Happy Bastille Day! liberté, égalité, fraternité

Jamie Dimon, Stephen Schwarzman, Richard Fairbank, Lloyd Blankfein, and Pete Peterson, Step Right Up!

Martin Wolf has a piece in the Financial Times noting the shocking statistic that 58% of all income gains in the United States in the three decades between 1976 and 2007 went to the top 1% of the income distribution (h/t Naked Capitalism).  Standing alone, that fact is pretty damning, but the reason it’s really bad, lies in the supposed “solution” to the problem:

In the US, soaring inequality and stagnant real incomes have long threatened this deal. Thus, Prof Rajan notes that “of every dollar of real income growth that was generated between 1976 and 2007, 58 cents went to the top 1 per cent of households”. This is surely stunning.

“The political response to rising inequality … was to expand lending to households, especially low-income ones.” This led to the financial breakdown. As Prof Rajan notes: “[the financial sector’s] failings in the recent crisis include distorted incentives, hubris, envy, misplaced faith and herd behaviour. But the government helped make those risks look more attractive than they should have been and kept the market from exercising discipline.”

In other words, the “solution” to wage stagnation among the lower and middle classes was to encourage lifestyle leverage, or borrowing so you could continue to acquire the accoutrements of a middle-class life, whether houses, cars, consumer items, or higher education.  Talk about a cure that’s even worse than the disease!  So it’s no surprise that starting around 1980, levels of household debt in the economy really started to take off, growing to more than 120% by 2007.

Now, I don’t mind inequality per se. Individuals that come up with great ideas, particularly those who follow-up their ideas with great execution deserve big rewards.  Bill Gates, Sergey Brin, Larry Page, and Steve Jobs, for example.  These guys actually create[d] useful products that enhance productivity and make us all better off.  They deserve their money!  But over the past three decades more and more of the profits of the economy have been funneled from  real product entrepreneurs to the paper “entrepreneurs,” especially in the finance sector.

As Robert Reich noted back in April, “The Paper Entrepreneurs Are Winning Over the Product Entrepreneurs (A Thirty Year Retrospective):”

The paper entrepreneurs are winning out over the product entrepreneurs.

Paper entrepreneurs — trained in law, finance, accountancy — manipulate complex systems of rules and numbers. They innovate by using the systems in novel ways: establishing joint ventures, consortiums, holding companies, mutual funds; finding companies to acquire, “white knights” to be acquired by, commodity futures to invest in, tax shelters to hide in; engaging in proxy fights, tender offers, antitrust suits, stock splits, spinoffs, divestitures; buying and selling notes, bonds, convertible debentures, sinking-fund debentures; obtaining government subsidies, loan guarantees, tax breaks, contracts, licenses, quottas, price supports, bailouts; going private, going public, going bankrupt.

Product entrepreneurs — engineers, inventors, production managers, marketers, owners of small businesses — produce goods and services people want. They innovate by creating better products at less cost.

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Yet paper entrepreneurialism is on the rise. It dominates the leadership of our largest corporations. It guides government departments, legislatures, agencies, public utilities. It stimulates platoons of lawyers and financiers.

It preoccupies some of our best minds, attracts some of our most talented graduates, embodies some of our most creative and original thinking, spurs some of our most energetic wheeling and dealing. Paper entrepreneurialism also promises the best financial rewards, the highest social status.

The ratio of paper entrepreneurialism to product entrepreneurialism in our economy — measured by total earnings flowing to each, or by the amoung of news in business journals and newspapers typically devoted to each — is about 2 to 1.

That’s not how it should be.  Finance has a place in the economy, but that place should be nothing more or less, than facilitating movement of capital from savers to product entrepreneurs.  Once finance became the primary means for formerly middle class people to continue living like they were middle class by taking on ever escalating amounts of leverage, aka debt, finance became predatory, extractive, and destructive to the economy.  And, once that happened, the returns to finance dwarfed returns to the real economy. Take a look at when financial sector profits began to diverge from profits in the real economy – just about the time the economy recovered from the 1982 recession.

Our current “Great Recession” was our best chance to rein these fuckers in.  Perhaps through nationalizing the banks, or simply letting them fail en masse and taking a true shared depression.  But that didn’t happen.  Again, back to Reich:

Americans are keeping their jobs or finding new ones only by accepting lower wages.

Meanwhile, a much smaller group of Americans’ earnings are back in the stratosphere: Wall Street traders and executives, hedge-fund and private-equity fund managers, and top corporate executives. As hiring has picked up on the Street, fat salaries are reappearing. Richard Stein, president of Global Sage, an executive search firm, tells the New York Times corporate clients have offered compensation packages of more than $1 million annually to a dozen candidates in just the last few weeks.

We’re back to the same ominous trend as before the Great Recession: a larger and larger share of total income going to the very top while the vast middle class continues to lose ground.

It’s not inequality.  It’s that the financiers are creaming off too much…from everyone.  They have households over a barrel with debt, and they’re destroying the “product entrepreneurs.”  As Michael Hudson puts it, “From the financial sector’s vantage point, the economy is to be managed to preserve bank liquidity, rather than the financial system run to serve the economy.”  They’re winning, perhaps they’ve already won.

Unless you want to head out and start pushing a guillotine down Wall Street (not a bad idea, BTW), the best tool you have at your disposal is to simply not play their game. They levered you up, and levered themselves on the assumption that you would make every effort to pay back those jackals.

To paraphrase William F. Buckley, the time has come to stand athwart the bankster takeover of the economy and yell “Stop!“

Print, Baby, Print!

The Angry Future Expat Heads Out To Buy A Six Pack In Inflationista Fantasyland

The big question for those of you with money to invest is just what type of “flation” is coming down the pipe.  Will it be inflation, or OMG!! hyperinflation, or are we heading into a period of secular credit revulsion and a deflationary debt spiral that will last for decades.  No one really knows.  You can always reverse deflation just by printing a lot of money and giving it to people.  And you can always reverse inflation, just by – well bringing on a recession and issuing a new currency.

Even Weimer Germany only had hyperinflation for about 18 months.  And since Zimbabawe shelved it’s own currency, they’ve been in deflation.  Ultimately, what will happen is all political.  Do we have the intelligence and political will to break out of deflation?  Do we have to intelligence and political will to get some inflation, but not too much?  Meh, beats the hell out of me.

All I know is that I look around and I see nothing indicating any willingness to allow even trivial amounts of wage inflation, which, as I’ve said many times, is necessary to break out of the deflationary trap we find ourselves in.  So, I’ve thrown in my lot with the deflationists.  Pretty sure I’m right, but I certainly could be wrong, and if you think I am, by all means go out there an buy the most expensive house you can with the biggest most levered mortgage possible.  Run up your credit cards, take out as many student loans as possible, buy a new car – hell, borrow money from payday lenders.

