Reconstruction, Redemption, Jim Crow, all Judge America’s Readiness to Heal Itself

The outcome of many political events can be predicted by examining the economics surrounding them. For instance, the demonstrators of the Arab Spring that would go on to turn over their governments were extremely well correlated to purchasing power parity and GDP growth of their respective nations.

http://jobvoucherplan.com/2011/01/30/what-is-the-effect-of-economics-on-the-egyptian-demonstration/

Likewise, the outcome of America’s Reconstruction era for African Americans was written by the political economics.

Most people, including those Arab Spring demonstrators and ex slaves of 1865, want to exercise their lives in the quiet pursuit of happiness. In the aftermath of the Civil War, after hundreds of years of oppression, in a land surrounded by groups of men who had nightly patrolled outside slave homes prior to the war’s end, and in which the President seemed bent on directing a lenient path back into the union, the last thing, ex slaves wanted was a major political disruption that would thwart the pursuit of happiness that was within their grasp. But they did need a way to survive if they were not just going to exist as before on their masters’ plantations.

To survive, these ex slaves would need a means to sustain themselves. To eat, to have a roof over their heads, and to clothe their families, at a minimum they would need to enter this new paradigm of an agricultural economy with either their own farm or a way to earn a living on another’s.

Without having to subject themselves to a continued plantation life, they would need to borrow the funds to live until a harvest produced. They would also need the means to purchase a farm, the tools to work it, and the seeds to plant on it. This would require a loan and some equity, if they were going to qualify to obtain a loan in America’s capitalist economy.

To obtain a loan typically requires some collateral, or at least some history of being able to repay the loan. A loan requires that the borrower have a job commensurate with the amount of the loan, own a business with some history, or at least have some form of education that would support the amount of the loan.

President Lincoln had promised the slaves 40 acres and a mule. This seemed a generous start to a new life in a world turned upside down politically and socially. In addition, the Freedman’s Bureau offered some financial and food assistance until they could gain an economic foothold. So the foundation for a new life seemed to be put in motion at war’s end.

However, the plantation owners did not want the ex slaves to gain this foothold for that would mean financial ruin to them and an end to the political economy of the south as it had existed for several hundred years. The single largest investment and equity of the South was the slaves. Emancipation destroyed that investment, leaving the plantations without an engine and the wealth of the Confederacy evaporated. They had no intention of letting this happen without a fight, even if they had just lost the war.

Fortuitously for the South, Lincoln was assassinated. In his stead, Andrew Johnson was made President. His sympathies were with the South, not the slaves. As such, he reversed the program of free land for slaves and gave it back to the plantation owners. Without land and without equity, ex-slaves would require generous loans to escape their old life. Neither were offered or even guaranteed by Johnson’s Presidency. Without even a guarantee to back loans, ex-slaves were relegated to some form of land lease, which reverted to odious share cropping across the South.

Granted, even though land grants were occurring along the railroads heading west, nonetheless, taking land from pre-civil war land magnates and giving it to ex slaves was a bit radical in our capitalist country. It also threatened northern lawmakers, who were also large landowners. The idea would not politically stand for precedence set would mean that sometime in the future when southerners regained political power, they could turn the tide on northern land owners.

While ex slaves were not given a quick fix to their poverty dilemma, over the long run, ex slaves held the power of change in that they now could vote in economic supports due to the passage of the thirteenth, fourteenth, and fifteenth amendments. They could enact laws to support land loans. They could fund schools to gain the education to build skills to afford loans and to eventually help ex slaves enter into the American economy.

Yet, southern plantation owners understood the politics of freedom as well and fought to thwart ex slave access to loans, to schools, and to political participation. Through legal, political, and subversive means such as the KKK, ex-slaves were denied the means to obtain loans and to decent education. And with the support of Johnson, their means of voting for change was subversively and violently denied.

Nonetheless, they hoped to sustain the slow and arduous path toward economic freedom, if the federal government could simply and, at least, moderately support their efforts. Sadly, economic events would erode the northern citizenry support of the federal government’s reconstruction. The erosion had standard elements of a greed caused boom/bust economic crisis that would divert national attention away from the tediousness of supporting a social goal that required a gradual lessening of prejudice from the North.

Similarly to the Great Depression that would follow, and the 2008 economic implosion that we all experienced recently, the discovery of gold in 1848 set up the economic failing of post civil war reconstruction when it started the mass migration West in search of riches. The migration to California was an impetus for the massive railroad-building boom after the war, including the transcontinental railroad.

Across Europe, a housing boom similar to America’s in the 2000’s was used to feed America’s railroad ventures, the size of the investment boom, which had not been seen before. Yet the rate of investment could not be sustained by the growth in America’s post war economy just yet. Unfortunately, as all booms do, it ended in a bust that caused a 20-year depression in Europe and the Long Depression in America, starting in 1873.

The depression caused a shift in public sentiment that resulted in political losses that signaled the end of support for Reconstruction. Pre Civil War southern political powers would regain their power in the South, and swift retribution plus starving of any economic progress for ex slaves would be the result.

America would then shift its attention to an economic revival that would simply bypass the sleepy South and focus on exploiting the rail system that had been laid. Millions of immigrants and an expansive growth of industry in the new industrial era would divert America’s attention on social justice for another 80 years.

The South would regain its plantation economy. Ex slaves would eke out a poverty-stricken existence, waiting for the next political upheaval that would not occur until the First World War. The chance at human progress had been thwarted. Decades of harsh treatment and social ingraining of prejudice both on the sides of the oppressor and the oppressed would ensue. How would this injustice affect race relations in America and how would it ultimately impact our inner cities?

Is the Mind of America Disordered or Ill?

Some say that America created its own mess and we deserve what we get. To that end I would ask, “Is a personality disorder or mental illness created by choice, environment or is it physiologically induced? If not by choice, does one who is negatively impacted by their own disorder deserve what they get?”

Does a nation have a collective mind or personality? Can that national mind be disordered? Why do we assume that a nation’s mind is healthy and therefore deserving of its fate when we accept that an individual’s mind may not be and therefore a victim?

If the government of a nation could be compared to its mind, and that government is acting entirely outside its original intent and against the wellness of its body of citizens, would we not declare this nation’s mind to be disordered or even ill. How then could we in good conscience declare that the body of that nation deserves what it gets?

The retort is that unlike we fellow human beings, a republic can choose its own mind/government so the body of the nation/its citizens can and should be hold responsible of the actions of its mind/government.

Disorder in the mind of the nation might exist as an extension of the disorder in the body/minds of its citizens but even then that does not mean the mind/government acts in a vacuum, but its actions rather reflect the disorder in the minds of its citizenry.

I would agree, yet the medicine for reordering the mind is quite painful. Two thirds of the federal government of the United States is highly subjective to the will of the people through elections yet the barrier to entry of being placed on the ballot is much higher than the vast majority of citizens could afford. Therefore, political parties essentially control the ballot. Over the decades, political parties have gerrymandered the ballot geography to lessen the cost of control and now have a tight lid on who gets elected.

The gatekeepers of the mind of America are the political parties. The gerrymandering effect allows the parties to become highly polarized, almost applying a bi-polar mentality on America. 2004 swung to the Republicans but Bush was too warlike so 2006 swung to the Democrats. 2008 was for hope and change but deficits and Obamacare scared the Republican mentality so much that the Tea Party lobe stressed budget cuts during a time of peak unemployment and attempted to use its newfound power to kill unions. Now in 2012, Ohio, a highly unionized state in the thick of having defended against union attacks may throw its weight to Obama.

