Monday, January 16, 2012

What do the headlines tell us?

New York Times: Foreclosure Auctions Show Raw Form of Capitalism

New York Times: European Leaders Use Debt Downgrades to Argue for Austerity, and for Stimulus

and [excerpted]
"Most European countries have embraced the austerity prescribed by Chancellor Angela Merkel of Germany to resolve what markets have identified as the big problems: high debts and budget deficits"

Recession Officially Over, U.S. Incomes Kept Falling

How are the headlines connected?

The US has for the last two decades encouraged financial liberalization and pursued strong dollar policies that have favored the financial industry while hurting US manufacturers. Consequently, many jobs were lost in manufacturing due to globalization and automation and outright competition from global suppliers with lower-labor costs.

The financial industry masked declining household income by promoting cheap credit. People wishing to purchase homes had no choice but to pay inflated values. For instance, we bought our home in 1999 and paid $270,000 for it. By 2006, identical properties in our neighborhood were selling at their peak of $750,000.

People who wanted to buy homes were forced to pay inflated prices and the financial industry facilitated these purchases by making creative lending available, usually with arms that postponed higher interest rates for 3 to 5 years.

The recession itself was precipitated by the collapse of derivatives based in securitized debt, including housing mortgages, student loans, car loans, etc.

However, the conditions of possibility for recession have been ongoing for ten years given the lack of real growth in the economy outside of the FIRE sector (finance, insurance, & real-estate) and the lack of wage growth and job production outside of these industries.

When the recession hit, wages fell across industries and people lost work hours, benefits, and jobs.

Simultaneously, inflated mortgage arms started setting in and people could not afford to pay the higher rates, nor could they easily re-finance when their houses had plunged in value.

Houses in our neighborhood are now back to year 2000 levels.

People lost their homes to foreclosures. Most importantly, they lost every cent of equity they had poured into their houses. Property prices plunge still further.

Our neighbors who were impacted by lost hours, medical bills from a terrible accident, and the costs associated with a dying parent lost 10 years of equity. Their house stands empty. 

It was picked up by an investor who hopes to "flip" the house. The investor paid for the house with almost nothing down using a very high interest loan. If the house doesn't sell quickly, the investor will no doubt lose it, and the house will continue to stand empty, degrading on the corner and degrading the neighborhood.

Investors are picking up these houses at rock bottom values. Even with high interest rate loans they hope to make a profit if they can rent the house high or sell it quickly.

They better sell quickly because property rates are still falling.

Falling prices and taxes mean that cities and counties are still suffering from lost income, and are therefore forced to continue cutting services and education. 

My son's middle-school closed. It was an exceptionally well performing school and had broad support in the community.

Instead of adequately rescuing homeowners and local governments, the US federal government focused on bailing out banks and insurance companies.

Similar scenarios occurred in European countries as sovereigns (national governments) assumed the risks and costs of their banking and insurance sectors.

Stimulus spending in the US and elsewhere has been very weak and is quickly diminishing.

Now austerity reigns as national governments cut services to populations in Italy, Spain, France, Hungary, Ireland, etc, etc. 

Furthermore, national governments such as Greece and state government such as AZ are selling off public assets in fire sales that allow many of the same investors and financial entities that caused the crisis to pick up assets at deeply discounted prices.

The New York Times headline above about auctions showing raw form of capitalism gets it wrong. The fire sale auctions are not symptoms of an orderly system of capitalism but rather are symptomatic of a capitalism that is run by an elite oligarchy that sets the rules that govern society in ways that promote exploitation and outright pillaging.

Meanwhile, austerity means education, health, and job production decline significantly.

What do the headlines tell us? They tell us that neofeudalism has arrived.


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