Friday, November 28, 2008

Get ready for an old-age, I mean new age revolution...

We spoke to a family member today who could be the poster child for this economy's woes. He owns a house in a area of the country that experienced greatly inflated real estate values over the past several years. It is also seeing incredible drops now, as well as an almost totally dead market. 

He's a working class guy, raised a couple of kids in a nice three bedroom ranch with pool. Nothing too fancy. He went through a divorce a couple of years ago and refinanced quite easily. Working overtime paid the bills and helped put one son through college. 

Then the terms of the mortgage adjusted just as his hours were cut back at work. With both sons almost grown, he thought he could sell. Nope. He's lost almost $100,000 in value. His house is worth less than he owes. Right now he's hoping a short sale will go through. Of course, he'll have to pay taxes on the forgiven part of the loan. And his credit is likely shot. 
Good thing he has friends to stay with. 

Another family member is hitting the big 5-0, and her pension plan just lost 40% of its value. Again, she did nothing wrong. No, she did what "they" tell you to do, put your money in a 401K. Don't worry about ups and downs in the market, it will all work out wonderfully when you are ready to retire. She'd have been better off to stuff the money under her mattress or put it in a money market account. 

These are only two examples of average, middle-class, hard-working people whose security has just been ripped away. If you play by the rules, you are supposed to end up with a mortgage-free home and a nice pension plan when you retire. 

They can do all the bail-outs they want, but that money went somewhere. I believe it's all part of the systematic sucking dry of the American middle-class that has been going for at least twenty years. One small example: a manufacturing firm sends production jobs to Mexico or China. The goods still cost almost as much but the profit has increased incredibly. The now unemployed or underemployed American public buys the item, thereby enriching the company. Yeah, it's a free market economy--businesses are supposed to make a profit and cutting costs is a smart move. But somehow we've ended up with an unbalanced economy. No longer are we buying goods that our neighbors make.  We all probably buy too much stuff, too. But if we don't, then the economy suffers and we lose more jobs--it's a bad cycle. 

Booms and busts in tech stocks and real estate exacerbate the problem as large chunks of capital move from pocket to pocket via speculation. Ordinary people doing ordinary transactions get caught in the cycle. Some do OK--like the ones who sold their houses 18 months ago. I blame the banks, too. They made a lot of loans that weren't prudent. My understanding is when the rates adjusted, people's payments went up too much. Why wasn't the effect of those new rates calculated on their present income?

So now what? I predict that we are going to see the emergence of an underground economy, increased communal living and a general disenchantment with the "system" and its supposed benefits.  Many of us "baby-boomers" did the gig. Now our kids are grown and who cares about "stuff" anyway? As long as I have my laptop, internet access and plenty of coffee, I'm good...

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