The root of the national credit problem and associated maladies

Before a disease can be cured, the scope of its root causes must first be established. That you do best by picking your way carefully back in time, starting with whatever symptoms confront you in the present.
The most obvious symptom of things going wrong with the American socio-economic system at this time is the wave of foreclosures and bankruptcies sweeping the country, along with the host of negative economic effects precipitated by that wave, not just presently but, almost certainly, for years into the future.
With regard to these troubles, most people acknowledge that our reliance on debt, as the enabler of an over-exuberant run-up in real estate values, outran the economy's ability to provide enough in earnings to allow people to service such debt in a responsible way. But few ask the next question: was it greed or just basic need that drove Americans to rely so heavily on debt? Was there, in fact, an even deeper level of inescapable drivers behind the surface mess of failed mortgages and worthless securities, more cultural, political and environmental in nature than the financial numbers, alone, indicated? And if there was indeed such a level, could it hold keys to reducing the number, and severity, of boom/bust cycles in the future?
Over the course of the past five years, I began to come up with some ideas about what steps government might take deep within the structural order of the American free enterprise system that would bring not just temporary, but abiding, relief to those who, over the past thirty years, have found themselves steadily falling behind - a plight affecting even those who have been continuously and conscientiously engaged in the work force since first becoming adults, in contravention of everything they were induced to believe by society.
Recently, as we all know, a whole lot of folks who thought they were on the right track to financial security suddenly woke up one day to find themselves in steadily worsening straits, with only a fistful of empty promises to carry them into a wrenchingly uncertain future.
Safe to say, most were betrayed by people whose judgment they had valued above their own.
To some observers, these casualties are only data points in a period of correction; to me, however, they invoke recollections of a far darker sort.
Once, about twenty years ago, in the wake of a nervous collapse brought on by twelve unrelenting years of pressure at the helm of the small manufacturing business I created, I myself became homeless for a little over a year. I know all too well the terrors of plunging into that terrifying state of uncertainty, and the kind of indelible fear it stamps into your soul over time as you struggle daily to keep on keeping up. Some days, it's hard to continue believing in being alive. The residual psychological difficulties persist for years afterward (even up to the present for me). That I - an otherwise disciplined and intelligent person - could suffer such a fate proved to me that it could happen to anyone, given the required turn of unmanageable circumstances.
As far as I'm concerned, those people who casually dismiss the plight of the many now facing similar terrors brought on by the current state of the nation's economy as just another statistical factor in a cyclical correction are either supremely ignorant about life or so lacking in empathy as to be hardly worthy of the sponsorship and protections that this social collective dutifully labors to maintain under their hides and over their heads each day. And why does it do that? In short, so that even they, the indifferent, may be free to enjoy the fruits of general providence in peace and security - fruits made possible by precisely the sort of common concern they see no reason to develop in themselves, even though they are the beneficiaries of it. To call that ironic is putting it kindly.
Based on my own experience, I know that a majority of those now in trouble will inevitably turn, along the way, to the use of some form of credit, believing it might give them a chance to get by in a reasonably dignified fashion until things improve. As a result, many will pass, or will already have passed, the event horizon of the black hole of debt whose interest load has grown so much they have no way of paying it down.
This slow compounding of individual liability, morphing into widespread social damage, should not have been allowed to go on without a decent show of urgency on the part of government to enact vigorous countervailing measures but, sadly, it was allowed to go on and the official reaction when the cracks began to show was too little, too late, for far too many.

When looking for causes behind the exponential growth in the use of credit across the nation, the one thing most often overlooked by analysts (up until the advent of the Occupy Wall Street Movement, at least) is something so elemental to our culture that we tend not to see it for the major driver that it really is. In this, we are much like a host that has lived with its parasitic companion for such a long time that it assumes it to be an axiomatic - and inextricable - component of its own natural reality.
