The great financial rape

Tyler Durden shows how the banks used the housing bubble to rob the middle class of half their wealth:

The Great Middle Class between those in poverty and the top 20%–56 million households– owns about $2.7 trillion in financial wealth, and the millions with mortgages own an additional $1 trillion in home equity. That comes to $3.7 trillion, or about 6.5% of the total household net worth.

Consumer durables–all the autos, washing machines, jet-skis, etc.–are worth about $2.2 trillion ($4.6 T = $2.4 T in consumer debt). Add the durables and the other wealth, and the Great Mortgaged Middle Class holds about 10% of the total household wealth ($5.9 trillion).

Before the housing bubble, households owed about $5 trillion in mortgages. The housing bubble came along, introducing the fantasy of home-as-ATM-cash-withdrawal-machine, and mortgages ballooned to over $10 trillion.

Back at the top of the bubble, the middle class had $6 trillion more assets on the books. Considering the Mortgaged Middle Class now owns about $6 trillion in net assets, then the bursting of the housing bubble caused their net worth to drop by 50%.

With regards to the importance of real estate and debt, note that household and nonprofit real estate is now worth $18.2 trillion despite its $6.8 trillion decline since 2006. This is non-trivial, given that real estate is still nearly twice the current $8.9 trillion of the M2 money supply. What I find particularly interesting is that mortgage debt and consumer credit are both nearly flat; this indicates that the Fed has successfully resisted the debt-deleveraging thus far while being unable to prop up the prices of certain asset classes.

This is further indication that what we are presently seeing in the equity and commodity markets is a speculative spike driven by liquidity rather than true monetary inflation. The silver market, in particular, has gone nearly vertical, which in most situations would indicate that there should be some further buying opportunities in the relatively near future. Alternatively, if the rising commodity prices are indicative of hyperinflation, we’ll see real estate prices start rising soon and silver could go to 400.

I think, however, that we’re more likely to see prices start collapsing when QE2 comes to an end. For all that the rising prices look superficially impressive, they’re actually quite moderate in comparison with the $5 trillion in global liquidity pumping. No doubt there will be calls for QE3, but given the increasingly obvious failures of the first two quantitative easings and the attention that is being given to the debt, I doubt the Fed will be in much of a position to try it.

Anyhow, the two most interesting signals now appear to be housing prices and silver. Right now, these markets are moving in opposite directions and its as foolish to ignore one as the other. Sooner or later, one of them is going to reach an inflection point and reverse direction and that should provide us with a better idea of whether Federal Reserve pumping has been disguising the deflation or various factors unique to the housing market has been mitigating the effects of inflation in the real estate market.