“The economic pursuit of happiness has grown more elusive for the middle class. My father bought the house on Emerson Street for $4000. That was almost double his annual income as a salesman for specialty advertising, and he was the sole breadwinner for the family. The day Pop made his last mortgage payment was truly a cause for celebration. Not only did he fully own the house on Emerson Street, by this time all five of his sons had gone to college without incurring large debts from student loans. Pop achieved the American Dream with a GED earned only after his wanderlust as a hired hand on yachts wore off. He worked hard to acquire a good home, provided a good education for his offspring and avoided debt except for the mortgage.

Two professionals now live at the house on Emerson Street, one a nurse, the other best described as a “computer cartographer.” Pop’s single income slightly surpassed half the value of the house at the time of purchase, but now our combined incomes still fall substantially short of half the current appraised value. When our three teenagers enter college in the near future, skyrocketing tuition costs will mean burgeoning student loans in addition to a sizable home equity investment. We will not be “getting ahead” anytime soon by converting our incomes to savings, unlike the man with only a GED who lived here before us.”

From “Losing Balance” in Systems out of Balance

“Too many dollars chasing too few goods” is an old economic saying that sums up both the causes and effects of inflation. Laissez faire economists tend to selectively apply this principle to monetary policy, in ways that best serve their interests, but the implications have a much broader reach than they would have us know. For example, consider a news item from this past week. The title was “Bernanke: Foreclosure woes require action,” (May 8, 2008), an article by staff writer Les Christie of CNNMoney.com, about a speech Bernanke gave at the Columbia School of Business.

Who can argue with that title? We certainly do not want the homes of the middle class taken away. By extension, we must infer that Federal Reserve Chairman Ben Bernanke and the Federal Reserve Board must have the best interests of the middle class in mind. Or must we? The Federal Reserve Board is made up of people well-connected with financial institutions but much less connected with struggling to afford a home. Even if they presume to act in our own best interests, they do so wearing the lenses of their own disconnected perspective of the middle class, lenses that filter the middle class experience through beliefs embedded in serving financial institutions.

The subtitle for the article states that “Price declines have become one of the biggest contributors to high default rates,” and the article reiterates that reversing this decline is in everybody’s best interest. Even back in the eighties, way before my recent quest to understand what was going on with our economic system, I would have questioned that claim. The housing market took off in the late eighties and we were bombarded by the news of how good this was, right up there with rising stock markets and standard of living indicators. Yet middle class folks were having a harder time buying a home in my town. I wanted to buy a home for as little as possible, and could care less if it went up in value afterwards. Why was a fast-rising housing market a good thing?

One reason relates to a statistic I read in the eighties that stated the average American moves 11 times. In our mobile society a home does not become one’s castle but one’s investment. A rising housing market is a good thing when homes become just another form of futures trading. There are cultural consequences of this which will be discussed in the cultural essays of Systems out of Balance, but our immediate focus for now is economics. In our current society our choice of economic employment often dictates our community location, rather than vice-versa. As long as the middle class was destined to be transient gypsies a robust housing market would be in our best interest. Or would it?

Bernanke provided a second reason for preventing declining housing prices. In addition to being an investment a house represents a line of credit. As the financial folks at the Federal Reserve Board see it, the rising costs of houses increases home equity credit for middle class consumers to use to bolster the economy and increase their standard of living. Of course, another way to see this is that rising housing costs have led to rising home equity debt and inflating the supply of capital in the economy. This returns us to the economic condition summed up by that old chestnut: “Too many dollars chasing too few goods.”

All that extra capital we are getting from our home equity creates too many dollars. Housing prices rise because we can “afford” it with the extra credit we have available to us these days, except that in the end this “credit” becomes “debt.” My father, a specialty advertising salesman with a GED, bought a house in the 1940s that cost twice his annual income as the sole wage earner for his household. The Pew Research Center reveals that by 1970 this ratio of home sales prices to median household income increased by nearly three-quarters. By 2005 this ratio of housing costs to median household income was almost 5:1. For the past 35 years the increasing disparity between housing costs and income has been due in some part to flooding the capital market with credit and other capital-generating gimmicks that have little to do with the productivity of an economy.

Surely those financial wizards on the Federal Reserve Board must understand this? Well, maybe they do and maybe not. One theme that recurs throughout the essays in Systems out of Balance is you can be an extremely intelligent scholar yet void of wisdom. All it takes is to have blinders on in regards to certain types of experience, such as the experience us middle class folks are having with owning a home. I, for one, am willing to give Bernanke the benefit of the doubt regarding his intentions for now. He has a long way to go before he fails the middle class as much as Alan Greenspan, who called the shots on monetary policy for much of that period when housing sales prices inflated to six times median household income.

Make no mistake, the proportion of a household income that must be devoted to housing costs is a more important economic indicator for the middle class than anything reported on corporate media. A housing market that rises faster than household income cannot be good for the middle class, nor can the extra credit that serves to inflate that market, pumping in “too many dollars chasing too few goods.” There is something else disturbing about Bernanke’s speech to the Columbia School of Business, but I’ll save that for the next post.

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