That crucial missed perception is this: A large part of the growth in the indisciminate use of credit is simply a reflexive adaptation by people to INSUPERABLE LEVELS OF DISPARITY imposed upon them at the POINT OF PAY - the point at which the gross profit of companies gets divided up between those who have worked to earn that profit and those who manage the broader architecture of company activities and company payrolls, namely, company executives - drawn out, decade after decade. This inclement transition occurred even as the cost of inescapable expenses,agaist which they could mount only weak consumer pushback - rent, insurance, tuition charges, etc - rose faster than inflation.
Think for a moment; how could it have been different? The under-compensated employees of companies, nationwide - principally those from the middle ranks down - would inevitably look to credit to make up for being so much less generously rewarded than their top-ranking company colleagues. The alternative option was to accept being left so far behind in their standard of living as to be considered downscale by their social contemporaries - something most Americans find unpalatable, and even degrading, to some degree or another. Is it reasonable to blame them for that? From my point of view, the answer is no. From the day we're taught to walk, we're taught to be concerned about falling behind.
Don't be misled: I'm not advocating parity in pay here. It's social equity that interests me. Parity in pay and pay reflective of social equity are totally different concepts. At the heart of my investigation lay the ratios in pay behind the different types of work people perform in the productive complex that offers goods and services in exchange for money within the general economy. This exchange process occurs both as materials move up the escalator of transformation from their origins in the natural world to the outermost reaches of social collectives as finished goods, and in the form of services rendered to create benefit. If we wanted to effect better outcomes in how people were being paid, it was in this chain that we would need to make the changes required to make that happen. The points of opportunity were as numerous as the number of people employed in that chain. If, at each point, some incremental change for the better could be had, the overall effect in the chain, as a whole, would be very large.
As a retired business owner, I know full well that companies beyond a certain size need better paid management positions in order to function in a sustainable fashion while responding to changing market factors in a savvy and timely way. The highest company productivity can only be achieved through an appropriate division of oversight that allows employees at all levels to really focus in on the tasks that fall under their respective enclaves of purview, comfortable in the knowledge that their employment has inbuilt potential for advancement in responsibility and pay, as time goes by.
This kind of symbiosis is fundamental to nature. As a natural phenomenon, it predates human history by hundreds of millions of years. The eco-systems of the world evolved to be full of examples of symbiosis.
When symbioticallyy-conjoined partnerships are healthy and successful, the smaller entity carried by a host benefitting from such an arrangement is called a symbiont - a word rarely used but quite precise in meaning. Symbionts have evolved over time to not imperil the existence of the hosts they depend on, and so they prosper, too.
Regrettably, when one transposes this idea onto the corporate upper class, it seems that a significant subset seems not yet to have reached that sublime level of logical, mutually beneficial co-existence.
The ones I refer to are anything BUT symbionts. If biologists were to look at the erstwhile top executives of a good many corporations (compare WAMU, Bear-Stearns, Wachovia, Lehman Brothers, Merrill Lynch, Countrywide, Enron, Worldcom, Freddie Mac, Fannie Mae, etc.), rather than classing them as human symbionts, they would probably have to settle for the word, "parasite," instead.
Unlike symbionts, biological parasites do not play a net contributive role in the lives of their hosts. Their presence is, first and foremost, an act of calibrated extraction. When the host is weakened by surrounding developments, they either become an added liability to survival or simply move on to the next accommodating option. They are insensate to outside attacks on the vitality of host organisms, continuing to deplete and sometimes even killing them during times of great stress.
Sound like a familiar scenario?
The most puzzling thing to me is how patiently Americans continue to put up with the presence of such financial parasitism in the economic system they've paid so dearly to build.
Nakedly disproportionate diversion of the fruits of the national enterprise has become normal practice; even something the average guy or gal covets.
This attitude toward immoderate acquisition may have been the start of things going out of balance, but it was certainly not the full extent of them. Other events were being put in motion as a direct result.
Contemporaneously, the growing presence in the market of a few people with vastly disproportionate purchasing power caused the cost of certain basic needs like housing and health care to drift more towards the tastes and buying power of the upscale side of the market than the remainder of the American public.
