14: Suction Up, Trickle Down

This is the final chapter in the section on economics, Attack of the Petrodactyls, from my book How to Dismantle an Empire. It looks at the growing wealth disparity in the US and how that’s been manipulated through college debt and housing costs. The 2008 ‘subprime mortgage crisis’ is examined for who benefited: Blackstone, Colony Capital, Barclay’s, Bank of America, Morgan Stanley. I show that even billionaires are struggling to keep up! You will be forgiven for not shedding a tear.

After this, the last two sections are on system change—imagining how we want money to work—and the framework of my solution, the caret system. This chapter shows the extent of the problem, which has only gotten worse in the decade since I put together this data. As always, I start with quotes:

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In America today, we have the most 
unequal distribution of wealth and income 
of any major country on earth, and more 
inequality than at any time period since 1928.
The top 1 percent owns 42 percent 
of the financial wealth of the nation,
while, incredibly, the bottom 60 percent 
own only 2.3 percent.
One family, the Walton family of Wal-Mart, 
owns more wealth than the bottom 
40 percent of Americans.
In terms of income distribution in 2010, 
the last study done on this issue, the top 
1 percent earned 93 percent of all new 
income while the bottom 99 percent 
shared the remaining 7 percent.

—SENATOR BERNIE SANDERS

A society that programmatically 
trains its young into debt and calls 
that “higher education” is as corrupt 
as a wealthy country that won’t 
rebuild its own infrastructure. Talk about 
the hollowing out of America: you are it.
No matter how substantial 
you may be in private, you are being 
impersonally emptied in what 
passes for the real world.

—TOM ENGLEHARDT, “GOING FOR BROKE 
IN PONZI SCHEME AMERICA”

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Suction Up, Trickle Down

Tom Englehardt is the co-founder of The American Empire Project, author of The End of Victory Culture, and editor of the online blog, TomDispatch.com. In a commencement address he will never be asked to give, he douses new grads with a cold splash of reality:

Today, we know that the class that preceded you was the most indebted in the history of higher education, and you’ll surely break that “record.” And no wonder, with college tuitions still rising wildly (up 1,120% since 1978). Judging by last year’s numbers, about 70% of you had to take out loans simply to make it through here, to educate yourself. That figure was a more modest 45% two decades ago. On average, you will have rung up at least $33,000 in debt and for some of you the numbers will be much higher. That, by the way, is more than double what it was those same two decades ago.

We have some sense of how this kind of debt plays out in the years to come and the news isn’t good. Those of you with major school debts will be weighed down in all sorts of ways. You’ll find yourselves using your credit cards more than graduates without such debt. You’ll be less likely to buy a home in the future. A few decades from now, you’ll have accumulated significantly less wealth than your unindebted peers. In other words, a striking percentage of you will leave this campus in the kind of financial hole that—given the job market of 2015— you may have a problem making your way out of.

Englehardt’s message to grads is that they’ve been scammed, but they can take cold comfort that they’re far from alone. Their professors and even their politicians have been made similarly dependent on wealthy corporate sponsors in order to survive. For every claim he makes, Englehardt links in solid and increasingly depressing research.

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homes: going ... going ... gone!

Another TomDispatch blogger is Laura Gottesdiener, author of A Dream Foreclosed: Black America and the Fight for a Place to Call Home.

She looks particularly at housing debt and its role in making middle-class security out of reach for all but the elite. From 2007 to 2013, more than 4.5 million repossessed homes displaced at least ten million people, according to Gottesdiener. A disproportionate number of those affected were minority families who were aggressively marketed subprime mortgages. Bounty-hunting agents went as far as to bribe ministers and exploit church affiliations, directing over half of minority borrowers to predatory loans even when they qualified for better terms.

