America’s Middle Class: Caught in a Vise?
This is a chicken and egg kind of discussion about what caused the housing crash.
It’s not that there’s a right answer (but I am right) or a wrong answer, it’s about looking at what happened to determine whether it’s going to happen again. It is.
I’m always right.
Really, it’s about America’s middle class mostly, and the vise they’re caught in.
Notice, the title here poses that as a question. Are they caught in a vise?
I say, “Yes!”
But, I’ll get to that.
First, it’s back to the chicken… or the egg.
Did borrowers over-borrow because they were greedy? Or, did lenders over-lend because they were greedy? Yeah, yeah, we all agree. They both were.
But what precipitated it?
Of course I want your opinion. But, first you’re going to have to hear mine. And since I’m always right, you may just want to come along with me and be smart. Just kidding!
It’s simple to me: You can’t borrow if lenders won’t lend.
There. I rest my case.
Oh, you want more depth, more color? Okay.
But let me first put aside something that I know will come up anyway. The Community Reinvestment Act didn’t cause the subprime surge. Did the surge happen when the government forced banks to reach into underserved areas to offer loans to folks who weren’t over-banked – and who didn’t have ATM machines on every corner of their neighborhoods – only to have those same banks create subprime loans that would later default?
Yes it did.
But the number of defaults in the subprime category within the boundaries of CRA-demarked neighborhoods is a drop in the bucket compared to the national corral, where subprime loans were drawing out, and creating subprime borrows out of better than subprime buyers – with higher creditworthiness.
Look at borrowers as the chickens. They had to be hatched. Not from eggs, because they were already in the market. Most of them would have been far too afraid to risk over-leveraging themselves on something they knew they couldn’t afford if they were charged the kind of interest that high-risk borrowers face.
To fatten them up, hard-boiled lenders gave those chickens legs and dreams – and a means to fly out of their old neighborhoods and roost in fancier digs.
Most people forget – or didn’t know – that prime borrowers had been pretty well exhausted by lenders bending over backwards to get them into new homes.
Interest rates were kept artificially so low for so long, which left investors clamoring for yield. Prime borrowers were getting harder and harder to find, so bankers grabbed the two-for-one throttle and pulled subprime borrowers into their origination factories. Then they did a “pool ‘em and fool ‘em maneuver – for yield-hungry investors, that is – and put them into mortgage-backed securitization, get ‘em off my balance sheet, schemes.
And it worked. Well, at least for a while.
So, what does all this have to do with the middle class being in a vise?
Bloomberg Businessweek is a great publication that I highly recommend. This week’s issue, February 18-24, 2013, has a piece titled, “Oh, Craps. U.S. Homeowners Are Repeating Their Mistakes.”
The gist of the article is that, for folks with a “very high risk exposure – a low wealth-to-income ratio, more than three-quarters of their assets are in housing or stocks, and (have) debt greater than a quarter of their assets,” which serves as my definition of the middle-class in America, lost 47% of their wealth between 2007 and 2010.
What bothers me about the article is that it presupposes that homeownership makes it hard to diversify. It states that, “since 1983, for the richest 20 percent of U.S. households, the principal residence as a share of net worth has been around 30 percent. For the next 60 percent – most of us – housing has risen from 62 percent to 67 percent of total wealth.”
So, what’s the problem? Those Americans leveraged themselves to get into their homes and borrowed against them.
We know what happened next.
But, it’s not just about middle-class America’s homes as their source of wealth. The article states, in its opening paragraph, “If there’s one thing Americans should have learned from the recession, it’s the importance of diversifying risk. Middle-class households had too much of their net worth tied up in their homes and were too exposed to stocks through 401(k)s and other investments.”
In other words: WAKE UP AMERICA – you idiots who have been struggling to get into the middle class and you idiots in the middle-class (thank goodness that idiot class is shrinking, right?) have it all wrong. You shouldn’t just be buying houses and stocks.
It’s not Bloomberg. They’re just putting this out there. I don’t want to insult one of my favorite magazines, but WHAT THE…
What is the middle class supposed to do? Trade derivatives?
It’s not ironic, it’s sad – no, it’s disgusting – that the two principal sources, or steps up the aspirational ladder in America – home ownership and an equity portfolio – are… well…
I’m not going to call them schemes, though there’s a part of me that wants to. That would be hyperbole to the max…
Those two steps up the ladder in America are manipulated by bankers and brokers for their own self-serving benefit.
That’s why I think – no, that’s why I know -that America’s shrinking middle-class is caught in a vise.
Do I have answers for this dual problem?
You bet I do.
But, first, I want to hear what you have to say.
The floor is open.
Best,
Shah
I’ll give Dodd -Frank as the culprits who said a house in every family, just like the chicken in every pot scam. The carrots for all were bigger and the entire operation made billionairs out of Wall St and the bankers including Mazzillo and friends. The first step in the right direction is some hard jail time for the perps. Then we’ll get on to the second chapter. Try that one and see!
You make a good point, but please learn how to spell the term vise. Spelling it vice is both humorous, and unintentionally accurate. When is a vise a vice?
See above. I am not a Facebook or Twitter patron
Bloomberg is correct in their presentation…and you are, as always, more insightful than any of the ‘commentators’ in the media; they (me) are in a vice. Heck, if I didn’t own some gold, silver, and mostly collectible coins, I would be a lot more worried than I am!!!
It is too bad we can’t put ‘trailing stops’ on our 401(k). Is that another device (or not) that the financial world uses to ‘squeeze’ us?!
Shah,
Well said. It seems so obvious. Also, most middle class households do not have the extra cash to diversify any more than their home and a perhaps a few stocks.
CASH DOES NOT CRASH
People (middle class) need to have a large cash cushion these days. These means they need to SAVE alot more, not invest more or consume more. Most people (whole country) do not want to give up their creature comforts or lifestyle, even if they can not really afford it. Not surprisingly, the whole country (government) is similarly unwilling to reduce government spending on their stuff.
Anything could happen and cash does not decline the same way stocks or real estate do during a bear market, financial crisis, or recession .
Cash does not crash if interest rates were to spike-up suddenly either. Cash is always there when you need it most (“like a good neighbor”) and you don’t need to sell anything. Fact is, most good long term investments are in practice illiquid to some extent. Everyone needs a pile of cash, not just Apple or Microsoft.
So agree with you Brent, even though I am living in South Africa.
