Best of the Week
Most Popular
1.Election Forecast 2015 - Opinion Polls Trending Towards Conservative Outright Win - Nadeem_Walayat
2.UK Solar Eclipse - End Time Sign, Judgement Day, Doomsday! - Nadeem_Walayat
3.Gold And Silver - When Will Precious Metals Rally? Not In 2015 - Michael_Noonan
4.Preparing for the Next Stocks Bear Market - Forecast 2015-2016 - Gary_Savage
5.Is a Stock Market Crash Imminent? - David Eifrig
6.Gold Price Slumps as US Dollar Soars, What's Next? - Nadeem_Walayat
7.US Dollar Forex Pairs and Gold Chartology - Rambus_Chartology
8.Election Forecast 2015: The Day Labour Lost the General Election - Nadeem_Walayat
9.The ECB Should End QE Next Month - EconMatters
10.Silver Price Poised to Surge - Zeal_LLC
Last 5 days
Deflation Watch: Key U.S. Economic Measures Turn South - 27th Mar 15
The Hard-Earned Truth About Recreational Real Estate - 27th Mar 15
Bitcoin Price Still in Important Territory - 27th Mar 15
Stocks Bear Market Conditions - Index Market Range Warning - 27th Mar 15
BEA Leaves Q4 2014 U.S. GDP Growth Essentially Unchanged at 2.22% - 27th Mar 15
Brazil Economy Victim of Vulgar Keynesianism - 27th Mar 15
Gold to Fuel Silver Price Upleg - 27th Mar 15
Gold and Silver Stocks Will Rise Again! - 27th Mar 15
Risk of ‘World War’ between NATO and Russia on Ukraine as Yemen Bombed - 27th Mar 15
FOMC Minutes Turned The Gold Tide - 27th Mar 15
Sheffield Hallam Election Battle 2015 - Lib Dems Go to War Whilst Labour Sleeps - 27th Mar 15
Gold Effect On Mining & Shale Wasteland - 27th Mar 15
How Stock Investors Should Play the 2016 Presidential Race - 26th Mar 15
MidEast Energy Alert: Why the Crisis in Yemen Could Get Ugly Very Fast - 26th Mar 15
Stock Market Downward Spiral of Dumbness - 26th Mar 15
The Monetary Approach Reigns Supreme - 26th Mar 15
Stock Market Large Gap Down, Despite the Algos' Push Back - 26th Mar 15
Crude Oil Surges, Gold price Spikes as Middle East Tensions Escalate - 26th Mar 15
The U.S. Housing Market Recovery Is Fabricated Optimism - 26th Mar 15
Why Yemen Is The Next Saudi-Iranian Battleground - 26th Mar 15
The Crude Oil Price Crash and China Economic Slow Down - 26th Mar 15
Global Financial Markets Are More Distorted Than Ever Before - 26th Mar 15
One More Stock Market Rally and Then a Huge Drop Expected - 26th Mar 15
Danger Will Robinson - Stock Market Crash Warning - 25th Mar 15
Learn the Basics of Corrective Elliott Waves - 25th Mar 15
Why CNBC Is Hazardous to Your Financial Health! - 25th Mar 15
Will Your Retirement Accounts Survive The Coming Tax Code "Revolution"? - 25th Mar 15
US Dollar - Americas Phoenix - 25th Mar 15
California’s Epic Drought: Only One Year of Water Left! - 25th Mar 15
What’s Wrong With Silver? - 25th Mar 15
SPX Futures Appear Weak. WTIC and Gold May Be at Max Retracement - 25th Mar 15
We’re at the Dawn of a “New Energy Age” - 25th Mar 15
A Very Weak U.S. Economic Recovery - 25th Mar 15
Zero UK CPI Inflation Rate Prompts Deflation Danger Propaganda For Fresh Money Printing - 25th Mar 15
