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NEITHER A BORROWER OR LENDER BE (PART I)

September 16, 2013

NEITHER A BORROWER NOR LENDER BE (PART I)

We all pay interest whether we sign on the dotted line or not. Thus when a retail merchant borrows money via accounts receivable loans, conventional loans, or whatever, the retail merchant includes such interest costs in the cost of product sold to you, so you are in effect paying the merchant’s interest on your purchase of the merchant’s product or service, along with the interest and profit margin to all those involved in the chain of commerce up to the point of retail. Everyone (and their bankers) in the chain of commerce takes a cut, so by the time the ultimate cost to you is collected, the retail price is greatly inflated. You as a consumer have not only paid the retailer’s cost of goods; you have also paid the retailer’s financing of the goods, their transportation, warehousing etc. You as an ultimate consumer have paid all costs plus a profit to the retailer with your purchase, and if it is a car or other large item that you must also finance, you are paying further interest directly rather than indirectly on the purchase for perhaps several years, and banks are involved every step of the way. The banks sell money, not cars or houses (except in cases of repossession or foreclosure). They are the good guys; they facilitate purchases and thus demand, which is the grease of the economy’s growth engine.

It is not only retailers and wholesalers who take a cut (profit) from the sale of goods and services; Wall Street operates their loan windows with leveraged (borrowed) funds at ratios to reserves that are downright scary and take commissions and fees in addition to heavy interest. They do not follow the titular adage: they are both borrowers and lenders. With globalization, Wall Street roams the globe armed with huge pools of capital (leveraged and otherwise) in search of big profits at the lowest possible risks, and to the extent that they can get governments to reduce their risks beyond the market reality (see Merkel and the EU and Greek bonds), they are the beneficiaries of corporate welfare. The rest of us have to live with market realities; we don’t have the clout or the money or access to it enjoyed by Wall Street. Few of us can afford massive bond purchases, Greek or otherwise.

The foregoing is prelude to my topic for today, to wit: the responsibilities of BOTH borrower and lender in a loan transaction. I was moved to write about this after reading an article by Jeff Madrick in Harper’s Magazine, July 2013 edition. He writes of the history of debt and the responsibility of both borrowers and lenders to manage its consequences. He notes that the term “debt” itself (via anthropologist David Graeber) is in many languages a synonym for “fault,” “sin,” or “guilt.” Such associations are, of course, to the obvious rhetorical benefit of the lender who refuses to forgive debts. More importantly, notes the anthropologist, such language leaves borrowers believing they have an obligation to pay what they owe. He takes it one step further, arguing that strict enforcement of debt contracts is in fact a kind of class warfare. There is a certain moral edge to the idea of paying one’s debts; can it ever be moral not to pay one’s debts, or to adjust payment schedules or otherwise require the lender to share in the responsibility of debt forgiveness or reduction? Yes.

This is a new way of looking at an old problem. Lenders have responsibilities, too. They accept a certain amount of risk. When boom and bust cycles recur and recur, as happened during the 19th and early 20th century with “wildcat banks,” during the S & L crisis of the early 80s and the 2008 housing and banking collapse, all examples of PROFLIGATE LENDING as well as borrowing, why is it that borrowers have to assume 100 percent of the fallout? What about the responsibilities of the lenders? Why, for instance, should under-regulated “wildcat banks” with their reckless lending (which can be traced all the way back to the Panic of 1819 during a frenzy of land speculation caused by cotton wealth) be absolved of all responsibilities in loans made to borrowers? Why in a two-sided loan transaction is it always the debtor who takes all of the responsibility for repayment irrespective of the situation in which the transaction was concluded or the irresponsible conduct of the lender in causing panics, recessions and near-depressions (see Wall Street big banks’ roles in the 2008 near-depression).

The fact is that we DO believe in debt forgiveness and reduction, BUT on a selective basis. Our federal government bailed out banks and businesses (investment houses and an insurance company) but denied any such assistance to individual borrowers (Americans with underwater mortgages which were arguably caused as much by greedy banks as by borrowers). Greedy Wall Street banks were much more responsible for the 2008 near-depression crisis than borrowers on mortgages, yet the banks and their minions were bailed out and mortgage borrowers were left hanging on the vine – a clear case of preferring the rich and well-connected over the mortgage borrowers, who were left to die on the vine and watch their home equity tank. Yet we say the borrowers are the bad guys and tighten the bankruptcy code to deny them relief – relief from a near depression they did not cause – one caused instead by the very people who were bailed out! What?

Iceland had a 2008 financial crisis, too. Its parliament nationalized failing banks, forced them along with other lenders to reduce excessive mortgage debt, and made shareholders take the losses. Here we did just the opposite. We bailed out the bad guys and put the marginally good guys underwater. The president of Iceland put it nicely: “Why are the banks considered to be the holy churches of the modern economy? Why are private banks not like airlines and telecommunication companies and allowed to go bankrupt if they have been run in an irresponsible way?” He is right; I have no answer for him.

Greeks these days are castigated for their poor work ethic, but it turns out that they work longer hours than many in the EU, including the notoriously industrious Germans. It was the German banks and other lenders who rushed in to make low-interest loans to the Greeks in the early 2000s, and they made huge profits as a result. Now the Greeks are the bad guys who can’t or won’t pay their bills. The Germans and other such lenders apparently have no responsibilities in having set the Greeks up for the fall, and now regularly lecture the Greeks as lazy and irresponsible (even as unemployment and austerity are making the situation yet worse, austerity being forced upon Greece as a condition for further “loans”).

Part II will expand on how greedy Wall Street banks caused other crises in the near past in East Asia and Latin America along with a look at what an enlightened bankruptcy code and relief from inequality could do for America’s economic recovery from our present and continuing malaise. Stay tuned.  GERALD  E

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2 Comments
  1. My eldest sister is fond to point out that it was the liberal Democrats in the 1990’s who demanded home loans to be made to people in the lower economic strata. There is hard proof of that. However, I am not so convinced of her point. Having worked in a bank in my college years, I could NEVER conceive of our loan officers making deals with customers based upon no money down with no adequate income to pay off a loan! I keep telling her that it is STILL the responsibility of banks, first and foremost, who allow these unstable loans to be made, but she does not buy that. She says the government “forced” banks to make these loans. What say you about her charge against the liberal housing agenda of the Clinton years?

    • I say that is an old cover (and even if true – peanuts by comparison) for the Wild West unregulated trip Wall Street took us with their credit derivative sales around the globe undergirded by the almost worthless mortgage pools supposedly supplying the collateral for such derivatives. Conservatives are feeling the heat for Bush’s blundering and want to bring up the usual canards of Freddie Mac, Fannie Mae, and Clinton’s loose mortgage paper to put people into houses who could not afford them. Any giant program will have its shortcomings under any administration, of course, but the arguments made in re Clinton, even if true, pale into insignificance when compared with those of George Bush, who showed Clinton how to do it. Bush was asleep at the switch, as were his regulators, and we are still feeling the sting from their respective slumbers. Niel informs me that his friend Jim Everett has been arrested at an atomic site in your area. I emailed Jim that he as a prisoner of conscience had distinguished company (M.L. King, Mahatma Gandhi, Jesus Christ et al.) and congratulated him upon his arrest. I predict community service, and I hope it is easy service (since I understand he walks with a cane). Warming here after near frosts earlier this week. P.S. I just blogged on the danger that the Republican party will become irrelevant unless they discipline their tea party element. Jerry

      On Wed, Sep 18, 2013 at 1:06 PM, elderblogger

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