October 22, 2008

Our representatives in Washington, alongside the easy-credit Federal Reserve and its Wise Leader, “€œHelicopter Ben,”€ have essentially subsidized a rash of misguided investments and profligate spending-sprees by consumers who”€™ve bought into the illusion of endless prosperity. Everyone knows about the Housing Bubble. Well, get ready for the even bigger Standard of Living Bubble, whose bursting is now upon us.

Because real wages have not been rising, the growth in consumer spending could only have been financed through borrowed money. Debt, which allows consumers to have cash on hand that hasn”€™t been earned or saved, has given Boobis Americanus the ability to live beyond his means, at least for a little while. And a great many have taken up this “€œpay later”€ lifestyle, accumulating a great many houses, cars, and other things.

A favored form of debt for funding extraneous purchases has been the home equity line. During the housing bubble, homes became virtual ATMs. Whereas home equity was once used for purposes of improving the home for the long-term, it became a source of quick cash for reckless buyers eager to turn their home into an instant showplace. First there’s the actual house, then comes the Martha Stewartization, followed by the furniture, the landscaping, the lighting, the additions, the appliances, and on and on.

The government’s mantra since the days of the New Deal has been the “€œright to own a home.”€ In the modern version of “€œthe American Dream,”€ a starter home is treated as a humiliation, as everyone has the right to own a great, big home in an esteemed neighborhood, and preferably one of new construction and with all the bells and whistles. The term “€œbeing house poor”€ used to be a negative connotation. During the bubble it became a bragging right.

Even worse, home equity has been funding the purchase of everyday consumer durables, especially those items that tend to be discretionary in nature. Home equity has funded the kind of purchases that should be funded from earned, saved monies. A perpetually (and rising) line of credit induces consumers to “€œbite”€ at the availability of easy money at low rates, and thus they take the cash and spend their way to a perceived prosperity.

For the average person, “€œthings”€ have become identical to wealth. They equate the accumulation of “€œstuff”€ with “€œbeing loaded.”€ Accordingly, everybody has been well-heeled in these bubble times. The availability of debt at bargain rates and the glory of immediate accumulation due to debt quickly erodes the values and common sense of people.

Some of the more pompous”€”and truly false”€”signs of prosperity can be seen within the automobile bubble. With the onset of the have-pulse-will-loan credit market, auto consumers have been bypassing common sense for a bloated sense of reality. Everyone deserves the biggest, the best, and the most custom vehicle they could dream up”€”and one’s income shouldn”€™t mater. People with mediocre wages purchased Escalades, Lexus SUVs, and other luxury-type vehicles, with many of these cars costing far more than the purchasers earned in a year. Additionally, the roads are now littered with brand new cars that have expensive aftermarket wheel sets, tires, boom-boom stereo systems, and gaudy-but-costly custom trim. In fact, stock, solid-transportation vehicles are no longer sufficient for the spoiled masses enjoying an overdrawn standard of living. Debt has funded the majority of these extravagant purchases, yet we call it “€œprosperity.”€

Auto consumers have not been compelled to pay market rates for their cars because they lease perpetually at discounted rates or get ultra-incentives from automakers desperate to keep the assembly lines moving with the UAW gang breathing down their necks. Leases have been a financial disaster for the auto companies, but the wild impulses of buyers, fueled by below-market interest rates, propped up that racket long enough so that Lexus and Mercedes dealers were popping up in wholly middle-class neighborhoods. Both Chrysler and General Motors have discontinued or cut back their unworkable lease programs. Additionally, buyers have not been required to put substantial down payments on new vehicle purchases. Cars have come on the cheap, with pushed-down interest rates, no down payments, and terms extending the payment plan to six or seven years.

Accordingly, with the housing market imploding and the entire banking system resting on wilted stilts, Americans are left with a devalued dollar, escalating costs of living, a massive federal bailout of Wall Street’s derelict financial management, and the nationalization of some of the country’s largest banks. The standard-of-living squeeze has made its way to Main Street, slowing down the spend-o-rama of the middle class, as retail sales numbers are starting to hit the skids.

The bursting of this bubble and its unwinding could result in some unpleasant withdrawal symptoms. People”€”especially younger folks”€”who have been reared on the splendiferous way of life that debt offers, will be resistant to changes which will require lower time preferences (longer term views) and more careful planning in terms of shuffling around priorities. As Main Street endures a stifling credit crunch; inflation; increasing interest rates; scores of home foreclosures; cut-off of home equity lines; a job market squeeze; soaring federal, state, and local taxes; and the inability to manipulate low-interest credit cards to cover shoddy financial decisions, there will be restlessness amongst the masses, especially from those people who have never had to live within their bona fide financial means.

Some of this anxiety has been witnessed already, as lenders who are taking back homes in foreclosure have been dealt some vile vengeance from bitter homeowners who take to vandalizing their homes before they vacate the premises. This problem is said to be present in almost half of all foreclosure cases nationwide. The response from lenders has been to take the most economical path and actually pay the vacating ex-homeowner to refrain from leaving behind a trail of destruction as leaves his property.

The worst part of the contraction will clobber Main Street with a shortage of the consumer credit that became an addiction for so many individuals. The price we pay will be oodles of socialistic legislation aimed at containing the fallout in order to further sustain the fictitious prosperity a bit longer. Central planners act on the notion that the unhappy reality of hitting bottom can be delayed indefinitely. Thus the cycle of fiction will be lengthened, turning a headache into a migraine, and perhaps even worse.

The central planners in Washington, along with the Federal Reserve, planned and fueled an unsustainable standard of living across the country, from the neighborhoods of McMansions to the ghettos. The impending bust will affect us all, regardless of whether or not we partook in any of those easy-credit orgies sponsored by our leaders in Washington.  


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