Middle class shuffle – how the banking system has given the illusion of prosperity with debt serfdom to working and middle class Americans. $14 billion in consumer credit yanked from the system last month.
A cold bucket of water was thrown on many middle class Americans when the consumer credit figures for May were released. Analysts were expecting an increase of $1 billion but instead over $14 billion in consumer credit was yanked from the system. You would think that a growing and healthy economy would require more credit as more people enter into the middle class. Yet the banking system has been pulling money away from working and middle class Americans at the same time that they have ramped up speculating in the stock market (with taxpayer money). The fact of the matter is that over the last 40 years middle class Americans have been given the impression of wealth building all on a foundation of debt. This debt was specific since it was handed out like chains from the banking system.
We should first take a look at total debt in the United States:
American consumers hold over $13 trillion in total debt secured by homes, cars, student loans, and other items. As you can see from the above, there are many other areas with enormous amounts of debt. It has been a massive debtor party for the last 40 years and this economic crisis is merely an inflexion point. Many who thought they were middle class are quickly realizing that they were operating on borrowed time from a banking sector that was all the willing to suck taxpayer money dry while pulling access to money away from the public.
The growth in total household debt has been exponential since the 1970s:
What happened during the 1970s? This is when the idea of “deficits don’t matter” took hold and the U.S. was completely decoupled from any static restrictions on the U.S. dollar. We were free to print what we wanted and float the currency. This of course sounded good at the time and in theory, with good leaders at the helm things would turn out okay. But this was a misguided assumption. Banks over this time have used their long tentacles to buy off politicians and weaken the enforcement branch of the government. It finally culminated to our current epic debt crisis. Yet what you notice is the consolidation of banking power. Even after all the bailouts growth is extremely weak. In fact, the only noticeable change has been a direct correlation with government spending which really isn’t good. If I put a dollar into the system we shouldn’t be shocked that we see a dollar of activity. Trillions of dollars funneled into the banking system and we have little to show for it.
The opiate given to numb the middle class was through easy access to debt. Just take a look at credit cards:
Notice a few familiar names? These are the banks that are now turning large profits on Wall Street as the economy struggles to get by. What exactly are they betting on? Keep in mind these banks are only surviving today because of the extensive taxpayer bailouts they have received. Middle class Americans are largely opposed to these bailouts but they don’t have much of a say in what goes on today in American governance. It is one giant illusion. Politicians will say the right things when it comes to reigning in Wall Street but by the time legislation gets through the Senate and lobbyists, it is so watered down that nothing is really done. It is all theatre for the masses.
The contraction in debt is rare:
An expanding economy theoretically will see more access to debt as people move into a wealthier status. The above data shows us something extremely different. Banks are largely promoting their propaganda to keep the taxpayer wallets open while data on the real economy is certainly still weak. Recent data on home sales has shown a dramatic collapse once the easy money was taken away from the home buying market:
New home sales have collapsed nearly in tandem with the removal of the tax credit. The market is so dependent on easy money that once it is removed, it nearly collapses in real time. The illusion of wealth masked by debt is a powerful force. I think many Americans are waking up to the reality that they have lived through an entire decade with no real wage gains.
The perception of being more prosperous was nothing more than spending money we didn’t have from banks that were simply looking for an easy way to grow their power. Once things went boom, they stuck the bill to all Americans while they dug their fangs deeper into the taxpayer neck.
As people were distracted with fancy plastic and absurd amounts of debt, the entire workforce was being eroded:
The amount of hours worked on average per week has been falling rather steadily for the past decade. So what was pushed as prosperity from the banking sector was nothing more than one enormous debt illusion. Now that the bubble has burst, working and middle class Americans are left cleaning up the mess and paying the bill. Like any magic trick, once it is revealed to you how it is done it loses its luster.
If you enjoyed this post click here to subscribe to a complete ad free feed.
Popularity: 13% [?]
Top 10 states with biggest renter occupied housing. Does having a low owner occupied housing rate create a state housing bubble? Renting is the solution, not the problem with the current housing crisis. Rents have fallen for Los Angeles and San Francisco.
