Bailout Basics: How to get Revenge
How did we get into this mess?
A simplified example:
People deposit money in a bank and earn interest. The bank lends the money to home buyers in the form of a mortgage.
The bank was required by law to hold on to a part of the their deposits, just in case a lot of people wanted to withdraw their funds all at once. That "law" was known as banking regulation. If a bank had a billion dollars worth of deposits, they would be required, for instance, to have 10%, or $100 million on hand.
Two things happened to change all that.
1. A new law was passed that allowed banks to get around the requirement to hold 10% of their deposits. This new loophole meant they could package a group of their mortgages and sell them just like a stock. This provided a level of speculation and risk taking that allowed Wall Street traders to make money on people’s mortgages. The law that opened up this loophole was known as the
Gramm-Leach-Bliley Act. For details see:
2. There was a downturn in the housing market. The "stock" that consisted of a group of mortgages suddenly went from a value of say $1 billion, to about half that, $500 million. As people started to default on their mortgages, the banks were left holding the devalued houses. Suddenly, a bank that had $1 billion in deposits was worth only $500 million. People wanted their money back, but now the bank doesn’t have the deposits on
hand. First because the value of their holdings in now only about half, and second because the lack or regulation meant they didn’t have to hold as much in
Multiply that same scenario by hundreds of banks, and you have the current credit crunch. With no reserves left in the bank, a farmer, for example, cannot borrow money to buy seeds for next year’s
For years now the Wall Street speculators, brokers, and CEOs made a fortune by gambling with our mortgage dollars. There is no way to get those fantastic salaries, million-dollar bonuses, and golden parachute payments back from the fat cats. The ONE THING you can do though is to raise taxes on the wealthiest 5% of the population, the people who made the most off our hard-earned mortgages.
Barack Obama promises to cut taxes for everyone EXCEPT those making over $250,000 a year. This is the karmic justice that will restore balance to our financial system. The bailout package being considered by the legislature will also close the loopholes that allowed speculation on our savings. The best thing you can do then, is to vote for Barack Obama!