The end of Ponzi financing era in the United States and the World – When income, revenues, and swindles no longer support servicing debt. From California home owners, Greek bondholders, and Japanese zombie banks.

“I wasn’t  worth a cent two years ago, and now I owe two million dollars.” Old newspaper anecdote.  Financial manias in the last century have occurred all across the world.  The interesting nature of this current financial crisis is how widespread it has become.  More and more over the years these manias have focused on real estate as their core speculative vehicle.  Take for example Japan and the Asian economies that experienced widespread real estate bubbles.  You also have the Florida real estate boom of the 1920s.  The ending is always the same but the cause of the bubble bursting typically varies.  Yet one central tenet is the inability to service current debt.  That is why in the United States the inability to pay for a mortgage with actual income was a bursting point.  We went from normal finance in housing (that is paying for the mortgage with current income), to speculative finance (where paying for the mortgage was based on cheap financing tools and projected incomes), to Ponzi financing where current income was unable to pay for even the servicing of debt.  The mania ended for a variety of reasons but the long-term outlook is bleak for United States real estate.

Can inflation save the housing bubble?


Source:  Case Shiller Index, BLS CPI

I have seen the argument that inflation will somehow save housing prices.  This argument is flawed and some have even pointed to the 1970s and early 1980s when inflation was running wild.  Yet the main caveat here was that inflation was also occurring in worker wages (aka the money you use to pay your mortgage).  Max Keiser and Stacey Herbert covered some of this from a previous article we posted:

max keiser

Source:  Max Kesier

The segment is worth watching and starts around the 9:00 minute mark but the main point to take away is that household incomes are not moving up so why would home prices?  To the contrary household incomes have fallen in the last decade.  This is interesting because the housing bubble occurred in the midst of this falling in income.  Access to credit became a substitute for real income.  The ability to service the debt came from:

-Low interest rate mortgage

-Teaser rate mortgages that lasted a few years to hand off to the next speculator

-Multiple mortgages and home equity loans

-Complete financial irresponsibility from the banking sector in exercising due diligence

-Government desire for all households to own a home instead of focusing on increasing income

The government and banks throughout history have been focused on short-term profits especially when they have a synergy as they do today.  Housing bubbles are not unique but the really different thing this time is the magnitude of the people and the mob psychology it placed on the global culture.  You still have raging real estate bubbles in Canada (peaking), Australia (popping), and China (peaking).  Take a look at what happened in an earlier time in Southern California (from the always fantastic Manias, Panics, and Crashes by Charles P. Kindleberger):

“The market in just-built and unfinished houses in Southern California, sold from one person to another at ever-increasing prices with the help of an active market in second mortgages, peaked in 1981 and then collapsed, with price declines of 40 percent.  There was a condominium ‘craze’ in Boston in 1985 and 1986; 60 percent of the buyers intended to sell the units.  The condo market turned soft in 1988, in a pattern to the ‘flat craze’ in Chicago in 1881.  A similar boom and dip occurred in the apartment market in Chicago in 2003.”

As CPK clearly puts it, real estate bubbles in the United States have been around for a very long time.  The stories of those standing with the bag and losing a large part of their savings are rarely recounted in the mainstream press or are kept silent by those who encounter the financial shock.  No one wants to admit they got caught up in the mania and announce they were the last one to enter the game.  Yet one thing is clear and that is the underlying asset in manias suddenly takes on another form of money.  It becomes like a casino chip to exchange for real money at a later time (assuming the bank has the money).  No longer is the home merely a place to live in but something that is speculated on.  Referring back to the above Case-Shiller chart, prices are down 34 percent from their peak nationwide.  In bubble states like California, Arizona, Nevada, and Florida this drop is deeper.  Yet prices are still inflated in many markets meaning the bubble is still going on at some degree.  Inflation is occurring in many consumer goods like food, energy, education, and healthcare.  Interestingly enough since the bubble burst housing has been going down but this is expected because it is reflecting the decline in household incomes through the weak economy.  Food and energy have global markets so the increase in their cost is expected especially with a weaker dollar.  Yet a home is now reverting back to its historical use, a place to live for local families.  You will have unique niche markets where investors buy second homes or beachfront property but these were never communities for the middle class.  The 99 percent of the market where working people live will face a correction where price comes in line with local area earnings.

