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By the end of the recession, there will be approximately 1,000 bank failures.  Does this sound extreme?  It should but the numbers don’t cover the entire story.  Since 2008 the number of bank failures has reached 269 and this doesn’t include consolidations done through the FDIC where bigger banks ate up smaller banks before they officially failed.  Last week, 7 banks failed.  At that pace, we are looking at 364 bank failures per year and the actual number of closings per week has consistently gone up.  The FDIC is in a precarious situation.  The Deposit Insurance Fund (DIF) is technically speaking, broke.  They have added additional cash reserves by front loading premiums on surviving banks but this can only stunt the financial bleeding for so long.  The problems in the banking system run deep and many of the smaller regional banks are failing because of commercial real estate loans going bad.

Here is the actual weekly trend of bank failures:

Source: FDIC

The trend is unmistakable.  The worse offending states are as follows:

Georgia:          40

Illinois:                        34

Florida:           34

California:       27

These four states make up 50 percent of all bank failures since the crisis started.  The current policy and momentum seems to be with banks ignoring balance sheet problems until they are no longer able to hide the dirt.  The too big to fail banks have already been chosen by the government and the rest will need to deal with the new economic landscape.  The FDIC, the seal of confidence and strength dates back to the Great Depression:

It is a game of confidence that we have increased the actual amount of deposit insurance to $250,000 from $100,000 at a time when the actual insurance fund is negative.  You would think that something this problematic will cause for a sense of urgency but the government is giving the FDIC until 2020 to get this fixed:

“WASHINGTON (MNI) – With the passage of the Dodd-Frank Act, the Federal Deposit Insurance Corp. will now have until the end of September 2020 to bring its reserve ratio to the statutory minimum of 1.35%, rather that 1.15%.

This is more than the eight years provided under the current Restoration Plan that would have given the FDIC only until the end of 2016 to bring its reserve ratio to 1.15%, an FDIC spokesman told Market News International Wednesday.

The latest projections presented at a Board meeting in June, indicated agency did not expect to meet that deadline.”

While the government gives the FDIC until 2020 to get their house in order, this is how the deposit insurance fund is looking:

This is the third consecutive quarter in the absolute red.  The banking system is starting to look like an imploding ponzi scheme and Wall Street is capitalizing on this vulnerability.  How?  If you were a big time investor would you invest in a too big to fail bank that may be performing poorly but has full government support or a smaller well run bank that has no support at all?  The incentive is not necessarily with the best performing and that is usually a staple of a well run capitalist system.  We are not operating in a capitalist system but a corporate oligarchy based on political connections between Wall Street and D.C.  This kind of system has been prevalent for decades now and crosses both political parties.

As the FDIC digs deeper into a hole, the number of problem institutions grows:

Keep in mind that the above list also fails to catch many of banks that do fail.  It isn’t exhaustive.  So even just looking at the above, we already have the 1,000 banks that will fail.  And the problem of course is how the current banking system is structured.  We have close to 8,000 FDIC insured banks but in reality, a very few control the bulk of the assets:

The top 4 banks of Bank of America, JP Morgan Chase, Wells Fargo, and Citibank make up 55 percent of all banking assets.  Then there is another tier of roughly 100 banks that eats up another 20 to 25 percent of assets.  So you have some 7,800 banks basically fighting for the remaining scraps.  The FDIC is in deep trouble going forward and this means we are in deep trouble.  The taxpayer is on the hook for the bill.  The U.S. Treasury already extended a lifeline of $500 billion to the FDIC “in case” they need the money.  Looking at the above data do you think they are going to use that lifeline?  It is only a matter of time.

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I recently had a conversation with a retired neighbor, a former Navy vet who worked most of his life at a local grocery store.  I wouldn’t call him wealthy but he has his financial house in order; he paid off his home in the early 1990s, has no other debts, and lives well below his means.  His big source of income comes from Social Security.  We talked about the current economy and the strain we are facing.  It was a good conversation and ultimately the mathematical problems we are facing for the working and middle class become extremely obvious when confronted face to face.  We both conceded that government retirement programs will have problems in one or two decades (doesn’t help many who are still working).  The economic issues faced between the generations will cause many hard decisions down the road.

First, we should examine income levels in the U.S.:

Source:  Bankrate

The bulk of American households bring in $65,000 a year or less.  The current tax rate for FICA (Social Security and Medicare taxes) comes in at 7.65% with the remainder paid by the employer.  So the family making $65,000 a year is paying roughly $5,000 a year into FICA.  With the employer match, this figure comes out closer to $10,000 going into the system.  If we look at the current amount paid out to Social Security beneficiaries it is roughly the same per year:

The average monthly benefit paid out is $1,067.  Over 53 million Americans receive some form of Social Security benefits.  The working and middle class have had an implicit agreement with the government that if they work for many decades that in the end there will be some sort of safety net to protect them.  Yet the system was designed at a time when people died at earlier ages and we had many more workers than we had beneficiaries.  The math now is tipping in a very unfortunate direction:

As of today, nearly 19 percent of all Americans receive some form of Social Security.  Compare this to 1970 when only 12 percent of all Americans received some form of Social Security.  The above chart is merely going to grow even faster as many more baby boomers enter into retirement.  For those in the working to middle class the prospect of a secure retirement is looking more and more remote.  It would be one thing if people had the ability to trust in Wall Street and invest into the market.  Yet Wall Street with no real reform is largely a predator casino as we have seen with flash crashes and large hedge funds making billions of dollars betting on the failure of Americans.

The original Social Security Act was signed in back in 1935.  The initial design was to help the old, widows, and children of the poor to have at least some basic safety net.  It was never designed as a long-term retirement program.  Today, over 50% of those that receive Social Security benefits in retirement use it as their primary source of income.  With Americans living longer, the strain on the system is largely taken on by the working generations.

