Death by Debt Strangulation

Edward J. Dodson

[A transcript of a Powerpoint presentation made at the annual conference of the Council of Georgist Organizations, held in Kansas City, Missouri, 10 July, 2008. Reprinted from GroundSwell, Vol. 21, No.5, September-October, 2008. This presentation has evolved over the last few years to convey current trends. An electronic copy of the current version is available upon email request.]

PRELIMINARIES

(Someone in the room asked about the role of the Federal Housing Administration in the housing crisis. I offered the following comments)

There is a point of view that FHA was created to help lower income households to obtain houses at affordable prices. However, as housing prices have increased and as household incomes have increased, FHA argued that to diversify the government's risk, FHA needed to insure borrowers with higher incomes and better credit profiles. FHA got the desired authority to provide insurance on higher loan amounts to higher income households. That diversified the risk. On the other hand, it is also true that the greatest volatility in housing (that is, in property) values is probably on the higher side.

If you are in a neighborhood with property values of $60,000 the housing prices might not go down at all. But with housing prices of $250,000, when housing prices start to come down, they might come down considerably. Thus, making or insuring loans at the higher end of the market exposes them to greater loss per incidence.

There are 115 million households in the United States, roughly 65% of whom are home owners. Thus, 75 million households live in the houses they have the deed to. So long as they have employment and income, they will make their payments even if housing prices fall and keep falling. Most people view housing as shelter and not an investment, and most people want to stay in their home and their community. Even though they might live in a house for which they paid $300,000 that would now sell for $260,000, they will keep making payments on it.

This is getting to the heart of the problem.

SLIDE 1: DEATH BY DEBT STRANGULATION
The Consequences of Becoming a Society Perpetually in Debt

For the first time since the Great Depression of the 1930s, an overwhelming majority of households in the United States have no liquid savings. We are drowning in debt, with foreclosures and bankruptcies at record levels. This presentation discusses some of the key reasons - the "triggers" - that have brought us to this precarious position.

Many households live perpetually in debt. This is a problem exacerbated by the aggressive marketing strategies employed by mortgage lenders, which caused the mortgage meltdown and our housing debacle.

SLIDE 2: TRIGGER - CREATION OF THE MONEY MARKET FUNDS

[No discussion]

SLIDE 3: TRIGGER - CREATION OF THE MONEY MARKET FUNDS (continued)

The first money market mutual fund was created in the early 1970s. From assets of $300,000 in 1972 this fund grew to $390 million in just three years.

By 1981 the assets of all money market mutual funds had grown to approximately $80 billion.

At the same time, interest rate ceilings on their lending prevented Thrifts (the savings and loan associations and savings banks) from paying competitive interest rates on deposits. Every time market interest rates increased, more and more deposits were withdrawn by consumers for placement in instruments with higher rates of return. Within a few short years many of the nation's Thrifts faced insolvency.

Finally, in 1980, the Depository Institutions Deregulation and Monetary Control Act removed many of the distinctions between different types of depository institutions and ultimately removed interest rate ceilings on deposit accounts.

An additional "reform" was an increase in the deposit insurance limit to $100,000 from $40,000.

SLIDE 4: TRIGGER - CENTRAL BANK POLICY SHIFTS

[No discussion]

SLIDE 5: TRIGGER - CENTRAL BANK POLICY SHIFTS (continued)

With his Presidency plagued by rising inflation and recession, Jimmy Carter (reluctantly) appointed Paul Volcker chairman of the Federal Reserve Board in 1979.

Volcker's challenge was to use the Fed's powers to bring down inflation, even as the economy continued to experience an unprecedented drift into stagflation (that is, rising inflation and high unemployment occurring simultaneously)

The Fed shifted its focus from stabilizing interest rates to managing the money supply.

The Fed's board was convinced by economist Milton Friedman that steady, predicable growth in the money supply would be the key to stable and minimally-inflationary economic growth.

The Fed allowed interest rates to rise, which dramatically curtailed access to credit but gradually brought inflation under control.

SLIDE 6: TRIGGER - INTEREST RATES CLIMBED WHILE THE ECONOMY WAS PULLED INTO A RECESSION

[No discussion]

SLIDE 7: TRIGGER - INTEREST RATES CLIMBED WHILE THE ECONOMY WAS PULLED INTO A RECESSION (continued)

Tight credit and inflationary expectations drove up interest rates as the Carter Presidency came to a close.

