Third World America (8 page)

“I feel like we’ve cut every corner we can cut,” Diana told Mooney. “We don’t take vacations. We never go out. Right now, I just keep my fingers crossed that nothing breaks. We need a new roof and new tires for the car. And we’re going to get hit hard by taxes this year.” At that point, Diana’s voice began to crack. “I’m scared. I’m scared we’ll never be able to retire. I’m scared we won’t be covered for health care. I’m scared we won’t be able to send our kids to college. We’ve never had much, but before I always felt like we were doing our time. We were working our way toward a more comfortable future. That doesn’t seem true anymore. At this point, I see no way out at all.”

Diana and Byron’s tale is an increasingly common one. Their high-priced college education—the kind many see as a
safeguard against economic hard times—is no longer enough at a time when the jobless rate is almost 10 percent and twenty-six million people are out of work or underemployed.
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Troy Renault is one of them.
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In August 2009, Troy, his wife, Tammy, and their five children were living in a three-bedroom home in Lebanon, Tennessee. Two years earlier, Troy had lost his construction job. Ultimately, as the Huffington Post’s Laura Bassett reported, they lost their home and had to move into a donated trailer on a local campground. They downgraded from a 1,900-square-foot house to a 215-square-foot trailer.

Says Troy, “You wind up starting to think to yourself, ‘Okay.
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Do we go ahead and make the house payment and keep a roof over our head but have no lights and no water, or do we go ahead and keep those utilities on and forgo the house payment, and hope that you can get caught up?’ ”

Rebecca Admire is another of the more than eight million people who have lost their jobs since December 2007.
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A single mom with two kids, Admire was laid off from her job at the Family Guidance Center for Behavioral Healthcare in St. Joseph, Missouri. After several months of struggling to pay her rent, she invited her cousin and two children to move in with them and share costs. There are now eight people living in Admire’s two-bedroom house. The four children sleep in one bunk bed, two to a mattress. But with so many in the house, the utility bills have gone through the roof. “I cry every time a bill comes in the mail,” Admire says.

In some cases, entire towns are falling into permanent decline when their central industries disappear. Mount Airy, North Carolina, for example, which has a population of just 9,500, historically relied largely on the textile industry for jobs.
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But, as Paul Wiseman reported in a March 2010 piece in
USA Today
, one after the other, the city’s textile and apparel factories shuttered, shedding more than three thousand jobs between 1999 and 2010. It’s a trend bound to continue: According to the Bureau of Labor Statistics, openings in textile and apparel manufacturing will nearly halve by 2018, as work is increasingly outsourced overseas and replaced by technological advances.

And in Mount Airy—the city where Andy Griffith grew up, and the inspiration for Mayberry, the epitome of small-town America for TV viewers for half a century—the transition has rattled an entire generation that had banked on the security of manufacturing jobs.
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“When you started work, you thought you’d be there until you retired,” Jane Knudsen, who began working in a textile mill in 1973, told
USA Today
. But Knudsen’s mill closed down, and now she works as a part-time cook at the local jail for two dollars less per hour. Another local, Steve Jenkins, opted to skip college and go straight into apparel manufacturing. He worked at Perry Manufacturing for more than thirty years, advancing through the ranks to earn a salary of $103,000 as director of purchasing. But Perry shut down in 2008. For Jenkins, who received no severance and had few other skills, life was suddenly upended.

“We were not prepared,” Mount Airy City Council member Teresa Lewis conceded.
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“We’ve had a huge loss of jobs in the textile industry. A lot of those people had devoted 30, 35 years to one particular company, and they found themselves in their early to mid-50s without a job or without the skills to go into something else.”

