Part One: Genesis

One of the themes of President Obama’s administration that draws controversy is the idea of “redistributing” wealth. Depending on your point of view, this is either nobly responsible or outright larceny. Or if you don’t fancy yourself to be a “liberal” or “conservative” (I don’t like to use the terms – they don’t mean anything anymore), then you know this is all malarkey.

Robin Hood politics is not the answer here. Never going to happen.

The current economic crisis is not the result of too many people being rich, even obscenely so. The problem is in how some of them got that way.

The general, parental culprit is the financial industry itself – its parents, banking and lending, and it’s havoc-reeking progeny, the credit card, insurance, mortgage, and investment businesses.

Now, I, for one, have no problem with the idea of being rich. Not for me or anyone else, for that matter. I do have huge problems with some of the ways to become rich.

For instance, stealing, cheating, lying, committing fraud, selling ripoff deals, extortion, and loansharking are all ways of making money that I believe are just wrong. I’m not big on gambling, but I don’t think it’s criminal unless it’s fixed, and it’s your own business making the bet as long as you’re prepared to suck it up if you lose and stop when you can’t afford it.

So, I have no trouble with Paul McCartney being a billionaire. Or Steve Wynn or Mike Ilitch.
Really. If you make, create, or build something; provide a skill; build a business; improve or fix or refurbish or sell something – any way to earn money by providing a service or skill or taking the bet and facing the risk fairly. In other words, tangibly honest.

Banking starts out that way. It provides the service of safeguarding your money. Likely, it began as simply as holding accounts and charging a fee for it. I’m sure one of the very first bankers immediately saw the possibilities from having a whole village worth of money at once. So, lending money and charging interest on the payments quickly became a principle function of banks in general. Along with public knowledge of the bank’s profit came the payment of interest to the account holders – essentially their share of the profits from loans on their money.

But, this is just the tip of the financial iceberg that we have crashed into. It didn’t take very long at all for bankers to realize that the more ways you could raise large capital, the more you could invest in loans, the more profit you make in interest.

So simple.

Soon everyone is borrowing something somewhere – governments, businesses, individuals, other banks – all generating huge cashflow in monthly payments.

Then the brilliant idea that changed everything.

Let’s sell shares of it!

Let’s let people buy a piece of the cashflow by putting up cash in return for a dividend from the profits. Just a small extension of the original interest bearing account technique, right?

Oh. no. Much more than that.
We’re looking at every kind of mutual fund, investment accounts, insurance, and the mother of all financial goldmines – The Stock Exchange.

Now, selling shares of your business to generate capital is a pretty normal way to make a business work. The basic idea is for investors is to reap the rewards through dividends. If the company increases its earnings, the dividends go up, and this is, after all, why you put up the money in the first place.

Financial tools don’t work that way. They aren’t based on real cashflow. They’re based on a company’s total value of assets, capital investments, estimated cashflow, and the resulting stock market value.

With stock trading came the reality of values going up or down and shares being bought or sold on that alone. Along comes the caginess of the stock broker, gauging the profitability of the different companies and their potential.

From a capitalist view, there is still nothing wrong here yet. As long as people know what they’re getting – guaranteed interest or potential dividend, this works fine.

But, along comes the insurance industry, again, with humble, sensible beginnings. The idea of paying premiums to a company who agrees to pay on your behalf for damage, loss, or injury beyond normal means is practical and in many cases, prudent. At the front end, handling accounts, the agent’s office is no different from the local banker, honestly just looking at parameters and figuring out what coverages you’ll buy and premiums you’ll pay. The fact that the salesperson makes a commission from the premiums isn’t out of line, either – it’s a standard retail sales practice.

If all the money from premiums just went into the bank and the insurance company just collected interest, deducted payroll and expenses, and paid out for claims, it would all be fine. Thinking like a normal retailer might, as your bank balance goes up, your
interest earnings increase. As your margin rises, you lower rates to attract more customers, growing by volume rather than individual customer profit.

But, that’s not how it works at the top.

It’s soon realized that the claim payouts are a small percentage of premium revenues collected. Nothing compared to the potential profit from investing this huge sum.

They figured out that they can collect all that cash upfront from the customer, and invest it themselves just like the bank would and keep all the profit. Most of the money just sits there, so let’s make it work for us by investing it in the stock market.

So, they stop keeping much more than enough cash to cover the statistical number of claims per fiscal quarter and expenses, salaries, and of course, bonuses.

The real risk here is that if they have too many claims at once, say, from a natural disaster like “Katrina”, they may not have enough cash on hand to cover everything. They may be forced to sell stocks or shares to raise the cash to satisfy claims. Being margined for investment will leave them short, and they may even have to borrow the money to make good.

It’s no accident that an insurance company is one of the most publicized bailout recipients. By refusing to bend on margins, acquisitions and executive salaries, they pushed their customers to the edge while maintaining excessively large investments and compensations.

But, I’m getting ahead of myself. All of this leads to some pretty large corporate fortunes. Money to burn, so to speak. Insurance, investment, and mortgage companies with lots to lend and running out of new ways to generate that payment-fed cashflow, strike on an idea that solves it all.

Credit cards.

The idea of letting people just buy things on your capital and pay back with interest goes right back to the heart of banking at the local level. A truly useful, even noble idea, taking the burden of running accounts off of the merchants, and letting those with capital to risk make a profit from the interest.

A marvelously capitalist, yet democratic, fair, and humane thing to do.

For approximately 30 seconds.

It couldn’t have taken longer than that for someone to say, “Hey, we don’t have to use our money to cover this – they’ll owe us the money, so we can charge anything we want for everything we do and they have to agree to pay it if they want the card. We can charge a fee just for having it. We can charge a fee if they’re late. We can charge a fee if they go over their limit. We can charge them all at once on top of interest and raise them anytime we want. We don’t have to touch wages, bonuses, and investment funds at all.”

They merely fold all those projected fees and charges into the portfolio. Part of the estimated cashflow.

So, an industry that now COUNTS ON $15 billion just in late fees has a stranglehold on our society.

And worse, this venom has spread backwards through the entire financial family tree. Safeguarding the margin by raising rates and penalties.

Insurance rates, of course, are outrageous – unaffordable for many. Auto insurance is mandatory by law everywhere, so no surprise that rates are through the roof and go up for any reason you provide, from buying a newer car to getting a ticket.

Banks used to pay an average of 5% on savings accounts, which was considered small but not embarrassing. Return fees were reasonable. Overdraft fees as well. Before the credit card era, most people could survive a cashflow crisis without the bank looking to destroy them.

But, along with the newfound “We’ve got you hostage because you owe us” greed came the inevitable banker’s gouging, now common today.

Now, 1% interest tops without buying an investment bond of some sort to get that 5% – sometimes requiring minimums of $5000 or more tied up for 10 years to get that rate.

They all, creditors and banks alike, ply what they believe are “fair charges that encourage timely payments” at $25-$50 a pop. What’s more, even the banks are saying, “if you owe us money, we’ll charge you more”.

So, now, running out of money becomes a very costly thing. Being broke is expensive!!

Let me get this straight. You don’t have any money, so we’re going to charge you more.
You have nothing, so you owe us more. The more you owe us, the more you, um, owe us.

 
Read Part Two: The Monster Grows
 

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