Best of the Week
Most Popular
1.War on Cash, Bank of England Planning Hyper QE, Scrapping Cash for Digital Currency - Nadeem_Walayat
2.Stock Market End Run Smash Crash Looks Imminent... - Clive_Maund
3.Europe Refugee Crisis, UK to Repatriate 120,000 Hungarian Economic Migrants Back to Hungary - Nadeem_Walayat
4.The Great Deflation Will Destroy All Bubbles – These Too - Harry_Dent
5.Deflation Signals Abound for U.S. Dollar, Forex Markets and Commodities - Rambus_Chartology
6.U.S. Housing Market Two Outs in The Bottom of The Ninth - James_Quinn
7.Poland, Czech, Slovakia and Hungary Refugee Hypocrisy After Flooding UK with 4 Million Economic Migrants - Nadeem_Walayat
8.The Two Real Reasons Crude Oil Prices Are Currently Slipping - Dr. Kent Moors
9.R.I.P. Interest Rates - Andrew Snyder
10.Steps from a Deep October Stock Market Selloff - Bob_Loukas
Last 5 days
Stocks Bear Market Apocalypse Imminent Crash Gets Nuked Again - 6th Oct 15
Redesigning Internet and Facebook to Explore Their Full Potentialities... - 5th Oct 15
Nightshades Curb Your Enthusiasm - 5th Oct 15
U.S. Recession Watch, High-Yield – Rising Defaults - 5th Oct 15
The Social Challenge to Find Humanity in Capitalism - 5th Oct 15
Fed Interest Rate Hike: "I don't care. It doesn't really make much of a difference" - 5th Oct 15
Gold Rose 2.2%, Silver Surged 5.4% After Poor Jobs Number On Friday - 5th Oct 15
Gold, Silver Precious Metals: a Critical Week Ahead - 5th Oct 15
Stock Market Correction Still in Force - 5th Oct 15
Gold Price Change in Character - 5th Oct 15
Putin’s Blitz Leaves Washington Rankled and Confused - 4th Oct 15
More Selling for Stock Market, Gold? - 4th Oct 15
Gold And Silver – A Reality Check - 3rd Oct 15
Stock Market Primary IV Still, or Primary V Underway? - 3rd Oct 15
The Oil Industry’s Day of Reckoning - 3rd Oct 15
U.S. Interest Rate Hikes Keep On Slippin' Into the Future; Treasury Yields Sink Again - 3rd Oct 15
China's Stock Market Crashing; Time for Panic or Restraint - 3rd Oct 15
SPX Stocks Bulls Struggle to Regain the Upper hand... - 2nd Oct 15
The Two Faces of Stock Market Volatility - 2nd Oct 15
Money Supply and the Fed’s Serious Inflation Risks - 2nd Oct 15
Stock Market How Bad Can This Get, And How Fast? - 2nd Oct 15
A Worrying Set Of Recession Signals - 2nd Oct 15
Negative Jobs Report Sents SPX, TNX Lower - 2nd Oct 15
Don't be Fooled by the Recent Equity market Rallies. Its a Bear Market, Stupid! - 2nd Oct 15
US Bond Market - How to Fix This - 2nd Oct 15
Survival Secrets from Colorado Resource Investing Front Lines - 2nd Oct 15
What Two Risks From Rising Interest-Rates Could Each Trigger A New Global Crisis? - 1st Oct 15
Stock Market S&P 500 Volatility-Based Price Probability Range - 1st Oct 15
Dow Stock Market About To Crash Like October 1929? Get Your Physical Silver - 1st Oct 15
Stock Market Negative Expectations Once Again - Will It Break Down? - 1st Oct 15
Advice for Biotech Investors: 'Hold Your Powder' 'til Winter - 1st Oct 15
Best Short-Term Commodity Market Opportunities - Video - 1st Oct 15
The Coming Corporate "Crime Wave" - 30th Sept 15
Stock Market Retracement May Have Run Its Course - 30th Sept 15
A Stocks Bear Market Is Now More Likely Than Not - 30th Sept 15
The Killer Ape, Human Evolution, Artificial Intelligence and Extinction End Game - 30th Sept 15
Junk Bond Market Imminent Collapse Threatens (Unwelcome) BIG Rate Rises - 30th Sept 15

Free Instant Analysis

Free Instant Technical Analysis

Market Oracle FREE Newsletter

America's Middle Class Caught in a Vice

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

By: Money_Morning


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 :

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:

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 - 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

Biggest Debt Bomb in History