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
half of society to pay back
unprecedentedly large debts.
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
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
around 1990, and so forth.
most of the time, you can get richer betting on the rich to
to be movie,
music stars but aren`t anymore. Yet, with the exception
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
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.
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
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
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
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.
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%.
the world made anybody think that the second quartile up
from the bottom was developing more earning capacity?
sent their wives out to work a couple of decades before.
What could they do now to pay bigger mortgage payments in
The second quartile folks weren`t getting
better educated, weren`t getting
more unionized, weren`t facing less
from China, weren`t facing less
competition from immigrants, weren`t getting
married at higher rates so they could better pool their
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.
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
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
institutions were making
huge bets on something that just wasn`t happening—the
lower middle of society getting much better off
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
can`t generate enough high-paying jobs to pay for all this
wait—it just didn`t.
they just haven`t.
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