Here is an interesting chart showing the progressive growth of the tax over the century:

Initially, the amount taken out of a typical worker’s paycheck was 1 percent.  Today it is up to 7.65 percent (not factoring in the employer’s portion).  It is also the case that SS is capped at a certain income level so the wealthy actually stop paying above a certain level (as of 2010 this level is $106,800).  Going back to a previous chart, you see that nearly $57 billion was paid out in May alone.  The demographics of the system only point to larger and larger monthly payouts:

The above chart is similar to charts in Europe although not as extreme.  But we see a shift to more and older Americans.  By default, many of these people will start drawing more and more on the already strained Social Security system.  And younger workers in our current economy are facing a much deeper impact of the current recession.  Even before the collapse of the system, the young were already losing ground:

The median net worth of Americans from 25 to 34 has consistently dropped since 1985.  There was a big drop from 2000 to 2004 and I would imagine the trend has accelerated in the current recession.  Yet how were people able to continue buying more and more?  It was all fueled by access to debt.  It was largely a debtor mirage that kept the economy going in the last decade.  In fact, the median amount Americans have saved in a retirement account (those still working) is $2,000:

Source:  BLS

The fact that the mean is $50,000 tells us we have massive income disparities in the system and it also helps to point to the fact that most stock wealth is concentrated in the hands of a very few.  Another deceiving factor that was brought into the net worth equation was the net worth figure used housing values during a bubble to calculate net worth:

A giant part of net worth was pulled from housing equity that has now largely evaporated.  The fact that half of U.S. households only have $2,000 in retirement accounts tells us that many are close to a zero net worth after the housing bubble burst:

“(National Review) The macroeconomic consequences of this shift toward low-equity homeownership are visible in research from the Federal Reserve that examines the assets and liabilities of U.S. households. In the first quarter of 2001, U.S. households’ home equity stood at $7.7 trillion, or 61 percent of the value of all residential real estate. By the third quarter of 2008, it had declined to $7.6 trillion, even as outstanding mortgage debt increased by $5.6 trillion over the same period. By the first quarter of 2009, home equity was $1.35 trillion lower than it had been in 2001. Put another way: Despite the housing boom, the portion of residential real estate actually owned by households declined. This means that the increase in homeownership rates (and the subsequent rise in housing prices) was entirely debt-financed.”

In other words, say someone bought a home in 1998 for $100,000 and took out a $95,000 loan.  At purchase, they have a net worth of $5,000 (assume no other assets).  Fast forward to 2006 at the peak of the bubble and the home is now “worth” $250,000.  Seeing that they now have $155,000 in equity, they decide to pull out $75,000 pushing their total loan amount to close to $170,000.  The money is used to buy goods, take a vacation, and generally injected into the economy.  The housing bubble explodes and the home is now worth $150,000.  Yet they have $170,000 in outstanding loans.  This family went from having a $155,000 in equity (net worth) to suddenly going to a negative equity position of $20,000.  Today, one out of three U.S. homes with a mortgage is underwater.  This is why actual wealth is a better measure of financial well being than simply looking at home values especially in a bubble.

The higher unemployment for younger generations is making it harder to put more money into the Social Security money funnel. The low savings from the working generations tells us that many simply cannot save given the current economy.  Ironically, this means that many more will be dependent on government programs.  The calculus is troubling.  There are no easy answers to this.  A few of them include raising the cap to tax higher incomes or cutting benefits.  Seeing how powerful groups like the AARP are, it is doubtful benefits will be cut.

As I think back on the conversation with my neighbor that has served our country proudly in combat, how can you begrudge him?  He is living modestly, paid off his house, and let us be honest, $1,100 a month isn’t exactly Donald Trump territory.  Yet as I go out to work with millions of others, we wonder how things will be in one, two, or even three generations.  Having a paid off home and no debt actually sounds like the apex of a good retirement given our current financial predicament.

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The mainstream press and their lack of focus or even caring about a shrinking middle class is disturbing.  Yet this shouldn’t be a surprise given that their focus of appeasing their sponsors is directly focused at keeping people stuck in a debt induced sleepwalking financial nightmare.  Wall Street has successfully infiltrated our government and most policies are vetted to ensure banking success before ever becoming law or what we now pass as reform.  Take this sobering figure as a measure of how deep this recession has impacted our national economy; in December of 2007 at the start of the recession 27 million Americans were receiving food assistance (already high in a supposed recovery).  Today, we have over 40 million receiving food assistance and we are supposedly in a recovery.  From March to April of 2010 we added 300,000 people to the food assistance column.  This is what passes as recovery.  Also, the persistent long-term unemployment is a perplexing issue facing the middle class:

This chart is daunting:

The amount of people that are long-term unemployed is at record levels.  The chart above shows that we have never been close to a similar situation going back to the late 1940s when records started being kept.  These are structural problems.  Nearly 7 million of the officially unemployed today have been out of work for 27 weeks or more.  The working and middle class saddled with incredible amounts of debt are losing any ability to stay above water.  This is why we see those jumping on food assistance exploding even at a faster rate than those losing their jobs.  Why?  We have a giant class of working poor in the United States.