But let’s talk for a minute or two about why this matters.  What’s wrong with deflation?  What’s wrong with inflation?  Why it is that every time I say we need to print money someone comes by and says, “inflation will kill us all, haven’t you ever heard of the Nazis!?!?!”  In the most obvious sense, inflation and deflation are flip sides of the same coin.  In one case – too much money chasing too few goods leads to price increases.  In the other, the reverse – too little money, chasing “too many” goods leads to price decreases.  But with both inflation and deflation, what really happens is that incentives relating to investment, savings, and consumption decisions get all fucked up, and it causes markets to break down.  That’s the problem.

John Malkin over at the American Enterprise Institute makes the case for the Rising Threat of Deflation:

As we enter the second half of 2010–the “postcrisis” year–while markets have been obsessed with Europe’s debt crisis, they have failed to notice potentially more ominous developments. The United States and Europe are heading toward–and Japan already suffers from–deflation, a classic prolonger of crises that boosts the real burden of debt and crushes profit margins.

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[T]he Bank of Japan, slow to ease after the real estate bubble burst in 1990, has pre-sided over two decades of disinflation that has become outright deflation. Japan’s nominal GDP, as of the first quarter of this year, at ¥480 trillion has dropped by an extraordinary 7 percent over the past two years because of a combination of outright deflation and low-to-negative growth. Perhaps even more dismaying, in 2010, Japan’s nominal GDP is equal to its 1993 GDP.

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Financial crises are deflationary because they create a rise in the demand for cash that depresses aggregate demand at a time when substantial excess capacity exists. The excess capacity is created during the run-up to the crisis, where underpricing of risk cuts the cost of capital and leads to substantial increases in the capital stock.

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In fact, banks have virtually ceased to function as financial intermediaries since 2008, preferring to use the zero cost of money provided by the Fed to finance purchases of Treasury securities instead of supplying loans to households and small businesses. After a financial crisis, banks become much more risk averse, as is manifest in their willingness to lend only to the government instead of to households and businesses. That development is deflationary because it means that a sharp boost in the monetary base engineered by the Fed does not translate into faster monetary growth at a time when the precautionary demand for money has been boosted by elevated uncertainty.

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There is a bigger risk that deflation will intensify sharply because once the price level actually starts to fall, the demand for money will be further enhanced. A deflationary spiral–a self-reinforcing, accelerating drop in the price level–can result. This is because a falling price level means that cash “earns interest” since it enhances the purchasing power of otherwise sterile cash assets that pay zero interest, just as interest on a bond adds to its value in terms of its ability to be used to buy goods and services. That is why deflation drives down nominal (market) interest rates just as inflation drives them up. The “real” return on cash rises as inflation falls, thereby further boosting the excess demand for money and, in turn, exacerbating deflationary pressure. The fact that deflationary real returns on cash are not taxed further exacerbates deflationary pressure by enhancing the demand for cash.

The piece is worth reading in full.  As John points out, the classic problem in deflation is that it increases the returns to cash, i.e. you can stuff cash in your mattress and have it earn “interest” – so people stop buying “stuff” and stop loaning it to financial intermediaries to lend or invest, and as wages decline and businesses fail, pre-existing debt obligations increase in real terms.  So, as we cascade down the deflationary spiral, expect to see more stories like this:

NEW YORK (CNNMoney.com) — Debt collectors are getting desperate and dirty.

Harassing phone calls, abusive language and physical violence are becoming a bigger part of business as debt collectors struggle to round up money from people who don’t have it.

“The American consumer is really hurting and collectors are having to fight harder to get money,” said Robert Andrews, a senior analyst specializing in the debt industry at research firm IBISWorld.

Complaints of harassment by debt collectors surged 50% to 67,550 in 2009, according to the Federal Trade Commission. And they are on track to jump 13% this year, based on the number of FTC complaints filed in the first six months.

As I’ve pointed out, paying down debt is itself a deflationary act, and wage garnishments are the equivalent of further wage deflation.  I’ll keep banging this drum until, well, until I stop, but what we need to do to break out of this is to print some money and give it to people to pay off their pre-existing debts.  I mean, hell, even Libertarians who believe in things like the “sanctity of contract” agree.

Print, Baby Print!

It’s The End Of The World As We Know It, And I Feel Fine

Well, maybe not fine, since the global economy is completely, totally, and irredeemably fucked (only a household debt jubilee can save us!).  As we’ve been saying for a while around here, the future holds two decades, or more!, of deflation, defaults, bankruptcy, sovereign restructuring their social program obligations (Note that in the lingo of dominant creditor class, this is called “austerity” instead of “default” because the people they’re fucking are poor and middle class).  But let’s start with a comment from the Economist magazine:

The idea that using borrowed money to buy assets is the smart road to riches might lose currency, changing attitudes to home ownership as well as to parts of the finance sector such as private equity.

This special report will argue that, for the developed world, the debt-financed model has reached its limit. Most of the options for dealing with the debt overhang are unpalatable. As has already been seen in Greece and Ireland, each government will have to find its own way of reducing the burden. The battle between borrowers and creditors may be the defining struggle of the next generation.

Everyone get that? Let me just repeat that, “the defining struggle of the next generation.”  This is absolutely true.  The creditors don’t want to accept less that full repayment, and the debtors know that there is no fucking way in hell that they will ever be able to repay it.  So, what happens?  Well, the banksters trundle the world down the Road to Neoserfdom (read the whole thing):

On June 3, the World Bank reiterated the New Austerity doctrine, as if it were a new discovery: The way to prosperity is via austerity. “Rich counties can help developing economies grow faster by rapidly cutting government spending or raising taxes.” The New Fiscal Conservatism aims to corral all countries to scale back social spending in order to “stabilize” economies by a balanced budget. This is to be achieved by impoverishing labor, slashing wages, reducing social spending and rolling back the clock to the good old class war as it flourished before the Progressive Era.

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Somebody must take a loss on the economy’s bad loans – and bankers want the economy to take the loss, to “save the financial system.” From the financial sector’s vantage point, the economy is to be managed to preserve bank liquidity, rather than the financial system run to serve the economy. Government social spending (on everything apart from bank bailouts and financial subsidies) and disposable personal income are to be cut back to keep the debt overhead from being written down. Corporate cash flow is to be used to pay creditors, not employ more labor and make long-term capital investment.

The economy is to be sacrificed to subsidize the fantasy that debts can be paid, if only banks can be “made whole” to begin lending again – that is, to resume loading the economy down with even more debt, causing yet more intrusive debt deflation.

Pretty much right.  And the result?  First, John Hussman:

In short, my concerns about the economy and financial markets are escalating quickly. Given the already vulnerable condition of the U.S. economy, a second phase of weakness would most likely contribute to already troubling levels of mortgage delinquency and foreclosure, and could be expected to push the unemployment rate toward 12%. It is not useful to rule out unfavorable outcomes simply because they seem unpleasant or unthinkable. It is also not useful to place superstitious hope in the Fed and the Treasury to fix the consequences of irresponsible lending without any ill effect. In the coming quarters, remember that every time you hear an incomprehensibly large bailout commitment from government, it will equate to an unconscionably large extraction of public resources, possibly through overt taxation, but more likely through the long-term destruction of purchasing power.

