The Diversity Recession: What Was The Financial (And Political) Establishment Thinking?


The weird thing about the

tumbling of the latest financial house of cards
is
that the cornerstone, such as it was, was confidence in
the increasing ability of the
bottom
half of society
to pay back
unprecedentedly large debts.

Underlying these

vast pyramids of debt
was, all too often, a promise by a

single mother
who works at the DMV or a drywaller from
Chiapas to (following

a brief teaser period
) make mortgage payments of, say,
$3750 per month for the next several decades.

In recent times, investors have typically
gotten rich in our society by betting on the rich to get
richer. And most of the time, that`s what happens: the rich
get richer. Every so often, however, we have a

meltdown
because,
during the
bubble
, investors temporarily overestimated the rate at
which the rich will get richer—e.g.,

Silicon Valley in 2000
, the

Texas oil patch in 1982
, commercial real estate
developers

around 1990
, and so forth.

But,
most of the time, you can get richer betting on the rich to
get richer.

For example,
Southern California is full of people who used
to be movie,
TV, or
pop
music stars
but aren`t anymore. Yet, with the exception
of
addicts
who blew all their money on drugs, you almost
never hear of ex-stars having to undergo the humiliation of
having to get real, boring, non-glamorous jobs to pay the
rent. Among ex-stars who stay off drugs, you find a lot of
them during the longer and longer periods
"between projects"
coaching their kids` soccer teams, taking yoga classes,
noodling on screenplays they never finish, walking their
dogs, and just generally enjoying pleasant lives without
bosses or jobs.

A big
reason for them not running out of rent money: back when
they were making lots of money, they didn`t rent, they
bought—and in very expensive neighborhoods.

One of the things everybody does when he
becomes a star is to
buy a
house
in Beverly Hills. And then
when you aren`t a star anymore and finally run out of money,
rather than get a job, you sell your Beverly Hills house,
which has appreciated dramatically, to somebody who is
currently a star, and you buy a cheaper house in Santa
Monica and live off the difference while you pretend you
still have a career in the industry.

Then, after a decade or two of going out
to lunch at nice restaurants you are running out of money
again. So you sell your
Santa Monica
house to a newly rich
person for a

lot more than you paid for it
and buy a cheaper house in
Encino. Lather, rinse, and repeat.

This strategy works because the rich
have been getting
richer.

What`s totally strange about the

mortgage meltdown,
however, is that the bet, at its
base, was on the more marginal members of society to be able
to pay off their inflated debts—a bet on the
pretty-close-to-poor to get pretty-close-to-rich.

And that made

no sense at all.

The
homeownership rate had been stuck at about 64% since the
late 1960s. The Clinton and Bush administrations pushed hard
to get it up to 68-69%.

What in
the world made anybody think that the second quartile up
from the bottom was developing more earning capacity?

They`d
sent their wives out to work a couple of decades before.
What could they do now to pay bigger mortgage payments in
the future?

The second quartile folks weren`t getting
better educated, weren`t getting

more unionized
, weren`t facing less
competition
from China
, weren`t facing less

competition from immigrants
, weren`t getting

married at higher rates
so they could better pool their
earning capacity.

So what
trend suggested they were now developing more capacity to
pay back huge debts than before?

Let me try to vaguely quantify how weird
this is. The LA Times regularly reports on real
estate dealings of celebrities. We regularly read that
somebody whom you sort-of remember from some sit-com in 1978
has sold his home for $2 million. Bigger stars frequently
sell homes in the $5 to $10 million dollar range. The real
superstars` showpiece mansion estates go for

maybe $12 to $25 million.

So, let`s say that big stars` homes in the
Hollywood Hills go for a median of $11 or 12 million. In the
spring of 2006, the median sales price of all homes (houses
and condos) in the Los Angeles region, an urban area of
about 5 million people that includes
vast tracts of Nowheresville
in South Central and the
San Fernando Valley, was
$580,000
. (It`s now just under $400,000). So the ratio
of home prices for stars to nobodies was about 20 to 1.

Now, 20
to 1 sounds like a big difference. But most measures of
ability to pay would favor stars over nobodies by much more
than 20 to 1.


Consider net worth outside of home equity. I would guess
that most people who take out a $10 million mortgage might
have, say, $10 million in stocks, bonds, CDs, art, vintage
cars, and other assets, for a 1 to 1 ratio. What was the net
worth of the median buyer of a $580,000 home with almost
zero down payment in LA in 2006? $58,000? Maybe not that
much when you subtract the car loans and outstanding credit
card debt.

If the
median net worth was $58,000, that`s a ten to 1 ratio
between mortgage and net worth (heck, there were buyers in
2006 and 2007 who had a net worth consisting of a monthly
bus pass and some lottery tickets, so their ratio was close
to infinite) vs. 1 to 1 for the rich folks.

Obviously, I just made most of these
numbers up. But I know that I at least got the sign right.
So how did people not notice that
financial
institution
s were making

huge bets
on something that just wasn`t happening—the

lower middle of society
getting much better off
economically?

(And don`t
tell me
about how much cheaper

DVD players have gotten.
I`m not talking about

standard of living
, I`m talking about ability to pay
debt obligations.)

That level of stupidity requires a

bipartisan consensus
on what you aren`t allowed to talk
about in public.

Are you some kind of Communist who is
saying that America“s free enterprise system
can`t generate enough high-paying jobs to pay for all this
debt?

Are you
some kind of racist who is saying that America`s

increasingly diverse population
won`t
pay
back their debts
?

Oh,
wait—it just didn`t.

And
they just haven`t.

Hmmm.


[Steve Sailer (
email
him) is founder of the Human Biodiversity Institute and

movie critic

for

The American Conservative
.
His website


www.iSteve.blogspot.com

features his daily blog.]