[NYTr] Debt: The New American Dream - millions on brink of bankruptcy

[All the News That Doesn't Fit]

Adbusters via Alternet - Nov 10, 2007
http://www.alternet.org/story/66634/

Pay It off Later: Debt Is the New American Dream

By Dee Hon, Adbusters

Money for nothing. Own a home for no money down. Do not pay for your
appliances until 2012. This is the new American Dream, and for the last
few years, millions have been giddily living it. Dead is the old
version, the one historian James Truslow Adams introduced to the world
as "that dream of a land in which life should be better and richer and
fuller for everyone, with opportunity for each according to ability or
achievement."

Such Puritan ideals -- to work hard, to save for a better life --
didn't die from the natural causes of age and obsolescence. We killed
them, willfully and purposefully, to create a new gilded age. As a
society, we told ourselves we could all get rich, put our feet up on
the decks of our new vacation homes, and let our money work for us.
Earning is for the unenlightened. Equity is the new golden calf. Sadly,
this is a hollow dream. Yes, luxury homes have been hitting new
gargantuan heights. Ferrari sales have never been better. But much of
the ever-expanding wealth is an illusory façade masking a teetering
tower of debt -- the greatest the world has seen. It will collapse, in
a disaster of our own making.

Distress is already rumbling through Wall Street. Subprime mortgages
leapt into the public consciousness this summer, becoming the
catchphrase for the season. Hedge fund masterminds who command salaries
in the tens of millions for their supposed financial prescience, but
have little oversight or governance, bet their investors'
multi-multi-billions on the ability that subprime borrowers -- who by
very definition have lower incomes and/or rotten credit histories --
would miraculously find means to pay back loans far exceeding what they
earn. They didn't, and surging loan defaults are sending shockwaves
through the markets. Yet despite the turmoil this collapse is wreaking,
it's just the first ripple to hit the shore. America's debt crisis runs
deep.

How did it come to this? How did America, collectively and as
individuals, become a nation addicted to debt, pushed to and over the
edge of bankruptcy? The savings rate hangs below zero. Personal
bankruptcies are reaching record heights. America's total debt averages
more than $160,000 for every man, woman, and child. On a broader scale,
China holds nearly $1 trillion in us debt. Japan and other countries
are also owed big.

The story begins with labor. The decades following World War II were
boom years. Economic growth was strong and powerful industrial unions
made the middle-class dream attainable for working-class citizens.
Workers bought homes and cars in such volume they gave rise to the
modern suburb. But prosperity for wage earners reached its zenith in
the early 1970s. By then, corporate America had begun shredding the
implicit social contract it had with its workers for fear of increased
foreign competition. Companies cut costs by finding cheap labor
overseas, creating a drag on wages.

In 1972, wages reached their peak. According to the us department of
Labor Statistics, workers earned $331 a week, in inflation-adjusted
1982 dollars. Since then, it's been a downward slide. Today, real wages
are nearly one-fifth lower -- this, despite real GDP per capita
doubling over the same period.

Even as wages fell, consumerism was encouraged to continue soaring to
unprecedented heights. Buying stuff became a patriotic duty that
distinguished citizens from their communist Cold War enemies. In the
eighties, consumers' growing fearlessness towards debt and their hunger
for goods were met with Ronald Reagan's deregulation the lending
industry. Credit not only became more easily attainable, it became
heavily marketed. Credit card debt, at $880 billion, is now triple what
it was in 1988, after adjusting for inflation. Barbecues and tv screens
are now the size of small cars. So much the better to fill the average
new home, which in 2005 was more than 50 percent larger than the
average home in 1973.

This is all great news for the corporate sector, which both earns money
from loans to consumers, and profits from their spending. Better still,
lower wages means lower costs and higher profits. These factors helped
the stock market begin a record boom in the early '80s that has
continued almost unabated until today.

These conditions created vast riches for one class of individuals in
particular: those who control what is known as economic rent, which can
be the income "earned" from the ownership of an asset. Some forms of
economic rent include dividends from stocks, or capital gains from the
sale of stocks or property. The alchemy of this rent is that it
requires no effort to produce money.