I sincerely doubt, that we are going to a “long-term destruction of purchasing power,” unless he means that people won’t have any fucking money, and therefore can’t buy anything, but he’s right that we’re about to head into the biggest leg down yet.  Not to be outdone, however, is Paul Krugman:

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

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[B}oth the United States and Europe are well on their way toward Japan-style deflationary traps.

In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.

Now look, this is all playing out very much as we thought it would over here at AFEP, but that doesn't make it good.  Let's put what's happening in bullet point form as it is my preferred presentation method.

• We (the "citizens") can't pay off our mortgage, credit card, car, student loan, and other debt;
• The Government takes our tax dollars to make the banks and other creditors whole on the loans we can't afford to pay off;
• The Government then raises our taxes (not yet, but probably will) and cuts our social safety net to make up for the cost of making the banks whole;
• We (the "citizens") suffer a massive recession and severe increases in unemployment;
• We (the "citizens") - now because we don't have jobs or income - can't pay off even more mortgage, credit card, car, student loan, and other debt;
• Rinse, repeat, all the way down.

Of course, the way to cut off the cycle is to have the Government intervene at step one, and eliminate, or force a major write down of household debt, but, hey banks are in control of the government, and that might mean they would lose a few percentage points (or optimally, a lot of percentage points) to inflation.  And we can't have that.

So, crack open that bottle of tequila you've been saving for a special occasion because the great unwind is here.

Maybe the debt will go away in a few decades, or if we all stop paying, a little sooner, and the economy can begin to recover.  But I wouldn't get my hopes up.

Central Bankers Say “No” To Inflation. AFEP Says, “After 20 Years Of Debt-Backed Asset Inflation, What’s A Little Wage Inflation?”

To any of our new readers that may not know, we like inflation.  Now, we don’t really enjoy paying more for “stuff,” but the inflation we’re looking for is necessary to 1) reduce unemployment, and much, much, much more importantly 2) reduce real debt levels by pushing up wages. See, for example, here, here, here, and here.  That, by the way, is the debt that is killing the economy in the United States and around the world (causing the unemployment!), see, for example, here, here, and here.

When you have levels of private credit market debt relative to GDP that look like this:

And household debt relative to income that looks like this:

You can pass stimulus measures from now until end of time, and you can print money and give it banks to speculate in government debt and commodities, and it won’t do a goddamn thing to fix the underlying problem.  Why, you ask?  Because the banks have few opportunities to lend to credit worthy borrowers (that actually want to borrow), i.e. people and businesses that are not already drowning in debt (and that have customers not drowning in debt).  And the government can spend, but the stimulus leaks back out of the economy as payments on this massive debt overhang.

So, we need to get rid of debt.  The best way to get rid of debt is to simply not take it on in the first place.  Oops, that ship sailed.  The second best way to get rid of debt is to simply get rid of it, bankruptcy, restructure and write off 75%, forgiveness, etc.  Oops, student loans aren’t dischargeable, and even for other types of loans, the debt persists (really, forever) in the secondary and tertiary collection markets.  So, even if it’s “written off” it will jump up to bite you in a few years, or a few decades.  Oh, and you can’t get a job with bad credit, sooo, sooo, sooorrry.

Which leaves wage inflation.  Wage inflation works because it lowers the real value of your debt as your income goes up.  But alas, we have 10% unemployment (actually more like 20%), underfunded boomers who are refusing to retire, massive wage arbitrage due to outsourcing, weak labor laws and unions (except public sector unions – ironically right where we don’t want strong unions), and a host of other factors that are pushing wages down, rather than up.

So in the face of all this deflationary wage pressure what do the Central Bankers say?  Well, according to the Economist Magazine, they say FUCK YOU!!!

“Deflation is not a lasting threat,” wrote Arminio Fraga, a former president of Brazil’s central bank. “The more interesting question is whether they can manage to keep inflation down over time under the regime of fiscal irresponsibility now prevailing almost everywhere.”

No, the more interesting question is whether 20% of the population of the United States can keep from starving to death as deflation takes stronger hold of the economy, and the government decides to cut back on its social spending.

Creating more inflation is harder than it sounds—even if rich-world governments were tempted to try, as a solution to their fiscal problems. It requires aggregate demand to return to, and exceed, potential output.

No fucking shit!  Anyone here think we’re near our potential output (other than Eugene Fama of course)?  Anyone, anyone?

Monetarists downplay the output gap and focus instead on the vast amount of money that has been created as central banks buy bonds or extend loans to banks. They worry that this money, which today is largely being hoarded by the financial industry, will eventually be loaned out into the real economy, prompting prices to rise.

Loaned out?  To whom exactly?  And, anyway, isn’t that money being hoarded by the banks so they can cover the massive defaults on real estate seconds, credit cards, car loans, and business loans?  BTW, it is.

The latest crisis has demonstrated that price stability is no guarantee of financial and economic stability—indeed, a narrow obsession with prices may have led central bankers to neglect asset bubbles and the condition of the banks. Yet in practice price stability has not been dislodged from the centre of central banks’ attention. If anything, some seem anxious to unwind their quantitative easing and normalise interest rates despite the prevalent deflationary pressure.

Heckuva job, guys.  Keep in mind that this is the same crew that in the preceding two decades shoved easy money on the banks and other finance players allowing asset inflation (not wage inflation, natch) to run wild. They even had a name for it – The Greenspan Put:

“Put” refers to a put option in which the buyer acquires the right to sell at a pre-agreed price if prices drop. During this period, when a crisis arose, the Fed came to the rescue by significantly lowering the Fed Funds rate, often resulting in a negative real yield. In essence, the Fed pumped liquidity back into the market to avert further deterioration. The Fed did so after the 1987 stock market crash, the Gulf War, the Mexican crisis, the Asian crisis, the LTCM debacle, Y2K, the burst of the internet bubble, and the 9/11 attacks.  The Fed’s pattern of providing ample liquidity resulted in the investor perception of put protection on asset prices. Investors increasingly believed that when things go bad, the Fed would step in and inject liquidity until the problem got better. Invariably, the Fed did so each time, and the perception became firmly embedded in asset pricing in the form of higher valuation, narrower credit spreads, and excess risk taking.

This easy money found its way into the pockets of real people by way of mortgages, student loans, credit cards, car loans, etc.  In fact, throughout the 90s and the 00s we had tons of money to play with, it just wasn’t money that was earned in the form of wages.  Hence the problem — too much debt, and too little income. Given that, you can reduce the amount of debt (Jubilee!), or you can increase income (wage inflation!), but alas, our betters seem content to simply let things be.  Allowing the debt to persist for, well, forever, and squelching any wage inflation in its cradle.

Who knows, maybe we will see inflation.  I know that plenty of people are worried and/or excited at the prospect, but we here at AFEP just don’t see it happening.  That why AFEP says, “do as we do and declare your own personal Jubilee year!”  If enough of us default maybe we’ll get the real jubilee** that the economy needs.

