End of the American Dream

It is ok to own a home to live it. But to buy an overpriced home, and to think of home ownership as an investment beyond the collection of rent and small profit is just a fantasy of the real estate bubble. For many, renting and investing the rest will be the wisest of choices. In markets where the foreclosure sharks bought the falling knife and have walked away as houses plummeted past their purchase prices, you may get a bargain. That has happened in North Las Vegas. We talked to a realtor who sells there and she said this is exactly what is happening, so that homes that sold at the peak for north of 350 thousand dollars are now selling for 120 thousand dollars.

I don't feel sorry for the foreclosure sharks because they were greedy. Yet in reality they were scammed as well. Home ownership before the bubble showed a modest increase in value, and that is how home ownership should be. The American dream, then is to invest, and BTW, that doesn't mean plowing all your money into stocks while they are overpriced. Careful investing is the key. With regard to new revelations and warnings from Paul Miller about the 30 year mortgage, the American Dream becomes even more suspect and elusive.

I am writing this as a shout, and a plea to all who read to wake up if you have not yet done so regarding the world financial meltdown. I shout here to warn you that you need to take action to preserve yourselves.

If you are looking for a crystal ball here you have come to the wrong place. But lets look at the facts. A memorable fellow on CNBC once said that the Chinese make things and we (US citizens) sell each other insurance! I would add to that real estate. So, the Chinese make things that we no longer buy and we sell each other insurance that we no longer can afford and real estate that is overpriced.The middle class aspiration of home ownership is an American dream that is in jeopardy.

It is plain fact that Americans are over leveraged with way too much debt. This debt includes car loans, real estate, credit cards and school loans. The deleveraging must take place in the short term. That means that families need to spend less, and they have less appetite for the very debt that has made this economy run! Thanks for nothing George Bush.

What gripes me about the last president, besides the stealing of oil in Iraq and torturing people, is that this guy could have allowed a garden type recession with less household debt after the dot com crash. But no, he wanted to finance the Iraq war and so his partner in crime, Alan Greenspan, decided to create this massive mortgage bubble in order to build a totally false economy. The hangover is worse than the original recession would have been!

And if any of you think that this all is over you have your heads in the sand. Let me give you an example. Manhattan Beach is a nice community in Southern California near Los Angeles. Manhattan Beach median income is around 100 thousand dollars per year. Historically house prices have been no more than three times yearly income. Even if you add 100 thousand dollars to the price of Manhattan Beach property, because of the proximity to the beach, the median house price in the community should be no more than 400k!

As it turns out, house prices are probably running well over 600k in Manhattan Beach. I hate to be the bearer of bad news, but housing needs to tank in a massive way in Manhattan Beach!! And if Manhattan Beach is overpriced what about all the other less affluent areas in Los Angeles? This calculation is based upon a little over 50k income there, so that houses should be worth no more than 200k, which is about half to two thirds of what they are worth now!!

If some of you think that the budget of California and many other states will not continue to crumble I don't know which planet you are taking up residence on! And I have more bad news. The economist for the Obama administration is out saying today that Americans need to spend; that this is a consumer society. Well, Walmart missed numbers by 7 percent in December and the consumer society is crumbling. There is not one thing anyone can do to stop this. Americans inherently understand that if Kansas cannot meet payments to those who have tax refunds, that maybe their own balance sheets are in jeopardy.

Even the last president, who made this all even worse than it would have been, went around telling people that the highest form of patriotism was in shopping. To use an old Arkansas phrase, a blind man can see with his cane that the consumer is shopped out!

Unless we stop kidding ourselves, start making things, saving the auto companies through bankrupcy so that they can lower car prices, and sell each other less insurance and overpriced real estate we are going nowhere! Things will get worse unless we do things differently!

Now we find out that our banks have exposure to the eastern European meltdown. This is not welcome news!

Any plan that depends on consumer spending is dead on arrival! Unless we do things differently, the American dream is at least on hold for a long time, maybe years, and years.

And politicians, don't ask people to take on more debt, recourse loans, or any such crap as if this will fix the problem. That will not fix crap. You cannot put the Humpty Dumpty of a credit driven bubble economy back together again.

The problem that we have is that we are unable to spend the amount of money that is needed for stimulus because we are already in too much debt. To spend the money needed, the United States would have to risk the credit rating of the United States, leading to permanently higher interest rates. And this is the reason Europe and other areas cannot spend on stimulus, because their countries have even worse credit exposure than does the United States!

The moral to this deteriorating situation is to save money and try to survive. This is going to get ugly.

The treasury department is trying to prop up crap bonds that are on the banks books when no investors want these bonds. They are worthless, and it is time the tax cheat comes to his senses and nationalizes the banks.

People do not want the crap that the United States investment banks pawned off onto the entire world. The treasury is trying to revive these Mortgage Bonds and so avoid the hit to the corporate bank bond. Wait till the banks report on deteriorating mortgage backed bonds and credit card debt, etc, in March of 2009, and you will see that the banks bondholders (owners of the actual corporate bonds) must take a hit rather than the taxpayers.

But the banks want taxpayer bailout and they are holding the taxpayer hostage by saying that if the corporate bondholders go down, America will never be trusted by foreigners. But wait a minute, aren't we already not trusted and aren't the mortgage bond markets already dead? May as well kill the corporate bank bonds as well, I say. I say F*** the banks. You cannot put Humpty Dumpty back together again.

It is interesting that the banks have written the cdo's and insurance in a way that they bet multiple times that the corporate bonds would not fail. In other words, if a bank had a billion dollars worth of bonds, the default of those corporate bonds will cost 10 billion dollars to investors!

By writing these evil contracts they were almost daring the United States government to avoid a real meltdown of corporate bonds forever! These "insurance" policies which had no financial backing are useless, leveraged in the trillions of dollars, and if the corporate bonds fail, there will be a major unwinding of credit on a scale never seen in history. But the creation of these credit insurance vehicles and the leverage that is upon them is not the fault of the taxpayer. If investors get hurt, too bad. Major bank insolvency will hit the economy, whether we cut the head off the beast or kill it slowly with a thousand cuts.

We will either die a slow financial debt by propping up banks doomed to failure, or else we will have a swift death of credit and a return to a cash society. I would rather take the hit now than bleed to death over time. I welcome your comments in the comment section on this subject.