Stock Market NYSE Hi-Lo Index Aggressive Sell Signal - 24th Mar 15
Palladium Commodity Price Forecast - 24th Mar 15
Bitcoin Price Gearing Up for a Fall - 24th Mar 15
Safety Deposit Boxes In UK Being Closed By ‏HSBC – Not Closing Gold Vaults - 24th Mar 15
Japan Short Term Gains And Long Term Disaster - 24th Mar 15
China's Fragile Evolution - 24th Mar 15
David Cameron Announces Resignation Even Before Being Re-elected, Handing Labour 6 Seats - 24th Mar 15
City of London's Ownership of American Colonies - 24th Mar 15
Stock Market Reversal May Have Begun - 24th Mar 15
Casey Gathers Top Gold Experts to Share Secrets for Making Money in Any Market - 24th Mar 15
Thoughts on The Current Crude Oil Market - 24th Mar 15
U.S. Economy Still on Life Support - What Your Governments Hiding From You... - 24th Mar 15
UK Election Forecast 2015 - Budget Bribes Fail, SNP Insurgency Catastrophe - Video - 24th Mar 15
Is Stock Market Minor Top Taking Hold? - 23rd Mar 15
Greece and EU Running Out of Time as Bank Runs Intensify - 23rd Mar 15
Stock Market Slightly Negative Expectations Following Last Week's Rally - 23rd Mar 15
This Rising Interest Rates Play Could Make You a Quick 55% - 23rd Mar 15
Platinum Commodity Price False Break Low - 23rd Mar 15
The Real Reason The American Dream is Unraveling - 23rd Mar 15
Election Forecast 2015 - Budget Bribes Fail to Impress Voters, Tory's Lose Seats in Opinion Polls - 23rd Mar 15
Silver Price Reliance During U.S. Dollar Rally - 23rd Mar 15
Gold Price Outlook Dramatic Improvement Following US Dollar Topping Action - 23rd Mar 15
Wall Street Doesn't Want You to Do This - 22nd Mar 15
The "Natural Interest Rate" Is Always Positive and Cannot Be Negative - 22nd Mar 15
Exploring The Gold Market: The Fed, The Charts. The COTS and GLD - 22nd Mar 15
Stocks Bull Market Continues - 22nd Mar 15
Gold And Silver - China's AIIB Spells U.s. Dollar Demise, Not Clear For Precious Metals - 22nd Mar 15
Cocoa Commodity Price Technical Outlook - 21st Mar 15
Yield Curve, Futures, Suggest No U.S. Interest Rate Hike Until December - 21st Mar 15
Three Iconic Stocks Are Poised for a Dive - 21st Mar 15
We're All Hedge Funds Now! - 21st Mar 15
Why Stock Market Seasonality May Be Critical in 2015 - 20th Mar 15
Yellen's Tiger Riding Dilemma Keeps Interest Rates Near Zero - 20th Mar 15
FOMC is boxed in, Gold and Silver - 20th Mar 15
Silver Price Poised to Surge - 20th Mar 15
Why Aren’t These Investors Worried About The Gold Price? - 20th Mar 15
Gold Price Downside $850/oz; Upside Jump to $2,000/oz on ‘Grexit’ - 20th Mar 15
Cheap Paper Money - Precious Metals Technical Outlook - 20th Mar 15
Best Cash ISA vs Budget 2015 Scrapping Tax on Savings Interest on First £1,000 - 20th Mar 15
GDXJ / Gold Ratio - 20th Mar 15
What the “Yellen Effect” Ultimately Means for Crude Oil - 20th Mar 15
Sharp Fall In USD Index And Its Implications - 20th Mar 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

