Take for example what Americans are saving.  A recent survey from the Employee Benefit Research Institute’s annual Retirement Confidence Survey found some startling data:

43% of workers in the survey stated they had less than $10,000 in savings while an amazing 27% of workers said they had $1,000 saved.  Many of these Americans are one illness or a job loss away from being broke (many are called the working poor).  It is no surprise that the survey found that only 16% of those who responded felt comfortable about retiring, the lowest rate in a generation.  What this survey highlights is that more and more middle class Americans are going to struggle in their retirement.  Thanks to the Federal Reserve artificially slamming interest rates lower, many Americans on fixed incomes or Social Security will see no cost of living adjustments even though their daily cost of living items will increase in price.  This is targeted destruction of the middle class.

And keep in mind this survey is comparing 2009 and 2010.  What happened to the rally here?  Workers clearly did not participate in the stock market rally.  Why?  Because a large part of the rally also hinged on “productivity gains” which is a nice euphemism for laying off people and making current workers juice out more production.  So this translates to great profits for the Wall Street elite while unemployment in the last year has done this:

Source:  BLS

It might be hard to save for retirement if you are getting fired.  And that is what millions of Americans experienced in 2009 as the stock market went on a massive rampage as Wall Street was fueled by taxpayer bailout money and decided to load into stocks.  Keep in mind that many of the large multinational companies are making a boatload of their profits internationally.  This is great for those companies but as most Americans know, small business is the juice of the American economy and most small businesses sell to domestic clientele.  A clientele that is increasingly poorer and unemployed.  We used to call this group the middle class.  This isn’t lost on some:

“(RR) Companies in the Standard&Poor 500 stock index had sales of $2.18 trillion in the fourth quarter, up from $2.02 trillion last year, and their earnings tripled. Why? Mainly because they’re global, and selling into fast-growing markets in places like India, China, and Brazil.

America’s biggest companies are also showing fat profits and productivity gains because they continue to slash payrolls and cut expenditures. Alcoa, for example, had $1.5 billion in cash at the end of last year, double what it had on hand at the end of 2008. Sounds terrific until you realize how it did it. By cutting 28,000 jobs – 32 percent of workforce – and slashed capital expenditures 43 percent.

The picture on Main Street is quite the opposite. Small businesses aren’t selling much because they have to rely on American – rather than foreign – consumers, and Americans still aren’t buying much.”

One of the disturbing trends especially when it comes to retirement is the massive increase in health care costs.  It is absurd to use health care costs (i.e., premiums, etc) to inflate GDP but that is exactly what is happening:

Source:  BEA

It is absurd that in 2008, as the economy was flying off a cliff and other service industries were contracting health care still managed to pull in 0.31 of the 0.32 gain in the entire year for this sector.  Take a look at 2009.  What service sector did the best in another troubled year?  Health care.  So to say that gouging Americans like the 39% hike in premiums in California is good for GDP is nonsense:

“(ABC) Reports that Anthem Blue Cross is raising premiums on some customers by 39 percent on March 1, have prompted the Secretary of the Department of Health and Human Services, Kathleen Sebelius, to write a letter to the company, Golden State’s largest private insurer, asking the company to “provide a detailed justification for these rate increases to the public.”

“Additionally, you should make public information on the percent of your individual market premiums that is used for medical care versus the percent that is used for administrative costs,” Sebelius wrote, noting that the profits of Anthem Blue Cross’s parent company, WellPoint Incorporated, have soared.”

Ask any middle class American about their health care costs and the likely story is that prices have gone up consistently over the last decade as incomes have gone stagnant.  How is this good especially when many baby boomers are now reaching retirement age with little savings as we have seen and are now going to shift a larger portion of their income to health care?

In many ways the health care industry is much in line with how Wall Street banks have operated for the last forty years.  They’ll gouge and exploit the middle class until every dollar you earn is either yanked by bank bailouts, health care costs, or taxes.  Let us run the numbers on a hypothetical family in California to see how this plays out.  We’ll use a family making $61,000 a year (Census 2008 data):

Now the above is merely a hypothetical budget.  I welcome people to comment on different items one way or another.  The above is a two adult household with no children with two cars.  This is very typical for California but I’m sure for other states as well.  But as you can see from the above, given that this household is at the median there isn’t much room for large amounts of flat screen TVs, expensive nights out on the town, or leased BMWs.  Yet many across the country lived like this and clearly that was on borrowed time and was all a ruse usually magnified by credit cards.  Now as many near retirement they are realizing that the only game in town is Wall Street and that has now become a large casino.

I know many people scream personal responsibility.  I’m the first to agree.  But there is this massive amount of cognitive dissonance when people blame the middle class and working class for this mess when Wall Street who created the financial instruments of destruction, not only got away with the biggest transfer of wealth in history, they are actually getting richer because of bailouts.  This is like putting a bank robber in prison for stealing $100 to feed his family while letting that same banker go to Wall Street and rob millions of Americans for billions of dollars and not only letting him go, but putting structures in place to make him richer!  Is it any wonder why there is so much anger festering in America?

Retirement is getting harder and harder for many middle class Americans.  What use is $1,000 a month in Social Security when your out of pocket costs for medicine is going to cost you $300 to $500 per month?  How did we do it before?  Stable banking that allowed people to pay off their mortgages and allowed people to live securely in their homes once they retired even with a small Social Security check.  But now, many have tapped out their equity and mortgaged their future.  Unlike Wall Street Americans don’t have access to the Federal Reserve.  Massive part-time employment, weak worker protection, a corporatocracy raiding the workers, and a disappearing middle class.  Get ready to work longer America because Wall Street needs that money to fund their bailouts and billion dollar bonuses for wrecking the economy.