It is the same here and I personally do not have a few hundred
thousand spare to diversify with. Which asset class is safe for
diversifying into anyway?
Cash is simply currency in the denomination of your country of residence or citizenship, nothing more. In America, we have a “legal tender” Federal law which requires payment for all goods and services in U.S. Dollars (U.S.D.) Only. For example, you can not buy food or pay the utility bill in Chinese Yen (Renumbi).
“Cash” itself is by the way, the ultimate diversifier.
Homes used to be thought of as units of production (i.e., family farm) rather than as units of consumption (someplace to put the newest gadget). If possible, return to that concept. Have a small home-based business – crafts, food, sewing, photography – that generates at least some of the cost of the home and which could be expanded if regular employment ceased. Who knows? With entrepreneurial spirit, that small home-based business could become your main one.
I agree with everything you stated. I am 77 and have no money to risk (very little money, leave alone risk it). All the “money” people seem to assume that everyone has a $500,00 portfolio. I wish I could locate someone who would answer the plight of people desperate to not have their savings shrink in the light of no interest on savings. I appreciate your newsletter. Joan
First, the Community Reinvestment Act didn’t cause the subprime mess. But it was an “enhancer” or what the military calls a Force Multiplier. It comes down to, “hey, we’ve been issuing sub-prime loans in these underserved areas for years. Let’s spread out and go main stream. What could go wrong?”
The real reason is that normal interest rates around the World were low. The Fed actully lowered one of it’s offical rates, because banks could loans cheaper elsewhere. BUt not only the Fed, but around the World. Well a lot of big money folks (think Middle East and elsewhere), wanted bigger returns. Then they discovered US mortgages. And they bought them, thowing money into the system. And they wanted more, and more. And as you say at some poInt, the banks and lenders went sub-prime, because of the demand of all this “liquidity” looking for a place to be. The bankers kept at it because they had a ready after market.
The banks and Morgage writers shouldhave know better, but it was so profitable to keep the game going.
Who’s ultimate fault? I’d split it between the Big money folks who were looking only to yield (and not to risk) who fuelled the mess and the Bankers who were willing to make a buck regardless. of consequences.
My husband and I have worked hard, our house is paid for and fortunately many of our investments are in Canada where we think, I reiterate “think” they are a little safer due to stricker banking laws. We have bought silver and gold boullion and have that in out of the country also. We own everything we have and don’t live extravagently but still are not nearly as comfotable as we had expected. We oversee our investements carefully but we are in the big squeeze with no where to invest except the stock market.
We can see the obvious manipulation including the FED and their latest statements about ending QE, wouldn’t interest rates skyrocket if they did that. I think this is disinformation to keep people out seeking preservation of wealth in gold and silver. Just look at what they have done to commodities the last few days. We really have nowhere to go and Obama is coming for everything he hasn’t already taxed and is going to blame it on the GOP. If the bad economic numbers were going to coming out I’m glad it is before the whipped up sequester finale. Housing down, enemployment up and manufacturing down….all before the confrontation. I don’t like either money grubbing party and would like to move…..where?? If there was a place to move you have to pay dealth taxes to get there, the government doesn’t want you leaving with your hard earned cash. I am a vet and love my country and most of it’s people but just hate what is happening. Any hope?
I agree with you Shah, to the point that many mortgage originators were working impunity and without conscience in making these sup-prime loans knowing full well that there were no direct consequences to them. The liberal ‘regulators’ were looking the other way because they thought all this home ownership meant growth and progress for under-served populations. Bankers were forgoing their due-diligence responsibilities in making loans to everyone who applied.
The folks who accepted these loans knowing full well that they could not afford the real cost of the loan are nearly as much at fault. I see a big problem with those ‘originators’ who had absolutely no skin in the game.
- Robert
There is a clause in the 1913 Federal Reserve Act that allows it
to be bought out. Until the American people have a sound monetary system (Backed by gold,silver,etc) which would restrain
politicians from spending more money then is brought in by taxes
we will continue to have dubious legistration (Rules Regulations)
that will continue to indebt the American people.
What about gold and silver holdings of up to 25% of one’s investment and/or retirement portfolio?
You would be better off turning your gold and silver into bullets for future catastrophic events. Then your investment would be of more use if the government needs to confiscate your property and what little bit of wealth you will have if the president activates any executive orders in the name of national security. Read up on the latest executive orders issued by the presidential administration. What kind of monetary system and investments will we need to go to next?
A question that needs to be considered.
If The Community Reinvestment Act had not been in place for years, would the mortgage writers and banks have spread out to sub-prime borrowers? Would the strangness of sub=prime loans, have stopped them? Or maybe just for a while. Or slowed them down? Or would they have jumped full trottle as they did?
Reasonalbe people will have different opinons on this, because we can never actually know.
You are right, the middle class is in more trouble that most people realize or will admit. I have 20% in stocks. 20% in Mn tax free bonds, 20% in my house, 20% in my business, and 20% in gold and silver coins, which I hold. I have no debt and I am scared to death of the future so how can most Americans who don’t even have 20% of anything sleep at night. What I fear most is that the whole economy may come tumbling down. It seems to me the best that we can hope for is what Japan has been going through the last 20 years and that won’t be pleasant.
What about gold and silver for 20-25% of investment/retirement portfolio?
what about gold and silver in retirement/investment portfolio?
In “The Signal and the Noise” – Nate Silver, as well as in Michael Lewis’ “The Big Short” both authors state that it was the credit rating agencies, primarily, that failed to adjust their grades for the various mortgage derivatives that led investors into the deep hole that was the Great Recession. Had S&P and Moody’s altered their AAAs ratings down, had they investigated what was actually in the derivative packages being sold by the mortgage repackagers, that investors would never had taken the bait. It all boils down to trust issues. Bob trusted Jim who trusted Roger who trusted Bob. And none of them did their due diligence to vet the actual information being trusted.
As for the “vise” (or vice) that the middle class is in; I would posit that it is the need for velocity of wealth accumulation that is the culprit here. 40-70 years ago, Americans accepted that a slow but steady increase of wealth was good and proper. That no longer is the case. There appears to be a threat of desperation at hand now. Millions of boomers and x-geners, and y-geners are feeling the squeeze of dwindling returns, and the pinching out of future potential. The path of the 1950′s and ’60′s (and even the 70′s) appeared simple, straight and followable. The path from here and now? Murky, perhaps even dismal and undoubtedly fraught with anxiety and uncertainty. And therefore a state of desperation has enveloped the middle class. We each feel we need that $1M in the bank by the time we’re at least 65 or 70 in order to feel safe. And to get there we partake in riskier and questionable practices and investments to get there.
