Forget The Squeeze: The Middle Class Is In A Choke Hold
The news is a muddle. The economy is showing signs of improvement -- the unemployment rate decreased last month -- or it is stagnant -- retail sales fell. The housing market is perking up -- housing starts for single family homes increased in July -- but 13 million homes are likely to default in the next five years. Health care reform's public option is at once indispensable and a meaningless litmus test for the left.
There are no certainties in the current economic and political climate. Except one: that the current downturn is hurting middle-class Americans more than the wealthiest households.
Two new analyses of the American consumer, one by Bank of America and one by Zero Hedge, paint grim pictures. As is well known by now, in recent years American households accumulated much more debt than was healthy for the economy. They took out large mortgages, home equity loans, and racked up credit card debt. They did this, in great measure, to finance a middle-class living, as higher education prices increased, health care costs skyrocketed, and wages stagnated.
Unfortunately, the quantity -- and type -- of debt that middle-class consumers accumulated over this period left them particularly vulnerable. Zero Hedge notes that the "debt-to-income ratio for the middle class is on average more than 200%, almost double that of the highest decile, 'Upper Class'." Furthermore, low- and middle-class consumers hold a disproportionate share of their assets in residential housing, the market hit hardest by the recent downturn, while the "upper class" holds most of its assets in stocks and other financial instruments, which have performed better recently. Along with wages that have dropped this year, this means that:
[I]t is once again the top decile, or the 'Upper' Class [that] benefited consistently over the past 15 years, to the detriment of both the low-income and the middle-classes, which represent 90% of the population...The double whammy joke of holding a greater proportion of new wealth in disproportionately more deflating assets is likely not lost on the lower and middle classes.
Zero Hedge and Bank of America both argue that the superior position of the "upper class" at this point in the downturn means that the federal government must cultivate the consumption power of wealthy consumers and, most importantly, not raise their taxes, which could stifle recovery. This suggests a rather cheerless view of economic recovery: a return to GDP growth absent government intervention.
Yet, the federal government should be paying more attention to ensuring a broader recovery in which Americans no longer have to use debt to finance a middle-class standard of living, a state of affairs far from inconsistent with economic recovery.
Currently, the federal government has done little to address the housing crisis. Foreclosures continue to set records each month and millions more are on their way. One in ten homeowners is underwater. The Bush and Obama administrations have both failed to take broad steps to stabilize housing prices and keep homeowners in their homes. Allowing bankruptcy courts to modify mortgages, including principal write downs, would cost the government nothing while keeping millions of Americans in their homes. Allowing foreclosed homeowners to remain in their residences as renters would provide households an option for stable housing while incentivizing mortgage modifications.
Both policies would stabilize housing prices without subsidizing homeownership. And both would help reduce the debt burden on middle-class households, which would free up resources for consumption elsewhere. Health care reform that took significant steps to cut costs would similarly shift middle-class households' consumption patterns away from expensive care to other, more productive uses. Pro-union policies, as well, could help boost the income of middle-class households.
The story of the squeezed middle class is not over. In fact, it has gotten worse. Using this continued crunch to argue only against "anti-wealthy" taxes instead of for policies that can strengthen the middle-class both now and for the future is perverse.
Follow Harry Moroz on Twitter: www.twitter.com/hmoroz
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What's even worse that the middle class being squeezed? After loosing your house, runing your credit because of over charging on your credit cards, you can now be denied a job because of your credit history!!!!!! I mean if you loose your job, loose your home, look for a new job, then be denied employment because of your CREDIT SCORE!!!!!!!!! Companies can run credit checks on perspective employees and if they have poor credit the company can deny them a job because they view them as having poor judgement based on their credit report. Why do they think you need a job in the first place??? To clear up your credit!!!!! Is this not the STUPIDIST Reasoning you have ever heard of??? I know that you are charged higher interest rates because of your credit, your car insurance is higher because of your credit, but to deny someone a job based on their credit seems to be bias, singling out a person based on their credit score. You deny them a job, they can't pay off their bills thus sending them further and further down a deeper hole. How can the economy get any better when the scales for the haves and have nots are so uneven. I'm totally baffled...