And during all this bipolar action. the 0.01 percent of the nation that pays for America’s elections will continue to push its agenda on American economics while the cuckoo bird sings. No, the mind of America is ill, is disordered, is severely outside the norm of the vast middle class, and defends itself mightily against healing.

America knows it is not well. Its passive youth sat outside Wall Street asking for counseling yet had no real clue how to heal America’s brain. Its unemployed swung double digits for Romney after just one debate hoping he offered mental salve. The gender gap has all but collapsed and women are turning for Romney even as Democrat campaigns spend tens of millions on abortion ads in the midst of a failed economy.

Yet until a either viable third party changes the landscape of American politics, or a grass roots effort rises up similarly to OWS, this time with the understanding, will power, and intent that our government must be exorcised of its bipolar excesses, or eventually after the body finds itself in the gutter after hitting mental bottom and chaotically reels in upheaval, this body will remain captive to its unhealthy brain.

America Faces a Worldwide Economic Revolution

In the midst of America’s great economic crisis, factions from every point in the political spectrum have raised issues as causes for America’s demise. Yet most of America’s problems, when examined in the light of day, are simply symptoms of our greater issues or even just political noise, offering no real hope in deducing the core of our dilemma. America will ultimately begin a path toward our thriving future. Yet, to do so, we must first clarify the true essence of our core problems before we can agree on viable solutions.

To that end, let’s peel back the political onion to examine what some say are our core issues, and then continue to peel until we briefly reach and peer into the collective complexity of our true core. Fret not however. An onion can make one cry because of its many stinky layers, but America’s solution knives, even those identified within these bindings, can cut through all of them.

Over the past three decades, we Americans spent our way to a debt mountain and a housing bubble that will take years to correct. Factions such as the Tea Party have risen up to chastise our government and to slow its ballooning debt even as record Federal deficits are predicted to continue for at least the next decade. Theirs is a worthy cause for what seems a politically irresolvable dilemma. But even if America comes together to solve our debt issues, reducing our debt will only remove a symptom of our nation’s core problem.

If we are to reduce America’s debt without defaulting on our worldwide financial obligations, we must once again employ all able Americans in productive, well paying jobs. Yet in the midst of our bursting housing bubble, we discovered that for three decades America had also created a false employment bubble, which burst as our economy faltered. As a result of our jobs deficit, America is now in danger of lingering in a severely dampened economy for many years to come, certainly another critical symptom.

America has fallen into a monetary contraction resulting from a combination of our housing debt overhang, our poor credit and a lack of jobs. A viable turnaround solution to this monetary implosion should be immediately implemented to begin America’s journey toward our thriving path, and Congress and the President must support it. Yet, while our slowly eroding jobs base, diminished credit and housing debt overhang must be simultaneously corrected if we are to have any hope of more than a token recovery, our monetary implosion, however frightening, is still at the edge of America’s core problem.

Faced with such dismal prospects for debt reduction and job creation, America is now forced to choose between two competing constituencies. Our very concept of freedom almost demands that we support free enterprise, for it has helped America’s multinational corporations compete in the world’s rapidly transforming marketplace. Yet, the immense worldwide scale of free enterprise is now tearing apart our middle class, assaulting the American worker, and we seem powerless to even slow its destructive path. This choice between competing alternatives of either 1) supporting American businesses in their quest to rise above world competition or of 2) supporting the American worker, who is being diminished by those same corporations’ conquests, begins to converge toward the core of America’s problems. Over the past thirty years, emerging nations have conducted mercantilist attacks on America’s gross national product. Yet, our government has resisted creating the economic weapons required to defend our nation against modern hybrids of global competition.

America is already thirty years behind the curve of economic revolution. We are seemingly only observers to a world in which free enterprise is a both a bulwark of defense used by nations against those that would employ mercantilist offenses against them, and also an offensive siege weapon used by emerging corporate-states to destroy the classical defenses of nations that would attempt to resist their growing invasive economic powers.

During these thirty “standstill” years of observing the world’s economic revolution, America’s baby boomer generation rose to positions of power in business and government. In the comfort of our former world prestige, our baby boomers enjoyed the luxury of basking in decades of societal actualization. We focused our attention on America’s internal problems at the expense of creating a competitive manufacturing base. Our political struggles over competing societal goals of social justice and military superiority blinded us to our emerging jobs crisis. Yet, the hungry world fiercely competed for and took from us our very own consumers and employers.

America’s consumers naively embraced the world’s competition for our dollar. We enjoyed the low priced fruits of a desperate world’s labor, not understanding the impact that our purchases would have in the destruction of American jobs, the explosion of our debt, and the diminishment of future opportunities for America’s growth. For awhile, the savings we enjoyed from globalization offset our slowly diminishing purchasing power. Yet, over three decades, our purchases raised the world’s productivity, brought an onslaught of global competition to our shores, and ultimately replaced the American worker with an army of overseas laborers.

Eastern nations adopted hybrid economies of neo-mercantilism to rise above the fray of neo-colonialism and to position Asia for a century of prosperity. Unchecked by any natural defenses against them, neo-mercantilist nations joined forces with international banks and emerging corporate giants to concentrate the world’s economic power for China’s 21st century rise toward hegemony. In the process of this world economic shift, America’s future competitors, the corporate-states, were born.

Fierce, global competition required American businesses to employ all manners of competitive measures including intercontinental scale efficiencies. As the world would soon come to realize, the international skills multinational corporations learned to survive included those necessary to pit nations against each other and to overcome the regulatory frameworks nations imposed in vain attempts to restrict corporations’ intrusions into domestic markets.

In the process, these commercial behemoths of corporatism trampled on America’s two hundred year foundation of classical free enterprise. Within the context of our government’s regulatory framework for fair competition, America’s version of free enterprise envisioned all nations playing by our rules of engagement. In the past thirty years of economic revolution, America instead became Redcoats in the global economic war. Our structured business legal system was a bright red target easily slaughtered by guerrilla warfare of nations and corporate-states intent on pillaging America’s capital and intellectual property.

As defined by our anti-trust laws, America’s isolationist views of perfect competition required that our industries limit any one competitor’s size to well under what could be called a monopoly within our borders. Our legislated size limits were smaller than the mega-factory direct foreign investments required to compete globally. As a result, even if not the root cause of business flight, America nonetheless needlessly influenced American businesses offshore in their bid for massive customer markets such as India’s and China’s.

Some of American corporations’ resulting worldwide operations have grown into virtual states. In their unquenched quest for profit, they have created international offensive siege weapons to easily circumvent the purposes of such antiquated American concepts contained within the Sherman Antitrust Act. Many of our historically American-centric enterprises have since blurred their connections with America. Consequently, the Sherman Act has become increasingly challenged by free market advocates as an albatross of regulation. Alternately, it has been condemned by those charged with protecting the rights of consumers and domestic small businesses in America as a weak, antiquated tool of defense.

Globalization has brought competing American interests to the brink yet we dare not allow political dysfunction to keep America on the sideline of global competition any longer. We somehow must now collaborate to support America’s multinational industries’ quests while simultaneously protecting our own competitive domestic market. We must provide a pro-business environment that places America’s businesses on par with those of other countries while stopping international corporations from employing siege weapons of free enterprise against our citizens. We must provide competitive yields for capital in America to ensure America’s posterity by reversing the tide of capital outflows from our country. And we must ensure that our loose federation of American businesses can compete globally against neo-mercantilist countries. America must define the post neo-mercantilist era.