During 1979 and 1980 the Federal Open Market Committee, under Volcker's leadership, abandoned efforts to control interest rates and tried to meet strict money supply growth targets, an objective that proved impossible given the global nature of currency markets, the amount of U.S. dollars in foreign hands, as well as other technology and policy limitations.

By December 1980 the prime rate of interest hit 21.5 percent.

SLIDE 8: TRIGGER - REAGANOMICS: SUPPLY-SIDE RHETORIC AND UPWARD WEALTH CONCENTRATION

Ronald Reagan's election in 1980 ushered in the removal of many regulations on business, a significant lowering of tax rates on capital gains and on high marginal incomes.

Price controls on fossil fuels, which hampered the delivery of supply, were also eliminated.

Jack Kemp had become friends with a Wall Street Journal reporter named Jude Wanniski, who had met Art Laffer, an economics professor at UCLA who thought it would be possible for the government to gain more revenue by lowering marginal tax rates. This, he argued, would encourage people to invest in capital goods creation and jobs creation. Kemp sold the idea to Reagan. The people at the Treasury bought into the theory. Some columnists bought into the theory. And, Reagan basically accepted the idea -- for a while.

Supply-side economic theory as promoted by economist Arthur Laffer was partially adopted, on the prediction that lower tax rates would stimulate economic growth and thereby yield increased revenue to the Federal government.

Reagan's tax policies ignored any distinction between earned and unearned income flows, allowing investors to choose options where the highest rates of return could be obtained regardless of the true economic implications.

To achieve the expected supply-side results, the Reagan administration pushed thru a reduction in marginal tax rates on high incomes. Unfortunately, Reagan was also a committed anti-communist. So, he went about spending on the military at a level the Soviet Union could not match without self-destructing.

Some years after this Art Laffer said Reagan did not realize there were two sides to the supply-side ideas. Government spending, he said, had to be brought under control to keep pace with economic growth. Instead, under Reagan government spending went way up. When revenue needs were not being met, more traditional economists in the administration pressed for an increase in tax rates.

SLIDE 9: TRIGGER - REAGANOMICS: SUPPLY-SIDE RHETORIC AND UPWARD WEALTH CONCENTRATION (continued)

Reagan, a committed anti-Communist, spearheaded huge increases in defense spending even as the lower tax rates took effect.

The result of these policies was a $41 billion Federal deficit in 1981, rising to $64 billion in 1982.

The U.S. economy slid deeper into recession, with official unemployment climbing to 10.7 percent in 1982 (but real unemployment certainly much higher).

The top marginal tax rate on individual incomes was reduced from 70 percent to 28 percent. The corporate income tax rate was reduced from 48 percent to 34 percent. Individual tax brackets were indexed for inflation.

SLIDE 10: TRIGGER - REAGANOMICS: SUPPLY-SIDE RHETORIC AND UPWARD WEALTH CONCENTRATION (continued)

Most of the poor were exempted from the individual income tax. The federal poverty level would not be enough to really provide a subsistence living. I don't know what it was in 1985, somewhere around $15,000.

AUDIENCE COMMENT (Pia): PIA: It was less than that. In 1980 it was about $10,500. And it was about $15,000 in mid-1980s, and that was median poverty for a family of four.

The experts had no sense of what it really cost to live. Tax benefits and tax subsidies were ended for specific investments that actually produced capital goods and created jobs. The Reagan administration did away with investment tax credits from 1981 to 1985; their idea was that by lowering tax rates the people would have income to invest and they would invest it in job creation. What happened, of course, is that those with the disposable income invested in speculation, mostly in the stock market and real estate and land markets as opposed to investment in job development.

At the same time, specific investment incentives approved in 1981 were gradually reduced in each subsequent year through 1985.

The unforeseen result was that a high percentage of increased after-tax income was channeled into speculative investment in the stock market and in real estate rather than direct investment in employment-creating production of capital goods.

SLIDE 11: TRIGGER - REAGANOMICS: SUPPLY-SIDE RHETORIC AND UPWARD WEALTH CONCENTRATION (continued)

By November 1982 well over nine million people were unemployed, the highest number since the Great Depression.

