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4 Secretive Ways Wall Street Extorts You

Wall Street execs continue getting richer off the backs of regular Americans.

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In January,  Richard W. Fisher, president of the Federal Reserve Bank of Dallas, said that Wall Street banks, "... as a result of their privileged status, exact an unfair tax upon the American people."

If a president of a regional Federal Reserve bank (hardly a socialist), is telling us that Wall Street is not only privileged, but using its privileges to "tax" the hell out of us, it might be wise to take a closer look. While he's not literally talking about a tax, he's talking about a kind of extortion -- a virtual tax that ends up in the pockets of our Wall Street barons. 

While our political elites warn us about becoming the next Greece (do we get the tasty retsina, good weather and nice beaches too?), the real "tax and spend" game is taking place on Wall Street, hidden from view. In fact, Wall Street is essentially exerting a hidden tax on us day in and day out -- but we don't even notice or get anything back in return. 

Before describing how Wall Street does it, let's try to wrap our minds around how big our biggest banks really are. In 1970, the top five U.S. banks owned 17 percent of all U.S. banking assets. By 2010, well after the crash, the top five banks owned 52 percent of all our banking assets.

Who are these giant banks today? The usual suspects -- JP Morgan Chase, Bank of America, Goldman Sachs, Citigroup and Morgan Stanley. These five alone have assets that account for more than one quarter of the entire U.S. economy. They form an oligopoly, defined by as "a situation in which a particular market is controlled by a small group of firms. An oligopoly is much like a monopoly, in which only one company exerts control over most of a market. In an oligopoly, there are at least two firms controlling the market."

As a result, a very small group of banks can exert power over markets to boost profits and gouge consumers -- that would be us. The extra we pay to them is precisely like a tax, except we don't know we're paying it. This puts an entirely new spin on "no taxation without representation."

Here are four Wall Street ploys that create a hidden and unfair tax on all Americans.

1. Too-big-to-fail banks jack up every mortgage rate in the country. 

The largest U.S. banks use their oligopoly power to siphon money from the mortgage markets. This means they can charge consumers higher interest rates for loans and credit card debt, and they can keep interest rates on home mortgages higher than they should be. For example, the five largest banks are the primary buyers of loans originated by community banks and mortgage companies. It's still enormously prosperous for giant banks, but the smaller community banks are squeezed. As Jeff Horowitz writes in the  American Banker, "The country's biggest banks are again making handsome profits from buying and servicing home mortgages. The smaller institutions that produce the loans have not been so fortunate."

Neither has the consumer. Although mortgage rates are low because of the financial crash, they would be even lower if the big banks did not extract extra oligopolistic profits. It's just a fact of economics that when competition among banks declines, the cost of mortgages to consumers goes up. How much? This amounts to a hidden tax of $1,000 per year for anyone taking out a 30-year mortgage. But this hidden tax is so subtle that the average consumer has no idea that she is being fleeced. As the  New York Times, reports, "Banks are making unusually large gains on mortgages because they are taking profits far higher than the historical norm, analysts say. That 3.55 percent rate for a 30-year mortgage could be closer to 3.05 percent if banks were satisfied with the profit margins of just a few years ago. The lower rate would save a borrower about $30,000 in interest payments over the life of a $300,000 mortgage."