Brown Web of Debt The Shocking Truth about our Money System (3rd ed)

Chapter 29 - Breaking the Back of the Tin Man

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Web of Debt

Chapter 29

BREAKING THE BACK OF

THE TIN MAN:

DEBT SERFDOM FOR

AMERICAN WORKERS

“I worked harder than ever; but I little knew how cruel my enemy could be. She made my axe slip again, so that it cut right through my body.”

– The Wonderful Wizard of Oz,

“The Rescue of the Tin Woodman”

The mighty United States has been in the banking spider’s sights for more than two centuries. This ultimate prize too may finally have been captured in the spider’s web, choked in debt

spun out of thin air. The U.S. has now surpassed even Third World countries in its debt level. By 2004, the debt of the U.S. government had hit $7.6 trillion, more than three times that of all Third World countries combined. Like the bankrupt consumer who stays afloat by making the minimum payment on his credit card, the government has avoided bankruptcy by paying just the interest on its monster debt; but Comptroller General David M. Walker warns that by 2009 the country may not be able to afford even that mounting bill. When the government cannot service its debt, it will have to declare bankruptcy, and the economy will collapse.1

Al Martin is a retired naval intelligence officer, former contributor to the Presidential Council of Economic Advisors, and author of a weekly newsletter called “Behind the Scenes in the Beltway.” He observed in an April 2005 newsletter that the ratio of total U.S. debt to gross domestic product (GDP) rose from 78 percent in 2000 to 308 percent in April 2005. The International Monetary Fund considers a

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nation-state with a total debt-to-GDP ratio of 200 percent or more to be a “de-constructed Third World nation-state.” Martin wrote:

What “de-constructed” actually means is that a political regime in that country, or series of political regimes, have, through a long period of fraud, abuse, graft, corruption and mismanagement, effectively collapsed the economy of that country.2

Other commentators warn that the “shock therapy” tested in Third World countries is the next step planned for the United States. Editorialist Mike Whitney wrote in CounterPunch in April 2005:

[T]he towering national debt coupled with the staggering trade deficits have put the nation on a precipice and a seismic shift in the fortunes of middle-class Americans is looking more likely all the time. . . . The country has been intentionally plundered and will eventually wind up in the hands of its creditors . . . . This same Ponzi scheme has been carried out repeatedly by the IMF and World Bank throughout the world . . . . Bankruptcy is a fairly straight forward way of delivering valuable public assets and resources to collaborative industries, and of annihilating national sovereignty. After a nation is successfully driven to destitution, public policy decisions are made by creditors and not by representatives of the people. . . . The catastrophe that middle class Americans face is what these elites breezily refer to as “shock therapy”; a sudden jolt, followed by fundamental changes to the system. In the near future we can expect tax reform, fiscal discipline, deregulation, free capital flows, lowered tariffs, reduced public services, and privatization.3

Catherine Austin Fitts was formerly the managing director of a Wall Street investment bank and was Assistant Secretary of the Department of Housing and Urban Development (HUD) under President George Bush Sr. She calls what is happening to the economy “a criminal leveraged buyout of America,” something she defines as “buying a country for cheap with its own money and then jacking up the rents and fees to steal the rest.” She also calls it the “American Tapeworm” model:

[T]he American Tapeworm model is to simply finance the federal deficit through warfare, currency exports, Treasury and federal credit borrowing and cutbacks in domestic “discretionary” spending. . . . This will then place local municipalities and local

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Share of capital income earned by top 1% and bottom 80%, 1979-2003 (Shapiro & Friedman, 20064)

70%
60%															top 10%
50%
40%
30%
20%													bottom 80%
10%
0%
1979	1980	1981	1982	1983	1984	1985	1986	1987	1988	1989	1990	1991	1992	1993	1994	1995	1996	1997	1998	1999	2000	2001	2002	2003

leadership in a highly vulnerable position – one that will allow them to be persuaded with bogus but high-minded sounding arguments to further cut resources. Then, to “preserve bond ratings and the rights of creditors,” our leaders can be persuaded to sell our water, natural resources and infrastructure assets at significant discounts of their true value to global investors. . . .

This will all be described as a plan to “save America” by recapitalizing it on a sound financial footing. In fact, this process will simply shift more capital continuously from America to other continents and from the lower and middle classes to elites.5

The Destruction of the Great American Middle Class

In 1894, Jacob Coxey warned of the destruction of the great American middle class. That prediction is rapidly materializing, as the gap between rich and poor grows ever wider. The Federal Reserve reported in 2004 that:

• The wealthiest 1 percent of Americans held 33.4 percent of the nation’s wealth, up from 30.1 percent in 1989; while the top 5 percent held 55.5 percent of the wealth.

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•The poorest 50 percent of the population held only 2.5 percent of the wealth, down from 3.0 percent in 1989.

•The very wealthiest 1 percent of Americans owned a bigger piece of the pie (33.4 percent) than the poorest 90 percent (30.4 percent of the pie). They also owned 62.3 percent of the nation’s business assets.