Four point five million houses for sale and ten million renters with ruined credit produced a glut that the market couldn’t digest. By 2013 the government agencies of Freddie Mac and Fanny Mae were left with an inventory of 90,000 foreclosed homes, with many of the other 4,410,000 sitting on the books of banks. The upside of the housing crisis should have been a return to saner prices, enabling more buyers to become homeowners after prices plummeted. After all, free market prices are set by competition between bidders; if all bidders are subject to the same constraints, the 4,500,000 most eligible buyers should move into those homes. But instead, the government agencies sold them in bulk to investors like Colony Capital, which bought nearly a thousand during a pilot program.

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capital’s colonies

Blackstone, the largest private equity fund and now the largest owner of single family homes in the nation, spent over $4.5 billion to buy at least 30,000 houses, often paying in cash. GI Partners gave a billion dollars to Waypoint Homes to scoop up over 4000 houses and Citibank extended them a quarter of a billion in credit. Major investors believe that “the single-family residential asset class will serve as a natural hedge against inflation,” which is redundant since property values and rents go up as the dollar loses value. No mention was made of how the wages and savings of renters will fare without this flotation device.

Meanwhile, in low-rent districts and overbuilt suburbs alike, property values took a nosedive because foreclosed homes sat vacant and decrepit, bringing down the property tax base that communities depend on. Banks did not fulfill their legal obligation to maintain and market properties, after they rushed through millions of robo-signed forgeries of foreclosure documents forcing owners out, sometimes at gunpoint. Due to lower property taxes, public services were slashed, further decreasing the jobs and money circulating in minority neighborhoods. True to the name of the unabashed Colony Capital, communities at home became capital’s colonies—capitalism being the way that civilized people colonize.

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locusts and money in the urban desert

Tom Englehardt introduced a different post by Laura Gottesdiener by suggesting to media pundits that they use Detroit as the benchmark for biblical-scale catastrophe instead of Katrina. He wrote:

... in a country in which Congress has trouble raising money for essential highway upkeep, not a single mile of real high-speed rail exists (the Acela Express in the Northeast being a high-speed joke), the national infrastructure gets a D+ grade from the American Society of Civil Engineers, and one of its formerly great cities makes the phrase “hollowed out” sound like a euphemism, perhaps we should change our metaphors. Maybe when something devastates part of this country, it’s not a “Katrina” any longer, but a “Detroit.” Maybe the next time a city is hit by a hurricane, the headlines should refer to it as “a five-hour Detroit.” Maybe when the next set of aging natural gas pipelines blows up, we should speak of “an under- ground Detroit.”

Gottesdiener’s 2015 article, “A Foreclosure Conveyer Belt: the Continuing Depopulation of Detroit,” highlighted the largest simultaneous property-tax foreclosures in history, with tens of thousands of people evicted at the same time. Sixty-two thousand homes were slated for the auction block in 2015, half of them occupied, affecting one out of every seven people in Detroit.

Property tax is like the “head tax” that colonies of the Roman Empire identified as the first step in slavery: whereas income is only taxed if you’re paid and sales are only taxed if you buy, everyone has to live somewhere. Home ownership gives a place to stand on the earth, a place to sleep that isn’t borrowed or trespassing, a room of one’s own from which one can’t be kicked out. Unless you fell behind on the property tax due to a heart attack. Unless you’re waiting for a lump sum payment from your former job. Unless your African-American father, who lived through the 1967 Detroit riots, can't keep up with the taxes on his hard-won home.

In the digital futuristic mock-ups of the Detroit planning commission, these neighborhoods were turned into “water retention basins” or, more simply put, ponds. The mass exodus of people made way for ducks and “superior storm runoff management.” It gave new meaning to whitewashing.

