My most recent diary discussed how the rich do not spend their wealth, they try their best to preserve it, for themselves and their heirs. This observation led to a very good question by hopelite9: "you're saying they don't put in a bank somewhere (making the money available for others to borrow)?"
Well of course they don't stuff it in their mattress. What happened to all that wealth that was supposed to trickle down?
So what have the banks been doing with all that money?
It looks like they have been lending it to homeowners to buy houses. Great, lets sink our national capital into assets that, once produced, do not produce any further value to society.
Still, now we have given jobs to construction workers, so if you worked in the home building business in the past few years, I hope you enjoyed it. But that party is over for a looong time, as we are now glutted with excess capacity.
And I know many of the mortgage brokers were enjoying the market.
Check this out from This American Life
Alex Blumberg: This is Glen Pizzolorusso, who was an area sales manager at an outfit called WMC mortgage in upstate New York. Just to repeat, he was making 75 to a 100 grand a month. That's over a million dollars a year. Glen was just out of college. His job was a lot like Mike Garner's, he was the same link in the chain, and Glen loved his job.
Glen Pizzolorusso: What is that movie? Boiler Room? That's what it's like. I mean, it's the cooling thing ever. Cubicle, cubicle, cubicle for 150,000 sq. ft. The ceilings were probably 25 or 30 feet high. The elevator had a big graffiti painting. Big open space. And it was awesome. We lived mortgage. That’s all we did. This deal, that deal. How we gonna get it funded? What’s the problem with this one? That's all everyone's talking about.
Alex Blumberg: And when Glen wasn't working, he was doing his next favorite thing, spending ... preferably in the company of, and this is his term, b-list celebrities:
Glen Pizzolorusso: We rolled up to Marquee at midnight with a line, 500 people deep out front. Walk right up to the door: Give me my table. Sitting next to Tara Reid and a couple of her friends. Christina Aguilera was doing some, I’m-Christina-Aguilera-and-I’m-gonna-get-up-and-sing kind of thing. Who else was there? Cuba Gooding and that kid from Filthy Rich: Cattle Drive. What was that kids name? Fabian Barabia? We ordered 3, 4 bottles of Cristal at $1000 per bottle. They bring it out, you know they're walking through the crowd, they're holding the bottles over their heads. There's fire crackers , sparklers. You know, the little cocktail waitresses. You know so you order 3 or 4 bottles of those and they’re walking through the crowd and everyone’s like: Whoa, who's the cool guys? We were the cool guys. They gave me the black card with my name on it. There’s probably 10 in existence. You know? And that meant that I spent way too much money there.
Alex Blumberg: Glen had five cars, a 1.5 million dollar vacation house in Connecticut, and penthouse that he rented in Manhattan. And he made all this money making very large loans to very poor people with bad credit.
So some of this money got captured by folks in real-estate.
A lot of it went to large development companies, and then paid out to wealthy investors, who want to invest it to grow some more.
Only so many homebuilders, mortgage brokers and real estate agencies can exist, and we don't want everyone to fight over them. So where else can we invest to take advantage of this bottomless housing boom? Well how about these Mortgage backed securities? Or perhaps in the companies insuring these nearly risk free securities? Seems like a great new innovation in making money out of nothing!
This latest bubble was a waste CREATED by trickle down economics. People loaning money to people loaning money to people loaning money. And of course, people insuring those loans. There was so much cash, there was nowhere to put it and still make a "decent" return. Except housing.
Some great examples of this in this excellent article in Salon by Daniel Gross discussing the Right's vilification of minority lending.
And as long as we keep piling money into a few people's hands, it will continue to vaporize in larger and larger asset collapses like this one.
In fact, looking back on history, market panics are most likely when wealth is overly concentrated.