Is it Too Late for America?

After enjoying a period of general, relative economic calm and growth since the 60's (and certainly since the Great Depression and World War II), America might be heading for a time of unprecedented economic upheaval.

The Bush administration has done considerable damage to American institutions, values and underlying economic competitiveness. Our international reputation to lead the world is ruined. America is now saddled with the largest debt in its history, China has grown into a challenging world power, more jobs have been shipped overseas, Iraq costs us billions (not to mention the emotional costs), economic disparity is accelerating and more fundamental warnings are released weekly. We are teetering on an economic cliff and it won't take much (inflation? increasing unemployment?) to send us down a slippery slope.

America is at a cross roads and needs visionary leadership more then ever before. But, it still remains to be seen if the Democrats can unravel and help solve the current mess. Is it too late to regain American competitiveness and vision?

As many people commented on my last blog posting, we already seem to be heading into an economic depression --- for the middle class at least. Wages are down and personal debt is at an all time high. More and more of us are living paycheck to paycheck. This is all masked by a low unemployment rate, record corporate profits, a sky rocketing stock market and the main stream media focus on materialism and the wealthy.

The last attempt to reach the American dream of owning a house was to lunge for that final gold ring: the subprime mortgage.

The mortgage crisis is just another "Canary in the coal mine." While the middle class continues to scramble for scraps and callously criticize people for "being irresponsible" during the mortgage frenzy, the big boys are laughing their way to the bank.

Here is an excerpt from an interesting article by Jon Markman with one of the world's leading experts on credit derivatives, Satyajit Das.

The credit bubble is just starting to unwind, Satyajit says. And while U.S. borrowers are being blamed for the mess, they were really just pawns in a global game.

"Defaulting middle-class U.S. homeowners are blamed, but they are merely a pawn in the game," he says. "Those loans were invented so that hedge funds would have high-yield debt to buy."

Rather than joining the crowd that blames the mess on American slobs who took on more mortgage debt than they could afford and have endangered the world by stiffing lenders, he points a finger at three parties: regulators who stood by as U.S. banks developed ingenious but dangerous ways of shifting trillions of dollars of credit risk off their balance sheets and into the hands of unsophisticated foreign investors; hedge and pension fund managers who gorged on high-yield debt instruments they didn't understand; and financial engineers who built towers of "securitized" debt with math models that were fundamentally flawed.

According to Das' figures, up to 53% of the $2.2 trillion commercial paper in the U.S. market is now asset-backed, with about 50% of that in mortgages. When you add it all up, according to Das' research, a single dollar of "real" capital supports $20 to $30 of loans. This spiral of borrowing on an increasingly thin base of real assets, writ large and in nearly infinite variety, ultimately created a world in which derivatives outstanding earlier this year stood at $485 trillion -- or eight times total global gross domestic product of $60 trillion.

This credit crunch is just the beginning of an overall economic unravelling. And, the middle-class and poor are going to be the one who will suffer disproportionately... again. A society cannot continue to flourish as inequity continues to grow.

Almost half of the newcomers on Forbes Magazine's list of the 400 richest Americans made their millions in hedge funds and private equity investments. Innovators such as the Google founders have justifiably been rewarded for creating value; but these hedge fund traders and "investors" simply move money and debt around, take their huge piece and then leave the rest of us to deal with the aftermath.

I decided to ask my 92 year old Grandmother what she thinks about the current economic climate. As someone who lived through the Great Depression, she feels that our society is now technologically advanced enough to avoid another economic crash. "People are more educated and innovative these days," she explains. But can innovation and technological prowess save us before it's too late? And, maybe even more importantly, will Americans elect visionary leaders that can put us back on track?

Comments

[Bruce123]

The main reason for this entire spectacle is so simple... People are more greedy and selfish today. The country that I once knew, where everyone was equal and looked out for one another, is long gone. We're so damn materialistic and greedy anymore.

