« One To Go | Main | Meat »

December 03, 2008

Comments

would have paid more for the increased risk

I think you mean paid less.

thx

I kind of doubt there will be any opportunity for a next time, based on the actions I see so far.

All good points, but the word missing in the discussion here and in Ezra's piece is "leverage".

Thanks -

"Enronness" -- that's a keeper.

I agree that lack of information about risk played a part. But the problem was *powered* by the pressure to create more investments. In that respect, it was just a typical bubble (as Ezra seems to be saying).

The famous "This American Life" episode does a decent job of describing where the pressure came from.

Blaming the financial crisis on the sub-prime borrowers has one great virtue. It will allow the Banks, Loan Brokers, etc. to avoid any responsibility for what is happening. An isn't that the important thing? After all, protecting those of wealth and privilege is what matters.

The problem, then, was the lack of information. Banks, investors, credit agencies -- no one seemed able (or willing) to value these things appropriately. And that blindness, it seems, stemmed in very large part from the sheer complexity and Enronness of the instruments constructed on top of the housing market.

I think this is right, partly because bad valuations cause bad mortgages to be issued. After all, some of these things should have been valued at zero, so in a sensible market they wouldn't be issued.

Another reason is that if you overvalue the securities, and then use massive amounts of leverage to buy them you're going to be in trouble regardless of how sound the underlying mortgages are. Push leverage to the limit, based on a 1% assumed default rate, and have defaults run at 2% and you've got tzuris.

Once again, Klein demonstrates the complete uselessness of neolibs.

Yeah, leverage.

Plus: how come no one's pointing out that this so-called "recovery" we've been having allegedly for years has been based entirely on housing and defense spending? Not a goddamn productive thing, just McMansions and Blackwater. And both of those leveraged to the hilt.

You're damn right that's a sandy foundation. Dow goes to 14,000 based on those two? You kidding?

And of course, borrowing at interest only makes sense if you expect the underlying asset to yield income or cost savings above the rate of interest.

Housing and defense don't do a damn thing to raise productivity, ergo no additional income or cost savings.

Now riddle me this: why did all the money go into housing, and not forklifts or machine-tools or database servers? Stuff that might've had a chance to pay for itself.

That's a good f'ing question, and I don't have a good answer for it. But my instinct is to personally blame Ezra Klein, since he's doing the same thing in reverse to poor people.

The point, which was made more than 165 years ago by Charles Mackay is that it doesn't matter which bits of sand you build your unstable edifice on. It's the method by which you decide to ignore risks and leverage that matters. We've had marginal borrowers and subprime loans for decades, but everyone knew it. The problem came when businesses were allowed to hide the low quality of the loans they were selling. When marketing gets control over underwriting, you will have a disaster.

In any bubble, the consequences are compounded by the impact of the "wealth effect" on other markets. In the 20s the stock market bubble was powered by enormous leverage but also lead to the investors borrowing against their stocks to go into debt for other things. These days, we have pretty strict regulation about how much you can borrow.

For housing, I think that when all is said and done it is a combination of both people making bad choices about buying houses that were valued too much and owners with a lot of equity extracting large amounts for consumption. Have you ever seen Calculated Risk's graphs about percentage of disposable income due to equity withdrawal? It was insane, near 10% at the peak.

Thus, the bubble allowed not only new speculators to become highly leveraged, but a lot of people that had decent mortgages too.

So the problem isn't just mortgage valuation, it is also over a trillion of MEW and various other debts that were taken on because of expectation that housing wouldn't fall much. It caused a general debt bubble (which in all fairness was just a blow off top from the debt bubble building in the last 30 years).

I think that even this explanation is too complicated. The housing market crash itself is just the symptom of an economy-wide speculative bubble. There was simply more money to be invested than there were good places to put it, leading to massive bubbles in many different asset classes. That's why the stock market tanked and oil prices collapsed. It's not because of financial contagion or speculation about future demand. It's because there was a stock bubble and an oil bubble, and those bubbles have now popped, too.


The subprime market -- which is to say, the market of loans sold to high-risk individuals -- exploded.

I think Erza has it wrong, and needs to study this issue in greater depth. His analysis is far too simplistic and causes him to miss the bigger picture. You don’t build a debt (both public and private) up to 350% of GDP just on houses, nor is subprime the sole culprit in the latter segment.

As soon as I hear somebody blame the fiscal crisis on subprime loans, without any indication that they are using that term merely as a convenient synecdoche for the housing market as a whole, I know that this person has not finished doing their homework. Alt-A is another big category which has to be mentioned (and which involved errors in judgment during the loan origination process different from those in the subprime pool), especially as this has a bearing on the blame-the-CRA framing which apologists for the lenders are using to obfusticate the issue (note that it took all of 3 comments for this to emerge on Erza’s thread).

In addition, debt of many other stripes is a big problem: CRE loans, auto loans, credit cards, commercial paper. This isn’t a case of “The housing market killed the economy”, instead the housing sector was merely the first victim, or at least the first one large enough to get everyone’s attention, of a wave of excessive leverage, mispriced risk, and unsustainable debt which is affecting almost every sector of the economy and is a problem at multiple levels – public debt at the state, local and federal level, consumer debt, and corporate debt.

One other point, as I see that others here have already done a great job of fisking Erza's post.

You don't have to be a dedicated reader of the housing blogs to understand that subprime is not the whole story. Plenty of other people have been pointing to the larger picture and at leverage and debt specifically as problems. Heck, Kevin Phillips has published what is essentially the same book three times in a row (Bad Money, American Theocracy, Wealth and Democracy) just to get the point across, because some people need the same idea explained to them multiple times before they get it.

Speaking of being massively in debt, anyone check out Yves Smith's most recent post?

Seriously, what the hell is wrong with our economic intellectuals? As someone pointed out in the comments, what is wrong with Krugman? He should be the very first to recognize the dramatic differences between now and then. It's almost like they want to cause the collapse of the dollar so we can default.

Thanks, Bernard and russel for bringing up leverage.

Roger Moore: ... there was a stock bubble and an oil bubble, and those bubbles have now popped, too.

Although oil prices are volatile, oil used to run around $25/barrel as a sort of base price. Now, even during this collapse, it's only down to $45/barrel. I expect it to head back up when the economy recovers. In the long term, the trend is up as India's and China's energy consumption continue to grow.

ThatLeftTurnInABQ: ... unsustainable debt which is affecting almost every sector of the economy and is a problem at multiple levels - public debt at the state, local and federal level, consumer debt, and corporate debt.

And it appears we have to add yet more debt to get out of the mess. I fear for my children's future.

But my instinct is to personally blame Ezra Klein, since he's doing the same thing in reverse to poor people.

that's excessive -- ezra's good people. and not a "neolib" - -unless neolibs suddenly love unions and nationalized health care

[oops, 2 "l"s in russell. Sorry.]

"ezra's good people"

I think this is more just a case of general pundit syndrome where our touted "intellectuals" spout off on things outside their explicit expertise. Now God knows that I don't think you have to have any qualifications or training to be able to have a good understanding or even contribute to a field. On the other hand, even reading the good economic blogs for the last couple of years would have given him a lot more depth in the argument.