If I can flip a home and earn 15-30% in a year – hell yes I’ll do it. Bubble be damned.
Shah, I just have to own a home, don’t I? Renting is a lousy option. Rents for a 1000 sq ft 2 bed 2 bath apt are over $1000 a month. I own a 5 yr old 2300 sq ft 3 bed 2 1/2 bath home for $1500 PITI and enjoy more luxury, privacy, security and a mortgage tax deduction. Why should I even consider renting?
Being caught in a vice is not particular to middle-class America. In fact is a world-wide phenomenon.
While I agree that bankers and politicians have a lot to be blamed for, the ultimate responsibility must be on the person who is affected. Like if I go to the outhouse and after I do mi thing I find out there’s no toilet paper; while I might want to blame somebody else, it is I who have the problem and could have avoided it if I had paid attention.
Likewise, most people’s ostrich syndrome (hide your head in a hole to “avoid” a problem), keeps them from becoming financially educated and thus have more resources to stay out of the vice.
As the late Jim Rohn would put it: “He that wishes to be ignorant, let him be.” Each person will have to bear the consequences of his actions or inactions.
I agree, WHAT THE —- should I do with my money if not put it into home and stocks? I have no idea. If I did it would be there.
Please, Shah, don’t keep us waiting for your answer.
America’s Middle Class: Caught in a Vise? http://t.co/gMiGr3tpEk via @http://twitter.com/#!/wallstreet_ii
Shah,
I say small business[2 million and under in sales] employ a lot workers.Why is it we never hear or read about low interest rates for the job creators? The banks can lower the mortgage rates for home owners but what good is it if they don’t have a job.
FRED
I gather what you are saying is that as a middle class citizen
we are caught between a rock and a hard place!
Income producing real estate ‘ 2 or 3 family house ;living in one apartment ,renting the others . hard work ,but a handyman could do it . I never handled a tool (not even a hammer ) we bought a 2 family in Somerville ,Ma. Put our three Children (grown ups ) through college ,without a loan . Tax deductions are great ,until you want to sell ;Tax preparer should be consulted ? We paid 15,500 , and sold for 150,000. the tyax we had to pay on capital gains was tough , but we still made out . A little planning .
Income producing property is the only decent investment out there. And, today there are lots of foreclosures and short sales around. If you are fortunate enough to be able to sell your mc mansion and put the equity in rental property, you will do well.
“It’s not ironic, it’s sad – no, it’s disgusting – that the two principal sources, or steps up the aspirational ladder in America – home ownership and an equity portfolio – are… well…
I’m not going to call them schemes, though there’s a part of me that wants to. That would be hyperbole to the max…”
To which I say yes, we the ‘middle class’ have been caught in the proverbial vise although the fault is not completely our own: Hype, Dreams (being ‘sold’ on the ‘American Dream’-go lookup the late great comedian George Carlin’s skit on ‘The American Dream’ on youtube.com) and of course Greed all have a hand in it.
The keys to middle class survival in my opinion are education, money management and personal productivity/self sufficiency (ie: relatively diversified means of self employment both while employed and with a goal to self employment at earnings levels at and above the average income of most metropolitan areas along with skills in self sufficiency) with a good dose of creative and independent thinking thrown in for good measure.
Education and knowledge in money matters and self sufficiency whether from formal or informal sources will and always is the the best minimizer/preventive of personal and national economic disaster.
PS: Few ‘middle class’ are aware that when they ‘buy’ a home what they receive is in actuality a Certificate of Title and not the Actual Title which our government has and which permits them ultimate rights such as eminent domain. George Carlin was right on so many levels when he quipped ‘The American Dream’ You have to be asleep to believe in it!”
I hope you have answers to this vice.
But I think the Middle Class as we used to know it, is toast. (Well, maybe if you go back to 1955, then THAT middle class might come back).
First, the Debt. It is over 100% of GDP. That is unsustainable. It is not like the Debt in Japan, where almost all the Government Debt is owned by Japanese. Most of the US Debt is owned by China, The Fed, and other countries and their citizens. Just like the US and Britain got rid of their WWII debt by Financial Repression, mostly by inflation in the US, that’s the only way our debt can be “resolved”. That’s going to hurt the middle class.
Second, Demographics. The US will soon be sliding into a reducing population and an aging population. It is very difficult to have a growing economy when that happens. Working longer will help or slow it down, but the slide will not be stopped by anything that could reasonably be considered possible (right now). No growing economy (in real terms) means no expanding middle class or betterment of the middle class.
Third. Housing. After World War II the US economy grew to a great extent by building houses. Lots of them. Bigger each year. For at least 35 years I’ve heard economist say that the US is “investing” too much into housing at the expense of – plant and equipment, research and development, and Infrastructure. The first 2 support jobs; but we didn’t (for at least 35 years) so the jobs went elsewhere. Those 35 years are cumulative. The third is the backdrop, the environment that allows economic growth. We don’t have that either. The American Society of Civil Engineers has been measuring the backlog of infrastructure needs of over 40 years. That number gets bigger each year, and in most years it gets bigger faster than the GDP gets bigger. My sense is that the Housing Inventory in the US is “too great, too grand” for the size (and character) of the US economy. By that I don’t mean we have too many houses, or that there aren’t any substandard ones. But over all, there are too many houses that are larger than are needed. Too many houses have too many so called up grades. We haul rocks from the southern half of Africa so we can put them in our kitchens as counter tops! To many houses (and offices for that matter) that are what we used to call “Gold Plated”, now they are merely called “up-scale”. Based on what is typical in other countries, I see a huge disconnect between the economy and our Housing inventory. The economy cannot support it. The various permutations of inflation, real growth, and housing prices that addresses that imbalance do not leave any that I have conceived that will help the middle class (or anybody in the bottom, 90%, 95% or 98%- depending).
I hope you have an answer that is feasible- considering the history of how we got here.
O.K. Shah, you have laid out a solid case and indeed you ARE right that it is happening again. So besides our houses and equities, what would make sense to buy in an attempt to prevent or at least slow down the rate of confiscation of our savings by the Government? Commodities (gold, silver, oil, natural gas) may all have increased volatility due to even a hint of QE’s coming to an end. T-bills have an analogous problem. What’s left????