We will soon be living in a land full of global corporate giants that employ modern offensive economic weapons to consume nations. Yet unlike the neo-mercantilist countries that have attempted to create hybrid, state run industries immersed in private capitalism to compete with these futuristic monstrosities, America has not yet even begun to create its weaponry against neo-mercantilists such as China, and certainly has no viable plans against emerging corporate-states.

As America faces the prospects of diminished power in this 21st century economic revolution, we must adapt to the corporate power realities that all nations will face. Our future thriving path strategies will inevitably merge the goals of our giant, American born, corporate-states with those of our nation and its citizens. Yet our government must go beyond such surface strategies to create America’s post neo-mercantilist framework to harness the power of corporate-states for the betterment of our citizens and for all nations.

If we are to create a thriving outcome from the 21st century economic revolution for all on our finite planet, America must seek out the core of our problems and create a model for other nations to follow. Our thriving path forward begins here.

Congress Must Act Now To Save America’s Homes or Seal Our Fate!

INTRODUCTION:

As of December 2011, housing prices have fallen 38% nationally, 7% more than during the Great Depression. While pricing has already dipped below the trend line that housing might have followed had the housing bubble not occurred, the outlook is for prices to continue freefalling another 4% during 2012. Some experts predict prices could drop nationally below 50 % of peak levels or more. Yet others suggest that economic fundamentals should be supporting a leveling of prices, and they wonder if normal economics of supply and demand have abandoned the housing market altogether.

Even though they may not appear so, the rules of economics actually still do apply to the housing market, and unfortunately they point ominously to even more alarming conditions in the years ahead. While many believe that Congress makes things worse every time they fiddle with the economy, Congress really has no choice but to intervene in this housing market if we are to save a cornerstone of America’s economic future. This post describes why housing prices rose and fell, and why they will continue to fall in the absence of intervention. It suggests why half the home mortgages in America could end up underwater and disrupt our economy for decades to come if Congress fails to act.

HOUSING’S RISE:

1995: Total housing units (in millions) 112.6 Renter Occupied 35.2 Vacant 12.7

In the five decades leading up to the 2000s building frenzy, housing prices rose predictably according to the principles of supply and demand. Housing pricing surged and slumped in response to peaks and troughs of business cycles, increases and decreases in interest rates, and growing or obsolescing local market commerce. Yet, nationally, averages followed historical patterns of a gradually rising nominal price market. Adjusted for home square footage that increased with each decade, new home prices tracked inflation nationally. Housing starts followed population growth, and as a major 14 % component of America’s GDP, housing generally has led the nation out of recessions.

Beginning in the mid 1990s however, housing economics began a dramatic divergence from historical trends. For the next decade, a sustained building spree added 6.6 million more housing units than was needed to support the rise in U.S. population, as many as one million units per year. In a rationally functioning market, this excessive addition of new homes would have quickly precipitated a business cycle slump and prices would have dropped to encourage a slowdown of new housing starts. But America got caught up in a housing frenzy and added enough demand to absorb this excessive supply while bidding prices up 225% above their historical trend line, a speculation that Fed Chairman Alan Greenspan as early as 1997 called an “irrational exuberance”.

COMPONENTS OF INCREASED DEMAND:

2006: Total housing units (in millions) 126.6 Renter Occupied 34.1 Vacant 16.7

LOW INCOME BUYERS: Some blame the excessive demand that pushed pricing well above its historical trend line on low income buyers who benefited from government regulations that forced lenders to ease requirements for lending. By passing the Community Reinvestment Act (CRA) and substantially revising regulations in 1995, Congress pulled these non-traditional buyers and their higher risk into the housing market. In doing so, Congress did nudge the beginning of the feeding frenzy, but the immediate effect of adding these buyers was not a large component of demand but merely a catalyst of future demand.

More importantly to the housing bubble than the numbers of low income CRA buyers was their impact on creative financing. Being forced into accepting additional risk, banks responded by creating risk spreading financial tools to mitigate high-risk, subprime loans. These tools would later be used to set the housing industry ablaze. Without them, the Housing Ponzi could not have developed.

BABY BOOMERS: Others blame the added demand of the bubble on Baby Boomers whose retirement accounts had been consumed by the bursting of the Dot Com bubble. In need of a quick fix for their fast approaching retirements, some Baby Boomers took advantage of “exotic” loans to buy too much home at too high prices hoping for substantial returns. As more Boomers entered the market, they pushed up home prices and acquired excessive debt in the process. At the beginning of the bubble, the median home price was $120,000 and the median income was $73,000, a ratio of 1.65. At the peak, the median home price had soared to $215,000 but incomes remained the same increasing the loan to income ratio to 2.94, an unsustainable level.

To cover the shortfall of income needed to make their new debt payments, consumers relied on home equity loans and credit card debt. Between 2000 and 2006, home equity debt increased $1.2 trillion and credit card debt rose $900 billion, again to unsustainable levels. By the peak of the Ponzi, home ownership had surged from a historical 65.1 percent to a 69.9 percent of the population and home ownership debt load had increased from 65% of GDP to an unsustainable 110%.

CONGRESS: More blame the actions of Congress for the housing bubble than the addition of non-traditional buyers and overreaching Baby Boomers. Certainly the Community Reinvestment Act and its subsequent regulatory revisions in 1995, including HUD’s direction that Fannie Mae and Freddy Mac set aside 50% of guaranty funds for low income earners, increased subprime loans tenfold and increased demand. But the repeal of Glass-Steagall, through the Financial Services Modernization Act of 1999 that allowed commercial-banking, Wall Street banks, and the insurance industry to merge, created banking products that swelled demand much more. And the Commodities Futures Modernization Act of 2000, that excluded certain financial commodities from oversight by the Commodity Futures Trading Commission, the Securities and Exchange Commission, the Federal Reserve, and state insurance regulators, allowed bankers to flood the world with lucrative credit-default swaps and to push exotic retail products into a growing speculative housing market to feed the swap market. Without the collusion of Congress, the irrational exuberance of consumers needed to fuel housing’s excessive demand could not have been enticed by the resulting banking products.

INVESTMENT BANKING: Most place the blame for the Housing Ponzi squarely on the shoulders of investment bankers. To allow non-traditional buyers into the market in the mid 1990s, banks initiated low doc and low down payment introductory loans to the primary market and combined these loans with others to form securities called Collateralized Debt Obligations (CDOs) which were then sold into the secondary market to transfer bank risk off their books. While 52% of low income loans were securitized by Fannie Mae and Freddie Mac in the early years, securitization quickly became a lucrative international commodity product of investment bankers and the market topped $2 trillion at its peak in 2006.

Yet as big a profit maker as CDOs were, an even greater profit was made in the issuance of Credit Default Swaps (CDSs), a form of unregulated insurance that allowed banks to take the risk of loans off their books, to increase their loan-to-collateral values four fold, and to profit from insuring events that they thought could never occur. At the peak of the Ponzi, the CDS outstanding market topped $60 trillion and had made $4 trillion in profits for participants in just three short years, much more than the $2.7 billion paid for lobbying Congress or the $1 billion paid in campaign contributions by the financial industry (peanuts in comparison) to persuade Congress’s votes allowing this free-for-all in the decade prior to the financial crisis.

