THIS IS MY 139TH BLOG ON UNDERSTANDING MONEY
TOOLS
August, 2018
understandingmoneytools.blogspot.com
We will continue with “America” and concentrate on 2008 to
today. I call this period
“Selective Breeding” and you will see why.
As with our past blogs on this topic let’s do a quick
re-cap. Blog 138 covered many
examples of debt incurred especially war years since 2000. Again, the premise of “did America
financially grow during these years or was it the “spin doctors” giving the
illusion of growth through borrowed and lent money? It has been stated that the Afghanistan and Iraq Wars cost
Americans about $4 trillion, and the loss of up to 1 million lives. Who came out? The defense contractors, and low and behold Vice President
Dick Cheney via Haliburton, and our President George W. Bush Family via their
ties with oil and the Royal Family of Saudi Arabia. If you remember, like me, oil hit a high for a short time at
around $145/barrel making a few a ton of money!
Then, we touched upon the push for “home ownership for all”,
even if you couldn’t afford it. Yes, America will provide all the borrowing you
need; banks lending and loans packaged by Fannie Mae and Freddie Mac. VA loans with nothing down. We addressed car loans, student loans,
furniture loans for homes and so much more debt.
The 2000-2008 era synopsis:
- No
growth.
- Doubled
the USA government debt.
- Banks
left in a financial mess.
- The
start of The Great Recession. (What is a recession? 2 or more quarters with negative GDP growth.)
- Stem
cell research set back years.
- The
stock markets beginning to crack and drastically declining in value.
- No
needed infrastructure work to speak of in the USA.
- Continuation
of wars.
- Oil
going sky high in price which is very inflationary, making a few people and
companies quite wealthy.
Now, back to reality 101 in 2008. The biggest lending “faux pas” leading up to 2008 was in the
residential real estate market.
Sub-prime quality loans were rated “A” bonds, packaged (many as mortgage
derivatives…or pieces of mortgages such as interest only or principal only) and
sold by the trillions of dollars around the world through Wall Street firms to
banks. (Please note how history
repeats itself and we do not learn.
These mortgage derivatives were similar to what was sold by Wall Street
in the mid to late 1980s taking down the Savings and Loan industry.) Corruption all over and no one went to
jail!
Toward the end of the Bush/Cheney term the government looked
at the financial stability of banks and their loans. Real estate had hit a high and trending downward. The government mandated banks adjust
their loan values to the declining values of loans on their books. The term
“mark to market” was used for this.
Many banks could not meet capital requirements and were shut down. Now, as I have stated before, the
wealthy, and the likes of George Soros, love these situations as they always
sit heavy with cash and come in to take advantage of adversity.
To save certain banks and corporations the government and
Federal Reserve came up with the idea to print a ton of money, known as staged
“Quantitative Easings”. Other
countries did this also with their central banks. This is basically the Federal Reserve purchasing large-scale
assets (our US Bonds) for printed money.
We reached around $4 trillion.
The damage from all this was not sudden, nor over
quickly. I would say The Great
Recession lasted about 20 months and affected most everyone in the US. In fact, even today the figures show
that 1 out of 10 residential homes are still financially “underwater”. Today, we read the great reports of how
well housing is doing, however it is localized with places like San Francisco,
Denver, Houston and New York City going through the roof with appreciation.
Now, this is where my term “Selective Breeding” comes
in. The US government could not
use this money (quantitative easing) for “all” short falls. First in line came banks to shore up
balance sheets. The government decided which banks to save and which to let
fail. Of course, this has evolved
today having consolidation of about 6 huge commercial banks. These big banks bought out smaller
banks, or let them fail. Then,
these banks heavy with cash only lent to big corporations and the wealthy at
very low interest rates. If you
were Mr. and Mrs. Jones with a small business or retail store you had your bank
working line of credit called and could not get other financing, thus leaving a
ton of unfilled light industrial and retail space.