In general I think that there is a tendency for cultured political players to try to put everything into neat little boxes that are easily explained. I know I have that problem, that's why I actively read the gritty details from inside players and try to change my view to accommodate new facts.

Usually this sort of thing is just of humorous interest, but I actually feel depressed about it now. It seems that our policy makers are completely blind to some very basic facts, and theoretically the political debate could rope them in a little....but the Beltway crew has this annoying tick and are trying to synthesize all these great theories instead of just going to places like Naked Capitalism, Calculated Risk, Roubini, etc. that have it laid out perfectly.

It's almost like they want to cause the collapse of the dollar so we can default.

mikkel,


But what if one can see that default is inevitable? Might one not then decide to get as much stuff as you can first? Meaning if we can (one more time) fool China into loaning us the money to rebuild our infrastructure and then default, we'll be broke but we'll have a lot of stuff that we are going to need as we try to get un-broke.

I did this for a couple of years before filing bankruptcy. I knew, absent hitting the lottery, that my debt was going to be unsustainable in the long run and bankruptcy was on the horizon. So I got as much stuff as I could and took on as much debt as possible to do it (yes, I know, I'm an immoral fraudster). Nevertheless, why wouldn't/shouldn't/couldn't a country (particularly one with the nukes and enough land to grow all it's own food) do the same if it's creditors are stupid enough to keep giving out more money (purchasing t-bills)?

Seriously, what the hell is wrong with our economic intellectuals?

It looks to me like Yves Smith is on the leading edge of a paradigm shift that most mainstream economists and journalists haven't caught up with. She has noticed that while there are striking parallels between today and Depression Era America, those parallels point towards China, not the USA.

In the 1930s we were a country with excess productive capacity selling into external markets, those markets being in other countries who suffered from excess consumption (relative to their own production) and unsustainable levels of debt, much of which was owed to us. Also, we had structurally immature financial markets which had just recently taken on a leading role on a global scale, eclipsing the older and more established City of London.

Today the country with too much productive capacity for its own internal markets, unsustainable debts owed to it by its biggest customer, and a very recently minted and thus untested financial system is China. Check out their stock market crash - it looks a lot like ours circa 1925-1933. Today we in the US are in a postion more like the debtor countries of post-WW1 Europe.

Other people are having trouble seeing this because they are thinking about the problem from too much of a USA centric standpoint - lookin at our current situation and then casting about for analogies with the past, most obviously our own past, rather than asking the question: who today most resembles which country in the 1930s?

The problem for Krugman, et. al. is less that they are fighting the battles of the last war, rather that they have the sides mixed up. The country which most needs Keynesian stimulus today is on the other side of the Pacific. I they are successful that will help us as well, because if the Chinese can rebalance their economy by stimulating internal demand, and shift away from a mercantilist export driven model, that will force consumption here in the US to seek other sources and (hopefully) stimulate a rebuilding of domestic production. We both need to rebalance our economies to bring internal consumption and production back in to alignment. How we do that without high tariff barriers and a trade war and deep global depression, I’m wish I knew. I think we have a very dark forest to get through before we make it to the Emerald City.

"There was simply more money to be invested than there were good places to put it, leading to massive bubbles in many different asset classes."

This is half of a really good point.

There was a lot of money to be invested in things, but for institutional reasons it ended up being malinvested. The systemic reasons for this malinvestment are all over the place. Off the top of my head (and I’m sure there are more good ones):

Tax structures which heavily favor personal investment in your residence.

Bubble mentality (not the same as having too much investment money) which made housing investment wrongly look more attractive when compared to other investments.

Ratings companies overvaluing housing investments compared to other investments (based on, and reinforcing the bubble mentality).

Various government pushes toward increased home ownership (Freddie/Fannie Mac operation changes 2005-2007).

Loose lending policies, some nudged by the government, others pushed by greed, some contributed to by lender fraud or borrower fraud (though it appears much less than we might have initially supposed in either of the fraud areas).

Decreased loan accountability facilitated by completely divorcing loan origination from loan collection in many cases.

I won’t say that all of these contributed EQUALLY, as I’m sure there are variations. But I’m fairly certain that all of these were large contributors to the overall impression that it was much better to invest in housing than alternative energy, technical improvements in automobiles, pharmaceuticals, or just about anything else.

It was a giant private-public, market-government [email protected]#%.

There was a lot of money to be invested in things, but for institutional reasons it ended up being malinvested. The systemic reasons for this malinvestment are all over the place. Off the top of my head (and I’m sure there are more good ones):

I'd add one to that: the general unpredictability of the Bush administration.

About all you could count on them to do was f' things up, make war, and cut regulatory decisions favorable to their pet industries.

With that kind of uncertainty, who in their right mind would put money into legitimate business? There was a flight to (false) safety: mortgages.

Probably impossible to verify, but that's my guess...

Although oil prices are volatile, oil used to run around $25/barrel as a sort of base price. Now, even during this collapse, it's only down to $45/barrel.

It's not as though it's stabilized at $45/bbl, though; it may still have a way to fall before it hits the floor. Even if you accept that $45 is as far as it's going to fall, that it's depressed by the bad economy, and that it's overshot the reasonable price based on current economic conditions, that still isn't enough to explain why it has fallen as far and fast as it has. The only plausible explanation is that the high prices earlier this year were unsustainably high- IOW that there was a bubble.

keatssycamore:

You didn't have to support 300 million people. That is an OK strategy if your country can be self supportive, but we can't. We don't have enough manufacturing or energy infrastructure.

This goes back to a point I made in another thread in response to Sebastian saying it didn't matter where stuff was manufactured. I agreed with him that when manufacturing chases the lowest place to produce stuff then it adds to productivity and lowers the price for everyone...but then argued that implies that trade won't be disrupted. If we maintained a low baseline capability for stuff we need but don't make (especially semiconductors and the like) -- even by paying an inefficiency premium -- then we would have more options now. We didn't, and so if we default we are pretty much screwed.


LeftTurn: I wouldn't say so much a paradigm shift as much as a careful analysis of reality.

To me the leading person for a true paradigm shift is Stiglitz, whom I've been reading more of and is 100% correct about our structural problems -- both for the country and in the study of economics -- even though I think he has missed the boat that Yves is catching on to. For instance, he is paying attention to how natural resource usage is related to real GDP growth, which is something that almost no one does (according to Yves, I asked her) and thus is a major reason why all our growth projections are so terribly messed up.

Again, we all need to rebalance, but a lot of the problem is over-optimization of economies, so even if we had the right fiscal/monetary policy, I think it's too late.

Roger Moore, sorry if I was unclear. I agree there was a bubble. Is it deflated now? My guess is yes but I recommend against taking any investment advice I offer :-)

ral and Roger:

I am going to take a weird position and argue that it (mostly) wasn't a bubble. I think the last 30-40% was almost pure speculation, but $100 oil was right on.

If you look at the growth projections for the world and then at the amount of accessible supply we have, then we were in very dire straits. The amount of oilfields that were going to be tapped out in 10 years was insane, and new finds were most likely not going to keep up. Unless we wanted to have total environmental destruction -- and spend enormous amounts of increasingly precious water -- by doing shale or sand oil then we were going to be in deep trouble.

