How we got here, how we crawl out of here Alex Wierbinski, Berkeley, Ca.,
Bernanke's warning about prime mortgage inversion is a little late, but I'm glad someone has finally  accurately described the nature of economic crisis we face. (see Bernanke statements, above) Unfortunately, Bernanke does not describe how we got here, or what it will really take to get us out of this mess, and what we need to do to avoid falling into this speculative trap, this trap constructed our of our own greed and corruption, in the future. how we got here
During the last 30 years US economic policy has been to drive every aspect of massive growth forward, with no regard for paying the social expenses, no regard for the damages to our natural resources and environment, and no regard for the consequences of using foreigners to move all of America's wealth and political power to the top of society.
The basic assumption behind this policy of massive expansion is that endless growth in population, consumption, profits and values is possible, and good. It has proved to be neither.
The main engine of America's growth and concentration of corporate profits, besides the greed of our corporations and their politicians, has been the massive expansion of the population. The fuel for this engine of growth has been crimigration.
An expanding illegal population has been the perfect tool for our business class to steal the wealth and political power of our country. Our massive irresponsible expansion in population has shortened the supply of everything, while simultaneously increasing the demand for everything. Thus prices and profits have been moving steadily upward throughout the expansion. But it gets even better.
The massive expansion of population also unbalanced the domestic labor market. The rapid growth of cheap labor quickly undercut the ability of American labor to maintain American wage and benefit standards, which were quickly replaced by Mexican standards. The press and politicians quickly covered up this rip-off by crowing about how Mexicans were doing jobs Americans will not do, when in fact Americans will not work for the slave wages that Mexicans accepted.
This difference between American and Mexican wages and benefits standards were quickly converted into profits, and put into the pockets of our corporations and their politicians. The corporate press and politicians crowed about how illegal Mexican labor increase profits, and, according to the corporate perspective, that makes them good for the economy.
Did you notice that the unions have been destroyed during the last 30 years? At the same time that our population growth has driven food, energy, and housing prices through the roof, the wages and the relative share of wealth that the middle and laboring classes hold in the US has plunged to third world levels. That too, has increased profits, and according to the corporate perspective, is good for the economy.
The result is that the American middle and laboring classes have been experiencing a severe economic recession since 1970, when the massive influx of cheap labor into the western US began to seriously alter the distribution of wealth and political power in the US.
The American working class has seen their wages race towards poverty, as their social lifelines, our public schools, our free colleges, and our medical and social programs have been intentionally collapsed to subsidize the very same illegal cheap labor that destroyed their wages.
In the meantime, it was not just the wealth of America that moved to the top of society. Political power, like our wealth, was also stolen and concentrated at the top of society. The stolen wealth of the newly impoverished American middle-class is, right now, being liberally distributed by our corporate aristocracy to both of the political parties, and virtually all of their politicians, where it has been effectively deployed to completely purchase both the parties, lock, stock, and barrel.
The wealth of our working classes is being showered upon the presidential candidates right now. These bribes assure that no matter which tool is elected, the winner will be obliged to do nothing to alter the corporate control of our economic, political, social, and media institutions by corporate wealth.
Once the corporate rich used illegals and irresponsible growth to move the money to the top, they still needed to maintain consumption in the middle and laboring classes. So they loaned our money back to the struggling middle and laboring classes they stole it from, through 20% credit cards, variable mortgages, and liberal credit terms on everything from big screen TVs to SUVs. The things we once bought with cash are now purchased on credit.
What this means is that our corporate profiteers on wall street made their vast financial profits by draining and seriously damaging our whole economy. Our national economy has funded these outrageous corporate profits by going into deeper and deeper in debt to the whole world, all to maintain wall street's outrageous profits.
The radical increase in corporate profits and the incredible expansion in the share of our national wealth held at the top of society has transformed our country during the last 30 years from a tattered democratic republic to a corporate fascist state.
Our nation's transformation, and the irresponsible growth that fueled it, would not have been possible without a massive expansion of crimigrants, who's desperation made them willing to do no more than obey and consume. The bulk of the "profits" our corporation have made during the last 30 years have been generated by nothing more productive than stripping our natural and social infrastructures, ripping off our middle class, and putting the educational, medical, retirement and incarceration costs of this massive increase in population onto the public. All of the bills for the last 30 years of irresponsibly growth are now coming due.
Bernanke has finally publicly acknowledged that prime mortgages have inverted. Bernanke admitted that the housing market has inverted, only nine months after I identified the fact that the housing market had inverted, in august of '07. Between august last and now, Bernanke has been busy.
During the time between then and now, as the number of sub-primes getting foreclosed snowballed, and the inversion of the primes was deepening, Bernanke and the fed were busy bailing out the big wall street idiots who piloted us into this mess. The corporate press and politicians cheered as they saved the bacon of one of the real villains and architects of the sub prime crisis, Bear Sterns.
This was a big mistake. The credit crisis began in housing, and will only end when housing stabilizes. Rather than addressing and fixing the credit crisis at the only place it can be fixed, where it began in the housing market, Bernanke spent the last nine months giving away billions of dollars to the biggest players on wall street to assure that their bad investments, irresponsible speculations, and unethical profits would be covered by the taxpayers. In the meantime, the real source of the problem, housing, continued to fester.
Investors, buoyed by the Fed bailout of Bear Sterns, checked the market decline. The big Wall Street players, now armed with the knowledge that their previous sins have been forgiven by the Fed, have been using the Fed overnight window to cover their bad paper, and have been nervously standing around waiting for the endless growth of profits and values to restart. That's not going to happen.