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If we want to understand the credit card industry we first should take a look at the most popular cards out on the market:

Source:  Creditcards.com

In total there are 631 million credit cards in circulation from Visa, MasterCard, Discover, and American Express.  Now given that we only have 308 million people in the U.S. many under the age of 16, many people have multiple credit cards.  It doesn’t seem odd for people to spend and buy with basically creating debt with each purchase.  The above chart also shows the amount of debit cards out in circulation.  In fact, making debit cards virtually identical to credit cards has created a psychological notion that debit and credit are interchangeable.  They are not.  This is obvious but do anything enough times and you can easily convince yourself of anything including believing the idea that debt equals wealth.  Debit cards access money you have while credit cards mortgage your future for a current item.

Americans are carrying an enormous amount of credit card debt.  The massive spike in credit card debt started 40 years ago when the middle class started losing ground.  You can almost mark the exact date when we started using credit to make up for the lost wage growth:

Since the early 1970s Nixon shock, Americans started losing their manufacturing base but also their ability to maintain competitive wages.  In 1968 Americans carried $1.3 billion in revolving credit.  By 2008 that number was up to $975 billion.  Nonstop growth for nearly 40 years.  Yet for the first time in over a generation this amount has fallen by a large number.  Today, $864 billion in revolving debt is outstanding.  Since the peak in 2008 we have seen consumer credit contract by a stunning $111 billion.  For a consumption driven economy this does not bode well for economic growth since many Americans are finding it harder to spend in such a weak employment market.

As the U.S. Treasury and Federal Reserve they have artificially pushed interest rates to historical lows, but banks have decided to keep credit card rates at extremely high rates:

Source:  Creditcards.com

How is it that the biggest beneficiaries from the Wall Street and banking bailouts are now able to charge such an outrageous margin on credit cards?  These are the banks that received taxpayer assistance supposedly to create more access of credit for middle class Americans.  We certainly are not seeing that.  And who are the biggest credit card issuers?

U.S. general purpose credit card market share in 2008 based on outstandings
(Note: 2007 ranking in parentheses)
1. JPMorgan Chase – 21.22% (17.74%)
2. Bank of America – 19.25% (19.36%)
3. Citi – 12.35% (13.03%)
4. American Express – 10.19% (11.40%)
5. Capital One – 6.95% (6.95%)
6. Discover – 5.75% (5.65%)
7. Wells Fargo – 4.21% (3.07%)
8. HSBC – 3.47% (3.65%)
9. U.S. Bank – 2.14% (1.84%)
10. USAA Savings – 2.02% (2.01%)

Source:  Creditcards.com

The top four issuers corner a large portion of the market and are some of the biggest bailout recipients.  The economy for most Americans still hasn’t recovered.  Credit card defaults are simply a reflection of this reality.  The fact that revolving credit has contracted so sharply in the face of $13 trillion in bank bailouts and support is only demonstrating that banks are unable to lend out money to consumers who can actually pay the money back.  Banks also need the money to combat their weaker Swiss Cheese like balance sheet.

Most Americans can’t envision a marketplace with no credit cards.  Many are now having to adjust to the new economic realities in the economy.  Yet the fact that less revolving credit is in the market tells us consumers are pulling back on using their credit cards or banks are simply issuing less credit.  In the end, middle class Americans simply cannot spend like they once did.  Many are now realizing that they will have to save to purchase items and that isn’t necessarily bad.  But with stagnant wages many are finding it hard to save and with no credit card access, dealing with realities that haven’t hit this country for a generation seems as surreal as believing that plastic is money.

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If you want to see how quickly credit is contracting take a look at this:

The chart above merely highlights what you already know. Banks no longer trust the average American.  While they based all their bailouts on the idea that taxpayer money was needed to keep banks lending this has been a lie.  In fact, banks need the money to plug the hole that their toxic assets are burning on their balance sheets.  You can also look at the amount of credit card offers you are getting in the mail to gauge how quickly the market has changed.  No longer do banks want to give credit out (that is, unless it is government backed like mortgages which they are all the more willing to lend out).

The U.S. has over 8,000 banks with the large concentration of assets in 10 banks.  These banks continue to use bailout funds to plug the problems from the boom years.  But this is not in the best interest of average Americans.  If Wall Street and politicians were honest, the bailouts would have been labeled as a massive charity to the elite of the country who made disastrous bets over the past decade.  The public takes the lumps while Wall Street actually gets richer.  While banks don’t want to reel in their spendthrift ways, Americans are pulling back:

Americans are now having to save more and more of their money as is expected in a tough economy.  Yet banks are back to gambling in the stock market while shutting down lending to consumers.  Banks are playing the poor me card by arguing that with too much tight regulation, they can’t make loans because they are worried about future balance sheet problems.  Thanks for telling us after you took the public money under false pretenses!  But this is all a political ploy to steal from the working class.  With so many people just unable to even service the debt and rising bankruptcies, banks are now going after good customers who pay their bills on time each month just because they are running out of “options.”  Don’t be fooled.  They are reaping billion dollar profits because they are using excuses to squeeze the golden goose dry.  How about we allow the typical American to borrow at the subsidized low rate from the Federal Reserve directly?  Why in the world do we need banks to operate as loan sharks in between?  What we need is to transform the banking industry into a utility model.  A model designed to serve the people, not the banks.  After all, why should they get the privilege of borrowing at criminally low rates while everyone else has to pay the interest and subsidize their gambling adventure?

Even after all the correction in the market American households still carry an inordinate amount of debt:

A giant portion of income simply goes to pay off debt.  A large part of the debt is interest or money the banks can suck out of the neck of middle class Americans.  Banks live off this margin.  Take for example a $100,000 30 year fixed rate mortgage at 6 percent:

Principal:             $100,000

Total Interest:   $115,838

In the end, you are paying more than the initial cost and all that interest goes to who?  What purpose does it serve?  Banks are delusional and want the public to believe in the propaganda that they need to charge a higher rate because of “risk” in the loan.  Are they kidding?  We already know that they are being supported by the entire Federal Reserve and U.S. Treasury.  They can make the most insane kind of bets and ultimately the taxpayer will eat the bill.  And keep in mind many of these banks are borrowing at low levels from the Federal Reserve.  Why not allow the public to keep some of that interest?  How is this bad?  If banks were lending their own money it would be a different story but they are not.  They are creating a dishonest narrative and most Americans are not buying it because they operate in reality and not some parallel universe where you can create something out of nothing.

