Crossing the student debt point of no return – for-profit colleges have default rates now rivaling subprime mortgage debt. $1 trillion in student loan debt on the horizon while college graduate wages fall for the decade.
The student loan market is back in the news as it makes its unrelenting march to the $1 trillion mark. This crippling figure comes in the face of a decade of lost wages for middle class Americans. Just like the housing bubble people were supplementing a disappearing middle class with more debt. The allure of housing was that never in our history have we seen national home prices fall, until they did in dramatic fashion. The same cultural nostalgia for education in every respect has created a zombie higher education system that is now expanding like the mortgage markets at the height of the housing bubble. Why? For-profit schools have largely lured in countless Americans into a system that has provided very little economic gains for students while enriching these Wall Street listed companies. It should come as no surprise that the highest default rates stem from the for-profit system and most of these loans are federal loans. In 2010 there were $100 billion in student loan originations, the highest ever in the midst of the deepest recession since the Great Depression.
The chastisement of the American saver – Federal Reserve offers a higher interest rate to banking reserves than too big to fail banks offer American savers.
Americans are facing a banking system that is largely designed to go against their best economic interest. Even a decade ago people were able to find a savings account or a certificate of deposit that would keep up with the rate of inflation. Today, most typical savings accounts at too big to fail banks offer essentially a zero percent interest rate. Mattress savings. And the true rate of inflation on items like food, education, and fuel is far outpacing in household gains. This is the dilemma. If you put your money into the banking system you will surely lose because of the erosion of money thanks to our central banking policies. The Federal Reserve has purposely created a negative interest environment to get people to spend again and restart the economy. The unfortunate point is that banks have plenty of excess reserves thanks to trillions of dollars in bailouts yet fail to lend it out largely because the public is seeing household incomes shrink. The last decade growth was largely debt based. The banking system essentially is punishing the American saver with whatever little amount they try to sock away.
Middle class do worse in current economic recovery – median household income falls faster during recovery than during recession. S&P 500 up 77 percent in recovery while home values are neutral or down in many areas.
Some incredibly disturbing data was released this week showing the continuing crushing body blow to the American middle class. What was striking was that middle class incomes have fallen faster during the supposed recovery from June 2009 to June 2011 than they did in the actual recession from December 2007 to June 2009. Why? First, the recovery has largely occurred with the top one percent where much of their wealth is derived from the stock market. The market has rallied significantly from the lows in March of 2009. Yet the vast majority of Americans, those with any net worth, draw a large part of their true wealth from home equity. The housing market is still mired in problems and never experienced any sort of recovery and in fact, is aiming for a second leg down. Two charts highlight this dramatic predicament.
The wonder years – over 70 percent of GDP comes from personal consumption. For the past decade home equity and credit from other sources fueled growth because of falling household incomes. What happens when credit contracts and home equity evaporates?
In a debt based economy a credit crisis is similar to an uncontrollable virus spreading from house to house. The slow infection hibernated for decades until it went into a pandemic. It is troubling to see how the middle class is slowly being dismantled. However there is one silver lining of the home price correction. Americans spend most of their money on housing as we will highlight later in this article. The media never bothers showing a detailed budget to Americans since the average per capita income is $25,000 and they don’t want to scare off people from purchasing that new trinket. Over 70 percent of our annual GDP comes from personal consumption expenditures. We are a spending nation but for the last decade, much of that spending came from the phony equity brought on by the housing bubble. Inflated home values really only benefit the banks at this point in time. With smaller incomes Americans would receive an automatic boost if they spent less of their smaller paycheck on housing. With credit contracting and home prices moving lower, there is little reason to believe that we will suddenly see a resurgence of debt based spending.
How investment banks turned housing and student loans into a toxic and financial disaster – Middle class largest asset coopted by banking sector to raid and speculate on. Financial sector nearly 30 percent of all corporate profits in U.S. In the 1950s it was under 10 percent.
Most Americans pull their net worth from their investment in good old housing. It is the biggest purchase most will ever make. And because of this, after the Great Depression, housing was a boring yet stable investment class. It had to be. This is the cornerstone of wealth for most Americans. Banks used to do their due diligence by verifying income and typically having a say in their local communities. All that changed starting in the 1980s. The first foray into banking corruption in housing came with the S&L Crisis. Thrifts largely gave out money with unsustainable interest rate schemes and when the market imploded, the taxpayers had to step in to bail out the banks. Yet during the process, many Wall Street financial firms made out like bandits on junk bonds and other “financial innovation” which was nothing more than sugarcoated robbery. Then in the late 1990s the depression era Glass-Steagall act was repealed and all bets were off. In a debt based system, housing was the largest debt class for Americans and investment banks decided to turn it into one giant casino. This financialization of our country is at the core of the disappearing middle class. Financial firms are largely wards of the state and operate to suck out rents from the productive economy.
