The New Road to Serfdom (Revisited)

Remember the Harper's Magazine article with the adorable cover art from last May? Well, just as Professor Michael Hudson and all the housing bubble bloggers predicted, the hopes of millions of new homeowners aspiring to join the rentier class are being dashed.

More confirmation comes from a Reuters report telling the sad tale of Johari Reeves, but first a quick review of the New Road to Serfdom, a reference to Frederich Hayek's classic on the perils of collectivism (note that the entire Harpers piece is worth another look - it has aged well).

Most members of the rentier class are very rich. One might like to join that class. And so our paradox (seemingly) is resolved. With the real estate boom, the great mass of Americans can take on colossal debt today and realize colossal capital gains—and the concomitant rentier life of leisure—tomorrow. If you have the wherewithal to fill out a mortgage application, then you need never work again. What could be more inviting—or, for that matter, more egalitarian?

That’s the pitch, anyway. The reality is that, although home ownership may be a wise choice for many people, this particular real estate bubble has been carefully engineered to lure home buyers into circumstances detrimental to their own best interests. The bait is easy money. The trap is a modern equivalent to peonage, a lifetime spent working to pay off debt on an asset of rapidly dwindling value.

Most everyone involved in the real estate bubble thus far has made at least a few dollars. But that is about to change. The bubble will burst, and when it does, the people who thought they would be living the easy life of a landlord will soon find that what they really signed up for was the hard servitude of debt serfdom.

Of course, big picture ideas such as how centrally planned socialist governments are related to centrally planned free market economies are lost on most homeowners - they either just wanted a place to live for the first time or they were thinking they were going to be the next Donald Trump.

Whatever the case, many of them are now drowning in the very same debt that was supposed to help set them free.

Here's the Reuters story - another one to add to the long and growing list of sad human interest tales about how the housing boom, now gone bust, is creating a new class of debt serfs. For an increasing number of homeowners, with dreams of riches now gone, it is a struggle just to keep a roof over their heads.

Stressed US borrowers use plastic to delay default
This may be Johari Reeves' last chance to catch up on her mortgage payments. The credit cards, she'll worry about later.

"We fell behind (with the mortgage) and twice we agreed to new repayment schedules that didn't work out," said the 31-year-old, a compliance officer at a small bank on Chicago's blue-collar South Side. "It's been a lot of stress. But this time, if all goes well, we should be able catch up."

In August 2006, Reeves and her husband bought a $214,000 home with almost no money down, leaving them with a monthly payment of $1,636 -- higher than they planned on, especially with her husband's furniture sales job largely commission-based and business not good due to the U.S. housing slowdown.

An attempt this spring at refinancing with another lender fell through, leaving them behind on payments and struggling.

But as part of her efforts to avoid defaulting on the mortgage, Reeves said she has "maxed out" all her credit cards, spending to the limit on basic needs. "Now all I'm doing is making the minimum monthly payments."
...
Nancy Barba -- a financial counselor at a local community group, the Resurrection Project -- helped Johari Reeves negotiate her latest attempt at a repayment schedule for her mortgage.

"The credit cards will be a problem later," Barba said. "But right now, the main concern is the house."

Unfortunately, this is just the beginning. With home equity extraction slowing due to plunging real estate prices, credit card debt is rising rapidly and credit card delinquencies are beginning to soar.