As for my own opinion, I too think that our day of reckoning is just around the corner. And it won't be pretty. The Great Depression that our Grandparents knew will be pale in comparison to the next one... Sudden. Shocking. Devastating. Such will be the demise of this once-proud nation, and the end of our present economic era..

David Walker, Comptroller General, draws sharp contrasts between the United States of the 21st century, and that of the old Roman Empire. All throughout history, great societies have risen and fallen, and maybe it is our turn this time.

Perhaps it is time to pull the plug on this culture of instant gratification, this society of greed and gluttony, the selfishness of this "take-take" world with the "here and now" attitude, this throw-away society of made-in-China junk, and the seemingly "couldn't care less" atmosphere that hangs over this entire nation? I'll leave that up to you to decide.

[Sundialsvc4]

Yes, on the one hand, the money-men may be laughing to the bank ... but it's merely "leprechaun gold."

To make REAL value, you must MAKE something. You can't just push numbers around on a computer. And it's not the same thing, not at all, if another country is making things for you and you're shipping them 10,000 miles across the ocean to your warehouse. There is no substitute for production ... for DOMESTIC production.

Why? It's simple: the person that you pay to produce your product, domestically, now has real money in his pocket with which to buy your stuff. Henry Ford well knew that he had to pay his workers enough that they could afford to buy his cars.

We're awash in "leprechaun gold" these days. Our goverment is "borrowing from itself" literally to the tune of more than $1 million a minute, 24/7/365, but you just can't "make up money" like that. It's called inflation .. absolutely ruinous inflation .. except that we refuse to use that term.

America is =still= an economy of more than 320 million people, all of whom have to eat (even though not all of them get to). It still has stupendous -capacity.- But the hangover from too-many years of stupid policies will not be easily shaken.

[jinjinpinti]

huff




HuffPo: I came back to find that none of my several comments were posted on this thread. Have reread carefully to figure out my unworthiness to be heard compared to other commenters. Unable to deduce their superiority, so request info on what is objectionable or inferior and therefore rejected. It won't smart so much if I, at least, understand my disqualifying aatributes.

[realitytrumpsbull]

Too much funny-money 3-card-monte economic funny business have carved too many wormholes
in the 'con me' for things to stay stable. Buy that gold, move to the Caymans! LOL

[godsaveusfromourselves]

and into the hands of unsophisticated foreign investors; hedge and pension fund managers who gorged on high-yield debt instruments they didn't understand; and financial engineers who built towers of "securitized" debt with math models that were fundamentally flawed.


I agree that the house of cards is teetering, but I think the speaker went a little soft on those who built and perpetuated the credit debacle, referring to "unsophisticated foreign investors" and "hedge and pension fund managers who didn't understand the HY debt instruments they bought" as if they were babes in the woods who just stumbled onto these pieces of paper lying on the forest floor. Are you kidding me? These guys knew exactly what they were creating and what they were buying. Their mistake was in subscribing to the greater fool theory-that they were just smarter than everyone else. The mortgage lenders played on the stupidity of the homebuying public, many of whom knew better than to take these mortgages but did it anyway to have and enjoy, at least for 2 or 3 years, a lifestyle that they'd never before had and never will again. (Many of my clients are those people. They just smile and say it was great while it lasted)

[toomuchtolose]

I have recently been informed that when a working spouse retires and gets his social security check (ex $2000.00/month), the non-working spouse gets a check for half that amount (ex. $1000.00/month). The working spouse has paid into the social security fund an amount that qualifies him/her for $2,000.00 a month, but since his/her non-working spouse get $1,000.00, that's a total of $3,000.00 a month. What has the non-working spouse done to get a social security check? Not talking about widows or widowers or divorced persons. These are married people. I hope that info is incorrect, but I have been assured it's accurate. Before throwing out the widows and orphans, let's take a hard look at non-working spouses gets social security checks. The working spouse isn't paying for that. The taxpayer is.