Shadow inventory reflection of end of Ponzi financing


The shadow inventory pipeline is still extremely full:

“That is a large number of homes.  Now keep in mind many foreclosures are now starting to make their way onto the MLS since banks are actually taking full possession of the homes (although the reality that 675,000 people have not made a single payment in two years tells you where things stand).  Think about the above data; you have roughly 600,000 to 800,000 as current REOs (all the way through the foreclosure process) but you also have 675,000+ people in foreclosure who haven’t made a payment in two years.”

You have close to 700,000 mortgages with no payment in over two years.  Why would banks allow this to happen if the market is supposedly turning around?  Only the banks know the exact book value of these properties and they are clearly not happy with what the reality based market is providing.  Otherwise, these banks would simply unload the properties.  You need to keep in mind however that each month is a loss for the bank now because these households are no longer servicing the note.  You also have the loss of income from a household living in the place actually paying the mortgage.  Yet the reality is newer buyers now have to reflect real earned income and receive mortgages based on this.  The Ponzi financing era is over yet banks want to pretend that it will come back soon.

For this reason we have an enormous pipeline of shadow inventory properties:


Source:  Calculated Risk

According to CR we have the following:

-2.24 million loans less than 90 days delinquent.
-1.96 million loans 90+ days delinquent.
-2.18 million loans in foreclosure process.

-For a total of 6.39 million loans delinquent or in foreclosure in April.

Housing in the U.S. has reached a debt spiral.  No longer can people use Ponzi financing to service their debts.  We had many in California using home equity loans simply to pay the monthly nut on their first and second mortgage.  This can only work so long as the mania continues.  The mania ended in 2007.  Now reality is setting in.  These shocks to the system can cause long lasting changes to the economic fabric like John Law in France so we shouldn’t expect a sudden shift.  The only factor I see causing home values to rise is higher household incomes.  Do we see that?  Here in California the underemployment rate is close to 23 percent.  We also have a troubling budget deficit.  What other places are dealing with massive deficits?

Greece reaching end of speculative stage

I find the Greece crisis troubling in many ways because the reality is, Greece in no way shape or form is going to be able to service its debts.  That is what this entire bailout talk is about.  They need money to simply stay current (otherwise they default, which is going to happen anyways).  The Ponzi finance industry that has overtaken many global bankers is simply looking for ways to pawn off the Greek debt to other suckers before jumping ship.  This is the issue at hand really.  Let us look at the 10 year bond in Greece:

greek debt

Greece GDP                       =             $310 billion

Greece external debt    =             $532 billion


How can anyone look at the above figures and think that this is sustainable?  It isn’t and by definition it will need an adjustment (aka default).  This is similar to households unable to pay their mortgage.  When the Ponzi finance era ends, these types of things happen.  Yet the bailouts continue to go to the financial sector and keep draining resources from actual things that can remedy this situation.

The good news is the vast majority of Americans are recognizing how bought out both political parties have become to their financial overlords:

“(Bloomberg) At the same time, the poll found that most Americans aren’t swayed by the arguments Republicans and Democrats make to advance their competing remedies for debt reduction and strengthening the financial stability of entitlement programs, viewing them as empty rhetoric. Among the rejected assertions are that either spending cuts or tax increases would cause a double-dip recession or would lead to continued joblessness.

“They always spin things one way or another and you can’t really trust it,” says Richard Klimczuk, 58, an independent voter living in Cleveland. “Democratic and Republican sides are both doing it. We have real problems in this country, but they’ll just say things to get people worried so things turn out the way they want them.”

