From AAA to Junk
Congress and the White House, state governments, local legislatures and lobbyists are vested to the hilt in denial: that the downgrade by Moody’s of at least $50 billion in collateralized debt from AAA to junk is a verdict on an economic model-suburban sprawl-that is torpedoing America’s middle class.
At the heart of sprawl is securitization: that is to say, the packaging of mortgages by Wall Street indifferent to locale so long as the shape, size, and purpose of its components is more or less the same.
The catalogue of horrors is not exclusive to the middle class, of course. In places like Miami, the housing bubble had the collateral effect of diverting attention from the needs of the poor. While local legislatures did the bidding of the growth machine, the county housing agency was looted to a fare-thee-well.
But it is suburbia is where the financial avalanche in debt markets started-in states like Florida where a sophisticated economic elite, tied to the interests of production homebuilders, primed the pump of the growth machine.
Today, the stock market remains near historic highs but it is increasingly irrelevant to the middle class. The Wall Street press is filled with hope for another interest rate cut by the Federal Reserve. There is James Cramer (who even appeared on NBC Nightly News! as a reporter from the trenches) hyperventilating over the Fed “doing something”, but when it can turn its TV set off long enough to pay attention, the middle class is like a boxer looking at its face in the mirror for the first time.
Round after round of promises: low inflation, steady job growth, health care, bridges, highways, the promise of public education, social security, the environment: what stares back at the middle class is an almost unrecognizable result.
The phenomenon was noted in the Sunday New York Times Magazine, “End Times for Evangelicals?” The report explored the profound change as Christian conservatives abandon the Republican party.
Some evangelical leaders are apparently concerned how closely tied the religious right has become to corporate America.
Another aspect, scarcely noted by the Times, is how the religious right organized in megachurches located in suburbia and rose exactly in proportion to the false prosperity of a housing bubble.
The constituents of suburban sprawl need constant spiritual renourishment even as discomfort spreads of its strip mall culture. The megachurches are a welcome relief for wage-earners pinned by long commutes from home to work and especially for latch-key children otherwise languishing in homes without mom or dad.
The bursting housing bubble is fragmenting the religious right. It’s not a matter of evangelical convictions faltering. It’s a matter of home economics ruining families as lines of credit and home equity make fools of believers. It’s not just about church on Sunday. It’s about the middle class coming to a boil over manifest inflation despite government assurances, good news papering over rampant fraud, it’s about vanishing home equity, and it’s about the middle class realizing that it has been left behind by arks of privilege.
It’s in this context to consider two pieces of news: first, that Stanley O’Neal-the CEO of Merrill Lynch-has been held accountable for the worst loss in Mother Merrill’s history, some $8.4 billion and yet will retire, according to press reports, with a payday that could reach $200 million.
The second piece of news is from the New York Times (Saturday, October 27, 2007), “As Housing in Florida Plummets, the Top Tier of the Market Just Dips.”
“Despite a record number of foreclosures and a raft of public auctions of unwanted houses, the upper tier of the real estate market in Florida remains relatively immune to the spreading disaster As in other once-booming regions, in Florida the housing market seems to be not one market, but two. The lower end is littered with vacant houses and unfinished developments, and homeowners are struggling to meet their monthly payments as rates adjust upward. The luxury end has its unsold new condos and mansions lingering on the market, too, but as in New York, where the demand in pricey Manhattan is still strong, sales have fallen less. And Miami and other parts of Florida are continuing to attract interest among the wealthy.”
At the same time, the stratification of housing markets in places like Manhattan or tony vacation retreats in Florida appear to the middle class to be supported by the kinds of financial fraud that turned dreams of wealth into bankruptcy on Main Street and turned AAA rated paper to junk on Wall Street.
But it does not pass unnoticed by Main Street that Wall Street can walk away from its failures with hundreds of millions, all taken down as fees and commissions and salaries in the creation of financial derivatives-or how speculators and bankers and developers in places like suburban Miami have squirreled away profits from developments at the edge of the Everglades foisted off as a public good-or, how the deal worked out by Wall Street banks whose off-book transactions shielded nearly $100 billion in losses will result in a further rain of commissions-as much as $1 billion worth according to recent financial reports.
These are the arks of privilege insulating the highest strata of society from the disintegration of the US dollar.
Today, homeowners in the millions-middle class Americans-are absorbed with the anxiety of foreclosure, of a home that can’t be sold except at a loss, or, of personal debt tied to vanished gains of an unrealized asset. But there is more.
How much more remains to be seen. The total damage to financial institutions, measured in the hundreds of billions, may be absorbed by the wealth of nations, but the damage is so large, so global, no wonder most middle class Americans have no idea what hit them.
Here is what hit the middle class: wealth drained from the US economy by the forces of globalization-owned as equity now in low-cost labor or oil-producing nations-returned to the United States in the form of US government debt but also ownership of mortgage backed securities and other higher yielding financial derivatives. That they should be less than eager for a repeat performance should surprise no one.
And American voters think the biggest problem is tax dollars financing both sides of the “war on terror”? No. There’s more.
If securitization defines suburban sprawl as a matter of scale (ie. more Targets, more Lowes, more McDonalds: can you really fit a hundred million people into Florida?), scale itself makes accountability vanish.
As accountability vanishes, uncertainty rises exponentially. There is a domestic analogue to the uncertainty plaguing world credit markets: for the American middle class, as accountability vanished in the financial sphere, so did the ideals of a civil society and representative democracy.
The middle class was promised the “ownership society”, and while it was passively satiated by “American Idol” and “Dancing with the Stars” promising that anything is possible, its pockets were picked.
The middle class was robbed by liar loans and mortgage fraud, from toxic consumer debt to the wholesale conversion of local government to the purposes of the growth machine.
The biggest risk-one that the mainstream press and Wall Street, both, should take into account-is that the coming recession will trigger a backlash against the bankers and financiers whose engineering related to housing markets and mortgages did not, in fact, diversify risk (as securitization of mortgages was advertised to do,) but concentrated risk by raising the unquantifiable to exalted status.
America’s political and economic elites have been perfectly happy with the arrangement, but in 2008, watch the “values voters”. This time, the middle class, evangelical or not, will be pegged to the value of the dollar more than the morals so many candidates for political office wear on their lapel like lacquered pins of the American flag.