That practice, along with various forms of speculation that attached themselves to those sectors, created a relentless up-pricing trend, lifting the costs of many key commodities far higher than they would have been had the excessively-compensated not been in the mix on the demand side of things. As the years rolled by, the under-compensated were gradually being left behind, greatly amplifying their willingness to catch up by using credit, wherever they could get it; in many cases, regardless of the terms attached.
It is a great irony that even as municipalities, government officials and banks loudly trumpeted the fact that houses were becoming ever more DIFFICULT to afford, free-and-clear, those same people were also touting the growing ease with which another great American necessity - food - could be secured. Chew on that one for a while. Why was it so important that food be kept affordable but housing not? The answer, of course, is that municipalities and banks were making greater amounts of passive income out of home values being higher. The more the values rose, the more easy money these entities stood to earn.
For all too many government officials, job security and career advancement was tied more to the inflow of such revenues than to how well those officials were serving the general public or the Greater Good.
With food, on the other hand, those same officials stood to gain nothing other than public heat from it being more expensive. When it came to food, it was easier for them to see the forest of the Greater Good than with housing, where the trees of more basic self-interest obscured the broader view.
How ironic it is then that the longstanding indifference of the body politic toward the true condition of poorer Americans should now bring us to a place where it is the price of food that is rising while that of housing is steadily tanking. For politicians, the heat is being put to the rear end now. The finger of blame is being pointed at everyone but the family dog but, in reality, if politicians really want to know who is responsible, the mirror in the nearest bathroom should do quite well.

Greatly compounding the negative social effects of the unholy differential described above was the continuing lack of a credible national social safety net, compared to other developed nations, leading people to turn to real estate - almost in desperation - as the financial hedge of ultimate resort against the potential costs of personal misfortune and old age in a highly competitive socio-economic conclave.
In response to the soaring demand for home-ownership over the past three decades, the financial industry sought to overcome the problem of steadily shrinking relative purchasing power of those in the bottom three quintiles, caused by ever-widening disparities in company pay, by engaging in an incremental process of liberalizing qualifying standards for loans and tweaking interest regimens. This wasn't a philanthropic move on the part of banks. In most cases, it was calibrated to allow people to just keep their heads above water, but certainly not to deliver them from debt once and for all - a risky but not unjustifiable business approach. After all, banks aren't social service agencies; they're there to be effective trustees of the money deposited in them, and to do that, they have to make money, not lose it.
In more recent years, the nationwide economic activity generated by loans based on the home equity created by this form of financial brinkmanship was huge; but it could only be sustained if a never-ending line of first-time home buyers stood ready to enter the market at ever higher prices, and since people weren't earning ever higher wages, that could only be accomplished by inventing ever trickier ways to package home loans, one being a type of refinancing that allowed other forms of common debt to be subsumed into mortgages. The earnings of the so-called middle class alone were no longer sufficient for many to make conventional short-term credit payments in addition to mortgage payments each month. Solution? Roll that debt under the time shelter of the mortgage on the home to reduce combined monthly debt service costs. This approach bought time; but time on unpaid principle added interest, in many cases leaving borrowers even worse off over the long run.

Home equity extraction, in turn, was totally dependent on shifting - and often arbitrary - assumptions about what people thought home resale values ought to be at any given point in time. That fuzziness in shared perception was offset by assurances from real estate professionals and government officials that home values would rise inexorably into the forseeable future, guaranteeing sellers a soft place to land in the event they were no longer able to maintain their mortgage obligations. Homeowners, trusting in the advice of a veritable cottage industry of such "experts", saw little reason to stop cashing in their home equity chits for the cash they were progressively more short of as prices rose and the wages of the lower-paid 60% stagnated or even fell. Afterall, if they really got into trouble financially, they could always sell the house for a fat profit, pay off all outstanding debt and walk away with a nice wad of cash at the end of it; at least, that was what they were being told.