Just think of the billions charged in overdraft fees.  This is criminal.  Why not just default debit cards to stop once the account is dry?  Instead they want people that charge a $2 burger a $39 over draft “convenience fee” for this nonsense.  Are you kidding?  Most people don’t want this.  They find out the hard way and now billions have left the wallet of consumers for this nice little loan shark fee.  $39 can buy you lunch for a few days so this is nothing to laugh at when 38,000,000 Americans find themselves on food assistance.  The bulk of the billions are paid by the poor.  Good job banks for helping your fellow Americans.  Yet banks are leeches sucking the productive life blood out of the economy with gimmicks like this.  Time to break the banks up and turn them into utilities.

Take for example JP Morgan.  They announced a Q4 profit of $3.28 billion.  Where did they make their money?

“(Huff Po) JPMorgan’s biggest trouble spots were in consumer banking and credit card lending. The bank’s retail financial services division, which includes its mortgage operations, lost $399 million. That was worse than the final quarter in 2008, when credit markets had essentially shut down because of the collapse of banks including Lehman Brothers.

The company reported increases in mortgages that were charged off, or classified as uncollectible, including prime mortgages, the highest quality home loans. It also reported an increase in home equity loan charge-offs.”

Wait.  So mortgages are being charged off as foreclosures remain high.  And this has spread to so-called prime mortgages as the unemployment and underemployment rate remains at 17.9 percent.  So let us write off mortgages to average Americans.  Where in the world did they get those billions?  Maybe they made good money in their credit card unit:

“The credit-card lending division lost $306 million during the final three months of 2009. Results would’ve been worse had the bank not had a payment holiday in the period.”

More losses here?  So we’ve ruled out credit cards and mortgages which have become the life blood for Americans.  We’re running out of places to look for where they can make a $3 billion profit:

“Despite the ongoing problems with consumer banking, JPMorgan is still performing well because of its robust investment banking unit. As long as stock and bond markets continue to improve, the bank will be able to churn out profits and reward its employees handsomely.

JPMorgan’s investment bank earned $1.9 billion during the fourth quarter, while its asset management division generated $424 million in net income.

Fees from financing debt and stock offerings continued to surge in the fourth quarter. Debt financing fees jumped 58 percent to $732 million from the same quarter a year earlier, while stock financing fees climbed 66 percent to $549 million.”

And there you have it.  We are financing Wall Street’s wonderful gambling casino once again while the traditional banking model has collapsed.  How this isn’t the number one priority for the government and the people to fix is simply astounding.  How we have had no serious financial reform after 26 months of the Great Recession boggles the mind.

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And if we look at the details of the jobs report, it turns out that 17.9 percent of Americans are either unemployed or underemployed or flat out have stopped looking for work:

Source:  BLS

This wasn’t the only spin going on in the media.  Before the jobs report came out there was a preemptive flow of information trying to justify the job cuts by blaming it on the weather.  Yes, now instead of blaming the financial catastrophe on the actual perpetrators in Wall Street who systematically looted the American system and turned our economy into a giant casino that they leeched onto, we are now to believe people are losing their jobs because of the weather:

“(CNSnews) Ahead of Friday’s announcement, Goldman Sachs predicted that the storm might skew the job loss number by as much as 100,000 – a prediction that was embraced by officials in the Obama administration.

“The blizzards that affected much of the country during the last month are likely to distort the statistics,” Larry Summers, director of the White House’s National Economic Council, said in an interview with CNBC. “So it’s going to be very important … to look past whatever the next figures are to gauge the underlying trends.”

If the storm caused a skewing of job loss numbers I wonder how many job losses can be linked to Goldman Sachs and their casino style gambling in the derivatives markets and mortgage backed securities?  Then again, people should be happy that the unemployment rate remained steady at 9.7 percent even though more Americans are working part-time with no benefits and many others have simply fallen off the payrolls.  This is supposedly the new American dream for the middle class through the eyes of Wall Street who are selling capitalism but living in a world of corporate handout socialism.

There is a new show called Undercover Boss where a CEO goes undercover to work in the trenches with the proletariat.  As it turns out, the middle class is being worked to death and as we all know, the CEO can’t even do the job most workers do on a daily basis.  Even Henry Ford understood the interworking of the cars he was putting out.  In the end the CEO reveals his identity and gives a nice little handout to the worker and all is well in TV land.  The check is a token of what CEOs actually make.  This is the ultimate reflection of our trickle down economy where those at the top act like sociopaths and rulers of the universe but when it comes to doing the daily tasks of their company, they have no clue.  This is the de facto rule running on Wall Street.  In fact, CEO pay has grown outrageously over the past few decades as the middle class has gotten poorer:

Source:  American Progress

In reality, part-time employment has spread even to poor CEOs making 300 to 400 times the average American worker salary.  Poor CEOs and Wall Street executives need time off to enjoy their tax payer funded yachts and all expense hedonism trips to the Caribbean.  They would like to convince each other that the money they have is all through their will power and market prowess but in reality it is nothing more than being part of a corporatocracy and buying out the government with an army of lobbyist and insiders.  You have to be a self indulgent narcissist to take the economy to the brink of financial destruction in the case of many Wall Street firms and still reward yourself with outrageous bailouts.  The fact that average Americans are still not protesting in mass about this tells me that many actually believe what Wall Street is saying.  You see this when many would rather blame the working class for the ills of today than focus their energy where it really needs to go.