An excellent, interesting and insightful piece of work. One that I agree with wholeheartedly. Thank you.
Telling Washington to stop fawning over the "Rich"; is like telling them to invite poor people into their home. It boggles the mind!
An immediate retroactive amendment to Bankruptcy for lost mortgages for those who make less than $60K would be a start.
But the middle and lower class is at war with the elite and the only difference is that the middle class don't know it.
The results tell the story.
Viva La Liberte !
I call it "smash and grab" economics in the classes I teach. An endless series of short con jobs perpetrated by members of the insurance, financial services and energy industries especially that are designed to redistribute wealth while creating as little value as possible. The run up in oil prices (which I argued publicly from the very beginning was the result of a speculative bubble in oil futures, rather than anything having to do with the fundamentals of oil supply) is a perfect example. Prepare to see the "middle" of the middle class slide continuosly to the left on the distribution of income scale.
You obviously have never drilled a hole.
You obviously don't run a commodity exchange.
"I call it "smash and grab" economics in the classes I teach"- LHB58 That's clever! Didn't the Bush admin call it "Shock & Awe" when they decided to fund their wars with a tax-break for the richest and the shifting of our nation's resources and future to their favorite profiteers?! "Shock & Awe" had nothing to do with modern weapons in Iraq...it was always about the 'economic bombs' they were dropping on America's workers.
"...a broader recovery in which Americans no longer have to use debt to finance a middle-class standard of living," This sentence struck me as especially poignant. What would a "broader recovery" look like? Wouldn't it include real solutions to the basic needs of any society? What if we could elevate everyone to the middle class? But how can we recover if we think we are recovering? And if we cling to the status quo, how can we progress in an intelligent manner? We've got to rethink housing and the need for shelter. As humans this is a basic survival need, and it should not be denied someone based upon how much money they have. We don't all have to "own" homes, but we could guarantee shelter for all. How many people have to be kicked out before we cooperatively solve this age-old problem? How many houses have to sit vacant while others go homeless before we realize that money is not a good enough reason for these conditions and circumstances?
I think there are good arguments for squatting, what do you think?
BUT IF THEY DON'T SQUEEZE YOU THERE IS NO TRICKLE DOWN MONEY !!!!!
lol
I dunno about you, Harry, but I rather think that a few thousand criminals (max...) have contrived to try to "corner the market" on all of Finance, Insurance, and Banking ... all at the same time ... and they sure did pour out the bribe-money in their concerted efforts to do it. Fast-forward a couple of dozen years now, and all I see left-behind is Rumpelstiltskin.
In other words, I don't see this whole thing as "an ordinary too-bad 'economic downturn.'
Hundreds of ... millions(!) of ... Felonies.
And, me's-a-thinkin', there are 307+ million of "us Plaintiffs," versus a couple thousand, max, of "those Defendants
Ahem. I think it's time to open that bottle of whup-ass, don't you? :-/
When the Fed has to DEVALUE the dollar like they did in the 1970's
THEN YOUR GONNA SEE HARD TIMES.
"Allowing bankruptcy courts to modify mortgages, including principal write downs, would cost the government nothing while keeping millions of Americans in their homes."
But it hasn't worked. Banks have already modified hundreds of thousands of mortgages. The problem is that almost all the folks with modified mortgages became late on payments again within six months. It just doesn't work, plus it's a very slow process.
If they would lower the value of the home and take away the 35 % average FRUAD in the orginal appraisl then you would see a big difference.
HOMES ARE NOT WORTH THAT SUBPRIME APPRAISL AND NEVER WERE !!!!!
Banker modification of loans has often come too late, if at all, or the modification is not of the right type to keep people in their homes.
