What people should be saying is, "Let's stop bailing out the banks. Let's stop buying their 'junk mortgages and cash for trash'. Let's investigate and put some bank executives in jail for fraud."
Read the interview (or view the video) by Michael Hudson on what really should be done to support the economy.
Wall St Burdens the Public Debt
By Michael Hudson interviewed by Paul Jay on The Real News Network
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HUDSON: Right. Now, it’s just amazing that the people who were talking about let’s get the government debt under control are only then following it by saying, so cut back Social Security and squeeze labor and cut back social spending. Not a single person is saying, cut back the giveaways to the bank; stop trying to reinflate the market. To the Obama administration and the Republicans they’re saying more private debt is the solution.
Well, in reality, the problem is private debt, not the government debt. And that’s because unlike government debt, private debts have to be repaid. And there are only two ways of resolving a private debt problem for an economy as a whole. Either you do the American way, which is foreclosure and essentially foreclose on the real estate, or you write down the debts to the ability that can be paid.
Now, in the past, when you had a financial crisis, the banks would have to liquify the loans. They take the loss on the loans. The debts would be written down to whatever the market could afford. That was the old market solution to the debt problem. But now the government is saying, we cannot have a market solution to the debt problem because our constituency, our largest campaign contributors, the banks, would lose, so we have to keep the debts in place, and in fact we have to have even more debt to reinflate the real estate market so that the banks won’t lose any money on the fact that they’ve lent much too much money that cannot be repaid.
So you have something very interesting. The largest form of debt in America is real estate debt by homeowners.
When I first went to work on Wall Street in 1961, everybody had to–there was a rule of thumb on Wall Street. If you were taking out a home mortgage, they would limit it: the mortgage payment couldn’t exceed 25 percent of your income. That was the rule of the thumb. The banker would ask: how much money do you make? And they’d say, okay, you can afford to pay 25 percent of that in debt. Well, then the banks began to make larger and larger loans.
So last year, Sheila Bair, the head of the Federal Deposit Insurance Corporation, said she recommended limiting the amount of mortgage debt service to 32 percent of the loans.
Well, just a few months ago, the federal housing agency of the government said, okay, the government will guarantee nine out of every ten mortgages in America are now guaranteed by the federal housing administration to the banks for up to 43 percent of the income of the borrower to be paid to the banks as mortgage service.
Now, just imagine what that does to a family. If you’re paying 43 percent of your income to the banks for your mortgage, if you’re paying–some people are paying 25 percent of their income for student loans. But forget student loans. Let’s say only 10 percent of your income, above that, goes for other bank loans, credit card loans; you have 15 percent of your salary taken out for Social Security; and then you have income tax. Then you’re only going to be able to spend about 20 percent of your salary on the goods and services you produce.
Read the entire article and view the video here
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