Living paycheck to paycheck with the housing albatross – Survey finds one in three Americans unable to make their mortgage or rent payment beyond one month if they lost their job. 61 percent unable to make payments beyond five months.
One of the unnerving revelations brought about by the current recession is how many Americans are living precariously close to the economic edge. The Band-Aid of credit cards, home equity loans, and other vehicles of debt masked the problem for many years. Debt was rolled over on a continuous basis and as long as the debt bubble expanded the process seemed limitless. Yet the bursting of the debt bubble largely brought on by the collapse of the housing market is revealing the true state of the economy. A sobering new survey finds that one in three Americans would not be able to make their mortgage or rent payment beyond one month if they lost their job. For most Americans this means $1,000 to $1,500 a month. This also ties in to the grim reality that one in three Americans has no savings to their name. The housing market has been mired with problems for nearly half a decade now. This clouds the perception of future home buyers going forward. Because of this buffet of problems the U.S. housing market will forever be changed.
The punishment of the American saver – JP Morgan Chase CEO makes 843 times the median household income and pays his Chase customers 0.01 percent on their savings.
The current financial system is designed to punish old school savers. By definition in our debt based economy those who save are actually taking fuel out of the consumption based economy. Spendthrifts are the high octane that keeps things spinning even if it comes with a high debt price tag. You see this occurring in the world for example with countries with high surpluses bailing out countries with big debt problems in particular in Europe. We are different but not so much. The Federal Reserve has made savers a pariah in the last decade. If you were to put your money in an old time savings account you would earn virtually no interest. And when we say no interest, we mean you would make the same amount by stuffing your hard earned dollars into your mattress. Why is this occurring? Is a system so dependent on debt sustainable? The Fed realizes that in order to keep the too big to fail banks standing people will need to continue to spend even if they are getting poorer as the statistics show.
The Big Change: Massive financial volatility and the occupation of Wall Street – when the middle class breaks protests will hit the financial streets. Poverty in the suburbs and rising food costs.
When the basic costs of living move up there is bound to be shocks deep in the economy. As we mull over the humbling Census data, it is clear that many Americans are struggling in this modern day economy that protects the banks at the cost of the majority. Let us call a spade a spade. We are in the epicenter of the biggest financial disaster in history spurred on by the investment banks and their purchased colleagues in Washington D.C. How do we know this? Because no real reform has been enacted on Wall Street and we enter a decade of lost wages. The middle class is disappearing because bankers have used corporate welfare to shield themselves from the brutal corrections of the markets while the rest of Americans need to get by on an average of $25,000 per capita. Oscillating votes from Democrats to Republicans has done absolutely nothing. Many are now taking to the streets and protestors are now marching to Wall Street taking action. If you look at those who are protesting many are young, in their twenties and thirties, protesting what the media has failed to cover for years. If we look at the last decade we realize that our current financial system has captured our political system and things are starting to get volatile, just like the stock markets.
The coming failure of Operation Twist – The Federal Reserve resurrects a program from the 1960s named after the Twist Dance. Appropriate timing for a Dancing with the Stars nation.
The Federal Reserve has literally run out of ideas. Operation Twist, a throwback to the 1961 action taken by the Fed named after the Twist Dance fad at the time, is now back in 2011. This time the Fed plans to purchase $400 billion of bonds with 6 to 30 year maturities while selling bonds with shorter term maturities. The Federal Reserve continues to deal with a debt crisis with more debt. The market has quickly spoken shaving off 700 points in two days and many global markets are now solidly back in bear market territory. The problem with this program is that it assumes that the only problem with the economy is that not enough people are borrowing and spending. The Fed goes after interest rates like a lion after a zebra. Interest rates are not a problem. Rates are at historical lows. The problem of course is that household income has gone south for well over a decade. The only true winners with these low rates are the banks who can access cheap money to wildly speculate in the stock market casino.
The banking gears of housing – Bank of America sells mortgage servicing rights on large loan pool to Fannie Mae. 400,000 loans shifted to Fannie Mae with $73 billion in unpaid principal.
Things just seem to get more perplexing with the housing market. Back in August the Wall Street Journal discussed a deal between Fannie Mae and Bank of America. The deal is odd even for the current banking system we have in place. It was reported that Fannie Mae purchased the servicing rights to 400,000 loans for the grand total of $500 million. Why would this be an issue you may ask? Well first, Fannie Mae being a GSE does not specifically service mortgages so buying a pool of loans with unpaid principal of $73 billion seems out of place. It also makes you wonder why a bank that has faced some troubles during the financial crisis would unload so many loans back to the government. This concern clearly does not go unnoticed and a Representative from the housing battered state of California sent a letter to the Federal Housing Finance Agency (FHFA) asking for more details on the deal.