Somehow, the bright sparks who dreamed up the general architecture of this liquidity system (a de facto Ponzi scheme) overlooked the two deciding factors upon which the continued viability of such financial leveraging rested - aggregate individual earnings among the growing number of those with riskier loan contracts and the continuing ability of new generations of buyers to enter the market at ever higher price points. For the rule to hold good, median earnings in question had to rise in direct proportion to the rise in median home prices. Why? Because everything depended on there always being a new generation of buyers willing to pay those prices, otherwise the bottom would ultimately fall out of demand and prices would tumble.

In the mad rush to make money in real estate, even seasoned professionals got a serious case of looking through rose-tinted glasses with respect to the financial capabilities of future buyers - this supposedly endless supply of upwardly mobile people, absolutely itching to get into first, second and third mortgages. No one seemed to be alarmed that the earnings of those who would be first time buyers - basically, middle class earners -hadn't budged since 2001, even as home values continued to climb exponentially.
A key factor to note here is that the rise in values was justified by general blind faith in continuing economic growth which, in turn, was becoming increasingly dependent upon the extraction of said equity for the liquidity that was needed to fuel such economic growth.
What you had here was one hypothetical (home prices) being dependent on another hypothetical (expanding local economic activity) that was reciprocally dependent on the first hypothetical (home prices), with both being dependent on the stagnant or diminishing wages of a sinking middle class to keep the wheels of this co-dependent relationship turning.
Separated from the cash they were borrowing against the imagined value of their homes, a fair number of those mortgagees were genuinely poor, by American middle-class standards.
Not surprisingly, a disproportionate number of those poor were black and Latinos. In North Carolina, to mention but one state, subprime mortgages constituted half of all mortgages made to blacks while the number for whites was around one in five. As a result, a higher proportion of black owners than whites are losing their homes to foreclosure in the credit correction that has ensued - another manifestation of America's longstanding lack of social equity between races.
Politicians of both major parties might note that one of the principal reasons the Republicans lost the statewide vote for the presidential election in North Carolina (and with it, quite possibly, the national race for the White House, since North Carolina was a key state in how the final stages of the race played out) was the anger of black voters at this disproportionality of hardship.
In California, a similar situation is unfolding with respect to that state's latino population.
Compounding the severity of this home loan problem and unnoticed by most, was the fact that the national level of ambient liquidity was dropping, much like an aquifer being drawn down by too many dispersed extractions, large and small. The process was almost too slow to notice, but profits and earnings across the nation were becoming harder to derive and the first to suffer because of it were lower-end wage earners.
The principal causes were many: the trade imbalance, combined with foreign remittances; the movement of cash from the general economy into private sector speculation instruments like currency trading and hedge funds; ballooning government budgets; soaring private-sector health insurance costs; rising levels of imported fuels; massive investment in offshore business operations; domestic funding of charities operating outside America and the constant net outgo of military actions the nation is engaged in (more than the rest of the world combined); all were significant contributors. This combined drain drew down the amount of money left available for general circulation throughout the domestic economic system. The burden of that pinch was transferred onto the backs of those who had the least say in how company profits were being distributed - overwhelmingly, lower-ranked workers, many of whose jobs were being exported to offshore locales, or taken over by machine technology, so that lower cost profiles on the production end of things could be achieved and shareholders and company executives could be shielded from loss. Ironically, in so doing, those same executives were undercutting the very mortgage-paying, home-equity-using sector that was keeping their side interests in real estate and other business viable prior to the collapse of the housing bubble.

Party-pooping, economic under-achievers, like myself, lacking in the more transcendent skills of financial visualization, predicted that too many straws were being piled on the back of the camel represented by the lower working class paycheck for the credit system to hold up. But then, I dropped out of college to follow my interests in music, so who was I to question the experts? Mere dilletantes who never went further than high school should not presume to question the superior insights of proven pundits and the exceedingly well-degreed. Why, on Earth, should any serious financial player give the slightest credence to the likes of amateur alarmists (such as I was at that time) whose thinking on money was so obviously limited to the kind of outdated, pedantic cash consciousness our parents taught us and their parents taught them? Now this little rant may seem peevish to the reader. In truth, but I was among those who subscribed to the preceding assumption until, at length, I began to wonder, could they all be wrong? But then, who was I to have an opinion on something so weighty? Think of it as an inferiority complex, if you like.