•The wealthiest 5 percent owned 93.7 percent of the value of bonds,

71.7percent of nonresidential real estate, and 79.1 percent of the nation’s stocks.6

Forbes Magazine reported that from 1997 to 1999, the wealth of the 400 richest Americans grew by an average of $940 million each, for a daily increase of $1.3 million per person.7 Note that lists of this sort do not include the world’s truly richest families, including the Rothschilds, the Warburgs, and a long list of royal families. Whether they consider it to be in bad taste or because they fear retribution from the bottom of the wealth pyramid, the super-elite do not make their fortunes public.

Debt Peonage: Eroding the Protection of the Bankruptcy Laws

While the super-rich are amassing fortunes rivaling the economies of small countries, Americans in the lower brackets are struggling with food and medical bills. Personal bankruptcy filings more than doubled from 1995 to 2005. In 2004, more than 1.1 million consumers filed for bankruptcy under Chapter 7. A Chapter 7 bankruptcy stays on the debtor’s credit record for ten years from the date of filing, but at least it wipes the slate clean. In 2005, however, even that escape was taken away for many debtors. Under sweeping new provisions to the Bankruptcy Code, many more people are now required to file under Chapter 13, which does not eliminate debts but mandates that they be repaid under a court-ordered payment schedule over a three to five year period.

Homestead exemptions have traditionally protected homes from foreclosure in bankruptcy; but not all states have them, and the statutes usually preserve only a fraction of the home’s worth. Worse, the new bankruptcy provisions require home ownership for a minimum of 40 months to qualify for the exemption. That means that if you file for bankruptcy within 3.3 years of purchase, your home is no longer off

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limits to creditors.8 In the extreme case, the homeowner could not just lose his home but could owe a “deficiency,” or balance due, for whatever the creditor bank failed to get from resale. This balance could be taken from the debtor’s paychecks over a five-year period. In some states, “anti-deficiency” laws prevent this, allowing the purchaser to walk away without paying the balance owed. But again not all states have them, and they apply only to the original mortgage on the home. If the buyer takes out a second mortgage or takes equity out of the home, anti-deficiency laws may not apply. The push to persuade homeowners to take out home equity loans recalls the 1920s campaign to persuade people to borrow against their homes to invest in the stock market. When the stock market crashed, their homes became the property of the banks. Elderly people burdened with medical and drug bills are particularly susceptible to those tactics today.

Another insidious change that has been made in the bankruptcy laws pertains to insolvent corporations. The law originally provided for the appointment of an independent bankruptcy trustee, whose job was to try to keep the business running and preserve the jobs of the workers. In the 1970s, the law was changed so that the plan of bankruptcy reorganization would be designed by the banks that were financing the restructuring. The creditors now came first and the workers had to take what was left. The downsizing of the airline industry, the steel industry, and the auto industry followed, precipitating masses of worker layoffs.9

Normally, it would fall to the individual States to provide a safety net for their citizens from personal disasters of this sort, but the States have been driven to the brink of bankruptcy as well. Diversion of State funds to out-of-control federal spending has left States with budget crises that have forced them to take belt-tightening measures like those seen in Third World countries. Social services have been cut for those most in need during an economic downturn, including services for childcare, health insurance, income support, job training programs and education. Social services are “discretionary” budget items, which have been sacrificed to the fixed-interest income of the creditors who are first in line to get paid.10

Billionaire philanthropist Warren Buffett has warned that America, rather than being an “ownership society,” is fast becoming a “sharecroppers’ society.” Paul Krugman suggested in a 2005 New York Times editorial that the correct term is “debt peonage” society, the system prevalent in the post-Civil War South, when debtors were

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forced to work for their creditors. American corporations are assured of cheap, non-mobile labor of the sort found in Third World countries by a medical insurance system and other benefits tied to employment. People dare not quit their jobs, however unsatisfactory, for fear of facing medical catastrophes without insurance, particularly now that the escape hatch of bankruptcy has narrowed substantially. Most personal bankruptcies are the result of medical emergencies and other severe misfortunes such as job loss or divorce. The Bankruptcy Reform Act of 2005 eroded the protection the government once provided against these unexpected catastrophes, ensuring that working people are kept on a treadmill of personal debt. Meanwhile, loopholes allowing very wealthy people and corporations to go bankrupt and to shield their assets from creditors remain intact.11

Graft and Greed in the Credit Card Business

The 2005 bankruptcy bill was written by and for credit card companies. Credit card debt reached $735 billion by 2003, more than 11 times the tab in 1980. Approximately 60 percent of credit card users do not pay off their monthly balances; and among those users, the average debt carried on their cards is close to $12,000. This “subprime” market is actually targeted by banks and credit card companies, which count on the poor, the working poor and the financially strapped to not be able to make their payments. According to a 2003 book titled The Two-Income Trap by Warren and Tyagi:

More than 75 percent of credit card profits come from people who make those low, minimum monthly payments. And who makes minimum monthly payments at 26 percent interest? Who pays late fees, over-balance charges, and cash advance premiums? Families that can barely make ends meet, households precariously balanced between financial survival and complete collapse. These are the families that are singled out by the lending industry, barraged with special offers, personalized advertisements, and home phone calls, all with one objective in mind: get them to borrow more money.

