MONEY 11 - BANKING #3

THIS IS MY ELEVENTH POST ON UNDERSTANDING MONEY TOOLS

BANKING AND FINANCING 3

Money! Money! Money!  Let’s take a broader look at money, financing and our government policies.

The Federal Reserve has done a couple of things to supposedly help restore our economy. First, we’ve had two Quantitative Easings (QE 1 and 2) and are coming out with a third round (QE 3) for $800 billion. This is expected to place more money into the US economy.  Secondly, the Federal Reserve has become the biggest buyer of our US debt (bonds), even bigger than countries like China, England, Germany and Russia.  This is to artificially keep our interest rates very low through 2015.

Government economics is quite complex, but I am going to simplify some things so you can have an overall understanding, if you don’t already.

QE 1-3 is meant to place more money into society through banks and then have the banks lend the money out. This also weakens the dollar as there are more dollars in circulation, thus we pay back our bonds (debt) with cheaper money.  Now here is the kicker, we have given the banks billions of dollars to assist the middle class with small company loans and to help with mortgage financing, but have not placed any mandates that they do this. What I have seen is that the big banks which get this money, lend it to big corporations taking jobs overseas, and they are investing the money for their own business and bottom line.  It is keeping our potential recovery in bay. So with these billions we have not created jobs here in the US, and international organizations like OPEC (oil producing countries) keep the price of oil high to offset getting paid in cheaper dollars.  This adds to inflation, and therefore, inflation now exceeds our rate of growth in salaries in the US. Some inflation is good if it is created here like our housing prices, which would give people an incentive to buy things rather than sit on their money.

What is GDP?  It stands for Gross Domestic Product and is the increase or decrease of goods and services in the US over a set time period.  Here’s an example: if we have $1 that circulates 5 times in a year’s period for goods and services, the GDP is 5.  If we put more money in circulation from the government it should help our economy grow, but the money needs to hit the streets.  If companies take jobs overseas and are permitted to book their profits here, but keep their dollars abroad in overseas accounts, it does not help us here, except for the stock market.  Corporate tax rates should be dropped from 35%, however I question whether it will help much as so few big corporations pay that rate anyway.  The money needs to flow for risk lending to small businesses and start up businesses.  Small business owners will employ Americans, and those Americans will spend the money here.

Let’s return to the residential real estate market.  Real estate is a huge industry, and we need to get people wanting and able to buy new homes.  If people can’t sell their existing homes they can’t buy a new home; if they don’t have stable good jobs they can’t get financing.

In the early 1990s there was a recession.  Trying to pull us out of recession the government encouraged home buying.  Fannie Mae and Freddie Mac were packaging loans and these mortgages were sold, mostly to Wall Street investment banking firms. What was the driving force?… Wall Street, wanting more mortgage loans, similar to the years 2003-2006. In my opinion people should be able to buy a home, especially in their family growth years when they have children and pets. A great deal of the current banking debacle has been blamed on the “corrupt” people in the US falsely filling out financial statements. Actually, I differ in thinking.  We had recovered from recession after 9/11/2001, bank financing was easy, but unemployment was 4.5% and people had good paying jobs and work.  Families with both husband and wife working were making let’s say $80,000 for the household and times were good.  Then, in 2007 people started losing jobs, companies weren’t paying the same salaries they had been, people were under employed and therefore they lost their homes.  Wealthy people also walked from their homes as the home was no longer a good investment and appreciating.

What was happening?  As a good friend of mine, Gene, says, “none of the ‘isms’ work.”  By this, he means because of human nature including desire for power, greed and more money, communism, socialism and capitalism don’t work.  Relating this to residential real estate Wall Street was packaging mortgage derivatives as fast as they could buy the packages, and placing pressure on Fannie Mae and Freddie Mac for more mortgages.  Then, the mortgages were falsely rated and Wall Street banks peddled them worldwide. If they were A rated many countries banks like Germany could leverage their purchases 30:1.  I have heard that at one point there was $100 trillion in mortgages out in the world, many falsely rated.  This created the banking mess in the US as well as across Europe. 

Where are we heading?  This is my opinion. I don’t think we are going have to worry about inflation for several years like many people thought as the buying public lacks buying enthusiasm and there is not money circulating. The greatest fear is more deflation, or the loss of values and assets.  People, banks and companies are hoarding trillions of dollars.  The Euro Union is in poor financial shape also and is attempting what we are, buying their own debt to keep interest rates low, trying to cut debt and spending and praying!  Their currencies will remain in parity for the most part with the US.  We are going to have a financial cliff to overcome in 2013.  We’ll see what happens first with the presidential elections.  What we certainly need to do is get Congress to work together with whomever is president and watch out for the American people and the middle class, and this needs loosening up money from the big banks and get money in circulation.

With the Federal Reserve continuing to buy US debt, perhaps our treasuries would become so desired world wide that they would rise significantly in price and prove that this was a smart move and the US would make a great deal of money.

Greed, control, lack of cooperation working together on the government’s part, the lack of ethics, the desire for control and power has destroyed Milton Friedman’s “free market theory”.  We need some significant changes to our current systems to get out of debt and move this economy forward.