On the other hand, one might keep in mind that Bill Gates and Richard Branson don't have college degrees either and if they could manage to come through the past decade pretty well, maybe a college degree isn't absolutely essential to having a good nose for how things actually work.
The blunt truth of it is that money issues - even really big money issues - are remarkably less complicated than academia would like their tuition-burdened students to imagine. 99% of the best kind of money management amounts to nothing more exciting than good bookkeeping, reading the newspapers, conservative risk assessment, staying ahead of developments and exercising financial self-discipline.
That being the unvarnished truth, the spike in ARM's during the years since 2001, and the bundling and securitization thereof, was basically a reckless last-ditch attempt to make an increasingly unstable socio-economic system's books continue to look rosy to investors as the credit industry scraped for options that would allow it to go on doing business with a public whose earnings were incrementally being outpaced by the life costs they were obliged to meet. Ironically, this imbalance was actually being stoked by the credit industry itself, owing to the liquidity it was pumping into the demand side of the economy. So, instead of prices dropping along with the drop in the aggregate measure of real personal means, as they should have, they were rising, especially in real estate where successful players stood to make a tidy bundle.

Any fair-minded person is thus forced to conclude that the subprime mortgage melt-down - far from being attributable to the imprudence of ordinary people (though many clearly were imprudent) - is, in fact, the logical end result of decades of people adapting to endemic inequity in a cutthroat economy - inequity spawned, in great part, by cultivated institutional biases in company pay practices in a country where everything short of breathing costs money and personal cache is king.
Since the Age of Greed was first declared sometime back in the 1980's up until about the middle of 2008, the mainstream media indulged a slavish expurgation of executive self-aggrandizement, on the one hand, while showing little interest in the declining fortunes of those in the general workforce, on the other. Over the course of the last three decades, this growing dichotomy of respect fed, by increments, the huge disproportionality in personal status and pay that we are still stuck with - and plagued by - today. (This held true until around 2009 when journalists and commentators with a different and less diffident approach toward corporate royalty began to be heard in major newspapers).
Somehow, in a classic case of conflict of interest to society, the absolute winners in the inner circles of this dichotomized world contrived to sit on one another's executive compensation boards - a practice that remains the norm, economic crisis, notwithstanding. As if to divert attention away from the systemic erosion of the sociological integrity of the nation over the past two decades, corporate style, the corporate image and the primacy of the executive classes gradually became the stock and trade of a large section of the entertainment and print industries of this country. Most of those under fifty have known no other cultural value system.
Stridently resisting calls for greater financial inclusiveness, corporate spokespeople rushed to defend the concept of winner-take-all whenever challenged. Among the countervailing tactics employed by them were sweeping assertions that libertarian market principles are always superior (compare that with, "We're too big to let fail so, for the sake of your own good, kindly bail us out if we happen to bomb").
Another tactic of market boosters was to publicly mock those pleading caution in the face of apparently unstoppable change as foot-dragging luddites. And, of course, let's not forget the usual dark warnings against socialism's evil interference with the Free World (this didn't seem to stop some pretty big capitalists from going to Congress, hat in hand, for some pretty big socialist help when they were undone by a one-two combination punch of the tanking economy and their own bad choices).
In effect, what the neoconservative position amounted to was that accommodating market imperatives was of far greater importance to this country's place in the world than repairing its broken social system (now dragging all of us toward the brink of national - if not global - financial disaster).
It took the insuperable troubles of their core constituency to demonstrate that neo-libertarian economics was bogus as a catch-all theory and that the market did indeed have some very critical interests that it was fitting for government to both protect and regulate.

