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The rich, as Voltaire said, require an abundant supply of poor.
Image by Renegade98
Top photo: Leo Russell
Middle photo: Steph Goralnick
Bottom photo: Leo Russell
From Adbusters #74, Nov-Dec 2007
The Empire of Debt
Money for nothing. Own a home for no money down. Do not pay for your appliances until 2012. This is the new American Dream, and for the last few years, millions have been giddily living it. Dead is the old version, the one historian James Truslow Adams introduced to the world as “that dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement.”
Such Puritan ideals – to work hard, to save for a better life – didn’t die from the natural causes of age and obsolescence. We killed them, willfully and purposefully, to create a new gilded age. As a society, we told ourselves we could all get rich, put our feet up on the decks of our new vacation homes, and let our money work for us. Earning is for the unenlightened. Equity is the new golden calf. Sadly, this is a hollow dream. Yes, luxury homes have been hitting new gargantuan heights. Ferrari sales have never been better. But much of the ever-expanding wealth is an illusory façade masking a teetering tower of debt – the greatest the world has seen. It will collapse, in a disaster of our own making.
Distress is already rumbling through Wall Street. Subprime mortgages leapt into the public consciousness this summer, becoming the catchphrase for the season. Hedge fund masterminds who command salaries in the tens of millions for their supposed financial prescience, but have little oversight or governance, bet their investors’ multi-multi-billions on the ability that subprime borrowers – who by very definition have lower incomes and/or rotten credit histories – would miraculously find means to pay back loans far exceeding what they earn. They didn’t, and surging loan defaults are sending shockwaves through the markets. Yet despite the turmoil this collapse is wreaking, it’s just the first ripple to hit the shore. America’s debt crisis runs deep.
How did it come to this? How did America, collectively and as individuals, become a nation addicted to debt, pushed to and over the edge of bankruptcy? The savings rate hangs below zero. Personal bankruptcies are reaching record heights. America’s total debt averages more than 0,000 for every man, woman, and child. On a broader scale, China holds nearly trillion in US debt. Japan and other countries are also owed big.
The story begins with labor. The decades following World War II were boom years. Economic growth was strong and powerful industrial unions made the middle-class dream attainable for working-class citizens. Workers bought homes and cars in such volume they gave rise to the modern suburb. But prosperity for wage earners reached its zenith in the early 1970s. By then, corporate America had begun shredding the implicit social contract it had with its workers for fear of increased foreign competition. Companies cut costs by finding cheap labor overseas, creating a drag on wages.
In 1972, wages reached their peak. According to the US department of Labor Statistics, workers earned 1 a week, in inflation-adjusted 1982 dollars. Since then, it’s been a downward slide. Today, real wages are nearly one-fifth lower – this, despite real GDP per capita doubling over the same period.
Even as wages fell, consumerism was encouraged to continue soaring to unprecedented heights. Buying stuff became a patriotic duty that distinguished citizens from their communist Cold War enemies. In the eighties, consumers’ growing fearlessness towards debt and their hunger for goods were met with Ronald Reagan’s deregulation the lending industry. Credit not only became more easily attainable, it became heavily marketed. Credit card debt, at 0 billion, is now triple what it was in 1988, after adjusting for inflation. Barbecues and TV screens are now the size of small cars. So much the better to fill the average new home, which in 2005 was more than 50 percent larger than the average home in 1973.
This is all great news for the corporate sector, which both earns money from loans to consumers, and profits from their spending. Better still, lower wages means lower costs and higher profits. These factors helped the stock market begin a record boom in the early ‘80s that has continued almost unabated until today.
These conditions created vast riches for one class of individuals in particular: those who control what is known as economic rent, which can be the income “earned” from the ownership of an asset. Some forms of economic rent include dividends from stocks, or capital gains from the sale of stocks or property. The alchemy of this rent is that it requires no effort to produce money.
Governments, for their part, encourage the investors, or rentier class. Economic rent, in the form of capital gains, is taxed at a lower rate than earned income in almost every industrialized country. In the US in particular, capital gains are being taxed at ever-decreasing rates. A person whose job pays 0,000 can owe 35 percent of that in taxes compared to the 15 percent tax rate for someone whose stock portfolio brings home the same amount.
