The Donkey Is Sleeping Today

Keeping Up With The Joneses

In Economics, Inequality, Krugman, Politics on July 5, 2010 at 10:18 am

Even though NFL training camps open in a week, I am not referring to Jerry Jones the megalomaniacal owner of the Dallas Cowboys — because who could possibly keep up with the owner of the “worlds largest strip club”? I’m talking about keeping up with your peeps, your peers, your frenemies and the fiscal turmoil that brought you (and by you, I mean me) to tears.

Go back to 2004 and remember how cool you felt reminiscing about last night’s “Even Stevphen” skit on “The Daily Show” which you Tivoed because you were too busy showing off your 164MG thumb drive and struggling to stay on the Atkins diet with a wedge of brie mocking you. Your façade of cool cracks, and you pick up your dirty martini realizing that you are not like the others at your table. You look to your left: homeowner. You look to your right: homeowner. You look at yourself: renter. You look deeper: loser.

Cut to last week, Paul Krugman speaking in Luxemborg about the direct link between income inequality and financial crises. Turns out the two greatest crises in American history have, not coincidentally, begun during the two greatest periods of income inequality in US history – 1929 and 2008.

Image: Paul Krugman

Pretty cool, right. Well, if you’re in the top 1% it sure is. See, in America we’ve gone from the top 1% owning 8% of our nation’s wealth  to the top 1% owning over 18% of that wealth in less time than it takes to go from “Norma Rae” to “Knight and Day”.

Back to the cold harsh reality of 2004. You feel lousy, unloved and alone in the world because you’ve missed the boat, you’re not a valued member of society, you’re not a trusted member of the most important American fraternity there is because you’re not a homeowner. So, you decide to put all you’ve got into the search for the perfect house (and by “perfect” I mean any house you can afford that’s not on the shoulder of the 405) because it’s California real estate, baby, and like Daddy Warbucks it doesn’t have to worry who it steps on on the way up because it ain’t never coming back down.

Cut to six months later when, drenched in flop sweat, you sit in front of a banker and sign a loan for $952,000. For those of you keeping score at home that’s almost One Million Dollars, and this to a guy (and by a guy, I mean me) who had never made even a third of that amount in his nearly 40 years on this earth up to the moment his pen hit that paper.

If enough of us are given this glorious opportunity to indenture ourselves for the rest of our lives, this is what happens. Watch the green line.

Image: Paul Krugman

Oh, shit. That’s household debt. See we’re like lemmings, so many of us. And Mr. Krugman, while no lemming himself, said that before 2008 he only mentioned the fact of this income inequality but did not conclude that there was a causal connection between income inequality and economic downturns. Turns out he’s changed his mind. Nice timing, Krugman. This is information I could have used YESTERDAY! (And by “yesterday” I mean 6 years ago.)

Krugman concludes quoting a guy named Frank (and by Frank I don’t know who the hell he’s talking about because I wasn’t actually in Luxemborg, but he sounds smart:)

“The wealthy are spending more now because they have more money. But their spending has led others to spend more as well, including middle-income families. If the real incomes of middle-class families have grown only slightly, how have they financed this additional consumption? In part by working longer hours, but mainly by saving less and borrowing more.”

Now, multiply my situation by tens of millions of us who, like all good addicts, had enablers: The Fed (who provided loose credit); The Mortgage Brokers (the predators who participated in fraudulent lending practices); The Banks (who funded the bender); and The Casino’s unabashed mortgage-backed security and CDO insanity (which to begin to understand I had to read Michael Lewis’ “The Big Short”.)

When you do this you realize we all fucked ourselves royally. (And by royally I mean we’re renters again. And by renters I mean losers. And by losers I mean me.)

– SH

(h/t Mr. Krugman and thank you for the slides from your speech which can be found here.)

  1. here is a 100 yr chart of housing prices ….it would apear to be a bad investment to own a home at this point in time….being out of real estate now makes complete scence !!The pendulam must swing back now for years .

    http://www.ritholtz.com/blog/2009/07/update-case-shiller-100-year-chart/

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