Wall Street loves this economic crisis.  They receive trillions in bailouts yet convince the public that what is occurring today is merely the “market” correcting itself.  So as most Americans have more and more troubles keeping up with their daily bills, companies are squeezing every little excess from those currently working.  Those that have jobs out of fear will work harder and probably demand less merit increases in the current economy.  After all, the head guy is only making 300 times what you make even though he can’t even understand the main function of the organization.  So what if the low level guy is selling toxic crap to some homeless person with no income and giving him access to a $500,000 loan.  These Wall Street tycoons are big picture thinkers and can’t be worried with the day to day operations of the proletariat unless it means turning it into a caricature for mass viewing and quick TIVO access.

You don’t think productivity actually increased?  Take a look at this:

Source:  BLS

This recession has been fantastic for productivity.  Just look at the above chart.  American workers have been doing their part during this recession.  After all, now you can hire a cadre of “contract” workers and not have to pay them one cent in healthcare support or even contribute to their pension.  Once the job is done you can kick them to the curb.  After all, this is capitalism so long as those at the top have managed to setup sweetheart deals and golden parachutes.  This is how the top 1 percent makes sure their hold on 40 percent of the nation’s wealth isn’t damaged.  And if you think financial institutions deserve this bailout money and their outrageous bonuses then companies like Circuit City or Mervyns would still be around today if that model applied across the board.  But this doesn’t apply to the general economy.  This applies to Wall Street and somehow the absurdity of it all still goes on.  The worst financial crisis since the Great Depression and not one solid reform has been enacted.  26 months of job losses and nothing.  Who is running the show?

The rise of the part-time work force is nothing new as we become more and more like Japan.  Japan bailed out their financial institutions after their failed stock market and real estate bubbles popped and today, their working class is made up of one-third part-time workers:

“(LA Times) In the world’s second-largest economy, the global financial crisis has forced part-time workers such as Kudo to face a harsh new reality.

Over the last few years, temporary employees have gone from being a rarity in Japan to accounting for one-third of the workforce of 67 million. They enjoy far fewer protections than full-time workers — placing their necks squarely on the layoff chopping block.

By March, the government predicts, 85,000 part-timers will fall prey to haken-giri, or temporary-worker cutbacks — a relatively small number compared with U.S. layoffs but high for a nation where job security has long been a staple.

On Wednesday, embattled Prime Minister Taro Aso made the plight of part-timers a major piece of a proposed stimulus package. Aso pledged to create 1.6 million jobs, partly by turning part-time jobs into full-time ones.”

Japan’s headline unemployment rate is 4.9 percent.  Just like our headline unemployment rate, the devil is really in the details.  If we continue on this path part-time work may be all that is left.

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What constitutes “middle class” in the United States?  If we go by the median household income the figure is roughly $52,000 per year.  Some 57 million households live on $52,000 or less per year.  This is based on 2008 Census data so it is very likely that figure is down to $50,000.  In fact, 38 million households are receiving food assistance so some are below the poverty line.

Let us look at how much income is used up by breaking down a few hypothetical budgets:

Source:  U.S. Department of Commerce

The biggest line item for most American families is housing.  When housing prices expanded into a massive bubble, more Americans to keep up with the middle class ideal took on more and more mortgage debt.  But without growing incomes they were seeing more of their money being funneled into servicing the mortgage debt.  With the advent of interest only and negative amortization loans, the process of building equity never took place and in some cases actually grew the initial mortgage balance.  Instead of saving, many middle class families saw their net worth retreat backwards.  This was one really new facet in this current economic crisis.  Traditional mortgages were once seen as a forced savings account because every month a portion of the principal was paid off.  Once you reached the later years of the mortgage, more and more went to paying off the mortgage.  That was not the case with some of the debt we saw in the last decade.

Part of the two income trap is hidden in more troubling ways.  Take for example automobile costs.  Most Americans with a two income household have two cars.  Let us assume that both cars were bought for $20,000 each and carry a $300 monthly payment.  So $600 a month right?  Wrong.  What about fuel?  Add $100 to $200 per month depending on how much you drive.  Car insurance?  This will be roughly $100 per month.  Car service?  Try another $50 to $100 per month.  So in total, many families are spending $600 to $900 per month on car costs.  And people aren’t taking much home after taxes:

So the take home pay for the middle class family is $3,400 if they live in California.  Subtract that $900 in auto costs and you are now down to $2,500.  In places like California where the median home price went up to $500,000 any middle class family stood no chance at buying a home.  Well, they were able to buy but holding on to the home was another story.  Yet people bought at these peak levels and that is why we are seeing such large number of foreclosures in the state but also in other states.  Even last month the number of foreclosure filings in California was near record levels.  The middle class is finding it tougher and tougher to keep their head above water.

Let us run the numbers if someone were to buy a home:

The latest home price for existing home sales in the U.S. is $164,700 for the median.  It is interesting to note that we are now back to January of 2009 levels and for 2009, prices did go up but went full circle back.  Let us assume this family uses a FHA backed loan and is only required to put 3.5% down:

Down payment:                               $5,764

Mortgage payment (PITI):           $1,098

So take that $2,500 left over and now subtract this amount.  $1,402 is what is left over.  This is the amount of money left over for food, healthcare (one illness and that is it with no insurance), and other daily good costs.  What about retirement savings?  That has to come from here as well.  The money can go quickly.  What about cells phones?  Utility bills?  Quickly that number dwindles.  And keep in mind this is household income.  As we now know many families are seeing one of their incomes disappearing and people are having a hard time finding work:

Source:  Itulip

When I look at the above chart it doesn’t take a rocket scientist to figure out that many people are still in the throngs of the recession.  The talk of recovery is muted by the reality of the numbers and all the average American will see is a recovery on Wall Street but in terms of their pocket book, little is funneling to them.  I’ve heard from people across the country looking for work and being unable to find anyone hiring.  And if they do find something, the wages are much less than what they once earned.  This isn’t reflected in the data.  How many people that are now marked as fully employed are in jobs that now pay less than what they once had?  That is why problems even in credit cards are filtering all the way to the bottom of the bank balance sheet.  People are relying on credit cards as their last lifeline and many banks are now shutting these off.

