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The Road to Debt Peonage

On Real estate debt

In an earlier interview you said: “The economy has reached its debt limit and is entering its insolvency phase. We are not in a cycle but the end of an era. The old world of debt pyramiding to a fraudulent degree cannot be restored.” Would you expand on this in view of today’s developments?

The Treasury’s aim is to revive Fannie and Freddie as lenders – and hence as vehicles for the U.S. economy to borrow from the foreign central banks and large institutional investors that I mentioned above. More lending is supposed to support real estate prices from falling quite so far as they otherwise would – and in fact, the aim is to keep the debt pyramid growing. The only way to do this is to lend mortgage debtors enough to pay the interest and amortization charges on the existing volume of debt they have been loaded down with. And since most people aren’t really earning any more – and in fact are finding their budgets squeezed – the only basis for borrowing more is to inflate the price of real estate that is being pledged as collateral for mortgage refinancing.

Nearly all real estate experts are in agreement that for the next year or two, many of today’s homeowners will find themselves locked into where they are now living. Their situation is much like medieval serfs were tied to their land. They can’t sell, because the market price won’t cover the mortgage they owe, and they don’t have the savings to pay the difference.

On Wealth disparity

The most striking economic dynamic today is polarization between those who live off the returns to wealth (finance and property extracting interest and rent, plus capital gains as asset prices are inflated) and those who live off what they can earn, struggling to pay the taxes and debts they are taking on. The national income and product accounts – GNP and national income – don’t say anything about the polarization of property, and doesn’t include capital gains, which are how most wealth is being achieved these days, not by actual direct investment to increase the means of production as lobbyists for trickle-down economic theory claim.

One way to achieve this tax shift has been to re-define taxes as a “user fee.” This is what the Greenspan Commission did in 1983 when it imposed heavy regressive taxation on labor via FICA wage withholding for Social Security and Medicare instead of funding these programs out of the general budget, to be paid for largely by the higher brackets. The Social Security Trust Fund generated a heavy tax surplus, which was used to cut tax rates on the upper wealth brackets.

The tax code’s “small print” made commercial real estate free of having to pay income tax by pretending that landlords were losing money on their property as buildings depreciated – as if the land’s rising site value did not more than compensate. Most important, interest was treated as a tax-deductible expense. This encouraged debt leveraging rather than equity investment, creating an enormous market for bankers creating credit and collecting interest on it.

Here’s how things look today: The richest 1 per cent of the population receive 57.5 per cent of all the income generated by wealth – that is, payment for privilege, most of it inherited. These returns – interest, rent and capital gains – are not primarily a return for enterprise. They are pure inertia, weighing down markets. They do not “free” markets, except by providing a free lunch to the wealthiest families. The richest 20 per cent of the population receives some 86 per cent of all this income – that is, what actually is increasing household balance sheets.

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