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binging and purging on property

And what about the homes that were financially underwater but not literally? In a 2013 article in Dollars & Sense entitled “Whose Housing Recovery?” Darwin BondGraham reported that high finance investors were buying up foreclosed homes by the tens of thousands. Homes were targeted in the “sun and sand belts” from Florida and Georgia to Arizona, Nevada and California. The new category of single-family rental houses was added to other asset classes like corporate debt, government bonds, currencies, and financial derivatives. By 2015, according to Barclay’s, 42,000 foreclosed homes had been bought for a total of $5 billion, which came to an average price of $119,000 in all-cash deals. Morgan Stanley called the growth curve the “60 billion dollar question,” while Barclay’s thought the potential could reach $100 to $200 billion, skimming 1.3 million homes off the market like a whale guzzles plankton.

How were US residents hammered? Let us count the waves: When Glass-Steagall was repealed, banks pushed mortgages they knew would fail while their investment divisions bet on their failure. Taxpayers bailed out the banks whose fraudulent mortgages led to the crisis. Citibank alone received $476 billion in government assistance including TARP funds. If Citibank had been forced to foreclose on the mortgages that were underwater (with the borrower owing more than the price at which the house would now sell) Citibank would have dropped below their required reserves, putting them into insolvency. Taxpayers saved Citibank. In return for this favor, Citibank provided a mere $1.8 billion to the borrowers it had defrauded, with which it prioritized underwater mortgages rather than refinancing retirees who lost their houses over small equity loans.

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a peculiar absence of pitchforks

Bank of America’s Countrywide Financial paid a fine of $335 million—a mere slap on the wrist—to settle documented claims that it had charged 200,000 minority borrowers higher rates and fees, and targeted them with subprime mortgages. Besides the $45 billion that B of A received in TARP funds, the New York Fed forgave them the $18 billion they cost the government for misrepresented mortgage-backed securities. With a wink and a nod between the NY Fed and B of A, taxpayers returned a ten-to-one profit for their discriminatory lending practices.

These no-guilt settlements were merely a business expense. For the 2012 robo-signing scandal, major mortgage servicers agreed to pay $26 billion in total for evicting homeowners with false or incomplete paperwork. Each evictee received an average of $2000 over the course of three years, or $55 per month. Because the Federal government settled on the public’s behalf without an admission of guilt from the bankers, victims can no longer sue the banks in civil court. This agreement also protected the perpetrators from any personal liability, including fines or jail time. Heads did not roll, but eyes did.

The homes that were not foreclosed were exactly the ones that should have been. These homes were part of the $700 billion that was underwater. Although it would have been painful, people who bought at the peak of the market with little or no money down would have been better served walking away and renting elsewhere. The banks, however, couldn’t afford to foreclose on these houses and recognize the $700 billion in losses. Owners of these “troubled assets” had their principles reduced, thanks to government subsidies that were really a gift from us to the bankers and not to the homeowners, who were still left owing more than the house was worth.

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one man’s castle is another man’s (s)hovel

The Bureau of Labor Statistics reports that housing demonstrates the greatest class disparity in percent of income spent. A low-income family that makes under $18,000 will spend $10,000 per year on housing or 56% of their income. Their total expenses will equal $25,000 per year, even though they bring in less than that in gross pay. Some of this is made up in programs like food stamps, which aren’t counted as income, yet housing will still be 40% of their total expenditures.

The hypothetical average family, who does have more coming in than going out, spends 26% of their income on housing, which is 34% of their total expenditures. In 2011 this mythical family spent $50,000 altogether of their $65,000 income. But while the average family income was $65,000, the median family income was only $51,000, which means they barely made more than they spent.

Census data for 2011 showed higher income levels than the Bureau of Labor Statistics, but reflected a similar income gap between the median family income of $62,000 and the average family income of $83,000. The difference was that 48% of all income was made by the top 10% of wage-earners. The top 10% averaged $250,000 per household and spent an average of $38,000 per year on housing, which was only 15% of their income. Half of their income, or $125,000, wasn’t spent at all.

