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Fed To The Sharks, Part 2: Housing And The Death Of The Middle Class
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
The Fed sacrificed the foundation of middle class wealth--stable housing values--to boost bank profits.
Lest you think the phrase "death of the middle class" is hyperbole, please examine these two charts, keeping in mind the middle class by definition must be in the middle of income/wealth distribution--conventionally, between 40% and 80%, i.e. the 40% between the bottom 40% and the top 20%.
See that little red wedge? That's the bottom 80%--the entire middle class and everyone below the middle class.
Here's another look at the wealth distribution: the middle class's share of wealth is modest, unless you define the top slice of households just below the top 1% as "middle class." But since the top 19% cannot be in the "middle," attempting to boost the wealth of the middle class by including the wealthy is truly Orwellian.
Why has the middle class eroded? We can start by looking at income. As noted yesterday in Fed to the Sharks, Part 1, household income for the bottom 90% has stagnated for 40 years.
The next chart shows how financialization boosted asset valuations in waves of boom and bust. Some of the first two waves of financialization leaked into wages, but the Fed's bubble-blowing since 2009 has failed miserably to increase incomes: disposable income fell off a cliff in 2009 and has continued falling, despite the Fed's blowing new bubbles in bonds, stocks and housing.
So what does the Fed have to do with the death of the middle class? As noted in What's the Primary Cause of Wealth Inequality? Financialization (March 24, 2014), the short answer is when investment returns exceed economic growth, the rich get richer, increasing inequality.
And when do investment returns exceed economic growth? When the Federal Reserve makes credit very cheap for financiers and speculators, which drives up asset prices as everyone with access to cheap credit bids up assets.
Low interest rates and free-flowing credit inflate bubbles. We can discern an implicit agenda in the Fed's policy of making credit cheap and abundant: since income for the bottom 90% is stagnating, the only way to boost consumption and debt is to inflate an asset owned by middle class households: housing.
Unfortunately, credit-driven speculative bubbles inevitably burst and housing valuations crashed.
The Fed responded to the housing crash with an unprecedented policy of buying over $1 trillion in home mortgages (mortgage-backed securities), roughly 10% of all existing mortgages in the U.S. In conjunction with the Fed's other policies (purchasing Treasury bonds and relaxing banking rules) and the opening of the loose-lending FHA spigots, housing recovered nicely--until the Fed slackened the pace of its purchases of bonds and mortgages. Housing immediately began trending down.
In response, the Fed restarted buying Treasuries and mortgages in enormous quantities. And sure enough, housing recovered.
But asset bubbles do not replace income or savings. The only way to benefit from bubbles in housing is to trade: buy in at the bottom and sell out at the top.
In essence, the Fed's bubble-blowing forced every homeowner into becoming a speculator.
There's another agenda at work of course: increasing debt and bank profits derived from debt. What better way to insure banking profits than to spark a speculative bubble in the core asset of the middle class--housing. Rising prices created temporary (and enticing) home equity that could be tapped with a loan (HELOCs--home equity line of credit), and the temptation to selling out and moving up the food chain to a bigger home and bigger mortgage was equally compelling.
Even better, banks and Wall Street had perfected the securitization of once-safe home mortgages. Banks had no need to take on the risk of holding mortgages--the big money was in originating the mortgages, packaging them into securities and selling the tranches to investors.
The much-ballyhooed "ownership society" turned out to be ownership of debt, not equity. Debt is profitable for banks; people owning homes free and clear is not.
In effect, the Fed sacrificed the foundation of middle class wealth--stable housing values--to boost bank profits. Take a look at what happened to financial profits in the 2002-2007 housing bubble: they skyrocketed to new heights. And look what happened when housing and the banks' securitization scams blew up: financial profits completely collapsed.
Middle class wealth was Fed to the sharks. As the current housing bubble deflates, the investor-buyers who fueled the rally are exiting en masse: what's the value of an asset when the bid vanishes, i.e. there's nobody left who's willing to pay today's prices?