As I said in aug of '07,
The only thing that will save the mortgage securities is for housing prices to continue rising in value. That's not going to happen. The Fed's infusions of cash and lowering of the discount rate will do nothing to restore the speculative bubble in housing, nor will it give clarity as to the actual values of the mortgage securities.
Only the real estate market can determine the value of the mortgage securities. This is causing a rather dramatic market effect from the different speeds at which the two markets operate.
The real estate bubble has the same chances of restarting now as it had last august: none. The housing bubble will not restart no matter how much money Bernanke pours into the private and public banks. The housing bubble will not restart even if Bernanke performs the miracle of stopping variable-rate loans from resetting. The housing bubble will continue to implode, even if Bernanke parts the red sea.
Here's what's going to happen: the housing market is going to drop to the level that the damaged purchasing power of the masses of middle and working class people of our country can support. That's why Bernanke was wasting his time bailing out the Wall Street players. The value of all the mortgage assets they hold is tied to the price of housing, which is directly dependent on the number of people willing and capable purchasing housing.
Unfortunately for us, as I pointed out above, our economic policy of stripping the middle class of their share of our nation's wealth through a massive crimigration, and plunging them into very deep debt to maintain their lifestyles, has put the price level where enough of our middle-class buy homes and restart the housing market based on their real earnings at a very low point.
The misdistribution of wealth in our country means that the housing market will find the sustainable prices and the market volume necessary to stabilize credit markets at a price point below the lowest prices the extreme leveraging of the banks can withstand.
If Bernanke would have focused the last nine months of his time, and those billions of dollars he wasted on the big Wall Street banks, on stimulating the housing market, the resulting price supports for housing would have worked to keep the primes from inverting. By throwing money at Wall Street without first checking the housing decline Bernanke was, and is, throwing good money after bad. Our good money.
Understand that Bernanke's statements make it clear that he has finally figured out that his original priority, to repair and restore Wall Street, was a mistake. He finally figured out that the internal bleeding of the big Wall Street bank's mortgage securities cannot be stopped until the housing market decline hits bottom. Unfortunately, Bernanke did not figure this out until after he allowed the housing decline to get completely out of control.
This house of cards is already imploding. Bernanke's call for Congress to violate the Constitution, and alter valid contracts, is a sign of just how deep his desperation really is. The reason Bernanke is calling for Congressional intervention is that he's trying as hard as he can to hold off the day of financial reckoning that knows is coming.
It is clear that the un payable debts in the housing and credit markets are so much larger than the assets and collateral the banks are holding that both the housing and banking markets will totally collapse when investors, homeowners, and the markets get a true picture of their asset values minus their liabilities.
Thus Bernanke is treading water, looking backward, working to limit the damages that the bad mortgages can do to the big wall street players, rather than concentrating on resolving the problem in the present context, which would require that Bernanke force the big wall street player to take their lumps, pay their bills. and resolve their outstanding liabilities. That would clarify the credit markets, and allow the billions he is giving to the banks to be used to support the price of housing, rather than the cost of credit.
The second stage of our recovery will require rebuilding the housing market by rebuilding the actual earning power of the middle and laboring classes. That's not going to happen as long as the bribes of wall street fund the candidates and campaigns of both political parties.
Independent of Bernanke stalling, we are going to take our lumps, and it appears that the housing market is going to go back to last century's prices. The real question is how far back? I put the likely level of housing, when all the smoke clears, somewhere around 1992.
On august 17, '07 I said,
The fed's hands are effectively tied. If the fed raises rates, the dollar will proportionally stabilize, but the housing speculators will scream in pain. If the fed drops rates, the dollar will plunge, and our domestic party will continue for a bit longer, as the world burns dollars around us.
The fed is damned if they do, and damned if they don't, raise rates.
At this time two things are clear: Housing will continue to fall for 18 months to 2 years, and the credit crisis will deepen in response to the fall in value of both housing and the dollar.
At this point no amount of Fed intervention will prevent the various markets from falling precipitously. The failures of the housing, auto, credit markets and the collapse of the dollar will eventually pull the Dow down to between 6800 and 7200. I see this as the market level that our actual economic activity will support. I see us hitting this low by June of 2008.
American economic weakness presents a significant risk of bringing down unstable foreign economies, such as China, and likewise, economic disruptions in China could cause even greater disruptions in our housing, credit, and currency markets that would make our present imbalances seem insignificant.
This day of reckoning is fast approaching. But before the day of reckoning arrives, Bernanke is determined to give wall street billions and billions of our tax dollars to protect them from the consequences of their greed, irresponsibility, and dishonesty. And we will pay to limit the bank's and wall street's losses, just as we were ripped off to provide their profits.
Background:
essays
Markets ready to Kill Economy, committee , August 4, 2007
Feds Bailing Out Greedy Speculators, committee , August 17, 2007
The impending meltdown , 1-14-08
death of the new economy, get ready for the big selloff , 3-14-08
Alex Wierbinski is a fifth-generation San Franciscan born in 1958 and raised in the Bay Area. I have had the misfortune to witness the Bay Area's transformation from a beautiful place to live into a mega-city that is, sadly, almost indistinguishable from Los Angeles. My life's work is to end the corporate bribery that has displaced our democratic process. Once that is achieved, we can easily change the qualification for citizenship from being an illegal servile economic slave, to belief in the core principals and practices of our democratic republic.
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