Wall Street Protestors Have Met the Enemy and It Is They
October 6, 2011 - 1:16 pm - by David P. Goldman America is the land of opportunity, and never before the great housing bubble has a Ponzi scheme drawn such a wide base of support and benefited so many people. This was the most democratic scam in history, and if you got in on the first half of it, you’re still better off. The big losers were not homeowners, but the bankers. A quick look at the numbers shows how misinformed are the protesters running around Wall Street. Instead of picketing the bankers, they should pair off and picket each other. I ran through the numbers recently in an Asia Times Online essay. Here’s the story of the People’s Ponzi scheme in a nutshell:

Household real estate assets rose nearly two-and-a-half times from around $9 trillion in 1998 to $23 trillion at the peak of the bubble in 2006. Bank stocks (a pretty good proxy for bankers’ net worth, as most of compensation for management is in stock) had a smaller bounce, from around 80 on the KBW index to a 2006 peak of 117, a gain of less than 50%.

That’s not surprising, for households could buy a house with 5% or 10% down, and deduct the mortgage interest from their taxable income. A homeowner who bought a US$100,000 home with a $5,000 down payment doubled his original stake every year as home prices rose 10% per annum. Return on equity of 100% to 200% was common for homeowners; Goldman Sachs’ return on equity never made it above the mid-30% range.



Household real estate wealth remains 70% higher than it was in 1998, even after the crash in home prices. Bank stocks, by contrast, are worth half of what they were in 1998. Many of the big banks are much worse off. Bank of America is trading at less than a third of its 1998 price, and Citigroup is at barely a tenth of its 1998 level.

By no means do I excuse the banks. Until 2005, I headed fixed-income research for Bank of America, and resigned for what the bank and I agreed to call “philosophical differences.” On leaving, I sold every share I owned. In July 2007, I warned the public (including Larry Kudlow’s national audience on CNBC) about a “trillion-dollar AAA asset bubble.”

The fact is that no-one likes a fast buck more than the American public. Wall Street was the enabler, but Main Street was the addict. Americans stopped saving as long as home prices rose; when home prices started to fall, they started saving again.




That is why the Wall Street protesters are foolish and petulant. American households levered a $6 trillion net inflow of foreign savings during the decade 1998 through 2007 into a bubble that benefited them far more than it did Wall Street. The impact of the bubble on the household balance sheet exceeds the growth in real-estate assets, moreover, because most small business expansion followed the housing bubble.

For fifteen years we rode a tsunami of foreign capital pouring into American markets. We didn’t save a penny. Why should we? Our home equity was our retirement account. Our smartest kids got MBAs and went to Wall Street derivatives desks. Engineering was for dummies. Home prices rose so fast that local governments swam with tax revenues and hired with abandon. Everybody went to the party. Now everybody has a hangover, especially the bankers. We thought we were geniuses because we won the lottery. Now we actually have to produce and export things, and we have to play catch-up. Our kids are competing with Asian kids who go to cram school and practice the violin in the afternoon. This isn’t going to be easy, and the sooner we decide to roll up our sleeves and get back to work instead of looking for bankers to blame, the better our chances of coming back.

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The basic problem is how to get inflows of capital restarted, there are easy answers that work, but you will never see them suggested.

 

for your words of clarity and correctness.

 

It is envy, rather than greed, that motivates the OWS rabble.

WW

 

Thanks for the kind words. A study of economics is essential to survival, your life may hinge on the correct choices. Economics has been weaponized for centuries, anything that limits your choices or coerces you is a weapon used against you.

If you don't understand that you are being manipulated or even how, your chances are greatly reduced. Like any idea, economics can be used for good or evil. The evil is most often disguised as something for your own good.

The only good deal you will ever get is one in which both parties enter freely.

I know it is one or more of the seven deadlies. Greed, envy, sloth-they all should get coverage.

 

Atlas Shrugged, by Ayn Rand...

 

You may also enjoy "The Road to Serfdom" written by the Austrian-born economist and philosopher Friedrich von Hayek (1899–1992) between 1940–1943. Less drama and perhaps more factual.

The Ludwig Von Mises Institute also has extensive material available on the subject of economics of the Austrian school.

 

Will pick that up.. Much thanks for the recommendation...

 

Refer to my reply signature!

 

Went 2 weeks without watching any news while on holiday .
I,ll say this and that is these folks who are protesting schould provide some focus and also some SANE solutions to the problems .
Where were all the protests when things went 'kaboom' some years back?
Don,t know about anybody else in here but I find myself getting more cynical and suspect as I get older.

 

I have deep reservations about the speculative nature of the markets today...a lot of short-term churn doesn't contribute much to the economy or society, aside from potential instability.

The original intent of the stock markets was to allow companies to conveniently raise capital, generally an economically beneficial activity.

But with trading occurring electronically, and often driven by artificial intelligence decision support systems I suspect the speed and opacity of the process has made it a potential hazard to the economy.

If it was just a bunch of uber-rich guys gambling with their own property, OK cool. But now we are ALL stakeholders in the market as well as the economy as a whole.

Defined-benefit pensions have gone the way of the Do-Do bird...after AA unloads theirs here in the near future there will not be any US pax airlines which offer one. We peons are now told to invest in 401k's and the math behind that REQUIRES a return rate far greater than T-Bills or your savings account will provide. Your only CHANCE at a financial future (far from a guarantee) is to bet your long-term financial future on the markets. the system is pretty rigged too...the average 401k, 403b investor has a very limited set of options. If you want to invest tax-deferred savings in something less traditional (like selected real-estate properties, REITs, even individual stocks) your are SOL. Even the federal employee TSP funnels the sheep to the usual wall-street suspects...mutual funds.

I suspect that peon-funded retirement accounts simply have evolved into the turf on which the big-boys play their game...and you know what the turf looks like after the game.

I mean do we really need complex derivatives? Should our long-term investments be caught up in the daily or hourly churn of the speculators?

But the problem is not really the evolved nature of the markets...it's how the financial health of the average worker has become tied to a system which is fraught with peril and is fundamentally incompatible with our investment needs. A lot of (well actually all) of the big players are out to win big...that means SOMEBODY has to lose big, and don't kid yourself, you know who that somebody is going to be. The heavies are not going to be satisfied with just consistent and modest long-term growth for all everybody involved!

I'm no expert on this, so I could be totally out to lunch here. But I have significant liquid assets and I'm gradually trying to find other investment outlets besides the "IRA small/mid cap growth fund".