Governments, for their part, encourage the investors, or rentier class.
Economic rent, in the form of capital gains, is taxed at a lower rate
than earned income in almost every industrialized country. In the U.S.
in particular, capital gains are being taxed at ever-decreasing rates.
A person whose job pays $100,000 can owe 35 percent of that in taxes
compared to the 15 percent tax rate for someone whose stock portfolio
brings home the same amount.

Given a choice between working for diminishing returns and joining the
leisurely riches of the rentier, people pursue the latter. If the
rentier class is fabulously rich, why can't everyone become a member?
People of all professions sought to have their money work for them,
pouring money into investments. This spurred the explosion of the
finance industry, people who manage money for others. The now-$10
trillion mutual fund industry is 700 times the size it was in the
1970s. Hedge funds, the money managers for the super-rich, numbered 500
companies in 1990, managing $38 billion in assets. Now there are more
than 6,000 hedge firms handling more than $1 trillion dollars in assets.

In recent years, the further enticement of low interest rates has
spawned a boom for two kinds of rentiers at the crux of the current
debt crisis: home buyers and private equity firms. But it should also
be noted that low interest rates are themselves the product of
outsourced labor.

America gets goods from China. China gets dollars from the U.S. In
order to keep the value of their currency low so that exports stay
cheap, China doesn't spend those dollars in China, but buys us assets
like bonds. China now holds some $900 billion in such U.S. IOUs. This
massive borrowing of money from China (and to a lesser extent, from
Japan) sent us interest rates to record lows.

Now the hamster wheel really gets spinning. Cheap borrowing costs
encouraged millions of Americans to borrow more, buying homes and
sending housing prices to record highs. Soaring house prices encouraged
banks to loan freely, which sent even more buyers into the market --
many who believed the hype that the real estate investment offered a
never-ending escalator to riches and borrowed heavily to finance their
dreams of getting ahead. People began borrowing against the
skyrocketing value of their homes, to buy furniture, appliances, and
TVs. These home equity loans added $200 billion to the U.S. economy in
2004 alone.

It was all so utopian. The boom would feed on itself. Nobody would ever
have to work again or produce anything of value. All that needed to be
done was to keep buying and selling each other's houses with money
borrowed from the Chinese.

On Wall Street, private equity firms played a similar game: buying
companies with borrowed billions, sacking employees to cut costs, and
then selling the companies to someone else who did the same. These
leveraged buyouts inflated share values, minting billionaires all
around. The virtues that produce profit -- innovation,
entrepreneurialism and good management -- stopped mattering so long as
there were bountiful capital gains.

But the party is coming to a halt. An endless housing boom requires an
endless supply of ever-greater suckers to pay more for the same homes.
The rich, as Voltaire said, require an abundant supply of poor.
Mortgage lenders have mined even deeper into the ranks of the poor to
find takers for their loans. Among the practices included teaser loans
that promised low interest rates that jumped up after the first few
years. Sub-prime borrowers were told the future pain would never come,
as they could keep re-financing against the ever-growing value of their
homes. Lenders repackaged the shaky loans as bonds to sell to
cash-hungry investors like hedge funds.

Of course, the supply of suckers inevitably ran out. Housing prices
leveled off, beginning what promises to be a long, downward slide. Just
as the housing boom fed upon itself, so too, will its collapse. The
first wave of sub-prime borrowers have defaulted. A flood of
foreclosures sent housing prices falling further. Lenders somehow got
blindsided by news that poor people with bad credit couldn't pay them
back. Frightened, they staunched the flow of easy credit, further
depleting the supply of homebuyers and squeezing debt-fueled private
equity. Hedge funds that merrily bought sub-prime loans collapsed.

More borrowers will soon be unable to make payments on their homes and
credit cards as the supply of rent dries up. Consumer spending, and
thus corporate profits, will fall. The shrinking economy will further
depress workers' wages. For most people, the dream of easy money will
never come true, because only the truly rich can live it. Everyone else
will have to keep working for less, shackled to a mountain of debt.

[Dee Hon is a Vancouver-based writer has contributed to The Tyee and
Vancouver magazine.]

© 2007 Independent Media Institute.