But that was with those growth projections.

The bubble was in the growth projections that were wrong because it didn't pay attention to the general debt bubble. Now oil has collapsed because it's obvious that the world can't grow as fast as everyone thought.

Which is OK for oil supplies, but very bad for economic and political turmoil. With the debt bubble popping it is very uncertain how the world is going to support the boomers.

It was a giant private-public, market-government [email protected]#%.

Good summary. I would add that we had a serial set of bubbles, which was really the same bubble migrating from market to market over time: first the dot-com boom in the equity market, followed by the housing bubble in the bond market, followed by a brief commodities bubble which took off in the summer of this year but crashed before it could really go hyperbolic.

This strikes me as a pattern - much like slash and burn agriculture - in which the same speculative behavior moved from one market to another, abandoning those in which a prior crash had occurred but seeking a new home instead of giving up the game.

One of the reasons why housing specifically went bubbly is that as an asset class it was well adapted to expanding the range and scale of securities sold thru the bond market, at a time when investors had been spooked by the dot-com crash and thus were leery of equities compared with bonds.

At a macro level I assign blame to a mix of public and private problems:

- A global economy with large imbalances of production and consumption (see my typo-filled comment above re: China today = 1930s USA), and also large imbalances in income distribution and distribution of political power which allowed decisions to be made for far too long without regard to the consequences because the decision makers were insulated from the outcomes they were producing. This is part and parcel of what Kevin Phillips calls the "financialization" of the US economy, by way of analogy with past victims of this self-inflicted malady, e.g. Great Britain, the Dutch, and Hapsburg Spain.

- A mispricing of risk, enabled and encouraged by the Fed who kept interest rates far too low for far too long, and the resulting growth in overall debt.

- Low yields (see Fed, above) led investors to leverage up in search of better returns, a terrible decision in retrospect. Looming Baby-Boomer retirement costs may have been a factor in fueling this self-destructive behavior, above and beyond just garden variety greed.

- Regulatory failures, both the dismantling of existing regulations (not just the final repeal of Glass-Steagall, but a series of changes ongoing since the late 1970s), and an oversight and enforcement failure with regard to regulations remaining in place, and a failure to extend regulatory oversight into new financial sectors (the swap market and the shadow banking system).

- Structural problems resulting from all of the above and from globalization more generally produced a tightly coupled system in which a large scale failure in any sector could trigger a more general systemic failure such as we are seeing now.

- A transparency failure, such that the ever increasing complexity of the financial system covered a multitude of sins and perils, allowing all of the problems above to grow and fester without attracting more attention until it was too late.


Great disussion. There's one thing, though, when discussing global recession/depression, that always creeps back into my head that I can't quite resolve. I can follow the specifics of the discussion well enough, but when I step back and try to look at the whole situation, I'm tempted to say "What's changed?"

The same things and the same people (on a macro level) are still here. Why, physically, should everything slow down? Is it purely artificial, such that, if the world could be of one mind and agree to hit some sort of economic reset button, everything could continue as it did before?

I know in practical terms, that's never going to happen, so it's a purely theoretical question. I'm just curious if anyone who knows (tons) more about economics that I do has ever addressed the idea, just for kicks.

Is it purely artificial, such that, if the world could be of one mind and agree to hit some sort of economic reset button, everything could continue as it did before?

This happens with respect to the stock market in Debt of Honor. Fiction though.

Bad news for the U.S. if we're playing the part of Europe in the 1930's. If Yves's is right, we're essentially screwed no matter what we do now. And this was inevitable when we allowed our manufacturing base and exports to fade. Which I think is what TLTABQ is saying.

"The same things and the same people (on a macro level) are still here. Why, physically, should everything slow down? Is it purely artificial, such that, if the world could be of one mind and agree to hit some sort of economic reset button, everything could continue as it did before?"

Doesn't this really depend on whether you think the default position is prosperity or poverty? Historically I would suggest that the default is poverty, while prosperity is the thing that has to be explained.

hairshirthedonist:

That is a great point which makes the whole thing seem like a farce once you recognize it. There are all sorts of economic reasons why things happen, but in my opinion those are secondary. I think that we've managed to create a complex representational system that we don't really understand.

In the huge macro level scheme of things to me it's all about natural resources, populations and labor. We have a monetary system that only works if there is growth, so the entire economy is just IOUs from the future and if we mess up in determining how well we can use our natural resources or labor, or we overlook the need to support a population, then things fall apart because they were based on a false premise.

I believe that in effect depressions are caused when we approach/overshoot the carrying capacity of the planet (which is a function of our desired standard of living) by a combination of consuming too much inefficiently and/or having too many people. In this viewpoint, I believe it is impossible for us to right our economic situation without a depression or hyperinflation, but those are just monetary consequences of the same thing -- forced reduction in standard of living.

Of course people don't like this, which is why major economic crises lead to war more often than not. I hate to sound so cynical, but I think a lot of what caused the depression to end was the fact that tens of millions of people were killed. That, AND the fact that we had built up a few decades of technological progress that hadn't been utilized, meant that the people that were left could realize a big increase in standard of living.

Considering I am not in favor of the death of tens of millions, this is why I am so irritated by our chosen course of action. To me the only way to avoid mass conflict is by purposefully accepting a reduction in standard of living, diverting a lot of resources to care for those that get left out in the cold, and making major investments in energy, industrial and technological infrastructure to try and utilize/create new sources of natural sources far better. (Of course a large part in accomplishing all those goals is to get the wealth disparity way down.)

I know this is a lot to ask, but it's better than global conflict IMO...and if we had strong clear-eyed leaders who knows, maybe it'd work. What is encouraging is that billionaires like Gates, Buffet and the Silicon Valley crew seem to recognize this, hopefully they'll step it up.

What went wrong:

1. Dumbed down underwriting standards that allowed all sorts of crappy loans to enter the system.

It was not primarily a subprime crisis -- many of the toxic ARMS, etc. were not subprime.

The impact of this was to introduce an unknown new risk into the mortgage market, which contributed to the blindness to the risk in the mortgage backed securities and derivatives market. To a great extent, the analysis of risk of the instruments pyramided on top of the mortgage pool was based on historical mortgage failure rates, which went out the window when new risks were added. This is similar to what happened to the junk bond market bubble created by Milken in the 80s.

The bubble fueled the pressure to allow more shaky mortgages into the system since everyone was making money based on origination and securitization (we must have more product!), and that in turn further fueled the housing bubble since so much cheap money was chasing real estate.

2. Unregulated risk taking in the derivatives market. Massive leveraging and also extension of credit defaults with no real capital backing up the risk. This allowed the bubble to inflate to titanic proportions. It was not the housing crisis which caused the disaster so much as the amount of unregulated speculation that was allowed to pyramid on top of it -- very much like the unregulated margin borrowing on stocks and the 1929 stock market crash.

The point is that with so much leverage piled on top of the risk, even a 10 or 20 percent correction in housing prices caused catastrophic losses in the derivatives market, and wiped out entire firms that bet the company on these things.


Bad news for the U.S. if we're playing the part of Europe in the 1930's. If Yves's is right, we're essentially screwed no matter what we do now.