9 of the top 10 industries in the United States are low paying service sector work:

Source:  BLS

There are many Americans that are actually counted as officially employed but are also receiving food assistance.  Think about the data for a second:

People receiving food assistance:                             40.4 million

Official unemployed:                                                      14.6 million

Part of the gap comes from the data of counting children in the food assistance figures.  Yet many people today are labeled as fully employed but are barely scraping by.  The median household income in the U.S. is roughly $52,000 – I’m sure this figure is lower or stagnant once data is released in September from the Census.  The economy is extremely weak for certain sectors.  If we crunch the data on the long-term unemployed future prospects do not look promising:

What does the above chart tell us?  The above chart shows very little recovery going on in the real economy.  Those that stay unemployed 27 weeks or more are likely to stay that way for a long period of time.  Now if we really want to see where things are heading, we can look at a few major sectors of our economy:

What you’ll notice in the chart above is that the manufacturing sector in the U.S. has been taken apart and this goes back to the 1970s.  These were quality jobs that are not coming back.  If you take a look at the actual FIRE side of things (finance, insurance, and real estate) job losses are showing up in good numbers but this sector has gone up on a very clear path since the 1950s.  We have decided to push real estate and toxic loan products instead of making things.  The banking sector has outsourced our workforce.  Why else are the top 10 job sectors in low paying service sector work like cashiers or servers?  This correlation did not happen by accident.

The government has been adding jobs over this time:

You really don’t want to see the government sector expanding at the same time the overall employment base is going lower.  Yet this recession is striking at the core of the working and middle class.  There was a recent story of a city manager in Bell California making $800,000 a year in a city of roughly 30,000 people.  The city is working class and people are rightfully outraged.  This is no different than a CEO making millions of dollars creating toxic mortgage products that required taxpayers to bail them out.  The country is being run by plutocrats on both sides of the aisle.  The middle is getting squeezed out.

It is no wonder that anger against both political parties is at record levels.  People are rightfully disenfranchised.  With no solid job growth we can expect further problems in many sectors of our economy and we will see even more incredible financial problems come to the surface that were hidden during the halcyon days of the credit bubble.  When the light comes on, the roaches scatter.

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Ludwig the II of Bavaria is rarely discussed in history class but most would recognize many of his castles especially the one that is replicated in Disneyland (Neuschwanstein Castle).  Ludwig spent money he didn’t have to indulge in his eccentric desire to build opulent castles.  Even wealthy royalty can put their balance sheet into jeopardy if they indulge every whim and wish.  The banking sector for the last decade has allowed many Americans to satisfy nearly every consumer desire they had.  Boats, cars, vacations, clothing, recliners, Jacuzzis, or anything else you can imagine.  Some took this to the extreme and created a massive market that demanded bigger and more extravagant homes even though average Americans were not getting wealthier or earning more money.  How this was accomplished was by allowing massive amounts of debt to accumulate until a crisis imploded the economy.  The credit bubble bursting has forced many into a new life of austerity.  No more Sleeping Beauty castles.

On a GDP percent basis the U.S. isn’t the worst offender but we are up there on the list.  The above list spans out to 2003 (and it only got worse until 2007) and you can already see what big amounts of household debt will do.  Take for example Iceland or Portugal that are now facing major headwinds ahead.  A country cannot go into massive amounts of debt and expect to have a sustainable economy for years moving forward.  It is a short term indulgence that masks deeper rooted problems.  The middle class in America were allowed to think they were all dukes and countesses but when the crisis hit, the banks retreated to protecting only their kings on Wall Street.  This was an economy built on a fairytale.

Part of this naïve belief was pushed by Wall Street and D.C. propaganda.  For decades the idea was that you can spend more than you earn.  This came all the way from the top so it shouldn’t be a surprise that many in the middle class took their signal from their leaders.  What happened?

Source:  Lew Rockwell

The personal savings rate went so low that it went from the double digits in the early 1980s and actually hit a negative percentage not too long ago.  At the same time, the amount of household debt went off the charts.  It is hard to remember that there was a time in our history when debt was actually something to be handled with caution.  In the last decade, the careless risk taking banks did with debt created a massive housing bubble but also created bubbles in the auto industry, student loan market, and other areas that were financed induced.  Industries where banks are heavily involved have somehow turned out to harm the working and middle class of the country.

Many financed their lifestyles through credit cards:

We have dropped from the peak of nearly $1 trillion in credit card debt down to approximately $850 billion in credit card debt.  Yet this contraction didn’t happen because people started paying down debts.  This has occurred through bank write-downs and many of the bailed out banks constricting access to credit cards to the American public.  In a way, this is what should have been done decades ago.  But what is troubling is that banks used this as an excuse and reason for receiving trillions of dollars in U.S. taxpayer money.  The bailout funds were to keep lending going so people could use the funds to live in their debt fantasy.  Well that fantasy has ended for the middle class but banks can continue on pretending and living in their fairytale world where taxpayer money and bailouts are somehow congruent with a free market.  Retail spending has contracted because people no longer have access to the amount of debt that was available only a few years ago.

If you want to see the new royalty in America, just look at the below:

Source:  Institute for Policy Studies

I’ve talked about the distribution of wealth in the U.S. in many articles but the above shows a solid plutocracy is already here.  Wealth is the key issue.  As many people are now finding out simply having a massive home with a jumbo mortgage and a leased foreign car is no sign of wealth.  In fact, that can be taken from you quickly (and it is by the number of foreclosures and repossessions we are witnessing).  But true wealth is actually owning the stock, or share of ownership in companies in the U.S.

“The above chart shows that half of all stock wealth is concentrated with the top 1 percent.  In fact, over 90 percent of Americans in the lower rungs own roughly 9 percent of all the stock wealth.  This is why the stock market is largely a game for the rich and jobs are largely a game for the rest of us.”

We are at a major crossroads for the U.S.  If action isn’t taken soon this massive inequality will dig deeper and the middle class will lose more and more people as the economy knocks people off the treadmill.  If we follow the money, our government, Democrat or Republican is largely bought out by the Wall Street cause.  Money is shifted to the least productive sector of finance at the expense of building real tangible assets that help the majority.  The real fairytale going on today is believing that our government and Wall Street are looking out for the economic good of the entire country.  Ask the 40 million people on food assistance how things are going.  Ask the over 15 million Americans with no job how the economy is progressing.  Let us ask the millions that are being foreclosed on how solid growth is.  For big banks, all is well and this is reflected by their billion dollar profits since they are stealing from taxpayers and gambling on Wall Street.  Not even a Disney fantasy is this outlandish.

