Punchinello’s Chronicles

November 13, 2008

American Consumers are Over their Limit

Filed under: Surely a Jest? — Punchinello @ 12:01 pm
Tags: , , ,

Ever go to a store and try to buy something with a credit card, and have that card denied? Boy, does that suck! So what happens? You end up either not “buying” that something, or you pay cash, or you try to use some other credit card; one that still has “money” on it.

Let’s suppose you buy a hat with a credit card. Did you really buy it? No, not really. You borrowed the money from a bank, via an instant loan, via your credit card. The store gives you the hat, handing off the responsibility to the bank to collect the money later. That bank gives the store the money.

You’re actually borrowing that hat for awhile, until you pay for it.

A bank gives you a credit card. They’re willing to loan you some amount of money (your credit card limit), assuming you’re good for the money later. The forms you signed are a contract. You will owe the bank any money you borrow (charge on your card), plus interest. And so the bank makes money on the interest, just like everyone knows…right?

Here’s an interesting twist, though. Suppose the bank starts selling shares in your debt? After all, everybody knows…for a fact…that you’re good for the money, right? Nothing could possibly stop you from paying off your credit cards, otherwise your credit rating would be bad. You’d have a mark on your Permanent Record, and end up expelled from school or something.

We’ll call these shares in your debt “securities.” They’re proofs of ownership in something. So, for example, the bank owns your hat. They decide to divide up that ownership into 10 parts (shares). Each 1/10th ownership in your hat comes with a piece of paper. And let’s say I buy one share. I now own 1/10th of YOUR hat, which you haven’t yet paid for…so it’s really partly MY hat!

Why would I want to buy 1/10th of your frickin’ hat? Well, because when you pay off your loan for the hat, you also pay the interest on the loan. And I get 1/10th of that interest! Hah! I might even be able to bring my relatives over from some other country, and celebrate with fine country dances.

Hmm…so what happens if you don’t pay for your hat?

I lose my money!

But what happens if I’m a really big investment company? What if thousands and thousands of grandmas and grandpas give me lots and lots of money that they’re saving for their retirement? And then I take all that money and start investing it in shares of…what?

Big investment banks and houses have done this for years! Lots and lots…and even more lots of money have all been put into securities like this. They’ve been “backed” by car loans, student loans, credit card loans, housing loans, commercial real estate loans, you name it. If you can think of something someone can buy with a loan, it’s been divided up into securities and sold.

So what happens if a whole lot of people can’t pay back their loans? How many of those loans are houses, and how many of them are general credit card purchase? Which do you think is a larger number, the money invested in bad mortages or the money tied up on the combination of EVERY other kind of consumer loans out there?

No surprise that “suddenly” we discover that the $700-billion (now on it’s natural way up to $1-trillion) package has “suddenly” changed. Treasury Secretary Henry Paulson told us that the Treasury isn’t going to use the money to buy up bad home loans. Nope. Things have changed (surprise, surprise).

Instead, the Treasury got wind of the rumor that a boatload of people can’t pay their credit card debts. They were astonished to learn that another boatload of people can’t make payments on their cars or student loans. And when they heard that, they also heard that gigantic investment companies have split up ALL that debt and sold it to lots and lots of other people.

Y’know what’s actually kind of weirdly humorous about this? Imagine Mr. & Mrs. Smith who decide to invest in the stock market. They buy some shares in big investment banks, not realizing they’re buying shares in their own debt. The more debt people accumulate, the better the portfolio looks. They’re trading, buying and selling shares in debt for higher and higher amounts.

The Smith family retirement fund is lookin’ good, lookin’ good! So they celebrate, take out some loans and buy a new car or two. They put a wide-screen TV on a credit card, and take out a student loan so Jill can go to college. All of those debts become “securities” as each bank splits it into shares and sell those shares.

The Smiths buy up shares in their own increasing debt, and that retirement portfolio is lookin’ good, lookin’ good! Then one or the other, or both of them lose their jobs. Outsourcing, don’t’cha know. Suddenly they can’t pay for the car, or the TV, or the student loan. They just…stop.

Along with millions of other people just like the Smiths.

Who, then, really owns that debt? Does the original bank that made the loan still own the debt? Or does everyone invested in the financial markets (all over the world) own that debt? How much debt is it, really? Does ANYone know?

And how will Mr. & Mrs. Smith come up with the money to pay the taxes that go to the government to be used to bail out the securities markets backed by consumer loans? The hip bone’s connected to the thigh bone. The thigh bone’s connected to the ankle bone. You do the Hokey-Pokey and you turn yourself around:

That’s what it’s all about! (Yikes!)


1 Comment »

  1. Nice analogies. I hear you!

    Comment by cjspicer1 — November 16, 2008 @ 10:09 am | Reply

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