17,000 businesses failed, the second highest number since 1933.

Countless farmers defaulted on mortgage loans, went into bankruptcy and lost their land.

Homelessness escalated, estimated in a 1984 study by the U.S. Department of Housing and Urban Affairs to be between 250,000-350,000 persons.

Low-income families began to experience homelessness because of declines in the availability of publicly-subsidizes and other low-rent housing units.

Take away investment tax credits and you don't get housing for lower end households. Money moves into where profits are, and profits are only generated in low income housing because of tax credits and other types of subsidies.

SLIDE 12: TRIGGER - THOUSANDS OF MAINSTREAM FINANCIAL INSTITUTIONS FAILED

[No discussion]

SLIDE 13: TRIGGER - THOUSANDS OF MAINSTREAM FINANCIAL INSTITUTIONS FAILED (continued)

Negative spreads resulted in losses of $4.6 billion in 1981 and $4.1 billion in 1982.

From 1980 thru 1983, 118 S&Ls with $43 billion in assets closed their doors, costing the FSLIC* an estimated $3.5 billion to make depositors whole.

Banks were facing portfolios of fixed rate assets on their books, while their cost of funds went up. Then, many of the thrifts suffered by mismanagement. If they were to sell your assets in the secondary market, they would have to do so at steep discounts reflecting the difference between current market yields and the interest borrowers were paying. The banks were not yet subject to regulatory requirements to mark assets to market value on an ongoing basis. What they were permitted to do was to sell their loans but amortize the losses over the remaining life of those loans. Without this accounting trick, many more thrifts would have had to close their doors.

The thrifts were hampered also because they were still restricted to making fixed rate mortgage loans subject to limits on the interest rates they could charge. It was about 1983, three years after they were in the red, and many had already failed, before they had the chance to issue Certificates of Deposit and usury laws were removed.

SLIDE 14: TRIGGER - THOUSANDS OF MAINSTREAM FINANCIAL INSTITUTIONS FAILED (continued)

Before the end of the financial crisis, more than 1,000 Thrifts failed.

Economist John Kenneth Galbraith described the situation as "the largest and costliest venture in public misfeasance, malfeasance and larceny of all time."

It was serious. I was temporarily moved from my job responsibilities at Fannie Mae into a new department that evaluated the portfolios of failed thrifts. We would review the borrower creditworthiness and the property appraisals, then repackage these loans and try to sell them to investors on behalf of the Resolution Trust Corporation, the Federal entity that was established to dispose of the assets of failed thrifts. Speculators made a bundle on a lot of this stuff because the RTC was not funded or staffed to handle the volume of assets that came pouring in. This included half-finished construction projects on condominiums and office buildings.

It is worth stating that the did a pretty good job of making good residential mortgage loans. The problem was they had these loans on the books that were overvalued and then went out and made new business loans to small businesses or mortgage loans on income producing properties; and, here, they made a lot of bad decisions in order to get paper profits. When you book loans with an interest rate of 20-21% and the loans perform, you are pulling your company out of the red. However, too many of these loans were poorly underwritten, many did not perform, and the thrifts ended up becoming insolvent.

SLIDE 15: TRIGGER - THOUSANDS OF MAINSTREAM FINANCIAL INSTITUTIONS FAILED (continued)

Deregulation permitted mergers and acquisitions, creating mega-bank holding companies.

European and Asian banks entered the U.S. market as major players.

AUDIENCE: Who was the largest mortgage lender in the United States?

When I left Fannie Mae in 2005, Countrywide Funding was our number one seller. They sold us more mortgage loans than anyone else in the country. Behind Countrywide were J.P. Morgan/Chase, Wachovia Bank, HSBC, and the U.S. subsidiaries of the Bank of Australia and Bank of Scotland. Our real estate market was being financed by banks all around the world.

SLIDE 16: TRIGGER - PROLONGED HIGH INTEREST RATES BROUGHT DOWN LAND PRICES BY CREATING A HUGE INVENTORY OF UNSOLD HOUSING UNITS

[No discussion]

SLIDE 17: TRIGGER - PROLONGED HIGH INTEREST RATES BROUGHT DOWN LAND PRICES BY CREATING A HUGE INVENTORY OF UNSOLD HOUSING UNITS (continued)

As rates came down after 1983, a "window of affordability" opened.