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42 million Americans work in firms that have 99 employees or less.  We are often told how vital small business is to the health of our nation’s economy.  Usually this rhetoric is given to us by banks and Wall Street yet recent data shows a very different attitude.  Words ring hollow when it comes to banks lending capital to small businesses.  In fact, in Q1 of 2010 lending to small businesses contracted by $40 billion versus lending in 2008.  The challenge we face is that back in 2008 when the banking system was being bailed out, one specific reason given to the public was the necessity of keeping the lending lines open to small businesses.  This has not happened.

If we want to chart out what has happened it is rather obvious:

Source:  Federal Reserve

No one is going to dispute that lending to small firms has contracted because of the economic malaise that we are experiencing.  But then where did all those trillions of dollars go that helped to bailout the banking industry?  The average American, many who work at small businesses (or did), were under the impression that the taxpayer bailout was designed to provide added liquidity to these business so they could continue to function in the economy.  Banks were supposed to distribute the funds intelligently.  What has occurred instead is the money aggregated in the hands of the banking sector and they are now using the money to patch up massive holes in their own balance sheet.   

The contraction of lending to small business has caused a double impact:

“As shown in table 3, panel B, in 2003, small firms that used credit cards, on average, charged $3,224 of new business expenses each month. 40 Users of business cards charged an average of $2,983, and users of personal cards on average charged $2,161 a month. Overall, risky firms were somewhat less likely to use cards than less-risky firms in 2003. Risky firms (column 2 of table 3, panel B) charged somewhat less than the less-risky firms (column 3)— $3,163 versus $3,390—in total, and also charged somewhat less on business and on personal cards.”

Small businesses spend an average of $3,224 each month on business credit cards for business expenses each month.  This includes purchasing hard assets that grow the business or adding to additional inventory.  Many smaller businesses operate on floating their credit and usually rely on their business lines to stay afloat.  The above contraction is intense and has added to the misery of most average Americans.  So you have a direct impact on spending and with actually maintaining employees or growing the workforce.

It is easy to see what has occurred with small business:

Since the crisis hit, the usage of credit cards has decreased substantially.  Many smaller businesses faced this change by force, not by choice.  So banks are impeding the recovery by hoarding capital and focusing on their own bottom line and many are speculating on Wall Street.  Yet what are we to expect from the industry that brought us CDOs and every other Wall Street gambling device that has sent a financial torpedo directly to the middle class?

It is true that many people work at smaller firms but many others work at large firms as well:

Source:  BLS

About 36 percent of paid employees work at firms with 99 employees or less.  Sure we can say that 80 percent of firms are small businesses but this skews the actual facts when you have a company like Citibank with 263,000 employees.  I’ve heard this stat often quoted and this gives a very unrealistic perspective of what is going on.  This is similar to saying that we have 8,000 banks in the U.S. when in reality about 10 too big to fail banks control virtually all of banking:

“The top 4 banks of Bank of America, JP Morgan Chase, Wells Fargo, and Citibank make up 55 percent of all banking assets.”

If the government wanted to increase lending to small businesses why not do it directly?  It could have been more efficient and cost effective to go directly to the source.  But just like in housing, the middleman (i.e,. the banks) need to get their cut all along the way.  They generate money by drowning the system in paperwork and charging interest and fees on every imaginable item.  Wall Street with their i-banking syndicate are in the business of taking money at every point along the production continuum.  The above data should not be shocking to anyone that has followed the crisis with open eyes.

We also raise additional problems going forward because now Wall Street is favoring larger companies and banks going forward.  There is now a stamp of approval for any too big to fail business (i.e., autos, banks, etc) and Wall Street will value smaller firms as having added risk even if they manage their operations wisely.  Think of the massive consolidation that we saw with JP Morgan eating up WaMu, or Wells Fargo taking on Wachovia, or Bank of America with Countrywide.  This all happened as smaller banks fail every Friday.

Small businesses are in the same boat as most working and middle class Americans.  The room to wiggle is getting smaller and talk of an economic recovery rings hollow.  The only people shocked about lending contracting to small business are those who are too busy counting their bailout billions.

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People quickly forget about the nearly 1,000 point “flash crash” brought on by glitches in the Wall Street casino machinery.  Still no sensible explanation has been given but today the stock market now stands below the flash crash moment.  The middle class is witnessing the largest wealth transfer in history take place and it is all happening because of the Wall Street infrastructure and the government’s lack of respect for the working class of the United States.  Even last month as we lost 125,000 workers the unemployment rate actually went down because over 500,000 Americans simply dropped out of the workforce.  In other words people simply threw their hands up in exhaustion and gave up.  The government is literally not counting tens of thousands of Americans.  What does this tell you about how much they value the middle class?

Let us break down some income data first:

47 percent of American households make less than $50,000 a year.  66 percent make less than $75,000.  This should give you a sense of the household income in the U.S.  Only 4.3 percent of U.S. households make more than $200,000.  Income for working and middle class Americans has remained stagnant for one agonizing decade.  What has occurred over this time is the artifacts of a middle class lifestyle like a decent home and a college education have been juiced with massive amounts of banking debt.  As banks have tried to put their hands on every aspect of American life, prices have zoomed up in every industry they have jumped into.  Look at housing and higher education for dramatic examples.  50 years ago most middle class Americans could afford a college education and a starter home without sacrificing every single penny to servicing debt.