Bottom line is you will need both revenue increases (tax hikes) and spending cuts.  Both parties currently stand to protect the wealthy financial class.  Yet Americans are largely catching on to this fine tuned orchestra of financial swindling.  This is why the “housing bailouts” have done very little in actually boosting home prices.  They have boosted banking profits however.  Ultimately a good like housing, which is very niche specific, needs to rely on local area incomes to arrive at a market price.  Long-term Ponzi financing is not the option similar to multi-generation loans in Japan that reigned supreme during their bubble or centuries ago in French bankruptcy law that pushed debts to future heirs.  The only answer is to clear the inventory and move on without protecting the “too big to fail” and their scare tactics.

Consequences of institutionalizing Ponzi finance

For those who doubted the Japan scenario, four years in we are following a very similar path:


Some thought that we were the entrepreneurs with quantitative easing but Japan did this first with their massive banking bailouts.  Called zombie banks because these banks were barely alive but needed constant money to keep them going.  Ultimately you see what it did to their overall economy.  In the end they have endured two lost decades (and the economy is still in trouble).  The amount of money required to keep the too big to fail going is incredible and shows no signs of stopping.  The Fed balance sheet is now inching closer to $3 trillion!  This is because they have bought trillions in mortgage backed securities and have shifted assets over from banks that are questionable.  In the end like all manias a price needs to be put on these assets by the market.

The fear of course is of doom but ironically flooding the market with cheaper homes will actually bring in new buyers that actually can afford the properties with the new lower range of American incomes.  This will also free up more disposable income to spend on other goods that keep the market moving.  The ‘doom’ scenario is merely for the banks.  We agree that banks are a necessity but more so like a utility, strictly regulated (for checks, savings, and regular retail banking).  Investment banking can do what it likes but failures will fall completely on the shoulders of their banking enterprise.  The commingling of these two functions, retail and investment banking has been disastrous for the typical hardworking family.

The scenario in Japan is playing out here in the U.S. so far.  Slow growth, stagnant household wages, a large transient part-time workforce, and zombie banks that continue to devour productivity and money from the workers in the country.  No matter how you slice it, the era of Ponzi finance is over.

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50 Responses to “The end of Ponzi financing era in the United States and the World – When income, revenues, and swindles no longer support servicing debt. From California home owners, Greek bondholders, and Japanese zombie banks.”

  • In south Florida interestingly both city & county governments continue to base there property taxes on outdated real property evaluations. Broward County’s millage rate is 2.3035%, but a closer inspection reveals that at current price trends the effective tax rate is 4% to over 10%. The lower end properties are closer to that 10% figgure while those at the higher end are at 1.5% or less .

  • Once Greece (or Italy) defaults, the stigma of being the first will be gone, and you will see some not too pleasant surprises around the world.
    We were in Montery, CA last week. Two houses on the same street, both great oceanfront locations. One was 1250 sq.ft, about 50 years old, at $1,700,000. (wishing price). Down the street is one 2,150 sq.ft, 11 years old, at $1,800,000.
    Care to guess which one was bought during the bubble, and is priced (insanely)
    trying to recoup their investment before the final collapse?

    • What is so unpleasant if Greece or Italy default? The Banksters lose and the citizens win. Russia and Iceland defaulted and rebuilt their nations. Now, they are not letting Banksters swindle them again.

  • Max is a crazy bastard, but he typically makes good sense out complex interrelated issues (of course, in his own sarcastic way). Good sense is not in demand these days…too bad.

  • Japan’s stock and real estate bubble looked much larger than the USA, so they are having a much harder time recovering. There are also other factors in Japan stunting their recovering. The USA should recover in a few years; but there are other things looming in the background that could make things difficult. The skyrocketing national debt, unfunded SS, state level debt, city level debt, aging population, etc will all combine to make things very hard on us in the next decade. The poor and middle class are going to continue to be on the brink.

    • Japan is an exporting nation; the U.S. isn’t. Our chief export consists of debt, not products.

