FP Passport has an interesting update on the sub-prime mortgage mess. Two parts worth passing along:
There is a widely held belief in the United States that the fallout from the subprime mortgage meltdown primarily affects lower-income borrowers who are primarily Hispanic or African American. While the subprime crash has affected the middle and upper class by slowing economic growth, few believed they would lose their homes.
Turns out, this perception is completely false.
As the post goes on to explain, subprime loans helped fuel the McMansion phenomenon across the nation's suburbs, so its actually much more of a middle class phenomenon than most people think. And that, as FP points out, is why it should almost inevitably lead to a fairly severe recession. It's one thing when poor people lose their homes; its another thing entirely when it starts happening to upper middle class people.
Which leads to the second point:
But the Dow keeps chugging along. I can't figure out why. I asked a trader in Chicago what he made of it, and his explanation was simple—it's irrational. Stocks are trading up on the hope that Fed Chairman Ben Bernanke will cuts rates again, as he did last month. But there's no indication that would happen. It would probably be a mistake, as it could (and probably would) trigger inflation.
I realize that it is probably naive of me to hope that this will one day become common knowledge, but I'm going to hope nonetheless. The performance of the stock market has nothing to do with the overall health of the economy. Nothing. The stock market really is just legalized gambling writ large. Its about large institutional investors betting on things like the next move made by the Federal Reserve.
Most Americans own homes or condos. Even greater numbers of us live in them. Most of us do not, however, own stocks or bonds. The things that Wall St. buys and sells belong to the upper class, not "middle America."
All of which leads to today's news:
NEW YORK (Reuters) - The richest one percent of Americans earned a postwar record of 21.2 percent of all income in 2005, up from 19 percent a year earlier, reflecting a widening income disparity among different classes in the nation, the Wall Street Journal reported, citing new Internal Revenue Service data.
The data showed that the fortunes of the bottom 50 percent of Americans are worsening, with that group earning 12.8 percent of all income in 2005, down from 13.4 percent the year before, the paper said.It said that while the IRS data goes back only to 1986, academic research suggests that the last time wealthy Americans had such a high percentage of the national income pie was in the 1920s.
The article cited an interview with President Bush, who attributed income inequality to "skills gaps" among various classes. It said the IRS didn't identify the source of rising income for the affluent, but said a boom on Wall Street has likely played a part.
So the "skills gap" explanation is coming back, eh? OK, I'll bite. If you believe in this explanation of things, please explain to me what precisely has happened over the past 10 years that has allowed the skills of those at the top to improve so rapidly. A 2.2% increase in the total share of national income taken by the top 1% is an enormous jump for one year. Were they all going to school during that time? and if so, how did they have time to work so hard? Do those at the top really have that much more talent than all of the rest of us?
And before you answer those questions, consider this:
New data shows that after adjusting for inflation, 95 percent of Americans reported smaller incomes to the tax man in 2005 than in 2000.
Despite this, all Americans had more in their pockets as a result of the Bush tax cuts, although the increases ranged from barely perceptible for the bottom half of American earners to thousands of dollars a month for those at the top, Internal Revenue Service figures show.For the bottom half of Americans, the average after-tax income in 2005 was $14,526, which was $20 a month more than in 2000. Without the tax cuts, their incomes would have slipped by $234 a year, or around $20 a month.
The next higher 25 percent, who made $30,881 to $62,068, had on average $52 a month more after taxes in 2005. For the next 20 percent above that, the increase ranged from $144 to $274 a month.
The only group to report higher incomes both before and after taxes was the top 5 percent.
After-tax income for the 96th through 99th rungs on the income ladder rose $5,656 on average, or $471 a month. For the top 1 percent, whose incomes averaged more than $1.2 million, after-tax income rose by $64,796, or $5,400 a month, even though their average income rose only $18,000 in the same period. More than 75 percent of taxpayers make less than $5,400 a month.
Analysis of the new income tax data, known as Table 5, also shows that while incomes rose markedly in 2005 from 2004, with all taxpayers’ average income up nearly 4 percent in real terms, average pretax income declined slightly for 75 percent of Americans.
Among the top quarter of American earners — those whose average incomes did rise in 2005 compared with the year before — more than half of the gains went to the top 1 percent.
The figures on incomes, both before and after taxes, help explain why so many Americans report feeling economic distress, despite overall economic growth since the Internet bubble burst on Wall Street in 2000 and the 9/11 attacks the next year. Other official data shows that median household income in 2006 rose by a fraction of 1 percent over 2005 only because more people were working and they were working longer hours.
Most Americans are working harder but earning less. Except for those uber-talented people up at the top. Not only are they earning more, they are being taxed less, too!
Trickle Down economics is one hell of a way to run a country, no?
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