Trickle Up Economics

Practicing law can sometimes give you a clear perspective of national events. Over the past few years, the car dealers, con artists and blue suede shoe boys that had previously been hawking multi-level marketing, penny stocks or ostrich farms seemed to all wind up in real estate finance. Mortgage brokers went from being a ridiculous waste of money to an every day occurrence. And since it was real estate, there was suddenly an air of respectability to the con games. And they became appraisers, developers, real estate brokers, title insurance agents and on and on.

 Flips were the buzzword of the day. Just about anyone, from the sidewalk wino on up, could qualify for a mortgage. And the price of real estate always went up. So it was a no-brainer to simply bid in for whatever real estate you could get and sell it to the next greater fool. Like all ponzi schemes, the last guy in the chain suffered all the losses.

 Now if this happened to your brother in law, everyone would express their deep sympathy and then snicker that you knew he was a moron all along. Sooner or later he comes around asking for a handout. He tries to tell you how its really in your best interest, how it would avoid painful situations for his family, the children and so on.

 The difference this time, is the last guy in the chain happened to be the so called financial pros – giant investment banks, hedge funds and derivatives holders. Of course your brother in law doesn’t have connections to the Fed, the U. S. Treasury and  the White House. These guys do. So the net effect is they simply don’t want to pay  up – plain and simple. They concoct all sorts of nonsense about why its really in your best interest, how it will avoid painful situations and so on.

 So the so called bailout is just another in a long line of brazen attempts to move your money to the pockets of the very, very rich.  This is trickle up economics. It was formerly just called a swindle. It’s the same as your brother in law, except this time they signed your name to the debt. The idea is to dump the losses on people who had the good sense or sufficient control of their greed to avoid overextending themselves to begin with. 

 Let me explain it in simple terms. About 6 years ago I bought a 900 foot one bedroom condominium on the North Carolina coast paying a little under $100,000. I sold it because the expense was more than I could handle with the condo dues, insurance and so on.

 This past yeara realtor I know had five of his clients purchase a 900 foot condominium on the North Carolina coast paying $1.5 Million. Not one put a single nickel into it. The first and second mortgage covered everything including the mortgage brokers, mortgage bankers, real estate agents, real estate attorneys, and the developer. All made out handsomely.

 Now my condo was probably better situated that theirs, at a closer beach with more amenities. I actually make a little more money than they do. The difference, and this is absolutely key, is that I expected to have to pay for mine. None of the other guys expected to pay anything. They expected to flip for an amount roughly twice my annual salary. When it came time to actually make some payments, no one was home.

 The reason for this, obviously, is that their condos were never worth anywhere near that price to begin with. The price quickly melted to about $800,000, then $600,000 and there are no takers. I would probably be willing to pay about $250,000 if I was in the market.

 Now here’s where the bailout swindle comes to play. The bailout is intended to prop up the mortgages that were made on the funny money. They want us to pay up on the $1.5 M in mortgages that we all had the good sense to avoid. They are not asking for any return of money from the mortgage brokers, mortgage bankers, real estate attorneys, real estate brokers or developers. And non from the purchasers. Every single wrongdoer in the scam walks. And we should pay for them so that an insanely inflated price won’t have its day of reckoning.

 There is another serious unintended consequence. Since the condo was never worth its asking price it could not attract anyone who actually intended to pay for it. The price was artificially pumped far, far past a reasonable market value that would be paid by a willing buyer.  My $250,000 estimate is 20% of the actual price and I would guess it’s not too far off the figure of most reasonable buyers.

 By propping up these fantastical values, they have effectively closed the market to those who can actually pay.  Those of us who play by the rules are priced out of the market so the hustlers are the only game in town. The point here is that the bailout is asking the taxpayers to underwrite the ridiculous valuations that only hustlers would pay.

 So we work and exchange value with other people for their goods or services. We skim the top for taxes or licenses or fees or whatever. Then we pay for our license tags, property taxes, fishing licenses, and so on.  Then they tack on the price tag for capitalist criminality.

 They told us we should fear the consequences if they did not swindle us. That the financial system would fall apart. So we are on the hook for more than we are going to earn. More than we can generate after making a living. At some point, it just won’t be worth it to go to work anymore. Or pay taxes. And then we start to barter, to move to grey economies and off the books transactions.

 And if there is anything the uber rich should fear, it’s for the rest of us to learn how little they actually contribute.