By Michael Hudson and posted with the author’s permission
The Federal Reserve Board’s ostensible policy aim is to manage the money supply and bank credit in a way that maintains price stability. That usually means fighting inflation, which is blamed entirely on “too much employment,” euphemized as “too much money.” In Congress’s more progressive days, the Fed was charged with a second objective: to promote full employment. The problem is that full employment is supposed to be inflationary – and the way to fight inflation is to reduce employment, which is viewed simplistically as being determined by the supply of credit.
So in practice, one of the Fed’s two directives has to give. And hardly by surprise, the “full employment” aim is thrown overboard – if indeed it ever was taken seriously by the Fed’s managers. In the Carter Administration (1777-80) leading up to the great price inflation of 1980, Fed Chairman Paul Volcker expressed his economic philosophy in a note card that he kept in his pocket, to whip out and demonstrate where his priority lay. The card charted the weekly wage of the average U.S. construction worker.
Chairman Volcker wanted wages to go down, blaming the inflation on too much employment – meaning too full. He pushed the U.S. bank rate to an unprecedented 20 percent – the highest normal rate since Babylonian times back in the first millennium BC. This did indeed crash the economy, and with it employment and prosperity. Volcker called this “harsh monetary medicine,” as if the crash of financial markets and economic growth showed that his “cure” for inflation was working.
Apart from employment and wage levels, another victim of Volcker’s interest-rate hike was the Democratic Party’s fortunes in the 1980 presidential election. They lost the White House for twelve years. The party thus is taking great courage – or simply being ignorant – by entering on this autumn’s midterm election by emulating Mr. Volcker’s attempt to drive down wage levels by financial tightening, which already has crashed the stock market by 20 percent.
President Biden has thoroughly backed up Republican-appointed Federal Reserve Chairman Jerome Powell in endorsing a financial crash in hope that it will roll back U.S. wage levels. That is the policy of the Democratic Party’s donor class and hence political constituency.
To Wall Street and its neoliberal policy backers … the solution to any price inflation is to reduce wages and public social spending. The orthodox way to do this is to push the economy into recession in order to reduce hiring. Rising unemployment will oblige labor to compete for jobs that pay less and less as the economy slows.
This class-war doctrine is the prime directive of neoliberal economics. It is a feature of the tunnel vision of corporate managers and the One Percent. The Federal Reserve and IMF are are the operating arms for impoverishing the masses. Along with Janet Yellen at the Treasury, public discussion of today’s U.S. inflation is framed in a way that avoids blaming the 8.2 percent rise in consumer prices on the Biden Administration’s New Cold War sanctions on Russian oil, gas and agriculture, or on oil companies and other sectors using these sanctions as an excuse to charge monopoly prices as if America has not continued to buy Russian diesel oil, as if fracking has not picked up and as if corn is not being turned into biofuel. There has been no disruption in supply. We are simply dealing with monopoly rent by the oil companies using the anti-Russian sanctions as an excuse that an oil shortage will soon develop for the United States and indeed for the entire world economy.
Covid’s shutdown of the U.S. and foreign economies and foreign trade also is not acknowledged as disrupting supply lines and raising shipping costs and hence import prices. The entire blame for inflation is placed on wage earners, and the response is to make them the victims of the coming austerity, as if their wages are responsible for bidding up oil prices, food prices and other prices resulting from the crisis. The reality is that they are too debt-strapped to be spendthrifts.
The Fed’s Junk Economics of What Bank Credit Is Spent On
The pretense behind the Fed’s recent increase in its discount rate by 0.75 percent on June 15 (to a paltry range of 1.50% to 1.75%) is that raising interest rates will cure inflation by deterring borrowing to spend on the basic needs that make up the Consumer Price Index and its related GDP deflator. But banks do not finance much consumption, except for credit card debt, which in the United States is now less than student loans and automobile loans.
Banks lend almost entirely to buy real estate, stocks and bonds, not goods and services. Some 80 percent of bank loans are real estate mortgages, and most of the remainder are loans collateralized by stocks and bonds. So raising interest rates will not lead wage-earners to borrow less to buy consumer goods. The main price effect of less bank credit and higher interest rates is on asset prices – deterring borrowing to buy homes, and arbitragers and corporate raiders from buying stocks and bonds. So the main price effect of less bank credit and higher interest rates is to reduce stock and bond prices and demand for home mortgages.
Rolling Back Middle-Class Home Ownership
The most immediate effect of the Federal Reserve’s credit tightening will be to reduce America’s home-ownership rate. This rate has been falling since 2008, from nearly 68 percent to just 61 percent today. The decline got underway with President Obama’s eviction of nearly ten million victims of junk mortgages, mainly black and Hispanic debtors. That was the Democratic Party’s alternative to writing down fraudulent mortgage loans to realistic market prices, and reducing their carrying charges to bring them in line with market rental values. The indebted victims of this massive bank fraud were made to suffer, so that Obama’s Wall Street sponsors could keep their predatory gains and indeed, receive massive bailouts. The costs of their fraud fell on bank customers, not on the banks and their stockholders and bondholders.
The effect of discouraging new home buyers by raising interest rates is to lower home ownership – the badge of being middle-class. The Fed’s policy of raising interest rates will greatly increase the interest charges that prospective new home buyers will have to pay, pricing the carrying charge out of reach for many families. The United States is turning into a landlord economy.
As the United States has become more debt-ridden, more than 50 percent of the value of U.S. real estate already is held by mortgage bankers. That means that homeowners are left with only a minority share in the value of their homes; most is owed to their banks. The remaining homeowners’ equity – what they own net of their mortgage debt – has fallen even faster than home ownership rates have declined.
Real estate is being transferred from “poor” hands to those of wealthy landlord corporations. Private capital companies – the funds of the One Percent – are going to pick up the pieces from the coming wave of foreclosures to turn homes into rental properties. Higher interest rates will not affect their cost of buying this housing, because they buy for all cash to make profits (actually, real estate rents) as landlords. Within another decade the nation’s home ownership rate may fall toward 50 percent (and homeowners’ equity even lower), turning the United States into a landlord economy instead of the promised middle-class home ownership economy.
