Recognizing our General Character and Overcoming it in the Future
From it's inception, America has been built on debt. There never was a nostalgic time when more than just a very few Americans lived below their means and saved for the future because it was the right thing to do. This is a popular myth.

In character, this soon to be "Great Depression" is no exception as leveraged debt in mortgages reached more than 50% of gross income(s) in places like CA and the cost of revolving debt service per household peaked at over 14% of gross income in 2005. Both of those percentages are records. Based on many years of actual results, bankers know that mortgage debt is not sustainable at levels of more than 28% debt to income (DTI) on a 30 year fixed mortgage. What happened was allowed to happen in spite of history and because of greed on all sides.

Thanks to a commercially nurtured consumer mentality aided and abetted by a profit hungry financial sector, the "savings rate" in 2005, (manifested in Mortgage Equity Withdrawal and revolving credit use) was officially reported at -2.5% but was really more like -13%. Once again (we did it in '29 too) we became a nation of "Monthly Payment Consumers" (MPC's), never questioning the total cost of any purchase over time, asking only "can I make the monthly payment". Without inflation in housing values to sustain MEW the bubble has collapsed. The only time consumer spending was a higher percentage of GDP was in the late 1920's, when it reached 83% in America.

Thanks to "exotic" mortgages and stretched DTI's, people that should only have qualified for and purchased a $500,000 home on a 30 year fixed rate fully amortized loan, qualified to purchase a home priced at $1,000,000 using two interest only loans, with 3% down. Prices inflated because people could qualify using unsustainable loans. Consumers used Home Equity lines of Credit (HELOCS) and refinances to keep spending beyond their means. With each refinance, new commissions and fees went to the lenders and servicers and each borrower started over making payments that were mostly interest. In other words, building equity the old fashioned way (paying down principal) became almost non-existent.


Keep in mind there has also been a not so subtle shift in the costs of health care and pension savings to wage earners by corporations during this time, in addition to lots of new, expensive "indispensable" services like cellular phones and cable TV. The media, supported by commercials was only to happy to propagate the "Life Styles of the Rich and Famous". In 2006, I  saw a womens magazine with a cover article that read something like "763 things I want now".

As desirable a place California may be to live, we reached a point where the ratio of housing price to median income was more than 20x in coastal areas and more than 10x in places like San Bernardino.  Historically it was more like 3x in most of the country. The bubble popped on the periphery and is slowly working toward the coasts. Who knows where prices will settle, but our coasts are treasured the world over and especially in places where people built productive businesses and saved like there was no tomorrow. They can still pay cash.

The "solutions" to the crisis being offered are more leverage and bailouts to the billionaires whose greed promulgated the environment that sustained the bubble and whose lobbies and campaign contributions have shaped our laws and political systems. If the free market is not allowed to determine property values in residential real estate once again this mess will drag on for years and our grandchildren will be little more than tax serfs. (See "Going Down with the Joneses" at http://www.box.net/shared/cfje9z2vpv) .