What was once thought of as middle class security is now heavily at risk:

-Secure job   [no longer]

-Steady home values [no longer]

-Access to affordable education [costs are outpacing inflation]

-Healthcare costs are skyrocketing with an aging population [just look at your insurance premiums]

The middle class is really coming under an onslaught of issues.  What we do in terms of financial reform and also, how we view our compact with our nation are going to be really important going forward.  But if the only sure thing is protecting banks from failure, then we are seeing the fruits of that decision playing out.

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One of the troubling findings in the report is the lax lending found in residential real estate was mirrored in the commercial real estate market:

In fact, the amount of interest only or partial-interest only loans was even bigger in CRE than in the residential market which in itself is a rather stunning accomplishment.  In 2007 at the height of the CRE bubble, nearly 90 percent of all loans were interest only or partial-interest only loans.  This number is astounding.  But what is even more disturbing is the recent ramping up of interest only loans.  In other words, banks are rolling over loans with the absolute minimum payment possible to keep borrowers above water.  Why does the bank want millions of square feet in empty office space?  They don’t so the shift here probably has something to do with that.  The commercial real estate market is in a giant form of financial purgatory.

The lax lending standards that came into the CRE market also show that during the boom due diligence was an afterthought on most loans.  Keep in mind many of these deals were multi-million dollar deals and in some cases, billions of dollars were at hand.  This wasn’t a $90,000 subprime loan, which is bad in itself with weak underwriting, but here you had millions being thrown around as if somehow banks forgot the actual value of a dollar.  The standards in CRE deteriorated rather quickly:

As more and more money bounced around the system lending standards became more and more generous.  Of course this led to the massive expansion in CRE space even when demand did not warrant it but has now led us to this current precipice where the market is flooded with too much inventory.  As is the case in most bubbles prices have corrected heavily in the CRE market:

CRE values across the board are down by 40 percent from their peak values, a steeper decline than even the residential housing market.  Yet banks holding onto these loans have been spared the stock market drubbing many banks took in 2008 and early 2009.  The loans are equally as bad so why then is the market responding so favorably to what seems to be disastrous data?  In March of 2009 it seemed the entire financial system was going to implode and finding a bid on any asset at one point seemed to be an act of futility.  Now this might have been extreme given how quickly we were approaching zero.  But today, the opposite is the case.  Many are overvaluing the actual damage that is going to hit the system in the next few years courtesy of the CRE market.  This is an enormous market where most of the loans are held by already weak banks:

The large amount of this debt is held in commercial banks.  These are the same commercial banks that are backed by the insolvent FDIC fund.  The FDIC now lists over 700 banks as “troubled” but it is very likely that when this crisis is over (which can be years away) we will have at least 1,000 bank failures.  Most of these banks now have CRE loans that are not being serviced or are being serviced at lower levels that don’t even cover principal and interest.  To paraphrase, if you owe the bank $1 on credit card debt that is your problem, but if you owe the bank $10 million in CRE debt it is the bank’s problem.  Many banks are in a position where they are now realizing that the borrower is calling the bluff of the bank.  You want your CRE back?  Go ahead and take it!  So banks would rather let the borrower hold onto the CRE even if it is bleeding on a monthly basis instead of forcing actual write-downs on their books.

And what is troubling is that many so-called conservative investment funds ate up this toxic waste:

So you might be thinking, “I don’t own any CRE so why should I care?”  You might not own any of this CRE debt but your pension might.  Now when things get this systemic, it is bound to roil the system just like subprime was the fuse that lit off the economic crisis.  Today, no one thinks that subprime was the cause of this entire crisis but was merely the most obvious first domino to fall.  CRE is equally as toxic but it seems that the market has chosen to ignore the problems inherent in the system.  Eventually the system will have to realize what is going on either through a market correction or by funneling more bailout funds to inefficient components of the economy.

The market is probably mispricing the actual problems in the system because it assumes that the bailouts of the banking industry will protect the problems with this mess.  Yet someone will be paying for this.  Wall Street is simply assuming it will be the middle class yet again.  Take a look at the concentration of CRE debt with the too big to fail:

At the core of this problem was the shifting of debt to the global markets by securitization.  To repeat an often misused quote, real estate is local.  So how can an investor in Norway really have a good sense of CRE in Houston Texas?  They don’t and clearly this is the same inefficient spreading of risk (and gambling) that led us into this crisis:

For 40 years securitizing debt was only a Wall Street trader pipe dream.  Suddenly in 2000, this was the way to make mounds of money on what used to be boring real estate debt.  CRE was only another asset class that was once relatively stable and suddenly became another slot machine in the Wall Street casino.  It is no mistake that over the past decade the middle class in America have lost ground seeing wages stagnant while a smaller portion of our economy goes to those in the government sanctioned casino knows as Wall Street.

Expect bigger problems to hit in the CRE market.  From the report:

“(COP) Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly half are at present “underwater” – that is, the borrower owes more than the underlying property is currently worth. Commercial property values have fallen more than 40 percent since the beginning of 2007. Increased vacancy rates, which now range from eight percent for multifamily housing to 18 percent for office buildings, and falling rents, which have declined 40 percent for office space and 33 percent for retail space, have exerted a powerful downward pressure on the value of commercial properties.”

In other words, get ready for more bailouts or dollar devaluation.