The Coming Economic Austerity (Indeed, Debt-Burdened Depression)
While home ownership rates have plunged for the population at large, the Fed’s “Quantitative Easing” has increased its subsidy of Wall Street’s financial securities from $800 billion to $9 trillion – of which the largest gain has been in packaged home mortgages. This has kept housing prices from falling and becoming more affordable for home buyers. But the Fed’s support of asset prices has saved many insolvent banks – the very largest ones – from going under. Sheila Bair of the FDIC singled out Citigroup, along with Countrywide, Bank of America and the other usual suspects. The working population is not considered to be too big to fail. Its political weight is small by comparison to that of Wall Street banks and other FIRE-sector beneficiaries.
Lowering the discount rate to only about 0.1 percent enabled the banking system to make a bonanza of gains by making mortgage loans at around 3.50 percent. The banks kept credit-card rates high – and made even more money on penalty fees for late payment than they “earned” on interest charges (in the range of 18 percent). And despite the stock market’s plunge of over 20 percent from nearly 36,000 to under 30,000 on June 17, America’s wealthiest One Percent, and indeed the top 10 Percent, have vastly increased their wealth in stocks, while the bond market has had the largest boom in history. But most Americans have not benefitted from this runup in asset prices, because most stocks and bonds are owned by only the wealthiest layer of the population. The Fed is all in favor of asset-price inflation. But For most American families, corporations and government at all levels, the financial boom since 2008 has entailed a growing debt burden. Many families face insolvency as Federal Reserve policy aims to create unemployment. Now that the Covid moratorium on the evictions of renters behind in their payments is expiring, the ranks of the homeless are rising.
The Biden Administration is trying to blame today’s inflation and related distortions on Putin, even using the term “Putin inflation.” The mainstream media follow suit in not explaining to their audience that Western sanctions blocking Russian energy and food exports will cause a food and energy crisis for many countries this summer and autumn. And indeed, beyond: Biden’s military and State Department officers warn that the fight against Russia is just the first step in their war against China’s non-neoliberal economy, and may last twenty years.
That portends a long depression. But as Madeline Albright would say, they think that the price is “worth it.” As seen by the Biden regime, the New Cold War is a fight between the “democratic” United States, with its privatized economic planning in the hands of the financial class, and “autocratic” China and Russia, where banking and money creation are treated as a public utility to finance tangible economic growth instead of serving the financialization of the economy.
There is no evidence that America’s neoliberal-neoconservative New Cold War can restore the nation’s former industrial and related economic power. The economy cannot recover as long as today’s debt overhead is left in place. Debt service, housing costs, privatized medical care, student debt and a decaying infrastructure have made the U.S. economy uncompetitive. There is no way to restore its economic viability without fundamental changes in economic policy. But there is little “reality economics” at hand to provide an alternative to the class war inherent in neoliberalism’s belief that the economy and living standards can prosper by purely financial means, by debt leveraging and corporate monopoly rent extraction while the United States has made its domestic manufacturing uncompetitive – seemingly irreversibly. To reduce their labor costs, U.S. corporations moved manufacturing offshore, thereby depriving the American work force of high value-added, high productivity jobs.
The Rentier Class Has Sought to Make America’s Neoliberal Privatization and Financialization Irreversible
It has succeeded to such a degree that there is no party or economic constituency promoting the policies needed for an industrial recovery. Yet the Democratic Party leadership, subjecting the economy to an IMF-style austerity plan, will make this November’s midterm elections unique. For the past half century, the Fed’s role has been to provide easy money for the economy, to give the ruling party at least the illusion of trickle-down prosperity to deter voters from electing the opposition party. But this time the Biden Administration is running on a program of financial austerity.
The Party’s identity politics address almost every identity except that of wage-earners and debtors. Advocating lower wages, more expensive financial charges for home mortgages and credit-card loans, and broken promises for student-debt writedowns does not look like a platform that can attract many voters, especially as the administration pours money into Ukraine. Republicans such as Tucker Carlson are appealing to the “deplorables” majority that the Democrats have left behind.
Addendum: Yves Smith of Naked Capitalism reminds me that: “Paul Volcker made it explicit that the Fed is in the business of crushing labor. As reported by William Greider in Secrets of the Temple, when Volcker was driving interest rates to the moon, he kept a note card in his pocket. It was a record of weekly average construction wages. Volcker wanted them to go down as proof his harsh medicine was working.”
M.K. Bhadrakumar, “West at inflection point in Ukraine war,” Indian Punchline, June 19, 2022
“Fundamentally, the Western economies are facing a systemic crisis. The complacency that the reserve-currency-based US economy is impervious to ballooning debt; that the petrodollar system compels the entire world to purchase dollars to finance their needs; that the flood of cheap Chinese consumer goods and cheap energy from Russia and Gulf States would keep inflation at bay; that interest rate hikes will cure structural inflation; and, above all, that the consequences of taking a trade-war hammer to a complex network system in the world economy can be managed — these notions stand exposed.”
– The costs of their fraud fell on bank customers, not on the banks and their stockholders and bondholders.
Pre-2008 crash selling mortgages was pushed by bank, to such extent 0% equity was required to buy a home.
In US the bank will take over the house when client default on mortgage. Then case is close. The rules favor the borrowers.
The sub-prime mortgages were then securitized into bonds (with excellent rating – with expected return much higher than US treasuries). These securitized bonds were then sold to gullible Europeans by Wall Street. In the end foreign buyers lost $trillion.
In my place municipality invested half their savings into these high paying bonds, and lost 90% of their money. Municipality was then put under governmental administration.
In Hudson’s world it was the single Black mothers who lost money … those who had nothing to lose in the first place.
The securitized mortgages – packed as bonds – were issued by Wall Street companies.
But the capital stream – the mortgages in botton – were junk loans.
These Wall Street companies became liable for their bonds. They COULD NOT pay coupon rate.
“So what you are telling me is that the music is about to stop and we are going to be left holding the biggest bag of oderous excrement ever assembled in the history of capitalism.” – Margin Call, 2011
The presence of a two positive feedback loops is the worst part:
The more rent extracted, the more it feeds the extraction machine to extract even more.