All fashioned buy the rich to get richer, period. Those in charge, politicians, bankers, wall street. Rember those who make the rules rule!! Dump ass and greedy congress was bought off in 2000 by the money people call them crooks all of them!!! Including paulson, geitner, congressmen they were all in this greedy thing together . MY question is why are none of them in jail, why doesn’t our govt go after the diveriative credit swap millionaires and sieze the funds and give it back like they do on small ass holes like us who play by their rules, SMARTEN UP THERE ARE NO RULES TAKE YOUR LIFE AND COUNTRY BACK NOW. Look Paulson came on tv and begged congress to give the system money now or its all over. well the bankers after 2000 became las vegas gamblers with our money, they went to the casinos and lost so they came back thru the govt officials etc begging to save them ( THEM NOT YOU you get it) Govt infused thru bernacke the fed ( by the way they never get audited, our $$ but not audit rights,whats wrong with this, we are dumb stupid asses ok, so every one smarten up stop playing their game, no more work, no more taxes no more laws, appeal all that bull shit, and wipe it all out and start all over is the only middle class answer for fairness periond. They know it and now you know it. Solution all bill payers, stop working, go to the closest large city, capital of state and /or better yet washington and stay until they crumble knowing no more control no more lies. Rember those who make thhe rules R U L E. Prtoblem no one has any balls to do what is right here, every one only cares about their home their family, their life , so you get the slavery you are predestined by the rule makers .
well said. We should all read “Ayn Rand” “Atlas Shrugged”. Refuse playing their game by offering your talent and sweat.
Bernice from Germany
What wonderful banks we have… the better to screw you with!
Back when I bought a house in the early 70′s they max. a person was to spend for housing when buying was no more than 20-25%. I know through the years that % has been on the rise and I think that is one big part of the problem.
I’d have to take issue with subprime being the primary driver- as subprime was defined back then. Everyone expected a default rate of 25% and that is what it turned out to be, so those loans were properly priced and should not have caused the meltdown.
Real causes were many, including limited doc loans (including Alt-A), bogus credit ratings from the “trusted” firms who we now know were bought off, a huge casino type of operation in which financial types could buy and use the loan aggregations to make huge and very risky bets that were highly leveraged, and all the factors you cite, too, But we forget two other things:
First, markets go up and down. It has always been thus and shall always be thus. Housing markets are markets, too, and had been in a long uptrend for longer than a typical period of 7-10 years. A basic correction was due, which the FDIC would estimate as a 15% decline of a 5 year period. This was worse due to the gambling, and then
The accountants required these RMBS investments on everyone’s books be valued current market prices- even though the investments, including the warts, were essentially long and not short term, and which are intended to produce an income stream. Though most did just fine overall, this created a huge capital ratio crunch; hence the unwilling lenders.
Brad
The people you reference as “middle class” who got whip sawed in the last melt down were caught in a market that was rising so fast, so many profits were being made by selling homes that greed stepped in and greedy realtors and lenders fueled the fire with loans that were foolish. No equity, no income verification, no advice about affording the mortgage. Why? Because, you the buyer were going to “flip” the property in a couple of months for profit and a bigger home with the profit. Boom!!! Market crash, homeowner stuck in big mortgage. Economy tanks, lose job, foreclosure.
Middle class is dying because technology has cut back higher paying jobs. Middle class cut back because employers are not giving pay raises, attitude of the employer is you are “lucky” to be working, no raises no promotions. How about the “permanent” temporary employee, no benefits, no raises, nothing but hourly wages, corporate greed, all money going to the top.
Finally the government is pandering to those who caught in the bad loans by seeking “homeowner relief programs to prolong the agony.
The middle class is being destroyed by the greedy, uncontrolled, unregulated businesses who say they are there to serve their needs.
The American public is living in an environment that feeds them bulllshit and calls it nourishment. No one can get the facts anywhere to make informed decisions for themselves.
Come on Shah why not ask why no one in any bank or mortgage company has not gone to jail over the trading of the AAA rated “mortgage bonds”, or the derivatives, or the trading of securitized investment betting on failure of both among the brokerage houses.
I agree with all of these points, but blame also falls on the buyers in many cases being greedy for a quick gain in equity, when common sense should have told them that large gains cannot continue forever.
There is hope for the future for the middle class. The increase in production of domestic shale gas and oil is starting to fuel a return of manufacturing to the US that will add many middle class jobs over the next decade. We should repair and expand infrastructure now to support this trend, instead of giving more money to the banksters.
I gave up my Business Week subscription because of the propaganda that I have encountered periodically. Your comments are right-on. I only wish that your insights will make a difference.
Shan–What you state is very true–Why are they not in PRISON___
The whole thing is going to FALL DOWN THE HILL—The National Debt and the unwillingness of Congress and the Senate and the Presi–What it to go down hill!!!!–THE ONLY GAME FOR THE LIB AND THE DEM IS TOTAL CONTROL AND THE TOTAL CALAPSE OF THE USA–TOMORROW WE’LL BE RUSSIA AND HAVE THE PRESIDENT AS DICTATOR AND HIS NEXT MOVE WILL BE TO BE PRESIDENT OF THE UNITED NATIONS IN WHICH HE WILL CONTROL EVERYTHING—HIS ONLY WORRY IS WHEN JESUS CHRIST RETURNS AND THROWS HIM IN THE SEA OF FIRE–AND HE KNOW THAT WILL HAPPEN–It Is All Writtten in the WORD!!!!!
There is no quick fix that can make numbers betters. Numbers increase or decrease by adding other numbers (for savings from simply saving money instead of spending it, or from increased profit from investments) or subtracting numbers (from overspending or reduced prices from investments) together.
The only other way is forgiveness of debt. Do we really think that will happen?
I agree with you whole heartedly Shah. I watched all of my co-workers and friends buying houses and running up credit card debt and refinancing, then taking out second mortgages on their houses only to file bankruptcy within a short time. While they were doing this I was sitting back and putting money into my 401K through work, save some money on the side, and live within my means. They all thought I was crazy for not going out to buy that new car, or move into a better house. The one I live in fits me fine and I am almost paid up in full. I have about 4 more years and I can call it mine.
