First Short Quiz Suggested Answers

[johnkarls]

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Question 1

What is the main criticism our authors are leveling at the U.S. banking system?

Answer 1

It is too highly leveraged.

Question 2

Are there other criticisms that could also be made?

Answer 2

(A) The commercial banks of the last decade (and the S&L’s of the 1980’s and 1990’s) obtained “free money” funding, courtesy of Federal Deposit Insurance Corp (“FDIC”) loan guarantees, at rates that did not (and still do not) reflect the actual risk in the absence of those guarantees.

(B) The commercial banks invest their under-priced over-leveraged funds in risky investments.

(C) Following the 1999 repeal of the Glass-Steagall Act, the ownership of the commercial banks and their under-priced over-leveraged funds can be combined in the same group as investment banks and their risky investment vehicles.

Question 3

Do banks make a significant percentage of the loans to American businesses?

Answer 3

No.

As we have studied several times in the past, it is true that in broad general terms (A) only American businesses that have NOT exported American jobs need loans, and (B) virtually all of the loans to these CHUMP American companies have been made by foreign tax-haven subsidiaries in which have accumulated virtually all of the worldwide profits of the American companies that HAVE exported American jobs because the Internal Revenue Code does not permit these funds to be dividended to the U.S. parent or used by affiliates without triggering the 35% U.S. income tax on these profits from exporting American jobs.

Indeed, following our 11/14/2012 meeting, we aimed one of our Six-Degrees-Of-Separation E-Mail campaigns at Princeton Nobel-Laureate Economics Professor and NY Times OpEd Columnist Paul Krugman requesting him to assign some of his graduate students to the task of confirming empirically that the 2008-201? economic meltdown was really caused by the $3 TRillion - $4 TRillion reduction in American payroll and American capital expenditures as the CHUMP American companies were forced to repay their borrowings of that amount from the tax-haven subs of the American job exporters when the U.S. Congress suddenly granted a one-time-only special 5.25% U.S. corporate income tax rate on their dividends to their U.S. parents.

[Details are available in the first section of http://www.ReadingLiberally-SaltLake.org where all of our Six-Degrees-Of-Separation E-mail campaigns are collected and further amplification is available by scrolling down on that bulletin board to the materials relating to the 11/14/2012 meeting and to earlier meetings referenced in those materials.]

NB =

A main impetus of the Six-Degrees-Of-Separation E-mail campaign to Prof. Krugman was the fact that since the time the short-duration special 5.25% rate on dividends from the tax-haven subsidiaries was granted before the 2008-201? economic meltdown, another $5 TRillion in earnings from exporting American jobs had piled up in the tax-haven subsidiaries.

And the job exporters were now agitating for “territorial taxation” which meant a complete exemption from income tax for profits from exporting American jobs!!!

[“Territorial taxation” was included in both President Obama’s Official Simpson-Bowles Deficit Reduction Commission Report and in the independent Rivlin-Domenici Deficit-Reduction Commission Report. In the wake of those reports, the American job exporters continued to push “territorial taxation” as a legislative proposal in Congress.]

Accordingly, the purpose of our challenge to the Sub-Prime Mortgage Crisis Myth was to avoid another catastrophic economic meltdown caused by another Multi-TRillion reduction in American payroll and capital expenditures by the CHUMP companies if our theory was correct about the real causation of the 2008-201? economic meltdown.

We have now left the issue in the capable hands of Prof. Krugman.

With the solace that the Trojans refused to listen to Cassandra!!! And we, like Cassandra, have done our duty in issuing the warnings!!!

Question 4

Do banks make a significant percentage of the mortgage loans in America?

Answer 4

No. Please see Q&A-5 for further details.

Question 5

If banks were stupid enough to invest in mortgage loans (as distinguished from originating mortgage loans and immediately selling them in the old days to Fannie Mae/Freddie Mac and nowadays to Ben Bernanke’s Federal Reserve -- and then collecting fees for “servicing” the mortgage loans owned by Fannie/Freddie/Bernanke), would we be witnessing the beginning of a Grade Z Hollywood re-make of the “Savings & Loan Crisis” of the 1980’s and 1990’s?

Answer 5

Of course.

Financing long-term fixed-return assets with short-term borrowing (customer deposits) is INSANE because any rise in short-term interest rates makes the long-term low-return assets TOXIC.

Question 6

Are Ben Bernanke and his Federal Reserve acting properly in buying $85 billion of mortgage loans PER MONTH (which they having been doing for a year already and which Ben Bernanke announced this past week that they would continue to do for the foreseeable future)?

Answer 6

Yes.

Because the U.S. Federal Reserve, unlike European central banks, has been tasked in the U.S. Code with the objective of maintaining U.S. employment in addition to minimizing inflation. And no other institution can print money to finance TOXIC assets. Which means that the entire housing sector would continue to be an albatross around the neck of the U.S. economy unless the Fed acted as it did.

However, the Fed’s action could, and perhaps should, raise the policy issue for Congress to consider in connection with a possible modification of the Fed’s prescribed objectives, whether U.S. housing should continue to be subsidized in the long term by the federal government. In which vein the U.S. income tax deduction for mortgage interest expense could also be considered.

Question 7

What is considered the minimum equity a homeowner must have before a mortgage is considered “sub prime”?

Answer 7

20%.

Question 8

What is considered the minimum equity a corporation must have before it is considered over-leveraged?

Answer 8

20%.

Question 9

What is the typical equity of a bank?

Answer 9

3% according to our authors.

Question 10

During the 2008-20?? economic meltdown, did Goldman Sachs suddenly register itself as a commercial bank so that nobody would “look cross eyed” at the sudden plummeting of its equity toward the 3% typical equity of a commercial bank?

Answer 10

Yes.

Question 11

How do commercial banks get their “free money” (that is, deposits at interest rates that do not reflect the actual risk in the absence of federal-government guarantees through the FDIC)?

Answer 11

The question’s parenthetical is its answer.

Question 12

If commercial banks obtain “free money” courtesy of the FDIC and operate on razor-thin 3% equity, don’t the nation’s taxpayers deserve better policing of their potential liability for the other 97% of each commercial bank’s assets financed by the “free money” provided by the guarantees of the nation’s taxpayers through the FDIC?

Answer 12

Of course.

Question 13

Who provides that policing now? Are the rules enforced by bank regulators adequate? Are our authors correct that a better approach would include the requirement for a significant increase in the 3% equity for commercial banks?

Answer 13

Policing is provided by bank regulators. Who are federal regulators in the case of federal banks and state regulators in the case of non-federal banks.

What do you think about the current rules and a significant increase in equity??? Let’s discuss at our meeting!!!

Question 14

Is it really necessary to increase the 3% equity of commercial banks which obtain “free money” courtesy of the guarantee provided by the nation’s taxpayers through the FDIC, since the commercial banks don’t make significant loans to business and they don’t own (vs. originate and service) mortgage loans but instead concentrate on making credit-card loans to the nation’s taxpayers at exorbitant interest rates?

Answer 14

What do you think??? Let’s discuss at our meeting!!!