Meanwhile, less and less credit is available for the real physical economy and worse still, for innovations and improvements to the real physical economy.
Unchecked, this is the recipe for a dark-age in the west.
– Unchecked, this is the recipe for a dark-age in the west.
In UK mortgage rates are 2.6%. In Russia 11.0-18.0%.
So you have to replace “West” with “East”. East is running austerity and gold backed currency. West is running fiat money and liberal money printing.
When inflation is 9% in US, and mortgage rate is 3% or 5%, then clients are subsidized. Dr. Hudson will rather term that “exploited”.
This subsidizing everything (negative interest rates) cannot last forever.
The mortgage rate in the UK is 2.6 % for 2 year 60% maximum loan to value loans, maximum 5,000,000 Lbs sterling..these are Loans are for FIRE sector investors…Rentiers, not for the masses. What good is such a loan to the unemployed ? The rentier class are subsidizing themselves as usual, and as usual complaining that the workers are stealing their money through the same government policies by which the rentier class is looting society. The prime rate for prime consumer mortgages n Britain is about 4% but again, the 10′,s of millions of unemployed and precariously employed cant afford loans and wouldn’t be offered the prime rate anyway.
– the average rate for the 15-year fixed-rate mortgage is 4.785%,
– the average rate for the 15-year fixed-rate mortgage is 3.87%,
– 10 year fixed mortgage 2.85%
Correction. No country in the world has a Gold backed currency.
Western Banks create mortgages out of thin air. They are offsetting asset/liability journal entries. Lower interest rates triggered higher nominal prices which means the banks were making the same amount on a 3.5% mortgage as they previously made on a 5% mortgage.
What appears to be happening during this tightening cycle is that the price of everything else will catch up to stocks and real estate. We still have a long way to go.
– What appears to be happening during this tightening cycle
If I have a house/mortgage at $200,000, and house price goes down by 20%, then my net value is $40,000 less. :((((((((((
If I have Google stocks worth $10,000, and Google falls by 50%, then I lose $5,000.
“tightening cycle” = hell
“Correction. No country in the world has a Gold backed currency.”
On March 25, 2022 the Bank Of Russia fixed the price of gold to it’s ruble at 5,000 rubles per gram.
All BRICS members are gold backed.
No currency is gold backed these days.
What Putin proposed after Russia’s dollar reserves were seized by western banks, was to insist any future exports from Russia would have to be purchased with either rubles or gold, valued at 5,000 rubles per gram.
Whatever the industry, be it the Military Industrial Complex, Medical industrial Complex, The Housing, Rent or Banking Complex, one thing is for sure. The greater the size of the industry, the more favor they will have with Congress and lawmaking.
When government is for sale, the end result if left unchecked, will be monopiles in every sector of the economy.
Why buy US bonds that are backed by the government when you can buy rental housing and have the same Federal government pay your tenants rent? If rental housing under Build Back Better provides the better return, the money will flock to rental housing.
“subjecting the economy to an IMF-style austerity plan, will make this November’s midterm elections unique…”
Meh. Just see 2020 election. Votes from graves, ballots re-run over & over, midnight shutdowns to “fix” the #s, algorithm adjustments, votes switched, 2000 mules.
The fix is in. Of course, best to vote just in case God steps in. But don’t get hopes up. Better a pleasant surprise than more dashed hopes.
What you have stated is true. In addition, this is one of the best written and explained articles on the subject I have read.
So Bridgewater is shorting European stocks, interesting. Government gets Europe to commit suicide in sanctions against Russia and then Wall Street moves in for the kill. With Allies like this who needs enemy’s.
And Bill Gates is shorting Microsoft
Individuals who desire to purchase new or existing residential or commercial property in the domestic real estate market need primary mortgages provided by financial lenders. Mortgages are monetary loans sold by financial lenders based upon various repayment terms constructed under government approved amortization schedules.
In order for capitalism to thrive in our economy, businesses must have a profit motive and moneylenders are no different. The profit of mortgagees such as banks is derived from usury commonly known as interest and paid to them based upon the rate of interest charged on the principal borrowed by the mortgagor.
When Americans apply for a mortgage loan they borrow a principal amount, not the interest charged by the lender. This means they have to have sufficient sources of income to pay the lender’s profit of interest as well as to repay the amount borrowed. This is a normal occurrence since the national economy is based upon the creation of debt, as money comes into existence through lender loans.
Lenders are allowed at least four advantages in this particular commercial endeavor. First, they are permitted to charge higher interest rates commensurate with risk, such as length of the loan term and creditworthiness of the borrower. Second, to protect the lender’s investment the title of the real property becomes collateral for the loan should the property owner default. Third, the lender can require payment of a monthly PMI (Private Mortgage Insurance) premium based upon the property’s high LTV (Loan to Value) ratio or the borrower’s minimal down payment. This cost is in addition to the monthly mortgage payment. These three benefits are deserved since money is a liquid, financial asset and medium of exchange that cannot easily be recovered outside judicial courts of law. Fourth, lenders further add to their profits by aggregating mortgages and selling them in the secondary mortgage markets.
From my perspective the most egregious benefit the lender is granted is the right to claim an unequal apportionment of interest payment in the early years of the loan rather than an equal payment of interest for the entire loan term. Effectively the lender is allowed to “front load” the interest charged each month. I find this provision most onerous because it denies the property owner a reasonable split between principal repayment and the interest entitled to the lender.
For example, assume $100,000.00 is borrowed for 30 years (360 months) at an annual fixed interest rate of 6.00 percent. The total interest paid is $115,838.19. The interest due each month is recalculated which results in a greater apportionment of the property owner’s monthly payment applied towards the lender’s profit not the principal borrowed, for the majority of the loan term under the current amortization formula used to calculate monthly principal and interest.
It can be readily seen how lenders enrich themselves using their clever scheme from the very first monthly payment of $599.55 where $500.00 of that amount goes towards the profit of interest, leaving the property owner with just $99.55 of principal in equity. Does that seem fair to you? It doesn’t to me.