Debt has engulfed our nation.  If we look at personal consumption as a percent of GDP we can start seeing where problems started:

Personal consumption makes up over 70 percent of our GDP.  Banks love using this figure to beat on middle class Americans to blame them for the problems in the current recession.  Keep in mind that the above chart also includes giant increases in health care costs and also, large piles of cash going to service debt that banks are so happy to take.  Yet the above point of the chart does hold steady.  That is, we have gone from producing to spending too much as a nation.  It is fun while things are good but is definitely unsustainable.  And don’t think this spending came from actual savings:

The drop in personal savings is incredible.  As we went negative for a short period of time, banks were capitalizing by allowing people to spend more money than they actually had.  If we look at the trillions of dollars given out to banks that made poor bets in the last decade, we’ll see that they are also the largest players in the credit card game:

Source:  Reuters

The above chart is basically the too big to fail.  They have fed massive amounts of credit cards into the system with little due diligence since they knew in the end, taxpayers would bail them out.  Now that things have gotten bad (not for too big to fail banks since they have gotten the ultimate gold plated bailouts) they are now crunching down on the middle class.  High interest charges, onerous fees, and other trickery are merely ways of sucking real wealth from those who work to a class that is largely unproductive and has led us into this economic predicament.  The government has worked hand in hand with the banks here.

Credit card debt eats up a large portion of annual household income for millions:

Much of what we consider to be middle class living has been kept on life support by banking debt.  Yet no system can go on forever with too much debt and too little production.  Banks have become a dangerously large part of our economy.  That is why so much focus is given to Wall Street and the banking sector.  It is a largely idle industry that merely attempts to suck off the wealth creation of actual real work.  The housing bubble was the pinnacle of banking neurosis.  The idea that you can simply repackage toxic mortgages into “sophisticated” debt products and sell them off as diamonds to unsuspecting fools is appalling.  Yet in most cases, all this was legal because our Senators write the laws that should be protecting us.  Instead, they have allowed Wall Street to control every aspect of finance and now here we are with 40 million Americans on food assistance and a close to 17 percent unemployment and underemployment rate.  Yet things are getting better for the middle class?

The current system is not capitalism but a form of state sponsored cronyism for banks.  Most of us can understand that if you have a good product then by all means make a profit.  This is the essence of any small business and their survival.  But the banking system operates under perverse rules.  They created inordinate amounts of debt products that serve no purpose and assured destruction of those taking on the product.  Think of option ARMs that actually grew the balance of the mortgage!  Horrible products that have destroyed large portions of the real economy and have pushed many off the middle class path.  How many foreclosures could have been avoided over the past decade with more prudent banking?  Yet this isn’t what the system wants.  Banks wouldn’t mind if all you did was work and had to open your beat up leather wallet and pull out 99.99 percent of your net pay to service your debt.  In fact, this is probably their ultimate wish.

Where do people spend their money?

Source:  BLS

Housing by far is the largest line item above.  Yet categories like medical care and education are growing at rates that outpace the overall rate of inflation.  Ironically these are areas that are favorites of Wall Street.  As long as you can slap a loan onto something, the big investment banks will be there drooling over every penny they can tack on.

There was a time when paying off your mortgage was a good thing.  We have a good number of Americans who own their home mortgage free:

Over 30 percent of homeowners in the U.S. own a home with no mortgage.  Yet these are typically people from an era that allowed them to pay down their mortgage even with a modest income.  How likely is it that someone in say a state like California who bought a home at $500,000 with a $70,000 income is going to pay off that home?  They’re not going to do it so that is why in the chart above you see distress levels off the charts.

Even if we look at current metrics for 3 of the largest states, we find that debt is not necessarily a good thing:

California and Florida both had major home price appreciation and relied heavily on the housing bubble.  Both areas have seen bubbles pop.  The difference however is that Florida prices have come down to more reasonable levels.  California prices are still too high.  A reasonable metric is 3 times annual household income for home prices (both Texas and Florida are close to that range).  California is still out of that range.  So why are economic problems still deep?  Because current income data will be lower when Census data comes out in September and that is not reflected above.

The ability for Wall Street to turn many things into a commodity has allowed them to gamble and speculate on the well being of middle class Americans.  Housing prices would not have gone into a massive bubble without banks pushing other people’s money out the door.  Wall Street is good at taking risk when their money is not at stake.  They are fine taking the biggest risk since they know the U.S. taxpayer will be on the hook eventually for their irresponsible decisions with a large safety new.  Do you think banks would have loaned out of their own treasury like they did if it was their money on the table?  Of course not.  Yet if something isn’t changed then middle class Americans are going to find it harder and harder to stay afloat while debt starts coming down over them like a tsunami.

It is time to break the chains from the Wall Street banks.  Split them up.  There is no need to have commercial and investment banking comingled.  The banking needs for most Americans are simple.  Why mix it up with banks that now operate like hedge funds and take needless risk?  If there is no change, people are going to start seeing more and more of their paycheck going to servicing debt and guess who ends up with that money in the end?

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The massive commercial real estate market is already plaguing the weak balance sheets of banks.  It is the case that each Friday, we are likely to see one U.S. bank fail because due to high levels of commercial real estate (CRE) debt on their books.  This market is likely to cause the failure of hundreds of banks and put the economy down into another real estate funk.  The amount of commercial real estate transactions shows no sign of recovery in this market.  And why would there be any recovery?  This is an area for hotels, strip malls, condos, and other projects that usually reflect a healthy and growing economy.  We do not have that and the problems embedded in CRE are going to stifle any growth for years to come.

