Thursday, August 24, 2006

War on the Middle Class? Lou Dobbs tells only part of the story.

For all you Lou Dobbs fans, I want to discuss his ongoing series about the "War on the Middle Class". Let me start by stating that I find Lou Dobbs to be quite intelligent, eloquent, and well informed on many topics. His efforts to maintain a focus on border security are admirable. And, his Exporting America dialog is thought provoking and something we all need to give more consideration to.

But, I really think Lou Dobbs needs to expand the breadth of his investigation with regard to this purported war on the middle class he so often speaks of. For brevity, I will refer to the "war on the middle class" as just "war-mc" throughout. Tonight's war-mc segment discussed how the housing downturn was yet another thing responsible for putting the squeeze on America's middle-class, citing various statistics about how:
  • 40% of mortgages now are zero-down or other "exotic" types
  • inventories of homes on the market are rising
  • 1/2 a trillion in ARMs will adjust this year
  • 700 billion in ARMs will adjust next year
  • people are facing huge increases in mortgage payments at the same time they are being squeezed by energy costs
  • (and, a common theme not necessarily mentioned today is how wages have stagnated)
All of these items may very well be fact. But, how is this representative of a war-mc? I am likely to upset quite a few persons that would like to have everyone believe that their woes are all due to this supposed war on the middle class, but I must put forth another side to be considered -- I believe that a significant part of this war-mc is a self-inflicted war.

Why self-inflicted? Because so many of the issues Lou Dobbs talks about result from our own actions ("our" being the middle class generally). Though I can not fully develop my reasoning in a single blog article (it would take a book), here are some of my reasons for calling this war-mc "self inflicted":
  • Mortgages. It is this simple: only you are responsible for taking on more debt that you can service, for believing that interest rates would never rise again, and to think that house prices were taking an endless upward climb that would always allow you to increase your home value and equity with little or zero effort.
  • Mortgages/housing: from what I see, the "middle class" is the driving force behind the housing bubble. It's the middle class that banks and lending institutions have targeted with excessively easy of access to debt. Not a day goes by without another offer for a credit-card, home-equity loan, or the likes for most of the middle class. And, the middle class bought into it all hook, line, and sinker, taking out as large of loan as possible, pushing their finances to the edge, and acquiring the biggest and most extravagant house they could possibly "afford" (afford being a term that has lost all meaning these days - it now simply means how much a bank will let them borrow... little to do with truly afford). The belief that home prices would constantly climb has made many feel they could do no wrong with such a move. Well, this all worked as long as the Federal Reserve made money so cheap (to borrow) that the house of cards kept going higher.
  • Housing add-ons: the large houses (and loans) are usually just the tip of the iceberg. With those homes come all sorts of products and services. The larger the house, the larger your costs - be it lawn service, landscaping, watering, heating, cooling, or simply the property taxes on that thing! Yes, one excess begets others. And, per the rules of supply and demand, the larger draw on energy resources to heat and cool those extra square-feet raises energy costs for everyone; many of the resources used (in larger amounts) to build and maintain a larger home are petroleum based too (roofing, vinyl siding, and much more), all increasing demand for limited resources.
  • Automobiles: you have to get to that fancy house in the suburbs, and you certainly do not want to rely on public transportation (which, is of course harder to even find out in the burbs). Instead, you have to have a veritable fleet of cars to go along with that house. These cars can not be too old, or they dare not fit your image (or match your house). Instead of driving 10 year old affordable vehicles, the norm is more like 4 years or newer. Those cars bring along a host of bills: insurance, fuel, tires and consumables. Note to all: all the extra demand for fuel raises fuel prices further.
  • Credit-Card Debt: I think everyone knows the story on this -- simply put, it is out of control.
Whether you want to admit it or not, many of the costs that are "waging war" on the middle-class are a matter of choice. That is what people like to forget, ignore, or make excuses in order to evade. It is your choice to purchase a 4000 square foot home, a Hummer, a Harley and all your other toys and niceties. And, even if you are nowhere near that level of expense, but still stretched to the edge, there are still likely to be many choices that you have made that led to you feeling like there is a war-mc.

We all have the worst example of all to follow when it comes to living beyond our means: our own government. They spend money far beyond what they have, and appear to have little to no concern about the long-term ramifications of ballooning debt and related obligations. The Federal Reserve, during the last recession, saw that the fastest way to make the economy look wonderful and robust was to enable the middle-class to take on excessive amounts of debt (just like our government) at low interest rates and allow a housing bubble to take shape -- and pull us out of a recession. Once could argue that it was a cure, but I believe a significant amount of this emergence from recession was simply a postponement of the inevitable adjustment that must occur when the realization that debt funding by overseas investors must eventually hit a ceiling. Until we ourselves save and control spending, we will be at the mercy of others.

I was raised in an environment where money was tight, and things had to be very strictly budgeted for. Debt was something to be avoided, as it makes you work to service it, and it introduces excess and avoidable fear when times are rough. Debt has its place in our economy for certain -- without it, growth would stagnate. But, debt abuse and easy debt has crept in and taken over for anything that I would consider sane and safe levels - for individuals, business, and government.

For those of you not already mired in excessive debt, please, think twice (and many more times) prior to entering into further debt. A simple solution is to live beneath your means (especially beneath the level of debt your income will allow you to get in today's age of easy loans). You do not have to do it forever; but, do it long enough to acquire solid savings skills and debt-avoidance skills. Then, you will not have to be part of those that interpret every negative bit of economic news (like the housing downturn) as a "war against the middle class"; instead you will see it for what it is (primarily), a war against those who chose to put themselves in the line of fire.

As a close, I must acknowledge the fact that there are a significant number of expenses that could be considered part of a war-mc. These expenses will nearly always exhibit some commonality in that: they are difficult to avoid; are for services/products you can not live without (and I do not mean your cell-phone); there are few supplier options (leading to easy and widespread price-fixing opportunity); their average rate of annual increases will far outpace inflation as a whole. Some examples include: health care and prescription drugs, food, other insurances, fees (e.g., banking fees), and taxes (or other government fees). I did not mention energy simply for the fact that we consumers control demand (though we do not exercise that control very well) for the most part.


Mark said...

I tend to agree that many times people are their own worst enemy. There is however, an undercurrent of corruption whereby the corporate raiders default on pension funds, skim mutual funds, manipulate earnings, and generally take theirs first from the top. Combine that with the debauchment of the US currency by loose monetary policy and profligate government spending and you have a recipe for a wipeout.

Mike Eberhart said...

Yes, there is something to be said about that, Mort. I plan to do an article about the con-game that the stock-market has become for the most part, since those types you mention stack the odds in their favor so highly over that of their employees, average investors, and so on. Not all companies / management fall into this category, but all too many appear to. And, I do think many of the corporate leaders that do fall into this group, use tactics closely aligned with those of their own government. So many of them either start in, or end up in, government or government-influencing positions that can ensure perpetuation of it all. But, that is another day's writings. :)

Pro Inmigrant said...

I am totally agree with you regarding that Mr. Lou Dobbs needs to focus on the essential part of the Middle class war..The Economy, Corporate Factor, and the lack of goverment leadership on the real essential issues of U.S. Domestic. (Middle Class). As a indivuals we need to learn to manage our finance better rather than spend more than what we earning.

BillyWarhol said...

I heard an outrageous number of $25,000 Dollars that a Large portion of Middle Class Workers were Earning - that is Ridiculous! & the Minimum wage should be at least $10 Bucks an Hour - we'll be into the year 3000 before people see any Trickle Down $Money from the Republicans!! ;))


Great Blog btw*