Actually I think it is the other way around. The Great Depression was deeper and longer lasting in the US than it was in Europe, because it is easier (in purely economic terms, leaving the politics aside) to reduce consumption than it is to make excess productive capacity go away.

The net debtor nations (in Europe) would have had an easier time of it than the net creditor nation (the USA) did, except that other political and cultural factors (bitterness and unresolved geopolitical issues left over from WW1 and the collapse of the Russian and A.H. empires, a dysfunctional political system in Germany especially, hyperinflation, the rise of fascism and national socialism) intervened to make things worse in Europe.

What worries me the most is that I'm not convinced that either the limited Keynesian stimulus under FDR or the much greater stimulus of WW2 really solved the overcapacity problem in Depression Era USA.

I think what really cured the problem for good (i.e. so that we didn't fall back into a depression after the war was over) was the enormous destruction of industrial capacity in other parts of the world (mostly Europe and East Asia) as a result of the war.

The USA was no longer in a state of overcapacity by 1945, because most of the rest of the industialized world was reduced to a charred smoking ruin. That doesn't bode well for the rebalancing we and the Chinese need to do today.

mikkel @1:51pm:

Well put. I think you and I (in my last comment @2:05pm) are saying the same thing in different ways - the destructivness of the Second World War was what pushed the reset button on the global economy and made the Bretton Woods era possible. And how nice it would be if we didn't have to take that path today.

To me the only way to avoid mass conflict is by purposefully accepting a reduction in standard of living, diverting a lot of resources to care for those that get left out in the cold, and making major investments in energy, industrial and technological infrastructure to try and utilize/create new sources of natural sources far better.

I think part of this is recognizing that "standard of living" does not equal "quality of life." I live in a suburban mini-McMansion, and when I see the material "wealth" around me, in my own home and my neighbors', I often wonder what good most of it is. I think I'd be perfectly happy being with family and friends, reading borrowed books, going for run now and then, and playing a cheap guitar as things beyond basic survival needs that would make life good. But I'm a minimalist, surrounded by, um, non-minimalists.

Oh, and I'd like some decent beer, too. Thanks.

Government's role in the failure:

The mortgage backed securities market based on FreddieMac, etc. is a wonderful thing that substantially lowers mortgage loan rates, but it depends on rigorous underwriting standards to keep the mortgage pool reliable. Allowing these companies to function too much as private businesses without rigorous oversight of this critical component is what perverted this element. Frankly, this is such a fundamental and somewhat obvious point that it is shocking that underwriting standards were dumbed down so much.

My sense is that the core of the problem was that FreddieMac, etc. began building so much of their profitability on issuing the mortgage backed securities -- hence the need to keep creating more product.

The other regulatory failure was allowing so much unregulated speculation in the derivatives market. Basic rules such as leverage limitations, capital requirements, etc. would have curbed this.

The point of the regulation is to let the free market operate within a fairly large box of options, but not outside of it in order to moderate the mercurial ups and downs of unregulated capitalism. What is happening is not a bug but a feature of unregulated markets. That is why it is so humorous (and telling) to have seen Greenspan slack-jawed about the fact that his free market heroes will on occasion gamble themselves into oblivion.

With the debt bubble popping it is very uncertain how the world is going to support the boomers.

Well, you could take us all out back and shoot us.

Failing that, I'd settle for 40 acres and a mule.

More seriously, it seems to me that, even with thing the way they are at the moment, there's a hell of a lot of wealth around. The issue is how it is distributed.

What I'll throw out there as a suggestion, if only as a topic for discussion, is that transfer payments aren't a really good model.

What we need, IMVHO, is a way of broadening ownership.

Thanks -

" To me the only way to avoid mass conflict is by purposefully accepting a reduction in standard of living,"

What does that look like? I'm not being snarky. I'll add that the last politician that I remember suggesting something along those lines was Jimmy Carter with his malaise speech, which I liked at the time, but soon found out I was in a minority. But that would have been the time to do it.

Getting back to my question, what would a reduced standard of living look like? What gets cut out? In theory we're a lot richer than we were back in the 50's, yet then (at least according to my source of info, which is old sitcoms) it was possible to raise a family with one income.

russell:

Yeah it's hard to know how much the wealth disparity is distorting things. But on the other hand, it's hard to know how much "wealth" there really is. I mean on paper sure the top 1% own a ton, but most of that is value based on holdings in companies or debt. If we are really talking about a reduced growth rate then those are going to plummet a ton. My friend grew up around the mega wealthy and he said most of his friend's parents are in just as bad of shape as everyone else because they were leveraged too much.

It'd be interesting to see how much more consumption the wealthy have instead of looking at raw dollar figures. I really have no idea. It'd give a better idea how whether resource distribution is the key or just a factor.

Donald: To me hopefully it will start as an overall reduction in consumption through getting rid of redundancy. Whether it's for transportation, or how many consumer goods are bought or even food -- most people have lifestyles where every individual has a full suite of stuff. You know, cars and TVs and entire closets of clothes for each person etc. Or for food, we basically create enough food to feed almost the entire nation, then feed it to livestock and get 10% of the energy out by eating meat. Even a 30% reduction in meat consumption would be a big help.

If families started sharing a lot of resources, let alone neighborhoods, then I think that is a good place to start. I've actually thought about making a Facebook sort of thing for neighborhoods where people could put up schedules and be matched. That way when someone was going out to do errands they could have the list for a few neighbors (or bring them along) and the good cooks could buy in bulk and invite people over or it'd be picked up. It'd even have a payment system so you could be compensated or pay for things that you didn't have time to do yourself.

And as hairshirt pointed out, just having more focus on recreation and social activities over working to buy more things is a natural consequence.

what would a reduced standard of living look like?

for a start, people would use durable goods much longer and not simply replace for the frisson of the "new." (a side benefit to this approach is that no one would be trampled to death in a grotesque shopping frenzy...)

"Leverage". Nice word. Sounds important, seems profound -- especially when used as a verb: "I leverage, you leverage, he leverages." But what does it mean, in plain English?

I cannot "leverage" unless I borrow. I cannot borrow unless you lend. I cannot use the money you lent me to overpay for an asset unless the owner sells it. He gets our money. The net result of my "leverage" is that he gets a lot of your money along with a little bit of mine. What I get is the asset. What you get is my promise to pay you back with interest.

Never mind whether the "asset" is a house, or a silver mine, or shares in a buggywhip company. The important thing is that the third guy has all the money.

No matter how evil "leverage" is, it doesn't make money evaporate. All the money is still there. It doesn't destroy wealth. The "asset" is still there. If the asset turns out to be worthless, well, it was never "wealth" to begin with, was it? The fellow who sold it for a large amount of your money and a little of mine made out like a bandit. Maybe he was just lucky, maybe he consciously swindled us, I don't know.

What I want to know is: who is that fellow who has all our money?

--TP

What gets cut out?

Leather car seats, soccer camp, giant TVs with pictures better than the eye can appreciate, breast implants, cars that cost more than - say - $40k, big diamonds, lots and lots of toys, housing square footage (foyers, dining rooms, formal living rooms to start), perfectly groomed lawns, fully prepared and processed foods, pricey glassware and siverware, bad blockbuster films. I'm sure I could go on if I felt like it.

what would a reduced standard of living look like? What gets cut out?

