One aspect of bank reform that is being missed is bankers' ability to make money from deposits. The traditional bankingsystem has for example,depositors making 3% returns on their cash, the bank lending money at 5% and taking a 2% spread. The challenge we are seeing today is that most bank accounts have fees and do not pay any interest (even if you meet the minimum deposit it is still 0.5%). What this is doing is giving banks free access to all of our deposits to use at their will (until the Volker rule comes in 2014).
The wealth disparity between the 99% and the top 1% is partially a result of the way banks operate, and how the Fed funds rate encourages it. Since 1992, the Fed funds rate has never been above 7%. This has made debt an easier choice for individuals and created a "mortgaged society". 70% of Americans have credit cards with an average balance of $16,000. This "easy money" is not free and the average interest rate is 12%. The FHA (through Congress) and the Fed also pushed credit on homebuyers, giving away "low APR" mortgages to anyone in a process that inflated the bubble in housing and has now left even more bad debt in the system.
Banks, Congress and the Fed have ostensibly encouraged lending to consumers to boost an economy that is: not adding jobs, running a $706 billion/yr trade deficit, seeing small business being marginalized due to subsidies to big business and not fostering an investment climate.
Debt is Slavery
This was a sign from Occupy Wall Street and it conveys the message: The 1% maintain their control is through debt. $16,000 at 12% APR is $1200/year the average consumer is paying to the banks for things they have already bought. A mortgage is different because it is an investment that historically appreciated at 3%, so even through you lose money on your housing investment (through taxes, interest, maintenance, etc.) - it is still better long-term than renting and can be classified as an investment.
The government needs to do two things:
1) Encourage consumer debt repayment and legislate the banks to pass on the Fed's low interest rates.
2) Fix the mortgage mess once and for all and dismember the zombie banks. i) Congress legislates principle right-downs for underwater mortgages. ii) The Treasury buys up written down assets into a bad bank. iii) Congress recapitalizes the banks, and the Treasury sells the debt to the Fed. iv) The Fed prints money to buy the debt, creating a structured round on quantitative easing. v) Inflation rises, but the economy begins to work again and the mortgage debt overhang is removed.
The total value of residential properties in the U.S. fell to $19.1 trillion by the end of 2008, down from $21.5 trillion a year earlier, so the losses are already being worked through at the expense of the average American. $4.17 trillion are underwater mortgages. Ceteris parabus that underwater mortgages are 30% underwater - that is $1.4 trillion that needs to be worked out of the system. Will $20 trillion of outstanding US dollars this would amount to 5% inflation that could be controlled through increasing interest rates.
This would achieve two policy goals as well: make imported goods more expensive/make exports less expensive; increase price of imported oil reducing consumption and encouraging conservation/domestic sources.
The alternative is to "muddle through" until house prices bottom (2015-16) and we work through 2 trillion in consumer debt overhang (roughly 14% of US GDP). Assuming a 10 year timeline, that is 1.4 percentage points off of GDP for a decade to come.
