Pundits and politicians are bemoaning the entiely predictable failure of America’s financial triplets’ [the banking, insurance and investment Behemoths]  irresponsible financial behavior over the past two decades: Bear Stearns, Indymac, Lehman Brothers, AIG, Fannie and Freddie, WAMU, Morgan Stanley, other lesser knowns and others yet to come.

The pundits want to explain the situation by pointing at everthing from executive compensation to overregulation.  The dems want to blame it on Bush and the republicans want to trace it back to Clinton.  You won’t find an answer that makes sense listening to any of those folks and their agenda driven drivel.

Here’s the straight skinney.

During the Clinton years, which coincided with [but did not create] a long and strong bull market, the line betweeen and among banks, broker-dealers, investment advisories and insurance companies got blurred and in some cases erased.  This blurring continued into the 21st century and the Bush years.  But, the bull market didn’t.

During the bull market the financial services industry came to the realization that the more money they could extract from Americans like you and me, the more money they could make for themselves. Moreover, they found that ‘invested’ dollars were more profitable for them than any others.  This led The Behemoths to create the myth that every American should be investing.

This myth was easy to perpetuate because of the bull market’s seemingly relentless growth.  When the bull market ended, however, the myth was in jeopardy.  Americans were running out of money and were less inclined to ‘invest’ and that meant the financial services folk might have to take a cut in pay. 

The Behemoths needed a way to perpetuate the myth.  Enter the easy mortgage, the HELOC, the concept of ‘harvesting equity,’ the emphasis on massive and misguided 401(k) contributions [see final thoughts below] and a variety of other strategies to extract money from Americans.

The result for many Americans is that they have no money and the investments they bought with the money they borrowed from their home equity - or their credit cards - are worth less than they paid for them.

Now the problem arises.

• Americans have a ton of debt.
• They had been led to believe that using debt to buy ‘investments’ was a good idea.
• It wasn’t.
• Now, Americans can’t repay the debt they incurred to buy ‘investments.’
• Now the companies that convinced Americans to ‘invest,’ and also loaned them the money to do so, can’t collect because Americans have no money - they only have ‘investments’ that are worth less than the debt they incurred to buy them.
• Crash, boom, bang!

KAL’s cartoon

Sep 18th 2008
From The Economist print edition

One final thought. If you think your 401(k) [or any investment plan for that matter] is a good deal because you are putting a large amount of money into it, think again.  If you put $10,000 in a 401(k) and incur the same amount of debt in the same year, you will likely pay more in debt service than you earn in your retirement savings account. 

And another…Tax deductibility is a monkey trap that many Americans fall into and never escape.

_______________________________

www.YouBetheBank.com

Filed under: Personal Economy, Taxes, The Dungeon of Debt, Uncategorized, What others have to say, 401 k contributions, aig, bank, banking, banks, bear stearns, credit, debt, easy mortgage, executive compensation, financial, financial behavior, heloc, indymac, insurance companies, investing, investments, lehman brothers, Money, morgan stanley, mortgage, Retirement, saving, savings, Taxes, undefined, wamu