To feed this frenetic pace of profiteering, international banking required the pace of loan origination to increase even though housing prices were accelerating upward beyond traditional affordability, and thus they began what became their final phase to lure additional demand. To bring the last customers into the Ponzi before its collapse, banks introduced a myriad of “exotic” loan products. After low doc and low down payment loans came no down payment and no doc loans. Later, interest only and negative amortization loans were offered. Banks then created piggy back loans with first and second mortgages that eliminated PMI and even offered to finance closing costs. From 2003 until the peak of the Ponzi, fully 25% of mortgage loans included teaser introductory rates. And in the final two years of the housing spree, banks allowed consumers to acquire pay-option mortgages that gave them the choice each month of paying fully amortized, interest only, or even very small monthly minimum payments. All of these risky products fed the secondary CDO and CDS market with mortgage securities by targeting the U.S. market for excess demand and exuberant prices.

RISING HOME PRICES: By 2003, all semblances of historical housing pricing metrics were gone. Brokers, agents, and bankers all explained that the new measurement of housing value was not bound by either the historical rental rate of housing or the constraint of trailing American incomes, but was instead measured by a new metric, combining these traditional valuations with the rate of return of increasing home prices themselves, thus spurring a real estate bubble with the fallacies of hope and greed. Half of all home buyers responded to this new flawed ideal by purchasing beyond their means, and in the process, pushing up the price of housing.

FEDERAL RESERVE: The Federal Reserve, flush with investment from China and concerned about recession because of the bursting of the Dot Com bubble and the economic shock of 9/11, consciously chose to support the housing surge through lowering of interest rates from 2001 through 2005. As a result, average mortgage rates reduced through the period from 7.9 percent to 5.6 percent, increasing demand and supporting higher home prices.

SECURITIES AND EXCHANGE COMMISION: The SEC inexplicably allowed five of the nation’s largest brokers to waive their capital-to-debt requirements that had historically been held to a 12 to 1 ratio. The brokers responded by leveraging their capital as high as 40 to 1, adding liquidity to debt financing, fueling housing demand, and pushing up pricing. Three of the five qualifying brokers later went bankrupt or were absorbed by other firms.

In the aftermath of the financial crisis, when many are demanding prosecutions of what seems to have been criminal actions by some in the financing industry, the SEC has been loath to act. Data suggests that the SEC had significant knowledge of financial firms’ negligence in following regulations for several years prior to the financial crisis and yet the SEC chose not to act on its knowledge. If the SEC were to take action now, the resulting trials would focus as much on the SEC’s foreknowledge and complicity as they would on the potential criminality of bankers and would shine an ugly light on the revolving door between government and industry, two reasons why the SEC might conspicuously choose to continue its inaction.

THE HOUSING BUBBLE POP:

2008: Total housing units (in millions) 130.3 Renter Occupied 35.8 Vacant 18.6

Inwardly, the banking industry knew that it had stretched the bounds of credibility and sustainability as it introduced riskier and riskier loan products to create additional demand. Bankers feared that resulting aggregate loan to income ratios exceeded all historical limits and might eventually collapse. In fact, some industry insiders even began to bet against CDO portfolios of other companies through CDSs, expecting to profit on rising defaults that began as early as 2004.

So when these defaulting subprime loan cracks appeared in the dyke of this elaborate housing Ponzi, a nervous fog settled in over the entire industry and many began to speculate whether highly leveraged firms such as Bear Sterns could cover their liquidity gaps. After some banks refused to cover Bear Stearns with short term loans, confidence waned, Bear’s stock plummeted, and Bear was purchased by J.P. Morgan Chase. By allowing Bear’s leverage to grow to 35 to 1, the SEC allowed just a 1% loss of asset value to increase Bear’s leverage to over 70 to 1. In this maximum consumer debt environment, that extraordinary leverage caused market confidence to collapse. Lehman Brothers followed suit six months later with a delayed total collapse of their 40 to 1 leveraged firm.

In the after shock of Bear Sterns and Lehman Brothers, the U.S. Government stepped in to rescue Freddy Mac and Fannie Mae, made loans to AIG, put in place a $700 billion bailout of teetering banks, forced the sale of Washington Mutual to J.P. Morgan Chase, and implemented a stimulus plan to strengthen Wall Street. The two remaining firms that had taken advantage of the SECs allowance of extreme leveraging, Goldman Sachs and Morgan Stanley, abandoned their status as investment banks. One effect of such sweeping industry changes was to substantially reduce the demand for higher risk mortgage CDOs in the secondary market, thereby dampening exotic retail products which then diminished housing demand and depressed pricing.

THE UNWINDING OF HOUSING SUPPLY AND DEMAND:

2011: Total housing units (in millions) 131.2 Renter Occupied 38.3 Vacant 18.7

SUPPLY:

EXISTING INVENTORY: At the peak of the housing bubble, housing inventory for sale equaled about 4 months of sales. From that point, listed inventory rose steadily to level off at about 9 months of inventory. Additional shadow inventory being withheld from the market, such as bank REOs, has kept listed supply at about 9 months for the past two years. However, as housing prices continue to decline, more houses will be returned to banks either through walk-aways or foreclosures, adding to bank’s already significant shadow inventory. In addition, job uncertainty and job immobility due to housing illiquidity continues to add to shadow supply. If demand increases, shadow inventory will flow into the market and continue to depress pricing.

NEW INVENTORY: Demand for new construction is now running at about half of the 1.2 million new homes per year required to fill the needs of a growing population. The excess supply of existing housing and the increasing cost of new construction commodity materials have combined to keep existing housing prices well below the cost of new construction. This price differential not only pressures construction labor rates downward and reduces profitability of the new construction industry, but it causes demand to be filled by existing homes rather than new ones. Therefore the vacant inventory of existing homes is being absorbed at a rate of 600,000 units a year. At this rate, the excess 6.6 million homes that were built during the Ponzi will not be fully absorbed until 2020, extending pricing slide and/or excessive gap for years to come.

VACANCY RATE: At 9.8%, vacancy rates are about 40% higher than the 40 year historical norm. Vacancy rates increased to such historical highs for two reasons. First, housing construction lagged the housing crisis and new units were completed even as the crisis unfolded. Vacancy rates surged as these lagging units came online. Second, as the crisis unfolded, foreclosure rates increased fivefold adding to the rental population. Increased vacancy rates have depressed pricing.

RENTAL RATE: Home ownership unwound from its Ponzi peak rate of 69.9% back toward its historical averages of 65.1% as home owners gave their homes back to the banks and entered the rental market. As a result of increased demand for rentals, the percentage of new construction rental units has increased. In addition the monthly rental rate in many U.S. markets now exceeds monthly mortgage rates. The growing gap in rental versus mortgage costs suggests either that home buyers are unable or reluctant to buy and indicates a lax demand that is depressing pricing.

DEMAND:

PURCHASE RATE: At a rate of 4.9 million purchases annually, housing purchases are occurring at approximately the rate that would be expected had the bubble not occurred and had the trend of purchases extended with population growth from the early 1990s until now. The current rate of housing purchases is slightly below historical standards, but only appears depressed when compared to the excessive standard of the housing bubble. No indicators point to any trends that will materially increase purchase rates for the foreseeable future. Therefore, an extended period of excess housing supply will continue to support a long term downward drift in pricing.

Buyers have left home ownership in droves since the beginning of the housing crisis by either selling, short selling, walking away from mortgages or being forced out through foreclosures and have shifted to either rentals, sharing quarters with others, or becoming homeless. Home ownership has unwound from its Ponzi peak rate of 69.9% back toward its historical averages of 65.1%. Nonetheless, there are no indicators to suggest in this high unemployment and uncertain business environment that home ownership will level off at its historical average of 65.1%. It will likely continue to decrease, depressing demand and pricing further as a result.