The Fed has failed to restore middle class wealth with its latest housing bubble, and the costs of the bubble's collapse will fall not on the Fed but on those who believed the recovery was more than Fed manipulation.
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Just more class warfare from a pinko hippy who hates Merica, and the troops.
LOVE IT OR LEAVE IT HIPPY, and get a goddamn job!
repeat that 80 million times, and it might be true.......
Hate the troops? hahahhaha. The hero troop meme. US Military is manned via a poverty draft.
You forgot the haircut.
Do still think you will be sucking the Medicare teat into old age ?
I've got some nice beachfront property in Indiana for sale by the way.
Re: Do still think you will be sucking the Medicare teat into old age ?
Git yer commy libertarian hands off my Medicare ! I'm entitled to that Medicare and all the goddamn hip-replacement surgeries I want.
i would love to be the fly on the wall the day an old codger "who earned it" gets denied the right for a fourth elective surgery that can't improve the quality of life anymore.
Sense of entitlement versus sense of reality.
That'll be when the rash of Boomer-Codger shoot ups of hospitals begin.
so you are starting the Dr. Josef Mengele charity ward?
That's sarcasm, boys and girls.
Not before I've eaten my morning baby.
For conclusional effect CHS stated :
"In effect, the Fed sacrificed the foundation of middle class wealth--stable housing values--to boost bank profits."
...and contradicted his full article and all it`s better wordings and arguments.
"the foundation of middle class wealth - stable housing values"
Are you sure CHS you are not talking about INFLATED housing "values" to keep the illusion of a middle class of whatever sorts ?
House prices out of reach for everyone but the almost retired in an upwardly mobile society were never meant to be.
You sound like a union guy pleading for keeps at a boomers
get together. Just because the retirement illusion is officially bust , house prices still have to come well down
by all measures.
Real Muricans support wealth inequality
I had a nightmare of a future world where even singing shows would be contests with MANY losers and one winner. It was really sick. I changed channels on my nightmare TV and there was only killing, monsters, Jimmy Fallon, and cop shows where the good guy is tied to a chair and a smirking psychopath is threatening him. And I couldn't wake up!
The Fed has a singular mandate: to enrich their banks/1%.
Dear banks with pens chained to counter,
We trust you with our money, but you don't trust us with your pens!...
Yours Sincerely, confused?
Unlike most things the Fed does, this actually worked out well. Bankers were left with properties with diminishing value. The Fed intervenes and some "savvy" investors start buying properties with cash. Banks get cash, investors get property. With the latest data showing 50% of home sales were cash deals, I would say the Fed did pretty well. When it crashes this time, the investors will be out the cash and the banksters will be back to where they were when the initial bubble popped.
"The Fed has failed to restore middle class wealth with its latest housing bubble"
Statist CHS appealing to Fed authorities to do the right thing for the middle class...or classes...or middling classes... His narrative gets better on a very low level but exellent food for thought.
I upvote him on every improvement.
Here is how it worked...
Suspend mark-to-market
Log jam the foreclosure pipeline
QE out the ass
Offload inflation knowing China will be forced to react, Japan will be forced to react, and the EU will go tits up
Money runs like hell into US equities and real estate simply because it has nowhere else to run either for yield or safety
"In effect, the Fed sacrificed the foundation of middle class wealth--stable housing values--to boost bank profits."
By design. The Federal Reserve is not Federal and has no Reserves.
It is a front for the bankster cabal; a force of slavery and suffering.
End the FED.
They fucking changed the rules in the middle of the game !!!
Nope the rules have always been....they win, you lose.
At this point, physical gold (and silver) outside the financial system is one of the few options left.
Their response will be to tax PMs at some level over 50%. Plan for that. Not sure what the solution should be.
Maybe I should start advertizing my PM losses that fell overboard my fishing boat like a few guys here who post that 24 hrs a day.?
I am looking at a silver round (Mexican) right now that does not weigh even a pennyweight less than it did when I acquired it over 30 years ago.
Even at todays manipulated market price it is worth >400% of the FRNs then traded for it.