But the amount of savings by the top 10% was, in turn, skewed by the top 1%, who have a habit of hanging onto their wealth. The 1%— those three million Americans whose annual family earnings were in excess of $400,000—saw their incomes rise 20% in 2012 compared to a 1% increase for the other 99%. By 2013, the 1% was garnering 95% of all income gains. And then there’s the top .01% who make over $10 million a year. By 2013 they were making nearly 1000 times as much as the bottom 90% of society, which was an exponential rise over 1975 when it was "only" 100 times as much.

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one in a million

But even the wealthy are subject to their own disparity gap. In 2011 the Swiss bank USB and the research firm Wealth-X compiled a list of the global 200,000. These were the .003% of the world who held at least $30 million each and a combined wealth of $28 trillion. Far from trickling down, this total escalated up by another $2 trillion in 2012.

A third of these ultra-rich were Americans: 65,000 people, or one person out of every 5000 Americans, with a combined wealth of over $9 trillion. This was over half of the then-US GDP of $16 trillion. If every person earned an equal share of the US GDP, it would have come to $50,000 per man, woman, and child or $200,000 for a family of four. Clearly this money went somewhere else.

But even that wasn't all. It turned out that 1% of the 200,000 ultra-rich, or the 2000 billionaires who made up the global .00003%, held 23% of this elite group’s total net worth. This is only one person for every 3.5 million people in the world. In 1960, the GDP of the world was $1.35 trillion. Two generations later 2000 individuals owned six times this—$7.4 trillion or over 10% of the $72 trillion global GDP in 2011. This money was extracted from the productive economy to become speculative capital.

Michael Moore tracked this migration of wealth in an article called “The Forbes 400 vs. Everybody Else.” Moore calculated total US wealth as $53 trillion in 2009. The bottom 60% shared only 2.3% of this, putting their total wealth at $1.22 trillion. The aggregate wealth of the 2009 Forbes 400 was more than this at $1.27 trillion. So an average person on the Forbes 400 monopolized more capital than 450,000 people combined in the US.

But there’s no rest for the weary in the race to the top. In 1982, when Forbes first started assembling their list of the 400 richest Americans, there were only thirteen billionaires. In 2012 the average net worth of the Forbes 400 rose $800 million to reach $5 billion each, so that less than $1.3 billion didn't even make the cut. The combined wealth of these one in every million Americans topped $2 trillion.

Poor little billionaires—keeping up with the Gates, Buffets, Bezoses, Zuckerbergs, and Kochs has never been so competitive.

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a tale of two middles

The consistent pattern of increasing money concentration makes it clear that this is a systemic problem, not a few greedy individuals at the top, some lazy bums at the bottom, and spendthrifts in the middle who used their houses as ATM machines. The problem goes deeper than can be fixed by a few policy tweaks or changing some key players.

In illustration of this, the Congressional Research Service compared the mean and the median of household net worth, going back to 1989, sourced from 2010 Federal Reserve data:

MEDIAN AND MEAN HOUSEHOLD NET 
WORTH, 1989-2010 (2010 DOLLARS)

Year      Median    Mean         Ratio
1989     79,100   313,600       4.0 
1992     75,100   282,900       3.8 
1995     81,900   300,400      3.7 
1998     95,600  377,300       3.9 
2001   106,100   487,000       4.6 
2004   107,200   517,100        4.8 
2007   126,400   584,600      4.6
2010     77,300   498,800       6.5

Starting in 1989 the average household net worth was four times the true middle class, defined as those who are in the middle of society with half the population above and half below. This discrepancy indicates that the 1989 distribution, if plotted on a line, was an exponential curve. With the so-called "average" household worth $313K, they would actually be in the top 10% wealth bracket. The rest of the money was squeezed out of the 90% like an empty toothpaste tube. In fact, so much money was extracted to the top that they would have to give $234,500 (the mean subtracted by the median) to every household to create a straight diagonal line from poorest to richest.