In the last 30 odd years we've added a whole new category of stuff beyond just food and manufactured goods for people to spend their income on - digital entertainment and information.

The upper middle class and above spend a lot of money basically purchasing bits. People can live without cable TV, internet access (sadly, this doesn't bode well for blogs - sorry), video games, cell phones, GPS systems, etc. Personally I think companies who are in the business of selling bits to the middle class are going to get hammered, much more so than say the makers of beer and toilet paper.

The rest of the answer lies I think I what russell said above:

Failing that, I'd settle for 40 acres and a mule.

In the short run, I expect the dollar to crash. In the longer run, I think some of the US population (say 10-20% or so) will be going back to the land. We still have comparative advantage in agriculture, but to be sustainable eventually we will need to leave behind our current petroleum based system of industrial agriculture (I think mikkel @1:14pm is right about oil prices – right now we are in a temporary reverse bubble w/ regard to oil), and go back to a smarter, more sustainable, and much, much more labor intensive way of working the land.

Mamas don’t raise your babies up to be (global) cowboys – we need farmers instead.

I'd keep some of the bits. They (can) make us more productive. Video games and TV can certainly go, though.

Tony P:

No one. You are thinking about consumer level leverage and forgetting that banks and investment banks were literally creating leverage and "wealth" out of nothing but future promises that it would be repaid.

Heck that's the only thing that our government operates on.

That's the basis of my argument that "wealth" is largely about macro policies of population, natural resources and efficiency. If those projections are wrong then all the imaginary wealth created by the banks does just disappear and no one actually has the money that backs it.

What I want to know is: who is that fellow who has all our money?

China's forex reserves hit record

etc., etc... (many other countries with lesser dollar reserves could be cited - Japan, the Gulf States, India, the list goes on and on).

That is our biggest export - dollars. What will we sell when nobody wants them anymore?

Slaney Black
//Housing...do[es]n't do a damn thing to raise productivity//

Have you slept in your car and bathed in a gas station restroom lately?

(No) free lunch
//The problem came when businesses were allowed to hide the low quality of the loans they were selling.//

Who allowed it? I point at the loan buyers. They chose to buy things without looking in the box based on the premise that everyone else was doing it.

Who allowed it? I point at the loan buyers. They chose to buy things without looking in the box based on the premise that everyone else was doing it.

The rating agencies were highly complicit. They put ratings on the securities that gave the buyers/traders a false sense of worth.


The rating agencies were highly complicit. They put ratings on the securities that gave the buyers/traders a false sense of worth.

This is a very important point. Don't forget the infamous S&P "we would rate a deal structured by cows" instant message that came to light in House Oversight Comm. testimony. For a more serious analysis of the conflicts of interest and perverse incentives at work at the rating agencies, follow the link on that LOLFed page to this post at FTAlphaville, which is very instructive.

Also, the monoline insurers put their reputation on the scales, making the MBS look safer than they were, thereby misleading investors.

I think some of what happened is that institutional reputations were leveraged (there goes that word again) in support of new financial practices which deserved no such support, and the whole mess was so complicated that this problem was hard for even a fairly diligent and determined investor to fully diagnose. We had (and still have) not just a solvency problem but also an transparency problem. Since transparency and trust are (among other things) a form of social capital, make that a solvency problem in multiple dimensions.

The obvious lesson here is don't invest in something too complicated to understand, but at this point that is closing the barn door after the cows have gone to get their deals rated.

The rating agencies were highly complicit.

And then they came up with an ex post justification that they didn't mean that AAA ratings for collateralized debt obligations meant exactly the same thing as AAA for a bond. It doesn't help that the companies that are issuing the paper are the ones who pay the bill -- and might not be back if the Nationally Recognized Securities Rating Organization (yes, NRSRO is a term of art in regulations) doesn't give them a good enough rating.

The rating agencies were highly complicit. They put ratings on the securities that gave the buyers/traders a false sense of worth.

They were, but that doesn't excuse the buyers. If your job is investing huge sums (hundreds of millions, billions?) in debt securities you are supposed to do a little more than just shrug and say, "Well, Moody's says it's AAA, so I guess it's fine."

The whole idea that a classification system as coarse as the ratings agencies' is adequate for these kinds of securities seems dubious to me. Reading Felix Salmon's explanation, and one by Sam Jones that he links to it's clear that the system was being gamed.

Maybe the trading mentality also hurt here. "Gotta act fast. No time to raise questions about the rating."

If your job is investing huge sums (hundreds of millions, billions?) in debt securities you are supposed to do a little more than just shrug and say, "Well, Moody's says it's AAA, so I guess it's fine."

There's something to that, but that's not how it worked in practice. Everyone needs to read The End, Michael Lewis' account of one man who tried to get people to face the house-of-cards nature of the situation, couldn't get anyone to take him seriously, and ended up going short on all the players until the day came when his sure thing paid off.

But he couldn’t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. “I didn’t understand how they were turning all this garbage into gold,” he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. “We always asked the same question,” says Eisman. “Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.” He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. “They were just assuming home prices would keep going up,” Eisman says. ... He was already short the stocks of mortgage originators and the homebuilders. Now he took short positions in the rating agencies—“they were making 10 times more rating C.D.O.’s than they were rating G.M. bonds, and it was all going to end”—and, finally, the biggest Wall Street firms because of their exposure to C.D.O.’s. He wasn’t allowed to short Morgan Stanley because it owned a stake in his fund. But he shorted UBS, Lehman Brothers, and a few others.

One of the viewpoints that I like to bring to bear is that of a (necessarily amateur) cultural historian. And in reading these articles in the financial press about What Has Happened, I'm absolutely gobsmacked at what a cultural disconnect there is between the world these people on Wall St. were living in and much of the rest of western culture for the last 100 years.

Reading over their shoulders about how "risk" (at least as dreamt of in their philosophy) can not only be quantified, but tamed and managed and engineered and sliced and diced and sold by the gram or the kilo, is like a trip back to the world of late Victorian physics, when a clockwork world of Newtonian masses bouncing off of one another was presumed to be God's own game of billiards, and if one but knew the position and velocity vector of every particle then forecasting the rest of history was merely a computational problem.

It is as if they live in a world where Poincaré and Heisenberg and Goedel and Mandlebrot had never lived, Sarajevo and the Somme and Passchendaele never happened, the Queen and the Kaiser still reign, and a League of Extraordinary Financial Gentlemen are keeping watch over all of us.

But instead of this strange and twisted dream being real, the beast "risk" which they thought was not only tamed but fully domesticated was merely resting, and they were the demented dreamers lost in malignant slumber, not it.

Is this sort of extreme cultural disconnect just an accident of history, or something to be expected when income inequality exceeds some critical threshold and our decision makers get to live in a different universe from the rest of us, for a brief span until the bill comes due?

what would a reduced standard of living look like? What gets cut out?

What it looks like depends on where you start from.

For some people it means they don't remodel their house this year. Sucks for their contractor and the local lumberyard. Other than that it may not make much of a dent.