I am looking at an FRN that I earned over 30 years ago…
You fill in the rest.
they would kill us all for a bonus
they WILL kill us all for a bonus
- fixed it for you.
That yellinator is out there. It can't be bargained with. It can't be reasoned with. It doesn't feel pity, or remorse, or fear. And it absolutely will not stop, ever, until we are all dead. [/reese]
HE'LL KILL US ALL! [/Sarah Connor]
When the fuck are we going to drag Krugman out and hang him in the streets
Krugman is just one of many "Keynesian" idiot savants ranting about his Diety.
You could kill him and another would take his place.
Debt is no more or less than a narcotic, and most humans are addicted to something.
Exactly! The robots are being assembled at the Ivy League schools as I type.
When the fuck are we going to...
When are we going to stop obeying our destroyers?
100 billion a month of QE before the end of the year.
By September, remember there is a midterm election in November and wehave to try to fool the rubes into thinking the crony fascism is working. Or we might lose the centerpiece of the Prog totalitarain project, i.e. Obama(not)care. We just gotta keep up the image of democracy for another election and then the project is self operating tyranny where it is illegal to criticize 9read: expose) the fundamental transformation of a once civilized, once free(ish) country. The good guys have almost lost.
All going according to plan. People who don't know a damn thing about investing are getting destroyed, and probably 99% of people don't know anything about investing. The "average" return for most investors is something silly like 3%, so most people work for 40 years and their entire life savings taxed away through inflation.
There are ways to get some more yields through proper investments, but to maximize returns, you need to do it yourself, which is quite a task and is akin having a full time job (if you're one of the lucky who still have one) plus a part time job, portfolio management.
Effectively, the Federal Reserve of the Soviet Supreme is assigning you to a portfolio management job if you want a retirement.
Does the Fed not each and every day, each of its ass breathed rim lickers not say that they lift/support/bla bla ( inflate ) housing, investment stocks ( stealing your return values ).
And so Chumpas Americanis's 5% yeild in a truthful 5-10+% Fed caused inflation regime is actually losing his purchasing power. But it gets worse. The 1913 Federal Reserve and Income Tax ....taxes you on your, above example, 5%!!!! So, you double lose
Throw in the now century of economic destortion, real property wealth destruction, the destruction of thousands of by the penny invested, built by sweat and countless generations of manufacturing cities, cities known world wide as bringing the highest quality, newest, most affordable goods.
All Treason, all thieven, all the time.
I said just the other day that C H-S is a commie and would soon be pitting the bottom 80% (what he calls the "middle class") against the top 20%, which is mostly working-class people.
There are three classes in the US: Obamaphone Takers, The Working Class, and the 0.001 Percenters.
We're all in this together.
Except for those other two classes.
I agree but it is only those who have nothing left to lose who will revolt. That is why the Obamaphones and EBT cards keep coming. The working class has family and must work to feed, clothe, and house them. The "street people" will riot and kill to get what they want if entitlements are cut off. The question is whether they will know who is to blame. Doubtful.
I was being sarcastic.
I wonder if the next Reginald Denny will be armed and ready.
I started speaking out against CHS with commie accusation ages ago that got finally fully justified with the links he provided but he seems to be getting better , don`t trust me...
He posted many good articles ever since and I`m willing
to support this his our ZH learning progress until I smell
another agent doing his bidding .
Which I do not in his case, dumb and cleverly enough for a real former commie, he just fucks up this termination grammar school like deduction.
"... the costs of the bubble's collapse will fall not on the Fed but on those who believed the recovery was more than Fed manipulation."
It seems there are no consequences for Fed Board members who screw things up time and time again.
FedFUBAR.
Nice. An elegantly concise and clear analysis of a massive shit sandwich, Charles!
Two classes exist. The honest class that earns what they have by doing honest work. Then we have the others that get thru lies,force or handouts more than they earned. At some point the honest will need to step up and step off.
We won't. We will hunker down and hope to survive, protecting our families until the fallout is over. Some will, some won't.
What will the new world order be like?