After 5 years (60th month of repayment), the total interest received by the lender is $29,027.39, more than 4 times the property owner’s equity. After 15 years (180th month of repayment), the total interest received by the lender is $78,967.94, still more than 2.5 times the property owner’s equity.
I find this fact to be an excessive and unwarranted profit for lenders and I propose a change that is equitable for hardworking American property owners who are struggling to financially survive where the purchasing power of the currency continues to shrink in value.
POFA (Property Owners Fair Amortization) Act
A legislative proposal for American citizens and American owned businesses to disallow the front-loading of monthly mortgage interest assessed by financial lenders and equalize the repayment of principal and the payment of interest due for each loan payment.
Using the revised amortization formula, divide the total interest charged for the term of the loan by the periodic payment schedule of the loan. That becomes the monthly interest payment and is subtracted from the monthly mortgage payment, which results in the principal repayment amount or property owner’s equity. Each monthly payment of principal and interest becomes equal to all other months of payment.
Example: a $100,000 for 30 years (360 months) is borrowed at an annual fixed interest rate of 6.00 percent for which the mortgage payment for each month is $599.55. The total interest due the lender is $115,838.19. By dividing that amount by 360 months, we obtain a monthly interest payment of $321.77. The interest is subtracted from the monthly payment of $599.55 and the remaining amount of $277.78 is applied as principal or equity each month.
After 5 years (60th month of repayment), the property owner’s equity is $16,666.67 as compared to the current calculation where the equity is only $6,945.64, a difference of $9.721.03.
After 15 years (180th month of repayment), the property owner’s equity is $50,000 as compared to the current calculation where the equity is $28,951.16, a difference of $21,048.84.
How does this help the property owner? First, it is a just and proportionate approach to paying down a mortgage where each month the lender receives the same interest due and the property owner repays the same principal due. Effectively it becomes “debt repayment in equilibrium.” Second, this plan allows equity to build faster which can be critical should the property owner find it necessary to borrow against principal through an equity loan. The federal tax implications for itemized deductions come into play since not as much interest can be deducted. Then again, property owners would not have paid as much interest either.
Real estate ownership is the bedrock of the national economy. As a capital asset it is a tangible investment that builds wealth, long term. It is more important than the financial investment markets where short-term wealth accumulation is always at the risk of political decisions that cause interest rates to fluctuate and destabilize the cost of money lent into the economy.
By pursing this suggestion to fruition, the real estate market for residential and commercial sales will become a beacon of enthusiasm to purchase real property since its market value will be perceived as a new way to increase borrower potential and stabilize market values.
This proposal insulates and protects the real property owner’s equity growth regardless if the interest rate charged by a lender increases or decreases. This holds true for each month of a mortgage loan as long as the amount borrowed and the loan term is the same across the different interest rates assessed by a lender.
Lenders have been amply compensated for: (1) the additional risk of a longer term loan by charging a higher interest rate, (2) granted the right to attach real property as collateral, (3) allowed to charge a monthly PMI premium, (4) permitted to sell mortgage loans in the secondary financial markets. However in my opinion they should not be given the right to front-load the monthly interest charged since it is disproportionate to the principal amount paid each month.
Under this proposal if the property owner repays the amount borrowed over the full term of the loan, the lender will continue to enjoy the entire profit of interest as is currently done today. The lender’s loss of the front-loaded profit of interest will be compensated when property owners apply for new loans or to refinance existing mortgages to take advantage of the accelerated equity growth.
– Example: a $100,000 for 30 years (360 months) is borrowed at an annual fixed interest rate of 6.00 percent for which the mortgage payment for each month is $599.55. The total interest due the lender is $115,838.19. By dividing that amount by 360 months, we obtain a monthly interest payment of $321.77. The interest is subtracted from the monthly payment of $599.55 and the remaining amount of $277.78 is applied as principal or equity each month.
Monthly payment is constant = 599.00
1st year that will be 5966.00 as interest, and 1228.00 as downpayment.
Last year that will be 228.00 as interest and 6966.00 as downpayment
I’m not sure how you arrived at a monthly mortgage payment of $599.00 for a $100,000 USD principal borrowed at 6.00 percent for 30 years.
Here is a standard amortization calculator and the monthly payment is $599.55.
See: https://www.calculator.net/amortization-calculator.html?cloanamount=100000&cloanterm=30&cinterestrate=6&printit=0&x=59&y=17 .
I’m confused as to what you meant by “down payment”, which is not a factor in my idea.
My proposal is to change the way monthly interest is calculated relative to the term of the loan so the mortgagor pays the same amount each month in profit of interest and repayment of principal thereby accruing equity in the real property faster than is allowed today.
Your link show my numbers. “Principal” column shows downpayment of Principal
The link displays the required monthly payment of $599.55, not $599.00. The reduction of the principal is referred to as “pay down” not “down payment”.
The calculator I included is the standard amortization table, which is how mortgages are figured today. What I proposed is to divide the total interest due for the life of the loan by the number of months in the term, which in my example is 360 (30 years) to arrive at a monthly interest payment that is the same every month. The difference between that and the $599.55 monthly mortgage payment is the principal accured every month, which builds equity faster than the amortization formula used today.
If you don’t understand, carefully reread my original post: it’s not that difficult.
-The link displays the required monthly payment of $599.55, not $599.00.
My own calculator returned: $599.5508333333333 per month
You are fogetting the $0.0008333333333
– My proposal is to change the way monthly interest is calculated relative to the term of the loan so the mortgagor pays the same amount each month in profit of interest and repayment of principal thereby accruing equity in the real property faster than is allowed today.
The calculator you used is already answering what payment will be each month.
It is The Same Amount every time.
If you change that it will be a variable amount (?)
Okay, let’s take this one step at a time.
1. The monthly mortgage payment on $100,000 borrowed at 6.00 percent fixed for 30 years (360 months) is $599.55 for every month of the term of the loan.
2. Under the current amortization schedule, the lender receives the majority of the mortgage payment as interest with a much lesser amount of principal payed down (see amortization schedule provided earlier).
