Mortgage Meltdown: Elephant in the Living Room


David Leonhardt: Congratulations on your article today in the NY Times. You addressed the elephant in the living room. For about 100 years, the United States has been acting like an embezzling bookkeeper. First “borrow” a little. Then borrow more because of “necessity”, now you are in debt you cannot pay and living better than you ought to, buying things you don’t need. Now you have better standing in the economic community and you can get credit (you have more because you are spending more, even if it is not money you earned and not value you contributed) whereas before you would have been laughed at. Each dollar you get into your hands becomes a down payment on something bigger and better that you can’t afford. 

People you buy from want you to buy more because they are making more money on more sales. Your employer is getting bookkeeping figures from you that show nice profits so he is spending and investing his “money” wisely or unwise; (money that isn’t there because you took it). Your vendors come up with ways to give you more credit, and the banks discover there is money to be made lending you money. Your balance sheet looks better and better as millions more like you are stealing from themselves (their home equity) or stealing from others to make the down payment on purchasing assets that they don’t need and in many cases don’t want shortly after they buy them. Balance sheets are getting better and better. “Income” is rising. All the economic indicators show that the U.S. is a magical powerhouse that for some reason could not be reproduced in other countries far more established than ours.

Eventually the big LIE gets bigger. Even the people who know or suspect, disregard their own judgment because things are going so well. Like Detroit automakers ignoring the threat from foreign car manufacturers and losing jobs, real income, and real wealth in the process. Assets rise higher and higher in price, more “equity” is created. The fact that the price rise is pulled only partly by demand is not analyzed or reported. Prices are going up because money is being created, printed and conceptualized by merchants, financial institutions and non-financial institutions who have figured out ways to get more money into the hands of the American consumer. Prices are going up because money’s value is going down. Eventually the embezzler starts to rationalize that with all his/her assets he could pay it back if called upon to do so, disregarding the fact that the value is dependent upon the greater fool theory — that someone will always come along and pay more for what you have. All the embezzlers hope for a miracle.

Longevity further “legitamizes” the illegal activity, the theft from your employer, the trick played on your creditors, and the willingness of the creditors to create, promote and allow the fraud and theft to continue. The day of reckoning we always know, comes to the embezzler. In individual cases it hurts only a few dozen people. But when 300 million people do it, it affects billions of people. While waiting for the end and denying it will ever happen, the embezzler become enslaved to their jobs and their standard of lving. They can’t go on vacation because a substitute acountant would discover that the figures have been manipulated — like the basket measured by various price indexes is revamped by a government measuring inflation. The government has an incentive to lie about inflation because if they didn’t, all the pensions and social security and other payments would have to be increased by more each year. That would leave less money for war and social programs. But the the loss of value of the dollar is catching up to us in what is developing as massive hyperinflation — due this year.

First the inflation caused by the greater fool theory. Second the fact that the tide is out on the massive shock caused by the mortgage meltdown —- embezzlement gone wild. The LIE gets bigger and bigger as the government and industry try to cover it up. But other countries with other central banks and other financial institutions and other investors have finally gotten the idea that the U.S. dollar’s “hegemony” as you call it is based upon vapor. We can’t predict what specific actions governments, financial institutions and commercial enterprises will take to protect themselves from the suspicous dollar, but we can predict with certainty, they will protect themselves before they protect us. The consequences of these actions, individually and collectively could be extremely serious to our government, states’ rights (witness greenhouse standards imposed by states where the Federal government failed to step up), regional alliances (witness alliances of attorney generals on tobacco suits and suits against lenders and investment bankers for the mortgage meltdown), where money is stored, and how commercial transactions are conducted. It will probably have a decisive effect on de facto national borders (sorry Dobbs — you are right, but the game is probably over).

The fact is that our economy, more than any other by a wide margin is primarily based upon consumer spending. There is nothing wrong with consumer spending and there is nothing wrong with profit or capitalism. The bitter pill that is coming, whether we like it or not, is that the money is running out. Increasing liquidity is a euphemism for printing money. But the Fed has little effect on the larger set of transactions that create money supply that the Fed cannot control — like the sale of CDO’s with triple AAA ratings, insured by respected bond insurers in order to get money into the hands of unsophisticated, uneducated (thanks to ignoring the educational needs of our young) and clueless people who trust that a system as large as our whole monetary system could not be manipulated, that the appraisal of the value of their house, the mortgage they were steered into by a mortgage broker, and the approval by the lender lends credibility to the transaction (just like on the other end the investor relied on on AAA ratings insured).

By moving the risk from the lender the only motivation was to lend more and devise increasingly sophisticated techniques to get people to sign up for houses on monthly payments they could afford, only to discover that they were guaranteed to lose the house later. By offering the investor a “safe” investment, and developing incentives along the way to sell, package and offer higher rates of return, they guaranteed an unlimited supply of money which would (like in the eyes of every Ponzi) last forever, because the values would continue to increase by 50% per year or more thus enabling refinancing, more fees and more interest as borrowers get deeper and deeper into a debt they will never be able to cover like our embezzler who took just a “little” as a “loan” at the start. 

Presidential candidates and candidates for other offices are skirting the issue because they don’t have the time to study it and therefore don’t understand it. Obama gets close by intuition, Clinton knows only the old school of economics and the econometrics that were manipulated to produce policy. Edwards, undertands the effect but the cause. McCain, Huckabee, Romney and the rest are in the same camp as Hillary. They just don’t understand the implications of selling our tolls roads, ports, military technology etc. to potentially enemy combatants.

Here is the truth: An economy based upon getting funny money into the hands of consumers who are too unsophisticated (because of lack of education) to know what to do with it, and under so much pressure to spend it, and under the spell of making every dollar count as a down payment on more debt, is a house of cards. The dollar is plummeting not because we have a temporary economic problem. It is plummeting because the core assumptions of our economic systems are based upon false figures, and mythology. An economy that is based upon consumers going into debt rather than savings is doomed just as the embezzler is doomed. A 60 inch TV screen that is purchased on debt that the borrower can never repay is not a real sale, not a real loan, and produces no real revenue or profits.

Added to that, like the embezzler, we are now viewed as the the nice guy next store that nobody knew was a criminal. The far reaching effects of the current socio-economic prospects both domestically and abroad are only beginning to surface. How well or badly the domestic and international populations take the reduction of essential social services like housing, food, fire, police and healthcare, nobody knows. History doesn’t give much reason for hope. We are probably in for a transition that will be historic in all perspectives.

One Response

  1. Can the donkey handle the trading room next year?

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