And if not, oh well.  It’s a large and exciting world with plenty of places your creditors can’t find you.

Update:

**Note that the AFEP version of inflation (printing money and giving it to people to pay off their debt) is a form of jubilee when the traditional transition mechanism from money printing to wage inflation breaks down – as, for example, in the current economic environment.

Also, the always excellent Medicinesux has a 6-point plan for fleeing the country in a comment over at Hardknocks’ and Angel’s place.  I’m taking the liberty of reproducing here (hope nobody minds!)

I am quite perplexed why more Americans don’t consider moving abroad especially considering present circumstances.

If you are single and have no cosignors on any of your loans and owed a ton of loans with no hope of paying it off, I would seriously consider doing this. You can take a 4 week CELTA course and teach English abroad wherever your heart desired. This would also allow you to get a visa to reside abroad when hired by an overseas school. It is also a very portable certificate allowing you to jump from country to country (this is key and I will explain below). Here are a couple reasons to consider jumping ship:

1) No more harassing phone calls to your phone or your employer. Instruct relatives that you put down on your promissory note to say you moved to Brazil when you are in fact living in China or Thailand. Go to the Sallie Mae website and put down Neptune as your new permanent address. Go to your email account and have all SallieMae email directed to your trash folder so you never see it again.

2) No jurisdiction to garnish your overseas wages, seize foreign bank accounts (do not leave ANY money in US based banks or you may return one day to find it gone!), or to put liens on property abroad (it is dirt cheap to rent abroad so I don’t know why you would buy but I digress). They would have to find you first and go through foreign courts to get a judgement (see reason number one). If this were to happen (highly highly unlikely unless you owed a million dollars), you could just move to a nearby country starting the process all over again. Good luck with that Dear Aunt Sallie!

3) No seizure of tax refunds since you pay no US taxes if you make under 80-90K a year abroad

4) Would cost Sallie Mae an exorbitant amount of money to hunt you down. And even if they do locate you (see number 1), they can’t do crap at all. Not cost effective.

5) When we finally get bankruptcy rights returned to student loans, you could return to the States. Dump all your assets you ever accumulated overseas in a homestead property(Florida and Texas), live there for 2-4 years and declare bankruptcy utilizing your unlimited homestead exemption.

6) Move on with your life having a decent nest egg saved that would’ve gone down the Sallie Mae toilet if you remained state side.

What A Bailout Is And Is Not: Or Why You Should Run Away From Your Debt

There is a fundamental disconnect among many people about what they think is a “bailout,” and what a bailout actually is.  This disconnect is well represented by the bumper sticker off to the right.  The simple fact is that, with the exception of a couple people who had their notes canceled by the courts due to fraud, bad faith, a lack of standing, or other misconduct, no mortgage holder anywhere in the United States have ever received a government bailout. Period.

Rather, bailouts are all about protecting creditors, or the bondholders of creditors, by protecting their payment stream.  For example, Fannie and Freddie’s exist to buy up so-called “conforming” mortgages, and then they securitize them and sell them to large institutional investors, such as pension funds, university endowments, etc.  These investors are not, however, true investors because they are not adopting the risk of default.  If a large group of mortgages in the securitization pool default, i.e. the people stop making the payment, the investors still get paid.

Now, the mortgage holder (homedebtor, “homeowner,” whatever you want to call them) still loses the house.  Same with student loans, the securitized student loan is guaranteed by the government, so when the grad school grad can’t make the payments, it doesn’t matter to the “investor.”  But the graduate still goes into default, has his or her wages garnished, gets hit with tens of thousands in fees and collection costs, and has to leave the county to have any chance of a normal life.

The bailouts are a one-way ratchet in favor of the creditors.  They do not help the debtor at all – in fact because everything is guaranteed, it creates a perverse incentive for banks and finance companies to push ever-increasing levels of leverage (aka debt) onto those too stupid, too young, too desperate, or too optimistic to really understand what they’re getting themselves into.

For the most part, the bailouts simply make the rest of the outstanding credit markets work like the mortgage and student loan markets.  Have Greek debt?  No worries, slick, the ECB will make the payments and impose austerity on the Greek population!  Own securitized car loans?  Not a problem, it’s all on the Fed’s balance sheet now!  But this does the debtor precisely zero good.

Instead, the guarantees and the bailouts have driven the level of household leverage from 40% 50 years ago to more than 110% of household income today.  The only other time in American history where household debt levels were anywhere close to where they are today was right before the Great Depression struck in the late 1920s.

You can guarantee the debt from now until pigs take wing, and it does absolutely nothing to reduce the level of debt.  In fact, a “bailout” often just makes things worse, while giving the creditors free rein of the public fisc.  For example, take this interview with the former head of the German Central Bank, or Bundesbank:

Pöhl: All the same, it was a mistake. That much is completely clear. I would also have expected the (European) Commission and the ECB to intervene far earlier. They must have realized that a small, indeed a tiny, country like Greece, one with no industrial base, would never be in a position to pay back €300 billion worth of debt.

SPIEGEL: According to the rescue plan, it’s actually €350 billion …

Pöhl: … which that country has even less chance of paying back. Without a “haircut,” a partial debt waiver, it cannot and will not ever happen. So why not immediately? That would have been one alternative. The European Union should have declared half a year ago — or even earlier — that Greek debt needed restructuring.

SPIEGEL: But according to Chancellor Angela Merkel, that would have led to a domino effect, with repercussions for other European states facing debt crises of their own.

Pöhl: I do not believe that. I think it was about something altogether different.

SPIEGEL: Such as?

Pöhl: It was about protecting German banks, but especially the French banks, from debt write offs. On the day that the rescue package was agreed on, shares of French banks rose by up to 24 percent. Looking at that, you can see what this was really about — namely, rescuing the banks and the rich Greeks.

SPIEGEL: In the current crisis situation, and with all the turbulence in the markets, has there really been any opportunity to share the costs of the rescue plan with creditors?

Pöhl: I believe so. They could have slashed the debts by one-third. The banks would then have had to write off a third of their securities.

SPIEGEL: There was fear that investors would not have touched Greek government bonds for years, nor would they have touched the bonds of any other southern European countries.

Pöhl: I believe the opposite would have happened. Investors would quickly have seen that Greece could get a handle on its debt problems. And for that reason, trust would quickly have been restored. But that moment has passed. Now we have this mess.

That excerpt is worth reading twice.  First, recognize that the Greek bailout is not a bailout of Greece at all, it merely protects the large banks and rich Greeks that are holders of the sovereign debt.  But more importantly, Pohl argues that the best thing you can do to restore fiscal confidence is not to layer on even more debt to pay off prior debt, which is a type of greater fool theory (with the other Eurozone governments, the IMF, and ECB being the greater fool).  Rather, the way to restore confidence and fiscal sanity to slash the amount of debt owed by the debtor.

Now, we over here at AFEP, would call that a “duh,” but it’s nice to see that those with some skin in the game are starting to get a clue about that reality.  On Saturday, we praised the Anecdotal Economist for recognizing the wisdom of walking from debt.