The housing market recovered and resumed an upward climb.

The window of affordability did not remain open for very long, of course, because market forces capitalized the lower interest rates into higher land prices. Another aspect of the housing market is, as economists say, housing prices are "sticky downward." Do you think this is the case?

AUDIENCE: No. People who have to must sell at a loss.

If you have a job and steady income, you can test the market by putting your house up for sale. If you do not get an acceptable offer, you just pull your house off the market and wait for prices to climb back up. This strategy does not always work, of course. A lot depends on the strength of the local economy and the stability of your neighborhood. A builder cannot do this because the housing unit is inventory, and the builder generally finances the construction. So, when a builder breaks ground without a sales contract in hand with a buyer approved for mortgage financing, the builder is taking on an enormous risk.

Builders burned in the past by downturns in market conditions may not even construct model units. Today, they can create virtual sample units on the computer.

One of the largest home builders in the Northeastern United States is Hovnanian, which consistently undersells the market. The reason Hovnanian is able to do this is that they have been a shrewd land investor. For decades they obtained options on land from farmers and other land owners in suburban New York and New Jersey. They let the farmers keep farming until they see a strong market for residential use. As long as the farmer is farming, the assessor will continue to assesses the land as agricultural.

When they finally construct housing units, their cost base is much lower than most other builders. So, they can offer the same product at a lower price and still make higher profits. People line up on weekends waiting to get in to get in to fill out an application.

SLIDE 18: TRIGGER - PROLONGED HIGH INTEREST RATES BROUGHT DOWN LAND PRICES BY CREATING A HUGE INVENTORY OF UNSOLD HOUSING UNITS (continued)

Housing affordability was not uniform across the U.S., and many markets remained soft.

Key factors were employment and household incomes, household savings and the cost of land available for new housing development.

SLIDE 19: TRIGGER - PROLONGED HIGH INTEREST RATES BROUGHT DOWN LAND PRICES BY CREATING A HUGE INVENTORY OF UNSOLD HOUSING UNITS (continued)

Demographic trends contributing to modest improvements in household income included increasing educational attainment and a dramatic increase in the number of women employed full-time in higher earning positions.

These trends were countered by an ongoing decline in higher-paying manufacturing employment of unionized workers.

SLIDE 20: TRIGGER - THE SECONDARY MORTGAGE MARKET RESPONDED TO THE NEED FOR LIQUIDITY AND UNIFORMITY

[No discussion]

SLIDE 21: TRIGGER - THE SECONDARY MORTGAGE MARKET RESPONDED TO THE NEED FOR LIQUIDITY AND UNIFORMITY (continued)

The rising cost of funds for financial institutions affected the two GSEs as well, who held large portfolios of low-yielding, fixed rate mortgage loans.

New options were needed to generate fee income, offset low-yielding assets and raise capital.

SLIDE 22: TRIGGER - THE SECONDARY MORTGAGE MARKET RESPONDED TO THE NEED FOR LIQUIDITY AND UNIFORMITY (continued)

The first major innovations were mortgage loans that allowed for periodic adjustment in the rate of interest, tied to U.S. Treasury debt and other indices.

For consumers, the benefits depended on how and when rates could adjust and whether they had the income to handle increases in monthly payments.

The vehicle that allowed the secondary market to dramatically expand was the issuance of collateralized mortgage obligations (CMOs), first introduced in 1983 by Fannie Mae.

CMOs countered prepayment risk for investors that occurred when interest rates were falling and borrowers refinanced to lower rate mortgage loans.

CMOs created classes of securities that offered principal repayment at varying speeds, so that investors were able to acquire an interest in cash flows with advantageous accounting tax implications.

The secondary market - primarily Fannie Mae and Freddie Mac -- was created to provide liquidity to savings banks and commercial bank. However, when interest rates were relatively low and stable, the volume of loans sold into the secondary market was steady at a low level. So long a depositors were putting their savings into the thrifts and commercial banks, they did not need to worry about matching the duration of long-term assets with short-term (deposit) liabilities.

