oftwominds: The Devolution of the Consumer Economy, Part II: Rising Costs, Declining Wages

I have been thinking along these same lines for several months now although I worded a little bit differently. I agree that the average American worker is increasing living as a debt serf. Increasingly they live from one paycheck to the next. This makes job changes and increased wage demands a risky career choice. It follows that the average American worker must rebalance both their spending habits and the debt portion of their assets. This implies that the consumer driven economy must decline and a manufacturing or export driven economy must pick up the slack. It also implies that there is a bubble in financial market driven by the derivative/insurance instruments. Unlike the stock and bond markets the securitization market appears to be very inefficient market as demonstrated by the collapse of the mortgage securitization market. Until these “derivative” markets are recognized as risky and containing many poor performing investments, investing in businesses that make “stuff that people want” will be a low priority.
The key feature of financialization is that the outsized profits and opportunities come not from producing goods and services but from leveraging, borrowing, obscuring risk and gaming widely ignored regulations. Banks made money not from prudent loans but from taking $1 in deposits and originating $50 of risk-laden loans from that paltry capital. Wall Street reaped billions by packaging high-risk mortgages as “low-risk” investments.

The housing bubble offered the ambitious debt serf a rare opportunity to lie and leverage just like Wall Street. Anyone with sufficient chutzpah could buy a number of houses with no-document “liar loans” with option-adjustable rate loans at super-low rates of interest, hold the homes for a few months and then flip them for profits.