And today, Yves Smith over at Naked Capitalism has a guest post similarly discussing the wisdom, even necessity, or default – mass default!

What we are experiencing is called the global credit crisis for a reason. There is too much debt in the world. More and more economists are talking about the threat of a deflationary crisis ahead. What does this mean for you? Well, if you have a house that is under water, or more debt than you can reasonably hope to repay, your best options may be the unthinkable. But it really should not be unthinkable to default on a loan or even to declare bankruptcy.

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When debt exceeds a certain level it becomes a cancer on society. Easy credit fuels speculation which triggers bubbles. These bubbles lead to a temporary lift in apparent wealth, which increases economic activity beyond its sustainable level. But eventually more and more debt triggers economic decline with the inevitable glut of goods produced by an overheated economy.

What people are discovering too late is that their debt is not repayable. Ever. They once had a hope they could wait out their bad times. This is true of many homeowners, many businesses and many governmental bodies. The “great unwind” is going to be deflationary. Prices and salaries will decline, jobs will become more scarce, and debt will continue to increase.

The earlier you pull the rip cord the better off you will be later.

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There should no longer be any moral question about whether it is wrong to walk away from debt legally. The advent of limited liability corporations and the legal ‘personhood’ of corporate shells have allowed business to create one sided bets for years, and they happily walk away when the tide shifts. This is the calculus of 21st century finance, and you are a bit player in this game.
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The economy will continue to stagnate, and unemployment will increase. Asset values will continue to decrease until the defaults begin. When the rot is finally purged from our system, the great American wealth machine will start anew. It is time to party like its 1454. Start your own personal debt jubilee.

This is exactly right.  Exactly.  The amount of debt sloshing around American households, companies, and governments at every level (not to mention the rest of the world!) is a giant sinkhole that will swallow the economy for decades or more unless we get rid of it.

I’ve said many times that the most profound political statement that you can make is not to just walk away from your debt, but to run.  Send Sallie Mae a photocopy of your ass and hop a flight to Brazil, stop paying your mortgage and enjoy the year+ before they kick you out, make a youtube of you setting your bills on fire, or choose your own form of protest.

Just do it!  It’s the right thing to do!

Always Ahead Of The Curve

We here at AFEP have always maintained that foreclosure reduction initiatives that do not involve massive reductions in mortgage and other debt are worthless, and a huge waste of time (it’s why we didn’t bother attempting to modify our mortgage). And we’ve always maintained that inflation – while desirable – just wasn’t in the cards.  As an aside, if you’re looking for the next big social trend, the overseas creditor flee is a good candidate.  Perhaps a business based on hiring well-educated American expats?  Hmmm…

Back to the post.  The media is waking up to the reality that people who are committing the vast majority of their income to debt service aren’t good candidates for a non-principal reduced mortgage modification – quelle surprise!

So now we get the delay, but why are the permanent mods failing at all if they’ve barely begun, and if the front-end debt to income formula is supposedly so perfect? I asked the banking folks and expected to hear “unemployment” as the answer.

I was wrong. They cite the back-end DTI, which is your mortgage debt in addition to all your other debt, like car, credit cards, etc.

P. 5 of the HAMP report puts that at 64.3 percent, meaning you’ve got 35.7 percent of your income to spend once you’ve paid all debt-related bills—not to mention your income taxes! Last month it was 61.3 percent, the month before, 59.8 percent, so it’s getting progressively worse. In the fine print under the chart, it says “Borrowers who have a back-end debt-to-income ratio of greater than 55 percent are required to seek housing counseling under program guidelines.”

Okay, so you would think those would be the riskiest borrowers.

So how is it that the “Median Characteristics of Permanent Modifications”, which is the title of the chart, shows the back end DTI (64.3 percent) at a level that would require counseling? i.e. risky??

And that’s the “Median”, which by definition means half the permanent mod borrowers have and even HIGHER back end DTI.

Or as I might say, duh.  Look at that chart, the median individual entering the HAMP program is committing 80% of their gross income (pre-tax!) to debt service.  And after the mod, they’re still committing 64% to debt service.  What’s the fucking point of even bothering?  Those aren’t sustainable numbers for more than a few months – no way they’re going to be able to keep up with that for more than a year or two. CR asks:

Do they have a life?

Simple question, simple answer: No. I’ve said it before, I’ll say it again, Jubilee!!!!!!

On a highly related note, after obsessing about inflation for a year or so, the deflation trade is back in vogue – quelle surprise!

The anticipation of a sustained economic slowdown has brought the deflationary trade back into view and highlighted the need for good yields and relative safety.

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Indeed, investors have turned their gaze strongly to bonds, boosting both corporates and Treasurys as the stock market has continues to wobble.

Long-term government debt has fared particularly well, with the iShares Barclays 20+ Year Treasury (NYSEArca:TLT – News) exchange-traded fund up about 3.4 percent in May. The 30-year bond has seen its yield drop a quarter percentage point, from 4.53 at the start of the month to 4.28 in afternoon trading Tuesday.

“Everyone thinks the Treasury auctions are going to fail. That’s why they’re exceeding estimates,” Springer says. “I’m not a fan of Treasurys. I don’t think there’s enough return. But if you’re a sovereign nation with trillions in liquidity you’ve got to put your money somewhere, so they buy Treasurys.”

Fixed income performs well in times of economic slowness and low interest rates because its value isn’t eaten away by inflation.

The foreclosure crisis isn’t going anywhere, and “inflation” won’t be boosting your paycheck anytime soon.  Plan your overseas creditor flee accordingly.

Inspiring, Up-and-Coming Politician Cheats On Wife. In Other News, Dog Bites Man.

Drudge is pimping some idiotic story about how Obama had an affair with one of his staffers back in 2004.  True?  Probably.  Do I give a shit?  I would have a hard time caring less.  I have my own reasons for disliking Obama: the health care “reform” bill; letting Timmeh and Larry Summers near the levers of power; the joke of a financial “reform” package that he’s pushing; opening up offshore drilling (nice timing BTW!); etc. etc. etc.  In all honesty, if this cheating story turns out to be true, I might have a little more respect for him – at least I’ll know that he’s not a complete zero.

People are flawed, in fact pretty much everybody is completely fucked up in one way or another.  It’s human nature, it’s always been that way, and it will always be that way – not a goddamn thing we can do to change it.  But there are things that, as a society we can do to make lives better.  For example, I’m all for a broad social safety net, and I think that Social Security and Medicare are, for the most part good programs.

But there is one function of government that it even more important: standing against the forces of oligarchy and their attempts to skim, steal, or otherwise plunder the national wealth.  Teddy Roosevelt knew that, so did Franklin Roosevelt.  But for decades, the United States has not had anybody pulling the levers of political power on behalf of the real lower and middle classes – which I define as about the bottom 95% of the income distribution.  Instead, the goal of the political elites has been to increase the “financialization” of the economy – which is just a cute term for blowing debt-financed asset bubbles and increasing household leverage (aka debt).