For other people it means they're sleeping in their car and eating at the shelter.

Yeah it's hard to know how much the wealth disparity is distorting things. But on the other hand, it's hard to know how much "wealth" there really is.

There's a lot. US GDP is 30% of the world's, and we have 5% of the population. Even deflated, there's a lot there.

A very large slice of it is owned by a fairly small percentage of the population. I don't have the cites right at hand, but IIRC the top 20% of the population holds something north of 80% of the net household wealth. Basically all gains in household income since 1975 have gone to the top 20%.

The US GINI index is around 45%. You have to look to Africa, South American, or China and Singapore to find places with higher levels of income inequality. Our OECD peers run 10 to 20 points lower.

I realize that the labor theory of value is all out of fashion, but those numbers represent people doing or building useful things that somebody else will pay for. The people who actually do and build those things are not, IMVHO, getting a reasonable or fair share of the wealth they create.

I'm not a fan of transfer payments to address things like income inequality. I like a straight up handout for people who, for whatever reason, are simply SOL and need help, but people who are productive should not need to look to government to help them out.

What they need is a business and industrial culture that actually values and rewards people who freaking work for a living.

Thanks -

TLTIABQ, do you really think the players believed risk had been tamed? I think it's more likely that they were just making hay while the sun shined. Here is another quote from the End

"You have to understand," Eisman says in his defense, "I did subprime first. I lived with the worst first. These guys lied to infinity. What I learned from that experience was that Wall Street didn't give a shit what it sold."

[Nell, thanks for the pointer. It's well worth reading.]

ThatLeftTurn.
I have found your comments on this thread very useful.

"ThatLeftTurn.
I have found your comments on this thread very useful."

That's a fairly common phenomenon, though I hope he's wrong about the end of blogs as one manifestation of cutting back. I'm serious about that. In terms of luxuries, yeah, cut back on mostly stupid blockbuster movies (though I liked LOTR, except maybe the final one) and oversized cars and homes and quite a few other things, but blogs, IMO, are a way of putting pressure on the MSM to be marginally more accurate in their reporting, plus they keep the rest of us a bit saner than we would otherwise be. They might even be more important than that, but I don't want to oversell it.

re: turningleft
// I hope he's wrong about the end of blogs as one manifestation of cutting back.//

Yes. Actually, I wrote that comment after his 'here's what happened' comments and before I came to his 'here's what it means for us in the future' comments. I don't see people giving up bits and opting to be farm laborers. They'll eliminate high cost or effort/low reward things like: multiple cars, new furniture, traveling vacations, etc. Someone above made a good list - I forgot who. Bits is an amazingly low cost way to get endless information and entertainment. It'll be the last thing to go. I'd be down to one set of clothes before I gave mine up.

What gets cut out? In theory we're a lot richer than we were back in the 50's, yet then (at least according to my source of info, which is old sitcoms) it was possible to raise a family with one income.

Take a look at how those sitcom families lived. The kids shared bedrooms, and the whole family shared one bathroom, so they could fit a family into a much smaller house than an equal sized family today. The had only one car that mom and dad shared. They had only one TV in the family room instead of one in practically every room in the house. They had only one phone, and long distance calls were reserved for vital, and usually dire, news. And they had no microwave, computer, DVR, video game console, or mobile phone to pay for.

Most importantly, mom didn't just kick back enjoying life while dad did all the work. She cooked practically every meal from scratch, so the family could live on cheap bulk ingredients instead of expensive processed, prepared foods and restaurant meals. Mom was home when the kids got back from school and helped them with their homework, so they didn't need expensive daycare and private tutors. She mended their clothes so they lasted longer, and even sewed them some of their outfits. Those traditional mom tasks are worth a lot of money, even though they don't show up much in economic statistics.

Doesn't this really depend on whether you think the default position is prosperity or poverty? Historically I would suggest that the default is poverty, while prosperity is the thing that has to be explained.

One could suggest that the post war liberal ascendancy, broadly defined, is causative factor in this and that we need more progress rather than less. Though I am relatively certain MMV.

"The problem, then, was the lack of information."

Oddly, the explosion of derivitaves, overlayed and palimsested upon each other, has made information obsolete.

If you're fully hedged, there is no need to know anything.

Alternatively, there is too much information. Wisdom, of course, remains level over time.

I challenge anyone to tell me they know everything about the business of a corporation and acan justify the price of a stock at any one time.

Really? You can? You've somehow managed to make your way through the phalanx of liars and cheats who stand between you and the fundamentals?

Without the liars and cheats, capitalism goes kaplooey.

It is the best system, natch. Stalin excecuted all of the liars and cheats and as a result, nothing worked.

Someday, we'll lie and cheat ourselves into a new bull market.

After misery.

Price is truth, unless its too low.

Take a look at how those sitcom families lived.

I was born in 1956. We moved a lot, but the first house I remember was an 1100 sf two bedroom cape with one bathroom on a 1/8 acre lot.

Six of us lived in that house. My old man insulated the attic and my sisters shared it as their bedroom. My folks had one of the official bedrooms, and my brother and I shared the other one.

The dog slept in the kitchen.

My sisters thought they had it great, because their room was really big (if short), and my big sister could blow her illicit cigarette smoke out the air vent and my folks wouldn't smell it.

One car, one TV, one income. The car was used. Milk, juice, and bread were delivered. The public schools were perfectly good, and that's where we went.

That's what everyone we knew did then.

The reason all this matters is that preventing the next crisis requires understanding what exactly went wrong this time.

What I hope we will take away from this exercise is the understanding that there are 1,432,739 guys ready to line up and take a number to sell us a sh*t sandwich if it means they can make their killing.

Seriously, they didn't know the gun was loaded? It doesn't matter, least of all to them, if they knew or not. They didn't care. They were getting theirs, and you and I could watch our own six.

I'm not sure what to do about that other than to make sure, by law, that it is somewhere between impossible and extraordinarily difficult to sell sh*t sandwiches.

Thanks -

"The problem, then, was the lack of information."

Oddly, the explosion of derivitaves, overlayed and palimsested upon each other, has made information obsolete.

If you're fully hedged, there is no need to know anything.

Alternatively, there is too much information. Wisdom, of course, remains level over time.

I challenge anyone to tell me they know everything about the business of a corporation and acan justify the price of a stock at any one time.

Really? You can? You've somehow managed to make your way through the phalanx of liars and cheats who stand between you and the fundamentals?

Without the liars and cheats, capitalism goes kaplooey.

It is the best system, natch. Stalin excecuted all of the liars and cheats and as a result, nothing worked.

Someday, we'll lie and cheat ourselves into a new bull market.

After misery.

Price is truth, unless its too low.

And that goes for you too, Russell!

It is the best system, natch.

I've become profoundly unconvinced of that. At least as we practice it.

The conclusion I've come to is that finance capitalism either needs to be kept on the strongest leash we can come up with, or else taken out back and shot.

There's just too much much of other people's money laying around winking at you like Lauren Bacall in "To Have And Have Not".

Who the hell could say no?

Stalin excecuted all of the liars and cheats and as a result, nothing worked.