One thing I would like to do is invest some of my savings since I lost my you know what on my 401K. I had to go on Disability due to a major back problem which I had to go through surgery for 4 times. Thank god I had long term disability insurance. I know this is not how I would have liked to finish my career, but I had no choice. What I do have left though I’d like to invest as I’ve cashed out my 401K and have savings of over 10,000.00 Plus a boat load of silver (Physical).
If everyone would follow my plan and live within their means and not borrow more than they can pay for, they would be in a better position and even though losing money on their 401K’s stayed with it and changed and took a little more risk, they would be better off. I had 2 high risk, One medium risk and one low risk investments on my 401K and made out like bandit when the market did start recovering. I had the option to make changes to my own 401K through the company so I would switch it up and take less risk when the market was down, buy low and then move my money to a higher risk which worked very well.
Now that I have some money to play with since cashing out and did not have to pay the penalty, I would love to have some first hand knowledge of where to go from here.
Well Mr KNOW IT ALL IF YOU WERE SO SMART AND YOU KNOW HOW TOO FIX IT DO AND QUICK CALLING THE MIDDLE CLASS IDIOTS
you know that the middle class is what keep the country running the
Mr bush and the Republican is what put the country in this it was’t the middle class try too live a life with out asking for hand outs . but when you take and spend all the money in two wars that we did not need and send all the work over seas what did you expect too happen yes the
house marking has fell because the people could find work and pay their loans.no it will come back and I thank if any is body is an Idiots it
all those dumb Idiots in Washington taking away from the middle class
that makes the country what it was 15 years ago
I have no idea what I’m supposse to be doing. we are seniors so our house is our house and thank goodness we were sensible when we boght and it not high priced when we bought and it not now and that’s OK. You tell me
I would first like to hear your definition of being “middle class”. The current administration occupying the White House are now trying to convince us that if we just raise the minimum wage we can move those that are below the poverty line to just above the poverty line, where they can now enjoy the benefits of being “middle class”. Now there is a solution you wrap your arms around, but only if you are ignorant enough to believe the rhetoric. In my opinion, the “middle class” American is anyone being single or married that is working for a living, paying their own way through life without relying on the Government for aid and striving to make a better life for themselves and their family. Yes, this sounds trite, but to the majority of Americans that have worked for what they have; they believe this to their core. Because we have become accustomed to accepting that which is now taught in schools and is on the news every night, we have lost our sense of responsibility and now just blindly follow and believe what we are being told without question. You wouldn’t want to upset Washington and have them take something away now would you. Once you stop questioning the motives and decisions of those making poilcies that affect your ability to make your own decisions, then the door is left wide open for manipulation.
We as Americans have been manipulated into accepting the motives and greed of our Government, Bankers and Wall Street. If the CEO of Goldman Sach’s or BOA goes on the news and give us a pile of “pity us” because we lost money, the only thing they lost was the immediate ability to steal more from us. I do not believe for a minute that any of the real ups and downs in the stock market are not a direct result of this manipulation. And don’t even try to convince me that Congress is not in on all of it. This is the most corrupt our Government has every been, and this is not going to change any time soon.
So, now the new “dirty word” is “the rich”, and all the morons watching the new, who have already fallen for the manipulations are chanting the same mantra. Like the song goes; “eat the rich”. The interesting part is why there is no real demand for accountability for the filthy rich in Congress who mostly got that way by propping up Wall Street and the major banks with legislation that allows them to legally steal our earnings. Instead, “the rich” is a faceless, nameless entity that encompasses anyone that has done well for themselves through hard work and intelligent actions. And because it is “not fair”, we must be forced to pay our “fair share” so those that rely on someone else for their subsistence (Goverment) rather than their own initiative can become part of the “middle class”. Let’s start calling it what it is; those that have and those that want what you have, pure and simple. The ideal of middle class living is dead and buried. Prove to me otherwise.
So, to finally get to your question of what the solution is, there is no solution as long as Goverment interference and greed is the rule of the day. You can hypothesize all the solutions you want, and they will make perfect sense, but have not a snowballs chance in you know where of ever making a difference.
Allan
Drivel. If people who took loans had a calculator they would have able to figure out if they could afford the payments. With the small % of people who lost jobs or had medical issues, the vast majority were people who took loans they could not afford. If everyone who took a loan paid it then no crisis.
You are sort of right on the vice thing. First not all people got caught up in the sub prime frenzy. Second, as soon as normally prudent bankers realized they could shift their lending risk to somebody other than themselves they enticed the under lended to assume risk they would not normally qualify for and passed the risk via derivatives to others. Third, it is our very nature as humans to want something for nothing, except something cost money. So we grabbed the money, bought the property and tried to flip it for profit before loan payback time. So the bankersters lent the money, sold the risk and tried to pocket the profits before payback time arrived. Except payback time arrived for all of us at the same time and nobody was prepared for that. Then the blame game started.
The point being that responsible borrowers and responsible lenders did not get fooled by the feeding frenzy.
Right now the same thing is happening in Washington. Irresponsible voters (voters who want something for nothing) voted for irresponsible politicians (politicians who promised us lots of goodies for free and low taxes) to run the country. Except all those “free”goodies we want cost plenty money. Our low taxes don’t cover those “free” goodies but we allow the politicians to borrow money (the deficit) to pay for those goodies.
And payback time for all of us is coming fast. Then the blame game start again. In the mean time we have had the “free” goodies and we will want to bail on paying for them.
In the end “we the people” are responsible for our own actions whether it is we as individuals or we as the government.
But alas we are all creatures of opportunity, we want something for nothing – we outsmarted all other creatures to get to the top of the food chain. Will we outsmart ourselves?
I am part of the middle class illusion. The higher end fortunately but unfortunately not secure in my status. I am an old man now and it doesn’t particularly matter but my son is very middle class and his children will slip deeper into the abyss unless they are able.as I have urged them reoeatedkt to get educated to the max, become professionals in careers that are likely to profit from the uncertainities that are dropping on us like rotten fruit from sick trees.that have enguled us abd fouled our path to the future. A metaphor for the present times..No investment is secure, i have found. The stock market sucks. It is controlled by really big money who can move it where they will with the impunity offered by the government agencies that are supposed to protect us from their manuvers and machinations. The rental housing market is a struggle for so many renters whose jobs are in jeopardy. State, counties and cities are going broke and residents are watching their RE taxes balloning to absurd heights. Maybe what I see is only the illusion of weath. With a total of 103 to a 123 Trillion dollar deficit facing us and perhaps biggiger soverign deficits in Europe and China what can the dollar really be worth. Nada, niente, garnicht, zero. That congress is worried about another trillion dollars added to the budgetwhen none of that indebtedness that already existst can ever be paid back.. What the hell are we talking about?, If a currency is worthless except with respect to other currencies that are aalso worthless then the supposed value of all the cirriences are an illusion. I feel like I am floating in a toilent bowl full of shit just waiting to be flushed into the national sewer by my National Leaders. I don’t like the feeling.