Have no illusions, that is real and vicious class warfare against the poor and the middle class.  While what’s been going on is obvious to those paying attention, Wall Street’s utter contempt for real people now has been put to paper (or pixel) in an angry little screed that’s making the rounds on Wall Street:

We are Wall Street. It’s our job to make money. Whether it’s a commodity, stock, bond, or some hypothetical piece of fake paper, it doesn’t matter. We would trade baseball cards if it were profitable. I didn’t hear America complaining when the market was roaring to 14,000 and everyone’s 401k doubled every 3 years. Just like gambling, its not a problem until you lose. I’ve never heard of anyone going to Gamblers Anonymous because they won too much in Vegas.

Well now the market crapped out, & even though it has come back somewhat, the government and the average Joes are still looking for a scapegoat. God knows there has to be one for everything. Well, here we are.

Go ahead and continue to take us down, but you’re only going to hurt yourselves. What’s going to happen when we can’t find jobs on the Street anymore? Guess what: We’re going to take yours. We get up at 5am & work till 10pm or later. We’re used to not getting up to pee when we have a position. We don’t take an hour or more for a lunch break. We don’t demand a union. We don’t retire at 50 with a pension. We eat what we kill, and when the only thing left to eat is on your dinner plates, we’ll eat that.

For years teachers and other unionized labor have had us fooled. We were too busy working to notice. Do you really think that we are incapable of teaching 3rd graders and doing landscaping? We’re going to take your cushy jobs with tenure and 4 months off a year and whine just like you that we are so-o-o-o underpaid for building the youth of America. Say goodbye to your overtime and double time and a half. I’ll be hitting grounders to the high school baseball team for $5k extra a summer, thank you very much.

So now that we’re going to be making $85k a year without upside, Joe Mainstreet is going to have his revenge, right? Wrong! Guess what: we’re going to stop buying the new 80k car, we aren’t going to leave the 35 percent tip at our business dinners anymore. No more free rides on our backs. We’re going to landscape our own back yards, wash our cars with a garden hose in our driveways. Our money was your money. You spent it. When our money dries up, so does yours.

The difference is, you lived off of it, we rejoiced in it. The Obama administration and the Democratic National Committee might get their way and knock us off the top of the pyramid, but it’s really going to hurt like hell for them when our fat a**es land directly on the middle class of America and knock them to the bottom.

We aren’t dinosaurs. We are smarter and more vicious than that, and we are going to survive. The question is, now that Obama & his administration are making Joe Mainstreet our food supply…will he? and will they?

This isn’t some trader “going rogue,” these guys actually believe this shit.  Read, and then re-read this email, it’s all here, the “we work so much harder than you mentality,” “we make your summers off and landscape businesses possible,” “we push up the value of your 401k,” the fundamental misunderstanding of what real people make, I mean seriously, does anyone get double time and a half?  In the real world 85k is a hell of a lot of money, or at least it would be if serial killer Alan Greenspan hadn’t caused household debt levels to spike to unheard of levels.  That’s what made Wall Street’s go-go years possible.  Robert Reich get’s to the heart of the problem:

The paper entrepreneurs are winning out over the product entrepreneurs.

Paper entrepreneurs — trained in law, finance, accountancy — manipulate complex systems of rules and numbers. They innovate by using the systems in novel ways: establishing joint ventures, consortiums, holding companies, mutual funds; finding companies to acquire, “white knights” to be acquired by, commodity futures to invest in, tax shelters to hide in; engaging in proxy fights, tender offers, antitrust suits, stock splits, spinoffs, divestitures; buying and selling notes, bonds, convertible debentures, sinking-fund debentures; obtaining government subsidies, loan guarantees, tax breaks, contracts, licenses, quottas, price supports, bailouts; going private, going public, going bankrupt.

Product entrepreneurs — engineers, inventors, production managers, marketers, owners of small businesses — produce goods and services people want. They innovate by creating better products at less cost.

Our economic system needs both. Paper entrepreneurs ensure that capital is allocated efficienctly among product enrepreneurs. But paper entrepreneurs do not directly enlarge the economic pie. They only arrange and divide the slices. They provide nothing of tangible use. For an economy to maintain its health, entrepreneurial rewards should flow primarily to product, not paper.

And our public policy, for decades, has been committed to ensuring that the pushers of paper, not the developers of products, are not only able, but actually entitled to skim an increasing percentage of the income and wealth of the nation. Not only is the government failing in its most fundamental role of stopping this, it has been enabling and actively encouraging it for decades.  Take a look at this chart which shows that the profits of the financial sector versus the non-financial sector began diverging in the mid-80s, accelerated radically around 2000, crashed back to Earth during 2008, and under Obama’s guidance, spiked back up during 2009.

It is fundamentally backward.  Finance serves one, and only one, purpose and that is to allocate capital in the real economy.  But protecting the finance industry, and encouraging people to leverage themselves and increase household debt levels has become an end in itself, as if there is no real economy, just pushing debt around.  Hey, here’s an $8,000 tax credit so you can overpay for some piece of shit exurban tract house! Praise be consumer credit is finally ticking upward!

So to help the banks, the government encourages as much household debt as possible, but then turns around and doubly fucks us when things go bad.  We have to make it a huge and expensive pain in the ass for consumers to discharge their debt is bankruptcy because otherwise it would be bad for the finance companies!  Much better to allow them to garnish 25% of the wages to pay off the collection companies, even if the supposed “debt” was (miraculously) discharged in bankruptcy, or, hell, never existed in the first place!

Despite owning Congress, getting absolutely every legislative and regulatory blow job possible for 3 decades, these guys pitch a hissy fit at even the most trivial and ultimately useless attempt to reign in some of the worst abuses. I mean, Jesus fucking Christ, if there was any justice in this country 90%+ of the executives on Wall Street would be sitting in prison sleeping with one eye open, but instead we get weak tea “reform” proposals, and another wholesale screw job for the bottom 95% of the income distribution.

With Obama as President (or Bush I and II, Clinton, and Reagan for that matter) you don’t need to imagine what it’s like to live in a banana republic ruled by a handful of oligarchs.  You’re living it.

Slightly Updated

Haven’t Fled The Country, But Did Make Some Beer Money – Win!

I know that up to ten of you have been sitting on pins and needles wondering if my absence from blogging meant that I had pulled the trigger and fled the country.  But no, not yet.  Although, do check in every once in a while because I promise that my first post as an expat will include numerous beach pics as well as photos of every attractive Costa Rican that I see on the street. In truth, I landed a short-term consulting gig (now concluded) which has enabled me to draft this brilliant and insightful post from a table out at a bar with Dire Straights’ Walk of Life as background music. The gig was, of course appreciated, but the timing was a bit unfortunate because this last week or so has been an embarrassment of riches for those of us who blog (a nonprofit activity!) about debt, debt, debt, the economy, and occasionally other things.