Given a choice between working for diminishing returns and joining the leisurely riches of the rentier, people pursue the latter. If the rentier class is fabulously rich, why can’t everyone become a member? People of all professions sought to have their money work for them, pouring money into investments. This spurred the explosion of the finance industry, people who manage money for others. The now- trillion mutual fund industry is 700 times the size it was in the 1970s. Hedge funds, the money managers for the super-rich, numbered 500 companies in 1990, managing billion in assets. Now there are more than 6,000 hedge firms handling more than trillion dollars in assets.
In recent years, the further enticement of low interest rates has spawned a boom for two kinds of rentiers at the crux of the current debt crisis: home buyers and private equity firms. But it should also be noted that low interest rates are themselves the product of outsourced labor.
America gets goods from China. China gets dollars from the US. In order to keep the value of their currency low so that exports stay cheap, China doesn’t spend those dollars in China, but buys us assets like bonds. China now holds some 0 billion in such US IOUs. This massive borrowing of money from China (and to a lesser extent, from Japan) sent us interest rates to record lows.
Now the hamster wheel really gets spinning. Cheap borrowing costs encouraged millions of Americans to borrow more, buying homes and sending housing prices to record highs. Soaring house prices encouraged banks to loan freely, which sent even more buyers into the market – many who believed the hype that the real estate investment offered a never-ending escalator to riches and borrowed heavily to finance their dreams of getting ahead. People began borrowing against the skyrocketing value of their homes, to buy furniture, appliances, and TVs. These home equity loans added 0 billion to the US economy in 2004 alone.
It was all so utopian. The boom would feed on itself. Nobody would ever have to work again or produce anything of value. All that needed to be done was to keep buying and selling each other’s houses with money borrowed from the Chinese.
On Wall Street, private equity firms played a similar game: buying companies with borrowed billions, sacking employees to cut costs, and then selling the companies to someone else who did the same. These leveraged buyouts inflated share values, minting billionaires all around. The virtues that produce profit – innovation, entrepreneurialism and good management – stopped mattering so long as there were bountiful capital gains.
But the party is coming to a halt. An endless housing boom requires an endless supply of ever-greater suckers to pay more for the same homes. The rich, as Voltaire said, require an abundant supply of poor. Mortgage lenders have mined even deeper into the ranks of the poor to find takers for their loans. Among the practices included teaser loans that promised low interest rates that jumped up after the first few years. Sub-prime borrowers were told the future pain would never come, as they could keep re-financing against the ever-growing value of their homes. Lenders repackaged the shaky loans as bonds to sell to cash-hungry investors like hedge funds.
Of course, the supply of suckers inevitably ran out. Housing prices leveled off, beginning what promises to be a long, downward slide. Just as the housing boom fed upon itself, so too, will its collapse. The first wave of sub-prime borrowers have defaulted. A flood of foreclosures sent housing prices falling further. Lenders somehow got blindsided by news that poor people with bad credit couldn’t pay them back. Frightened, they staunched the flow of easy credit, further depleting the supply of homebuyers and squeezing debt-fueled private equity. Hedge funds that merrily bought sub-prime loans collapsed.
More borrowers will soon be unable to make payments on their homes and credit cards as the supply of rent dries up. Consumer spending, and thus corporate profits, will fall. The shrinking economy will further depress workers’ wages. For most people, the dream of easy money will never come true, because only the truly rich can live it. Everyone else will have to keep working for less, shackled to a mountain of debt.
_Dee Hon is a Vancouver-based writer has contributed to The Tyee and Vancouver magazine.
Adbusters Magazine
adbusters.org/the_magazine/74/The_Empire_of_Debt.html
housing bubble..if i pop, you’re screwed!! …..item 3..US homes lost to foreclosure up 25 pct on year (September 2010) …..item 5…The financial fallout was an ‘Inside Job’……
Image by marsmet47
"If the people understood the rank injustice of the money and banking system, there would be a revolution by morning." – Andrew Jackson "
Our goal is gradually to absorb the wealth of the world." – Cecil Rhodes. "
The Federal Reserve is the most corrupt institution the world has ever seen." – US Congressman Luis McFadden. "
Banks loan money they DO NOT HAVE" – John Maynard Keynes. "
A "loan" made by a bank is a clear addition of money into the community." – Encyclopedia Britannica, 14th ed.