For the next six years from 1989 to 1995, the median and mean came closer together as the middle class made modest gains and the upper class had modest losses. During the twelve years of 1995-2007 they both climbed steadily, with the wealthy gaining more than the middle class. If we divide the number of people in the US by 2.5 people per household and then multiply by the average net worth, total US “wealth” went from $31 trillion in 1989 to $70 trillion in 2007 or more than double.

Once again, however, what increased wasn’t the real wealth but the monetary value attributed to it. The natural capital of forests and fossil fuels went down, the physical capital of housing and infrastructure aged and depreciated, and—although the population increased by 22%—the human capital of US skills and education suffered from neglect. In the same way, when a house goes up or down in “value,” the beauty or functionality of the house doesn’t necessarily change, just the hypothetical sale price.

By the height of the housing bubble the median had made a net gain of 60% while the average had climbed 87%. This may not seem like a big difference but, subtracting the median from the average, it means that the richest 1% could now afford to give $400,000 in value to each household and still be at the top of the line. Stop and imagine for a moment what this would mean in terms of quality of life if each household had $400,000 more in assets and security.

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sweeping up

Imagine now if that $400,000 per household was a share of the community's capital—ownership of and, therefore, responsibility for part of the joined wealth in land, property, infrastructure, skills, creativity, and knowledge. The credit extended from this shared wealth would enable households to enhance their private capital—fix up old homes, learn new skills, and start small businesses. The community would be able to subsidize agriculture that improves the soil, construction that restores the infrastructure, and services that enhance wellness and happiness. No matter what happened to the monetary value, these things could never be taken away.

But monetary value isn’t wealth and hypotheticals can evaporate— as happened when the bottom fell out of the housing market and this imaginary "wealth" dropped to $62 trillion in 2010, merely twice its level two decades previous. While the climb in wealth had advantaged the upper class, in the drop, the middle class lost more net worth than they’d gained since 1989. They had accrued an additional 60% since 1989 but lost it all and plummeted an extra 2%. The upper class lost a mere 15% from their peak value in 2007 but kept gains of 59% over their 1989 net worth. They now held $421,500 of excess value from each of the 124 million households in the US rather than $234,500.

In 1989 a middle class household needed to quadruple their net worth in order to be average; by 2010 they needed to own six and a half times as much. To make matters worse, the $77,300 of value the median did own represented only half as much healthcare, half as much education, and half as much house as it did in 1989. The rest of the dollar’s value had migrated up to the wealthiest 1%.

It’s as if the influx of monetary value acted like a broom to sweep the real wealth into the far reaches of the upper echelon, creating a 6.5-fold discrepancy between median and average. Explaining this, the Congressional Research Service observed that during boom times the average net worth grew faster than the median, but during recessions the median fell faster than the mean.

In other words, in good times the rich got richer and in bad times the poor got poorer. A rising tide lifts all boats, as they say, but when it recedes the yachts fare far better than the rest of our sinking dinghies.

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CHAPTER 14 EXERCISES

Using examples from the book, or from your own research, logic, and experience, comment on the following and what it means today:

Paradigm Shift #14

Four things rise with income: housing, healthcare, higher education, and hope for retirement, or the Unaffordable 4H.

For necessities, our economic system is designed to take everything a person has and, when their savings and borrowing capacity are exhausted, socialize the rest of the cost. The populace pays in cash, credit or taxes, and the .0001% always profits. There is no middle class, therefore, only a precarious median muddling through.

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LEXICON

Explain how the following definitions change the dialogue around social problems. Is this concept used in discussion of the examples to which it applies? If not, how does this affect the potential solutions?

subprime mortgages: loans in which the bank creates more credit (money) than the market value of human capital (wealth) relative to a home (physical capital). Rather than allowing the market to adjust to the available buyers, this drives housing prices up at a temporary loss to the banks but puts more credit (money) into circulation to pay off other mortgages. Borrowers are at high risk of losing both the physical capital and human capital they've put into it when the bankers raise the interest rate.

predatory lending: a scheme to gain ownership of natural, physical, or human capital (wealth) by extending bank credit (money) in a way that's designed for the loan to fail and extract the capital.

