Wall Street Protestors Have Met the Enemy and It Is They

America is the land of opportunity, and never before the great housing bubble has a Ponzi scheme drawn such a wide base of support and benefited so many people. This was the most democratic scam in history, and if you got in on the first half of it, you’re still better off. The big losers were not homeowners, but the bankers. A quick look at the numbers shows how misinformed are the protesters running around Wall Street. Instead of picketing the bankers, they should pair off and picket each other. I ran through the numbers recently in an Asia Times Online essay. Here’s the story of the People’s Ponzi scheme in a nutshell:


Household real estate assets rose nearly two-and-a-half times from around $9 trillion in 1998 to $23 trillion at the peak of the bubble in 2006. Bank stocks (a pretty good proxy for bankers’ net worth, as most of compensation for management is in stock) had a smaller bounce, from around 80 on the KBW index to a 2006 peak of 117, a gain of less than 50%.

That’s not surprising, for households could buy a house with 5% or 10% down, and deduct the mortgage interest from their taxable income. A homeowner who bought a US$100,000 home with a $5,000 down payment doubled his original stake every year as home prices rose 10% per annum. Return on equity of 100% to 200% was common for homeowners; Goldman Sachs’ return on equity never made it above the mid-30% range.

The contrast is clear if we index 1998 to 100 in order to put the two gauges on the same scale.

Bank stocks vs household real estate assets, index 1998 = 100

Source: Federal Reserve Flow of Funds, Yahoo Finance. 

Household real estate wealth remains 70% higher than it was in 1998, even after the crash in home prices. Bank stocks, by contrast, are worth half of what they were in 1998. Many of the big banks are much worse off. Bank of America is trading at less than a third of its 1998 price, and Citigroup is at barely a tenth of its 1998 level.


By no means do I excuse the banks. Until 2005, I headed fixed-income research for Bank of America, and resigned for what the bank and I agreed to call “philosophical differences.” On leaving, I sold every share I owned. In July 2007, I warned the public (including Larry Kudlow’s national audience on CNBC) about a “trillion-dollar AAA asset bubble.”

The fact is that no-one likes a fast buck more than the American public. Wall Street was the enabler, but Main Street was the addict. Americans stopped saving as long as home prices rose; when home prices started to fall, they started saving again.

Household real estate assets vs personal savings rate

That is why the Wall Street protesters are foolish and petulant. American households levered a $6 trillion net inflow of foreign savings during the decade 1998 through 2007 into a bubble that benefited them far more than it did Wall Street. The impact of the bubble on the household balance sheet exceeds the growth in real-estate assets, moreover, because most small business expansion followed the housing bubble.

For fifteen years we rode a tsunami of foreign capital pouring into American markets. We didn’t save a penny. Why should we? Our home equity was our retirement account. Our smartest kids got MBAs and went to Wall Street derivatives desks. Engineering was for dummies. Home prices rose so fast that local governments swam with tax revenues and hired with abandon. Everybody went to the party. Now everybody has a hangover, especially the bankers. We thought we were geniuses because we won the lottery. Now we actually have to produce and export things, and we have to play catch-up. Our kids are competing with Asian kids who go to cram school and practice the violin in the afternoon. This isn’t going to be easy, and the sooner we decide to roll up our sleeves and get back to work instead of looking for bankers to blame, the better our chances of coming back.



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