In 2008, Americans gambled and lost in the stock market in a way unmatched since the dismal end of the last century's so-called "Roaring Twenties." The loss estimates are in, and according to the New York Times today, they are colossal (italics mine):
In a mere 12 months, the Dow Jones industrial average plunged 4,488.43 points, or 33.8 percent, its most punishing loss since 1931. ... All told, about $7 trillion of shareholders’ wealth — the gains of the last six years — was wiped out .... Almost no industry was spared as the crisis that first emerged in the subprime mortgage market metastasized and the economy sank into what could be a long recession.
It's all gone. And although it may sound like American investors might have done little worse than "break even" (Whew, we've only fallen back to where we were six years ago), the truth is that it ain't nearly over. In fact, it's hardly begun. We've only seen the initial wave of requests for bailouts and declarations of bankruptcies. More will certainly follow. Jobs will continue to be lost. The shock waves of what happened on Wall Street will continue to reverberate around the globe, wave after wave. Those who understand such things — those who read their history — know that the 1930s Great Depression didn't end until World War II. The causal links between financial depression, poverty, unrest and inevitable conflict are simply too easy to trace. Things could get unimaginably worse before they get better. That reality is what triggered such quick and surprisingly nonpartisan efforts to devise "bailouts" that the U.S. Congress would have deemed unthinkable in any other time. Their willingness to go to such lengths is a accurate gauge of the primal fear that has motivated them.
The root of it all is a quintessentially American phenomenon, home ownership. Nothing intrinsically wrong with that. But historically, owning a home has not been the norm. Economists now tell us that home owners, in a healthy economy once averaged slightly more than 43 percent of the populace, while the balance were renters. The figure has risen to higher than 60 percent. While that might be a happy statistic, on the face of it, it's actually symtomatic of great ill: The increase has come in a time when earning power has steadily declined. In the last two decades it's become, very gradually, harder to make ends meet. People work longer hours for less pay. In consequence, Main Street folks have become increasingly desperate to get into a home.
Little wonder, then, that they conspired (there's no more accurate word for it) with greedy mortgage lenders to circumvent already too-loose loan qualification standards. In the 1950s, prospective homeowners were permitted to spend only one-quarter of their gross income on PITI (principal, interest, taxes and insurance). By 1980, however, this prudent standard had been relaxed to one third. In the last several years, even that precarious threshold has gone by the wayside. Scratch below the surface of today's foreclosures, you'll often find homeowners who pay one-half or more of their gross income out in PITI. Meanwhile, the banks looked the other way on loan qualifications, preferring to find ways to profit from such desperation. The fixed rate mortgage, which protected the homeowner from fluctuations in the credit market went by the board as lenders steeped in the new dogma of "creative financing" crafted ARMs (adjustable-rate mortgages); interest-only instruments that culminated, at some point in the future, in large "balloon" payments; and various combinations. Then there were the subprime mortgages, those on which (as recent events clearly demonstrate) a mortgage holder's investment could only be protected if housing prices continued to go up — despite the fact that economists have documented a long history of the inherently cyclical nature of housing prices.
What is hard to understand is that millions of people actually believed such extremely high-stakes gambles had any chance of bringing a lasting return. What's becoming increasingly clear is that many, specifically the folks who packaged the securities in which these inherently bad loans were cleverly disguised, knew full well that these loans had no chance, but callously passed them on (taking larger profits) to unwitting investors who in turn, to their chagrin, were willing to believe, often without question, outlandish promises about the securities' "safety."
Why would they do that?
For what it's worth here's my opinion: The problem really started decades ago, when the "home" began to be redefined. Once upon a time, a young couple bought their first house on Main Street, often after years of saving, and raised their kids in it, retired in it and died in it. It was once common for several generations of a family to maintain ownership of the family "homestead." The home was a physical center for a family's emotional center. An ideal, to be sure. Not everyone who aspired to it achieved it. But a home represented permanence, stability, and a repository for a family's history.
Once a place to raise a family, and the anchorage to which generations of younger family members perennially returned even after establishing their own homes, the home now is seen by many primarily as a financial investment instrument. One big reason for the current high percentage of home ownership is, in fact, the rise of the "financial advisor," who moved from Wall Street to Main Street, telling Main Street clients that their home was their best bet for retirement — their "nest egg."
The result has been a cultural shift with far-reaching effects: The average U.S. citizen moves every five years, often motivated by what real estate agents call "trading up." Buying low and waiting for housing prices to go up is the stuff of smart economic discussion around the watercooler at work. Buying a fixer-upper, giving it a facelift (often only that) and reselling it for a profit has become one of the "smart" strategies for the American middle class. Hopping long distances to cash in on the difference between markets where housing prices are artificially high and markets where they are artificially low is a common "upper-middle" strategy.
Trading up as income goes down has taken its toll. A house is no longer where we live. It's a merely place to sleep, while both parents run frantically to jobs, dumping kids in day care, spending long hours chasing the cash they need to fund the "investment." Once, the home was where the members of most families met for most if not all meals. Now it's just the place where we do the laundry. We eat out, often separately. Many kids have more fun at the McDonald's PlayPlace than they do at home. For too many of us, the only people who spend significant time in our backyards are the lawncare crewmembers who mow the lawn each week.
Meanwhile, these nomadic Main Street climbers are sleep deprived, alternately anesthetized with drink and pepped up on "energy" concoctions laced with legal drugs. They drive longer distances to work, from suburbs further out from crumbling inner cities.
What keeps them in the game are the stories about the successful gamblers. These are the folks who hit the jackpot and now sequester their belongings in ever-larger houses in gated communities, but spend a growing portion of their gains on alarm systems, gardeners, au pairs, maids and homeowner's association fees. They give their teenagers piles of cash to keep them happy while they fly to distant cities to maintain the increasingly complex businesses that keep the mortgage payments coming. (Police in affluent communities say that arrests of home-alone teens is epidemic. Stranger yet, a kid busted for shoplifting is likely to have a $100 bill in her pocket!) Parents and kids who hardly know each other escape from the craziness by buying bigger, more expensive and more distracting toys. They take second and third mortgages to finance their students' college educations, so they can get jobs that permit them, too, access to the gated lifestyle.
The unsuccessful gamblers (the vast majority, who only see the gated communities from the outside and don't see what goes on inside) wring their hands as their credit card balances escalate and hope. They endure the frequent moves, despite the painful toll the endless shuttling between schools, daycare centers, fast-food restaurants and bedrooms takes on their kids. They refuse to see the connection between the way they live and their increasingly poor educational performance, cultural alienation and deep skepticism. They await foreclosure.
Increasingly relationship poor, because they spend the greatest portion of their waking hours not with family or friends but with coworkers, lonely adults are uniquely susceptible to the career and marriage destroying workplace love affair. Those who can't find love at work find it in all the other wrong places: the local watering hole, the business trip, even the church. Or they seek a poor substitute in "escort" services, phone sex, chat rooms and Internet porn. Half of first marriages and one-quarter to one-third of the rest end in divorce. (As foreclosures mount and home values tumble, divorce lawyers who once helped their clients fight over who would get to keep the home now fight over who gets stuck with it.)
In 2008. We traded in the American Dream for a nightmare. In the scramble to get and keep a house of our own, many of us surrendered the possibility of making it a home. Main Street wanted to be like Wall Street, and everybody lost.
New Year's resolutions, anyone?
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