Then, in the 1980s, the volatility in the housing and mortgage markets brought on several innovations occurred that made the secondary market take off. One was the adjustable rate mortgage loan, with rates that periodically changed based on some index (e.g., 1-year Treasuries). Banks could make the loans without taking on the interest rate risk. And, ARMs became a big part of the market while interest rates were high.

When interest rates came back down, millions of borrowers came in to refinance their mortgage loans into a 15- or 30-year fixed rate mortgage. Although this reduced the interest income to investors, the mortgage originators made profits from fees charged and for servicing of the loans for the investors.

The second big change in the mortgage market was securitization. Loans were pooled together as collateral for bonds (i.e., the mortgage-backed securities), offered for sale to banks, insurance companies and other investors. Wall Street firms took on the job of marketing MBS to their institutional and individual clients.

People trusted the strength of the MBS because either Fannie Mae or Freddie Mac documents and guidelines were adhered to. A percentage of loan files were pulled to examine the loan documentation, the credit decision and the property appraisal.

So, because of securitization banks got back into the mortgage lending business in a major way. They now saw the mortgage banking business as a great opportunity for revenue with minimum risk. They would pay Fannie Mae or Freddie Mac a "guarantee fee" for its services, and the MBS would be rated as a AAA bond by the rating agencies.

SLIDE 23: TRIGGER - AN EXPLOSION OF SPECULATION ERUPTED AT THE CLOSE OF THE 1980s

In September of 1985 representatives of the major industrial nations of the world met and agreed to coordinate economic policy.

Tariffs and other restrictions on international trade were gradually lowered.

The Japanese agreed to reduce taxes on imports and to stimulate domestic demand.

The signatories also pledged to intervene in foreign exchange markets in an effort to drive down a U.S. dollar widely perceived as overvalued.

For the Japanese, they were experiencing a major shift from a production oriented economy to one that acknowledged domestic consumer needs, and that workers were demanding better housing, automobiles and a higher living standard. For more than three decades after the end of the Second World War, the Japanese people devoted themselves to rebuilding their nation.

As markets have opened around the world, those who are able to invest have increasingly shifted financial resources wherever investment promised high rates of return. And, in the process, we experienced dramatic increases in speculation.

SLIDE 24: TRIGGER - AN EXPLOSION OF SPECULATION ERUPTED AT THE CLOSE OF THE 1980s (continued)

On the 19th of October, 1987, the stock market experienced its largest one day decline in history.

The Dow lost 22.6% of its nominal value, or $500 billion.

Investors pulled billions of dollars out of the stock market and shifted to real estate.

The total investment in real estate had declined because of high interest rates. High income earners who had wealth shifted their money to the stock market. Prices were driven up even though not supported by corporate profits and the overall economy. This was also when economists were beginning to come up with computer models for directing investment decisions.

AUDENCE COMMENT: Wasn't there also a big divergence between returns on stocks and returns on bonds? You said there were high interest rates. People started running for bonds then.

Looking for a safe harbor. In today's market, for example, because the stock market is so volatile, a significant shift has occurred in favor of bonds, even though the yields may be low. At least you are preserving principal (if inflation is running lower than the interest rate being earned).

SLIDE 25: TRIGGER - AN EXPLOSION OF SPECULATION ERUPTED AT THE CLOSE OF THE 1980s (continued)

In 1988 the Japanese stock market reached new heights, and by the beginning of 1989 accounted for over 40 percent of the nominal value of all markets worldwide (up from 15 percent in 1980).

Land prices, particularly in and around Tokyo, doubled between 1986 and 1990.

Residential property prices in Tokyo rose by roughly 70 percent in 1988 alone. Commercial property rose by 80 percent in the same year.

Now, how does any company acquire land, produce goods and services, and grow their profits with those land prices? Today if you look at the Japanese companies that were struggling to maintain profit margins, they are moving offshore. Moving facilities to Korea and Singapore and Indonesia and Mexico and even the United States was their survival strategy. The Japanese economy had reached the end of its period of rapid growth and was now faced with the destructive character of its land markets.

SLIDE 26: TRIGGER - AN EXPLOSION OF SPECULATION ERUPTED AT THE CLOSE OF THE 1980s (continued)

Speculation in Japanese land markets, fueled by bank credit, drove prices to the point where economic use of land became impossibly expensive. Land prices in major Japanese cities, especially Tokyo, began to fall during 1990, and were down by 20 percent by the end of 1991.