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…..item 1)…web-link……yahoo news…Housing Optimists Are "Not Paying Attention" to the Facts, Says Dean Baker
Posted May 12, 2010 10:02am EDT by Heesun Wee in Investing, Banking, Housing
Related: xhb, ^dji, ^gspc, xlf, tlt, tbt
finance.yahoo.com/tech-ticker/housing-bulls-are-"not…,^dji,^gspc,xlf,tlt,tbt
Among the crowded ranks of economists and market watchers, Dean Baker stands out. Baker presciently called the housing bubble when he published “The Run-up in Home Prices: Is It Real or Is It Another Bubble?” in 2002.
So does our guest Baker see the so-called housing recovery now? "No. I mean I think people that are saying that just aren’t paying attention to what’s in front of their eyes," says Baker, an American economist and co-director of the Center for Economic and Policy Research.
"I think we’re going to see a big fall-off in purchases for the rest of 2010 and even into 2011,” Baker says. “So the idea that somehow the market is stable, that housing prices will rise anytime soon – it’s really hard to make a case for that."
Baker lays out several reasons for his bearish case:
* Programs that lifted the market, including the tax credit for first-time buyers, have expired.
* The Federal Reserve is exiting the mortgage market, which will likely push rates to 5.5% to 6% by the end of the year.
* There’s still an inventory glut and rental rates are falling in many markets, notes Baker, author of "False Profits: Recovering from the Bubble Economy." He says the rental market doesn’t lie.
Naturally the housing bulls disagree. Hedge-fund manager John Paulson, for example, said housing prices in hard-hit California will begin to rise this year, setting the stage for a wider recovery, as the FT reports.
So what are the chances of, say, another tax credit or purchase of mortgage-backed securities? "I think they’d be reluctant to do that because of the signal it would send," Baker says in the accompanying clip. "I mean it would send this unambiguous signal things really are bad, worse than had been advertised."
Click on the player to learn about Baker’s idea to let struggling homeowners stay in their homes, and prevent home inventory from climbing even higher.
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…..item 2)…….housing bubble….flickr member…TheTruthAbout…
farm4.static.flickr.com/3078/2683703739_818b785616.jpg
Excess…
I took this photo while just north of Los Angeles in the city of Santa Maria. It’s been one of the harder-hit areas of California, despite being fairly close to pricey and always fashionable Santa Barbara. Perhaps too much building/supply and simply not enough demand was the problem here. This particular photo was taken right off the 101 freeway, and actually only captured a handful of the many, many real estate signs planted on the patch of growth by the on-ramp. I was immediately drawn to the scene, as I felt it summed up the housing bubble perfectly, which in my opinion, has been all about excess – photo courtesy The Truth About Mortgage
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…..item 3)…..Yahoo! News …bought to you by Yahoo! Finance….US homes lost to foreclosure up 25 pct on year
By ALEX VEIGA, AP Real Estate Writer
Thursday September 16, 2010
news.yahoo.com/s/ap/20100916/ap_on_bi_ge/us_foreclosure_r…
LOS ANGELES – Lenders took back more homes in August than in any month since the start of the U.S. mortgage crisis.
The increase in home repossessions came even as the number of properties entering the foreclosure process slowed for the seventh month in a row, foreclosure listing firm RealtyTrac Inc. said Thursday.
In all, banks repossessed 95,364 properties last month, up 3 percent from July and an increase of 25 percent from August 2009, RealtyTrac said.
August makes the ninth month in a row that the pace of homes lost to foreclosure has increased on an annual basis. The previous high was in May.
Banks have been stepping up repossessions to clear out their backlog of bad loans with an eye on eventually placing the foreclosed properties on the market, but they can’t afford to simply dump the properties on the market.
Concerns are growing that the housing market recovery could stumble amid stubbornly high unemployment, a sluggish economy and faltering consumer confidence. U.S. home sales have collapsed since federal homebuyer tax credits expired in April.
That’s one reason fewer than one-third of homes repossessed by lenders are on the market, said Rick Sharga, a senior vice president at RealtyTrac.
"These (properties) are going to come to market, but very slowly because nobody wants to overwhelm a soft buyer’s market with too much distressed inventory for fear of what it would do for house prices," he said.
As a result, lenders are putting off initiating the foreclosure process on homeowners who have missed payments, letting borrowers stay in their homes longer.
The number of properties receiving an initial default notice — the first step in the foreclosure process — slipped 1 percent last month from July, but was down 30 percent versus August last year, RealtyTrac said.
Initial defaults have fallen on an annual basis the past seven months. They peaked in April 2009.
Still, the number of homes scheduled to be sold at auction for the first time increased 9 percent from July and rose 2 percent from August last year. If they don’t sell at auction, these homes typically end up going back to the lender.