My guess is that there's at least one other alternative.

Thanks -

The kids shared bedrooms, and the whole family shared one bathroom, so they could fit a family into a much smaller house than an equal sized family today.

that may have been more a function of soundstages than of ideal image of family housing. The parallel is the star trek hallways, which were large in order to accomodate the tv cameras, where a realistic image would have had much tighter spaces.

Also, the proportion of one's salary for a TV, then and now, for instance, are quite different as would be the cost of a long distance call. Furthermore, the benefits that are derived from cheaper technology and communication are hard to quantify, but overwhelmingly benefit us.

Sorry lj, I don't think our memories of the size of the houses we grew up in has anything to do with the soundstages for sitcoms.

I read something a few years ago (I'm approximating; if I can find an exact quote tomorrow I will, but the magazine I read this in is surely not online) like this: The average square footage per person in family houses in the US when I was growing up (1950s) was 300 square feet; 10 or 15 years ago, when I read the article, it was up to 800. McMansions indeed. And all that additional space? You have to heat it, furnish it, clean it, air condition it....

My experience was like Russell's, only my brother, being the only boy, got a small room to himself, and we three girls shared. There was one TV in the house, not one in every bedroom, never mind the fact that VCR's and computers and microwave ovens and answering machines and cell phones didn't exist.

From another angle, on what we might do without now: I have no dishwasher, no clothes dryer, no microwave, and no TV. We had a dryer and a dishwasher during some of the years the kids were growing up, but eventually we reverted to washing dishes at the sink and hanging clothes outside in the summer and on racks indoors in the winter. (The kids helped, and when they were old enough they did a lot of their own laundry and dishwashing. My son made his own feasts of spaghetti from the time he was about 8 years old; I guess I just didn't feed him on a schedule that suited him. ;)

I could do a major rant on what I think of as "the Great Stuff Machine" -- but never mind, I've gotta get to bed so that I can be up for an appointment in the morning.

Before I say goodnight, though, I want to say how bemused I am by the fact that I agree with d'd'docile dave about not one but two things in this thread. First, his appreciation for ThatLeftTurn. Second, this:

Bits is an amazingly low cost way to get endless information and entertainment. It'll be the last thing to go. I'd be down to one set of clothes before I gave mine up.

We all have something, I guess.

The same things and the same people (on a macro level) are still here. Why, physically, should everything slow down? Is it purely artificial, such that, if the world could be of one mind and agree to hit some sort of economic reset button, everything could continue as it did before?

Because the "physical" problem is a misalignment of the productive capacity with long term demands.

To illustrate: judging from the economic signals your company estimates a demand for 100 million widgets per year. So you build a factor that makes 100 million widgets per year. However it turns out that the people buying widgets were doing it on credit, and when their credit runs there's only a long term demand for 50 million widgets per year. So you cut your output/staff/purchases/expenditure in half. Now the money is still there, it's in the hands of the people who lent it to the widget buyers. However these people don't need widgets, they need doodads. So all those people that used to work for you to make widgets can just go make doodads now right? Problem is there's no doodad factory. So while the doodad factory is being built the workers get to sit around doing nothing. And of course this cascades down the line to all the companies that supplied your or your employees with goods and services.

This example can be applied to any industry who's goods, services or labor aren't as mobile in the global economy as capital is. The loss of wealth is two-fold: firstly in the wasted material and labor spend on the over-sized widget factory, something which could only be avoided by a more transparent and better modeled economy; and secondly the cascading effect this has on the wider economy, something which is much harder to manage.

When a poor decision is made on a small scale the cascading effect is short and minor, part of the cost of optimization within a capitalist economy. However given the business monoculture within the management of dominant corporations in industries such as the financial sector, the effect of poor decisions becomes as bad as in a centralized economy.

Russell and Janie's descriptions might be considered near the poverty line now but at that time they were probably at least middle lower middle class if not higher.

It shows a couple of things to me: 1. we have become accustomed to more than the essential things in life - we'll survive if we have to go back a little. 2. I'm guessing the poverty line includes nonessentials.

I'm guessing the poverty line includes nonessentials.

Essential to survive till tomorrow, or essential to become a productive member of society?

that may have been more a function of soundstages than of ideal image of family housing.

Maybe, but I doubt it. The inter-war and early post-war housing that I've visited is on a much smaller scale that what would be considered acceptable today. Just open your favorite real estate web site and look at some 1950s era housing tracts. Then look at some more recent ones. You will find that the average square footage per bedroom is much higher today than in the 1950s, and the average number of bathrooms per bedroom is radically higher.

desipis
//Essential to survive till tomorrow, or essential to become a productive member of society?//

You mean like free public education, library cards, church communities, opportunities to work, and stuff like that?

Sorry to be unclear, but my point wasn't that things hadn't changed, but that we shouldn't use sitcoms as data proper because they are subject to a range of different constraints that have nothing to do with how we live, which is why I gave the star trek example.

I'm also kind of wary of the 'you kids don't know how lucky you are' stuff, if only because it was delivered with a certain aplomb by my parents. And I'm not doubting it, mind you, but it sometimes comes off as you should make the same sacrifices we made, which sort of negates the reason the sacrifices were made in the first place. I'm not saying that having a TV in every room is a requirement, but my daughters 10 and 5 are on the computer every day doing various stuff, such that we have a computer in their room. They can start it up, log into their account, mouse skills, typing skills, etc, though they having gotten to dropping in the terminal or the like. But that kind of foundational level ability is not something one can simply toss aside. Especially when I deal with university students who have actually never touched a computer in their lives.

There was a line of educational research that I'm now investigating, called precision teaching, that set out to discover, to use as for assessment, what were the basic skills that were needed. One finding that I find particularly interesting is that students were unable to progress in the math skills if they weren't able to write down a series of numbers accurately in a given amount of time. Many of those skills were paper and pencil ones and I'm looking at how things like typing accurately with a certain speed and being able to find and correct errors in a given amount of time can be thought of as replacing some of those paper and pencil tasks (the research is from the 70's) But the ubiquity of TVs is in large part because the cost of screens and electronic parts was pushed down thru demand and innovation. I would agree that the world that this has given us is not an unalloyed good, but for technology (as opposed to floorspace) we don't really get to pick and choose after the fact.

lj, I can understand the wariness of "you don't know how lucky..." That's partly why I didn't go on my rant.

My feeling about it isn't that I think things were unalloyedly "better" (whatever that means) when I was a kid: far, far from it. But I don't think they're unalloyedly better now, either. I'm not remotely saying your girls (or any girls) shouldn't have their own computer, I just saying (to try to clarify at 6 a.m. when I should be sleeping) that we could be a lot more selective than we are, and that a lot of the stuff we have is not only not necessary for a good life, it detracts from a good life.

Is it really a necessity of life to have an electric clothes dryer and to run it for 3 quarters of an hour with nothing but a pair of socks in it, because someone has to have that pair of socks, and no other, right now? I've seen that kind of thing, and its equivalent, a lot, and to me it's just heedless waste. I go into stores (reluctantly, unless they're grocery or book stores!) and I see mounds and mountains of junk that "we" should never have used the planet's resources to manufacture, much less ship, sell, buy, store, then discard in landfills.

