Friday, December 7, 2007

When The Middle-Class Can No Longer Cope

It is often commented that the current crisis in the credit and subprime mortgage industries can be attributed to individuals' poor money management skills, failure to read the fine print, or trying to buy more than they could afford. And in some ways this is very true. But it is far from the whole story.

In the following video New York Senator and Presidential Candidate Hillary Clinton states that Wall Street must share the blame. However, the problem is even larger than Wal Street. Americans need to completely rethink their attitudes toward credit, debt, consumption and prosperity.

The strategy behind the subprime housing market is the same as the one that has been employed by in the retail sector for decades.

Retailers and credit issuers have sold Americans on the idea of buy now, pay later. In fact, retailers absolutely count on the fact the consumers will rack up significant credit card debt during the Thanksgiving to Christmas season. Hence, the day after Thanksgiving has come to be known as "Black Friday", the day that retailers and banks love. Retailers turn a profit for the year and banks rejoice at the anticipation of all of that credit card interest.

Retailers and banks count on the fact that consumers, caught up in the "holiday spirit", will buy and buy and buy on credit and gamble that they'll be able to pay off those purchases over the course of the next year.

In the case of the sub-prime mortgages, individuals were cajoled into believing that they could buy the $250,000 house then with a low down payment and a variable rate, subprime mortgage, and worry about the rate adjustment and interest today. Of course, I'm sure that they weren't calculating that crude would be near $100 per barrel and that wages would remain stagnant. And of course, no one counted on being laid off or having health problems. But that's how the economy works.

In many ways our personal and national economies are like houses of cards. Remove the wrong card here or there and it all comes tumbling down.

excerpt from :

It's the Economy, Stupid

By Robert Reich, The American Prospect on Reprint

The Middle-class has exhausted the coping mechanisms they've used for over 30 years

The first coping mechanism was moving more women into paid work. The percent of working mothers with school-age children has almost doubled since 1970 -- from 38 percent to about 70 percent. Some parents are now even doing 24-hour shifts, one on child duty while the other works. I call these families DINS - double income, no sex.

When families couldn't paddle any harder, we started paddling longer. The typical American now works two weeks more each year than 30 years ago. Compared to any other advanced nation we're veritable workaholics, putting in 350 more hours a year than the average European, more even than the notoriously industrious Japanese.

As the tide of economic necessity continued to rise, we turned to the third coping mechanism. We began taking equity out of our homes, big time. But now that home prices are sinking for the first time in decades, this final coping mechanism no longer keeps us afloat. As Moody's reported last week, defaults on home equity loans have surged to the highest level this decade

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