Bailouts are NEVER for the little guy no matter what spin their proponents use to sell them to the public (who will be paying for them through their taxes). The role of the little guy in a Ponzi scheme is to be the empty-bag holder. This is the tragedy of our times, and there’s nothing anyone can do to prevent it, whether or not they might want to. The losses have already occurred, but as yet still lie out of sight in illiquid ‘asset’ accounts supposedly worth hundreds of trillions of dollars, but actually worth close to nothing.
A predatory lending structure has been sucking the wealth out of ordinary people through debt enslavement for a long time, by encouraging them to buy far more than they could actually afford on margin (ie with borrowed money). That is a recipe for paying far over the odds for everything, while the financiers collect the excess – an excess collected preferentially from those near the bottom of the income scale, who were most likely to carry a perpetual credit balance at a predatory rate. This is how credit bubbles form – a combination of predators and all-too-willing prey that doesn’t understand the nature of the trap. Hansel and Gretel and the witch’s Gingerbread House comes to mind, minus the escape at the end.
Unfortunately, it was easy to entice people into debt slavery, as the offer of access to material goods is always hard to resist, particularly when it seems like everyone else is enjoying new-found wealth. It doesn’t take long to convince people that they deserve to have a large home, multiple cars and all manner of consumer goods, or to convince them that they are somehow inadequate and that their children will suffer if they don’t participate in the consumer culture. The relentless marketing barrage played on our insecurities, conveying a message that happiness and social status could, and should, be bought.
A situation where ordinary people are able to buy anything on margin is historically very rare, as credit is normally only extended to those who do not need it. The last several decades have been an aberration, largely due to an increasingly reckless attitude towards risk. For ordinary people, low interest rates led them to believe that huge debt burdens could be sustained so long as the budget could be stretched to cover the monthly payment. For those higher up the financial food chain, the process of securitization created the appearance that risk could be passed on ad infinitum, until it ceased to exist. Unfortunately, low interest rates are a trap, and securitization, instead of minimizing or eliminating risk, actually magnified it into a systemic threat.
In terms of mortgages, even those that seemed conservative in recent years were not. In the latter stages of a credit bubble, even a deposit of over 50% and a monthly payment that could be covered by one of two salaries is a recipe for deep trouble. We are looking at a collapse of property prices and a huge rise in unemployment, which will combine to cause an unprecedented amount of negative equity, defaults and foreclosure, and, thanks to leverage, the resulting loses will snowball, further undercutting the supposed value of financial assets. The ‘conservative’ mortgagees are mostly just as trapped as those who over-extended themselves further.
Even those who own homes free and clear will find that, in a frozen property market, they can not move to where the jobs are, or to a more suitable property with some self-sufficiency potential. If they lose their jobs, they may lose their homes through being unable to pay the sky-rocketing property taxes that municipalities will introduce in a desperate attempt to fill the gaping holes in their own budgets. This is why we suggest that people generally rent rather than own (unless they own a homestead free and clear). Renting amounts to paying someone else a fee to take the property price risk for you, and that is a very good bet under today’s circumstances. Rents will fall a long way in a deflation, and although landlord default is always a possibility (perhaps meaning more than one move), that risk is preferable to losing the bulk of one’s assets in a property price collapse.
The middle class has been comprehensively fleeced by the debt trap, and the consequences for social stability will be extremely unpleasant once the chickens come home to roost. Except for a few of the super-rich, we will all share in the misery to come, and none of us can expect a bailout. Whether we’ve been gorging ourselves on the Gingerbread House or merely nibbling at it, we now find ourselves in a cage.