Re: [A-List] The Debtor Crisis

["Tony B." <tal1@xxxxxxxxx>]

"...and let our money work for us."

As I've often intoned whilst in the rough and tumble of debate, 'Money 
dosen't work...only people do. (i.e. If your money is 'working' for you, 
then somewhere, someone is being exploited.)

T.


----- Original Message ----- 
From: "Charles Brown" <charlesb@xxxxxxxxxxxxxxxxxxxxx>
To: <A-List@xxxxxxxxxxxxxxxxxxx>
Sent: Thursday, January 17, 2008 1:47 PM
Subject: [A-List] The Debtor Crisis


GRANMA
January 15, 2008

The Debtor Crisis

MANUEL E. YEPE

According to the neo-conservatives of the United States, the new American
dream seemed a reality. Money would lose its value. What was important would
be credit. âYours with no money down,â âBuy a car and your home appliances
now, and pay for them in five years.â

UNCERTAIN FUTURE FOR THE US HOUSING CRISIS

This orientation brought with it a buying boom of large homes, luxury cars,
expensive vacations and many other signs of wealth that in realty were
unsustainable pompous illusions destined to collapse.

The first signs of the disaster came when a large number of people fell
behind on smaller loan payments; credit they received almost miraculously
considering that their payments were way beyond their income, and based on
poor credit references. However, the matter has now been felt on Wall
Street.

In his article Pay It off Later: Debt Is the New American Dream published in
the Vancouver, Canada magazine The Tyee, Dee Hon, award winning researcher
on economic issues, explains how the situation got to where it is.

âHow did it come to this? How did America, collectively and as individuals,
become a nation addicted to debt, pushed to and over the edge of bankruptcy?
The savings rate hangs below zero. Personal bankruptcies are reaching record
heights. America's total debt averages more than $160,000 for every man,
woman, and child. On a broader scale, China holds nearly $1 trillion in us
debt. Japan and other countries are also owed big.

âThe story begins with labor. The decades following World War II were boom
years. Economic growth was strong and powerful industrial unions made the
middle-class dream attainable for working-class citizens. Workers bought
homes and cars in such volume they gave rise to the modern suburb. But
prosperity for wage earners reached its zenith in the early 1970s. By then,
corporate America had begun shredding the implicit social contract it had
with its workers for fear of increased foreign competition. Companies cut
costs by finding cheap labor overseas, creating a drag on wages.â

âEven as wages fell, consumerism was encouraged to continue soaring to
unprecedented heights. Buying stuff became a patriotic duty that
distinguished citizens from their communist Cold War enemies. In the
eighties, consumers' growing fearlessness towards debt and their hunger for
goods were met with Ronald Reagan's deregulation the lending industry.
Credit not only became more easily attainable, it became heavily marketed.
Credit card debt, at $880 billion, is now triple what it was in 1988, after
adjusting for inflation.â

âThis is all great news for the corporate sector, which both earns money
from loans to consumers, and profits from their spending. Better still,
lower wages means lower costs and higher profits. These factors helped the
stock market begin a record boom in the early '80s that has continued almost
unabated until today.

âThese conditions created vast riches for one class of individuals in
particular: those who control what is known as economic rent, which can be
the income "earned" from the ownership of an asset. Some forms of economic
rent include dividends from stocks, or capital gains from the sale of stocks
or property. The alchemy of this rent is that it requires no effort to
produce money.

Governments, for their part, encourage the investors, or rentier class.
Economic rent, in the form of capital gains, is taxed at a lower rate than
earned income in almost every industrialized country.â

âGiven a choice between working for diminishing returns and joining the
leisurely riches of the rentier, people pursue the latter. If the rentier
class is fabulously rich, why can't everyone become a member? People of all
professions sought to have their money work for them, pouring money into
investments. This spurred the explosion of the finance industry, people who
manage money for others. The now-$10 trillion mutual fund industry is 700
times the size it was in the 1970s.

âCheap borrowing costs encouraged millions of Americans to borrow more,
buying homes and sending housing prices to record highs. Soaring house
prices encouraged banks to loan freely, which sent even more buyers into the
market -- many who believed the hype that the real estate investment offered
a never-ending escalator to riches and borrowed heavily to finance their
dreams of getting ahead.â

And thatâs how, in the judgment of economist Dee Hon, the current subprime
mortgage crisis in the United States came about and nobody dares yet to say
where it will lead.



Pay It off Later: Debt Is the New American Dream

By Dee Hon, Adbusters. Posted November 10, 2007.

The U.S. addicted to debt -- and the country and millions of its citizens
are at the brink of bankruptcy.

Money for nothing. Own a home for no money down. Do not pay for your
appliances until 2012. This is the new American Dream, and for the last few
years, millions have been giddily living it. Dead is the old version, the
one historian James Truslow Adams introduced to the world as "that dream of
a land in which life should be better and richer and fuller for everyone,
with opportunity for each according to ability or achievement."

Such Puritan ideals -- to work hard, to save for a better life -- didn't die
from the natural causes of age and obsolescence. We killed them, willfully
and purposefully, to create a new gilded age. As a society, we told
ourselves we could all get rich, put our feet up on the decks of our new
vacation homes, and let our money work for us. Earning is for the
unenlightened. Equity is the new golden calf. Sadly, this is a hollow dream.
Yes, luxury homes have been hitting new gargantuan heights. Ferrari sales
have never been better. But much of the ever-expanding wealth is an illusory
faÃade masking a teetering tower of debt -- the greatest the world has seen.
It will collapse, in a disaster of our own making.