And this, when some people live in the streets and go hungry all the time. (In the US and in the world.)

Okay, now I'm into the rant. The point is, while some people are living in the streets, other people are awash in "stuff" that it wouldn't be all that hard to do without. (I don't mean computers, okay? I really don't! ;) Russell has said it better more than once, but in this as in other ways, our distribution is more skewed than it needs to be, than it should be, than I would like to see it be.....

Maybe you don't see this in Japan, but to me another symbol of the excess, besides McMansions, is the mushroom-like proliferation of "self-storage" facilities all over the American countryside. At least in the territory that spans Maine and Ohio, where I travel to see family, they are all over the place. What are they there for, if not to store the unnecessary overflow! And that's just the overflow that doesn't go into the landfills.

Okay /rant. (For now.) Back to bed.

[Nell, thanks for the pointer. It's well worth reading.]

It's worth pointing out that certain ObWi front pagers posted a link to said article some two weeks prior to Nell.

Cough. Ahem. Cough.

http://obsidianwings.blogs.com/obsidian_wings/2008/11/nobody-expects.html

Russell and Janie's descriptions might be considered near the poverty line now but at that time they were probably at least middle lower middle class if not higher.

Our situation was, in fact, low-middle to middle class at the time. Typical post-war NY suburban young family starter home.

I don't think anyone living at the standard of living we enjoyed then would be considered 'poverty level', then or now. The cost of that small house relative to my father's sole income was modest. We had decent new clothes to wear, ate well, and went to the doctor whenever we needed to. We only had one car, but we could walk less than a half mile to schools and stores.

There's a reasonable point to be made about overly large homes and redundant consumer electonics, but that doesn't really get at what makes "poverty level" poverty level.

The federal poverty level for a family of four is, I believe, currently $21,200. That is just more than $400 a week. To net that, you need to be making about $15.00/hour for a 40 hour week.

Rent for a two-bedroom, one-bath apartment in a blue-collar city like Lynn, MA starts at about $800.00.

For similar cities closer in to Boston or Cambridge -- Everett, Chelsea -- two-bedroom one-bath places start at about $1000/mo and go up.

An MBTA pass costs anywhere from $40 for local bus service only, to somewhere over $100 if you want bus and subway with connections to non-local bus lines.

Food, clothes, medical co-pays.

If you're making poverty level in my area, you are poor, by which I mean you don't have enough money to cover essentials. By essentials I mean food, shelter, clothing, transportation, and whatever medical expenses aren't covered by the government.

Other places cost less for rent, but you have to have a car.

There really isn't a comparison.

Thanks -

It's worth pointing out that certain ObWi front pagers posted a link to said article some two weeks prior to Nell.

Sorry, Eric, I overlooked it.

Excellent thread. If Mark Twain was a troll, he would have written John Thullen's minifesto. Pure poetry, sad as it is.

What with all this 'coming to grips' with what we might have to give up, and d'dave's curt (and astute) observation about the effects of housing on productivity, I'm surprised that Maslow's hierarchy of needs hasn't come up. It's what we're discussing, after all, and it neatly allocates all aspects of a fulfilling life, without letting 'priority' cut into our essential dignity. I'd love to see comments on this topic as filtered thru Maslow's theory.

ral: no worries. just Farberizing for a moment.

@Eric: I should have noted that you'd already posted about 'The End' in my comment. I brought it back up because so many commentators seem drawn to putting the bulk of the responsibility for the crisis on the people at the bottom of the house of cards.

EM -- to my recollection, Gary doesn't care to be verbed.

Nell: again, no worries. just having a bit of fun.

Farmgirl: Gary will just have to remember that I love him and that he is, eternally, my homey.

Many thanks to Nell and the others who recommended and linked "The End," Michael Lewis' brilliant account of the greed and unethical practices that would have bankrupted Wall Street investment houses had taxpayers not been forced to bail them out.

I hope everyone takes the time to read this gripping article that is equal parts fascinating and disturbing. A great read that is a piece of great journalism.

And after reading it, I dare you to say why the $700 Billion Bailout was necessary.

The goverment doesn't refund gamblers who lose money at the racetrack or casino or on the lottery. Why should it refund Wall Street banks that knew its bets were based on bad loans, backed up by gussied-up ratings by institutitional giants like Moody's, who were in on the whole thing, too?

The thread that follows the Lewis article is pretty interesting, too.

A sample post, from commenter "Dean":

"A friend of mine who was a civil engineer suddenly changed his career to become an independent real estate appraiser in the the Atlanta area.

"He visited me one day in 2006, told me things were going great , how he changed his career and was making good money.

"I asked how he got into appraising. He said he took a course got certified and started doing it part time then started doing it full time.

"We were having lunch and I asked him more about what's involved in appraising a home. He explained the different approaches and as he was talking his phone rang. It was a mortgage broker asking if he had finished the appraisal, actually the phone was ringing often. Same conversation different broker.

"He finished I think two or three appraises during the lunch. He asked me if I was interested in developing a software program that could speed up the appraisal process. I guess what was available could not produce the appraisals fast enough to meet the demands of the brokers.

"I asked about these brokers and what was his relationship with them. Turn out they exerted at times extreme pressure to get the homes appraised and to get them appraised for the 'right' value, that is the value that will satisfy the loan to value ratio.

"He relies on the brokers for business, so it is in his best financial interest to make them happy. He also has a duty to come up with 'true' value. Well what do you think wins out?

"After more questioning it turns out he satisfies the brokers demands and also his fiduciary duty by coming up with a 'fair' value and then adding 10-15%. I asked him how can he justify adding 10-15%. He said the market is rising more than that so adding that extra to the value is fine.

"I said nothing and just nodded. Probably should have ran out of there and started a hedge fund."

"Getting back to my question, what would a reduced standard of living look like? What gets cut out? In theory we're a lot richer than we were back in the 50's, yet then (at least according to my source of info, which is old sitcoms) it was possible to raise a family with one income."

Speaking from the perspective of someone who has always been poor, it looks to me that most people seem to think they need a lot of stuff that it's hard for me to see that they do.

Things like an expensive car instead of a cheap one, or one at all, big fancy tvs instead of cheap old ones, expensive furniture instead of functional stuff, fancy exercise equipment instead of just lifting heavy stuff and doing exercises, expensive food instead of economical choices, expensive clothes intead of off-brands and less fashionable items, and so on and so forth, down to little things like not paying attention to turning off the lights when you leave a room.

All those things are very nice, if you care about them -- I'm particularly partial to the fancy food, and I'd certainly love to have an HDTV, or a bigger screen, among other things, myself -- but they're not necessary in most cases. A lot of thinking that they are does seem to be the old cliches of "but my family/neighbors/co-workers/children will think I'm a failure if I'm not seen to have these things!" Or people just think that for themselves.

And on the world scale, almost everyone is a lot richer than they think.

"Farmgirl: Gary will just have to remember that I love him and that he is, eternally, my homey."

Yeah, it's the spirit that it's done in that matters most. I don't care to have my name used as a defamatory epithet (who does?); used appreciatively is fine.

The comments to this entry are closed.

Blog powered by Typepad