First, we should look at the trend in commercial real estate prices:

Source:  MIT

The above chart is extremely helpful in showing how quickly bubbles can grow but also, how fast they can deflate.  It took 7 years for prices to peak and only one year for prices to collapse.  We have seen similar trends in the residential real estate market.  The crash is rather obvious but why did it happen?   The reason prices collapsed so fast was that it was a speculative boom.  Lending became much too easy with the Federal Reserve flooding the system with easy capital trying to find a home.  In more sober times, CRE deals were scrutinized with a due diligence and it was inspected to produce cash flow from day one with sizeable down payments and strong financial reports.  But this is not the case and many of these giant deals ended up going the way of the little to nothing down world of residential real estate.

The market in CRE is enormous.  This market is over $3.5 trillion and is likely to damage the regional banks much more deeply than larger banks that have a taxpayer safety net:

Source:  T2 Partners

The current weakness in the economy is a realization that problems are still deep in the system.  Think of how large the CRE market is.  Roughly $3.5 trillion in debt secured by casinos, strip malls, empty condo projects, and other real estate that likely is underwater.  Keep in mind that at one point this market was over $6 trillion in value.  The CRE market looks to be valued at $3.5 trillion to $3 trillion with the same amount of loans outstanding.  In other words, the market sector is underwater.

The problems with commercial real estate have shown up in prime locations like San Francisco to Chicago.  These CRE debt problems are not a reflection of poor areas as we are at times led to believe.  These were high flying speculative bets that were only successful as long as the pipeline to greater fools was in place.  When that line quickly dried up, so did the system and all the funding that kept the game going.  It was the perfect definition of a bubble.

If we really want to see how quickly things have dried up in this market take a look at the following:

Source:  Real Estate Channel

“At the peak in 2007 $522 billion in sales transactions took place.  In 2009 it collapsed to $52 billion, a drop of 90 percent.”

This is why the CRE market is the next shoe to drop and with so much debt outstanding it is going to put an incredible amount of pressure on already weak balance sheets.  What is even worse is that the U.S. taxpayer is going to be likely on the hook for all these speculative bad bets.  If you haven’t noticed the bailouts don’t do much for the real economy except shoring up the investment banks on Wall Street.

The amount of lending in this market has dried up and so have profits in this arena.  Now the piper needs to be paid but with what money?  How can you service your commercial real estate debt if you don’t have any money coming in?  This is where delinquencies are spiking.  It is also the case that the peak years for CRE debt maturities won’t hit until 2011 and 2012:

Source:  Real Estate Channel

Unless CRE prices miraculously recover the problems are only going to get deeper in this market.  Commercial real estate unlike residential real estate has quicker turnover rates on their loans.  That is, many of the loans need to be rolled over every 5 to 7 years.  Normally on a cash flowing property this is no problem but with trillions of dollars underwater, this is a major issue coming down the road.  The FDIC with a negative deposit insurance fund is taking over banks on a weekly basis and is having a firsthand look at the tremendous amount of bad debt on bank balance sheets.

Banks clearly understand what sits on their balance sheet and if anything, nonperforming loan volume has shot up:

Source:  Bankregdata

Throw in CRE debt, troubled residential mortgages, defaults with credit cards, auto repos, and all other debt instruments and you can understand why the chart above is spiking.  But think of it this way; the credit card market is approximately $850 billion in debt outstanding while CRE debt is up to $3.5 trillion.  What do you think is going to cause bigger pain down the line?

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The economic crisis has ushered in the end of a generation long bull market.  Most average investors ignore the fact that heavy market volatility is a sign of an unhealthy stock market.  The stock market since the lows reached in 2009 has been on an unstoppable bull run.  Yet the real economy where most Americans work and spend money has not reflected any of this irrational exuberance.  The S&P 500 has rallied 53 percent from the lows reached in early 2009 and that is including the current retracement back.  On Tuesday the stock market pulled back on data showing consumer confidence plunging from what analysts had expected.  Outside of Wall Street the economy is walking on eggshells.

If we look at S&P 500 data we find that we have entered into a new era:

The above chart highlights milestones for the S&P 500 dating back to 1968.  For the S&P 500 to double from 100 to 200, it took a slow 17 years.  From 200 to 400 it took 6 years, an incredibly quick jump.  Another 6 years after that and the S&P 500 was riding high at 800.  From 1997 to 2007 the S&P 500 went from 800 to 1,576 in the intraday high that is now far in the past.  It almost doubled yet again in a 10 year horizon.  Yet that trend has been broken.  The S&P 500 is now back to 1,041 and has pulled back to levels seen in 1998.  Does anyone really see the S&P 500 going to 2,000 any time soon?

“The stock market needs to reflect the underlying health and productivity of the overall economy and not simply the gambling penchant of Wall Street banks.”

Most of America is dealing with the new austerity that is being thrust on them from an unforgiving economy and a government that seems to be preoccupied with helping out the financial industry before setting things right with the average worker.  In other words, the middle class is being thrown to the wolves in this crisis.  The government is serving the interest of big money at the detriment of the middle class.

If we look at the volatility of the S&P 500 over the past 22 years we’ll notice two different stories.  From 1988 to 2000, the stock market enjoyed a once in a lifetime bull run.  There were virtually no negative years and some incredible year over year gains.  Keep in mind that we are looking at a 12 year timeframe on a tiny chart but this is over a decade of mental conditioning here.  If we look from 2000 to our present day, the massive amount of volatility has sent the S&P 500 to levels seen in 1998:

2008 was the worst stock market year since the Great Depression.  That is how bad that one year turned out for investors.  This large amount of volatility simply reflects a weak real economy and the recent stock market run to the peak of the mountain was super charged by taxpayer money going into large investment banks who in return went into the stock market and gambled your hard earned money.  Clearly it hasn’t done much for consumer confidence, aiding in the foreclosure crisis, or bringing jobs back.  What then did all this money really accomplish?

