Recently the American economy has been assaulted on multiple fronts. These attacks should have been all too easy to predict had the stewards of industry advanced a modicum of common sense. To whit, it is reckless to establish an economy that requires people to use increasingly large amounts of credit at the expense of saving. Notice all the applications from banks one receives in the mail each day, even our dog had one addressed to her. This is particularly true when the extension of that credit has been accomplished by using the equity in one’s homestead. Nevertheless, the issuers of said credit (banks) continued to encourage careless practices. Recall the commercials that explained to viewers that when having trouble paying the mortgage, or the boat, the car, and other perhaps even a cottage, the solution could be found by taking out a second mortgage. Some companies even touted that these individuals “saved” so much money that the recipients of such loans were about to use the excess to build a backyard pool or go on vacation.
In reality we should all have known that the “savings” realized was in the form of lower monthly payments at the expense of increasing debt and much, much longer financial obligations to the banks. This extension of equity alone would not have been enough to weaken the economy. Rather this was the first symptom of an even greater disease…greed!
Conservatives believe that an unbridled free market guided by the “invisible hand” will always benefit society. As long as money is made, the collective good is being served. We have all watched the Dow Jones Industrial Average soar to new heights in the past years, in theory everyone should have benefited. The truth is that thanks to tax cuts that favored the richest 1%, our country has experienced one of the largest income disparities since the 1930’s. ( http://www.cbpp.org) Jobs that were created in the past eight years paid less, so that the middle-income levels have not increased with respect to those at the top
Now many will say that each person should have the ability to earn, as much they are able. The creative should not be stifled in their endeavors. Ayn Rand wrote the novel Atlas Shrugged to emphasize that without an external incentive such as making profit humankind would stagnate. No one is begrudging the wealthy their due, but the truth is those at the top of the income level do not need more money. By cutting taxes mostly for the wealthy, while fighting two wars our national debt level has soared.
The solution I have heard, is to cut benefits from those who can ill afford to lose another penny. Conservative writers have belittled these people since they do not pay federal taxes. Some writers argue that all individuals should pay taxes, and that the burden should be shifted to the lower income groups. This becomes the conservatives’ logic, because after all these lower income individuals and families use more of the services, such as Medicaid, food stamps etc. There is a reason that these people are using Medicaid and food stamps. This due to the fact that their income will not sustain the necessities of life. Most of the pundits who decry wasteful government spending complain that these people are looking for a handout. Writers on the National Review Online pointed out a You Tube video of a woman who stated that when President Elect Obama was in office, she would no longer have to worry about paying her bills. Some interpreted this to mean that the woman was under that impression that the money would flow freely to her. This is reminiscent of the “welfare queens” driving Cadillacs that many on the right invoked in the early 1980’s. Today people are struggling with all of their bills. Contrary to President Bush’s belief that anyone can get healthcare you just go to the emergency room, I know of many families who cannot afford proper medical and dental care, or to send their children to college. Without a college education, how can one hope to advance out of poverty? I would encourage people to spend time with the less fortunate before criticizing their way of life.
Today we find the economy needs people to purchase more and more big box items. To grow the economy we need to purchase a new automobile before all the payments have been made on the one we are driving. Auto dealers encourage people to bring in one’s payment coupon book and trade in their used car. We are bombarded with advertising imploring us to purchase big screen televisions, I-pods, Play Station, Wii, X-box and of course new computers as our old ones become obsolete in less than 5 years. All these purchases should strain households with incomes below $50,000 given that the mortgage and two cars alone exceeds $2,000 each month. This does not include groceries, clothing, health insurance, out of pocket health costs, and ever-increasing college tuition. To be able to pay for all this many have begun to live on credit. Look, around you everywhere you turn you can now pay for such items as your doctor bill, dental care, groceries, and even fast food with your credit card. This all works fine as long as credit is available.
Now for the sobering reality, in an earlier post I remarked that the sub-prime mortgage market allowed investors to make exorbitant fees, and realize large obscene profits while creating complex new products such as credit defaults swaps. As long as home prices increased, the market could grow. However, to continue selling homes and taking more fees lenders decided that they no longer needed valid proof of income. This became possible since the lender was intending to sell the mortgage to others. The buyers of these poorly rated mortgages would then use complex mathematical formulas to bundle and then slice up these collective mortgages thereby creating higher rated securities. This bit of prestidigitation would have astonished even the master of escape Houdini.
Now what happens when you lend money to those who do not qualify for a home? Answer, they are foreclosed and they lose everything that they can’t carry on their backs. Have you ever heard of the term “Trash Out”. This is a relatively new term in our vernacular. Trash out refers to people who leave all of their possessions behind when they default on their loans. A company is hired to quickly remove all items and personal effects in each household. They leave no stone unturned, there’s another house waiting.
Computers, big screen televisions, appliances, furniture etc.are quickly removed and thrown into a dumpster.
Finally, as more and more homes are foreclosed, the value of all homes decease and interest rates rise. As interest rates rise those with adjustable rate mortgages began to feel the pinch and they too begin to default as they are unable to pay the increased mortgage costs. Eventually the holders of those highly rated securities that are in reality based on mortgages that are being defaulted have found that they do not have a way of valuing these securities. This uncertainty lead to the dissolution of the venerable investment house Lehman Brothers and the need for the $700 billion TARP payments. All to save the financial industry for their own short sighted stupidity.
Oh, finally yet importantly, credit is much harder to qualify, and people are purchasing less. If this continues, more people will be out of work as companies will be selling much less. This whole downward spiral happened because people wanted more and more external incentives. Ayn Rand would have been proud, but what she never saw was that unbridled greed could bring us all down.
At least my dog won’t get any more credit applications!