US Economy Still on Life Support

America's Middle Class Caught in a Vice

Politics / Social Issues Feb 26, 2013 - 03:21 PM GMT

By: Money_Morning

Politics

Shah Gilani writes: This is a chicken and egg kind of discussion about what caused the housing crash.

It's not that there's a right answer (but I am right) or a wrong answer, it's about looking at what happened to determine whether it's going to happen again. It is.

I'm always right.


Really, it's about America's middle class mostly, and the vise they're caught in.

Notice, the title here poses that as a question. Are they caught in a vise?

I say, "Yes!"

But, I'll get to that.

First, it's back to the chicken... or the egg.
Did borrowers over-borrow because they were greedy? Or, did lenders over-lend because they were greedy? Yeah, yeah, we all agree. They both were.

But what precipitated it?

Of course I want your opinion. But, first you're going to have to hear mine. And since I'm always right, you may just want to come along with me and be smart. Just kidding!

It's simple to me: You can't borrow if lenders won't lend.

There. I rest my case.

Oh, you want more depth, more color? Okay.

But let me first put aside something that I know will come up anyway. The Community Reinvestment Act didn't cause the subprime surge.

Did the surge happen when the government forced banks to reach into underserved areas to offer loans to folks who weren't over-banked - and who didn't have ATM machines on every corner of their neighborhoods - only to have those same banks create subprime loans that would later default?

Yes it did.

But the number of defaults in the subprime category within the boundaries of CRA-demarked neighborhoods is a drop in the bucket compared to the national corral, where subprime loans were drawing out, and creating subprime borrows out of better than subprime buyers - with higher creditworthiness.

Look at borrowers as the chickens. They had to be hatched. Not from eggs, because they were already in the market. Most of them would have been far too afraid to risk over-leveraging themselves on something they knew they couldn't afford if they were charged the kind of interest that high-risk borrowers face.

To fatten them up, hard-boiled lenders gave those chickens legs and dreams - and a means to fly out of their old neighborhoods and roost in fancier digs.

Most people forget - or didn't know - that prime borrowers had been pretty well exhausted by lenders bending over backwards to get them into new homes.

Interest rates were kept artificially so low for so long, which left investors clamoring for yield. Prime borrowers were getting harder and harder to find, so bankers grabbed the two-for-one throttle and pulled subprime borrowers into their origination factories. Then they did a "pool "em and fool "em" maneuver - for yield-hungry investors, that is - and put them into mortgage-backed securitization, get "em off my balance sheet, schemes.

And it worked. Well, at least for a while.

Middle Class Mistakes?
So, what does all this have to do with the middle class being in a vise?

Bloomberg Businessweek is a great publication that I highly recommend. This week's issue, February 18-24, 2013, has a piece titled, "Oh, Craps. U.S. Homeowners Are Repeating Their Mistakes."

The gist of the article is that, for folks with a "very high risk exposure - a low wealth-to-income ratio, more than three-quarters of their assets are in housing or stocks, and (have) debt greater than a quarter of their assets," which serves as my definition of the middle-class in America, lost 47% of their wealth between 2007 and 2010.

What bothers me about the article is that it presupposes that homeownership makes it hard to diversify. It states that, "since 1983, for the richest 20 percent of U.S. households, the principal residence as a share of net worth has been around 30 percent. For the next 60 percent - most of us - housing has risen from 62 percent to 67 percent of total wealth."

So, what's the problem? Those Americans leveraged themselves to get into their homes and borrowed against them.

We know what happened next.

But, it's not just about middle-class America's homes as their source of wealth. The article states, in its opening paragraph, "If there's one thing Americans should have learned from the recession, it's the importance of diversifying risk. Middle-class households had too much of their net worth tied up in their homes and were too exposed to stocks through 401(k)s and other investments."

In other words: WAKE UP AMERICA - you idiots who have been struggling to get into the middle class and you idiots in the middle-class (thank goodness that idiot class is shrinking, right?) have it all wrong. You shouldn't just be buying houses and stocks.

It's not Bloomberg. They're just putting this out there. I don't want to insult one of my favorite magazines, but WHAT THE...

What is the middle class supposed to do? Trade derivatives?

It's not ironic, it's sad - no, it's disgusting - that the two principal sources, or steps up the aspirational ladder in America - home ownership and an equity portfolio - are... well...

I'm not going to call them schemes, though there's a part of me that wants to. That would be hyperbole to the max...

Those two steps up the ladder in America are manipulated by bankers and brokers for their own self-serving benefit.

That's why I think - no, that's why I know -that America's shrinking middle class is caught in a vise.

Do I have answers for this dual problem?

You bet I do.

But, first, I want to hear what you have to say.

The floor is open. Let me know what you think in the comments below.

Source :http://moneymorning.com/2013/02/26/is-americas-middle-class-caught-in-a-vise/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014