MONEY 37 - ECONOMY/BANKING RIDICULOUS

THIS IS MY 37^TH POST ON UNDERSTANDING MONEY TOOLS

I write these blogs mainly from a constructive point of view to help those who read them.  I am going to re-visit banking with this blog. I am also going through parameters banks have set in conjunction with the US Government and the outcome which is ridiculous and not a pretty picture for the future. I will touch upon the current US economic situation that all ties in together.

As I write this on August 14^th, 2013 the Federal Government is all but shut down because the Republicans and Democrats can’t decide on finances.  Come this Thursday, August 17^th, the US Government may default on its debts.  This is horrible for many reasons and will have a future negative effect on our country and the people, especially the middle class. What are the obvious negative affects?  Some immediate thoughts are interest rates will go up, America’s credibility to pay its debt will go down, the US dollar that has been held as a benchmark to world currencies will go down, and the recovering building industry which happens to be the biggest US industry will slow and perhaps lead us into another strong recession.

First, have we ever defaulted on debts?  The answer is yes.  We did after the War of 1812 in 1814, and again in 1979. As a sidetrack, I will quickly touch upon the financial detriment of war and much of what has lead us into so much debt. After our Revolutionary War we were broke.  World War I and World War II were necessary wars, and left us in debt.  After those wars I am not sure if our involvements in wars had much to do with anything other than top political people deciding to go to war, and the defense contractors making a ton of money.

The Korean “conflict” could have ended in three weeks as we pushed the North Koreans back to the Chinese Border and the Yalu or Amrok River in that amount of time.  Viet Nam was over Communism. Now some of the world’s most capitalistic countries are in Asia, including Viet Nam.  That war was long and financially a disaster except to a few who made millions.  On August 15^th, 1971 we went off the gold standard to a Fiat currency because we couldn’t pay our debts to the French.  On and on, and then the Iraq war and Afghanistan which have both proven to be a failure, and not one 9/11/2001 was from either of these countries.  You get the point, ridiculous decisions, and now we are broke.

Let’s take all my ranting into how it affects you and me.  As you know the US Government in August, 2007 started indicating that our banking system was tanking financially. The US Government started restructuring regulations, and along with the Federal Reserve started assisting certain banks and large corporations. The Federal Reserve started a program called Quantitative Easings, referred to as QE 1, QE2, QE 3, and now QE4.  The total money involved is about $3.4 trillion.  Now, we must know that the Federal Reserve is independent from the US Government, however it’s power is indisputable. “He who has the gold rules!” As we know, the Federal Reserve has been purchasing US bonds to keep the interest rates artificially low.

Okay, so the big boys have been helped; all the major banks, including investment banks on Wall Street, with the exception of certain ones like Lehman Bros. have been assisted with generous amounts of money, and they invest this money for their own profitability. Quite selective! The Q’s were meant to help the economy in general and it did, however the word “trickle down theory” was a part of this. As I’ve stated many times, “trickle down” does not work, and certainly didn’t.  The theory is if you give the big companies, big banks and the wealthy the money, eventually the money will reach the middle class and perhaps a bit for the poorest people.  Unfortunately, the theory didn’t work at all, and never in history has worked. That is one reason labor unions were started many years ago, to bring some equality to hours worked and a decent pay level. The first appearance of labor uniting was as far back as the 1820s, although real strength started around President Lincoln’s time in about 1866.

With new regulations in place for banks and commercial lending what has happened?  Basically, unless you have so much money you don’t need a loan, you can’t get a loan!  The wealthy don’t need loans, and if they do, they have many sources to go to in the US and outside the US.  Of course, poor people can’t get loans.  Now, the middle class is being crushed.

Last Friday, I had meetings with two financial institutions, one being a credit union and the other being a large US bank which I have had accounts with for over 20 years.  The meetings were a test.  Here is how it went and the outcome. I asked if I could get a relatively small loan, $500,000 to start a home building company that I have structured and have ready to go.  This type of loan is considered a business loan and I was told by both institutions that unless I have had a company in business and showing a profit the past three years I could not get a loan.  So…..I went to ask for a personal loan to see if I could get further.  I was told that I could get a loan if I collateralize the loan with liquid assets, like stocks and bonds, for an amount equal to or greater than the loan amount. I also would need to have enough income to support my current living expenses plus the additional interest and principal reduction on the new loan. Why would I want a personal loan if I had sufficient income?  Aren’t you then essentially borrowing your own money?  It is essentially impossible to get a loan other than a small amount on credit cards at high interest rates.  The banks pay approximately 1/4 to 1/2% interest on a short-term deposit.  If you borrow money it is much higher. Years ago, banks were happy with a spread of 2-3% between what they paid out and what their lending interest rates were, not any longer. A lot of credit card debt is 20% or more.

This is crazy, and is leading to the downfall of the middle class and this country unless something is done. Developers now need to have a large percentage of space leased to major corporations as banks know they are not assisting small businesses, and therefore the big public companies need to be able to support and loans. About 9 out of 10 new small businesses go bankrupt in the first 3 years. Many times the reason for small businesses going bankrupt is that they are under-funded and need loans to meet their needs during business cycles.

Wages and incomes are down for middle class people, thus people won’t be able to buy the same goods and services as in the past. We need money circulating and none of this outrageous $3.4 trillion in QE money has reached you or me.  The banks have invested this money, and aren’t lending it out.

I have read that many middle class people are now cashing in their retirement accounts to start small businesses as banks won’t loan.  This means people are desperate to get some money to start something that will possibly bring in cash to live on.  Fundamentally and economically this is not good. First, you are taking away retirement security, and secondly this will catch up with America down the road. Middle Americans will have no retirement money to live on and join the poor. When you take money out of your retirement account you have the penalty of 10%, and federal and state income tax on top of that, so in most states it amounts to about half your withdrawn money.

This situation has also forced people to seek capital from private lenders. Many private parties who have money to lend want outrageous rates like 20-25% plus collateral for the loan, or a healthy portion of the business.

Enough said.  Bottom line, unless we change banking regulations and get money into the system, available and at low rates to help the middle class start new companies it does not bode well for the future.