FRFI 214 April / May 2010

As the stock market rises higher and higher in value, as the media commentators chortle about ‘the recovery’ and the billionaire blood-sucking leeches of Wall Street gulp down  multi-million dollar bonuses, another America groans under the burden of the continuing economic crisis. For them, the majority, life is turning into a nightmare – one which is going to get worse.

Rich and poor

The gap between rich and poor is widening. In 2009 there were 1.41 million personal bankruptcy filings, up 32% from 2008 and 100% from 2007. Median credit card debt is 15% of a household’s annual income. Foreclosure filings are running at 300,000 per month. One in eight people in the US are now on Food Stamps. Recent tax data showed that between 1992 and 2007 for the 400 top income families, pre-tax income grew by 476% to a median of $345 million, while median household income rose by just 13.2% – to $50,233. A recent New York homeless count showed the number living on the streets had grown by 34% in a year. Unemployment remains high.

The urban crisis

This crisis has hit states and local governments hard, and hardest in Detroit, pointing in the direction that many other cities are sliding towards. 35% of its municipal area is uninhabited, with barren streets of once good but now dilapidated houses standing empty or serving as crack dens. 33,500 houses are empty and 91,000 residential lots are vacant. Half the population left over the last half-century as the car industry ran down, reflecting the general decline in US manufacturing. At almost 30%, Detroit’s official unemployment rate is more than double what it was at the beginning of 2008, but the city administration believes it is far higher, around 50%. One third of Detroit’s inhabitants are estimated to live below the poverty line.

The state of the city has grown so bad that the Mayor plans to bulldoze a quarter of Detroit – 90 square kilometres, about a third of the size of inner London – replacing 10,000 houses, buildings and empty lots with fields and farmland. Already community groups are taking things into their own hands: ‘Blight Busters’ has pulled down 200 houses and crack dens, replacing them with community gardens growing free, fresh vegetables. Destroying a city in order to save it has been tried elsewhere, but never on such a scale.

Debt storm

Further problems lie ahead. Although some economic statistics give the impression that the US economy may be beginning to get less bad, if not actually improving, it looks like 2010 is going to be the lull before the storm. A new wave of debt default and destruction is building.

In the residential mortgage market, $300 billion of ‘Option ARMs’ (adjustable rate mortgages) begin to reset this year at increasing rates, peaking in 2011, creating a new crisis. Nearly half of these loans were made in California.

In the commercial market, some $1.4 trillion of mortgages are expected to expire between now and 2014. The loans were taken in the expectation that they could simply be ‘rolled over’ – renewed. But commercial property prices have fallen by 40% since 2007 and nearly half these mortgages are ‘underwater’ – worth more than the property they were borrowed against. Hundreds of billions of dollars could soon be lost.

In the corporate world, $700 billion of ‘junk bonds’ – risky, high-yield debt – starts to fall due in 2012: $155 billion in 2012, $212 billion in 2013, $338 billion in 2014. The loans were taken during the boom by private equity companies and similar outfits to pay for mergers and leveraged buyouts before the crisis struck. At the same time $1.2 trillion of investment-grade corporate debt will be falling due, $526 billion in 2012.

A small bubble is about to pop in the ‘muni-junk’ bond market – high risk municipal debt dependent on state and local government finances. Yet tax revenues have fallen for four consecutive quarters and investors may lose interest income, the entire principal, or be forced to sell at steep discounts. States slip deeper into debt as they run budget deficits and their pension funds fall behind.

It is no surprise then that the FDIC, which insures bank deposits, reported 252 banks on its ‘problem list’ rising to 702 by the end of 2009 and the FDIC ended the year with its ‘rescue’ fund $20.9 billion in the hole.

To cap the list of coming disasters, there is the huge Federal debt which will need some $2 trillion of borrowing in 2012, potentially squeezing out some of these risky borrowers who are trying to roll over debt.

With continuing suffering from the financial crisis, the decline of the cities and the looming second wave of the financial crisis, the ‘American dream’ is turning into a living nightmare.

Steve Palmer