REDUCED DEMAND OF SECONDARY MARKET: While the market for credit default swaps still exists and continues to destabilize the world’s economy, demand for CDSs has dropped to half of its peak of $60 trillion at the height of the housing bubble. Demand for underlying CDOs has been hampered by the scandal of claims to title that has rocked the CDO market. During the frenzy of the housing bubble, short cuts were taken that left the chain of title to millions of individual notes in question, threatening legal entanglement for years to come. At the same time, housing value deteriorated, reducing the value of their packaged CDOs and in some cases triggering repayment from their corresponding CDSs. The resulting title debacle collapsed the secondary market for CDOs, squashed the exotic loan supply, lessened demand for housing, and dampened housing pricing.

REDUCED ACCESS TO CREDIT: Banks, that had received bailouts from the Federal Government in its attempt to preserve lending liquidity, instead chose to reserve funds to enhance balance sheets. In addition, without being able to pass risky loans to the secondary market, banks tightened credit criteria and withdrew to more standard loan products, requiring PMI insurance, higher down payments, higher credit ratings, more solid work histories, and historical income to debt ratios. Tighter credit requirements diminished demand for housing and depressed pricing.

Banks also substantially retracted from the credit card market, eliminating 25% of $5 trillion available credit. In addition, banks increased average rates on credit cards from 10.9 percent to 16.2 percent. Buyers had counted on consumer credit to support their short fall between income and housing debt during the bubble, and without it, home buyers lost the ability to carry higher priced homes. Even though the financial crisis eliminated the motive to flip houses for profit and thus removed a primary reason for excessive use of credit card credit, the loss of credit as a cash management tool for existing housing dampened demand and depressed pricing.

SAVING TREND: After the housing bubble burst, consumers prudently used excess funds to pay down loans, eliminating more than a trillion in housing debt, and more than $100 billion of the peak credit card debt. Another $4 trillion is needed to reduce housing debt overhang and close to $800 billion in credit card debt still remains. If the economy and housing prices continue to drift downward, these numbers will grow. The trend toward repayment has subsided somewhat but continues to remove funds from the purchase market and to depress pricing.

INFLATION: While median salaries essentially remained stagnant throughout the housing bubble and beyond, prices for commodities have increased. As food, energy, clothing and other essential commodity prices continue to increase against a back drop of stagnant wages, less income will be available for housing which will dampen demand and depress pricing.

The Fed has signaled that interest rates will be held at essentially zero for the next two years but the Fed may be forced to change its position as external events overtake it. Housing ARM interest rates are threatened not only by creeping inflation but by rating agency threats over continued Congressional inaction, the Fed’s stuffing of long term treasuries with the its Operation Twist, and by potential overflow reaction as the Euro Zone worsens. The mere uncertainty of interest rate increases that would cause more funds to be used to pay interest instead of higher home prices dampens demand and depresses pricing.

POPULATION DEMOGRAPHICS HAVE SHIFTED: The housing bubble was driven in large part by Baby Boomers who controlled 80 percent of America’s wealth. During the bubble, they aggressively added 12 million housing units to the existing inventory of 112 million units, influencing the size and style of new inventory. Boomers reached beyond their means to buy more square footage than they needed or could afford. From the post war 1950s, the average home gradually increased from 258 square feet per person, but during the bubble, size increases swelled to over 960 square feet per person. To fill the square footage void, boomers added immediately obsolescing features such as gargantuan walk in closets, media rooms, sitting areas, and home offices that would not be valued by the following green generations.

The housing bubble burst just as the Baby Boomers began to retire, wanting to shed themselves of large houses. Their 1.7 children were flying from the nest and Boomers now wanted to condo-size. However, the 20 years following the Boomers’ births, 1965 to 1985, produced about one million less babies per year, not enough to absorb Boomer houses. This group of home buyers is now entering their peak earning and peak square footage years at a time of economic slump and increased awareness of energy and space efficiency. Therefore, the demand for large Baby Boomer houses will be diminished as contractors build new houses to meet this group’s desires. Changing demographics will place a downward pressure on Boomer housing pricing that will permeate the entire home market.

PRICE STICKINESS: 28.6 percent of homes with mortgages, or 14.6 million homes, have underwater mortgages. If the cost of selling a home and putting a down payment on a new home is included, then fully 50% of home owners cannot afford to sell their homes now. As pricing drifts downward, this figure will only exacerbate. As a result, would be buyers who cannot take the loss of a sale of their own property are trapped from entering the market, reducing demand, and depressing pricing.

Employers, who used to buy workers’ homes to initiate job transfers have ample local employee choices and can no longer justify the cost, further exacerbating a reduction of demand and thus putting a downward pressure on pricing.

GLOBALIZATION: After WWII, the United States military provided a modicum of economic stability in the world, lessening the risks of businesses transferring operations to overseas locations. As a result, mass transfers of capital and jobs to direct foreign investments increased significantly. With China’s doors opening in 1979, the U.S. flooded China with 40,000 new factories that each took away certainty of America’s future and that accelerated a trend toward wealth disparity and a diminishing middle class. The resulting impact on wage pressures over the past three decades has lowered the expectations of the new generation of home buyers, reducing demand and depressing pricing.

MONETARY IMPLOSION: The artificially stimulated economy of the past two bubble decades hid the underlying sickness of America’s base GDP. When the housing bubble finally popped, our consumer based economy was clogged with both housing and consumer debt that had been diverted from the real economy to feed the housing bubble. After the banks quickly pulled credit to protect themselves from what they knew would be a chaotic implosion, America’s consumer base had no means to continue consuming, the credit engine of small business was stopped even before small business could fulfill its current client requests, and business shortfalls translated to employee layoffs, precipitating a circular implosion of consumers, businesses, and employees wealth and debt capacity.

After the implosion, as the economy lingered without commerce or money creation, debts mounted, credit ratings suffered, and unemployment intensified. The ability of home owners to pay their mortgages decreased which in turn increased mortgage delinquencies and foreclosures and accelerated the deflation of the housing bubble, exposing the housing debt overhang.

The resulting economy now suffers from a trifecta of dilemmas. The greatest bubble America has ever experienced has led to a housing debt overhang that stifles America’s engine of consumption. It has also damaged credit ratings that have pulled American businesses’ and home owners’ access to essential cash management tools and vital growth credit. And it has led to a loss of productive jobs for 25 million Americans who without work cannot help to restore America’s economy. If a simultaneous solution to these dilemmas is not enacted, the economy will spiral lower and will create an environment for a continued downwardly drifting malaise of the housing market.

CONCLUSION:

Since the passage of the National Housing Act of 1949, Home ownership has been heralded as a benefit to American society, supporting stable families and prosperous communities. It has provided the number one source of economic security for the majority of Americans for the past six decades. However, rather than bring hope to millions of Americans that had previously been left out of the American dream, two decades of governmental policies and international banking have led to the gutting of that dream not only for those who could not afford homes previously but for tens of millions more Americans, eroding home ownership benefits in the process.

Rather than the rock of social stability that it could have been, the American home has become the proverbial albatross around the neck of the middle class, draining its limited wealth to keep banks from suffering the consequences of their prior decisions. If Congress is to stop the housing crisis’s deterioration of families and communities across America, and if it is to protect the cornerstone of our economic and national security, Congress must act now to stabilize what, by all indicators, will be another decade of housing pricing decay.

