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Last week, purely in the spirit of mischief, we brought up a sore subject: America’s largest mortgage finance companies, Fannie and Freddie. The two have so much water in their lungs it will take at least $25bn of the public’s money to save them. Possibly much more. Were it up to us, we’d leave them on the beach.
But, last week, the US Senate bent down and pressed its large mouth onto those gaping traps of the mortgage twins – gurgling into them a corrupt breath of life. Since the two hold one out of every two mortgages in the nation, in effect, Congress is nationalising the US housing stock. Henceforth, citizens will pay not only their taxes to the government, but their mortgage payments too.
In America, how this came to be is of little concern to many. Meanwhile, in Britain, we gape... and only see our own reflection. Time then for a reminder.
At a speech in Vancouver, James Kunstler seemed positively delighted. Finally, gasoline over $4 a gallon was going to do what generations of artistic scorn could not – destroy Fannie and Freddie’s collateral. Kunstler’s problem with American houses is that they are not real houses – but “cartoon houses”. They have porches that look like real porches from a distance, but they are too narrow to sit on. They have shutters too – nailed to the wall and completely useless. They may have “picture” windows – looking out on nothing – or no windows at all. And they wouldn’t exist at all were it not for cheap credit and cheap gasoline.
Of course, the same may be said of America’s – and Britain’s – entire economies during the last 20 years.The loose credit that built cartoon houses also constructed cartoon economies; they look like real economies, but are essentially useless, consuming wealth rather than creating it.
For proof, we return to Fannie and Freddie, two companies that appeared to be helping Americans own houses. But since they were created, homeowners’ equity – that portion of the house actually owned and paid for by the homeowner – fell from 70% to below 50%. Americans’ total equity is now lower than total mortgage debt. So the nation’s homeowners are “upside down”. Nearly nine million Americans have zero or negative equity already – and house prices are still falling.
This looney tune approach to finance radiated to all points of the economy. People pretended that they earned more – spending more money to buy more goods and services – but wages did not really increase. Then, they bought houses – believing they were investments, rather than consumer items. With no down payment, no proof of income, and zero interest loans, for most of the new buyers, home ownership was merely a dangerous conceit. Now the roofs have caved in, it is a staggering burden.
The “consumer economy” was always a mockery. No serious economist would have ever suggested you can get richer by consuming wealth. But that didn’t make consumerism unpopular. The more people consumed, the more GDP went up. GDP measures output, not wealth creation; but who could tell the difference in a cartoon economy? Besides, spending made people feel as though they were getting richer.
Then, whenever the consumer threatened to come to his senses, the feds rushed to “stimulate” him – by giving him more of what he least needed – credit. More spending kept the cartoon economy running. In 1971, when the US went off the gold wagon, household debt was less than 50% of GDP. Now, it is more than 100%. The poor consumer’s knees are buckling; he will be forced to work the rest of his life to keep up with his debts, let alone pay them off.
Even the capitalist class was bamboozled by its own claptrap. Stocks rose from 1982 to 2000... fell heavily to 2002 and bounced back. For the last ten years, shareholders have gotten little for their effort. In July of 1998, the FTSE hit a high of 5,458. This month, it reached 5,625. And in America, if stock prices were quoted in gallons of gasoline, the Dow would take the driver no further in 2008 than it did 40 years ago.
The cartoon capitalists did it all backwards; they are supposed to exploit the workers, not be exploited by them. But while consumers and rentiers were going nowhere, corporate managers and Wall Street hustlers were getting rich. The two Bozos running Fannie and Freddie, for example, pocketed about $32m last year – during a period in which the companies lost almost $5.2bn.
And on Wall Street, managers paid out $250bn in bonuses in the four years leading up to the credit crunch. The firms declared a profit and paid bonuses when the bets were placed; they didn’t wait to see how they turned out. The big banks and big brokers became capitalists without capital, dependent on the gullibility of investors to keep them in business. Then, when investors began to wise up, they turned to the public for capital support.
What kind of scam is this? It may look like capitalism from a distance. But this is not real capitalism; this is cartoon capitalism – run by clowns, who sell freak investments to chump investors, and encourage the lumpen householder to ruin himself.
Published in
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Bill Bonner
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