Shah, you are basically correct in your analysis (of course!). I would add that we have rules for every game we play, and Wall Street finance should not be an exception. As a result of the
Great Depression, stricter banking laws were instituted, and worked very well for 70 years (we had no big crashes) until they were abolished, permitting the financialization of our economy, and turning Wall Street into a casino. Dodd Frank is weak, and our current crop of politicians is much too corrupt and beholden to Big Money to do anything serious about controlling these global financial interests. We are well on the way to a form of corporate feudalism.. Therefore, we are also well on the way to another, even more devastating crash, which will siphon the remaining “wealth” of the middle class into the pockets of the global elite, who are beyond the control of geographically-limited nation states. Shah, what do you have in mind?.
Ignorance is a very dangerous trait when you apply it to money, investments. The ignorant low and middle income individual have the appetite of a wealthy person but the brain of a chicken. Society has the responsibility to protect this class of person from the slings and arrows of market. How to do this? Education, as we know it in the schools is pretty well worthless when it comes to solving this problem. However, I have devolped and simple method for solving this problem. Feel free to contact me for my solution. By the way, I am 75 yrs of age, been an investor for a long time.
Read “The destruction of America..APFN FROM bob 1776
This is a master plan…a certain few want control….we are peanuts…we will beg for food …..we will be 100% controled.. read SOROS and his money will break the country…how he hates America and loves THE puppet president…..read and learn.
Marge
Dear Shah,
did you read the article in NYT yesterday about how the junk food industry is ripping both the money and the health off it’s customers? When you look at their schemes (chemistry, psychology, large scale testings etc) to create addictive fast food products, there are so many similarities to what is happening in the banking business, and also in many other sectors like the health industry. To me it seems like the cutting edge science in combination with high speed greed is too overwhelming for normal people. It is hard for us to defend ourself against it. So this is not only a problem within the finance world, it is more of a system failure – or what do you think?
Mr. Gilani, I appreciate your enumeration of the high risk factors. One question: Is residential rental property also “housing” for purposes of your illustration?
Shah,
I am really impressed with the knowledge of your readers!
Didn’t Iceland decide to jail their banksters as the first step in putting their finances back in order? The way I hear it, they are already out of the soup (chicken or otherwise) and one of the most stable countries after just a couple of years.
We’ll sell it to you now, and monetise your debt
You pay less on your purchases , for everything you get
You add somewhat to monthly bills,so work a little harder
Enjoy the house , you can’t afford,dont let that cool your ardour
Consumerism is the thing to benefit mankind
so don’t hang back, or try to save, stay positive of mind
For money’s made to go around, so please don’t stop the flow
Just spend, don’t save -that’s all you need to know
Untill the Banks stop lending, they’ve done this all before.
Your wealth is gone and you’re forlorn–
What was it you did not know.
There is one more variable that should be added to the discussion – savings accounts, CD’s etc. Back then if you were smart and conservative you could but your money in savings, today that is not an option. Even more pressure on the middle class to risk their money now gambling it on wall street – and most likely loose it.
Deregulating the banks allowed them into businesses and strategies that had been unavailable to them previously. I don’t think anything would have slowed them down, sub-prime, or not. I am surprised that people are taking the mortgages that got so many into trouble just a few years ago, but then again, maybe I shouldn’t be so surprised.
What annoys me are the people who blame everything that’s happened on Obama and the Fed. I am not a big fan of either Obama or the Fed, but the bailouts of AIG and GM and the rest happened under Bush. Should the Fed have run away and hidden
from what was happening? Isn’t that what happened in 1929? I’m not a big fan of printing money endlessly, but would the Fed doing nothing have been better? My biggest problem with all of this is the bailouts. If the people running the banks and insurance companies and auto manufacturers aren’t smart enough to stay in business, why is it my job to make sure they do?
Welfare for the poor is necessary, as a temporary measure to get people out of trouble, not as a permanent solution. Welfare for the rich? I see no excuse for that.
First I do not try to agree or disagree with your article but to find HOW the middle class can remain middle class..
quote: Those two steps up the ladder in America are manipulated by bankers and brokers for their own self-serving benefit
In Money Morning we also read silver is manipulated.
Gold is going down, gold is rated in US currency and US currency is going down relatively.
Thus Gold is manipulated down.
Commodities is not improving. When there is too much it justifies its downshift (gas). When there is not enough, absence of political conflict justifies the downshift.
For those the principal residence as a share of net worth is still around 30 percent where to go not to be entrained into the spiral of downshift?
High dividend share,? They are reputed risky since they deliver too high yield…
Out of american or european countries, we cannot react to up or downshift.
I’m reading you the last years, maybe I did not understand?
Having all in cash with the central banks of overprinting, I consider this unsafe.
I’m reading you the last years, maybe I did not understand?
Where can we put the assets not to loose them I fail to understand you.
in 2007 i was helping stepdad with his business,he was 90,had renter nt paying asked them to move. they went t buy house.mtg.broaker asked for report from land landlord,which they got.stepdad got call from mtg.br. asked if renter pay back rent,would he fix credit report,they did he did,they bot house &lost it2yr.later .talked to warehouse manager today.he said 1of2 he tries to hire can not pass drug test & truck drivers have so many regulations can’t hire what is needed. God bless America!
Get your money out of the banksters! When you have whatever is left from paying your debts, move it to gold, silver, copper, graphene, platinum….I don’t care.
The fiat will be worthless (as if it isn’t now), you will need to have tradable money to survive when T.S.H.T.F.
The vise is the banksters and the polishitans and we are smack dab in the middle. They want everything we will give them, so give them nothing!
Face facts American’s. YOU are the “reason” that is crashing the World Economy today from your Greed driven Excess Consumption in Global Resources. A Country that makes up 5% of the World’s population and Consumes 25-30%% of Global Resources is off the Richter-Scale!