"inflation hedge": an asset (wealth) whose value remains stable as bank credit (money) is increased and diluted relative to the asset that backs the money.

property tax: a semi-annual extraction of bank credit (money) that requires ongoing human capital to retain the physical capital (wealth) that's the basis of security. Creates an ongoing rent relative to the speculative value even after the asset is paid off and "owned." For communities, it allows them to access a small percent of their own labor after the banks and central government have claimed the lion's share in mortgages and income tax, putting the sovereignty of communities and families at odds with one another.

property tax foreclosures: eviction of the owners of a home based on non-payment of an annual fee that's a percentage of the speculative value. Often affects retirees and multi-generational homes in impoverished areas, even though houses will remain vacant after owners are evicted or be auctioned at fire-sale prices.

asset class: a category of speculative investments bought in bulk by multinational hedge funds.

robo-signing: low-level clerks hired to approve hundreds of foreclosures at a time, with no investigation.

Troubled Asset Relief Program (TARP) funds: central bank credit issued by the Federal Reserve to private banks whose subprime mortgages were underwater. If foreclosed, the banks would need to recognize a loss, putting them under their capital-to-loan ratio requirements and into bankruptcy. This would allow the public to repossess their assets (mortgages) if public banks were in place.

mean: the average of a set of data, in which the extremely high and extremely low are evened out, obscuring the shape of its distribution.

median: the point at which half of the set of data is above and half is below. The difference between the median and mean illustrates how top-heavy the data distribution is or, in this case, money distribution.

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QUESTIONS FOR REFLECTION AND DISCUSSION

Are Tom Englehardt's words to new grads overly dire or accurate? How could you solve the problem? Does it promote self-reliance to subsidize according to parents' income? If universities were 100% subsidized for everyone, who would control the curriculum, who would be eligible, and for how long? Through public banking, is there a way to distribute partial subsidies and bring the costs down so it can be learner-driven and affordable throughout a lifetime?

Discuss how the tropes of subprime mortgages and mortgage-ATMs blame the victims. What would be better terms to fit the reality? Like subsidized healthcare and higher education, would there be problems with subsidized housing? Could you accomplish the same goal, of making housing equal to the use-value by instead eliminating speculative investment? If housing without improvements tended downward, like other possessions, because the interest rate for borrowers was stable, would it be a target for speculative investment? Is it better to have a hedge against inflation or to not have inflation?

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A home is the greatest expense of a family or individual, yet bankers own them with the click of a keystroke. Whether high or low, it will cost as much as the market can bear. In this episode, I compare the astronomical prices of California to my hometown of Cumberland, MD, where a car might cost more. Although the problems are opposite, the solution could be the same. I look at Michael Hudson and how the petrodollar is affecting real estate and 'institutional investors.' I wish for an economic coalition like the Italian healthcare cooperative IppocrateOrg, presented by Robert Malone. And I hope to put the FIRE economy of Finance, Insurance and Real Estate back in the hearth of community where it can empower our future.

What are the ends and means of The Great Reset? I define them as dispossession through economics and monopolies, depopulation through military and medical, and psychological manipulation through education and media. I look at what our purpose is as societies, communities and families, and how we can measure whether their agenda or our purpose is succeeding. I explain why our existing system is the worst of both worlds because banks create the money but leave government to care for the people. To reverse the flow of predatory capital, three co-existing economies are proposed: a subsistence economy for self-reliance, a trade economy for reciprocity, and a gift economy for creativity and pure joy.

Responds to Matt Taibbi's "Magic Monetary Theory Goes Primetime." He looks at the film Finding the Money with Stephanie Kelton and says, "Run!" From my book, How to Dismantle an Empire, I show how deficits do turn into someone's assets--and we need to make sure that someone is local communities.