The AFEP did, however, make time to watch a few hours of the Goldman Sachs hearings.  While it’s always fun to watch a bunch of preening, narcissistic sociopaths get questioned by a bunch of preening, narcissistic sociopaths, I find Congressional hearings a little  frustrating. The problem is that those who are making an appearance are usually smarter and better prepared than the representatives themselves.  This means that you almost never get a truly dramatic moment because everything is hedged and bullshit – although I did appreciate the fabulous Fab’s unequivocal assertion of innocence and claim that he told ACA about Paulson’s short – seems like a risky thing to do under oath while a lawsuit is pending, but, hey, if Fab ends up in prison on perjury charges, I’ll not shed a tear.

While the biggest news items of the last week were the downgrades among Club Med and the impending implosion of the Eurozone, I found a couple other tidbits to be a little more important – I mean, hey, if the Euro collapses and the dollar strengthens, it’s good for dollar-denominated expats!

First up was a note over at VoxEU that parsed some microeconomic data to look at the relationship between Household debt and macroeconomic fluctuations.  I’m just glad to see that economists are taking it seriously:

There once was a decade in US history in which financial innovation led to a sharp rise in the flow of credit to households. Durable goods consumption increased dramatically as household debt climbed to over 100% of GDP. The subsequent economic downturn was tragic, and the severity of the malaise was closely related to the preceding rise in household leverage (see Eichengreen and Michener (2003), Mishkin (1978), and the chart from David Beim at npr.org).

Research has argued that the “drop in consumption resulted from the unique combination of historically high consumer indebtedness and punitive default consequences” (Olney 1999).

While the storyline sounds eerily familiar to our recent past, it in fact describes the decade preceding the onset of the Great Depression. The form of innovation was not subprime mortgages – it was instead instalment loans related to automobile purchases and other consumer durables – but the parallels are striking. Household debt for Americans went over 100% of GDP only twice in the last century, in 1929 and in 2006.

From NPR Planet Money

You want the answer to pessimism about the medium-term economic prospects for the U.S., there it is.  Economies simply can’t function at or near “trend,” with debt-service payments soaking up such a huge amount of income.  Credit cards, mortgages, student loans, it’s all the same phenomenon.  The essence of leverage is fragility, and a highly levered economy, household, individual, business, and/or investment bank is not robust enough to reverse (or in many cases survive) a deflationary debt spiral.

The close link between household debt and the severity of the recession provides support to a key policy lesson. Regulators must appreciate the role of leverage in understanding asset price movements and macroeconomic fluctuations. Both researchers (Geanokoplos 2009) and regulators (Dudley 2010) have called for a closer monitoring of leverage ratios associated with all asset classes through the economic cycle.

Or as I might say, duh. But at least the economists are saying it now.  On that note, this headline from Naked Capitalism made me smile: Morgan Stanley: Strategic Defaults Hit 12%.  Given my desire that everyone default, immediately, and en masse, this should make me happy, but Yves points out what is likely going on:

Second, it also suggests that some of these strategic defaulters are simply “pre defaulting”, as in recognizing their ability to service the mortgage is tenuous (as in they may be straining to stay current, and recognize that one shock will put them in arrears) and they’ve decided, with the home under water, that it’s better to face the inevitable early.

I tend to agree.  What’s probably happening is that these consumers are cutting back on their biggest debts first, house, and then as the financial crunch continues, they’ll default on others.  So I don’t take the increase as the good news that people really are wising up and walking away, but rather as evidence of across-the-board financial stress, but, hey, I’ll take my defaults wherever I can get them.

A couple other notes, Barry Ritholtz agrees that we are in a deflationary environment:

As of today, Deflation is a fact, inflation is an opinion. We are still living in a period of falling prices, heavy discounts, wage deflation, asset depreciation and lack of pricing power.  The S&P500 is below levels seen in the 1990s; Wages are flat for a decade.

The risk going forward is that the Fed fails to remove the accommodations in time. But they have Japan as an example of ZIRP with no inflation.  So long as labor under-utilization is near record levels, they can take their time in tightening.

Or as I might say, no shit, and might I suggest that Ben fire up his helicopter (aka a money-financed tax credit) – it’s ok Ben, it’s the right thing to do.  And finally, what the fuck is wrong with this Stephanie Grace chick?

Glad to be back.

The Poor Man’s Stimulus And The Rich Man’s Plunder

The only reason I can afford some pretzels, beer, and if I’m feeling really frisky, some chicken wings, is because I’m not sending any goddamn money to the vultures holding my debt.  So, putting this thought in the category of “provocative” is perhaps a bridge too far:

Here’s a provocative thought: what if ‘extend and pretend’ within our nation’s troubled mortgage markets is actually providing a lift to consumer spending? It’s not as far-fetched as the idea might initially sound, and it might help explain some interesting data we’ve seen as of late — and it also might explain why the statistical recovery we’re seeing now doesn’t really feel like a recovery to most Americans.

Or as I might say, “no shit Sherlock!”  This is exactly what’s going on.  Fuck, the only reason I’m not out there starving in the street right now, is because I can’t be thrown out of my house under my state’s law for another 7 months.  As Yoda might say, “Some big fucking mystery, it is not.”

But this is what it all comes down to, isn’t it?  The rich get bailed out by the government securing all of the securitized debt “assets,” so when I go broke, whoever holds my mortgage, credit card debt, and/or student loans doesn’t share in my misery.  Meaning they have no incentive to negotiate down the amount that I owe them – why the fuck would they?  They get their money no matter what.  At the first sign of trouble the government steps in to secure the payment stream, and nobody says boo about that monumental plundering of the public treasury to protect the rich.  So put this under least surprising new ever, the rich are spending again:

But even people who came out of the financial crisis relatively unscathed are pulling back. The possibility of losing their wealth has become more real.

“Today if they buy, they are not willing to be embarrassed by overpaying,” said Jane Bayard, executive vice president at Warburg Realty Partnership of Manhattan. Though the Manhattan residential market has held up reasonably well, “there were times in 2007, for example, when there were multiple offers and people paid millions over the asking price,” Ms. Bayard said. “Today, nobody wants to be the last monkey in the tree.”

In an economy that remains weak, no one expects a rapid recovery.

And just how the fuck would they get scathed?  As soon as it even looks like the shit might hit the fan, Timmeh Geithner comes rushing in, begging Congress to guarantee every debt in the financial system.  But the struggling homedebtor or overeducated and underemployed slave to Aunt Sallie is left to twist in the wind, ground under hundreds of the thousands of dollars in debt.  With the pay from whatever horseshit low-wage job they’re able to find, garnished to fund bonuses for Richard Fairbank or Jamie Dimon.  But if the poor or formerly middle class apply for any help, no matter how minimal, they have their spending – right down to fucking penny – examined, questioned, and judged by a bunch of assholes:

Let me begin with a word to the wise for HAMP applicants: unless you believe Snooki is now in charge of approving HAMP applications, it might be a good idea to cut back a bit on some of the creature comforts to which you have become accustomed at least a month before submitting your HAMP modification application.

