How investment banks turned housing and student loans into a toxic and financial disaster – Middle class largest asset coopted by banking sector to raid and speculate on. Financial sector nearly 30 percent of all corporate profits in U.S. In the 1950s it was under 10 percent.
Most Americans pull their net worth from their investment in good old housing. It is the biggest purchase most will ever make. And because of this, after the Great Depression, housing was a boring yet stable investment class. It had to be. This is the cornerstone of wealth for most Americans. Banks used to do their due diligence by verifying income and typically having a say in their local communities. All that changed starting in the 1980s. The first foray into banking corruption in housing came with the S&L Crisis. Thrifts largely gave out money with unsustainable interest rate schemes and when the market imploded, the taxpayers had to step in to bail out the banks. Yet during the process, many Wall Street financial firms made out like bandits on junk bonds and other “financial innovation” which was nothing more than sugarcoated robbery. Then in the late 1990s the depression era Glass-Steagall act was repealed and all bets were off. In a debt based system, housing was the largest debt class for Americans and investment banks decided to turn it into one giant casino. This financialization of our country is at the core of the disappearing middle class. Financial firms are largely wards of the state and operate to suck out rents from the productive economy.
The burden of housing and investment banks speculation
By far, the largest debt American households carry is with mortgage debt:
This is one of the most troubling charts since it shows how household debt since the 1950s has become a larger and larger part of our economy. In fact, at the peak in this crisis household debt nearly equaled our annual GDP. It isn’t too far from this point either today. The biggest part of this debt is made up by mortgages. Over 76 percent of household debt, some $13+ trillion, is made up of mortgages. And with homes sinking in value we now have 25 percent of households with mortgages holding onto underwater mortgages. The biggest factor here is that banks that serve with a fiduciary responsibility largely ignored all parts of their mission to rip off the public. This came at a taxpayer cost of trillions of dollars that have been paid out by the Federal Reserve and U.S. Treasury. The middle class is still paying for it today in a multitude of ways.
Inequality rises because of broken financial system
Wealth inequality in the U.S. is now at the levels last experienced during the 1920s:
The top 5 percent in the U.S. control 63 percent of all wealth. Keep in mind that the vast majority of Americans, those with an actual positive net worth, derive their wealth from housing. Most of those in the financial sector derive their wealth and income from financial speculation. They even pay 15 percent on their investment income which is what they live off of. When was the last time your tax rate was 15 percent? Just think about the hedge fund managers that made billions of dollars betting on Americans losing their homes and winning on this bet. How in the world does this add any value to the system? This is nothing more than socialized gambling and a vampire sucking the life out of the real economy.
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