The aggregate effect of these stories—and tens of thousands more like them—is deeply troubling for our country. Through
an enviable mix of jobs created by innovative American businesses and a national culture based on self-reliance, America has always had unemployment rates far lower than other developed nations. But this historic advantage is coming to an end. By the end of 2009, the unemployment rate among sixteen-to-twenty-four-year-olds was 19.1 percent.
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And 19.7 percent of American men aged twenty-five to fifty-four (prime working years) were unemployed—the highest figure since the Bureau of Labor Statistics began tracking this data in 1948.
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“Every downturn pushes some people out of the middle class before the economy resumes expanding,” wrote Peter Goodman in the
New York Times
in February 2010.
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“Most recover. Many prosper. But some economists worry that this time could be different. An unusual constellation of forces—some embedded in the modern-day economy, others unique to this wrenching recession—might make it especially difficult for those out of work to find their way back to their middle-class lives.… Call them the new poor: people long accustomed to the comforts of middle-class life who are now relying on public assistance for the first time in their lives—potentially for years to come.”

There are those in our country who look at the struggles of the middle class—mortgages underwater, foreclosure notices on the door, mounting credit card bills in the mailbox, bankruptcy on the horizon—and think, “They got into this mess of their own
free will; they’re just getting what they deserve.” Who told them to buy that house they couldn’t afford, sign that mortgage without reading the balloon payment fine print, and run up those balances on a credit card that came with a teaser interest rate that is now 30 percent? Why should the rest of us, who were more prudent, be expected to carry the burden of the irresponsible?

This response ignores the ugly truth of what brought about this crisis. It wasn’t a sudden spike in irresponsibility on the part of middle-class Americans. It was the inevitable by-product of tricks and traps deliberately put in place to maximize profits for a few while creating conditions that would soon maximize misery for millions. The devastation was predictable—and, in fact, had been predicted by any number of Jeremiahs who saw the writing on the wall. Indeed, looking at the foreclosure crisis and the credit crisis—and the resulting bankruptcy crisis—it’s hard to avoid the conclusion that, in many ways, things are working out exactly as planned.

In hindsight, it’s as if a giant bear trap had been set for the middle class—a bear trap that was sprung by the economic crash.

Let’s start with the bursting of the housing bubble and the foreclosure crisis that followed. For a century, from the mid-1890s to the mid-1990s, home prices rose at the same pace as the overall rate of inflation.
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The bubble started to inflate in 1996 and within a decade home prices had jumped 70 percent—an $8 trillion bubble.

That bubble was no accident. We’ve just seen the way middle-class incomes had fallen behind expenses over the past three decades. How is it that more and more Americans were
able to buy more and more houses—even as incomes stagnated? By taking on more debt, of course, provided by an underregulated army of lenders pitching seductive new mortgage vehicles. By 2005, subprime mortgages had skyrocketed to 20 percent of the market.
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Fueling the boom was the development of securitized mortgages—including collateralized debt obligations (CDOs)—in which mortgages of varying degrees of risk were bundled together in “tranches” and sold to investors.
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Since lenders were selling off the risk to someone else, they felt much freer to make loans to borrowers who never would have been able to qualify for a prime mortgage.

The Fed did its part, too, contributing extremely low interest rates and lax oversight to the increasingly toxic housing mix. In the words of economist Dean Baker, “The Federal Reserve Board completely failed to do its job.”
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And both sides of the political aisle aided and abetted the bubble. Even after a spate of accounting scandals, many Democrats continued to support Fannie Mae and Freddie Mac, seeing them as valuable facilitators of affordable housing.
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Between 2004 and 2007, Fannie and Freddie became the top buyers of subprime mortgages—exceeding $1 trillion in loans.
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George W. Bush and the GOP also helped inflate the bubble by pushing to dismantle some of the barriers to homeownership—part of Bush’s vision of “an ownership society” that sought to, as he put it in his second inaugural address, “give every American a stake in the promise and future of our country.”
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The road to hell continues to be paved with good intentions.

Refinancing homes and offering home equity lines of credit—the better to be able to buy all those things you see on
TV but really can’t afford—became a fee-generating bonanza for financial institutions. Protected and encouraged by their political cronies in Washington, banks were given free rein to push ticking time bomb mortgages on the middle class—mortgages they could then slice and dice and sell as swaps, derivatives, and all sorts of complex financial products to investors around the world.