YOU are the reason that Drives the Wall Street Sociopathic Too Big to Fail Banking Bonus Boy’s to create the Pyramid Schemes that suck the Wealth out of Humanity’s Pocket – through “High-Speed” Daylight Theft! Are they to Blame – sure, but if YOU weren’t willing to Borrow on the Value of your Middle Class Home and throw it down on the Wall Street Craps Tables YOU wouldn’t be Teasing the “Great White Shark” by chumming the water with Blood then going for a little swim with your new Laptop Day Trading Software designed by Wall Street, like the “One Armed Bandits” in Vegas and the “Voting Machines” that are designed by the same Bottom Feeders!
YOU are to Blame when Ronald Reagan opened the Exit Door and outsourced ALL of your job’s and you sat there dumb and happy slurping Diet Coke by the Gallon with Super-Sized Domino’s Pizza Chasers while watching Married with Children & spending you un-employment checks on Big Time Wrestling tickets. A FOOL could have seen this coming and all YOU could see was the Massive Motorhome in the Neighbor’s Driveway and working out some scam so you could have one too!
YOU have lived very comfortably off of the Blood, Sweat, Tears and the Dead Body’s of the rest of the World for FAR TOO LONG through your Sloth & Greed…and now you can’t figure out what’s wrong??? Please give us foreigners a break, even we aren’t THAT Dumb!
You’ve sucked this World and it’s Population dry and demand MORE, MORE, MORE then when we tell you to slow down – you march in and spread your version of Freedom and Democracy and wipe out entire Cultures if they resist your sick ways of one sided “American Interests”!
YOU could have prevented all this through Fair and Mutually equitable Trade Agreements and by showing respect to your Trade Partner’s and their chosen way of life, but YOU CHOSE “Force over Fair”. YOU chose Coersive Politics over Partnerships & Diplomacy to achieve Win-Win’s. YOU chose massive consumption over Environmental Conservation. You’ve made your choice folks – now it’s time for you to pay the price for your Exceptionalist Behavior and Unbridled Greed. Kharma is catching up with you now, so don’t ask what the world can do for you, what can you do to repair the Millions of Lives your GREED has destroyed. That’s what you
can do – please do it!
This World is Humanity’s Bedroom and Human’s claim to be far superior to the Animal World, but even Animals know better than to S–T in their own Bed!
How would you feel if the World invaded and occupied your Country?? Set up Military Bases in your backyard and forced their own version of Freedom and Democracy on you? Would you fight to save your home, your Family, your own life??? Yet when you do that same thing to others and they fight back, they’re called Terrorists???? WTF is that??? I’m sure Shah’s answer will be different to mine, but he’s sellin something – I’m not… Truth is Truth!
Veni, vidi, vici, vice, vise, visa.
All of US came. (most as immigrants to USA) We saw progress. We conquered both enemies, and economies that were previously captive to others. Our vice was to think that we were better and deserved better than everyone else.
Our vise tightened when we began to ignore that fat chickens meet a difficult fate in the stew. We were squeezed by the reality that all that we had was more than others could even dream for. As the rest of the world began to recover from WWII and found that they too wanted a piece of the pie, we discovered a squeeze on our individual share of that pie which we had enjoyed.
Bankers, brokers, politicians, and fellow citizens sought two chickens for every pot. The rest of the world was hungry. They had settled for less and began to work harder for more.
They did work harder, and in some cases were smarter than those who bought into the schemes of the bankers, brokers, and politicians who perpetuated the idea that we (US) could have it all as #1.
Because we were more deserving? Because we worked harder? Because the others would be satisfied with less?
The magic of Bretton Woods, the magic of Nixon going off the gold standard, the magic of the printing press, the magic of fractional reserve banking in the hands of bankers, and the foolishness of folks
who bought the dream on Visa; all of US must come to reality.
Why must we pay more for world security thru military expense far greater than any other people? Why must we carry the burden of the world policeman? To protect our sources of energy? To protect our petrodollar entanglements? To fuel our Continental SUV economy?
To preserve our right to a bigger share than lesser countries get?
We found that GREED IS GOOD when we are getting more than we (US) really need. We came to tolerate hunger, sickness, and malnutrition elsewhere for others. Then we expanded our beliefs to find it acceptable even here in the USA for those in the poor neighborhoods we left.
Those places got old, run down, in need of repair, just like our roads, our bridges, our schools, our community, our common good.
Now we are stuck. We find it hard to hold up a sign that says “Will work for more than our share” It is hard to plead ignorance of how we bankrupted ourselves, and promised ourselves pensions and inflations forever on the backs of others. We voted for it. We bought the KoolAid. We have discovered the enemy and we have found that in our hearts, we have lost our willingness to continue as we have been doing for over 75 years.
Alas, we must return to sanity. Instead of an instant fix from drugs, or a pain killer in the form of sedatives that say all is well, we need to rediscover our link to our fellow humans.
We need the stamina to stand up and perform on our ideals that everyone is endowed with the same rights, even those in other lands.
We need to learn to share with each other, not just with bankers, pols, or brokers of the golden dream that became a nightmare. We need to make peace with ourselves and our creator, wherever she is now.
New world order needs serfs.
Unfortunate but true. What changes.
I place 90% of the blame on the Federal Reserve and the Congress that serves it.
The Fed has manipulated the markets and banking and credit to such an extent that almost nothing is a “real” or normal valuation of an actual free market exchange/decision by buyers and sellers today.
What is the value of a house or stock or gold or bonds?
No one knows, since there are no unmanipulated markets for any of these.
Where do you put your money today? I don’t know and I doubt anyone else does.
I moved to SE Asia before the 2012 elections, since I could see that no matter who won, we the people lost. This will not change until we take back our government, disband the Federal Reserve and print our own gold-backed currency, removed from Congressional “oversight”.
Our future money devaluation will take care of the few middle class families that have survived the fiasco of the last 40 years of degradation of our entire society.
Go to FairTax.org and actually read their proposal. It’s not a complete solution, but a good start in the right direction.
Your home is not an investment. At least not by any standards of the valuation of carrying charges. Forget the interest rate. Consider property taxes, utility bills, replacement equipment ( dishwasher-5years, water heater-10 years ) lawn care and lawn tools, paint and the painter, insurance, under insured insurance repairs, travel? ( 10 miles to work, 5 miles to the store, 3 miles to school, 3 miles to sports ) , second car, third car if you have teenagers, cable/phones, day care – need two jobs by now, extra take out food ( never home on time ), and much more I’m sure. But, you have property! You could raise some chickens-nope, grow vegies in the front yard-nope, take on a boarder-nope, start a home business-nope, park motor boat in the street-nope, Aahhhgh. You could sell but there is no where to go. Fifty years of suburbia has left the condo market behind. Most condos are small and overpriced. Maybe Bush is right to buy all the property in Argentina. He could see it coming.
