The financial bubble that is still popping – Home prices enter a deep double dip because household incomes are still in a rut. Housing bubbles in Los Angeles and San Francisco persist while Miami and Phoenix metro areas face double digit annual price declines.
Some people are stunned that home prices continue to sink as if a lead weight was placed on the value of housing. The mainstream press never sliced and diced the minor jump in prices we had last year because much of the increase occurred around tax credit gimmicks and the Federal Reserve using artificially low rates to drum up demand where none existed. In the end this has been a vastly expensive proposition that failed to address the main problem with housing. Home prices need to drop or household incomes need to increase. The housing bubble only occurred because of lax credit and massive speculation. Debt filled the gap of non-existent income growth. The housing bubble did not occur because real household incomes went up. It is the case that in the last decade the median household income actually declined for the first time over such a period since the grim days of the Great Depression. Keep in mind the average per capita income in the United States is $25,000 and the median household income is $50,000. How much can you afford with this income? Even areas that looked cheap last year have fallen much deeper in 2011 because of weak employment prospects.
Banking in darkness – FDIC system insures over $7 trillion in deposits with a dwindling insurance fund. Americans are offered close to zero percent interest rates to stuff their money into this banking vortex.
The American banking system is based on pure faith. Usually when the topic comes up in conversation I will ask someone if they know what backs the green cash in their wallet. One of the common responses is “there is gold in Fort Knox” or another typical response is that it is backed by U.S. assets. Unfortunately both of these answers are incorrect. In fact all of our money deposited in the banking system is backed by the pure faith in our U.S. government. Now for decades this implicit belief was fine because we actually were a creditor and exporter nation. We also had a higher savings rate. Today we have a system where we continually spend more than we produce and expect this dynamic to somehow function long term as if we found an endless well of Kool-Aid. The Federal Deposit Insurance Corporation (FDIC) insures each individual account up to $250,000. Given that one in three Americans has zero dollars to their name and most others have a sum nowhere close to this amount, many go forward with an unstated faith in the system. However the FDIC Deposit Insurance Fund is largely running on fumes. This shouldn’t be such a big issue aside from the fact that the American banking system has over $7 trillion in deposits.
Financial raiders and the loss of the American middle class. 5 charts showing the slow erosion of the middle class in America. 12 states have underemployment rates above 17 percent, insiders selling out, Great Recession in perspective, and a race to the financial bottom.
The current economy is built on a flashy digital casino interface and most of the middle class in the United States is at risk of moving backwards in the coming years. Millions have already fallen a few rungs lower on the economic ladder. The stock market no longer benefits the buy and hold investor but those who have the ability to quickly jump in and exploit short term trends. The working and middle class have no chance against high frequency traders and sophisticated hedge funds that actually profit on the financial destruction of the middle class. Just think of the billion dollar bets placed by a hedge fund manager that millions of Americans would lose their home. In no shape or form does this even benefit the real economy. Many enjoy this fantasy world of derivatives but the unfortunate consequences of these bad bets are shouldered by the working public. Need we discuss the cost of the bailouts to banks and the $2.7 trillion Federal Reserve balance sheet? If we look closer at key data points in the economy, we see that the foundation is still largely made of financial sand and many are sinking fast even as a recovery is touted.
The covert bailing out of the commercial real estate industry by the Federal Reserve. How the Fed bails out ritzy hotels and empty shopping malls on the back of taxpayer dollars.
Part of the success that the Federal Reserve has achieved with boosting up large banks stems from its secretive ability to forge shadow bailouts of residential and commercial real estate loans. The more secretive of the previous two comes from the commercial real estate (CRE) industry. During the height of the housing mania in the United States CRE values were estimated to be worth $6.5 trillion. A hefty sum no doubt and with $3.5 trillion in loans securing these properties, a significant cushion of equity was in place. Yet with the crash in all real estate values, banks were left holding a smoldering portfolio of empty shopping malls, luxury hotels, and in some cases fast food outlets. Today CRE values are estimated to be at $3 to $3.5 trillion putting many loans in a negative equity position reminiscent of many individual homeowners. This issue of bailing out CRE was never discussed openly with the American people because it would have never carried any political muster. So what the Federal Reserve accomplished was to create a system where banks were able to exchange toxic loans in place of U.S. Treasuries without taking up an open dialogue with the public. In other words a clandestine bailout.
Home on the bear market range – the United States will face a 10 to 15 year real estate bear market. Hard to believe but we are already 5 years into this economic trend. The failure of Quantitative Easing in Japan.
Can Americans cope with a 10 to 15 year bear market in real estate? On this front I have good news, and bad news. The bad news is that we are likely to face at least a 10 year bear market in real estate thanks to a lost decade in household income and the continued erosion of the middle class. Home prices can only reflect the underlying income of households paying the mortgage. Clearly with record foreclosures many cannot accomplish this financial Herculean task. The good news is we are already 5 years into this correction (so either we are half way or one third closer to a bottom). For the United States this is a new experience because we have never seen an annual drop in home prices on a nationwide basis outside of the current crisis. People point to the Federal Reserve as the knight in bailout armor for housing but look how far that has gotten us in the four years since the crisis started. It is safe to say that home prices will face a 10 to 15 year bear market so let us examine the details carefully.
The financial tipping point of peak debt – Total credit market debt owed increased from $28 trillion in 2001 to over $52 trillion in 2011. Household debt contracting while Fed juices up the banking sector with more debt.
At the dark heart of our financial dilemma is debt. Too much debt was used to bolster households during the real estate bubble and now too much debt is being used by the government to bail out the financial sector. Is there a tipping point in the amount of debt the American economy can shoulder? I believe there is and looking at the data carefully we begin to see unusual patterns not seen in a generation. The mosaic of tools used for this financial crisis would have worked if the problems we faced were merely issues of confidence. Of course the problems were very real and dealt with more than just perception and instead of confronting the reality of an over leveraged debt addicted machine we have only stepped on the accelerator. Yet this time instead of credit flowing to households for added game rooms or a trip to Hawaii credit is being extended to Wall Street courtesy of the Federal Reserve. Total credit market debt owed jumped from $28 trillion in 2001 to over $52 trillion today. During this time GDP went from $10 trillion to $14 trillion. You do the math where the growth is occurring.
Student loan shark industry – total revolving debt contracts during recession while student loan debt increases by a stunning 80 percent on an annual basis. A college degree for working at McDonald’s?
College sticker shock is probably stunning many parents as college aged students now sign their intent to register at thousands of schools across the country. You can almost feel the panic when Johnny or Suzie tells mommy and daddy she is going to University of Break the Bank while they watch their home equity plummet. What should be a proud time is now becoming a scary prospect for many parents looking at backbreaking student loan debt. If not the parent, many teenagers are looking at going into debt similar to taking on a mortgage without even owning a brick and mortar house. Many private schools now charge $50,000 or more per year in tuition and fees. Given that the average annual income for an American worker is $25,000 this one year cost is daunting. In the past if you picked the wrong major or school you ended up with a nice looking piece of paper and a likely opportunity to work in the blue collar world as a backup earning a relatively decent income. Today, pick the wrong career and school and not only do you have that same piece of paper but you also have limited prospects in finding even a basic job to service your college debt, forget about paying the rent or filling up your car with $4 a gallon gas. To expect teenagers to pick the right college and have their lives figured out early on is a bit much to ask. Students in the past did not have this same albatross hanging over their head. The big problem now is the massive cost of college.