Components of my plan:

Equity for debt swap to remove excess housing debt
http://jobvoucherplan.com/2011/08/04/hawaiians-have-the-hale-housing-solution-to-right-america-housing-bubble/

Job voucher plan to employ all able Americans immediately
http://jobvoucherplan.com/must-reads/

Credit amnesty program to quickly repair business and consumer credit
http://jobvoucherplan.com/2011/09/08/yes-america-can-quickly-turnaround-heres-how/

Modified Republican multinational incentives that entice domestic investment without giving carte blanche tax holiday and that do not entice further foreign domestic investment
https://jobvoucherplan.wordpress.com/2011/10/26/our-economy-can-be-re-ignited-like-a-boy-scout-fire/

Cautious Worldwide Win-Win Solutions Should be Sought

Vaclav Havel, Former Czech President, Commencement address at Harvard University
Cambridge, Massachusetts, May 1995
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http://www.humanity.org/voices/commencements/speeches/index.php?page=havel_at_harvard
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The problem with the premise of Vaclav Havel’s speech stating that we have essentially reached a single global society is that he contradicts himself throughout as if to say that it is merely his hope for future global achievement. I do not see evidence that mankind is evolving toward his ideal. Havel idealists can point to certain social structures and advances in the precedence of laws to suggest that we are progressing as a species. For instance as of 1981, all nations on earth have passed laws against slavery. And yet, others would point out that the earth contains more slaves in 2011 than at any other time in the recorded history of mankind.

We can point to the relative peace that has been achieved since WWII but this peace is not without precedence and has been at the extraordinary cost of the United States as hegemonist spending more than all other nations combined on military assets and personnel and creating technologies that could destroy the world many times over. And yet, with all this extraordinary expense of national will power, the number of battles has not decreased nor has the atrocities committed by nations or men.

We can point to the evolution toward democracy intertwined with capitalism as a trend away from the captive ideas of feudalism and mercantilism, yet where on Earth does true democracy exist? Globalism has reversed any trend toward economic and social freedoms envisioned by those that espoused the virtues of free enterprise of capitalism back toward even larger geographies of quasi-feudalism and mercantilism.

The nature of man is unfortunately not evolving at any measurable pace. The capacity of all is toward evil although 99 percent seek our better natures. The 1 percent who are ruled by their own sociopathic desires find positions of power when opportunities arise with which to pursue societal evil played one nation upon the other. The tools with which to accomplish this evil are unfortunately far outpacing mankind’s social progress.

To protect ourselves from those evil doers who have successfully harnessed other nations or societies, our societies have evolved to nation states and even larger civilizations of shared histories, shared cultures, and shared socioeconomic futures. However, because of the nature of mankind, we are far from evolving to a society that encompasses the entire world.

So mankind must cautiously move forward accepting as best we can winning compromises that allow others to win as well. Cautiously because we do not know if like all other bubbles of this period, that relative peace and cooperation are a bubble as well.

Ashes, Ashes, We All Fall Down

If we choose to continue a stagnation of political will, American’s children of the 21st century and beyond may not have to worry about riches that could crush their human spirit. Instead their children and children’s children may spin around in the summer’s fields and recall their ancestor’s macabre poems.

Ring around the bank moats,
Pockets full of bank notes;
Cash’s crashes,
We all fall down.

Or perhaps America could get on with cleaning up the rats’ droppings before they bring the plague of financial destruction upon us. Unlike the poor inhabitants of feudal villages that took for granted their lives had to be shared with pestilent rodents, we do not have to share ours with diseased vermin of Wall Street. We know the right course is to restructure the banks. In 1932, FDR restructured the industry in 100 days after his election. Today, we watch dumbstruck and carry our financial, job and mortgage dead to the front door steps for our law officers to cart off, while the ongoing financial shenanigans of these disease bearing rats continues to plague us after 3 years of stagnation that seems to have no end in sight.

Certainly, one can argue that the right thing for Hank Paulson to have done was to save the banks from utter destruction by massive injections of capital in 2008 when public officials had no clue the depth or breadth of the calamity before them. Yet now after three years, can we honestly say that we do not know the extent of the devastation, and if so, why? Does it make sense to sit helplessly by watching the banks trying to put out this monetary wildfire that has swept through their industry without trying to carve out a safe zone of financial capitalism that can survive when the whole thing comes crashing down? Rather than keep too big to fail banks in place while they continue to falter and continue to fail in their needed support of an economic recovery, perhaps America should once again act paternally to break up the banks and cull out the ones that have healthy balance sheets to help them to grow under the tighter restrictions of reinstituted banking regulations.

For those banks that continue to bleed with poor capitalization after such revitalization, they can continue to wallow in a sidelined non-lending stagnant existence or die as America gets on with its historical culture of survival of the fittest. There is no need for America to wait for the next financial virus to scourge all of Western Culture when we can instead systematically yet expeditiously put our financial house in order.

America Must Default Now

Remember the classic story of the leak in the dike? A young boy hiking along a dike in Holland stuck his finger in a leak that threatened to collapse the dike and let the waters of the North Sea rush in to destroy his village. He stayed the night holding fast to his duty until the men of the village came to find him and to repair the leak. The legend goes that this small boy, acting on his sense of duty, saved his community with his single act of bravery and that all of Holland might have perished had he not. Perhaps not the prime moral of the story but as important, had the village leaders not found this young patriot and quickly repaired the dike, he would have perished and his bravery would have been in vain. It took a village to ultimately stop the dike from collapsing.

The Tea Party has been America’s little Dutch boy. Tea Partiers claim that America’s debt is as ominous as the stormy North Sea bearing down on the dikes of Holland, threatening to destroy our economy. They also suggest that just as the dikes of Holland held back the seas, America’s economy must hold strong against our national debt to keep it from limiting our future. Seeing our historic deficits as powerful enough leaks to collapse our nation’s credit, in 2010, the Tea Party rose up to stick their finger in the dike, pledging to stop America’s excessive public debt from growing further until we could agree on a path for recovery. In the meantime, other leaks have sprung up on America’s dike.

Clearly, our Federal budget is not the only ill that is afflicting us. Another little Dutch boy, the Occupy Wall Street movement, with just as much valor and patriotism as the Tea Party, has now climbed the dike to stick its finger in political leaks as equally important as our federal deficit. Occupiers have identified the illicit bond between Wall Street bankers and our politicians that threatens to diminish America’s future and they pledge to remain on the dike until all of America can persuade our leaders to relieve both the Tea Party and the Occupy Wall Streeters from their patriotic duties.

Unlike Holland, where village leaders relieved the little Dutch boy’s first aid plugging of the leak by repairing their dike, our nation’s leaders have been conspicuously absent in rushing in to relieve our patriotic Tea Party and Occupy Wall Streeters from their first aid missions. Our President and presidential candidates are reluctant to present bold reformation plans, Congress’s Super Committee is unable to compromise on material Federal budget reductions, the rest of Congress is unwilling to put forth substantial jobs bills or to work on restructuring a healthier business environment, our state and local governments are dangerously close to insolvency by refusing to resize to fit lower tax revenues, our banks are refusing to restructure upside down mortgages that are stagnating America’s private economy, and our multinational corporations are unwilling to reinvest in America’s workforce.