      How do you justify the claim that we’ll recover in a few years? That’s just wishful thinking, and not backed up by facts. The chief problem remains that you can’t fix bad debts by adding on more debt. That’s the theme of the world these days, from Greece to Wall Street. The debts are unpayable, and need to be defaulted on before recovery can take place, I’m afraid.

    • Japan’s bubble was not larger than the US real estate bubble, and they did not have the financial WMDs called Derivatives to desperately try make whole either.

      And no, the US is not “going to recover in a few years” and no, the SS Trust Fund is not unfunded: it is looted. The Treasury securities in the SS Trust Fund had better be made whole, or the entire Bond Market goes away.

      Reparations and clawbacks will occur from those that helped themselves to our money..

      • Wont happen. Much of that money was spent decades ago, often on beneficial projects like highway construction. As much as we may wish they could, our elderly can’t eat I-5.

  • Once again, Thank you Dr. HB. Good explication of the overall situation. Keep clarifying this for the internet audience. Max Keiser should interview you on his show!

  • Doug Terpstra

    Excellent, constructive post.

    “The good news is the vast majority of Americans are recognizing how bought out both political parties have become to their financial overlords”

    The bad news is democracy has gone bye-bye. Obama showed us we can’t achieve change through elections, and now the Supine Court has institutionalized bribery and corporate rule. Only the next Ponzi casino collapse may offer a window for a new political party, a constitutional convention, nationalization of the banks, the impeachment of jurors like Scalia and Thomas, and a return to the rule of law.

    Also, a couple of points on parallels to Japan: prospects are far worse for the US because Japan’s unemployment rate is half of ours and additionally, our eternal multi-front imperial wars will continually drain our resources and undermine our morality and culture. This cannot end well for US in the short term.

    • There’s been a glimmer of hope with Jerry Brown, and now John Chiang. They know the serious voters out there want to raise taxes and cut spending, to bring CA back into the black. We’re even willing to go the next step and use the increases to widen the basic social safety net of housing, food, and clothing.

      What we should do is bring back squatter laws that make it easier to take over empty houses. By eroding that property right, you not only house dozens of homeless and poor (and even middle class), but you create another reason for banks to lower the asking price on REOs.

      • Or get bankster goons to clear out those squatters by force in the middle of the night.

        Sounds good – incentivize the banks by allowing squatters/homeless to take ownership to get the market moving. But I don’t see such an attack on the holiness of property ownership ever occuring.

      • So the serious voters want tax increases. NOT one more red cent until the underlying structural problems are addressed. And we all know what those are, in no specific order: entitlements to illegals, downsizing of state government, reigning in state worker compensation (that includes pensions), overhauling welfare system, overhauling the state prison system, getting rid of most of the useless, fraudulent committees and good old boy networking, reel in CARB madness and make it easier for small businesses to compete and survive.

        We are just wasting time until these issues get addressed. Sooner or later change will be forced.

      • I don’t know where you get your information. The “serious” voter wants public employee pension/salary reform before ANY talk of new taxes. I, for one, and millions of others will not vote one more cent until that is taken care of…something Brown is ignoring.
        More food, clothing and housing? CA already has the largest welfare rolls in the nation. The legislature won’t budge on cash give outs where they are taking gambling. I don’t mind helping the truly needy but I, and millions of others, want the corruption out before we are taxed another cent. Also, I am not interested in being taxed more for public employees who get so many more benefits than most of us. The answer is NO more taxes, period.

    • Doug,
      Couldn’t have said it better myself. I really believe that if we can’t achieve some real change through elections this will have to eventually end in revolution. Obama isn’t the socialist he is painted out to be, but just another puppet to the special interests and financial industry.

    • “The bad news is democracy has gone bye-bye.” It went bye-bye in 2000 when the vote was rigged, and has stayed that way until the present. Bottom line.

