Social benefits turn a potential labor force into a dependent population.
By Marc L. Flaster
NEW YORK New York (Texas Insider Report) Remember the Little Old Lady Who Lived in a Shoe? Well she is still there; but life is not quite the same. The phone has been disconnected to counter all the persistent calls from the bank inquiring about delinquent mortgage payments the yard is a mess as there is no money for upkeep the oil company has not been by to refill the tank the electricity has been turned off and the car was repossessed.
A reversal of fortune began when the kids came by and boasted of the profits they had reaped from flipping options on Florida condos. They encouraged their Ole Lady to get an appraisal of the Shoe Palace re-work the mortgage to get some cash out and get into the game ... Taking the plunge in her favorite vacation spot Las Vegas she put all her chips on Black. The local brokers wined and dined her paid for her lodging and gave her good deals.
Within a few months she owned or had options on four houses or condos in the surrounding area. Smelling the rewards of her investments she took out a home equity loan with the combined properties as collateral and signed up for a cruise around the world. Life was good!!
You all know where this tale of gold in them thar hills is headed. Las Vegas real estate collapsed from the 2006-2007 peaks foreclosures mounted and whole subdivisions were in various stages of halted construction. The Shoe Palace is now up for sale the boys lost their homes and are living with Mom. The family has taken the strategic option again of not heeding any notice of past due bills.
The plan is to wait out the government till they come up with a program that forgives the greater part of their debt lowers their mortgage payment to something that is reasonable and cleanses their credit profile.
The most recent abridgment to the HAMP mortgage assistance program gave them their wish. With a family in financial straits it is uplifting to know that their government has turned a safety net into a concrete surety. With no cares nor bills to pay nor buyers for their dilapidated shoe and a steady stream of online deposits from Uncle Sam life is good again.
Here it is 2016 and we look in on Ole Mother Hubbard and her family; we find that they have continued the high life. The boys are in college supported by the Obama mandated student loan assistance program. Rather than seeking an education they have targeted their major as random campus protests joining force with those who seek redress for personal affronts and social injustice dating back to the Civil War.
Mrs. Hubbard has returned to college for continuing education. Unable to make up her mind she amassed over $250000 in debt starting out to become a visiting nurse then changing her focus to legal aid under the assumption that she could better understand the duress she had endured. Finally she joined the Peace Corp and all the debt was forgiven.
Of course she voted for her benefactor on his second round to the Oval Office. The debt load was beyond her ability to ever have enough income to return. This resulted in stress related PDS diagnosed as a pre-existing condition; she was now eligibe for the new ACA initiative. Bitten by a mosquito on her first assignment in the
Peace Corps she returned to the homestead and receives life time disability.
The real estate bug never faded. With the help of the EB-5 program she sold the air rights of the dilapidated Shoe. The cloud scraping luxury condo building sold out to Chinese nationals in a weekend setting an all-time record for turning a depressed property in a declining neighborhood where drug dealing was the major occupation into a diversity conclave. The steerage class level was reserved for those economically challenged. Soon their complaints of isolation developing into low self-esteem along with annoyance at entry reserved for trash compactors resulted into a demand for government aid to right a social wrong.
Meanwhile the streets were turned into bicycle paths organic focused restaurants soon lined the avenues and the millennium generation found the trendy atmosphere a place to continue their internet deconstruction of established businesses.
Turning another page the same banks which refused her appeal for mortgage relief now competed for her business offering free checking lending rates below the cost of delivery hoping to achieve a positive return through mortgage origination. However the condo buyers all bought with cash.
Local politicians blessed her fortitude and determination and even 60 Minutes aired an interview. She has used her new-found wealth to buy up distressed energy companies melding them into a refining enterprise. Cheap feedstock has improved margins and the record consumer buying spree for trucks and SUVs has assured the
demand for fuel. Every cloud has a silver lining.
You may ask what all this has to do with the course of interest rates as we begin the second half of this decade? If you are waiting for the Wells Fargo Wagon as the song goes you are going to be disappointed. Over 80 of the worlds commodities and energy are in the hands of governments and they all need foreign exchange. Their social benefits have turned a potential labor farce (spelling correct) into a dependent population. World trade has come to a standstill and is unlikely to improve.
We are the only country that has a shopping ethic that consumes more than it produces. At some point the debt to finance all this largess will overwhelm the investment market as the world loses faith in our dollar. In the meantime all our governing systems are damning the torpedoes and the throttle is set to full speed ahead. Inflationary expectations have sunk to zero as imports undermine local production costs and energy costs plummet. The Feds data dependent models are blind to the realities of the world markets.
If the model reports that it should be raining but the sun is shining bright it is God who got it wrong not the Feds models. For those with vision there is opportunity. For those without there are demonstrations for equality and more government benefits.
The protests of today remind me of the warnings of Teddy Roosevelt against the destructive vogue of hyphenated Americans: We should expect protected status and special privileges all unearned.
Marc L. Flaster
has advised financial institutions in balance sheet management for over 35 years and is a founding principal of Sandler ONeill Partners L.P.
The views expressed in this article do not necessarily reflect the opinions of any client or organization with which Marc L. Flaster might be affiliated. Readers are advised to complete their own due diligence and analysis.
