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Is the American Dream for Bankers?

 6 min read / 

Banks make loans – that is their main business. It may seem like they were favouring consumers when they lowered the interest rate on mortgages, but low-interest rates primarily serve the bankers. On average, life got more comfortable when people refinanced their house and started paying less, but that was only temporary. The next buyer for that same house has to pay a higher price, because of the low rates, so society in the long-run winds up paying the same or more. The percentage of income used to pay for housing has been going up for decades, which leaves less money for everything else.

Low-interest loans for mortgages as a one-off are an excellent thing for the individual, and may in some cases be ‘the American Dream’ come true. However, banks in the grand scheme of things can technically offer an infinite number of mortgages, which makes it much less appealing in the long run. That is because the amount of housing is limited, which will cause prices to go up until people cannot afford to pay more.

To buy a home, a person has to place an offer on it, and the seller, if they are smart, will look to receive multiple offers. The highest bidder determines the value of the home. The only benefit of unlimited debt and low-interest loans, in the long run, is for bankers, who get to loan out larger sums of money for the same asset. The problem started when President Nixon got rid of the gold standard, which allowed bankers to have no limitation on lending, something Nixon may not even have considered.

Consolidation Eliminates Opportunity

Selling a business is also looked at as the epitome of ‘the American Dream.’ The windfall from selling a business is great for the seller, but very few people get to sell a business in their lifetime. There is more to the story: the merging of companies, called consolidation, means less competition, fewer employers and fewer employees. Farms provide a good example; once banks got access to greater amounts of money to lend out, the number of farms dwindled.

Farms grew so large that it became impossible for the small family farms to compete with the volume and scale of the mega-farms. The extinguishing of the family farm as a means to make a living was caused by the banking industry’s access to large amounts of capital for lending. And there are countless other business models, formerly of a small ‘family’ style, that are gone forever because banks have access to infinite money funding their loans.

Another example is AT&T acquiring Time Warner for $85bn. JP Morgan and Bank of America are funding the acquisition with $25bn each. Many politicians have opposed the deal for one reason or another. However, a judge ruled that the acquisition was ‘legal’. From a business perspective, the accountants must have figured out a way to make more money from merging the businesses then they otherwise would, and that includes financing the debt. This is precisely why asset prices go up with low-interest rates, because the accountants have lower expenses for the acquisition with lower interest rates, which means they can afford to pay more. When one company acquires another company, the interest rate has a direct effect on how much a company can afford to pay if they take out a loan to fund the take-over. 

Consolidation of business is therefore driven partially by banks access to infinite capital. The lower the interest rate, the more consolidation can occur. There are many executives, shareholders and stakeholders that see tremendous gains from this activity. However, there are also many workers who get laid off from the duplicity that is created by the merger. Banks win because they provide funding and collect interest and fees. However, there is no consideration of the overall impact on the workers and the economy.

There is no question that business owners should have the right to sell their business, but the bank’s influence over the Federal Reserve and their access to immense amounts of money is dangerous. The danger lies in the pursuit of bankers driving the economy with greater and greater amounts of debt. Can anyone say that low-interest loans on $50bn, for the merger of two large companies, is what is best for society? People rarely ask that question, but unemployment is in danger of rising as a result of it. If interest rates were at 10%, fewer mergers could occur, but the current monetary policy seems to largely serve the banking system, above all.

Humanity’s Great Adaptation

The aftermath of the Great Recession saw the Federal Reserve flex its muscle. People often see power as the government sending its military to war. Or local police abusing their ability to use force on civilians. However, there is a much scarier power, wielded over people since the day they were born, which is the incentives that are attached to owning money, largely in the hands of financial institutions.

Pundits are saying that everything is fine since the world is getting wealthier and poverty is slowly but surely being minimised. An honest look at the world shows massive advancement in technology and little improvement on anything else. Humanity has the ability to survive extreme conditions and still proves it every day. The jobs and opportunities people create for themselves every day are a testament to the strength and resilience of humankind. But this is no excuse for letting the economic system run amok. People’s ability to adapt to their environment is not an excuse to keep the status-quo going. The power of the Federal Reserve should be harnessed for the good of people, not just the banks and the super wealthy that can benefit from the bank’s financial products.

Conclusion

The pundits are saying that consolidation is part of business as usual, that there are jobs and that people find ways of making a living. But people’s ability to innovate and fight for their survival is little reason not to be concerned. The massive debt, accumulating because of low-interest loans, actually makes life more difficult for the average person. It is great for the lucky few who can sell their businesses, but on the whole, society is being driven towards hardship. All this debt can’t help the poor because they aren’t credit-worthy. And the middle-class is occupied paying their mortgages. The effects of the banking system on humanity are pervasive, and in the end, pitted directly against a prosperous society.

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