Monday, November 24, 2008

Fall Leaves

Instead of going on our usual brisk walk yesterday, I dragged my friend A to the park, so that I could take pictures of fall leaves. California doesn't have fall like the East, where all of the trees turn at the same time. Our fall dribbles from the end of August through January. Some trees are budding out at the end of January, just as the last trees going dormant lose their leaves. We do, however, have good years and bad ones--well, not so much bad, as mediocre. The best color seems to come with a short, sharp fall, when the nighttime temperatures drop suddenly from 60 to 40 degrees. This year we had erratic temperatures through the fall, so our fall color has ranged mostly from dull yellow to brown.

I've written before that I had little expectation that I would be happy with the Obama Administration. And so far, I've not been disappointed. He headed straight for the miserable centrists in and about the Democratic Leadership Council that brought us the eight-year fiasco that was the Clinton Administration.
(The only reason that one no longer seems quite so awful is that the present government is so thoroughly appalling.) The economic advisors are mostly people who helped bring about the mess we're currently in. It will soon become part of the ruling conventional wisdom that the Republicans were responsible for the deregulative frenzy that collapsed so many of our major banking houses. This is not true; the Democrats were as culpable in bringing about the "modernizing" legislation that enabled the development of the alpahbet soup (SIV, CDO, CDS) as the Republicans.

I've been thinking lately about the intersection of Wall Street and Main Street in the present crisis. What made the housing bubble so much more disasterous than the stock bubble? Yes, the collapse of the stock bubble did cause a recession, but it didn't threaten the entire economy. The housing bubble does. Several things are at work here. The first is that the poorest 2/3 of the population has been precarious since the mid-1970s.
Wages have been declining since then, and it's only because more family members have gone out to work that household incomes haven't collapsed. (In 1973 a family could make the median income with forty-two work hours a week at the average weekly wage. By the mid 1990s, achieving the median income required eighty-two work hours a week.) When that was no longer sufficient, families turned to the credit card to stretch their incomes. Credit cards were particularly important for single-earner households, as they couldn't work the eighty-two hours a week required to make the median income. Brett Williams called the credit card the virtual domestic partner and that's an apt description. The banking system made huge amounts of money from the expansion of credit card lending--interest, late fees, overlimit fees--but by the beginning of the 21st century, it was pretty obvious that people couldn't borrow much more from Mastercard and Visa. There simply wasn't sufficient income to service all of that debt. I remember Alan Greenspan trying to explain that not all households were in insurmountable debt--only some of them.

So what was left? If I were someone who believed in conspiracy theory, I'd imagine a bunch of bankers looking at the little house on Cul de Sac Lane, light bulbs going off over their heads. What was obvious to them, I'm sure, was that housing was the only resource left to exploit. Most Americans didn't have anything else left. What the mortgage brokers, lenders, hedge fund managers didn't understand was that people were so precarious that they were taking loans they couldn't hope to pay back. I remember reading in the local papers that people would always pay the mortgage, no matter what. But if the mortgage payment is more than the household's monthly income, there's no belt tight enough to save it.

So a good number of our fellows started borrowing against their houses to pay off the aforementioned credit card bills, fix up the house, buy cars and so on. I suppose that some of them bought big-screen TVs with the money or took expensive vacations or whatever, but a lot of people just wanted to send the kid to college. What's
worse is that some tenants, who should have been living in subsidized rental housing, were induced to take on mortgages so that they could have a decent place to live. Many tenants are barred from decent rental housing by credit problems, so their best option really was to buy a house they couldn't afford.

That they believed that housing prices would only go up isn't surprising; most of the nation's leading financiers thought the same thing, and produced charts and graphs to show us the truth of their proposition. Unlike our nation's financiers, however, they are suffering the consequences of those beliefs. Whatever credit they had has now been trashed, and they're now doubled up with friends or relatives. Some have rented apartments from unscrupulous landlords, paying exorbitant deposits, only to find that the house they've rented has gone into foreclosure. Particularly sad are the people in their mid-50s who suffered foreclosure, as they will never recover from it.
(For a variety of reasons, people born in the mid-1950s are less likely to own houses than those born before or after, so they were specially susceptible to the "now or never" pressure.)

I do wonder what Wall Street will come up with next. They tried commodities, but that seems to have been a bust. Maybe tulips?

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