Japanese companies began to relocate production offshore to rebuild deteriorating profit margins. Japan's economy entered a deep recession and its financial services sector faced insolvency.

The Bank of Japan responded throughout 1989 by tightening credit standards and raising the discount rate. The Japanese Ministry of Finance issued new regulations reducing the amount of credit banks could provide for land purchases.

The spill-over effects around the globe were significant, as Japanese companies began a world-wide sell-off our assets in order to raise cash.

Sales of Japanese-owned U.S. real estate -- mostly hotels, resorts and office buildings - returned only about 60 percent of what the Japanese companies had paid for them.

Japan had this advantage in the market; it didn't have any defense budget. It didn't have to worry about the Evil Empire and defeating the Soviet Union and so it had the capacity to bail out its financial sector without really crashing the economy, although parts of Japan have not fully recovered from recession even today. There is a lot going on here to indicate that the global economy is under stress and that Japan is not an unusual case.

SLIDE 27: TRIGGER - AN EXPLOSION OF SPECULATION ERUPTED AT THE CLOSE OF THE 1980s (continued)

As the Japanese currency increased in value against the U.S. dollar, exports suffered and profits in the manufacturing sector fell -- 24.5 percent in 1991 and 32.1 percent in 1992.

Bankruptcies began to rise starting in the latter half of 1990 and continued to escalate.

Countless real estate firms active in fund management constituted more than half the corporate bankruptcies in 1991 and 1992.

Bond ratings for the ten largest Japanese financial institutions fell rapidly beginning in 1990 and also continued to fall through the first half of the 1990s.

SLIDE 28: TRIGGER - AN EXPLOSION OF SPECULATION ERUPTED AT THE CLOSE OF THE 1980s (continued)

Beginning in late 1988, the downturn in rents (i.e., leasing fees) generated by income-producing properties began to fall all around the globe.

Property values fell in many regions of the United States, in some cases by as much as one-third.

By 1989, the number of new homes constructed dropped to 1 million, the lowest number since the Second World War.

SLIDE 29: TRIGGER - THE CLINTON ADMINISTRATION'S THIRD WAY

Delinquencies on consumer debt reached 2.5 percent of outstanding loans in 1992.

Campaigning for the Presidency, Bill Clinton told an audience at the Wharton School at the University of Pennsylvania that the economy hadn't really been working since the early 1970s, that the recession had simply aggravated problems that existed long before George H. W. Bush took office. "Even when the Bush recession ends," Mr. Clinton said, "most Americans will find themselves worse off."

Campaign promises aside, Bill Clinton immediately adopted the economic policies of a fiscal conservative.

Not long after the election, Clinton declared: "We're Eisenhower Republicans here. We stand for lower deficits, free trade, and the bond market."

SLIDE 30: TRIGGER - THE CLINTON ADMINISTRATION'S THIRD WAY (continued)

Between 1993-2000, the unemployment rate fell steadily from 7.5 -- 4.0 percent, as measured by government agencies (yet, many workers were, in fact, underemployed and experiencing declining incomes and benefit packages).

The official inflation rate, reported to be 1.6 percent for 1998, ignored what was happening to land prices and the effect on property prices.

Many economists attributed improving economic signals to the maturation of structural changes in the global economic system (changes that on the surface seemed to favor the United States).

Production of goods of high quality now came out of countries with lower wage and lower land costs, establishing global prices U.S.-based firms had to meet or lose market share.

SLIDE 31: TRIGGER - THE CLINTON ADMINISTRATION'S THIRD WAY (continued)

The U.S. was absorbing large numbers of unskilled immigrant labor who could not command high wages for their services, allowing businesses to increase or at least maintain profit margins.

Global competition also weakened the negotiating strength of labor unions, as heavy industry and manufacturing firms faced with high labor costs and high land costs threatened to move to other regions or other countries unless concessions were made.

Things got better - at least for some -- during the Clinton years. So, since they got better he took credit for it. Being at the right place at the right time has a lot to do with what happens in an economy. Between 1993 and 2000 we fell steadily from 7-1/2 to 4% unemployment as measured by government. Yet many households had two adults working multiple jobs. A lot of doubling up occurred, young adults continued living with parents.