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Let us first look at a Gallup poll registering underemployment:

Source:  Gallup

Now the Bureau of Labor and Statistics usually measures the above through their U-6 rate.  This rate measures those that are working part-time but would like to have a full-time job.  There is something psychological about this that makes it seem a lot better than full unemployment but the repercussions on the working class is deep and profound nearly as deep as full unemployment.  First, if you are working part-time you have less money to spend and this showed up in the survey clearly:

Source:  Gallup

This is important in understanding that even with a 6 percent growth rate in GDP last quarter that many people still feel this recession deep in their pocketbooks.  In addition, that latest GDP number is based on companies cutting their top line item, employees and also inventory restocking.  But these are usually one time measures.  What we want to be seeing is GDP growth because of additional consumption and growth through hiring.  That is the real nature of a healthy expanding economy.  Cutting and firing middle class workers isn’t exactly the recipe for a longer-term recovery.

Americans are having to do more with less and are facing new measures of austerity.  Many are adapting and many are simply unable to cope with the radical changes taking place.  Even in the past decade, many Americans came to rely on credit cards and home equity as some kind of embedded ATM for most households.  For over a decade this seemed to be the case.  Even many that relied on this deep down realized that something just wasn’t right when home prices kept going up by double-digits while their salaries remained stagnant.  Any lack of wage growth was made up by additional borrowing.  Banks were willing to lend out this money.  But now that the bubble has burst, Americans are filing for bankruptcies in record numbers, losing jobs, and losing their homes through foreclosure.  At the same time, the banking industry has kept their practices going thanks to taxpayer bailouts.  The middle class is bailing out the same industry that was largely at the center of this financial crisis and their practices still largely remain the same.

This struggle to maintain the middle class is going to be the story of the next decade.  But beyond that headline, we now have over 38,000,000 Americans receiving food assistance in this country:

Source:  SNAP

The most prosperous nation in this world has over 12 percent of its population receiving food assistance.  It is tough to see fellow Americans in such difficult times.  You can see on the chart above how quickly the rate has risen in this recession.  Clearly in every recession the rate will go up but in this recession the number has struck many more Americans.  In fact, the length of unemployment is a large reason for this as people eat into emergency funds.  Beyond that, we now have the largest percentage and number of Americans working part-time in history:

Source:  Itulip

In fact, the large number of underemployed has been a shadow to how deep this crisis really is.  For example, the headline unemployment rate nationwide is 9.7 percent.  That seems bad but nothing historical.  But just look above and add in that underemployment rate.  In reality, we can understand why middle class Americans are struggling so much with daily financial life.  Think of someone that lost their job and is now working at Wal-Mart as a greeter.  Sure they aren’t part of that 9.7 percent but they probably would think so:

“(The Atlantic) Over lunch I spoke with one attendee, Gus Poulos, a Vietnam-era veteran who had begun his career as a refrigeration mechanic before going to night school and becoming an accountant. He is trim and powerfully built, and looks much younger than his 59 years. For seven years, until he was laid off in December 2008, he was a senior financial analyst for a local hospital.

Poulos said that his frustration had built and built over the past year. “You apply for so many jobs and just never hear anything,” he told me. “You’re one of my few interviews. I’m just glad to have an interview with anybody, even a magazine.” Poulos said he was an optimist by nature, and had always believed that with preparation and hard work, he could overcome whatever life threw at him. But sometime in the past year, he’d lost that sense, and at times he felt aimless and adrift. “That’s never been who I am,” he said. “But now, it’s who I am.”

Recently he’d gotten a part-time job as a cashier at Walmart, for $8.50 an hour. “They say, ‘Do you want it?’ And in my head, I thought, ‘No.’ And I raised my hand and said, ‘Yes.’” Poulos and his wife met when they were both working as supermarket cashiers, four decades earlier—it had been one of his first jobs. “Now, here I am again.”

We are in a deep struggle and fight to preserve the middle class of this country.  What has made this country strong has been a compact between the government and the citizenship between work and some semblance of financial protection.  Yet right now with the banking system in power, it is all about that bottom line and they have no idea what is happening in Main Street USA.  They are happy with GDP going up by 6 percent even though this was based on restocking lost supply and firing workers.  But how is this really good for the middle class?

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“(Prison Planet) A new advisory being sent by America’s third largest bank to its account holders has stoked fears that major financial institutions could be preparing for old fashioned bank runs if the economy takes a turn for the worse.

Originally reported by John Carney over at the Business Insider website, Citigroup is sending the following information to customers along with their bank statements.

“Effective April 1, 2010, we reserve the right to require (7) days advance notice before permitting a withdrawal from all checking accounts. While we do not currently exercise this right and have not exercised it in the past, we are required by law to notify you of this change.”

In other words, let us assume many clients decide to withdraw all their funds in a short period of time because people suddenly realize that $250,000 is actually being supported by pure faith.  In addition, average Americans realize that -$20.8 billion will certainly not cover $5.3 trillion in actual deposits that can be redeemed at any given time!  That is the psychology of our current banking system.  As long as people believe the wizard behind the curtain can back up the deposits then all is fine.  This worked as long as assets actually had values that banks claimed were true.  We know that game is over.  In fact, that is why the entire banking system has received roughly $13 trillion in bailouts and backstops.  It really is this fragile.  This is how the deposit insurance fund looks like:

Source:  FDIC

So you would think that people would at least try to diversify their investments since even a minor bank run would cause major damage.  But instead, people have increased their deposits at these banks at a rapid pace:

And I can’t blame them.  What choice is there?  Gamble in the Wall Street rigged casino or put it in the bank.  If we go back to December of 2007 when the crisis started, DIF-Insured deposits have shot up by $1.1 trillion and the actual fund has gone negative because of all the additional bank failures.  This psychology really does remind me of the mania surrounding the housing bubble boom. What if, hypothetically, people decide that one of the too big to fail is suddenly not that big at all, and Americans start withdrawing funds to some other institution.  Worse yet, they take their funds out and put them in a non-DIF insured institution.  Then what?  Or maybe people want the actual cash.  This is what is so troubling.  Just go to any local store and see how much actual cash is being exchanged.  It is all electronic debits and credits.  Insured to $250,000?  On what?  Clearly the U.S. Treasury would step in at this point and flat out start printing money but what use would that be since the dollars you are being paid with would quickly devalue (even more).