[realitytrumpsbull]

Blame who you will, too much creative financing
and officially sanctioned loan sharking has
gone on for too long for it to be healthy,
but don't worry, Bernanke can just add
a bunch of zeroes to the end of the debt, there,
and it's all good, right? Right?

[zizyphus]

Money is good, but planting a sustainable garden of your own now is paramount.

[givemycountryback]

Yaeh, I think it might be too late. Consumerism and materialism has ruined our society.Why would anybody have paid those ridiculous prices for houses to begin with. The housing prices in Calif. are disgusting. I know I have family there. And the way these companies have marketed to our young is down right evil. Example, the big launch for Halo 3. And as long as I am spouting off, I am so tired of hearing about the boomers like we are such a burden. Doesnt anybody think we worked all these years and paid in. Deal with it. I am 57 and I expect to get my SS come hell or high water. If it is such a large population to get SS, well that means that this large population paid in a lot of money. Hand it over and quit stealing it. How dare they. I am sick to death of being called a burden. I Have worked 32 years uner the sytem and I don't appreciate these young smart ass politicians referring to me as an entitlement person. And yes I believe in means testing. Isnt that the right thing to so. Why should someone who doesn't need and probably never paid their fair share of anything, not let someone who really needs it have it. Oh Its called greed.

[TheWesternBreed]

At least since the mortgage crisis stopped I have almost entirely stopped receiving what used to be two or three junk-mail letters from obscure loan brokers with offers to "REFINANCE WITH A LOW, LOW, 1.9% INTEREST RATE!!!!" and so forth. I guess a lot of ignorant people were suckered that way.

[TheWesternBreed]

Wrote "stopped," meant "started."

[mrcontinental]

We are doomed I'm afraid. Perhaps it's for the best.

[robinhood1]

Even a Rothschild was gassed at Auschwitz. You can read about it in William Manchester's biography on the Krupps (the German steel making family), written in the late 1960's.

The 2008 election may well turn out to be the most important since 1932. Just think, if a Nazi sympathizer had won the Presidential election that year, instead of FDR, how differently things might have turned out. Philip Roth's novel "Plot Against America" is set against a background in which FDR loses the 1940 election to a Nazi sympathizer.

[NABNYC]

When people buy a home, their only economic concern is what will it cost them every month. That is how people evaluate their ability to afford a home.

When Greenspan artificially dropped and then held down interest rates, it allowed brokers, lenders, and developers to radically yank up the price of housing (increasing the price 3 fold in many areas), yet allowed people to have a monthly payment that they could "afford."

The lenders make huge loans, the brokers get huge commissions, and the developers make huge profits. (Particularly when they also fire all the $25/hour construction workers and hire $8/hour illegal immigrants to build the houses).

Not so long ago most houses cost about 3 to 4 times the gross income of one average earner. Today houses in many area cost 10-12 times the gross combined income of a two-earner family.

Artificially holding down interest rates also hurt seniors who keep most of their money in interest-bearing accounts so the principal is secure.

Cutting interest rates now will not solve the problem. The problem is that the housing stock is overvalued by at least 100%, if not more. In other words, a $500,000 loan on a home that has a true fair market value of $250,000 means that 1/2 of that loan, or $250,000, is not going to be paid.

Whether it is not paid today (through foreclosure), or not paid a year from now if the loan is extended and renegotiated, is irrelevant. Someone is going to take a bath on this deal.

Not the developers, not the brokers. Many home buyers will take a loss, but they couldn't afford the house to begin with. The lenders are ultimately holding the bag, but the federal government will give them our tax money to prop them up. The likely effect on the economy will be devastating. All thanks to George Bush and his commitment to destroying this country.

[FogBelter]

Great Point NABNYC!

What's been happening the last decade or so with the "flipping" game is nothing more than the Real Estate version of Check Kiting ...

A "Flipper" buys a property with no intention of living in it ... does some cosmetic fixes then in a few months puts the property back on the Market at a higher price ... the property is then picked up by another "Flipper" who performs the same routine. The value of the property increases because the Market is "fixed" to inflate the selling price to feed the "Flipping Scam".