3. My proposal splits the $599.55 such that the same amount of principal is repayed and the same amount of interest is received by the lender each month. Example: $277.78 goes towards the principal borrowed and $321.77 goes towards the profit in interest.
This allows the mortgagor to build equity faster than what is provided for under the current amortization schedule calculation. My original post provides a more detailed explanation.
I hope this clarifies what my idea offers any one who is seeking a loan to purchase residential or commercial property.
The calculation of $599.55 is the solution for
1. Same amount of payment for 30 years
2. The interest being paid is exactly = running interest
90% of the principle is profit, too (assuming fractional reserve requirement set at 10%), because $90,000 of that $100,000 was just created by making a ledger entry, and never physically existed before the loan was made.
Welcome to counterfeiting without making phony dollar bills.
– This means they have to have sufficient sources of income to pay the lender’s profit of interest as well as to repay the amount borrowed.
As long as the bank has the colleteral in their name, the bank only need the interest payment. What else is not important.
You’re confused; the principal borrowed (i.e., $100,000 USD) has to be repaid by the mortgagor. The interest paid is profit due the lender for the loan.
The real property is attached as collateral in the event the lender has to foreclose on the loan due to nonpayment and recover the principal owed through a real estate sale.
– the principal borrowed (i.e., $100,000 USD) has to be repaid by the mortgagor.
The bank got what it needed by the mortgage signature. There is no time limit on that signature. If lender just dies property goes to the bank.
Assuming already 30% downpaided bank is more than happy
When a person or business borrows money (i.e., loan principal) from a lender to purchase real property, it has to be paid back, usually on a amortization (month-to-month).payment schedule. Banks are in the business of making loans and that is now they make money on the interest charged against the loan.
The mortgagor has to make the monthly payment of principal and interest for as many months described in the term of the loan or the loan can be paid off early but may incur an early payoff penalty. If the monthly payment is not made then the lender can foreclose on the property assuming there was no one that co-signed the loan.
When a mortgagor dies before the loan is paid off the executor of the estate will either sell the home to pay off the mortgage or a named beneficiary may choose to take on the responsibility to continue paying the mortgage due the lender.
90% of the principle is profit, too (assuming fractional reserve requirement set at 10%), because $90,000 of that $100,000 was just created by making a ledger entry, and never physically existed before the loan was made.
Welcome to counterfeiting without making phony dollar bills.
The profit is the interest payments.
But of course the profit will be ROI on some capital the bank does not have, or 95% something the bank does now have.
Deutsche Bank operated at “30” leverage I remember
Total equity $78.3 billion
Net income $17.3 billion
ROI = 21%
While pension funds in West are glad to manage 2%, even 0%
When a bank charges 12-20% interest on credit card debt we understand they are greedy.
Sberbank (all banks) are more greedy than that
Sberbank is a RCB bank, a “People’s bank” to use those terms
As always the bigger point is entirely missed. The bank’s profit is not only the interest. The whole repayment including the interest is “profit”, because the capital that is “lent” did not exist before the loan was created. I challenge anyone to go therough a publicly owned commercial banks books and find any evidence that correlates deposits received with loans written. The banks “lend” money into existence, and then charge interest on it. The onlt requirement placed upon the banks is that they hold a small percentage of the value of their loan book as “reserves” to cover themselves if their depositors ever come asking for their money. In NZ and Australia the governments created laws requiring that wages could be direct deposited into bank accounts which greatly aided that provision of reserves, without the need to pay much in the way of interest on those often short term deposits.
Clearly there are more than a few people reading this that need to go away and learn a bit about how fractional reserve banking works.
When a mortgage is fully repaid the mortgage document is terminated and principal removed from balance sheet. In case of a huge loan: Balance sheet of local bank may be $100 mill less in one day. Local newspaper will understand nothing.
“Fractional reserve banking” as fomulated in Wikipedia is not real. It is for public consumption, and repeated by journalists.
“Real estate is being transferred from “poor” hands to those of wealthy landlord corporations. Private capital companies – the funds of the One Percent – are going to pick up the pieces from the coming wave of foreclosures to turn homes into rental properties.”
this is exactly what’s happening in canada so i assume it’s in full swing throughout the states. in vancouver you see lines around the block for a dank basement unit. i personally live in a collection of town houses; when i first moved into one there were several for rent out of the dozens that make up the complex. pretty much all of them – including the one i moved out of – have been sold by the owners to cash in on the insane housing bubble.
some speculators aren’t even in the country. the french whore people call the “PM” claimed he would stop that but real estate attracts some of the whiniest bitches in the FIRE sector and i’m guessing their diaper filling tantrums shut that down. money that easy tends to appeal to the lowest forms of capitalist “life”.
just a “US adjacent” take on it. this stuff always makes me think of my favorite joke:
“you’re in a room with hitler, stalin and ayn rand. you’re handed a gun that only has 2 bullets. what do you do? shoot rand twice.”
– in vancouver you see lines around the block
Housing prices Canada
It is the result of the influx of Chinese millionaires.
– the french whore people call the “PM”
He is one of yours, a left liberal Castro son
‘Full Employment’, lol.
Close AMAZON, problem solved.
Yes, the wages are too high at the working class level. The Boards of Directors (Bankcorp) and Shareholders( Pelosi & Co) are unhappy with their remuneration packages and dividends.
Totally disagree. Russia raised rates to +20% and crushed inflation. The US has to go back to a sound dollar, that is the best for workers. If you want full employment, abandon globalism and use tariffs to protect jobs.
How to create full employment,:
– Subsistence agriculture occurs when farmers grow food crops to meet the needs of themselves and their families on smallholdings. Subsistence agriculturalists target farm output for survival and for mostly local requirements, with little or no surplus. Planting decisions occur principally with an eye toward what the family will need during the coming year, and only secondarily toward market prices. Tony Waters, a professor of sociology, defines “subsistence peasants” as “people who grow what they eat, build their own houses, and live without regularly making purchases in the marketplace.”: 2
What is highly likely is that the high interest rate was in place to avoid capital flight. Russia didn’t want money leaving the country owing to the perceived risk that went with the military going into the Ukraine. The reason Russia has not had inflation is that the local cost of producing things has not gone up, plus as the ruble has sustained value, imported goods have not gone up in price either. Early on the high interest rate supported the value of the ruble by avoiding capital flight, money leaving the country. Now that things have stabilized for Russia politically, I suppose there is still some risk premium on the ruble, but not so much, so the interest rate does not have to be all that much higher then the super low interest rate here in the West.
