24/7 Wall St.

The great fraud perpetrated by the criminal manipulators at the top of the US financial system was that almost every American could move up a level in the US caste system, an entity whose existence most Americans would not even acknowledge.

The con and its temptation was simple at each level. The poor would become middle class if they bought a house. The middle class would become wealthy, and the wealthy would become maharajahs and sultans. Like many well-crafted schemes, it worked for a while.

The trouble with the mechanics of the most recent boom is that the imaginary financial upgrading of so many people left very few who viewed themselves as poor enough that they needed to save money or live frugally, and none seemed seriously concerned about their financial future. The incentive for each person to keep his place in the hierarchy was gone. As long as money was cheap and houses were increasing in value, this train just picked up speed.

The charlatans made money at each level of the intricate framework. At the most basic level in the system, mortgage brokers were paid for each deal which they originated, regardless if they made sense financially. Indeed, they made less money if they only lent money to people who were good candidates.

At the level of the mortgage banks themselves, operations like Countrywide collected fees by granting mortgages, levying fees on late payments it knew people could not afford in the first place, and from the interest paid on the loans. As long as housing prices moved up, the company could even make money  from foreclosing on properties and selling them at higher prices. It was a fool’s paradise and men like Angelo Mozilla, Countrywide’s CEO, made hundreds of millions of dollars. Most of these people will probably not spend a day in prison.

Investment bankers were at the top of this Darwinian heap. They were intelligent enough, and had the sense to hire Phds in math from universities such as Princeton to create new financial paper consisting of  thousands of mortgages thrown together and then cut into tranches that they could then sell and trade. The only problem with this program was that a system-wide jump in subprime mortgage failures proved that the calculus behind the mortgage-backed securities was flawed from the start. It was based on the certainty that the average home value in American would keep going up indefinitely.

That brings the mortally wounded economy back around to the presence of the poor, or those who feel poor, as the most critical underpinning of any financial system, although the logic of that appears perverse and unimaginable.

One of the pillars of any successful economy is having a large number of people who do not aspire to things which they cannot afford. They will not sign for the delivery of things unless they easily have the ability to pay for them whether it is a tractor, a home, a car, or a plasma-screen television. No financial system works when a number of people do not feel "poor" regardless of their incomes. Those who are close to poverty in their own minds save and accept the frugal life for what it is—a life that can not survive the additional risks of debt added to those of potential medical, social and political calamities.  Then there is the trouble of having to deal with the dysfunctional aspects of a world which revolves around the need to feel rich.

For years, the typical American has not saved money for "a rainy day". Retirement was based on the notion that everything became more valuable every year. There was no point in keeping any money in reserve. Saving was equated with wasting money because it yielded so little.

The financial companies who benefited the most from this con plan to make money by encouraging the aspirational life from the bottom of the economic system to the top are now going through catastrophic  failures.  Now millions of people will join the ranks of the poor. The caste system has had its revenge. No one can be rich if no one is poor.

Douglas A. McIntyre