Like Putin, or Hitler. The "left" side of the fascist equation of dissovling culture to rutting bestiality has about run its course. The next stop on the pendulum is intensely moralistic repressive authoritarianism, and very likely racist or nationalist thematically. In any event becuase they are minorities the homos and the "people of color" who have been the vangaurd of the dissolution of individual rights and the rule of law will find themselves on the opposite end of usefulness for the TPTB. Payback of this sort will garner great popular support as the resources dry up and the shrnking pies exerts its crushing math. Then our heroic lawbreakers will have nothing, not even tradition to protect them as they face the hyped up wrath of a humiliated populace with their elite cheerleaders. That is, if things go as they have gone before.
Consider from a Man for All Seasons:
William Roper: So, now you give the Devil the benefit of law!
Sir Thomas More: Yes! What would you do? Cut a great road through the law to get after the Devil?
William Roper: Yes, I'd cut down every law in England to do that!
Sir Thomas More: Oh? And when the last law was down, and the Devil turned 'round on you, where would you hide, Roper, the laws all being flat? This country is planted thick with laws, from coast to coast, Man's laws, not God's! And if you cut them down, and you're just the man to do it, do you really think you could stand upright in the winds that would blow then? Yes, I'd give the Devil benefit of law, for my own safety's sake!
Clark, doomsters give the devil the benefit of the doubt,
not knowing they are in for the next best Faustian bargain.
I sure hope the wheels come off this thing soon. I can't remember a time in my trading years where the markets were so dependent on some douchewad central (huckster) bankster for trading direction. There's zero price discovery and the likes of Draghi and Yellen & Kuroda should be hung from the nearest swingset, oak tree, lamp post ASAP!
It will be so nice when we don't have to sit around for 1...2...3 weeks for some cocksucking central bank head to speak about the rigged economies of the world because of global dependence on money printing and manipulation.
Previous recoveries all began whenever a recesssion or stock market crash re-set prices back the level that the middle class could afford -- based on the wages the middle class was capable of earning. By interfering in that re-set, prices never reached affordability for the middle class, and are further away today than ever. The Fed tried to save the value of housing because the big banks held those mortgages that were underwater. The free Fed money drove up housing prices way past the middle class wage increases. This is unsustainable - and the crash and re-set is only postponed - but is inevitable. One cannot help but wonder if the Fed sees it too -- and is buying mortgaged backed securities just to get them off the big banks balance sheets and onto the taxpayers.
tell that to bubble headed bleach blonde suburban housewifes that you might be living with and want a larger home
Of course, they are! The question is, Have they bought them all up yet? If they have, the FED will taper and cause the reset. Then, react to that when it starts hurting banks again.
... remember when a presidential candidates first campaign stop was to auto workers union? and the candidates policies were aligned with the interest of workers? then ronald reagan came into power and busted union, followed by massive media campaign to tarnish the union's image? then paul volker jacked up the interest rates to the moon, basically wiping out the small/medium manufacturing sector and government policy allowed the large companies to export jobs to asia, giving birth to the japan inc? now presidential candidates first campaign stop is to private luncheon at wall-street ...likewise the policies are aligned to the interest of banks and multi-national corporations ... now the most powerful workers union belong to janitors, and the middle class lives in name only ...
Volker raised rates in response to the falling dollar. Jobs were sent overseas on the back of Nixon's closing of the gold window, too. Without gold, the US could start running huge trade deficits, driving down the dollar. Nixon sold the country into banking/corporate slavery.
The housing re-bubble rebust is no big deal, rolling over bad debt is relatively painless.
Who is opposed to putting off the pain a lil longer? nobody.
The municipal & state bonds, they're another story, the first round of debt wasn't replaced, it was leveraged and expanded into more debt.
The Merideth Whitney Collapse will be come and be worse than prognosticated .
Oh Ya Detroit
Smitty - there is a even timetable. At least a "buck stops here" sort of point in time. Massive balloon style loans that started getting written a few years ago with I believe (dont quote me on this) 20 year terms. This indicates to me that people on both sides of the table expect the system to be bust long before then (but far enough out that they will be out of the game).
