The housing fiasco does nothing better than demonstrate the bifurcation of the US economy. Normally, "decoupling" is a term used to describe the rest of the world breaking free of the United States. But that is not the only separation we're witnessing. The real economy of goods and services is splitting from the financial economy. And at bottom, the corporate oligarchy is separating from any specific population.
No longer are the moguls of American industry men who have built empires on plant and equipment, nor a better mousetrap, nor anything of intrinsic value. Today's billionaire's are made by financial engineering.
In housing, the subprime mortgage debacle, and its complement, the securitization of garbage (CDO's) were excesses tacked on to the end of an asset bubble, devastating fruit of the financial sector's complete absence of regulation and even disclosure requirements.
The housing bubble. In spite of the huge number of investment experts it made out of the house-owning public, the rise in home values was never related to its role as a place to live. Its value was as a financial asset in a rising market. When the market stopped rising, the home reverted to its previous place to live value. This will take a long time to unwind, but it will unwind.
The onset of the housing bubble was stimulated and its duration was extended not by any demographic or otherwise coherent source of demand, but by aggressive lowering of interest rates by the Fed under Alan Greenspan. Houses became assets whose price was increasing. Mortgages became the basis of innovations called collateralized debt obligations. CDOs were demanded by financial markets hungry for high yields and AAA ratings.
Okay, okay, we know that. What is absent, and was absent throughout the run-up, in spite of the low interest rates, was capital investment by business. Capital investment is the basis of stable economic growth. Yes, the government could have stepped in and built infrastructure or sponsored the more than necessary move to clean energy. This would have been stable growth. (Just see what happens without that investment.) But it didn't, because taxes are evil and oil consumption is good.
To further underline the point, the Supply Side tax cuts of 2001 and 2003, even in concert with the interest rate reductions, led to the same absence of capital investment.
Instead, this period saw the phenomena of private equity (a reprise of leveraged buyouts of the 1980s) and hedge funds. These vehicles have made billionaires of money managers specializing in buying, leveraging, organizing and reselling companies. An occupation not so different from house flipping. We are about to see that the ultimate results are similar, too. Everybody is going to make money, except those holding the bag at the end. Unfortunately, there are a lot of bags to hold.
Real economy companies are victims, too. Michael Metz of Oppenheimer opined recently on Bloomberg that much of the absence of capital spending since 2000 occurred because companies needed to protect themselves from private equity groups. They chose to buy up shares rather than invest.
The CEOs retiring from Merrill and Citigroup and others carry away hundreds of millions in consolation packages. They leave behind credit markets clogged with garbage CDOs. Who knows who owns these. The appetite for double digit returns rests on the tongue not only of the greedy and wealthy, but also pension and insurance funds.
Left behind also is the realization that the financial economy is largely unregulated. Cowboy capitalists can get away with a lot when nothing is against the rules, and when further, nobody is allowed to see what they are doing. This is the direct responsibility of the Fed and the SEC. MIA.
More oversight is applied to the purchase of a toaster than to a $500,000 adjustable rate mortgage. More disclosure is required of an employer of two than of a hedge fund, private equity firm, or mortgage broker responsible for billions of dollars.
The Libertarian Alan Greenspan was chosen by Ronald Reagan. Greenspan has been responsible for an incredible and hypocritical enabling of cowboy capitalists. As Henry Kaufman, a scion of Wall Street, correctly noted recently:
The Libertarian model is, If you do well, you make money and succeed. If you do poorly, you fail. [Greenspan] has not allowed [financial sector] firms to fail. This has been well learned by market participants.(Bloomberg on the Economy, October 1, 2007)
Past indulgences have led to the current events, and Greenspan's successor Ben Bernanke is traveling the same well-worn path, acceding to financial sector interests yet again. Upping the ever-increasing ante and degrading the currency which the real economy tries to use as a medium of exchange.
There are those who would argue that the real decoupling is between the corporate oligarchy and the broad population. The absence of regulation and taxation of markets and market players, mortgage originators, hedge fund operators and the like, and the massive government assistance to the financial sector is simply a special, if more extreme case, of a larger pattern.
Regulatory panels across the board are captives of the industries they serve. It just so happens that the consequences of a pliant Fed and an SEC stacked with political hacks is much more damaging.
The multinationals now roam the globe like toxic clouds, unfettered by any rule, because they control the rule-makers.