Allow me to explain. The guidelines for servicers participating in HAMP stipulate that the borrower must submit a “hardship affidavit”. This, ostensibly, is to serve as their sworn testimony that they have been driven into default due to some particular hardship they encountered, and despite making every possible sacrifice, they can no longer “maintain payment on the mortgage and cover basic living expenses at the same time”.

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The very first ‘HAMPlication’ that your correspondent pulled up recently showed a wanton disregard for minimizing spending. On the contrary, it looked like “cutting back” for this applicant does not involve such Draconian cuts as eliminating:

• visits to the tanning salon
• the nail spa
• some kind of gourmet produce market (have you seen the price of arugula?)
• various liquor stores
• A DirecTV bill that must involve some serious premium programming or pay-per-view events (or both?).
• And over $1,700 in retail purchases, including: Best Buy, Baby Gap, Brookstone, Old Navy, Bed, Bath & Beyond, Home Depot, Macy’s, Pac Sun, Urban Behavior, Sears, Staples, and Footlocker.

Hey cocksucker!  Any chance that was the spending profile for December?  Maybe trying to paper over their hardship by buying a few presents for the kids? Maybe buying some suits for job interviews?  Or maybe just trying to fend off depression with a few trinkets? To sum up, go fuck yourself!

But hey, at least the rich are able to take their vacations on private jets without being judged:

Blair LaCorte, chief executive at XOJet, which owns 23 jets and leases them for charter, said that his business was picking up. But he concurred that prices remained flat.

“The problem is that it is often hard to distinguish whether companies or individuals are opening their wallets,” Mr. LaCorte said. “Some small-company owners buy planes in the corporate name for personal use, and corporate jets are often used for personal agendas, including golf trips and vacations. We tend to use a criterion of whether there are children or pets on board, or how much wine was drunk,” he said. “I believe that business is growing faster than personal use, but personal use went down less in the downturn.”

Believe it or not it actually gets worse – really!  David Brooks, aka the World’s Biggest Douchebag is rooting for the rich, because they work so fucking hard:

David Brooks: Yes. I was going to say that for the first time in human history, rich people work longer hours than middle class or poor people. How do you construct a rich versus poor narrative when the rich are more industrious?

Yeah, gee, it sure is hard to come up with a rich versus poor narrative.  Seriously, can no one at the NY Times rid us of this meddlesome douchebag? At least, Taibbi isn’t having it

I had to read this thing twice before it registered that Brooks was actually saying that he was rooting for the rich against the poor. If he keeps this up, he’s going to make his way into the Guinness Book for having extended his tongue at least a foot and a half farther up the ass of the Times’s Upper East Side readership than any previous pundit in journalistic history.

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I would give just about anything to sit David Brooks down in front of some single mother somewhere who’s pulling two shitty minimum-wage jobs just to be able to afford a pair of $19 Mossimo sneakers at Target for her kid, and have him tell her, with a straight face, that her main problem is that she doesn’t work as hard as Jamie Dimon.

Only a person who has never actually held a real job could say something like this. There is, of course, a huge difference between working 80 hours a week in a profession that you love and which promises you vast financial rewards, and working 80 hours a week digging ditches for a septic-tank company, or listening to impatient assholes scream at you at some airport ticket counter all day long, or even teaching disinterested, uncontrollable kids in some crappy school district with metal detectors on every door.

Most of the work in this world completely sucks balls and the only reward most people get for their work is just barely enough money to survive, if that. The 95% of people out there who spend all day long shoveling the dogshit of life for subsistence wages are basically keeping things running just well enough so that David Brooks, me and the rest of that lucky 5% of mostly college-educated yuppies can live embarrassingly rewarding and interesting lives in which society throws gobs of money at us for pushing ideas around on paper (frequently, not even good ideas) and taking mutual-admiration-society business lunches in London and Paris and Las Vegas with our overpaid peers.

Brooks is right that most of the people in that 5% bracket log heavy hours, but where he’s wrong is in failing to recognize that most of us have enough shame to know that what we do for a living isn’t really working.

A-fucking-men!

Update: Made a few edits for readability.

Come and Get Me – Mortgage and Student Loan Edition

I’ve been saying for a while that the most profound political statement you can make is to simply stop sending the banks your debt service payments. If you don’t pay, they may come for you – and will – but if we all don’t pay, they need to pay attention. The mortgage market is the best example of where this strategy has been 1) implemented on a wide scale, and 2) is in the very early stages of being somewhat effective.

This chart from Clear on Money, which is also posted at the The Big Picture, is an example of the “they can’t get us all” phenomenon.  There is a very compelling wedge between those mortgages that are “seriously delinquent” and both Foreclosures in Process and Foreclosure starts.  With the solid lines, it’s a little bit difficult to compare them because one is a stock variable, while the other is a flow variable, but there seems to be an inverse correlation between increases in the category of seriously delinquent and foreclosure starts and foreclosures in process.  In other words, when the rate of increase in delinquency slows, then the banks are able to play “catch-up” and get the ball rolling with more foreclosures.

If you look at some of the underlying data from the report (.pdf) out of the Office of Thrift Supervision it also shows that an increase in delinquency is not matched by an increase in foreclosures.

If you run the numbers, what it shows is a pretty pronounced divergence from the end of 2008 to the end of 2009.  A mortgage generally cannot be foreclosed on for at least 90 days, so that is most relevant category, and at the end of 2008 the percentage of foreclosures in process relative to 90+ delinquency was 81.7%.  By the end of 2009, that percentage had dropped to 67.3%.  Delinquency is simply outstripping the ability of the banksters to pull the trigger on foreclosure. To those of you out there that are foreclosing on that overpriced debt trap (strategically or otherwise), I say “nice work.”  Your efforts are beginning, only beginning, to have an effect.

Here’s how we know (.pdf).

To expand the use of principal write-downs, servicers will be required to consider an alternative modification approach that emphasizes principal relief. This alternative modification approach will include incentive payments for each dollar of principal write-down by servicers and investors. The principal reduction and the incentives will be earned by the borrower and lender based on a pay-for-success structure.

The government is trying to create an incentive for the reduction in the amount of debt owed by real people.  Now, don’t get me wrong, the plan as announced is a joke and won’t accomplish anything, but it represents a significant cognitive shift among our political and financial betters that they are even willing to consider debt reduction.

What prompted this post was a poll that Rob put up over at his student loan forgiveness blog.  The poll suggests various forms of protest that can be used to agitate for student loan principal reduction including suicide, moving out of the country, and withholding payments.  Now, far be it from me to try to talk anyone out of moving out of the country (I’m leaving soon too) or even offing themselves (not a fan, but whatever), but the mortgage market is starting to show some signs that widespread default really can have a political effect.

I’ve said all along that there needs to be a wholesale debtors’ revolt and refusal to send payments to banks and other finance companies.  The housing market collapsed more than 3 years ago, and we are just beginning to see our political betters wake up to the reality that mortgage debt which cannot be paid won’t be.

So, make a political statement, keep more of what you earn, and in the end get rid of your debt, hopefully.