So, outside edge is maybe 2030 or so.
I wager they all miscalculated and we are looking at between 2016 and 2020 for it all to come unglued.
The Chinese will keep buying US houses. They use the houses to launder money so do not care about the price.
Just wait until they stop buying houses in Australia and NZ. God bless, house prices there disconnected from reality some time ago and haven't looked back since.
CHS ought to examine trade deals and look at the decline in the US industrial base.
This is a union sponsored study but provides decent background data for the loss of factories and jobs akin an unforced major depression. But trade laws were forced from within our halls of power.
http://www.highroadstrategies.com/manufacturing-and-the-erosion/
CHS ought to examine trade deals and look at the decline in the US industrial base.
This is a union sponsored study but provides decent background data for the loss of factories and jobs akin an unforced major depression. But trade laws were forced from within our halls of power.
http://www.highroadstrategies.com/manufacturing-and-the-erosion/
The amazing thing, and I bet nobody picks up on this, is that the greedy .1% are likely being played for fools. There has been a movement in this country for over 100 years to create a communist takeover. Key to that goal was demolishing the middle class. Well, the .1% are doing that work now. Once the middle class is gone and the masses are fully dependent on .gov for subsistance the .1% are dead. They will be strung up and executed en masse along with their families. Their wealth will be confiscated by the people, care of the state.
Sure this vision may be tweaked a bit by corporatism but even the corporations will be nationalized so in the end we will have full on communist tyranny and all the dead bankers and C-levels you could ever hope for.
Wealth is not power unless you have the guns too. The .1% do not have the guns. The people with the guns, .gov, will take the wealth when they are ready.
The .1% are fullfilling the prophecy. They are selling the rope by which we will all be hung.
Lastly, I think Obama is the useful idiot who will be deposed for the real leadership once the popular resistance has been put down.
Please.... housing has been moore of a bubble since the 1970's than any 'stable' source of wealth. The middle class has been played for fools since they were convinced women had the 'right to work' (no objections to that aon my part - the problem is when that became 'a woman HAD to work'). The US went from a nation where a family could be comfortably 'middle class' on one income to a place where TWO incomes were REQUIRED to buy a house. Most people forgot the run up in housing prices in the 70's. The place my grandparents bought for $12,000 in 1948 was bought by my parents 20 years later for $28,000. Within a decade it was 'worth' more than $200,000. It sold for over $500,000 when they died in the early 2000's. Housing USED to be 2 1/2 times annual earnings - and WAS in my example for 1948 and 1969. That jumped higher and higher - requiring much higher family earnings which were obtaiable ONLY through two incomes.
The REAL killer of the middle class has been an incessant attack on the job base that created the US 'middle class'. 'Free Trade' - pushed by BOTH political parties on behalf of theior corporate overlords - has been an endless pursuit of the cheapest possible labor. The US manufacturing base was destroyed - whole plants sent overseas. Data Processing and Systems jobs (remember 'retraining' as a programmer was the solution to blue collar job loss) went to India in the early 90's. Call centers and customer support followed. Now you're seeing accounting functions sent overseas. THIS endless attack on wages also forced a move to TWO INCOME families. A side effect to all this is that divorce - far too common now - almost guarantees a substantial drop in income for most families that go through it (we're exceptign the lives of the rich and famous here).
All through this you had INCREASED corporate profits and increased 'productivity' (from tech and from squeezing the remaining workers in the US) that ALL went to the top. At the same time you had corporations looting the 'excess' capital in pension funds earned by the workers that were disappearing.
Some like Perot saw it coming. This is a classic from Goldsmith prior to GATT:
http://www.youtube.com/watch?v=4PQrz8F0dBI
Women joining the workforce was a reaction to the removal of the gold standard and the inflation it caused. Worked right into the Left's hands.
left, right. as long as you believe there are two parties, the real power will remain in power
That and the 'need' for two cars and a house twice as big as our grandparents.