And yet, even today, after all that has transpired, between them, the image makers and the paymasters continue to leverage the disproportionate power they have over who gets what; and, true to modern American culture, the deciders unfailingly bias the split squarely in their own favor, not because they have some empirical metric that proves the worth of themselves to the companies they work for, but rather, because they wouldn't be seen dead making less than so-and-so; simple as that. In the end, like it or not, for the few at the top, the vaunted Free Market is little more than a gonad-driven playpen. To the worst of the offenders in question, the duties of top corporate management are less of a sacred trust on behalf of all who have interests in the company than an opportunity to fiercely prosecute a private quest to win at THE GAME before a gallery of their peers; and the point of the game - any game, afterall - is to dominate the play, rule the field and win, is it not?
In the process, some almost incomprehensibly wealthy winners have been made. The average 2007 pay for the nation's 400 highest-paid was $278 million. And while they've been doing so terribly well, tens of millions of others have seen their own prospects decline, as a direct result - most disturbingly, young adults who, instead of aspiring to having a house and kids when they talk about "getting ahead," are actually thinking more along the lines of being paid just enough to stay solvent and ensconced in a cramped little rental somewhere.
There's a deeply insidious social trend lurking behind this last truth in that, while a minority of more affluent young adults lucky enough not to be encumbered in pocket enjoy unfettered access to the prospect of having and raising children in the home and environment of their choice with a reasonable sense of certainty about being able to pay for that in a responsible manner, the rest of their less well-set contemporaries do not. Other countervailing considerations may exist for the young rich but money - the most potentially significant - is not one of them.
In the past, the lack of birth control options we now take for granted tended to wipe out fertility differences between rich and poor. The wages of lust were children, regardless of financial degree, and lust would have its way. Children, born rich or poor, just happened (brought by the stork, no doubt). Today, it's a different story. Access to contraception is relatively easy and the overwhelming majority of the sexually active who don't wish to segue on to having children, because they're intimidated by the financial considerations of doing so, are able to defer pregnancy, often indefinitely, until the option slips away forever. Hardly surprising, given the known costs involved in responsible parenting and the claims made on personal time by the work week of the average Jack and Jill trying to make it on something below the median income.
The sad thing is that many ache to have at least one child, if they could only summon the sense of financial security needed to take the plunge; but, these days, for many, having even one child is too daunting a financial risk.
Some argue that it is good that those with financial acumen are getting the genetic edge over those who are less inclined that way. Their contention is that, by this method, we are developing a society with the genes to help future generations become more acquisitively successful in the world (as if we weren't greedy enough already).
If this premise is indeed valid, what happened to the genes of those who were so successful in the investment banking sector not so long ago but who have ended up being so catastrophically unsuccessful of late? It's not like their genes suddenly switched off one fateful day in the fall of 2007. Obviously, genes have little to do with it. Something else was at play. Could it, by chance, have had a whole lot more to do with something far more pedestrian, like luck, timing, access to capital, geography or family connections, perhaps? Hmmmm.....So much for breeding a nation of Sam Waltons, Warren Buffets, Steve Jobses and T. Boone Pickenses.
As I look around the world to those who have done much good for society, I see many who came from the humblest financial and social circumstances. For most of them, their dedication to the public good is inseparable from their experiences in humble beginnings; and so I shudder to think what this country would be like if all we had to choose from in leaders were those who had come from wealthier backgrounds - people with no personal experience of real hardship - while the bulk of those from hard-up families were left to slide off into genetic extinction.
There's a form of passive eugenics at work in that scenario that is truly troubling and, I'm convinced, deeply malign and the only way I can see of tackling it is by finding fiscally efficient ways to get more money circulating lower down in the ranks of society; ways that engage the best of both public and private sectors. I dare say that those at the top would lament not having it a lot less than those at the bottom would welcome getting it and if we, the People, have to be the authors of that benign transfer, let it us act to make it so. The relief created would outweigh the grief imposed, resulting in a net gain for the Greater Good. Certainly, it would be better than just sitting on our thumbs and hoping for the best while society slides down a rat-hole.
Though it may not yet be clear to many of the experts, it is clear to me: continuing to give extra consideration to the inordinately rich - and the agendas that their wealth persuades government to allow them to impose on the rest of us - is something we can ill afford to be clueless, blithe or passive about.