Which middle class are we talking about here? Ours or King Barry’s?
Entrepreneurs and those with the expertise to carry out the plan shouldn’t be at the mercy of highly trained financial wizards who depend on the wealth of creators and producers for their own success via gross financial manipulations for self-serving purpose. Solution: fewer financial wizards and a whole lot more ethical conduct.
The Community Reinvestment Act, Fannie & Freddy, Dodd & Frank all contributed to the mess. No one mentioned ACORN. They had groups occupy bank lobbies, effectively closing them down, until management signed agreements to lend an unreasonably high percentage of their loan funds to poor “unqualified people”. in the neighborhood.
What I remember is very few were speaking out against this nonsense back in 2003-2007. When I would at cocktail parties I was told I was crazy (true) and you can’t lose money in real-estate. As long as the cash was flowing in the right direction greed was good. Only when it all blew up did the finger pointing begin and all the talk about how it was the wrong thing to do started. And most “victims” I know actually made money even though they “lost” the house they had $0 invested in.
Had the same experience, I might add that some of us weren’t talking about it as an investment. A lot of us, my wife and I included, just wanted a home. There was a lot of pressure to get in, or rather on the property ladder. It didn’t work in our favour. Maybe people could just head over to Vegas if they want play.
Suppose you were the head of a bank and all your competitors were making big money loaning to everyone.You would look like a fool if you didn’t do the same.In fact,you would risk losing your job,if a public company.Probably would have been sued for discrimination.On top of the fact that everyone thought housing couldn’t decline much.Then you had Fannie,Freddie and investors willing to take the loans.So,I believe it was 100% the fault of politicians wanting to make the economy look good.They did it by keeping interest rates negative and forcing lenders to lend to everyone.
Interesting insight. In addition to a sadly misdirected consumer mentality which handicaps most of middle and lower class America, a huge majority are financially illiterate. Unless well mentored by money smart parents or some successful mentor few have any fundamental understanding of economics, finance, or investing. Consumer finance and economics 101 should be a foundation of every high school education in America. Today the cost of money may be cheap but the price of financial ignorance is at least financial insecurity if not eternal poverty.
America’s Middle Class: Caught in a Vise? http://t.co/bJV20T2a30 с помощью @http://twitter.com/#!/wallstreet_ii
my question is ,how much were the subprime delinquent loans in dollars,had the fed/treasury just bailed out those loans ,would we be printing our way into/out of that debt,or would it have just been a small blip in the monetary chain,would the anks have needed any money to stay solvent..my suspicion is that the problem wasn’t the subprime loans at all,it was the offshore credit ponzi vehicles invented to steal millions/billions
Shah, good stuff. I’m not sure if the “Streets” (Wall Street, Washington DC Street or Lobby Street) knows or cares to get Main street going again. I’m thinking they just want to legislate their own wealth.
I’m just an old industrial sales guy and I don’t think the CRA caused the sub-prime mess either. I do think the politicians and HUD used the law to push for the sub-primes. It was with good intentions to let people have a chance to purchase a home – especially from the areas that had been red-lined. So, if they could have kept the program as intended it should have been good. I remember reading an article that by 2006 that the sub-prime mortgages were 55% of all mortgages outstanding. Just a little bit out of hand.
So I’m thinking that the Streets got together, including your 3 favorites and revised the Glass Steagall Act and it was on. The people at Fannie Mae liked those million dollar bonuses also. I’m sure there was an understanding amongst the Streets that the bankers would be bailed out and the gov’t would blame them. So the bankers stay rich and the gov’t has a scapegoat.
Bloomberg says we’re not smart. I’m thinking the middle class has to work around the gimmicks that the Streets give us. Like housing: the 1950′s mortgage interest deduction, the 1970′s two income mortgage qualification, the 1990′s sub-primes. I personally think the two income mortgage really was a big hit on the middle class. If we could have stayed with a one income mortgage we could have paid off our houses quicker. Then we would not have to send all that extra money to the banks. Yes, a lot of house prices would be lower (that could be a good thing) and all that extra money could have been used to grow the economy in other ways. I bet home building would have stayed stable also.
so, I’m looking forward to seeing your article on how to break the vice and get it all going again for the middle class.
First, the “middle class” has always been at best a partial myth. Much of it was perpetuated by “fair trade” laws ensuring limited competition, labor unions that perpetuated that idea that high school drop outs could earn two or three times what say teachers earned (railroads, airlines, auto makers, dock workers, etc.) while the rest of the industrialized and developing world recognized that ambition and hard work would get you ahead, rather in the absence or despite reliance on unions. We are now paying the price for the artificial prosperity of the 50s -60s and 70s. Our first wake up call came in the Regan years where businesses downsized and right sized in order to survive in a global economy. When it pays more to take government payouts than to work we will not recover, no matter what housing prices are. Don’t blame Wall Street for the laziness of the American population and the socialism of government. It will all come crashing down. the sooner the better.
Banking and Government Malfeasance. They knew what they were doing.
During the 2002 2003 time frame I was unemployed (Tech boom and bust). I had various living arrangements thanks to family and friends. My sister-in-law was working for a bank and asked me if I wanted to buy a home. Of course I questioned her sanity and reminded her I was unemployed and going back to school. She says, “No problem I can get you a No No No loan” After she explained what that was I was amazed and dumbstruck, “Who in their right mind, would do something like that?” Apparently flippers and their ilk, who for some reason think that a house is an investment. The S&P is a better investment over the life of a typical 30yr mortgage.
At this point I believe the American banking community in general has shown it’s self to be dishonest, deceptive and criminal. We have seen nothing in the last 2 decades to indicate even a modicum of repentance. For me there is only one reasonable response. I am researching the ways and means of bankers in places like India, China and the UAE.
I liked Des reply about the Shahs 3 favorites (Phil Gramm, Lawrence Summers and Robin Ruebin whom orchestrated doing away with the Glass Steagal Act. They were the financial genuises who got this country into the 2008 financial debacle. Maybe we can go back to ask them what to do now; if we can find them. The Republicans don’t seem to remember them.