And I predict that no matter how much they raise interest rates in Europe, a transitory inflation is baked in the cake. Their trade sanctions against Russia have raised the cost of Russia’s export items for which their is no ready substitute. Thus higher prices for consumers for energy and a few other things, plus higher cost for domestic producers. Thus higher prices.
USDRUB used to be 30.00, now it is 54.00.
Basically it does not matter what USDRUB is, except for the price Russians have to pay for imports and vacations in Egypt. The price of a Toyota will follow USDRUB rate.
– The reason Russia has not had inflation is that
Assuming inflation is 15% in Sweden, and 5% in Russia, real interest rate (mortgage) will be
Sweden: 1.44% – 15% = -13.56%
Russia: 11% – 5% = 9%
A difference of -13.56% -9% = -22.56%
A that competetive advantages everything in Russia will be owned by Swedish companies?
Without US global leadership the planet will collapse, as the world outside America cant handle their own affairs without a tough hand as the only thing people outside US understand, is force. Everybody knows that!
Sometimes Michael Hudson makes me so mad. Paul Volcker is merely an outlier on Fed action throughout the post WWII period. Restricting wages or working class prosperity by interest rate contraction has always been the policy of choice for curbing inflation.
The neoliberal and Green policies have undermined domestic production in the US ever since the 1970’s. What once was a growing economy afflicted by Fed cyclical policies is now a declining economy afflicted with Fed cyclical policies.
The real fear of the universal masters under current conditions is rebellion and revolution as a declining economy plus the downside of the Fed cycle creates a big down move in economic activity causing intolerable stress. Still their fears may be minimal. The working class has always been a despair to any, including socialists, who may wish for unending, accelerating growth. These fools at the bottom of the economic pyramid just don’t rebel.
Nobody ever went broke by overestimating the stupidity of the general population. This fact requires that even opponents of the regime should this time back the crushing of the working class to the point of oblivion as quickly as possible. It is time to find out if these fools will ever rebel. Think of it as a judo move in which one uses the intentions of the opponent towards his downfall.
These people may be victims but they are in their victimhood making the continuation of the current order possible. They are as much the enemy as their masters until they change their behavior. if they do not learn this time we definitely need an economy without a working class.
“…definitely need an economy without a working class”
I am reminded of a political cartoon of robots playing a symphony before an audience consisting only of robots.
Exactly, but with one obvious omission.
Supply chains were disrputed before covid by the trade war with China.
Dr. Hudson’s books should be taught in schools but they won’t be. All Western economics departments teach a Hayek/Friedman false theoretical version of economics. Wanna Nobel, don’t question. The world is about to go into transition and All the dirty tricks and wars of the west can’t stop it. Russia is divorcing the west and China won’t be far behind followed by the global south. 400 years of Western colonialism and financial imperialism is coming to the end. China is building a thousand school’s in Iraq; how much more do you need to prove how evil our ruling classes are?
– The economy cannot recover as long as today’s debt overhead is left in place. Debt service, housing costs, privatized medical care, student debt and a decaying infrastructure have made the U.S. economy uncompetitive.
-China’s overall debt was 270.1 per cent of gross domestic product at the end of 2020, up from 246.5 per cent at the end of 2019
(US external debt was 102% of GDP. Private debt excluded)
According to Dr. Hudson China will not be able to compete in the world because of it’s record level of debt.
Not true. What make business thrive is easy access to money, not austerity.
China has no external debt either to foreign banks or foreign corporations, since its domestic currency the yuan is created by its government owned central bank. Any money owed is to itself, that can be written off with impunity. This is how they power their economy by putting people to work in industry and infrastructure building, and medical care.
The US and EU are both burdened with debt to private banks and the rentier class that renders its industry non competitive with high rates of unemployment. The US Bureau of Labor Statistics falsifies the numbers by categorizing the long term unemployed as “not in the Labor Force”.
Civilian Labor Force 164,157,000
Not in Labor Force 99,521,000
30.4 trillion [source “The World Factbook”. ]
13 trillion [ source “Netherlands: National debt”. Retrieved 2022-04-19.]
9.02 trillion [soruce “Office for National Statistics”]
Why will a Russian go to a foreign bank in EU and borrow €1 mill at 3% interest, when Sberbank can offer €1 mill at 20% (in Ruble)?
A simple reason why there is debt in foreign currencies
China has no external debt. It is the largest creditor nation in the world.
As I stated before, all its debts are internal, that can be written off if necessary.
– China has no external debt.
Give us a source.
Mortgage rates has been 4% in US for many years, while 6% in China.
That tells us it us it has been cheaper to lend money in US.
China is big on real estate in US.
According to the Chinese government stats the “external debt” was $2.75 trillion in 2021.
Young Chinese medical doctors and engineers who come to the US on H1B visas seem able to purchase million dollar homes upon arrival without borrowing from banks. The cash arrives pronto from offshore, and this comes about from kickbacks by US importers to Chinese suppliers of consumer durables into tax haven banks, that have not been taxed either by the US or China. These dollars can only be spent in the US, since they are not legal tender anywhere else.
I assume private wealth among Chinese millionaires / Chinese dynasties is gigantic. Both CPP and SEC/IRS would love to catch those values. To accumulate wealth is Chinese culture.
Being an American means not wanted anywhere by international banks, as they have to file tons of reports upon everything for Americans.
We have learned what happened to Greece and Portugal 2010-2012 because of austerity
They doubled Value Added Tax to 25%, from 10-12%.
It was a tragedy – worse than COVID-19.