      Voting isn’t going to change anything when the owners of both candidates use the msm they also own to foist a “narrative” of the candidates America “wants” and the “important issues”, like whether Paul Revere rang bells while shouting through a bullhorn at British “We’re more stupid than we look….and we’re armed!!! And don’t pay taxes, nyah nyah nyah!!!”…..17 months before the election….from reading the news, you’d think the damn election was next week, not a year from November.

      BTW: we are not a democracy, we’re a constitutional republic, elected democratically…in theory.

    • Hey Doug, did you go to UofA Schoold of Renewable Natural Resources – Landscape Architecture? If so, Hi! It’s Ali!

  • anybody else see jon stewart last week discussing the greek crisis? He stated their debt averaged out to be 43000.00 for each greek resident (pop. 10 million) What is ours in comparison? 45000.00.

    Heaven help us all.

    • I think $43,000 per US citizen is a tad low…and, you also have to add the local and state debt on top of that federal debt number…..which I heard was $63,000, not $43,000…but who’s counting when Uncle Ben can whip it up in a minute?

      $63,000 could be a week’s pay soon….for a paperboy.

    • Greek GDP per capita is $27,716
      US GDP per capita is $47,275

      which is (we had better hope) all the difference!

  • Doctor HB, Can you please write a new piece about Culver City. What time frame do you have in order to see a large drop in prices there? Would love to buy in CC but after looking for a few months at houses in 90230 and 90232 decided it wasn’t worth it. I am renting a nice 2bd 1ba house for $2k/mo whereas buying would cost over 4,000 even with 20% down. doesn’t make the least bit of sense as an investment.

    • I lived in Culver City once, i will never move back there. Crazy, $2,000 month for rent. holly cow, I see the RE is still out of control in Culver City, 250-400 for condo and 450-1m+ for a SFR. my advice, keep renting, if you want to buy homes, buy rentals in areas of CA that will cash flow on 15y fixed loans.

  • Somehow the Mississippi Company’s share price is still high despite no dividend and no future earnings. Didn’t John Law have to leave France as he left England – with his tail between his legs or face the hangman?
    Ponzi financing was carried out by bad people like Mozilla and his ilk. We need to TARP bailout all those two year squatters so they can still have their “American Dream” and a garage full of HELOC toys for the river (Chevey 3500, Toy Hauler, Quads, Etc). Poor stiffs, nobody told them about herd mentality.

    Somebody get me a DOCTOR! I keep getting REDFIN generated emails with Mission Viejo and Lake Forest Fantasyland listings – and the sellers of 1800-2000 sq. ft. homes in isotlated tract suburbia are all asking $500-$550K. Maybe it will take a summer of listing and open houses for the sellers to get a dose of the Doctor’s medicine.

    Welcome back Dr. HB. Good to get back on the meds.

  • Nice plug from Max’s show 🙂
    I wonder if people will get the big picture that housing is disconnected to purchasing power.

  • As the market struggles to correct itself, in spite of stoopid government meddling, we hope to see a return to sanity in prices of resale properties. I wonder if the old technique of purchasing a piece of property “subject to the loan of record” still has feet. I bought my present home that way 15 years ago during bottem of last RE recession. I would appreciate comments

    • Sure, I’ll reply. The “stoopid government” is bought and paid for by the same people that brought you this housing psychosis. Without AAA ratings, none of the CDOs would have made it past go into the Wall Street Casino. Even now, there’s intense pressure to keep the value of REITs artificially high. Why? Because pension funds are loaded with these AAA safe assets which if marked to market would have middle aged Americans working till they drop dead in their depends. S&P, Moody’s, and Fitch are to blame for this mess and should pay for it.

      • Isidor Straus

        You’ve said that S&P and Moody’s are to blame for this mess, and they should pay for it.

        They may have messed up, but they can’t pay for it.

        They are only part of the story. It’s a combination of greed on their part for rating fees, greed for short term returns on the part of the banks and investment banks like Merrill, Bear Stearns, and Lehman, and the enabling provided by the government in the form of the Community Reinvestment Act and the repeal of Glass Steagal.