This Real Estate kiting is why you have properties in a flood plain in the middle of "No Where, California" selling for half a million dollars now when their actual value might be 1/4 of the current price.

The argument that the Market is decides the values is a falsehood as well when the Market is a Ponzi Scheme rigged to reward Real Estate Agents and Mortgage Brokers with fees and commissions for absurd Real Estate transactions that in a regulated industry would never see the light of day.

Probably scrutiny should fall on Real Estate Apraisers as well who fudge their property apraisals for the simple reason that if they were honest they would never be called on for their services by Real Estate Agents and Mortgage Brokers waiting to make a killing on a transaction.

The inflated valuation of property is rarely spoken of in terms of the subprime meltdown, but once these foreclosed houses start hitting the market and the neighbor's with good credit start seeing their property values collapsing, yet another revelation will be upon Mortgage Holders in every catagory.

[Purple Girl]

We ahve allowed this political ideology to sway everything. Blame the victim. Instead of identifying the real culprits to issues they find a way of making the mere presence of a victim the cause of the crime. Cancer- smoked ( not air pollution from the industry down the street). Brain tumor- using their cell phones - not those power lines over head or the station down on corner. Obesity- gluttony not corporate ambitions to make their product addictive ( physically or just mentally). Granted we are al responsible for our decisions and life choices, but our small decsions do not explain mass epidemics (pan demics) around the world. Food poisoning- you didn't cook the food well enough, the food is unsafe to begin with. so before they come after my cigarette, my super sized Ice tea, my candy bar. The gov't better clean up their community responsiblities first. My cigarette is not killing people in Afghanistan- it's cholera- public works system !!(and of course the war- which my cigarette had nothing to do with)

[jinjinpinti]

Yes, Purple girl...and imagine how it will be when all those consumers of "needful things" like iPods, video games, 2nd and 3rd cars, hot tubs, fancy kitchen gadgets, season tickets, plastic surgery, designer anythings, takeout dining 24-7, the thousands of pricey cosmetic/hair products, disposable mopheads, disposable everything else, etc., etc., etc., etc.,...imagine them having to do with out so many of the corporate overlords' products and services...only to discover that life is still good WITHOUT all that crap and without having to keep up with the Joneses. Sometimes being poor ALREADY is actually easier. "Freedom's just another word for nothing left to lose."

[Spookcatcher]

It's too late baby. There won't be any leaders going to repeal the laws (nearly 24,000,000!)that bind us now. President Washington had it right in observing that the demise of the democracy would be the insurgency of a 2 party system. President Jefferson went further when he wrote that a little revolution from time to time is neccassry. As long as Walmarts, cellphones, internet porn and video games, Mcdonalds, and Pizza can be delivered to us ain't nothing gonna change but the rising cost of a gallon of gas and a lot more traffic tickets as they coral us into our neighborhoods with Cameras on every corner, and RF technology imbedded in everything we buy and wear, and with Biochips coming to us in the next Prsidency.

[FogBelter]

The problem is that Americans, who have enjoyed the affluence of the Post WWII era, have no personal knowledge of how bad things can actually get. Those Americans that weathered the Great Depression as adults have all but died off, those who lived through the Great Depression as children may have some memories of hardship, but not the same memories as the adults who had to scrape by to survive.

Worst of all, Americans have the dual problems of not having a great affection for the learning of their History, unless it is a cartoonish abridged version, and exhibiting an arrogance that the problems of the past would never return to afflict them because they are some how more advanced than previous generations.

This is bad news, because if the worst comes to pass and the economy suffers a major setback the American people. except for those already used to living in poverty, will have no understanding of how to react to the situation, compounding the already dire effects of economic collapse.

People should prepare for the worst, while hoping for the best for it seems the United States is in the process of moving from a "Boom Economy" to a "Bust Economy" ... and those who view this as a ludicrous assertion may be in for a rude awakening.