“Payday” lender operations offering small “paycheck advance” loans have mushroomed. Particularly popular in poor and minority communities, they can carry usurious interest rates as high as 500 percent. The debt crisis has been blamed on the imprudent spending habits of people buying frivolous things; but Warren and Tyagi ob-

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serve that two-income families are actually spending 21 percent less on clothing, 22 percent less on food, and 44 percent less on appliances than one-income families spent a generation earlier. The reason is that they are spending substantially more on soaring housing prices and medical costs.12

In 2003, the average family was spending 69 percent more on home mortgage payments in inflation-adjusted dollars than their parents spent a generation earlier, and 61 percent more on health needs. At the same time, real wages had stagnated or declined. Most people were struggling to get by with less; and in order to get by, many turned to credit cards to pay for basic necessities. Credit card companies and their affiliated banks capitalize on the extremity of poor and working-class people by using high-pressure tactics to sign up borrowers they know can’t afford their loans, then jacking up interest rates or forcing customers to buy “insurance” on the loans.13 People who can make only minimal payments on their credit card bills wind up in “debt peonage” to the banks. The scenario recalls the sinister observation made in the Hazard Circular circulated during the American Civil War:

[S]lavery is but the owning of labor and carries with it the care of the laborers, while the European plan, led by England, is that capital shall control labor by controlling wages. This can be done by controlling the money. The great debt that capitalists will see to it is made out of the war, must be used as a means to control the volume of money.

The slaves kept in the pre-Civil War South had to be fed and cared for. People enslaved by debt must feed and house themselves.

Usurious Loans of Phantom Money

The ostensible justification for allowing lenders to charge whatever interest the market will bear is that it recognizes the time value of money. Lenders are said to be entitled to this fee in return for foregoing the use of their money for a period of time. That argument might have some merit if the lenders actually were lending their own money, but in the case of credit card and other commercial bank debt, they aren’t. They aren’t even lending their depositors’ money. They are lending nothing but the borrower’s own credit. We know this because of what the Chicago Fed said in “Modern Money Mechanics”:

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Of course, [banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers’ transaction accounts. Loans (assets) and deposits (liabilities) both rise [by the same amount].14

Here is how the credit card scheme works: when you sign a merchant’s credit card charge slip, you are creating a “negotiable instrument.” A negotiable instrument is anything that is signed and convertible into money or that can be used as money. The merchant takes this negotiable instrument and deposits it into his merchant’s checking account, a special account required of all businesses that accept credit. The account goes up by the amount on the slip, indicating that the merchant has been paid. The charge slip is forwarded to the credit card company (Visa, MasterCard, etc.), which bundles your charges and sends them to a bank. The bank then sends you a statement, which you pay with a check, causing your transaction account to be debited at your bank. At no point has a bank lent you its money or its depositors’ money. Rather, your charge slip (a negotiable instrument) has become an “asset” against which credit has been advanced. The bank has done nothing but monetize your own I.O.U. or promise to repay.15

When you lend someone your own money, your assets go down by the amount that the borrower’s assets go up. But when a bank lends you money, its assets go up. Its liabilities also go up, since its deposits are counted as liabilities; but the money isn’t really there. It is simply a liability – something that is owed back to the depositor. The bank turns your promise to pay into an asset and a liability at the same time, balancing its books without actually transferring any pre-exist- ing money to you.

The spiraling debt trap that has subjected financially-strapped people to usurious interest charges for the use of something the lenders never had to lend is a fraud on the borrowers. In 2006, profits to lenders from interest charges and late fees on U.S. credit card debt came to $90 billion. An alternative for retaining the benefits of the credit card system without feeding a parasitic class of unnecessary middlemen is suggested in Chapter 41.

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Chapter 30

THE LURE IN THE

CONSUMER DEBT TRAP:

THE ILLUSION OF

HOME OWNERSHIP

“There’s no place like home, there’s no place like home, there’s no place like home . . . .”

If the bait that caught Third World countries in the bankers’ debt web was the promise of foreign loans and investment, for Americans in the twenty-first century it is the lure of home ownership and the promise of ready cash from home equity loans. Increased rates of home ownership have been cited as a bright spot for labor in an economy in which workers continue to struggle. In 2004, home ownership was touted as being at all-time highs, hitting nearly 69 percent that year.1 The figure, however, was highly misleading. Sixtynine percent of individuals obviously did not own their own homes. The figure applied only to “households.” And while legal title might be in the name of the buyer, the home wasn’t really “owned” by the household until the mortgage was paid off. Only 40 percent of homes were owned “free and clear,” and that figure included properties owned as second homes, as vacation homes, and by landlords who rented the property out to non-homeowners. Even homes that were at one time owned free and clear could have mortgages on them, after the owners were lured by lenders into taking cash out through home equity loans. As a result of refinancing and residential mobility, most mortgages on single-family properties today are less than four years old, which means they have a long way to go before they are paid off.2 And if the mortgages are less than 3.3 years old, the homes are not subject to the homestead exemption and can be taken

by the banks even if the strapped debtors file for bankruptcy.

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