Home > finance > The Great Wealth Transfer, late 1900’s to early 2000’s (part 1)

The Great Wealth Transfer, late 1900’s to early 2000’s (part 1)

April 16, 2012

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.

Categories: finance
  1. April 16, 2012 at 8:45 pm

    cathy, I’m not following how people became debt slaves through the housing bubble. In a lot of bubble states, the mortgages were nonrecourse, and even where they are not, in many cases (most?) homeowners don’t have enough money for it to be worthwhile for the banks to even sue them beyond what they can get in foreclosure.

    And I personally know people that have walked away from houses in bubble states, mailing their keys to the bank, after the bank refused to cut the mortgage debt to the fair value of the house. So I’m not sure how these people were screwed. They got to live in a bigger house than they could’ve afforded by paying rent, especially in cases where they lived mortgage and rent-free due to the bank sitting on its hands.

    • ianm
      April 17, 2012 at 12:08 am

      @vbonded. Not to ding, but you totally missed the point. The people that are the debt slaves are not the “jiggle mail” people. Not anymore at least.

      I know people that are struggling to hold onto houses in no-recourse states — the reasons are obvious if you think about it: stigma, attachment to the home, denial. And I have family in a recourse state that put down 150K and are down another 250K past that — they have fantasies about being laid off and cratering so they can move.

      A large portion of homeowners are significantly below water (I believe 25%). These are the debt slaves. And they were sold a bill of goods by our government and popular culture. Remember Greenspan saying “now’s a great time to buy a house” when the bubble was in full swing?

      Sure, some people lived rent free for a while and enjoyed living in a big house (but rents were cheaper than mortgages, so you’re wrong on the first point).

      The deal is we’re all living with the fallout. A few people living mortgage free for a few months doesn’t make up for trillions.

  2. tomas
    April 17, 2012 at 7:45 am

    this post was very very very good.

    very good.

  3. Conscience
    April 17, 2012 at 10:56 am

    It is an American Dream to overpay their CEOs. Bankers are not the only culprit that were paid significantly. Look at history going back to when Disney CEO was paid $200 Million in the 1980s and ask yourself what happened to Disney over the last 30 years..Why pay Exxon CEO $400 Million when Exxon benefited from gas price increases that has nothing to do with the CEO. If someone was fortunate enough to be the CEO at the time of better prices for the company’s product should they be paid hundreds of million? That is the real problem. Fix the compensation, you may fix the problem of a society rewarding for the sake of rewards and not true contribution!

  4. Michael C
    April 17, 2012 at 1:28 pm

    I think this happened to a large degree because housing as inflation hedge was a solid middle class striver principle, at least till the dot com boom/bust.
    The Fed was supposed to continue to do its part by steadily debasing the currency over the 30 year term of most mortgages. That plan paid off in 70-87s, and for the leading edge of the baby-boomer retirees in the early 00s. For children and grandchildren of depression era folks buying more house than they could afford was a rock solid core principle. Repaying debt with debased currency in the future was common sense, so debt ownership pre-CDS was rational, especially if it came with shelter attached.
    By 2006 it looked like housing had gotten ahead of itself, as it had in spurts from the 70s on, but reversion to the mean was still a not unreasonable view for middle class families who planned to ride it out over the long term and who knew nothing about credit derivatives.
    To a degree home owners had been protected, until credit derivatives came along when everyone and every asset class was ripe for the looting. Massive housing short sellers, complicit regulators and corrupted governments sealed the deal.
    .
    The great wealth transfer (by design) was baked in by 2004/2005.

    The conflation between home ownership and debt ownership persists, I think, because underwater ‘homeowners’ with jobs who are still able to pay look at the period between the last housing bust (87-97-98) as the model they want to relate to. Anyone who bought in the run up to 87, was stuck in underwater mortgage for the next decade.Those that survived that slump eventually did become ‘homeowners’.

  5. stedun
    April 17, 2012 at 1:43 pm

    looking forward to part 2 and beyond. A smart read.

  6. Patrick (G)
    April 17, 2012 at 5:57 pm

    Language is important; Which is why I call it a ‘mortgage bubble’ rather than a ‘housing bubble’.

    Keeping housing stock relatively low, while increasing the number of bidders in the Great American Housing Auction means the Auction Organizers (AKA mortgage-Securitizing banks) get to capture bigger fees as a result of higher bids.

  7. Beethoven
    April 17, 2012 at 11:14 pm

    And similar things have been happening in Europe. Big German banks lent money to Greece and, when the Greek government could not service its debt, the German government (taxpayers) bailed out Greece in order to save the big banks from losing their Greek government bond portfolios. This is how the system works.

  8. steve
    April 18, 2012 at 7:57 am

    I thought your article was well written, and is accurate.

    The question is, can you come up with a solution to the problem of the ultra-rich transferring (not creating) ever more money to themselves? Can you think of a practical solution, that will work to some degree?

  9. RichL
    April 18, 2012 at 8:03 pm

    I suppose that you’ve never heard of the Community Reinvestment Act, where banks were REQUIRED to make loans of dubious provenance to the deserving poor.

    I also suppose that you think that all of the bad loans, the large majority of which were foisted onto the system by independent (unscrupulous) mortgage brokers, are an unalloyed good thing for those institutions who bought the duff paper.

    There wasn’t a wealth transfer. The money from the bubble went to money heaven, and EVERYONE lost.

    How can you POSSIBLY think that this was a banker’s plot to get wealthy??? You should NEVER underestimate that sheer stupidity is a far greater cause of financial problems than intentional malfeasance.

  10. AS
    May 2, 2012 at 5:32 am

    Spot on. Michael Hudson explains this very concisely in his piece in Harper’s back in 2006: “The new road to serfdom: An illustrated guide to the coming real estate collapse” (M. Hudson, Harper’s Magazine, May 2006).

    http://www.outstitute.org/blog/download/MichaelHudson/Hudson_RoadToSerfdom.pdf

  1. April 16, 2012 at 5:21 pm
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