If we look at the VIX which looks at option trading volume and is a good sign of volatility we also see this recent stock market reshuffling:

What we can gather from all this volatility is a new paradigm has arrived.  Most popular financial books that hype compound interest always focus on a convenient 7 to 10 percent annualized gain in the stock market.  That may have been the case from 1968 to 2000 but that isn’t the case anymore.  What are you going to invest in when U.S. Treasuries are barely offering any interest and bank accounts are offering rates of 0.01 percent on savings accounts?  Your mattress would rival some of these rates.

The stock market right now is one large casino.  No real reform has taken place and that is why we see no real changes in the economy yet trillions of dollars funneled into a financial abyss.  Someone got this money but clearly it wasn’t the middle class.  The public was told that money was going to go to shore up the housing market (didn’t happen) and to keep lending to the public going (didn’t happen).  So what did happen was that big investment banks used taxpayer money and gambled to bolster their own profits.  That was basically the smoke and mirrors campaign that we have gone through.

The middle class is largely a casualty of this all.  9 out of the top 10 jobs in this country are in low paying service sector work.  We hear this rhetoric about a double dip but the middle and working class never got out of the first dip to begin with.  Who is this double dip for?  Wall Street gamblers who have funneled taxpayer money into the casino?  Must be nice for their 53 percent rally but sadly none of that is reflected in the real economy.  If we want to be happy about gambling why not talk about the person who just won the lottery last night.   Wall Street certainly won the lottery here at the expense of the taxpayers.  The collapse of consumer confidence is merely a reflection of what most of us already know.  The real economy has never recovered.

This is the end of a generational bull run just like the 1920s came crashing down with the Great Depression.  Unlike that time, we have allowed the banks and Wall Street to continue to pollute our real economy with their gambling schemes.  Can you believe that no real reform has taken place?  No wonder why average Americans are displeased with both political parties and are furious at Wall Street.

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Big states with dismal budget short falls like California and New York have been making the news for the last couple of years.  Yet the problems with state budget deficits go beyond the big and mighty.  The banking system has been stabilized at a very high cost to average Americans but state budget deficits reflect a deeper underlying problem.  States generate revenue through a variety of taxes; these show up through payroll taxes, sales taxes, property taxes, and other fees.  As a metric for the economy, these are a good way of measuring the health of economic activity.  Looking at current massive budget deficits states are mired in expenses with revenues falling.  For the next fiscal year of 2011 states will face a combined $112 billion in budget short falls.  California’s current budget deficit is $19 billion (current plus next fiscal year).  But things can and may get worse.

A recent survey compares this recession with the previous recession:

Source:  CBPP

As of this year we are facing a deeply painful year for states.  This will be the worst on record if 2011 doesn’t come in close contention.  How is it that the rhetoric has shifted to recovery while states are facing deep and pervasive gaps in their funding?  A large part of the so-called recovery has been directed to the banking sector.  That is clear.  Unemployment and underemployment is pervasively high and when we look at the top job sectors, 9 out of 10 are in low paying service sector jobs.  Last month we added over 400,000 jobs but the vast majority were temporary Census positions.  This is not a true recovery and state budgets reflect this.

Why is the above gap occurring?  Take for example the collapse in housing prices.  States adjusted revenue projections to assume higher assessments and thus believed that bubble level prices were the new norm.  Take for example in California where property taxes can range from 1 to 1.5 percent of the assessed value of a home.  We’ll use a $500,000 home as an example.  Initially, this home would bring the state $5,000 per year at the low end in revenue.  The bubble pops and that home now sells for $250,000.  Only $2,500 comes into state coffers yet the state was expecting that funding to come in at a much higher level.  That is one facet of the problem.  Then you throw in pervasive unemployment that is taxing the system and you can see why state budget gaps are so wide and profound.

The state budget gaps are largely a reflection of a struggling working and middle class.  Sales taxes have fallen in many states as people have cut back and started applying a level of austerity to their lives.  Less spending obviously means less money coming in.  To show how widespread this problem is, all but four states with small populations have budget gaps:

Now I know some will only see the gaps and talk about closing them at any cost.  Yet some forget what this will mean to the overall economy and the so-called recovery.  At this point, take for example the mortgage market, 95+ percent of all mortgages originated are government backed.  The last month of employment gains were largely all (90+ percent) from government hiring.  The current economy is largely supported by massive government spending.  The problem is how we allocated the money.  We have funneled too much money to the banking sector with little tangible results outside of Wall Street.  As states cut deeper into their budgets, federal support is lagging and focusing more on helping out Wall Street.  What this will mean is larger cuts and a drag on the overall economy going forward.

Going forward we know that there are only two ways to balance the gaps.  More cuts or higher taxes and both hurt the economy.  The issue so far is that states have gone after low hanging fruit.  There are hundreds of state workers making high six-figures with fantastic pension plans and lifelong employment with little economic yield and these are not the people losing their jobs.  They are going after janitors, repair workers, young teachers, and other easy targets that do little to balance the bigger line items.  Penny wise but absolutely pound foolish.  Below is from the CBPP:

“Expenditure cuts are problematic policies during an economic downturn because they reduce overall demand and can make the downturn deeper. When states cut spending, they lay off employees, cancel contracts with vendors, eliminate or lower payments to businesses and nonprofit organizations that provide direct services, and cut benefit payments to individuals. In all of these circumstances, the companies and organizations that would have received government payments have less money to spend on salaries and supplies, and individuals who would have received salaries or benefits have less money for consumption. This directly removes demand from the economy.

Tax increases also remove demand from the economy by reducing the amount of money people have to spend — though to the extent these increases are on upper-income residents, that effect is minimized because much of the money comes from savings and so does not diminish economic activity. At the state level, a balanced approach to closing deficits — raising taxes along with enacting budget cuts — is needed to close state budget gaps in order to maintain important services while minimizing harmful effects on the economy.”