Many articles are now finally highlighting the financial benefits of renting or leasing a home. There is no national association with deep budgets that promotes renting so there is little advertising dollars that go into this market. But in many cases, renting is a solid and financially wise decision. Given this current housing market debacle many people are coming to this new enlightened perspective. I was interested in seeing various owner occupied housing data for all 50 states in the U.S. The data gives us a good perspective on owning versus renting and how it impacts prices. Many argue that states with lower owner occupied housing rates reflect higher priced markets but this doesn’t always pan out. The nationwide homeownership rate is approximately 66 percent. We can argue about the millions that are underwater but we’ll simply go by the current status of those with a mortgage on a home and those who own their home outright and now have possession of the deed.
Let us examine the top 10 states with the largest renter percentages:
Source: Census
It should come as no surprise that New York has the lowest number of people who own their home. New York is nearly split down the middle between those who own and those who rent. New York is an incredibly expensive market. So in this case, it does prove the notion that higher priced markets have lower home ownership rates. This also applies to California and Hawaii. But what about Nevada and Texas?
For Nevada and Texas, home prices are affordable but for two very different reasons. The low home ownership rate of Nevada is largely due to the enormous amount of people that bought homes in the state as investment properties. These were not labeled as owner occupied homes but more as rentals. After the bubble burst, it will be interesting to see how this trend plays out over the next few years. With Texas, home prices never really entered into a housing bubble category. Then again, their home ownership rate is more in line with the nationwide rate of 66 percent. For this market, it is likely that they will do better going forward simply because the amount of foreclosures is much lower than say a Nevada or California. Foreclosures by default pull prices lower.
The enormous housing bubble has brought into question the overall purpose of real estate. The lack of discussion surrounding renting and the merits that it brings are troubling. In many cases, to rent a place offers many benefits including:
-Low to no maintenance costs
-Fixed duration (you have the ability to leave after the lease is up for other career opportunities)
-Lower overall housing costs
There are many positive things that come with renting but with so much housing propaganda, people have been conditioned to believe that renting is the equivalent of flushing money down the toilet. This view is wrong. In fact, with millions of “homeowners” underwater it is easy to argue that renters are in a better financial position than many so-called homeowners. Many of these underwater homeowners now have a negative net worth simply because of their inflated mortgage. The housing bubble bursting has changed the calculus on homeownership and has made renting much more attractive.
The irony of the current policy of trying to push people to buy more homes with tax credits and artificially keeping interest rates low is that it has pushed the vacancy rate up dramatically:
As more demand was pulled forward, a large amount of rental properties were left vacant on the market. What this did was also added pressure to current rental rates thus making renting a more attractive option moving forward. So as the government, combined with Wall Street’s blessing encouraged homeownership at a near religious pace, the rental market actually has gotten better for those looking to rent. This has also added more pressure for large commercial real estate holdings that actually cater to the rental market. So we shift problems from one market (residential real estate) to another (commercial real estate). In the end, there has to be a balance and in places like California, rental rates have fallen:
Peak Rents
Los Angeles Rent (measured from CPI): 281.284 (May 2009)
San Francisco Rent (measured from CPI): 299.643 (July 2009)
Current Rents
Los Angeles: 279.260 (drop of 0.7%)
San Francisco: 296.926 (drop of 0.9%)
The fact that rents have actually fallen in these popular markets is significant. This comes at a time when there is an enormous push to get people to purchase homes. Yet if people can’t afford a home, then why push them into a financially disastrous situation? Clearly the interests for the banking and housing industry are closely tied. If we think about a program like HAMP, it was largely designed to help the banks to get their monthly payment for as long as possible. There were no principal reductions (cram downs) and research shows that this would be the only alternative to really have a fighting chance of helping in foreclosure (and a small amount at that).
Renting is an excellent option for many and the current misguided policies are showing up in different areas of the housing market.
If you enjoyed this post click here to subscribe to a complete ad free feed.
Popularity: 2% [?]