How investment banks turned housing and student loans into a toxic and financial disaster – Middle class largest asset coopted by banking sector to raid and speculate on. Financial sector nearly 30 percent of all corporate profits in U.S. In the 1950s it was under 10 percent.
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Most Americans pull their net worth from their investment in good old housing. It is the biggest purchase most will ever make. And because of this, after the Great Depression, housing was a boring yet stable investment class. It had to be. This is the cornerstone of wealth for most Americans. Banks used to do their due diligence by verifying income and typically having a say in their local communities. All that changed starting in the 1980s. The first foray into banking corruption in housing came with the S&L Crisis. Thrifts largely gave out money with unsustainable interest rate schemes and when the market imploded, the taxpayers had to step in to bail out the banks. Yet during the process, many Wall Street financial firms made out like bandits on junk bonds and other “financial innovation” which was nothing more than sugarcoated robbery. Then in the late 1990s the depression era Glass-Steagall act was repealed and all bets were off. In a debt based system, housing was the largest debt class for Americans and investment banks decided to turn it into one giant casino. This financialization of our country is at the core of the disappearing middle class. Financial firms are largely wards of the state and operate to suck out rents from the productive economy.
The burden of housing and investment banks speculation
By far, the largest debt American households carry is with mortgage debt:
This is one of the most troubling charts since it shows how household debt since the 1950s has become a larger and larger part of our economy. In fact, at the peak in this crisis household debt nearly equaled our annual GDP. It isn’t too far from this point either today. The biggest part of this debt is made up by mortgages. Over 76 percent of household debt, some $13+ trillion, is made up of mortgages. And with homes sinking in value we now have 25 percent of households with mortgages holding onto underwater mortgages. The biggest factor here is that banks that serve with a fiduciary responsibility largely ignored all parts of their mission to rip off the public. This came at a taxpayer cost of trillions of dollars that have been paid out by the Federal Reserve and U.S. Treasury. The middle class is still paying for it today in a multitude of ways.
Inequality rises because of broken financial system
Wealth inequality in the U.S. is now at the levels last experienced during the 1920s:
The top 5 percent in the U.S. control 63 percent of all wealth. Keep in mind that the vast majority of Americans, those with an actual positive net worth, derive their wealth from housing. Most of those in the financial sector derive their wealth and income from financial speculation. They even pay 15 percent on their investment income which is what they live off of. When was the last time your tax rate was 15 percent? Just think about the hedge fund managers that made billions of dollars betting on Americans losing their homes and winning on this bet. How in the world does this add any value to the system? This is nothing more than socialized gambling and a vampire sucking the life out of the real economy.
The big problem in our current system is that a large part of corporate profits now come from the unproductive financial sector:
Think of the last decade where household incomes have fallen for the middle class, the financial sector has done fantastically well as the chart above highlights. In the meantime household income across the country did this:
It stalled out. This is the issue at hand and why so many people are starting to wake up to the oligarchy of the current banking system. The banking system’s purpose is to lubricate and keep the real economy growing. But when profits can be had on speculating on homeowners defaulting or student loan debt rising, why leave the office when you can push a few keys on a Bloomberg terminal and make more in one day than a manufacturing worker will make in one year?
You also have the absurd amount of student loan debt in our country and the cost of education:
Take an open look at the above chart and align it with these stats:
Since 2000, in real terms college costs are now up by 23%
Since 2000, in real terms real pay for college graduates is down by 11%
Education costs have gone up over the last decade by 23 percent yet college graduate pay has fallen by 11 percent. How does that work? More debt. And of course banks have their hand in every aspect of this shell game.
It is no surprise then that you have the CEO of JP Morgan Chase making over 800 times the average annual workers wage. JP Morgan Chase owns trillions of dollars in “assets” largely in mortgage debt.
Low wage nation
One of the more disturbing trends emerging from this is that while those at the top of the financial sector continue to expand by greed and corruption, the few jobs added in the last few years have come from low wage sectors:
In other words, the middle class is being crushed at the expense of the financial sector. And this is a zero sum game since the taxpayer bailouts went directly to the banking sector. This wasn’t an “earned” victory for the delusional investment banks. This came at a heavy cost. How much longer will we allow commercial and investment banking to be intertwined in a system that clearly doesn’t work? Do we need more proof that the current setup is absolutely flawed? We are living in the midst of the worst economy since the Great Depression. Yet with so much money flowing into D.C. from Wall Street, we might as well look at Manhattan as the power hub of this country. Some have argued that people should protest D.C. because they make the laws. I disagree. Wall Street signs their paychecks and funds their campaigns so the real power is in New York in particular with the investment banks. Most other companies have to work to produce something while these banks simply need to look at what other industry they can pilfer and make bets on. If those bets go bad, they’ll just dip into the taxpayer wallets again. Housing, education, healthcare, and what else?