Monday, September 17, 2012

Example of the Evolving Neofeudal Order: Rent Backed Mortgage Securities

Charles Hugh Smith of Two Minds Writes "Financialization and Crony Capitalism Have Gutted the Middle Class" (July 13, 2012)

[Excerpted] The neofeudal colonization of the "home market" has transformed the middle class into debt serfs.

According to the conventional account, the Great American Middle Class has been eroded by rising energy costs, globalization, and the declining purchasing power of the U.S. dollar in the four decades since 1973. While these trends have certainly undermined middle-class wealth and income, there are five other less politically acceptable dynamics at work:
  1. The divergence of State/private vested interests and the interests of the middle class
  2. The emergence of financialization as the key driver of profits and political power
  3. The neofeudal “colonization” of the “home market” by ascendant financial Elites
  4. The increasing burden of indirect “taxes” as productive enterprises and people involuntarily subsidize unproductive, parasitic, corrupt, but politically dominant vested interests
  5. The emergence of crony capitalism as the lowest-risk, highest-profit business model in the U.S. economy
Majia here: Smith's argument is compelling. An article in today's Wall Street Journal (9/17/2012) illustrates point 3: "the Neofeudal 'colonization' of the 'home market' by ascendant financial Elites":

The article is titled "Boost for Foreclosure Market: Real-Estate Firm Gets Citigroup Loan To Buy Properties to Turn into Rentals" on page C3 9/17/2012 WSJ:

[Excerpted] "Waypoint Real Estate Group LLC, a major investor in US foreclosed homes, has secured a $65 million loan from Citigroup Inc to help add to its portfolio of properties.... Investors have spent billions of dollars in recent months snapping up foreclosed homes, betting they will profit from the rental income the properties produce....

...Bankers said they have been hammering out details on how to create the first security backed by home-rental payments. As they do in bonds backed by mortgages and other assets, banks would pool the rents of thousands of tenants living in the formerly foreclosed properties and sell to investors a promised return based on the income the homes produce....

Citigroup and other major banks have held talks with the major credit-rating firms about potential securitization....

Majia here: the article states that the Federal Reserve is backing the move by investors to buy up foreclosed properties.

Here we see neofeudalism occurring in two distinct ways. First, we see that assets are being shifted from the populace (in the form of home ownership/equity) to the banksters.

Second, we see that the banksters are up to their old tricks: They are seeking to develop yet more strategies for "rent seeking" in their plan to securitize rent streams from previously foreclosed properties.

Bonds will no doubt be developed from these pooled rent streams.

Derivatives - collateralized debt obligations - will no doubt be derived from these bonds.

Credit default swaps will no doubt be sold on the likelihood of the underlying bonds becoming valueless as indebted and insolvent renters are removed from properties owned by banksters.

On Sep 13 the Wall Street Journal reported "Household Income Sinks to '95 Level" by C. Dougherty and A. W. Matthews pp. A1, A6.

Majia here: The article describes a Census Bureau report finding that annual household income continues to decline, falling for the fourth consecutive year. The report describes more people on Medicare. 

It also attributes income distribution as being intensely unequal: the top 20 percent of households have over 50% of income. 

Keep in mind that income doesn't represent wealth. The truly wealthy don't work for salaries and their wealth is offshored and tied up in assets that don't count as income unless they produce capital gains, dividends, etc.

So, what we have is a situation where the vast majority of the population is losing the capacity to maintain an income that allows home ownership. Ownership of societal assets is therefore being further consolidated in corporations whose stock are owned by elite households.

Rather than producing goods with value, the financial industry devises ever more ephemeral "rent seeking" strategies for acquiring wealth by shifting it from the many to the few.

This entire scenario - acquisition of foreclosed homes by investors backed by the biggest banks and subsequent creation of securities from "rent" - illustrates point 3 identified by Smith.

What we have is a kind of monopoly capitalism that has become so debased that it is consuming the population. Capitalism today is destroying itself as it institutes a new kind of social order called "Neofeudalism."

Contemporary environmental and energy limits mean that the 19th century strategy of consuming the population by expropriating wealth produced by labor is no longer viable. 

Oligarchic capitalism today produces value through ephemeral products and investments aimed at shifting what is left to the very few.

Soon there will be no more capitalism. Instead, we will have a deeply entrenched global, neofeudal order.

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