I’ve seen a few people dismiss the current negative DIF fund by saying “the FDIC is flush with cash.”  Really?  Let us examine that part of the equation.  From the latest FDIC quarterly bank report:

“In June 2008, before the number of bank and thrift failures began to rise significantly, total assets held by the DIF were approximately $56 billion and consisted almost entirely of cash and marketable securities (i.e. liquid assets). As the crisis has unfolded, liquid assets of the DIF have been to protect depositors of failed institutions and were exchanged for less liquid claims against assets of failed institutions. As of September 30, 2009, although total assets had increased to almost $63 billion, cash and marketable securities had fallen to approximately $23 billion.”

Did you get that?  The FDIC “cash” went from roughly $56 billion in June of 2008 to $23 billion in September of 2009.  And supposedly, they now have “assets” of $63 billion but how much of this is crap mortgages from failed banks like WaMu and IndyMac?  In reality, the FDIC at this point only had $23 billion to back up $5.3 trillion.  But in December of 2009 the FDIC took the radical step to front-load prepaid assessments:

“To provide the FDIC with the funds needed to carry on with the task of resolving failed institutions in 2010 and beyond, but without accelerating the impact of assessments on the industry’s earnings and capital, the FDIC approved a measure to require insured institutions to prepay 13 quarters worth of deposit insurance premiums. These prepayments—about $46 billion—were collected on December 30, 2009. Cash and marketable securities stood at $66 billion on December 31, 2009.”

Now don’t you feel better?  The FDIC took in 13 quarters of prepaid deposit insurance premiums and we now have a combined total of cash and marketable securities of $66 billion.  In other words, one too big to fail going down and good luck with that $250,000 backup really being worth what you would actually think.  This is what surprises me here.  We all know things are actually getting worse with the banking system yet we keep piling on the risk.  In fact, the FDIC has even upped the number of troubled banks on their list:

You know if the FDIC is saying 702 we know it is much higher.  I still stand by my prediction that this crisis will bring down at least 1,000 banks when all is said and done.  I love how the FDIC lists “assisted institutions” as 8 with total assets of nearly $2 trillion.  I wonder who those could be?

The bottom line is, we are playing a very big game of confidence here.  Gallup just ran a poll showing that 19.9 percent of Americans are underemployed.  That number is getting really close to the 25 percent rate of the Great Depression but with part-time employment.  That does a number on the psyche of average Americans.

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I think most Americans have noticed new methods of austerity all around them.  For example, I’m sure many of you have seen the Wal-Mart ad that talks about taking lunch to work.  They even break down the numbers to show you how much your budget will save by doing this.  Contrast that ad with this one below talking about taking a home equity loan while having a couple in a speed boat cruising in the background:

Source:  YouTube uploaded on June, 2007

When you contrast the two messages, one of easy money and endless excess and the new ads talking about brown bagging your lunch to work, we realize that average Americans are finding it much harder to saddle on more debt.  Some might try to recall the last decade as a wonderful time but the economic data shows otherwise.  Much of the spending and consumerism was built around easy access to debt.  People weren’t buying new automobiles with cash, they were financing it with 5 or even 7 year loans.  Want a new surround sound system but are low on cash?  No problem, just take on an extra credit card and charge it up.  Now, the ads highlight a very different economic climate.

I stopped by a local dollar store to pick up some items for the house and noticed that first, the parking lot was full.  A few years ago the parking lot was two-thirds empty.  This trend has been going on for about two years since the recession hit.  After entering the store I noticed that people for the most part were buying groceries.  Now this area is one that I wouldn’t consider poor but more along the lines of middle class.  Yet this is the new reality for the middle class.  There is no sharper contrast than seeing a women load her leased Mercedes full of dollar store groceries.  Austerity doesn’t happen overnight.

On Monday we received news that some of the most egregious practices from credit card companies will need to change now that legislation is in effect.  Yet credit card companies have already adapted by hiking up rates, charging annual fees on good customers, and other methods of front loading earning before the law came into effect.  So Americans who have relied so heavily on credit cards will now have to be extremely cautious when using these items of consumption.  Even the tried rule of paying off your balance every month may not save you from the annual fee that some companies are now imposing.

Casinos Lose Money for Second Time in History

In another clear example of changing habits of the American middle class, Casinos in Nevada lost money last year for only the second time in history:

“(Las Vegas Sun) CARSON CITY – For only the second time, Nevada casinos posted a loss – but this time it was the biggest.

The state Gaming Control Board today released its “Gaming Abstract” for fiscal year 2009, which ended June 30, showing a net loss of $6.7 billion among the 260 major casinos in Nevada.

Clubs along the Las Vegas Strip, which makes up 53 percent of the gambling revenue in Nevada, registered a $4.1 billion loss. The only bright spot, from a financial standpoint, was that people drank more. Sales of booze rose by 2.5 percent while revenue tied to casinos, rooms and food dropped. But 36 percent were recorded as “comp” drinks.

“It was a horrendous year,” said Bill Bible, president of the Nevada Resort Association, which represents several casinos on the Strip. He said many of the casinos had three and four waves of layoffs to cut cost during this national recession.”

I find it really telling that the only “bright spot” was that people drank more booze.  Self medication for the realities of the new economy.  Gambling whether it is in Las Vegas or through lottery tickets is a form of escapism.  I think many people in places like Las Vegas go to strike it big.  The irony of how the city has morphed is a large part of their revenues now come from other sources outside of gaming.  These include boutique stores and high end restaurants.  I was in Vegas only a few months ago and strolled down some of the shops and the higher end stores were very empty.  A few years back, these places were bustling with people.  It is a microcosm of the new austerity in our country.  Contrast the $100 t-shirts versus the Wal-Mart ad highlighting the benefits of taking your lunch to work at the cost of a few dollars per day.  Things are shifting out of a practical necessity.

