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Is America's Middle Class Caught in a Vise?

This is a chicken and egg kind of discussion about what caused the housing crash.

It's not that there's a right answer (but I am right) or a wrong answer, it's about looking at what happened to determine whether it's going to happen again. It is.

I'm always right.

Really, it's about America's middle class mostly, and the vise they're caught in.

Notice, the title here poses that as a question. Are they caught in a vise?

I say, "Yes!"

But, I'll get to that.

First, it's back to the chicken… or the egg.

Did borrowers over-borrow because they were greedy? Or, did lenders over-lend because they were greedy? Yeah, yeah, we all agree. They both were.

But what precipitated it?

Of course I want your opinion. But, first you're going to have to hear mine. And since I'm always right, you may just want to come along with me and be smart. Just kidding!

It's simple to me: You can't borrow if lenders won't lend.

There. I rest my case.

Oh, you want more depth, more color? Okay.

But let me first put aside something that I know will come up anyway. The Community Reinvestment Act didn't cause the subprime surge.

Did the surge happen when the government forced banks to reach into underserved areas to offer loans to folks who weren't over-banked – and who didn't have ATM machines on every corner of their neighborhoods – only to have those same banks create subprime loans that would later default?

Yes it did.

But the number of defaults in the subprime category within the boundaries of CRA-demarked neighborhoods is a drop in the bucket compared to the national corral, where subprime loans were drawing out, and creating subprime borrows out of better than subprime buyers – with higher creditworthiness.

Look at borrowers as the chickens. They had to be hatched. Not from eggs, because they were already in the market. Most of them would have been far too afraid to risk over-leveraging themselves on something they knew they couldn't afford if they were charged the kind of interest that high-risk borrowers face.

To fatten them up, hard-boiled lenders gave those chickens legs and dreams – and a means to fly out of their old neighborhoods and roost in fancier digs.

Most people forget – or didn't know – that prime borrowers had been pretty well exhausted by lenders bending over backwards to get them into new homes.

Interest rates were kept artificially so low for so long, which left investors clamoring for yield. Prime borrowers were getting harder and harder to find, so bankers grabbed the two-for-one throttle and pulled subprime borrowers into their origination factories. Then they did a "pool "em and fool "em" maneuver – for yield-hungry investors, that is – and put them into mortgage-backed securitization, get "em off my balance sheet, schemes.

And it worked. Well, at least for a while.

Middle Class Mistakes?

So, what does all this have to do with the middle class being in a vise?

Bloomberg Businessweek is a great publication that I highly recommend. This week's issue, February 18-24, 2013, has a piece titled, "Oh, Craps. U.S. Homeowners Are Repeating Their Mistakes."

The gist of the article is that, for folks with a "very high risk exposure – a low wealth-to-income ratio, more than three-quarters of their assets are in housing or stocks, and (have) debt greater than a quarter of their assets," which serves as my definition of the middle-class in America, lost 47% of their wealth between 2007 and 2010.

What bothers me about the article is that it presupposes that homeownership makes it hard to diversify. It states that, "since 1983, for the richest 20 percent of U.S. households, the principal residence as a share of net worth has been around 30 percent. For the next 60 percent – most of us – housing has risen from 62 percent to 67 percent of total wealth."

So, what's the problem? Those Americans leveraged themselves to get into their homes and borrowed against them.

We know what happened next.

But, it's not just about middle-class America's homes as their source of wealth. The article states, in its opening paragraph, "If there's one thing Americans should have learned from the recession, it's the importance of diversifying risk. Middle-class households had too much of their net worth tied up in their homes and were too exposed to stocks through 401(k)s and other investments."

In other words: WAKE UP AMERICA – you idiots who have been struggling to get into the middle class and you idiots in the middle-class (thank goodness that idiot class is shrinking, right?) have it all wrong. You shouldn't just be buying houses and stocks.

It's not Bloomberg. They're just putting this out there. I don't want to insult one of my favorite magazines, but WHAT THE…

What is the middle class supposed to do? Trade derivatives?

It's not ironic, it's sad – no, it's disgusting – that the two principal sources, or steps up the aspirational ladder in America – home ownership and an equity portfolio – are… well…

I'm not going to call them schemes, though there's a part of me that wants to. That would be hyperbole to the max…

Those two steps up the ladder in America are manipulated by bankers and brokers for their own self-serving benefit.

That's why I think – no, that's why I know -that America's shrinking middle class is caught in a vise.

Do I have answers for this dual problem?

You bet I do.

But, first, I want to hear what you have to say.

The floor is open.  Let me know what you think in the comments below.

