Best of the Week
Most Popular
1.North Korean Chinese Proxy vs US Military Empire Trending Towards Nuclear War! - Nadeem_Walayat
2.Researchers Find $10 Billion Hidden Treasure In A Dead Volcano - OilPrice_Com
3.Gold and Silver : The Battle for Control - Rambus_Chartology
4.Asda Sales Collapse and Profits Crash! UK Retailer Sector Crisis 2017 - Nadeem_Walayat
5.Deep State Conspiracy or Chaos - James_Quinn
6.The Stock Market Guns of August, Trade Set-Up & Removing your Rose Tinted Glasses - Plunger
7.Gold Stocks Coiled Spring - Zeal_LLC
8.Neil Howe: The Amazon-Walmart Rivalry Will Determine the Future of Retail - John_Mauldin
9.Crude Oil Price Precious Metals Link in August - Nadia_Simmons
10.Gold and Silver Precious Metals Nearing Breakout - Jordan_Roy_Byrne
Last 7 days
4 Reasons European Stocks Will Make a Big Comeback This Year - 22nd Aug 17
3 Lesser-Known Charts Revealing a Massive Stock Market Disconnect - 22nd Aug 17
U.S. Treasury Secretary: "I Assume Fort Knox Gold Is Still There" - 22nd Aug 17
Is the Stock Market Setting itself up for a Spectacular Crash? - 22nd Aug 17
Power Elites Launches Civil War Against Trump - 22nd Aug 17
The Stock Market No Longer Cares About Trump - 21st Aug 17
The Coming Boom Of Productivity Will Get Our Economy Back On Track - 21st Aug 17
Buffett Sees Stock Market Crash Coming? His Cash Speaks Louder Than Words - 21st Aug 17
This Could Be The Biggest Gold Discovery In History - 21st Aug 17
Stock Market Correction in Full Swing - 21st Aug 17
Seeking Confirmations – US Stock Market - 21st Aug 17
The changing demographic of online gamblers - 21st Aug 17
Gold is a coiled spring… the breakout is here, fundamentals are in place, technicals are compelling - 20th Aug 17
A Midsummer Night's Dream: Buy Gold and Silver - 20th Aug 17
Gold Mining Stocks 2017 Fundamentals - 20th Aug 17
EIA Weekly Report and Crude Oil - 19th Aug 17
4 Insights for Adjusting Your Portfolio in a Rate-hike Environment - 19th Aug 17
Gold Direction Indicator - 19th Aug 17
Historical Inevitability and Gold and Silver Ownership - 19th Aug 17
You Are Being Lied To About “Low” Gold Demand - 19th Aug 17
This is Why Cocoa's Crash Was a Perfect Setup - 19th Aug 17
Gold, Silver Consolidate On Last Weeks Gains, Palladium Surges 36% YTD To 16 Year High - 19th Aug 17
North Korea Is Far From Being Irrational… It Has A Plan - 18th Aug 17
US Civil War - FUNCTIONAL ILLITERATES TRYING TO ERASE HISTORY - 18th Aug 17
Bitcoin Hits New All-Time High Over $4,400 As It Catches Paypal In Total Market Cap - 17th Aug 17
3 Psychological Ingredients behind Great Web Content - 17th Aug 17
The War on Cash - Rogoff, Orwell and Kafka - 17th Aug 17
The Stock Market Guns of August, Trade Set-Up & Removing your Rose Tinted Glasses - 16th Aug 17
Stocks, Bonds, Interest Rates, and Serbia, Camp Kotok 2017 - 16th Aug 17
U.S. Stock Market: Sunrise ... Sunset - 16th Aug 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

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

© 2005-2017 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

Catching a Falling Financial Knife