/chronicle

This morning Representative Barney Franks was on NPR advocating a bailout of the auto industry.  While I don’t think this is a good idea Rep. Franks had a real good point. He said…

“Well, [insurance company] AIG, which I don’t think anyone would think was as important to the American economy as the auto industry … got $40 billion just now to make it up over $100 billion. To some extent, let’s not have a white-collar/blue-collar bias in our public policy.”

Barney’s dead on with this observation.  Paulson and his cronies are quick to hand money to their friends in banking who grossly mismanaged their companies but they are quick to refuse money to the auto industry using the justification of mismanagement.   The difference in my opinion and Barney Franks is that he seems to think we should be continuing and extending bailouts.  I say end them all immediately.

No industry, automotive, financial or otherwise deserves preferential protection from the Federal government. Furthermore the invocation of public funds into these industries, with ownership stakes in the companies, is the forerunner to socialism.  Add to it that none of this does anything to restore activity in the micro economy and there is zero chance that this will actually help restore and improve the economic conditions for the majority of Americans.

I just read this bit of information this morning regarding more testimony to be given by Henry Paulson to Congress on Tuesday.

“Paulson, who is overseeing the bailout program for the Bush administration, said he was also working on a proposal that would allow the government to take over a wide range of financial institutions – not just banks – that are in danger of collapse.”

That sort of talk should worry you. If it doesn’t you most likely work for a bank or another failed industry on the verge of collapse eagerly waiting for the government to start providing your paycheck. When Republicans had the nerve to call Obama a Socialist during his campaign it was hipocracy in a most brilliant disguise. Yet Democrats are not without their faults in this mess. Their support of the UAW for a bailout of the auto industry is disgusting.

Let’s recap (yet again…)

1. Banks won’t lend because people can’t pay the money back. Job losses are at an all time high. I suppose Paulson and Bernanke missed that part.
2. Paulson pushes for more tax dollars to the banks so they’ll lend.
3. So banks begin to lend money? Well, no. But if they did no one would want to borrow it.
4. American car manufacturers make cars no one wants. But what if they made wonderful cars? Still, not many can afford to borrow $24k to buy one.
5. American car makers ask for some of the love the banks are getting. After all they’re both losing money right?
6. Paulson does not want to give car makers bailout money because the government isn’t sure GM and Ford won’t die anyway. The wild hypothesis is that people don’t want to borrow money to buy big, gas guzzling, expensive cars right now.
7. Rinse, repeat.

Do you see the cycle here and the common denominator? Do they get it yet? Consumers are tired of mounting debt! And every economic solution put forth by industry and regulators include a recipe for more debt and renewed lending they insist we need. People are in a saving mode right now. Even people with money and credit don’t want to use it.

We have to fall down to get back up. Prolonging the inevitable does not make facts avoidable. People need time to pay for what they’ve got and debt relief. Any industry relying on people to open lines of credit right now is screwed. This includes the lenders. Using credit and going into debt is bad. Allowing the government to take part ownership of these failing industries out of desperation is even worse. The law of the jungle must be allowed to run its course. Some will not come out alive.

This morning I decided to take a look at some bills that have been repeatedly introduced in Congress that have not gotten support primarily because of the continuing Bush/Neocon economic agenda. One of these is House Resolution 946, The Consumer Overdraft Fair Practices Act, introduced a couple of times by Rep. Carolyn Maloney of New York. It’s essentially stalled for now, referred to the subcommittee on Financial Institutions and Consumer Credit, a subcommittee far more tainted by the evils of the bank lobby than any in government history. I’m not holding my breath for anything fast.

While researching this bills status I noticed many posts on the Internet that indicate most Americans are not aware of the breadth of this problem. Most topics and discussions around excessive overdraft fees go something like this “I hate Bank of America” or “Screw Wachovia”. Followed by rantings of account holders about how their bank processes transactions from highest to lowest and creates excessive fees of $33 to $35 per transaction for the lowest cost transactions, usually a “cup of coffee”. Why it’s always a cup of coffee in these posts I do not understand.

Anyway, my point is that it needs to be recognized that these are industry standard practices, not bank specific. Many people make comments like “I’m firing them and switching banks”. Well that won’t do you much good. All banks follow the same practice of imposing fees as soon as they learn another banks lawyers have found them a loophole to create said fee. They also standardize on close to the same amount for these fees once the amount is established as acceptable by the industry. The common overdraft fee seems to be $35.00 today.

Most complaints are that this overdraft fee amount is excessive. That’s not really the problem I’m hoping legislators address in H.R. 946. While getting charged $35 for a $2.50 overdraft is in fact excessive and needs to be lowered, the real problem is that by willingly allowing customers to overdraft their accounts in the first place, through approving the transaction and then charging these excessive fees, the banks are, as a point of fact, loaning the money to cover the transactions and then charging the fees for the loan.  For now this is skirting existing lending laws, barely.

Add to this that banks do not have an opt out policy on “overdraft protection” and you have a forced lending scenario. Once it is agreed that this is a lending practice, not consumer “protection”, we can start looking at the other immoral practices the banks instituted such as ordering transactions from highest to lowest (to maximize the number of overdraft fees). Most banks cap the number of overdrawn transactions the fees can be applied to at five or seven per day. That could mean as much as $245 for overdrafts totaling as low as $10 to $15 dollars. That’s a lot of interest for this loan to cover the account holders unfunded expenditures for less than 2 weeks.

Just how do banks insure they are going to collect this money? By requiring direct deposit on the account to avoid checking account fees. You see, the banks are going to get theirs or they are going to get theirs. It’s a systematically formulated revenue scam against banking customers.