So banks, confident in the securitization of their loans, began selling mortgages to anyone who had a pulse, and they often neglected to confirm that borrowers could afford the mortgages they were selling them. By 2006, 62 percent of all new mortgages were so-called liars’ loans—loans that required little or no documentation.
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We got a glimpse into the back rooms of the mortgage industry in April 2010 when a Senate panel investigated the collapse of mortgage giant Washington Mutual. Among the findings, as reported by Sewell Chan of the
New York Times
, was that the bank offered its loan officers pay incentives to originate riskier loans.
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Loan officers and salespeople “were paid even more if they overcharged borrowers through points or higher interest rates, or included stiff prepayment penalties in the loans they issued.”

The behavior of the WaMu bankers, and the many others just like them, was no different than the behavior of corner drug dealers—and while they weren’t peddling crack or meth, they were selling something every bit as addictive: a no-money-down, no-proof-of-income-needed, interest-only, teaser-rate ticket to the good life. The bankers, with a green light from Congress, were determined to turn everyone into irresponsible consumers.

Of course, the bankers knew that the housing bubble, like all bubbles before it, had to eventually burst. And when it did, massive foreclosures and bankruptcies would result. So they needed to set up their self-protecting bear traps.

Enter the bankruptcy bill that banking lobbyists pushed through Congress and President Bush signed into law in 2005.
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It was a bill so hostile to American families that it could have come about only in a place as corrupt, cynical, and unmoored from reality as Washington.

Instead of cracking down on predatory lending practices, closing loopholes that favor the wealthy, and strengthening the safety net for working people, single mothers, and elderly Americans struggling to recover from a financial setback, the Senate put together a nasty little bill that:

• made it harder for average people to file for bankruptcy protection;
  
• made it easier for landlords to evict a bankrupt tenant;
  
• made it more difficult for small businesses to reorganize, while opening new loopholes for the Enrons of the world;
  
• allowed creditors to provide misleading information; and
  
• did nothing to rein in lending abuses that all too frequently turned manageable debt into unmanageable crises.
  

Even in failure, ordinary Americans could not get a level playing field.

And make no mistake, the inequitable nature of the bill—bending over backward to help the credit industry while sticking it to working people who fall on hard times—was not the result of chance. Time and again, the Senate shot down amendments that would have made the bill less mean-spirited. Senators denied proposals that would have made it easier for military veterans, the sick, and the elderly to qualify for bankruptcy protection. They even rejected an amendment that would have put a 30 percent ceiling on the interest rates credit card companies can charge.
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Thirty percent—that’s more than your neighborhood loan shark charges.

According to the Institute for Financial Literacy, in 2009, 9.1 percent of the people who filed for bankruptcy earned $60,000 a year or more, up from 4.7 percent in 2005.
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And among those who declared bankruptcy in 2009, 57.7 percent had attended college, an increase of 3.9 percent.

The institute’s executive director, Leslie Linfield, also points out that there is an alarming bell curve for bankruptcy filings in the thirty-five to fifty-four age group.
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“Fifty-six percent of bankruptcy filers,” she says, “are in this age group. This is concerning because you are looking at a group of people who are middle-aged and very unprepared for retirement. As a society we can’t help but ask the question what will happen in twenty years when this group does in fact retire?”

Our elected leaders utterly ignored the fact that the vast majority of people who file for bankruptcy are middle-class folks who can’t pay their bills because they’ve lost their jobs or been hit with high medical bills. In fact, a 2009 study by researchers at Harvard and Ohio University showed that healthcare problems were the root cause of 62 percent of all personal
bankruptcies in America in 2007.
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Using that rate, roughly 900,000 of 2009’s 1.4 million bankruptcy filings were medical bankruptcies.
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Or, to put it another way: Just over every thirty seconds someone in this country files for bankruptcy in the wake of a serious illness. How’s that for a shocking stat? Here’s another: 78 percent of the so-called medically bankrupt had health insurance at the time of their illness.
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It just wasn’t enough to cover the dramatic rise in health-care costs.