        What a mess! The best book I read on this was “The Sellout” by Charles Gasparino. As far as what needs to be done–and it won’t be–the market needs to clear, the government needs to back off of using CRA as a political redistribution club, Glass Steagal needs to be reinstated, and we need to take some pain. There is no single scapegoat responsible; they all worked together.

  • In that same Max Keiser video where Dr. Housing is mentioned, the following guest is named Steve Keen, an economics professor from Australia (West Sydney). Keen states that the only hope to end this debt deflation we’re in (global) is to raise wages. Unfortunately, he doesn’t explain how to do this.

    To some extent, his argument makes sense. Raise wages and then companies must also raise prices to continue making money. But who will force them to raise wages in the first place? The government could raise the minimum wage, but this wouldn’t have any significant impact on housing, until some much later time as rising wage pressures worked their way up the wage structure. And it would take a pretty substantial increase in the minimum wage to impact other wage brackets. The mood of the government is not to increase the minimum wage at ll right now I think, much less by some huge amount to spur inflation.

    The other obvious problem that Keen doesn’t address is how many MORE jobs will flee to China if wages start going up in developed countries. In conclusion, I would say that rising wages is NOT the answer. Better to write off the debt and start over with new banks.

    • Dr. Keen is one of only 18 academics who predicted the crash of 2008 in published journals. Compared to him, every other Economist missed the biggest event of their career. IMO, that makes every other Economist completely incompetent. Keep that in mind when you hear some supposedly respected Economist talking about how they see the future. The odds are that they have no clue whatsoever of what they are talking about.

      Keen is also the only one who is using approaches from Physics, and basic calculus, for his economic models. That should also give you an idea as to how very, very bad the main fields of Economics are. Personally, I find that completely mindboggling.

      • If it were as easy to force wages higher, as Keen implies, don’t you think every politician under the sun would have have done it by now? Who’s on the record against higher wages?

        Workers want higher wages, politicians want everyone to have higher wages, Bernanke, Real Estate agents, bankers, and salemen want everyone to have higher wages. Even employers would love to pay higher wages if they could, and still make a profit. So it is almost unanimous. Everyone wants higher wages.

        So why didn’t your hero explain how to get wages to go up? Keen didn’t say how, because there is no way to get wages higher in the present global economy. The USA could erect trade barriers to attempt to protect American jobs, like in the 1930’s. How did it work out then, lol?

      • You’re overlooking the fact that that has been done, quite successfully, in the past. Henry Ford, back in the 1920’s, recognized the fact that in order to get people to buy cars, you had to pay them enough so that they could afford it. It was quite successful.

        Given that this would result in less profits for shareholders, and a reduction in the ridiculous salaries for the top managers, no, there’s not a chance that this will be done; either by corporations or via today’s politicians. The pols are owned, lock, stock and barrel, by the corporations.

        In short, it’s excess greed which is bringing down the financial system. Your conjecture, that everyone wants higher wages, doesn’t belay any of the facts. Corps want to reduce Cap-Ex, not increase it. And that’s been the theme for quite a while now.

      • Jason said: “politicians want everyone to have higher wages”

        Hahaha. HAHAHAHAHA! AaaaahahahaaHAAAAhAhaahHAAAAAAA!

  • Another insightful post, Doc! I want to thank you (and for saving me from joining the homedebtor sheeple. The simple concept of cost to rent vs cost to own has transformed my life. I continue to monitor that statistic and will only buy when it makes sense. BTW, I currently have my best rent v own deal yet: Ocean front high-rise in 90802. Rents in my resort style building run from $1500 to 3500 (low floor vs high floor and city vs ocean views). Simple research on the MLS shows that similar condos sell for $300-500/squar foot (and nobody lists association “maintenance” which tends to be high in highrises!). My napkin calculation tells me I’m paying somewhere between about 1/2 what it would cost to buy the equivalent unit. Rent “equiv” Cost is 1/4 to 1/3 if I assume associate fee of 600-900/month. The “north Korea” towers in Irvine have monthly maintenance of $800-1200/mo! Thanks to your education, I truly have “Learned to love Southern California and forget the housing bubble.”