I blog on this exact issue and legislative bill frequently. By now most probably think its because I bounce transactions left and right. That’s not true and it matters to me that people know that. Not because I’m worried readers think I can’t manage my personal finances but because I feel the reason this issue doesn’t get more traction is because people who have well padded checking accounts don’t see the problem for what it is: essentially an industry tax levied on the working poor. It’s an attack by an industry on those who can least afford it.  Historically this is not where banks obtained the bulk of their revenue.  It was through investment dollars and commercial loans which have dried up.

Who thinks banks make money by loaning to the rich these days? Of course not. Those with substantial cash flow can afford to pay their bills on time, at low interest rates, generating very little revenue for banks. So the banks have to go after those who can’t afford to their products. Higher interest rates on credit cards, mortgage loans, check casing fees and overdraft “protection” fees are just some of the utilities they’ve formulated to achieve this. It is a hard truth that no one can afford to be poor in America. Those who are will pay a higher premium for everything.

This is why Paulson is fighting to eliminate the “credit freeze” that has the financial industry in turmoil. I’ve never doubted it’s existence but I firmly believe it is a well earned “freeze” and the banks should spend some time suffering losses through a lack of lending capability. What Paulson is trying to do is get banks to begin lending to higher risk borrowers again, like the middle class and working poor. That way they can resume increasing their revenue through higher interest rates and credit fees. Simply translated: The Federal government wants to pad the banks so that they can accept losses once they resume their attacks on those who can least afford to borrow.

Don’t doubt for a second that banks are still lending. If a company has the highest of D&B ratings or a consumer has a FICO above 740 they’ll lend. They simply don’t want to accept losses on defaulted loans anymore. They want to run the gamble of lending to high risk while avoiding any actual risk. If the loans succeed they win and if they fail they win.  I say let them burn.

Here’s how consumers can fight back against the banks and bring them to a realization that they must change their business model to offer products and services people want to buy or become reduced to an industry which the government cannot even help:

1. Never overdraw your checking account. As hard as this may be for some find the discipline to keep a separate register from the web banking sites, use cash, whatever it takes but don’t give them the satisfaction of the overdraft fees.
2. Don’t use consumer credit or consumer credit cards. Need a new washer and dryer? Find a way to pay cash, fix your old one, anything but that consumer line of credit at Lowes or Home Depot. At Christmas don’t spend above the cash you have on hand. Set aside some of your paychecks over the year and pay cash in December, not interest later. Find a way to become a cash and carry consumer. And the new 42″ flat panel can wait until you save the cash too. It’s really not that important.
3. Avoid bling. All that crap you think you need to put on a credit card so that you’ll look wonderful, guess what? Nobody gives a damn. Got a new iPhone you paid for on a Discover card? So what. You’re pretend rich.

Ever wonder how different the world would look if everyone wore cloths, drove cars, carried cell phones and lived in houses that displayed their actual income instead of their credit score? This is where we need to get for the US economy to survive. The banks hate this idea and they will use every lobby they can afford in Washington to stop it.

This is clearly an uphill battle because Americans judge one another based upon perceived material wealth and possessions. Any method Americans can use to fake their material wealth will be used to try to portray affluence where there is none. I hope that at least some will join me in the fight to put banks back in their place and stop their attacks on the working poor. The only way we will achieve this is far each of us to begin living within the means of our paychecks.  Not off the banks line of credit.

AIG sold credit default swaps they did not have the money to repay to all of those who purchased them.  A credit default swap is basically investment insurance that can be bought by any savvy investor who does not even need to own the underlying security or credit instrument it is insuring.  So for the buyer it’s betting that a certain loan instrument or security will default and the owner of the CDS will get a payout.  AIG sold them to almost any investor as they backed speculative hedge funds.  For AIG it’s gambling that mortgage backed securities would not fail and they would reap the rewards of credit default swap payments for years to come.

Then the foreclosure crisis emerged.   Bearers of credit default swaps came to AIG to collect their insurance (or spread) on the defaulted loan instruments.  Most of these collectors did not even have a stake or vested interest in the failed instrument they were collecting on because they were buying through specualtive hedge funds.  AIG went bust.  They can’t pay out on all of the default swaps.  Hell, they couldn’t even pay out the spread on securities deamed least likely to default.  Whoever will save failed AIG from their stupid mistake spurred by greed?

Enter Henry Paulson.  “Don’t worry”, he says “We’ll use the tax payers money”.  And summarily hands AIG over $130 billion dollars.  Ah the luxury of being a financial institution in America.  You can get so big through moral and financial negligence that when it comes time to pay up you can put a political crony in your pocket and use tax payer dollars for decades to come to keep your employees happy.

What a damned scam.  And the real problem is most Americans don’t understand one bit of this even as it’s spelled out in this post.  All they hear is their “trusted” politicians telling them they are working to make everything alright.  As far as I’m concerned Henry Paulson is the most corrupt human to ever walk the face of the earth.  He professes his concern for the economy while his only real objective is saving banks through hard times and wealthy investors.  The rest of us be damned.

Henry Paulson will be one of the greatest skid marks in the Bush administration legacy.  Possibly even greater than Iraq.  He is a man who cares nothing about creating jobs (oh yes Henry, please tell us more about how giving billions to banks helps create jobs) and feels the road to our economic salvation is for banks to start lending?  Is that really what we need Mr. Asshat?  More consumer debt?  I thought that’s exactly what got us hear in the first place.

WE DON”T NEED MORE CONSUMER DEBT.  We need an increase in wages and job creation, through realistic means, so that people can pay the debts they already have.  Until this fundamental fact is addressed this economy will struggle until death.  This is not a rainy day we’re heading into.  Through his continued misuse of tax payer dollars and the manipulation of Congress, Henry Paulson and his political cronies are driving us into a class 5 fire tornado full of dead cats and razor blades.  We’re all going down.  How well do you bounce?