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About the Author

Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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  1. L. Joseph | February 26, 2013

    As a single woman, I have tried hard to build wealth . . . through stocks and real estate, naturally. I, too, lost 45% — well, really much more when you look at what happened to real estate values in Florida — over the 2007-09 period. Thus, your article describes me to a tee. I am waiting with bated breath for your solution to this vise I am in!

  2. Lee | February 26, 2013

    I observed how my grandfathers made a living and what they invested in and what my Father did. I also noticed that we have been having inflation for many, many years with the Depression caused by the banks, the S&L Crisis caused by the banks, government spending causing inflation, etc. I realized that if I gave my money to someone else for ~40 years (e.g. IRAs) and then they decided how much to give me back at the end of 40 years, this is as bad as trusting banks or the government. I invested with little down and bought 8 rentals and sold them 15 years later and traded them so that even after the 2006 bubble, I still have a sound financial future. I bought mining stocks and that is also trusting someone to give you an honest amount of money the mining company makes…Lost 80%. I now physically buy silver and gold. It's putting value away for the future knowing that bullion will always retain value and I control it….rather than other people deciding how much to give me back of my investment.

  3. Lorne DeWitt | February 26, 2013

    Much of the problems regarding the Florida housing market and other retirement states involved over speculation. Many speculators were drawn into Florida's realestate market from wealthy states in particular California, New Jersey, and New York. These greedy "carpet baggers" pushed prices so high, that it priced residents living in Florida out of the market.

    Look at it this way, there's little or no manufacturing, no industry to speak of, the few jobs that are available are nearly all related to tourism and a service industry that pay "RAT" wages. These fools came to our state with their "butt loads" of money and soared our housing market to undeniably unsustainable levels. It was a no brainer that it was not only going to crash, but burn as well.

    They got everything that they deserved for being so damned stupid and greedy!

    There were winners, if you were smart like myself. I anticipated the crash, so I experienced no loss, as I placed all my investments into fixed investments before the crash. Then when the markets bottomed out, in early March '09, I placed all into indexed annuities. I chose the S&P 500 stratgy, as government always hammers the Mom & Pops and small businesses with taxes and regulations to help corporate stocks recover as quickly as possible.

    My first year I made 41% from '09-'10, the equivalent of 24 years of projected growth, according to the contract! Currently I'm up nearly 150% in only 4 years, not bad! I'm sure others have done better but, this way my principal was safe, and completely risk free.
    Ha, ha, ha! (That's me laughing all the way to the bank) ;0)

  4. Michael | February 26, 2013

    You are correct, there is a vise, but it's reversed. The financial classes are dependent on the middle class for their enourmous payouts. Rich people don't trust them and the poor can't afford them.
    Without a middle-class putz, they wouldn't be able to survive, since all they do is read numbers and push papers (and sell junk to those who trust them).
    The best way out is entrepreneurship. Invest in yourself and in those around you. Investing is not just money, time is the best investment we can make. Something my father used to call sweat equity, something missing in today's society.

  5. dourdan | February 26, 2013

    Stop being so condescending and patronizing.

  6. Unicorn1941 | February 26, 2013

    The entire problem with sub prime mortgages is they alter the dynamics of risk and reward. So what do the lenders do to realign the balance? They get creative and develop new money making schemes – maybe unethical, but not necessarily illegal.

  7. g clayton | February 26, 2013

    To find the best path forward we need to look to the past. This war between good and evil has been prophesied and is coming true. The only escape from the evil which is not only today,but for all eternity is to turn to the Lord. No one believes in God. Thousand of pulpups are filled with false teachers, and false prophets. Turn to the Bible, read the New Testament and believe what God has said. I would also suggest the Book of Mormon as a correct text to get you to Christ. Read until you believe in God and He will come to you in person.

    • James | February 26, 2013

      You are right Shah, the middle class is caught in a vise.

      Why? Class warfare – It is the rich versus the middle class.

      And who is winning? The rich, meaning the banks and the Wall Street gang.

      Through their patronage power and influence, the rich make the rules to favor themselves at the expense of the middle class. The ones who make the rules rule. The middle class are the takers and are at the mercy of the rule makers.

      This imbalance in our society is making our middle class second class citizens. This inequality and injustice in our economic system are allowed to occur even with all the evidences arising in the recent bubbles, like banks lending to unqualified home buyers.

      What is perplexing is the powers to be are not addressing the issues and taking corrective actions. They are letting them go unheeded. The same mistakes will be repeated. President Barack Obama did not mention the problems existing in the financial sector in his State of the Union address. If he did he touched it lightly. I thought the omission was obscene because it is a major problem affecting Americans. Your voice and others in the investment community have brought up the topic, and until it becomes mainstream in the public's mindset, the rich will get their way.

      You are right, Shah: WAKE UP AMERICA!

      The wheels of government turn slowly, and they are turning very slowly now to achieve equality and justice for all.

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