More than 2.3 million homes have been repossessed by lenders since the recession began in December 2007, according to RealtyTrac. The firm estimates more than 1 million American households are likely to lose their homes to foreclosure this year.
In all, 338,836 properties received a foreclosure-related warning in August, up 4 percent from July, but down 5 percent from the same month last year, RealtyTrac said. That translates to one in 381 U.S. homes.
The firm tracks notices for defaults, scheduled home auctions and home repossessions — warnings that can lead up to a home eventually being lost to foreclosure.
Among states, Nevada posted the highest foreclosure rate last month, with one in every 84 households receiving a foreclosure notice. That’s 4.5 times the national average.
Rounding out the top 10 states with the highest foreclosure rate in August were: Florida, Arizona, California, Idaho, Utah, Georgia, Michigan, Illinois and Hawaii.
Economic woes, such as unemployment or reduced income, are now the main catalysts for foreclosures.
Lenders are offering a variety of programs to help homeowners modify their loans, but their success rates vary. Hundreds of thousands of homeowners can’t qualify or fall back into default.
The Obama administration has rolled out numerous attempts to tackle the foreclosure crisis but has made only a small dent in the problem. Nearly half of the 1.3 million homeowners who enrolled in the Obama administration’s flagship mortgage-relief program have fallen out.
The program, known as Making Home Affordable, has provided permanent help to about 390,000 homeowners since March 2009.
Regardless, many troubled borrowers have seen their efforts to get a loan modification stymied.
Larry Book of Winter Garden, Fla., was one packet away from a permanent loan modification from Chase under the Obama administration’s foreclosure prevention plan after more than a year of back and forth and one failed attempt.
But his modification never went through. Instead, his loan was transferred from Chase to IBM Lender Business Process Servicers in July and he was told he owed ,562.62 and must bring his mortgage current by Sept. 15 or foreclosure proceedings will begin.
"It just becomes too exhausting," Book said about the modification process. "That’s why some people walk away. But I’ve invested too much and given up too much to just let it go."
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AP Real Estate Writer J.W. Elphinstone in New York contributed to this report.
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…..item 4)…..Yahoo! News…..6 Trillion Retirement Deficit…September 2010
CNBC EXCLUSIVE
news.yahoo.com/video/business-15749628/21910261#video=219…
There’s a .6 trillion gap between what Americans will need to retire and what they will actually have, according to a Retirement USA study. CNBC’s Scott Cohn has the details.
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…..item 5)….website….Marketplace……..The financial fallout was an ‘Inside Job’….with youtube video…
Wednesday, September 15, 2010
Kai Ryssdal talks to Director Charles Ferguson about his new documentary "Inside Job," which explores the causes of the 2008 financial crisis.
photo of …..Director Charles Ferguson. (Ian Gavan/Getty Images)
images.publicradio.org/content/2010/09/15/20100915_charle…
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marketplace.publicradio.org/display/web/2010/09/15/pm-the…
TEXT OF INTERVIEW
KAI RYSSDAL: I know I said yesterday that I’m not a big fan of anniversary stories, but this is kind of a big week. Two years ago today, Lehman Brothers went broke, kicking off a stretch of a crazy couple of months that we’re still trying to recover from.
Documentary filmmaker Charles Ferguson has a new movie out — "Inside Job, it’s called — that tries to explain what happened that fall and to figure out who’s to blame.
So that’s where we started when we talked, with me asking whether it’s possible to blame individuals for the whole financial crisis, or whether the problems on Wall Street were more systemic?
CHARLES FERGUSON:What has happened is that a very substantial fraction of the financial services industry has come to be outside the law, and as it has become increasingly powerful, it has attracted increasingly amoral people. Its behavior has become more and more dangerous to the financial system and to the American economy.
RYSSDAL: There was also a sort of trend of not talking about any of this stuff. There’s a great moment in the film when one of the few regulators you’ve got on camera was Christine Lagarde, the French finance minister. And you started asking her about Lehman Brothers, and when she found out that it was going under.
FERGUSON: When were you first told Lehman in fact was going to go bankrupt?
CHRISTINE LAGARDE:After the fact.
FERGUSON: After the fact? Wow, OK. And what was your reaction when you learned of it?
LAGARDE:Holy cow.
RYSSDAL: Clearly, we’re connected financially, but not so much along the lines of communication, huh?
