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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 bud-
get 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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Chapter 29 - Breaking the Back of the Tin Man

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 “sub-
prime” 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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Web of Debt

serve that two-income families are actually spending 21 percent less
on clothing, 22 percent less on food, and 44 percent less on appli-
ances than one-income families spent a generation earlier. The rea-
son 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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Chapter 29 - Breaking the Back of the Tin Man

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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Web of Debt




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 . . . .”




I f 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. Sixty-
nine 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 mobil-
ity, 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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Chapter 30 - The Lure In The Consumer Debt Trap

The touted increase in “home
ownership” actually means an in-
crease in debt. Households today
owe more debt relative to their dis-
posable income than ever before.
In late 2004, mortgage debt
amounted to 85 percent of dispos-
able income, a record high. The
fact that interest rates approached
historic lows appeared to keep
payments manageable, but the
total amount of debt rose faster for
the typical family than interest
rates declined. As a result, house-
holds still ended up paying a
greater share of their incomes for
their mortgages. Total U.S. mortgage debt increased by over 80 per-
cent between 1991 and 2001, and residential debt grew another 50
percent between 2001 and 2005. From 2001 through 2005, outstand-
ing mortgage debt rose from $5.3 trillion to $8.9 trillion, the biggest
debt expansion in history. In 2004, U.S. household debt increased
more than twice as fast as disposable income; and most of this new
debt-money came from the housing market. Homeowners took eq-
uity out of their homes through home sales, refinancings and home
equity loans totaling about $700 billion in 2004, more than twice the
$266 billion taken five years earlier. Debts due to residential mort-
gages exceeded $8.1 trillion, a sum larger even than the out-of-control
federal debt, which hit $7.6 trillion the same year.3

Baiting the Trap: Seductively Low Interest Rates
and “Teaser Rates”

The housing bubble was another ploy of the Federal Reserve and
the banking industry for pumping accounting-entry money into the
economy. In the 1980s, the Fed reacted to a stock market crisis by
lowering interest rates, making investment money readily available,
inflating the stock market to unprecedented heights in the 1990s. When
the stock market topped out in 2000 and started downward, the Fed
could have allowed it to correct naturally; but that alternative was
politically unpopular, and it would have meant serious losses to the

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Web of Debt

banks that owned the Fed. The decision was made instead to prop up
the market with even lower interest rates. The federal funds rate was
dropped to 1.0 percent, launching a credit expansion that was even
greater than in the 1990s, encouraging further speculation in both
stocks and real estate.4
After the Fed set the stage, banks and other commercial lenders
fanned the housing boom into a blaze with a series of high-risk changes
in mortgage instruments, including variable rate loans that allowed
nearly anyone to qualify to buy a home who was willing to take the
bait. By 2006, about half of all U.S. mortgages were at “adjustable”
interest rates. Purchasers were lulled by “teaser” rates into believing
they could afford mortgages that in fact were liable to propel them
into inextricable debt if not into bankruptcy. Property values had
gotten so high that the only way many young couples could even
hope to become homeowners was to agree to an adjustable rate mort-
gage or ARM, a very risky type of mortgage loan in which the interest
rate and payments fluctuate with market conditions. The risks of
ARMs were explained in a December 2005 press release by the Office
of the Comptroller of the Currency:
[T]he initial lower monthly payment means that less principal is
being paid. As a result, the loan balance grows, or amortizes
negatively until the sixth year when payments are adjusted to
ensure the principal is paid off over the remaining 25 years of
the loan. In the case of a typical $360,000 payment option
mortgage that starts at 6 percent interest, monthly payments could
increase by 50 percent in the sixth year if interest rates do not change.
If rates jump two percentage points, to 8 percent, monthly payments
could double.5
Homeowners agreeing to this arrangement were gambling that
either their incomes would increase to meet the payment burden or
that the housing market would continue to go up, allowing them to

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