The sub-prime crisis in the U.S.A.

Most people would have heard by now the problem that exists and which will continue to exist regarding the housing collapse in the United States.

The reason for the collapse and the foreclosures is basic and should not be a surprise to a Social Crediter. The reason can be given in one word: MONEY.

We know that under the current financial accounting and banking system that people are living on drafts upon the future. Whether that is in the form of a bank overdraft, personal loan, credit card debt or a housing mortgage it makes no difference. All repayments for debt incurred in the past have to be repaid out of future income.

We also know that all bank lending is a debt and that all money that comes into existence comes in as a result of borrowing from banks and that means money comes into existence as a debt.

Banks are businesses and as they deal in money, which is a debt, it is necessary for them to be as prudent as possible in their day-to-day operations. When there were controls in place to ensure they did not go beyond certain limits there was some measure of safety. Those regulatory controls, which have been gradually removed, allowed the banks to reduce the fiat control from 18% to 12% to what is today a negligible %. When banks have reached the position of lending nearly 100 to 1, i.e. lending $100 for $1 in their possession they reach a point where growth is restricted as well as leaving themselves open to substantial losses.

Having reached this stage banks resort to borrowing themselves from other banks and then can continue to lend on the same basis as before.

Add to this scenario banks lending to other institutions who in themselves are in the lending business. Such is the case with the banks putting together bundles of mortgages and sold as mortgage-backed securities.

The purchases of these mortgages then use them as collateral to issue bonds in order to finance other deals. Such is the growth of what is called the "sub-prime market". The money originally lent homebuyers attracts interest and the idea is that this interest will cover the interest to be paid on the bonds issued.

To add to this the sub-prime market institutions have been lending to homebuyers on a no deposit and 100% financing of their homes. Sometimes falsifying records to show the borrower’s earnings greater than they were and locking them into low interest rate contracts, which escalated after the initial period.

As if this was not enough some of these sub-prime market forms created new "structured finance products" referred to as collateralised debt obligations (CDOs). They are in actual fact "slices" of the other mortgage securities, issued as bonds. To put it simply it is operating on the principle that one debt can be split into two or more and offered on the market. Many of these CDOs were picked up by "hedge Funds" who in fact borrowed money to buy them.

When people have been lent money for the purchase of a home and do not have the continuing ability to meet their commitments for whatever reason foreclosures occur. When interest rates increase or when people enter into contracts with an interest rate that converts to a higher rate at a later date for instance one, two or three years more problems arise.

It is like a house built out of a stack of playing cards or those structures built with dominoes. When one starts to go, the rest follow. When foreclosures increase and homes have to be sold to obtain cash the value of the homes decrease, which exponentially increases the problem.

Because many banks around the world have been lending money and buying into hedge funds they eventually feel the crunch when things go wrong.

Banks in Australia, Canada, and Europe have been affected by the recent collapse of the sub-prime market.

Authorities, particularly the Central Banks have been attempting to keep the problem under wraps but finally had to concede that it WAS A BIG PROBLEM.

The US Federal Reserve, the European Central Bank, the Central banks of Canada, England, Switzerland, the Bank of Japan and Sweden’s Riksbank got together to work out a plan to create money to inject into commercial banks to starve off what could develop into a massive collapse of the world’s financial structure.

In keeping with the usual question that is put to Social Crediters we can ask, "Where is the money coming from?"

The answer is quite simple, they create it out of nothing like the commercial banks do.

The whole exercise in the debt lending game is for the banks to offload their risks out of the banking system. It has been estimated by the US Congress’s Joint Economic Committee that although there have been 1.7 million foreclosures in the first eight months of 2007 it is expected that probably 2 million families will lose their homes over the next two years.

That statement is sufficient to indicate that the problem is going to get worse.

It is interesting to note the resort to the idea of a "Change of Heart" creeping into the debate on the problem. C.H. Douglas in his book Social Credit wrote:

"No one, having debated any consideration to the subject, can fail to feel the exasperation at the exhortation of the confirmed sentimentalist forever clamouring after a ‘change of heart’. What effect on his particular difficulties is it going to have, if the miner, abandoning self-interest, goes to his employer and offers to accept half his present wages? Or the mine-owner, faced with a loss, who raises his men’s wages? What effect on the dividends of the shopkeeper already in debt to his bank, and in doubt as to the source from which he shall pay his next week’s rent, and meet the difference on his overdraft does it have, if smitten with the sudden desire to apply the golden rule to business, he sells his goods at half their cost to him, because he knows his clientele, who are coal-miners, cannot afford more?

The US Treasury Under Secretary for Domestic Finance has been urging key lenders to take a more sympathetic approach.

There is, however, one question that has always baffled Social Crediters. How is it possible to borrow your way out of debt?

Whether or not current efforts by Central Banks to alleviate the problem are successful, time will tell. Whether it is next year, the year after, or the year after there is one thing certain many, many people are going to be hurt.

What the current problem does illustrate is the funny money system under which our expert financiers support, is that it is an illusion and not based upon reality. It is an illusion to the extent that the money accounting system is false and yet whilst accepted by people as being real it does affect them in a real physical way.

Like the oasis mirage in the desert the physical reality will express itself in natural terms.