AUDIENCE COMMENT (Wayne Luney): The statistics of government economists argue that structural unemployment is meaningless. In 1948 it was listed at 2%. Everyone said 5% is really full employment. The official inflation rate was reported to be 1.6% in 1998. What about land prices and property prices? We know the consumer price index is very flawed in terms of how it treats land price increases. One of the dynamics here is that the production of goods of high quality is not hinged to lower wage and lower land costs. So we have a global price for what U.S. firms had to compete with.

We see many firms relocating employment off shore in order to protect their profit margins. That, to my mind, is a key ingredient of how decisions are made as to where to locate production. I have profit margins to achieve and so I will move to wherever I can get those profit margins. And relative land costs affect those profit margins more than anything else.

SLIDE 32: TRIGGER - HOME EQUITY DRIVES A RESURGENCE IN CONSUMER SPENDING

[No discussion]

SLIDE 33: TRIGGER - HOME EQUITY DRIVES A RESURGENCE IN CONSUMER SPENDING (continued)

A sustained period of low interest rates triggered an explosion in the volume of home equity mortgage loans

SLIDE 34: TRIGGER - EMERGING DEMOGRAPHIC PATTERNS

[No discussion]

SLIDE 35: TRIGGER - EMERGING DEMOGRAPHIC PATTERNS (continued)

In 2006, as the first boomers turned 60, personal savings was reported to be negative for the first time since the great depression.

Most vulnerable to even minor financial setbacks are an estimated 35 million people categorized as poor by the U.S. government. Yet, controversy exists in how poverty is measured.

A Heritage Foundation report in 2004 highlighted the facts that 46% of households labeled as poor are homeowners, 76% have air-conditioning in their homes or apartments and more living space than the average enjoyed by residents of many cities throughout Europe. The majority of the poor in the U.S. also own other assets, including one or more automobiles.

The primary reasons why some children are poor is that they are part of families where the adults are not employed full-time or not regularly employed or reside in single-parent homes; some 1.3 million children are born out of wedlock each year.

TIME DID NOT PERMIT COMPLETION OF THE PRESENTATION. THE FOLLOWING CONCLUDING COMMENTS WERE MADE TO SUMMARIZE THE OVERALL SITUATION.

We have just a few minutes left to get to the bottom line of all this. We are not saving and people are highly leveraged with credit. Household income is stagnant or declining for a large portion of our population. Land prices are down, so homeowners are losing net worth even though it was unearned.

Low interest rates benefited millions of households who needed to borrow; but savers did not benefit and seniors have been hit hard because of the loss in interest income. Alan Greenspan has been given a lot of blame for the recession, and he deserves some, for sure. As land prices (and, therefore, housing prices) skyrocketed, people were able to borrow to remove equity from their property. However, because of deregulation of the financial services industry, many unscrupulous lenders engaged in predatory practices. If you pay somebody commissions based on loan volume, they will make loans -- regardless of whether the borrowers have the capacity to repay the loans or not. A whole lot of mortgage brokers made a lot of money on the basis of fraudulent lending.

It is a very complex system we have developed over the last century and since the Great Depression. Deregulation has its benefits and its consequences. The trend has been upwards towards greater and greater household debt. The financial sector has come up with reasons to allow people to take on more debt than historically we would have allowed in the past.

Focus groups of women and minorities explored the reasons why these consumers made use of mortgage brokers and nontraditional lenders rather than going to the banks. People who have had bad experiences with banks and expect the banks to decline their applications are easy targets for predatory lenders. They are more inclined to use check cashing places to cash Social Security checks or get a payday loan. All sorts of circumstances cause people to borrow under conditions that are to their own disadvantage.

The delinquency rates on subprime loans have been 10 times higher than what one would expect because the subprime lenders often looked at real estate loans as a profit center. If the homeowner cannot pay the loan back, the lender would foreclose, resell the property and recycle the profit.

The bottom line is I don't know how much worse it is going to get before it starts to get better. We are due for another round of banking regulatory reform. Whether or not any of those measures will have the desired effect of cleansing this beast I don't know. But there are still a lot of people who are suffering from the worst predatory lending. A lot of seniors are being victimized by the practice.