Without substantial and coordinated efforts by all in leadership to increase our national productive output, to support corresponding jobs that can sustain a right sized government budget, and to reduce our public debt that is stagnating economic growth, America’s dike will collapse. Whatever we do going forward to solve our leadership crisis, whatever the terms of restructure, Our leaders must know that Middle America will not complacently wither through decades of high unemployment nor will our military complex accept the eventual severe lack of domestic military resupply capability that will result from such languishing. America must now face the inevitability of “DEFAULT”.

The word default is an enemy of the state yet its effects are already sinisterly invading our country. Our Federal government has already defaulted on the value of the dollar with its stimulus and quantitative easing. Our state and local governments have already defaulted on public services to keep bloated public employees in place. Our multinational corporations have already defaulted on America employment by slashing work forces to sustain profitability through the monetary collapse. Our bankers have already defaulted on their obligations to provide financial liquidity, first by choosing to bet against America and then by creating the monetary implosion that sent millions of Americans into foreclosure and bankruptcy. Now, the American people must join in this cacophony of defaults by forcing a restructuring of America’s business and political environment to sustain our families and our country into the 21st century.

Americans must default on our support of indefinite extensions of trillion dollar budget deficits that reflect commitments to unsupportable baby boomer ideals of social justice and vast military dominance. We must default on our submission to government policies supporting unrealized promises that free trade and globalization would enrich all Americans. We must default on our acceptance of the status quo shenanigans of a financially democratized two party system that places the overwhelming benefit of the few over the welfare of the many. And as importantly, we must default on subservience to the mountain of debt that has been yoked to our economic future for the benefit of bankers, multinational businesses and political parties.

Ultimately, the legal power of Americans to default rests in Government acting on our behalf. However, rather than focusing on these transformative needs of the electorate, America’s government representatives are locked in an addictive trance, fixated on meeting the desires of powerful masters. To constitutionally affect change, we will have to break the grotesque relationship between Wall Street, multinational corporations, and Congress; one in which Congress depends upon bankers’ and businessmen’s’ financial elixir for re-election, where Congress has the power to dole out favors, contracts, tax breaks, and laws in return for their election fix, and where bankers have the power to print money to support Congress’s illicit behavior. If America is to ensure an equitable solution in which our Congress, bankers and businesses help to fix the mess they’ve made, we must forever sever our enabling support for this addictive relationship.

If we do not act to break these addictive bonds, our Federal Government will most certainly continue to provide cover for banks and businesses while authorizing massive deficits that expand its growing $15 trillion dollar debt. If not forced by the Tea Party or international credit rating agencies to finally face its unsustainable lack of institutional moral fiber and financially driven dearth of governing judgment and foresight, Congress will recklessly inflate our dollars beyond any semblance as a safe store of value. But private debtors do not have the luxury to print money. Private debts can only be repaid by the output of our people. We now have to decide if our output will be used to invest in America’s future or to pay our mounting Federal debt.

Certainly our multinational corporations have been given free rein to invest where they will and to employ whom they will. Because of substantial market opportunities to the East, America’s ignorance in creating a hostile business environment at home, and our bankers, businessmen, and politicians’ complicity in exploiting both, our multinational corporations have chosen to invest overseas. Yet somehow, America’s politicians hoped that our businesses, which are made up of citizens of this great country, would also act as model “virtual citizens” making business decisions in the best interests of all Americans. Our government even went as far as to dictate from the decisions of our Supreme Court these hopes. The Federal Government’s complicity with bankers and multinational corporations would be much more guilt free if they could imagine businesses having a patriotic conscience, but alas the vast majority do not. Our businesses are hardwired for maximum, risk adjusted profit and for the reasons previously mentioned, maximum profits exist offshore.

No American Dutch boy movement has yet risen to force government to soberly recognize business’s profit nature. Until such a movement pressures Congress, it most likely will not create laws to protect the public from the more destructive nature to our economy of business’s international profit motive, nor will it attempt to find win-win solutions to harness this profit motive for the mutual benefit of both multinational businesses and our people.

Certainly America’s bankers have created their own free rein to conduct at will commerce by the power of their purse. Unfortunately, this rein has been out of alignment with America’s domestic interest for decades. Now that our bankers have indebted America beyond our ability to pay, they will fight any attempts by others to loosen their financial hold on our political system. America’s bankers would have Congress force us to stagnate in debt for decades while China surges past us into the new millennium, and why not?

Bankers used our debt to place investment bets on China’s rising over the past three decades, and in so doing shorted America’s future. They now are counting on Americans to pay this historic debt to protect their clients’ and their own disproportionate, concentrated, and increasingly risky investments in China. Because they placed their mountain of eggs in one basket, A sure bet is that our banker’s actions going forward will be singularly focused on ensuring that America complies with the terms of our debt obligations, whether or not they are in our best interests.

The Occupy Wall Street movement has become the little Dutch boy in defense of America’s interests against international bankers and they have rightfully begun asking if we should follow the terms that have been structured by America’s bankers. Our bankers set the initial terms of indebting America beyond its means to repay. They reneged on terms of protecting us from over indebtedness and covered up their own complicity in doing so. And now that they have extracted maximum debt from America, our bankers are threatening to destroy our economy if we even question their bastardization of the American financial system.

Occupiers are rightfully asking why our bankers set lending terms to soar America’s debts to levels that they knew through historical ratios could never expect to be paid without a high degree of default. Why were bankers comfortable in doing so? Were they hoping that the American ethic of fiscal responsibility would hold even when seduced into unchartered waters of financial servitude? It seems that betting banks’ fortunes on mere hope would be too risky. Did they expect that banks could dictate to our government that it subordinate the will of the electorate to that of America’s financially elite, even if excessive debt deteriorated America’s future? This strategy was successfully exploited before and therefore less risky, but given the emergence of social media democracy, it is becoming self delusional. Whatever their reasoning at the start of the housing Ponzi, bankers’ fortunes are now so dependent on maintaining the status quo that they will defend it with all available measures, even if exposed to the light of day.

Given the stagnating wages of our citizens for the past three decades, Occupy Wall Streeters are right to question why bankers did not meet their obligations to protect America from excessive debt. The prime reason that America awards bankers the right to charge us interest is because we expect our bankers to discern who is capable of repaying debt, and to judiciously discriminate by providing loans only to those that meet repayment qualifications. It is for this sole risk mitigation responsibility of protecting America from excessive debt that we pay America’s bankers such a disproportionate percentage of America’s wealth. Otherwise, we could pay technicians much less to merely print and distribute money.

Occupy Wall Streeters are right to question our bankers why in the height of the frenzy they threw away loan ratios that historically protected Americans from default. Why as America’s debt began to dramatically climb beyond the safety of these ratios did our bankers ignore warning signs and press for even more debt? Why did they pass out credit cards like Halloween treats? Why did our bankers create even more, no income verification, zero money down, speculative debt instruments to extend this bubble to unprecedented heights? Why when some Americans asked why loan ratios were no longer employed, did America’s bankers tell them that we had entered a new economy in which the old ratios no longer applied, one in which appreciating real estate values now dominated the loan equation?

Based on our bankers’ logic, housing prices could just continue to inflate forever without end. The fallacy in their folly to forget fundamentals was that underlying debt has to be paid by the wages of America’s citizens, and these wages were not rising but were in fact stagnating. When the housing bubble burst, we sadly realized that there was no new economy, but instead that greed had only temporarily supplanted old ratios and finance fundamentals. In the wake of America’s monetary collapse, with ratios now re-established, and with debt far exceeding them, America is now faced with the reality of choosing between stagnation and default!

