. The loud crash of the economy was preceded by another sound -- the “POW” of a bursting bubble which took years to form. The people who were entrusted with the care of the country during that time can't claim that they were suddenly overtaken by catastrophe in the manner of a meteor flashing into the atmosphere without warning and smashing to Earth six seconds later.

The bubble which portends a financial crisis like this one is very visibly blown bigger and bigger over months of wild speculation in something – Dutch tulip bulbs in the 1630s (the price of a single bulb reaching many times the annual income of a skilled artisan), the South Sea Bubble (worthless stock rocketing from 100 to 1000 pounds a share in a few months), the Florida land boom (and bust) of the 1920's, the U.S. stock market bubble leading to the crash of 1929, and the Internet “dot-com” stock market bubble of 1995-2000.



The pattern repeats now as then: Enthusiasm for a “get rich quick” investment spreads to people all walks of life. Stories of quick profits lure more and more people into the frenzy until even the most unlikely speculators, from shoe shine boys to drugstore clerks, are telling tales of incredible gains.

The media are only too happy to trumpet the sensational growth of wealth. The certainty that one can put a little money in and take a lot out encourages people to “invest” money they can't afford to lose – and to borrow gambling money from banks. Buy a house or tulip bulb today on borrowed money and sell it soon at a 50% profit from which you can pay back your bank loan. Guaranteed!

The South Sea Bubble

The banks love it. Banks make their living renting out money for a fee called “interest”. By the time a speculative bubble approaches the bursting point the banks are practically begging people to rent money – including people who ordinarily would be turned down as bad credit risks, as demonstrated in the most recent housing bubble.

What happens, of course, is that the inevitable limit is reached and for the first time sellers outnumber buyers. Prices falter, borrowers can't make their mortgage payments, and a chilly breeze of fear sweeps through the land as stories of foreclosures and losses replace the “New Golden Era” headlines. When it is recognized that the rainbow glistening bubble has disintegrated into insubstantial mist, there is widespread panic as borrowers default in hordes and the banking system is stuck with “toxic” loans which will never be repaid.

The Dot Com Bubble -- From 5000 to 1000 in a Gasp, But Plenty of Warning Before the Top

Meanwhile, for months before the “bust” there have been plenty of wise heads warning publicly that frenzy is leading to a predictable crash. Those warnings, citing the lessons of history, mean that even as low a form of intelligence as an American politician – not to mention political appointees like the Secretary of the Treasury, the Chairman of the Federal Reserve, and the heads of regulatory agencies -- had to know that the recent housing bubble was expanding to an unsustainable point long before it blew up in their faces. No wonder they are crying, “Now is not a time for finger pointing!”

Ah, but there is one happy bit to all this for one class of participants: The bankers have learned in modern times, and are being taught once more by the government's actions during the present week, that they are “too important” to be allowed to fail and go bankrupt. No matter how irresponsibly they behave in blowing up a bubble, they will be bailed out by the government taking what you and I have paid in income taxes to “buy” the worthless mortgages and IOU's from the bankers – readying them for another round of Blow up the Bubble after everybody catches his breath.

For the financial institutions, it's like going to Las Vegas with a guarantee that Uncle Sam will pay them back all the money they lose at the roulette table.

For the taxpayers it's like Robin Hood in reverse – the government robbing the poor to bail out the rich.

It's definitely time for finger pointing.

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NEWS BULLETIN: As I wrote the last sentence this morning, Saturday, September 20, 2008, a USAToday story arrived in my email:
WASHINGTON (AP) - The Bush administration is asking Congress to let the government buy $700 billion in bad mortgages as part of the largest financial bailout since the Great Depression.