Wednesday, December 03, 2008

Starvation and a Quiet Revolution

Famine does not normally evoke images of peaceful revolution, but I refer to a financial starvation with great and positive political consequences. I refer to the starvation of banks.
All too many scenarios about the Coming Depression cast the citizenry/ debt-serfs in the role of passive victims, watching from the sidelines, as it were, as irresistable forces tighten their grip and hardships increase.

How about we re-write the playbook and make the debt-serfs players instead of passive observers. How about we have the debt-serfs slowly strangling the political power of bankers by refusing to play debt-serf any longer.

How do you refuse to be a debt-serf? By refusing to borrow money. It's really that simple.
What happens when people stop increasing their credit card debt, stop getting auto loans and stop signing mortgages? The income of banks plummets, and thus so does their ability to purchase political power.

But how can we live without ever-expanding credit? Won't the world end? No, it won't. Unbelievable as it may sound, life will actually go on if we all cut up our credit cards and only use cash or debit cards.

Rather than buy a new car with $1,000 down and a $25,000 loan, it is entirely feasible to save up money from earnings and buy a car with cash. It may be a used vehicle, but nonetheless no loan is needed. This is, after all, the way cars are bought elsewhere in the world--with cash.
Since housing is still dropping in value, and will probably lose value once inflation is factored in for years if not decades, why borrow money to buy a house? Why not save up and buy one cash, if you really want one? People in other countries routinely save up large sums as families and then buy real estate with cash. Once houses fall to the $50,000 range--a process well under way in many places--then saving up to pay most or all of the purchase prices becomes possible.

If a loan is absolutely necessary, then make it a 5-year loan. Put 50% down on the house and pay the rest off in 5 years. The interest collected by the bankers will be far less than the astronomical sum they collect on a 30-year mortgage.

Many debt-serfs will involuntarily renounce the debt-dependent lifestyle via foreclosure and bankruptcy. The seven-year holiday from debt ("cold turkey") imposed by bankruptcy is a positive behavioral modifier, as households will learn that life without debt is not just possible but actually better. Being free of debt is a great feeling--even if the "lifestyle" one can afford is frugal.

Voluntary renunciation of debt-serf servitude is a peaceful and legal revolution. The banks made their hundreds of billions of dollars in profit-- only a thin slice was needed to buy the silence and collusion of elected officials-- on the backs of debt-serfs. All those mortgage-backed securities, and the derivatives piled on the MBS? They were all based on real mortgages signed by debt-serfs.

Without the debt-serfs' mortgages, the banks have nothing to sell and nothing to spin into the gold of political power.

Yes, banks will still be able to earn outrageous profits on huge late fees and overdrafts... oh, but wait--if you don't use a credit card, in fact don't even own one, then you can't get nailed with outrageous late fees and overdraft fees, can you?

How about those greedy checking account fees? Close your account at the bank and open one at a credit union. If you don't "qualify," then join Costco or any number of other organizations out there in which membership "qualifies" you to join a credit union.

Outrageous bank fees? Just say no. Outrageous bank profits and political power? Just say no. Cut up your credit card, pay off your auto loan, sell your house and pay off the mortgage, or walk away from being a debt serf if repayment is no longer an option.

Yes, banks will still collect a sliver of profit from transaction fees on debit cards--but those modest fees cannot be spun into derivatives or political power gold. Yes, banks will make money on construction and commercial loans, but without debt-serfs, their vast profit centers will have dried up. Their ability to reap profits in the hundreds of millions will be eviscerated.

But how will the economy function with a much smaller banking sector? Just fine. All the essential services short-term debt plays in commerce--letters of credit for overseas trade, other commercial loans, etc.--will continue to be provided by someone somewhere. But the amounts of money to be reaped on these small spreads is modest compared to the huge spreads banks make on credit cards and debt-serf loans.

A much smaller banking sector will be a more highly regulated one, because it will no longer have the vast pool of money needed to buy silence and collusion in the halls of Congress. A tightly regulated industry will also have fewer loopholes to exploit in terms of tax evasion and funny-money legerdemain like credit-default swaps.

And so a new virtuous cycle will begin: less profitable banks will be far more tightly regulated which further reduces their income and thus their political influence.

Mao famously said that "Political power grows out of the barrel of a gun," and in certain circumstances that is obviously true. But it is equally true that political power comes from cutting up credit cards and refusing auto loans and mortgages, too. Reduce the monster's food supply and the monster starves. That's political power, too--a quiet revolution on many levels.

New essay by Chris Sullins:
Operation SERF, Part I(Chris Sullins, December 1, 2008)
Eduard Morgan sat in his wheelchair looking at a laptop on the kitchen table. A household wireless unit connected to a two-way home satellite system fed his browser with the latest news. He and a handful of other residents in his gated community were among the small minority of people in their city who still had regular access to the internet. Given the city’s frequent power outages and cable thefts outside his secure subdivision, household usage of the internet had dropped from its national peak only a few years ago.
The internet was well on its way to reverting back to its original users within the walls of government, education, and large corporations. Even without the loss of physical infrastructure supporting the hard-wired, few could afford it given the economic situation. The two-way home satellite system was a luxury even in Eduard’s neighborhood, but he still had some personal connections from his past professional career that cut him a good deal

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