Distress is already rumbling through Wall Street. Subprime mortgages leapt
into the public consciousness this summer, becoming the catchphrase for the
season. Hedge fund masterminds who command salaries in the tens of millions
for their supposed financial prescience, but have little oversight or
governance, bet their investors' multi-multi-billions on the ability that
subprime borrowers -- who by very definition have lower incomes and/or
rotten credit histories -- would miraculously find means to pay back loans
far exceeding what they earn. They didn't, and surging loan defaults are
sending shockwaves through the markets. Yet despite the turmoil this
collapse is wreaking, it's just the first ripple to hit the shore. America's
debt crisis runs deep.

How did it come to this? How did America, collectively and as individuals,
become a nation addicted to debt, pushed to and over the edge of bankruptcy?
The savings rate hangs below zero. Personal bankruptcies are reaching record
heights. America's total debt averages more than $160,000 for every man,
woman, and child. On a broader scale, China holds nearly $1 trillion in us
debt. Japan and other countries are also owed big.

The story begins with labor. The decades following World War II were boom
years. Economic growth was strong and powerful industrial unions made the
middle-class dream attainable for working-class citizens. Workers bought
homes and cars in such volume they gave rise to the modern suburb. But
prosperity for wage earners reached its zenith in the early 1970s. By then,
corporate America had begun shredding the implicit social contract it had
with its workers for fear of increased foreign competition. Companies cut
costs by finding cheap labor overseas, creating a drag on wages.â

âEven as wages fell, consumerism was encouraged to continue soaring to
unprecedented heights. Buying stuff became a patriotic duty that
distinguished citizens from their communist Cold War enemies. In the
eighties, consumers' growing fearlessness towards debt and their hunger for
goods were met with Ronald Reagan's deregulation the lending industry.
Credit not only became more easily attainable, it became heavily marketed.
Credit card debt, at $880 billion, is now triple what it was in 1988, after
adjusting for inflation.â

âThis is all great news for the corporate sector, which both earns money
from loans to consumers, and profits from their spending. Better still,
lower wages means lower costs and higher profits. These factors helped the
stock market begin a record boom in the early '80s that has continued almost
unabated until today.

These conditions created vast riches for one class of individuals in
particular: those who control what is known as economic rent, which can be
the income "earned" from the ownership of an asset. Some forms of economic
rent include dividends from stocks, or capital gains from the sale of stocks
or property. The alchemy of this rent is that it requires no effort to
produce money.

Governments, for their part, encourage the investors, or rentier class.
Economic rent, in the form of capital gains, is taxed at a lower rate than
earned income in almost every industrialized country.â

âGiven a choice between working for diminishing returns and joining the
leisurely riches of the rentier, people pursue the latter. If the rentier
class is fabulously rich, why can't everyone become a member? People of all
professions sought to have their money work for them, pouring money into
investments. This spurred the explosion of the finance industry, people who
manage money for others. The now-$10 trillion mutual fund industry is 700
times the size it was in the 1970s.

âCheap borrowing costs encouraged millions of Americans to borrow more,
buying homes and sending housing prices to record highs. Soaring house
prices encouraged banks to loan freely, which sent even more buyers into the
market -- many who believed the hype that the real estate investment offered
a never-ending escalator to riches and borrowed heavily to finance their
dreams of getting ahead.â

People began borrowing against the skyrocketing value of their homes, to buy
furniture, appliances, and TVs. These home equity loans added $200 billion
to the U.S. economy in 2004 alone.

It was all so utopian. The boom would feed on itself. Nobody would ever have
to work again or produce anything of value. All that needed to be done was
to keep buying and selling each other's houses with money borrowed from the
Chinese.

On Wall Street, private equity firms played a similar game: buying companies
with borrowed billions, sacking employees to cut costs, and then selling the
companies to someone else who did the same. These leveraged buyouts inflated
share values, minting billionaires all around. The virtues that produce
profit -- innovation, entrepreneurialism and good management -- stopped
mattering so long as there were bountiful capital gains.

But the party is coming to a halt. An endless housing boom requires an
endless supply of ever-greater suckers to pay more for the same homes. The
rich, as Voltaire said, require an abundant supply of poor. Mortgage lenders
have mined even deeper into the ranks of the poor to find takers for their
loans. Among the practices included teaser loans that promised low interest
rates that jumped up after the first few years. Sub-prime borrowers were
told the future pain would never come, as they could keep re-financing
against the ever-growing value of their homes. Lenders repackaged the shaky
loans as bonds to sell to cash-hungry investors like hedge funds.

Of course, the supply of suckers inevitably ran out. Housing prices leveled
off, beginning what promises to be a long, downward slide. Just as the
housing boom fed upon itself, so too, will its collapse. The first wave of
sub-prime borrowers have defaulted. A flood of foreclosures sent housing
prices falling further. Lenders somehow got blindsided by news that poor
people with bad credit couldn't pay them back. Frightened, they staunched
the flow of easy credit, further depleting the supply of homebuyers and
squeezing debt-fueled private equity. Hedge funds that merrily bought
sub-prime loans collapsed.

More borrowers will soon be unable to make payments on their homes and
credit cards as the supply of rent dries up. Consumer spending, and thus
corporate profits, will fall. The shrinking economy will further depress
workers' wages. For most people, the dream of easy money will never come
true, because only the truly rich can live it. Everyone else will have to
keep working for less, shackled to a mountain of debt.