Even after the Recovery Act, large budget deficits will remain:

So combining budget gaps for 2011 and 2012 will result in budget shortfalls of $260 billion combined.  This is an incredible amount of money.  Even a modest recovery will have a hard time making that up and we have yet to see a recovery for working and middle class Americans.  The recovery to many is largely lost in the trillions of dollars funneled to a banking sector that is merely concerned about shoring up their balance sheets.

If we look at a map of state tax collections, 34 states saw declines in the first quarter of 2010:

Source:  Rockefeller Institute of Government

What this means is there are two recoveries going on.  A real one for Wall Street and the investment banks and a phantom one for working and middle class Americans.  I wouldn’t even call it a recovery for the investment banks since they are simply stealing taxpayer money and calling it turning a profit.  State budget gaps are merely a reflection of what we already know and that is the economy has yet to actually recover.

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Trying to get honest data from the banking industry regarding the current state of housing is a monumental task.  We are left using multiple data sources to get an accurate picture of the current state of the American housing market.  Even then, we are left trying to piece together data that is largely incomplete.  For example, we now know that banks are delaying foreclosure filings so these don’t show up in monthly reports.  Next, we have another group of home owners that have stopped paying their mortgages as a strategy.  These points are important but are buried deep in reports.  Yet we can still try to garner information from other sources that will provide a better perspective on the U.S. housing market.

It is safe to say to say that a foreclosure filing is the worse sign of problems for housing.  After all, the first action is taken with a notice of default and this requires at a minimum three missed payments.  If we look at the current rate of foreclosure filings we see very little in the way of improvement:

The above rate will put us at 4 million foreclosure filings for 2010.  Interestingly enough, we can see that the amount of foreclosures started tracking up in early 2006.  Even though the actual recession did not start until December of 2007 we have nearly a 22 to 24 month gap between rising foreclosure filings and the actual official start of the recession.  Keep in mind that during 2006 the housing bubble masked some of these problems.  Part of this comes from the inflated prices and a market that still had buyers willing to pay higher prices with easy financing.  Even if a homeowner was behind by 3 payments they were then able to sell it into the momentum of the market.  As prices collapsed, the underlying problems were fully exposed.

Now much of the blame has been put on toxic and trashy mortgage.  No doubt this is the nucleus of the problem and much of this was spurred on by Wall Street and their insatiable appetite for mortgages to put into their exotic mortgage backed securities.  However if we look at HAMP data carefully we will realize that beyond toxic loans, the housing market was running on pure fumes and speculation.  In fact, those going into HAMP modifications have a unique ability to tell the truth as to why they are going into housing distress.  This is a look in between performing loans and non-performing loans:

This is a very telling chart.  The largest reason for hardship is loss of income.  Let us be clear here:

“The biggest reason people are entering into HAMP loan modifications is loss of income.”

This is something that the banking industry doesn’t want to reveal because it would strike at the core of their argument that loans simply need to be reworked to make things better.  In reality, we need something much more substantial and this will only come from having a healthier economy.  Anyone that lives as a working class or middle class American realizes that the economy is anything but healthy.  The reason foreclosures are near record levels is because the real economy is still struggling with pervasive problems.  If we look at the HAMP data we realize that many loans don’t qualify because income levels do not work even with this generous program:

Over 3 million delinquent loans are eligible for HAMP.  Of the actual borrowers, there were 1.5 million trial offers extended.  From that, we see that only 340,000 permanent modifications have taken place (this doesn’t reflect the current new foreclosures coming down the pipeline).  And many of these will re-default because as we have seen the number one reason for distress is loss of income.  How can someone pay a mortgage if they have no job?  It isn’t like HAMP strikes at lowering principal:

You’ll notice that all the help is guided at protecting the banks.  Term extensions and principal forbearance are merely extending the misery for many that can’t afford their homes.  Many would be better off renting.  Yet banks want to extract every single penny for their years of horrific mismanagement and their primary cause for the housing bubble.  A principal reduction would force banks to eat the loss and actually have to recognize real losses on their balance sheet.  At the moment, they are happy pretending things are good so they can extract additional money from taxpayers and make billions gambling on Wall Street.

Contrary to things getting better, the call center volume for HAMP is still as active as ever signifying that problems are still at peak levels:

This data is probably the closest we are going to get to having a reason for current housing distress.  Clearly toxic loans are involved here too yet the major theme of this all is that the real economy in a reflection through wages is the absolute major reason for current housing problems.  After all, since the collapse of the mortgage market 95+ percent of all loans are now “safe” government backed loans.  Yet problems are still here.  So doesn’t it seem unwise and downright illogical to try to get more people to buy if clearly wages and jobs don’t support this?  This is why it is absolute nonsense that tax credits and trillions of dollars to the banks were given under the pretense of helping people to buy homes and keep lending activity going.  I’m sure most average Americans now realize the shell game that is occurring.  The fact that new home sales collapsed last month to a low not even on record keeping data going back to 1963 is not a shock.  It merely suggests that without government tax credits and artificial subsidies the housing market is running on fumes.  This isn’t different from 2005 and 2006 when lenders got more aggressive with going no-doc, no-income, no-nothing, and gave loans to anyone and everyone just to keep the party going.  The market was telling us something else.

Yet here we are in 2010 repeating similar mistakes.  Yet my sense is the overall population isn’t behind all this.  They would like to put their overall feelings about the housing market into words but cannot.  In some markets, home prices remain inflated because of these programs subsidizing the rich while those in poorer to middle class communities subsidize the current wealth transfer.  It is pretty clear that without a strong economy housing is an afterthought.  Spending more and more money with banks is a futile effort and it is no shock that after $12 trillion in bailouts and backstops that there is very little to show for everyone else.

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