Letting bankruptcy judges modify mortgages on primary residences--they have the power to modify loans on second homes today--would keep people in their homes based on an individual's specific circumstances. If judges had the ability to write down principal on first mortgages-
If we can give billions to those banksters--who turn around and pay themselves huge bonuses while people are still suffering--and still they refuse to help people...t
Hasn't this economy (and the people of this country) been punished enough by the failure to address the foreclosure problem? First it was happening to "those people who took out loans they could not afford". Now because unemployment continues to rise, even prime loans are falling into foreclosure--to people who did everything right. We are all in this mess together, and its time to accept that fact. It's time to stop playing the blame game and fix the problem.
Why would want to stabilize home prices at such historically high levels? Hasn't the government done enough already? Americans were encouraged to live beyond their means by the Fed's loose monetary policy which artificially inflated home values and encouraged people to "invest" in houses and/or deplete their equities through cash extraction, by an over-zealous legislative agenda ("Even minimum wage earners should own a home!") and by the deregulatory frenzy of Clinton and Bush which removed the final shackles from the thieves who financed those charlatans' campaigns in the first place - and now you want the government to do more?
Who was it that said - over and over again, as I recall - that you don't solve a problem with the same tired philosophy that created it? He should have added: UNTIL YOU'RE ELECTED.
Government is a big part of this financial crisis and now you want them to prevent the deleveraging process in order to what, prolong it? Good call.
Actually, home affordability is at it's best level in about 20 years. Home prices alone don't tell the entire story. You have to take into account interest rates, which are near 50 year lows.
Right, the much celebrated "affordability index." What the media or the index fails to tell you, however, is that the reason the long term treasury rates (and by association, mortgage rates) are so low is that the Fed is maneuvering behind their primary dealers to purchase the treasuries themselves. At last week's auction, for example, the Fed was the end purchaser - you have to dig beyond the primary orders to discover this, something the mainstream media clearly isn't interested in doing - of 47% of the treasuries sold. And then, once the auction was completed in which the central bank purchased half of what the Treasury was selling, government officials actually had the audacity to declare that demand for U.S. debt is still high - good news!
The only reason interest rates, which is the other half of the affordability index you're referring to, are artificially low is that the Fed is monetizing the national debt. In other words, they're pursuing a reckless short-term strategy to artificially prop up demand for housing. Some folks then use that as evidence that housing prices has bottomed, despite the fact that pricing charts clearly refute that assertion.
I would humbly argue that our government, by bailing out their large friends in the hopes of a swift economic turnaround, by trying to artificially stimulate markets rather than let them adjust naturally, is doing far more harm than good. Housing will only stabilize when market forces are allowed to work.
Your criticisms, not my proposed "legislative agenda", are overzealous. In fact, I propose a strategy - right to rent - that would move the feds away from their unnecessary subsidization of homeownership.
The home price stabilization that would be accomplished from the right-to-rent policy and the bankruptcy mod policy both result from preventing the externalities associated with abandoned homes. Plus, the whole point of principal write down is to reconnect mortgage principal with the actual, noninflated home value. These are ways of "deleveraging" the consumer without inflating home price (they are alternatives to things like the tax break for first-time homebuyers which exacerbate the bubble that you are so concerned about).
You are making sense Harry but whenever you do that with respect to the issues of unemployment, the housing crisis and the middle-class getting, as you say "choked" to death, you're going to get this disconnect by people who insist that any middle-class homeowner who is facing foreclosure "deserves it," that foreclosure is good because it "gets those irresponsible homeowners" out and makes room for "responsible people who can now buy homes at rock bottom prices," and that middle-class people who lose their jobs, again "deserve to lose their homes because they should never have bought a home in the first place in case they lost their jobs." Tell you the truth, this story isn't even getting appropriate coverage. What's happening with unemployment, the middle-class and housing is as critical as healthcare reform if the country is serious about turning the economy around.
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