And this isn’t simply a function of discretionary spending like trips and gambling.  Even in more practical aspects of daily life this is changing and evolving.

Fast-food Breakfast Slumps with Fewer Workers

You know things are tough when even low cost fast food is taking a hit:

“(WaPo) The nation’s high unemployment rate has thrown millions of people out of work, scared shoppers away from stores and threatened the economic recovery. Now it’s taking a bite out of breakfast.

Breakfast sales had grown at a ravenous pace during the boom years as busy workers scarfed down sausage biscuits on the way to the office, fueling a $57 billion business and accounting for as much as a quarter of sales at some fast-food chains. Chains opened earlier and expanded their morning menus to accommodate the traffic as lunch and dinner sales flatlined.

But as the jobless rate hit 26-year highs fewer people headed to work, and even those who did worried about their spending. So they poured bowls of cereal at home or simply slept in, putting breakfast on the back burner.

“Typically, if you’re unemployed, you’re not getting up at six and not going through the drive-thru,” said Jeffrey Bernstein, an analyst at Barclays Capital. “There is a direct correlation between unemployment and breakfast sales.”

It is hard to even comprehend that breakfast sales accounted for $57 billion in revenue.  However, with more people out of work many are skipping breakfast or eating at home.  On my early morning drives I will always see cars pulling up to McDonalds or Starbucks for that early morning purchase.  The lines seemed a lot shorter and looking at the data it is part of the new frugality that Americans are having to deal with:

Source:  Washington Post

And this recession is shaping how people view their future and what they expect out of it:

“(New York Times) See that,” she said, spotting a man dressed as the Statue of Liberty. Standing on a sidewalk, he waved at passing cars with a sign advertising a tax preparation business. “That will be me next week. Do you think this guy ever thought he’d be doing this?”

And yet, she would gladly do this. She would do nearly anything.

“There are no bad jobs now,” she says. “Any job is a good job.”

That person dressed up as the Statue of Liberty is a very common vision especially with tax season here.  2010 is a very different world from 2007.  I wonder what lady liberty would think about how we are spending our tax dollars in bailing out banks while average Americans are forced to tighten their belts?

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If you are wondering why mortgage rates are at historically low levels yet the economy is still in the doldrums look at the following chart:

Source:  Federal Reserve, St. Louis

Over 40 years of data and the 30 year fixed rate mortgage averaged 9 percent.  Today that rate is slightly below 5 percent, a level unseen in nearly a century.  Now this isn’t where the quantitative easing stepped in to bolster the market.  If you look at the chart above since Alan Greenspan dropped rates early in the 2000s the 30 year fixed mortgage has been historically low.  The Federal Reserve added maximum fuel to the housing bubble.  Banks borrowed at extremely low rates and speculated in mortgages and other forms of debt.  Seeing how much demand was stimulated early in the decade with lowering the Fed funds rate, Ben Bernanke decided to pursue a similar policy this time as well.  Yet it didn’t work and he reached the zero bound level.  The market was saturated with debt and demand was nonexistent for mortgage backed securities.  In steps the Fed:

Source:  Federal Reserve, Atlanta

It is interesting that the Federal Reserve Banks of smaller more fiscally prudent districts offers the best kind of data.  The New York Fed with the most assets held offers very little transparency.  Above, we see the major source of quantitative easing.  With no market, the Fed starting early in this crisis has been buying up mortgage backed securities to keep the housing market going.

“The Fed purchased a net total of $11 billion of agency-backed MBS through the week of February 10. This purchase brings its total up to $1.188 trillion, and by the end of the first quarter of 2010, the Fed will have purchased $1.25 trillion (thus it is 95% complete).”

So the Fed has roughly six weeks to go and $50 billion left in this component of the quantitative easing phase.  If you think about this, this is electronically creating money out of thin air.  The Fed in the past was only able to take on triple AAA rated securities on their balance sheet from banks.  In this crisis, the Fed in order to free up the toxic waste on the balance sheet of banks decided to take over many forms of toxic assets including buying up mortgage backed securities.  They nationalized the banking system without talking to Congress, the public, or anyone else for that matter.  This is really the only reason the housing market did not correct further and the stock market is now up over 60 percent without any real change in the employment level.  The Federal Reserve has monetized toxic waste since there is no other sensible buyer in the market that would buy this junk up.  Banks have been lending government backed mortgage debt in barrels because this is off their hands once they finalize the loan.  With the bailout funds costing banks near zero to borrow, they have gone back to making additional funds gambling in the stock market casino.  In other words quantitative easing is financing the Wall Street circus with money we don’t have, literally.

Most Americans would probably be outraged to find out that their central bank is irresponsibly printing money out of thin air.  Knowing this, the Federal Reserve obfuscates their real actions by calling it quantitative easing.  But this is exactly what is happening.  Banks have balance sheets full of junk and toxic waste.  Without the bailouts many banks would be insolvent and fail.  So the Fed steps in and removes this junk off their books to give them breathing room.  But now after 26 months of financial crisis the average American is seeing no benefit from the actual bailouts.  This is because the money was funneled into the banking sector elite, not the average public.  They sold the public a bill of goods to keep their con game up.

And if you look at the Fed’s balance sheet since the crisis started they have trillions of dollars in junk on it most of it picked up since the crisis started:

The Fed’s balance sheet has ballooned to nearly $2.5 trillion.  Back in August of 2008 it was under $1 trillion.  Most of that growth came in the form of quantitative easing as we have seen above from buying those mortgages that no one else in their right mind would buy.  That is why mortgage rates remain artificially low.  That is why over 95 percent of all mortgages made today have some form of government guarantee.  But that gig is ending soon unless the Fed decides to go further with this charade.  Expect mortgage rates to go up.  Expect the housing market to enter a second adjustment because the artificial housing steroids will be removed. Quantitative easing failed in Japan and it didn’t do much in this market except allow the banking sector to drain the wealth from the middle class of this country.

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