The Great Wealth Transfer, late 1900′s to early 2000′s (part 1)
When historians write about this era of U.S. history, how will it be described? I have a guess: “the Great Wealth Transfer” from the middle class to the wealthy. Let me explain why I say this.
There are lots of different parts to this story, but today I’ll concentrate on the housing wealth transfer.
We all know there was a housing bubble, that millions of people took out mortgages on dubious terms for houses that were already overpriced but that they were each counting on to go even higher. The way this was sold at the time, and even today is described, was as “home ownership for an expanded middle class.” But as Sue Waters from the Alt Banking group pointed out to me, these people didn’t get home ownership, they got debt ownership.
I know, it sounds a bit strange, but that’s just it, the language is important.
When people say they own their home, do they mean they don’t have a mortgage? Probably not. They probably mean they’re in the process of paying a mortgage, but they conflate the two concepts because they assume they will pay off the mortgage eventually. But in the meantime they don’t actually own their home, the bank does. The extent to which this is an important distinction is the extent to which it is likely that they will be able to pay off that mortgage some day in the future.
When you’ve stopped conflating home ownership with debt ownership, and you look back at the housing bubble, it’s a different picture. How many new home owners were there really? It’s not an easy question to answer, but it’s clear that there were way fewer than we thought- many of the mortgages had terms that were clearly very optimistically written. Nobody really thought it would work out well, but the system just kept growing and the optimism kept getting less reasonable. Meanwhile, bankers got extremely rich.
How did this all happen?
This is answered by asking an even larger question: how does the financial system make money? I claim a large part of it is by finding a group of people that are relatively naive and pushing risk to them. For example, the dot com bubble was created by getting normal people to invest in dumb new-fangled things – they were the pawns.
For the housing bubble, it was a bit more devious. One one end, systemic risk was pushed (into the future) to the taxpayers themselves through bailouts of the banks, AIG, Fannie, and Freddie. In other words, taxpayers didn’t know it at the time but they were getting more and more on the hook for losses as the banks and financial system took larger and larger bets on the direction of the housing market.
At the same time and at the other end of the mortgage contracts, the so-called “homeowners” who took on mortgages were the fall guys. As a whole, they signed up for debt (and the right to claim themselves as homeowners) and in return are now hopelessly underwater. The Obama administration, just like the Bush administration before it, is urging these people to do what they are morally compelled to do, namely pay off their unmanageable debts, while changing the laws for the big banks so they can get away with whatever they need to in order to ignore their outrageous undercapitalization.
To sum it up: we found a very large pool of people too naive to understand the risk they were taking on, we signed them up for that risk while painting them a beautiful picture of the American dream, and now we get to accuse them of being immoral for not being able to hold up their end of the contract. It was an amazing swindle.
To be continued in part 2, in which many of the same players who brokered the mortgages to the “new homeowners” are now buying up their foreclosed homes and renting them back.