For NATO to take down Russia they should propose to Putin
1. Increase interest rates to fight inflation
2. Double Value-Added-Tax, and tell there will be a special coffee-tax for cafes
3. Make Ruble=Gold, and tell farmers if they don’t have enought of these Gold-Rubels they will be declared defaulting
4. Promote people should spend less, and walk to job
And it will all be for naught.
China is not playing this game. They, as a civilisation are laser-focusef on capital creation – be it human, infrastructure, or housing.
40 years ago, no competition in sight, the US could still ignore the world out there which was still far behind. Today it is the US who will be left behind.
Nothing to cheer. Is is sad how it is to be.
Yes. China would have delt with the Wailing Wall Street crowd quite differently, from the top down…They would have all been scrambling to the swindler’s nation state of no extradition, or left in a ditch after full restitution of funds…Instead of fat fourth quarter bonuses…
The 1973 oil embargo was due to U.S. Nixon/Kisinger white house, providing Israel satellite intel for their losing battle in the sand…Ramadan War pissed off the supply chain Arabs…America’s special relationship, Cough, Cough…
– 40 years ago, no competition in sight,
1973: Oil shock led Americans to look for more energy-efficient cars abroad
1980: Japan becomes the world leading auto producer
Japan was on a leash then. They were part of the same system.
China is not.
With Europe and Russian natural resources combined with the US capital, the West stood a chance vis-a-vis the Chinese world. All they needed to do is put down their Hubris a bit and respect Russia.
What happened was the rulers decided to move industry to Asia. US cars should be of low quality to make sure Americans would not buy them
One GM worker told (I remember): – You can hear something is wrong just by the sound of shutting the door on our GM cars
First rule of intelligence analysis: Never look for conspiracy when hubris and incompetence will do.
The US car makers simply cut corners as they were over-confident. What you describe the common worker saw the folks on the top – who rode in Caddilacs with chaufeurs – never saw. They just saw their bonuses increases year by year as the profits came.
Either way, Japan /and Korea later/ were part of the “US system” as occupied countries. The same as Germany. So their prosperity was never a threat – there were levers in place to “extract” any surplus value they would produce back to the US.
No such lever is in place with the Chinese. They play their own game and are big-enough to be able to outcompete the west by simple economy of scale. I.e. the same weapon US used to rely on against others over the last century or so.
– Closed meeting 1969 retold by a participant to public domain
“The New Order Of Barbarians – 1969 Dr. Richard Day .”
– In order to create a new [global] structure you first have to tear down the old. American industry is one example of that
– Our system [U.S.] will have to be curtailed in order to give other countries a chance to build their industry
– Heavy industry [in U.S.] will be cut back. Japanese products will be better. Things will be made [in U.S.] to fall apart
OOOUCH A planned destruction of U.S. formulated 40 years ago!
Oh, I do not dispute there were such ideas.
There are a lots of ideas out there. If you were to believe in some of the garbage EuroTrash in the EP produces you would think the EU must have gone bankrupt a couple decaded ago. Yet it is still there – because saner minds either prevailed or found a sensible compromise eventualy.
What I dispute is that such ideas were the /major/ *cause* of the changes. Nowhere close to that.
The caused the shift was the widespread abolition if tariffs combined with the hubris of a lot of US industry managers.
Yes, they made the same-old-same-old. But not because they *wanted* to go bankrupt. They simply did not know better and by the time they woke up it was too late.
No, that’s the first rule of gullibility and stupidity.
Quit trying to avoid the obvious evidence of deliberate sabotage of our nation, our economy our culture.
A stupid person would occasionally make the right decision.
It is about the salary of the poor, the fortunes of the rich are untouchable because it would be socialism.
It is socialism – but only for the rich. It’s austerity for everyone else.
Time and again the banksters get bailed out, the rich get richer, and the people get fucked.
“The Federal Reserve Board’s ostensible policy aim is to manage the money supply and bank credit in a way that maintains price stability. That usually means fighting inflation, which is blamed entirely on “too much employment,” euphemized as “too much money.” In Congress’s more progressive days, the Fed was charged with a second objective: to promote full employment.”
There is a lot of delusion among economists. A lot of it is wrapped up in these 3 sentences.
The FRB, or any other central bank, has no business pursuing price stability. Price stability would only naturally occur when you have a static economy that is in perfect equilibrium – which precludes progress. The pursuit of price stability is intrinsically at odds with the function of pricing – which is to provide guidance for spending of capital. Manipulating the money supply and bank credit does not create capital and only make it more difficult to properly allocate what capital exists efficiently.
The same is true with regard to targeting full employment. Stating full employment as a policy objective is misguided. When there is unemployment (Setting aside the portion of people who simply cannot, or will not, work) it means that the economy is either insufficiently productive or the unemployed are insufficiently skilled. In the first case it is counterproductive to take capital that could make the economy productive enough to employ the unemployed. In the second case, putting idle people to work doing things that are not economical to do is wasting capital that could be spent on training and educating the unskilled.
In the end, the only thing a central bank can do is mask the economic signaling that would make for a better performing economy. Well, that and provide opportunities for the central bank parasites to skim off a great deal of wealth from decent people. They should all be abolished/
Luongo”s (Gold, Goats n Guns blog) take is that there is feud going on like between 3 Mafia clans – the USA Commercial Bankers, the European Davos club elites and the Democrats now aligned with the war mongering Neo-cons (post Trump). It’s no as much about inflation that the Fed is raising rates going into an economic slowdown. It’s about putting down the Davos elites and an end to their globalist schemes and showing the Democrats the Fed isn’t there to serve the party in power so they can line their pockets. If the Fed raising rates means more pain for the EU and the USA going into an election, what is there not to like? Putin has called it. Heads will roll as a consequence of the sanctions. The Fed is just adding more fuel to the fire. Bring it on. Let the heads roll.
The system was designed to fail because it was designed by the elite to keep hold of the levers of power by controlling the finace system.
Sooner or later the dumb worker will realize they are a self-financed slave.
This world would be a better place if thought was the primary aim of schools instead of the idiot savant system now in vogue.