Houses are made from physical properties. Money is a nothing, yet accepted as being representative of the physical properties, which it is not.

One economist writing on the sub-prime collapse unwittingly puts his finger on a very important factor. He refers to the crisis as a confidence crisis stating that since the sub-prime crisis intensified last July major banks have lost confidence in each other. He says that without trust the system falls apart. That does sum up the basic problem. Banks lend, and in this particular case, not on the basis of something physical but on the thought or idea that the entity to whom loans are made will be repaid with more money than they the banks have lent.

If a financial system is built on nothing more than trust or confidence it is no different from the actions of a con man or a counterfeiter. Providing no one questions the con man or people are prepared to accept counterfeit money he will get away with his actions and counterfeit money will do the same job as the real thing. It all depends on trust and confidence.

The economist writer also makes valid point when he commented that we in Australia are lucky that the banks here "were not heavily into sub-prime poker and lucky that this gave the Reserve Bank time to institute major changes in the way it deals with our banks to give them greater confidence that they can continue without the risk of running out of money".

There is no doubt that it is like a game of poker. It is pure gambling based on maintaining confidence both in your own action and the confidence that others will act accordingly. If we disregard the occurrence of the sub-prime collapse it is possible to see the effect of a restriction of bank credit on industry.

It was stated earlier that all debts have to be repaid out of future income. This being so it is obvious that any restriction on the receipt of income whether in the form of wages and salaries, dividends or profits means a reduction in the ability to liquidate or reduce a debt incurred.

Businesses can continue to operate provided they are either making a profit or can show their bank a cash flow statement that will indicate that future cash will eventuate to be paid into the bank. A business may have assets, which can be regarded as being "gilt edged", and have a cash flow, which is more than acceptable to their bank or even investors but the moment that its credit rating or ability to obtain credit becomes obvious, the pack of cards can start to fall.

It has been stated more than once in these columns that if the financial "experts" who oppose Social Credit and what Douglas has said about our debt system there is one simple way to prove the analysis wrong; Stop lending, stop creating credit! They know that the moment that happened the system would collapse. That is why Central Banks were so eager to get together to prop up the commercial banks.

If any further evidence is required one has only to look at recent events involving a Company that was regarded as a shining light in the investment field.

The Company, Centro Properties Group, which has investments in at least a dozen countries around the world including the US, Canada, Europe, Russia, China, Brazil, India, Japan, Africa and other Latin American countries has succumbed to the sub-prime collapse. Centro is Australia’s second largest shopping centre owner with a $26.6 billion managed property portfolio. It owns almost 700 shopping malls in the US and 128 Australian centres.

Centro borrowed heavily to finance a rapid US expansion, increasing from $11.5 billion to $26.6 billion in about 12 months. Australian banks have a $4 billion exposure to Centro Properties Group including $1.5 billion in unsecured loans. On top of this Centro attempted to refinance $1.3 billion of its long-term debt in early December but hit a brick wall. It has announced that it must refinance its mounting debt by mid-February or it will be in dire straits.

Perhaps we can look forward to a "change of heart" by the banks and all will be well but it may take more than just that to stay off the repercussions felt by other investors. It may well be that Superannuation Funds will be affected reducing the returns to superannuants on the money they have forgone in wages and salaries.

The banks involved in selling their mortgage debts have been very shrewd. They create the debt when they lend to borrowers and as a result they create the money when the money borrowed and credited to the borrowers account and is then used by the borrower to purchase. When the bank sells off the mortgage debt it relieves itself of any risk. It receives payment from the entity buying the debt. The sub-prime entity or whoever may have bought the debt are not in the position of creating money in the manner that banks do.

To add salt to the wounds the private banks in Australia have decided to increase their interest rates on home mortgages in particular. This action has been taken because of the effect that the sub-prime market has had on their borrowings. In other words they expect the home owner who has an existing mortgage whether taken out last year or five years ago to pay more interest to the banks in order to cover the losses incurred by the banks on their bad investments and borrowings.

According to the "experts", interest is the price of money. Money borrowed is no different to money bought. Imagine the uproar if all companies leasing motor vehicles or involved in Hire Purchase contracts decided that their company was not doing too well and decided to increase the lease charge or Hire Purchase fees. Imagine any company going back to the purchaser of one of their products and asking for more money because they had to reduce their losses because they had a duty to their shareholders.

It is bad enough when the Reserve Bank increases interest rates and banks pass on the increase but to simply increase interest rates to maintain their profit position is, to put it mildly despicable. Of course this is all done under cover of using the VARIABLE loan racket.

The action of the banks is little less than criminal although legal because our politicians allow it.

Whatever happens it strengthens the claim by Social Credit that there needs to be a change in the financial accounting system to reflect facts and not mirages.

 

 

Mr. and Mrs Bridger of Australia with Pierre Marchildon

 

This article is taken from the Jan.-Feb. 2008 issue of the Australasian Social Credit Journal A Journal of the Social Credit School of Studies, 209 Palm Lake Resort, 1 Webster Road, Deception Bay Q. 4508, Telephone (07) 33859794, E-mail: This email address is being protected from spambots. You need JavaScript enabled to view it. — Internet: http//www.ecn.net.au/~socred/