They say that those who choose to ignore the past are doomed to repeat it. They also say that those who ignore the present are doomed to get royally fucked over. Luckily for America, the former is the current conventional wisdom. But that wasn't the case up until... um last week.
I'm sure you've heard the multitude of comparisons to our current economic status to that of the 1920s. Of course, back then it was known as the "Roarin' '20s," and we're on pace now to establish the "Reelin' Naughts." Nomenclature aside, the Great Depression was caused by a series of factors, beginning with an unimaginable amount of debt. Realistically (which is good, because I tend to just make shit up), the entire Capitalist system relies on debt, which is why we're in such a shitty place right now.
Some people wonder how banks make money. After all, all they do is collect other people's money, and reward people for doing it (i.e. interest). And in some cases, that's a lot of interest. But banks do an awful lot more than just collect money -- they dole it out. Lots of it. Unfortunately, more than they have available. And that's why we're in this position right now.
Let's say you owned a bank. Ye Olde Bank Of The D'Bag, for example. You encourage ten of your friends to give you their money. Why would they do something crazy like that? Because you promise to pay them for it! Woohoo!! And the more they give you, the more you're going to pay them! AWESOME! So your ten friends each give you all their money -- let's say they all have $1000 ( because -- let's face it -- if they're friends with you, their life savings is probably less than $1000). And you promise to pay them 1% on their money. That doesn't seem like much, but that's $10 they didn't have before.
Okay, so now you find yourself with $10,000 of money that wasn't and isn't yours. I mean.. it still belongs to your friends, you're just holding it for them. So now it's time to make some money on that money.
Let's say you have another friend, and he wants to buy a car. That car costs $10,000! So you offer to lend him your $10,000 so he can buy the car -- but he'll have to pay you interest on it. How bout 5% per year? So by the end of five years or however long it takes him to pay you back, you've made about $2500!! Just for being nice and lending your friend some cash.
Except that money isn't yours! What would happen if your ten friends, all at once, decided to come withdraw their $1000. And you already lent your friend their money? Holy Great Depression, Batman!
Not really. Your friends could get their money and there'd be no problems. Why? Well, have you ever wondered who makes money? No.. it's not the U.S. Mint or treasury or even the government at all. It's banks!!! When you lent your friend that $10,000, you didn't give him real money at all. You invented debt. You invented a $10,000 IOU out of thin air. So now, there's $20,000 of money flying around -- the $10,000 in your bank that belongs to your ten friends, and the $10,000 that just got paid to the shady used car salesman. That could be a problem, right? Well, so long as your deadbeat friend pays you back, everything should be fine. You'll have made an extra $2000, your friend has a new car, and your other friends each make about $10 a year. EVERYONE WINS.
Okay. Enough happy talk, let's get down to business. This post is getting way too long. Same principles apply to normal banks -- they collect a fraction of the money they lend out, and as long as people pay it back, it's all good. So what went wrong in the U.S. financial sector? People stopped paying back their loans. And we're not talking $10,000 car loans -- that'd take A LOT of used Tauruses to bring down the nation's largest banks. You've probably heard talk of subprime mortgages, although not much is being said about it anymore. When people stopped paying back their mortgages -- some of which costing several million dollars -- that kinda threw the lending companies into the shitters. All of a sudden, they don't have enough money to cover their deposits, and etc etc, we would've been on the verge of financial meltdown, like in the '20s. (Funny sidenote, the AP is slugging their stories each day on the economy, "FinancialMeltdown." You know we're fucked when the oldest press agency in the nation says we're in a meltdown.)
Long story long, if everyone were to lose all faith in the financial system and withdraw their money from the banks, we'd have a similar Great Depression scenario. BUT, the federal government learned from its mistakes last time. Now there's something called the FDIC, which is a federal corporation that insures deposits up to $100,000. And if you have more than $100,000, you're filthy rich and probably keep it in a vault like Uncle Scrooge.
So your money is safe, up to $100,000. The FDIC was established in 1933, post depression, because the government realized some big shit had to go down to keep the world from falling apart.
Alright, so now we're to the present. Giant investment and mortgage companies have already gone under, now the biggest private bank in the U.S. went under too. Which sucks, because WaMu is a million times better than Chase.
Anyway, as we speak, Congress is hammering out the details of a $700 billion plan to "fix" the financial crisis. Essentially, we're doing what banks do -- take people's money, reinvest it, and hope we get it back. Only this time, it's tax money, so we don't really ever see that again anyway.
This bailout package was devised by Henry Paulson, Treasury Secretary, and Ben Bernanke, Chairman of the Federal Reserve. These are the men in whom we've placed the entire fate of America's monetary future. Great.
Here's the problem. Republicans aren't willing to vote on this package because they're too f-ing attached to "NO GOVERNMENT, LOWER TAXES," blah blah blah. The government HAD to step in, 75 years ago, to ensure the future of our nation's financial system. The government HAD to step in this time as well, because rampant lending and bad choices by investment companies and their CEOs -- i.e. Republicans -- got us into this mess.
And what happens? Republicans in the House and Senate fight the bill, tooth and nail, forcing Democrats to knock off key provisions just to get enough votes to pass. This thing is close to passing, but I'm sure it'll be completely fucked by the time the GOP is done with it.
I just can't understand how the old way of thinking is helping right now. It's like the Republican party is too proud to admit they're embarrassed, so they just keep harping on the same points until the Democrats give in.
Personally, I'm not really in favor of spending nearly a trillion American tax dollars to protect huge corporate interests. That may be because I don't have any investments, and I'd rather my money be spent on something that I actually believe in. But in the end, I think the hicks in the South and the bank robbers of the Old West had it right -- stuff as much money as you can under your mattress, and just hope the barn doesn't catch fire.
Really great video that explains all this in plain English, and a lot better than my lousy attempt.
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