FERGUSON: I was truly, truly dumbstruck when I learned the extent of the ignorance and disconnect in this, of the American regulatory system during the crisis. Paulson, Bernanke, were astonishingly ignorant of the consequences of their decision. They did not understand foreign bankruptcy laws, they did not understand that all transactions in London would be halted and then that would cause catastrophic financial results cascading throughout the financial system almost immediately.
RYSSDAL: I want to play something from the film. It’s Allan Sloan, he’s a senior editor at Fortune magazine. He’s a well-respected financial writer. He tells a little story.
ALLAN SLOAN: A friend of mine who’s involved in a company that has big financial presence said, "Well, it’s about time you learned about sub-prime mortgages." So he set up a session with his trading desk and me. And the techie who did all this gets very excited, runs to his computer, pulls up in about three seconds this Goldman Sachs issue of securities. It was a complete disaster. Borrowers had borrowed on average 99.3 percent of the price of the house, which means that they had no money in the house.
RYSSDAL: So for all the blame that Allan puts on Goldman Sachs — and certainly they deserve it — what about Americans looking in the mirror and saying, you know what, a little bit of this is our fault too.
FERGUSON: Well, certainly that’s true to some extent. There was a bubble, and it was a big bubble and many people bought houses that they couldn’t afford and were careless with regard to the loan documentation that they signed. But over half of people who received sub-prime mortgages actually would have qualified for a less expensive prime mortgage. They were steered into more expensive sub-prime mortgages by mortgage brokers who were paid extra money the more expensive the loan they made was. So it was something that was cultivated, and in many regards, forced upon the American people by the financial services industry.
RYSSDAL: How come nobody went to jail?
FERGUSON: Well, there’s a simple obvious answer and then there’s a deeper, more complicated answer, which I don’t fully understand. The simple obvious answer is that this has become an out-of-control industry; a very, very powerful industry.
RYSSDAL: What’s the more subtle reason that you haven’t quite figured out?
FERGUSON: For some reason that I truly don’t understand, this situation has not generated the level of popular outrage that similar or comparable things have generated at other times in American history. There have been other times in American history — some recent, some long ago — when our leaders, our business leaders, and/or our political leaders, have done something terribly wrong and more than once, the American people have risen up and said, "We simply will not permit this." And that hasn’t happened here, yet. I think that part of the reason that it hasn’t happened might be that people think that finance is too complicated for them to understand, and that the situation is too complicated for them to understand. And indeed one reason that I made the film is to make it clear that actually they can understand it.
RYSSDAL: Charles Ferguson, his new film is about the financial crisis and the events of fall two years ago and how it got there. It’s called "Inside Job." Mr. Ferguson, thanks so much for your time.
FERGUSON: Thank you.
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…..item 6)……website….DNAinfo….Manhattan Local News…..New York Film Festival Documentary Tackles Wall Street Greed
October 1, 2010 7:23am
Director Charles Ferguson explores the financial meltdown.
dnainfo.com/20101001/manhattan/new-york-film-festival-doc…
MIDTOWN — Academy Award-winning director Charles Ferguson has shifted his sights from the origins of the Iraq War to greed on Wall Street.
The director of "No End in Sight," which examined the Bush Administration’s actions leading up to the war in Iraq, traces the root causes of the financial meltdown in his latest film, "Inside Job," showing Friday and Monday at the New York Film Festival.
"It’s important that the American people understand what happened here," Ferguson said in an interview with DNAinfo. "I hope that people come away with an understanding…that is hasn’t been fixed yet, and that it’s up to us, the American people to fix it."
Ferguson said even he was taken aback by some of what he learned over the course of interviews with top economists, politicians, scholars and even a Wall Street psychotherapist, who detailed the cocaine habits of senior management level bankers.
Glenn Hubbard, dean at Columbia University’s business school, is taken to task in the film for his ties to leading financial services firms. Ferguson argues that big consulting fees corrupt economic scholarship.
While the film’s message is far from cheery, it features an upbeat soundtrack with songs from Peter Gabriel and Russell Ballard as well as narration from actor Matt Damon. In between interviews, the camera lingers on shots of the Manhattan skyline at dusk and dawn, and zooms down on Learjets, yachts and Long Island mansions.
"I wanted the film to look cool, but also I wanted to convey that New York is a big place, and there is a lot of money here," Ferguson said. "Certainly when we took film of the Hamptons, I wanted to convey to people where all that money was going."
The "Inside Job" will be released in theaters on Oct.8.
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…..item 7)….
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