U.S. Consumers - The end losers

Putting myself in the US point of view.

Bush’s administration decided to pump in another $700 Billion for mortgage buyouts. By agreeing to purchase the toxic assets no one else will buy, the U.S. government stands a chance of coaxing banks to resume lending to each other by erasing the risk counterparties are exposed to with subprime mortgages. By taking care of thousands of mortgages, there may be lesser credit costs leading to lower mortgage rates, it will also allow the government to set favourable terms so that people can find a way to repay their loans and stay in their homes.

Of course, so much emphasis has been on the financial sector, we may forget there is an ongoing real estate crisis as well. Looking at the real estate market, there is simply too much inventory to unload. Why has demand died? House prices are still in the stratosphere, relative to the general public's family income. Problem is that the family income has been dropping as businesses suffer and coupled with rising inflation, consumer buying power is shrinking. Earlier, house prices soared because everyone bought into the greater fool postulate and assumed there would always be a greater fool who would pay more for the overprice housing that people bought. And we blow and blow till the bubble burst. Suddenly, most of the fools found themselves severely injured or killed. And the world without fools is surprisingly quite hectic and ugly.

Since the late 1970s and throughout the 1980s, governments have been intent on making the labour market more “flexible” which is basically another way of saying that risk was transferred from capital to labour. But workers are also consumers. As corporate profits expanded as a share of national income, households went into debt. What Henry Ford early in the last century had grasped, that paying his workers well meant he had customers for his mass-produced cars, has been largely unlearned in recent years. With the consumers’ spending capability impaired, the whole scale is tipped towards the corporate sector which can’t even take care of itself right now.

Now, with the U.S. economy hobbled for generations by the massive public and private debt ($1.2 trillion owed to the Chinese), incomes needed to afford home ownership will be held back for decades. The money to pay off even the U.S. Federal debt of $11 trillion, let alone just pay the interest, will cripple the U.S. economy into the foreseeable future. Yet, the government is left with no choice but to guarantee every bad mortgage loan made by Wall Street and to borrow from foreign sources in order to do so. I can just hear the consumers cursing in the background. This is America. Live and learn.