This financing and new requirements slid over to investment
banks. At one time we had
wonderful local and regional investment banking firms; no longer. I had very good friends from my New
York City days who worked for “old line” firms like Lehman Bros. and Bear
Stearns. These people became
unemployed as the government did not “select” these firms to survive.
For the first time in my memory the US became a fascist
state. Do you remember the
President of Spain up until 1975 and his Fascist government? Dictator Francisco
Franco. In this form of governing
the government participates in ownership of companies. We did this most obviously with General
Motors. Perhaps we need to do this
with our large companies that refuse to bring their billions of profits back to
the US, like Apple and Microsoft?
It is rumored that Ford Motor Company is going to manufacture their Ford
Focus in China. This will leave
Michigan with less employment.
Similar to Russia when the Soviet Union was broken up and the country’s
assets and industries such as oil and gas were given to a privileged few (the
Oligarchs), our big banks offered significant assets to the wealthy with
financing for cents on the dollar.
We stripped the Middle Class of their assets and gave these assets to
the wealthy. Capitalism is
designed for only a few privileged: Warren Buffett, Bill Gates, Mark
Zuckerberg, and Jeff Bezos. An
analogy I like to use would be a running race of 5,000 runners. In a capitalist society there is only
one winner and 4,999 losers. In a socialist society there are the same 5,000
runners, however there are 5,000 winners as the people who showed up and tried their best are all winners!
Another new banking law came in during the Great Recession
that killed private companies, and
especially real estate developers.
I, for one, got caught by this. (Again, I have covered this more
thoroughly in prior blogs.) This
new regulation stated that bank loans needed to be “performing loans”. What does this mean? These loans needed to have immediate
principal and interest payments.
Typically, for me and my partners, we would buy a parcel of land with
cash and permit the bank to collateralize our operating line of credit with
that land. Then, as we developed
the land and sold off lots to homebuilders the line of credit would be
reduced. This operating loan no
longer exists. Obviously, large public real estate companies can use cash flow
from other projects because of their size. (In my case when The Great Recession hit our lines of credit
were called. Our Arizona
master planned community north of Prescott had 2 appraisals completed for $150
million net assets based upon contracts, however we could not complete the land
work to fulfill contracts and lost our project and all that money!)
I think the best learning you can have is from an actual experience.
Before I tell you the next episode let me tell you that any bank line of credit
can be called due and payable; this includes home equity lines, operating lines
and business loans. You better
have the liquid assets to cover the lines.
With the above paragraph, here is another example of
“selective breeding” and the wealthy taking advantage of adversity. As is so true today, the wealthy have
been passing the “rights” on for generations. I have an old partner whose expression I love, “these people
are all part of the lucky sperm club!” In 2004 I joined a few partners, put
together $7.5 million in a partnership to loan money short term to custom
home-builders at 11%, and also seek out real estate land opportunities. The managing partner was not to
leverage the partnership and borrow money from a bank, but he did; $1.5
million. Long story short, The
Great Recession came along, the bank called our loan due and payable
immediately, and we had to place all our land and lots on the market. (Please note
here that in Arizona, a note and deed of trust state, you only have 30-60 to
liquidate or the bank takes over.
In mortgage states you have about 6 months.) We put everything on the market and the wealthy came in to
buy out our best real estate at about $.20 on the dollar, leaving us with
mediocre real estate. We did pay
the bank back promptly.
In respect to the Quantitative Easing of $4 trillion, what
would you have done with this money?
I would not have permitted the Middle Class disruption. One thought that comes to mind was to
give each of the 130 million people working $35,000 each over a period of
time. I would have wanted people
to remain in their homes stabilizing values, and not enabled the wealthy to
absorb these assets. This would
have benefited the entire economy as this money would have circulated
throughout. With the circulation
of money comes taxation, thus helping our government.
I hope you can see the destruction that entitlements and
“selective breeding” did to our country.
We will continue on with America in the next blog covering
national health care and more.
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