Reducing wages to below livable levels will make the recruitment of the young and middle-aged into military service in the coming terminal conflict that will become necessary to keep a restless unemployed populace from rebellion.
On the bright side, it sounds like the Dems are embracing their own political suicide, which, after all, is their raisin d’etre.
“The entire blame for inflation is placed on wage earners…”
Yet the irony, at a fundamental level, is that wage earners actually are to blame for inflation. In aggregate, at a macro level, all currency costs are labor costs. One employer’s cost of inputs (raw materials, property, plant, energy, financing, equipment, etc.) is just another employer’s cost of labor.
The issue is how wages are distributed by public policy choices. Income in the present system of political economy has huge outliers at the right hand tail as a few connected insiders receive compensation far in excess of the value of their labor.
If wages reflected the task at hand, lots of millionaires and billionaires would have lots fewer currency units, and lots of wasted make-work wouldn’t happen, so inflation wouldn’t be an issue. Or if the income of the rich was taxed appropriately, that too would destroy inflation.
Bill Gates, for example, wasn’t made wealthy by aliens or something extrinsic to the international financial system. He was made wealthy by a global legal system that allowed him to claim compensation as an employee of Microsoft far beyond the value of his work product and then keep that compensation protected from taxation by authorities in the US or any other country (yes including lots of Zone B countries).
The Fed doesn’t care about either price stability or full employment. The debate between the two is essentially a circus for public consumption. Buffer stocks that anchor prices simply are irrelevant in the era of the BIS/Fed/ECB/BOE/JCB/PBOC/etc. The decisions are made in the political realm not the monetary plumbing. Over the past century, neither gold, nor silver, nor copper, nor a reserve army of the unemployed (Fed dual mandate) nor a reserve army of the employed (MMT argument for a job guarantee) have or can address inflation.
Inflation of the currency could easily be controlled by having the IRS delete a fraction back out of existence as necessary every year using a progressive federal income tax. This is what the banks do as the principal of loans are paid back, but they get to keep the interest.
“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”
Thomas Jefferson in the debate over the Re-charter of the Bank Bill (1809)
I think it’s wrong to blame the system (capitalism) which has delivered the wealth that it has.
Each party, the lender and the borrower take calculated risks, legally binding from the start.
The problems arise with corruption of the regulators, in particular with lawmakers.
The power to issue and determine both the quantity and use of money is in the hands of bank boards, representing the individual shareholders of the bank.
It is well known that a small number of families, who essentially invented modern banking, have become fantastically wealthy and dominate the shareholdings of the banks.
From their very roots, these people are supremacist, power mad, paranoid, control freaks manipulating the rise and fall of empires, let alone mortgage bonds and employment conditions.
Reserve banks are the invention of these people and whatever they were in the past, they now represent the interests of the banks. They do not print money. They are the frontrunners of bank policy.
Unfortunately, the same is true of government.
Frontrunners of bank policy.
All wars are bankers wars.
I think the best thing to do for the futures sake is to bring them out into the open, shine a light on them and tell them that we love them.
When a cabal of bankers headed up by Paul Warburg cooked up the Federal Reserve Act at a secret meeting on Jekyll Island in Georgia, President Wilson signed it into law that essentially privatized the US money supply, giving private banks the exclusive right to create the US money supply ex nihilo as interest bearing debt. i.e. no debts = no money
Despite warnings, Woodrow Wilson signed the 1913 Federal Reserve Act. A few years later he wrote:
“I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men.”
– It is well known that a small number of families
Banking is an open profession. All those who are now Gold and Silver dealers could have chosen to create a bank – a small bank as a start.
There are some requirement, as for most businesses. Once they have created a bank with equity, they can start creating debt. They don’t have to be Jewish to create a bank, and the bank does not have to be 100 years old.
But all Gold and Silver dealers are telling:
– I will have nothing to do with money that is not gold
Increasingly complex banking regulations imposed on their member banks by the federal reserve impose additional overhead, that is particularly onerous for smaller banks to contend with. Thus we have seen many of the smaller banks gobbled up by the major banks, that leads to less competition among them.
– Thus we have seen many of the smaller banks gobbled up by the major banks
Here we read https://en.wikipedia.org/wiki/Peter_Schiff#Investigation
“Schiff founded Euro Pacific Bank, a full reserve banking operation originally in St. Vincent and the Grenadines.”
The requirements for equity is much larger than starting a restaurant … otherwise it is straightforward.
Then the shares must not be possible to buy unless you want a bigger bank to bail you out.
Sberbank total revenue is $143,000 per employee, net revenue is $61,000 per employee
Always enlightening, and weirdly reassuring to me, Professor Hudson. Just knowing that you put facts to form makes me feel that I am less alone in knowing “something is dreadfully wrong here.”
My have they truly mucked things up in this country and the world. Cold and calculated evil. That’s all I’ve got.
In the Carter Administration (1777-80) …
Wow, that was a long time ago!
Bob Pollin seems to sing a similar tune but he also mentions the nationalization card, but he is pretty sure it won’t be played, and the oil and gas rentiers raising the rent, can be alleviated to some extent.
. . . . My position, which may be a bit controversial, is that I don’t think energy prices should come down. I think energy prices and fossil fuel energy prices need to stay high and maybe even go up higher. Why? Obviously, to discourage people from consuming oil, coal and natural gas because they are the major cause of climate change.
So what do we do when we also have to defend the well-being of the working class? Actually, there’s a pretty good proposal in Congress now, which is a windfall profit tax that would tax at least 50% of the profitability of the energy corporations, and private corporations and distribute that money back to people.
My own rough calculation, if you did that at current gasoline fossil fuel prices, it would be about $130 billion in revenue over the year. Then you could distribute that in equal shares to every single person in the country. To keep it simple, everybody gets $400—every single person. Say a family of four, therefore, gets $1,600. So it does a pretty good job of defending the living standard of working-class families. Ideally, we shouldn’t have the oil companies having pricing power at all, and we should therefore have the oil companies nationalized.
Yeah, that’s the proposal I like. If you nationalize fossil fuels, you could lower the cost of gasoline for ordinary people because it would be part of a plan to phase them out.