Finally, Wall Streeters are right to ask why America’s bankers are threatening that if we do not honor our public and private debts then they will destroy our economy. What a spurious argument! Were not our bankers complicit in driving America to this debt precipice of their own making? And now that we have arrived at this critical juncture, are not these same bankers arguing that if we fail to honor the predicament in which they placed us that they will cut us off from future credit and capital? Yet theirs is a hollow threat, because it is only by America’s authority that America’s bankers are even given the right to create credit and capital from thin air on our behalf.

Without the self delusional support of a Fed like central bank to cover their losses, European bankers do not need to be cajoled by an Occupy Wall Street movement to accept partial responsibility for excessive European debt in order to stave off full absorption of a complete default. When German led banks first told the Greeks that they must surrender their livelihoods and enter into decades of an austerity program to repay their bank debts, the Greeks simply said “NUTS!” European bankers have since struggled but have finally and responsibly put forth their newest Greece restructuring plan including a bank “forgiveness” of 50% of Greece’s debt held by the banks. And Greece will most likely not be the last to see its debt reduced as other European countries will ultimately demand equitable treatment as well.

America’s bankers are not ready to accept default. Surrounded by the Fed and both political parties, they are well hidden from public view. Yet America’s little Dutch boys are on the dike exposing their defenses. The Tea Party will continue to press Congress to stop the spending. Without the cover of political largesse to mollify the masses, many of America’s politicians will then be forced to take sides, either openly exposing their support for globalist policies in a vain attempt to gain financial backing for re-election in the face of the electorate, or retreating from previous indefensible positions to save their political feathers from the onslaught of social media exposure. As more Dutch boy politicians are elected, America’s bankers will be left exposed in the open.

Occupy Wall Streeters will continue to root out America’s bankers, exposing unpatriotic profiteering. They should have no illusions that banks will respond to sit-ins or even to riots by agreeing to absorb debts as did the European banks. Yet in clarifying through their movement for the American people our bankers’ complicity, America’s social democracy will build political will to force a realignment of political power that will insist on equitable treatment of debt in America just as elsewhere across Europe.

For what other choice will our bankers have in the end really? When debt becomes so excessive that it strains the ability of a nation to repay it, then it loses its character of debt. If a nation defaults on its debt and international banks cannot force it to repay, then the banks have only the choices of either forfeiting their debt, as the European banks have chosen to do, or exchanging their debt for equity if allowed by the nation and as I have proposed in my set of solutions.

Once America’s little Dutch boys persuade America’s leadership to join Europe’s leadership in returning our nations to economic health, our bankers will have no choice but to join the ranks of the disillusioned and disheartened elite. America’s bankers will finally meet Europe’s bankers in dispassionately determining how they will discharge our excessive debt. When America’s banks accept their partial responsibility for America’s failure to thrive, Americans’ debt of $54 trillion dollars which threatens to stagnate our economy for decades, leading to even greater job losses and further threatening our national security, will be held back behind the water tight dikes of a renewed and prosperous future.

European Bank Announcement is the Latest Step in Deleveraging the China Bubble from Debt to Equity

In 1979 when China opened its doors to prospectors, millions rushed in bug-eyed on the prize. They scurried for trillions of dollars of capital to plop down factories on their newly acquired claims. Those trillions first came from EurAmerica’s savings, that currency that had already been acquired through decades of previous achievements. When that was not enough to satisfy the frenzy, they buggered trillions more in future obligations of EurAmerica’s citizens on the promise that these glorious gold seams of the East would make EurAmerica rich beyond its wildest dreams.

And why not…EurAmerica had grown obese on other stakes plopped down around the world. We created equity from thin air to offset the obligations of third world and emerging countries and spent the arbitrage from our financial creations to feast in our homeland for decades. Yet none of these opportunities held a candle to China’s mother load. China would once again be the feast to engorge all our known senses with pleasure and reward. So EurAmerica indebted herself beyond all reasonable abilities to repay, knowing that this gold seam would pay off by its own merit.

But how could it pay off? Were not these same factories supplying EurAmerica with goods that their own citizens would have otherwise supplied? Were not these same factories paid for by the obligations of “EurAmerica’s citizens to work into the future to pay off the debts they had incurred in order to build these factories? And if these EurAmericans could not work to pay their debts to gain the riches they had hoped for from these factories, how could they buy the products that would eventually pay them the riches they had sought? It seems this time around, the door that was opened in China was the hinge of a Venus Fly Trap and EurAmerica was the fly.

Now that we have incurred this massive debt and our scheme for getting rich was found to be yet another Ponzi of get rich quick avarice to be piled on the heap of human foibles, it is now time to clean up the mess from the last three decades’ party. People will have to pay for this latest excess just as all in human history before us. Europe languished for 22 years after its 1871 financial extraction to fund America’s railroads. Some countries like Russia rose up from those excess in political system revolutionary defiance. Others chose military aggression while still others congregated in socialist shifts of wealth redistribution to deleverage the world from its dilemma.

We cannot yet predict the world shifting power struggle that will ultimately emerge from this great crisis. However, what started as Europe’s riots and later erupted into an Arab Spring in reaction to Wall Street’s grand foray was again played out in yesterday’s announcement by Europe’s leadership as another step in the unraveling puzzle. The information age has shifted the balance of power and bankers can easily see that 2011 will not be a repeat of 1871. Infighting will continue as EurAmerica sorts out who will pay the costs of financial obligations from this great extraction. But Europe’s announcement was a break through nonetheless.

European Banks will eat a distasteful sum. Their shareholders will pay the price as much as they can. Some banks will call upon the European Financial Stability Facility, which will in turn call upon governments, which will look for handouts and push for further austerity, which will in turn lower GDP growth, which will further exacerbate the debt crisis. In the end, a massive debt overhang will have to be managed by all of EurAmerica in a deleveraging and slower GDP growth, if not retracting, environment.

Banks only have so much in reserves and even those may be grossly overstated as a result of credit reserve requirement manipulations during the 1990s including bank reserve sweep accounts and parent/subsidiary loans that have as of now extended bank credits 1.1 trillion beyond bank deposits. EurAmerican governments could take all their reserves and destroy our international banking functions just as banks could take much of the housing stock, destroying millions of lives and our nation’s economic futures. Governments and central banks could print money throughout EurAmerica and destroy national economies for decades. And then what….

When a debt load becomes so excessive that it cannot be paid by the annual output of its guarantors, it becomes in essence equity. All of this past three decade Great EurAmerican Capital Extraction creditors, from our wealthy elite to retirees on fixed incomes, “own” pieces of the thousands of factories on the shores of the East. They may not have bargained for that outcome but that is what they got. Right now, rather than accept this eventuality, creditors are willing to shave their loan returns in order to keep their position of being first to be repaid rather than suffer what is amounting to an even greater uncertainty for equity shareholders. And thus we have the announcement from Europe’s banks.

In the end, accepting that their loan position is untenable and must be converted to equity will be the ultimate solution. That position is hard to swallow for many reasons just yet. European banks and governments had been playing a dangerous game of chicken, both refusing to budge on movement toward resolving this debt leverage. For now, the dangerous game of chicken stalemating any movement toward the final solution and putting the entire world in jeopardy has had a “great” move among many more to follow.

My solution for America’s turnaround: Convert debt overhang to equity. Clean up credit through credit amnesty. Put all unemployed people in domestic work opportunities through free market job voucher program. Turn on the switch and go.