Also, women working in WW2 realized they could make a living without having to be marrie and dependent on a man. Everyone loves freedom.
In 1974 you could fill up your gas tank for $7.00, about 2 hours wages of a low wage job. Today to fill up that same car at the pump it costs $70.00, about 10 hours of a low wage job. Everything from the food you eat to the buttons on your shirt is driven by the cost of energy. The loss of jobs was driven by union greed and the resulting strangulation of company profits. This in turn caused companies to cut R&D expense resulting in lousy product for high dollars which opened the door for imports of cheap products made better and cheaper than similar product made at home.
Once America saw product that kicked American products ass in quality and cost, the floodgates were opened. We designed our own demise, compliments of tiny, self serving union minds and profit driven stock prices.
The housing market is not back; it is not a bubble; it is a tragedy. It is a calamity that has hit the American middle class where the greatest part of their estate resided – their home.
“Most middle-class families didn’t have much wealth to begin with — about $100,000. For the 22 million families right in the middle of the income distribution (those making between $39,000 and $62,000 before taxes), about 90% of their assets was in the house. Now half of their wealth is gone and it will never come back as long as they live…,” Rex Nutting wrote on MarketWatch on July 8, 2011.
For the few it is partially back, but it is patchy and sketchy.. By destroying the housing market, the Fed destroyed private wealth, the biggest single asset Americans had -- $7.38 trillion to be exact.
So now, where are "homeowners" to invest, the Fed’s rigged stock market? Their savings have been wiped out by ZIRP; their 401(k) mutual funds are flat and down 30% since 2000 if Fed-admitted inflation is factored in; their Social Security down 38% in lost purchasing power since 2000.
Trulia trends’ John Kioko’s latest Bubble Watch, shows “national home prices still 5% undervalued compared with long-term fundamentals. He finds them overvalued in only 19 of the 100 largest metros – including 8 of the 11 large California metros.
Bubble Watch charts show that…
“Bubbles Haven’t Broken the Surface Nationally
“We estimate that home prices nationally are 5% undervalued in the first quarter of 2014 (2014 Q1), which means we’re not in a nationwide housing bubble. Remember that prices reached a high of 39% overvalued in 2006 Q1, then dropped to being 15% undervalued in 2011 Q4. One quarter ago (2013 Q4) prices looked 6% undervalued, and one year ago (2013 Q1) prices looked 10% undervalued (see note at end of post about the trend over time). This chart shows how far current prices are from a bubble (See chart):
http://www.trulia.com/trends/2014/03/bubble-watch-local-worries-national-calm/
http://www.marketwatch.com/story/how-the-bubble-destroyed-the-middle-class-2011-07-08
This piece is misguided. The middle class was fed to the sharks by CONgress back in 1993, when NAFTA was passed. So called "Free Trade" deals are what was the head shot to the middle class.
Yep. It doesn't matter which way you steer the ship (monetary policy) if the hull is already full of holes (globalisation).
Labor share of income cannot be boosted when US production and US workers can be constantly undercut by Chinese equivalents operating under conditions that would be illegal on US soil.
Ironically, by looking to boost profits via exploitation of cheap Chinese labor, corporations end up gutting themselves because there's eventually nobody left who can afford to buy anything (the unemployed don't make reliable customers). Debt hides the problem only so long.
Totally obvious, in fact predicted by people like me for decades in our resistance to globalists, then along comes that dickhead, mentally disordered Larry Summers, (who is largely to blame for this mess), he talks about "sectoral stagnation", (which is a really shoddy version of what's going wrong, albeit on the right track) and the idiot MSM makes out like he's some kind of genius.
Guillotines. It's the only way. That's how the French dealt with their sinking share of labor income being siphoned off to support a rentier class.
The only question remaining is... will temporary support for the housing market be provided by hordes of rich Chinese getting out of dodge before they get hung for all the financial malfeasance that made them rich?
Absent that support, it is all downhill from here. Which means, smart home owners will sell ASAP, and potential home buyers will sit around and wait while prices fall for several years.