  • Kudos to the good Doctor for getting some recognition on a bigger stage. He should at least be at the level of Gerald Celente in media interviews.

    And about Max Keiser, I think he would make a great Jon Stewart in the economic arena. He could really do a public service by exposing the talking head “economists” dominating mainstream outlets especially bearing down on the fact that none of these people called the top so why should we listen to them now?

    BTW: Don’t you love the current crop of Realtor commercials? What were they telling us at the top of this roller coaster…? Oh yeah,


    Never Forget: “Suzanne Researched This” Never Forget.

    I think if you give Max Kaiser the production support that Jon Stewart has it could result in an economic awakening in America and I would start with this vintage infamous commercial and then segue to an interview with the Doc.

  • I would be thrilled if the American public woke up to the fact that both parties are owned by wall street. It doesn’t seem like they have, their still arguing over the same tired topics, with all that crap of our side is better than yours. Thats all the media feeds us. The whole system is set up to bicker between two freaking parties and the real issues never get brought up. The only way a person can find out the truth is if they do the right kind of google search and get turned on to alternative media. Most Americans are to fat and lazy to give a crap. They just stick to making thirty grand a year, claiming to be a proud patriot supporting the neo-con right and the top one percent who has been supressing their wages since the seventies. Because their proud capitalists doncha know.

  • Dr H.B. says: “Bottom line is you will need both revenue increases (tax hikes) and spending cuts. ”

    I think that this may be true, but in the area of taxation policy, we must carefully think through taxation policy to make sure that it doesn’t cause more damage to the already fragile economic recovery. I am not a big fan of high marginal tax rates, as they tend to lead to a lot of investment in tax shelters. (You can forget about eliminating those! Too much government policy is already dependent on such things as tax free muni bonds, etc.) Plus, I think that higher federal income tax rates will lead to more investment in states that do not have high income tax rates. 35% is the current top bracket and in the states with the highest top tax rates (OR & HI), that is 46%. My preference is to leave the rates alone.

    I am not a tax accountant, and I don’t know enough about tax credits and deductions for the upper income folks to really make any suggestions in that area. I am sure that there are probably some awfully useless and unfair tax breaks out there, but I leave it to others to document them. I think that often these breaks are the government’s way of picking winners and losers (which means that those who pay off are winners).

    I do have some other ideas on the tax code that I think would help the economy, increase fairness, and prevent the government from benefitting from bad behavior.
    First off is the social security tax (information from the internet):

    “What is the Social Security tax rate and what is the maximum taxable earnings amount for Social Security in 2011?

    For 2011, the maximum taxable earnings amount for Social Security is $106,800. The Social Security tax (OASDI) rate for wages paid in 2011 is 4.2 percent for employees and 6.2 percent for employers. For example, an individual with wages equal to or more than $106,800 would contribute $4,485.60 to Social Security in 2011. The employer would contribute $6,621.60.

    For Medicare’s Hospital Insurance program, there is no limitation on taxable earnings. Tax rates under the Medicare program are 1.45 percent for employees and employers and 2.90 percent for self-employed persons.
    Self Employment

    For 2011, the maximum taxable earnings amount for Social Security is $106,800.

    For Medicare’s hospital insurance program, there is no limitation on taxable earnings. Tax rates under the Medicare program are 1.45 percent each for employees and employers, and 2.90 percent for self-employed persons.”

    The upper cap on taxable income for the social security tax is based on the fiction that social security is “insurance” and not a social welfare program. We should do away with the cap. This would generate more money for the programs that are called “third rail”.

    Income from dividends (or why Berkshire Hathaway pays none). Here’s internet information on dividend taxes:

    “Qualified Dividends: For the purposes of calculating the dividend tax, ordinary dividends are for stocks held more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. These are taxed at what is known as the qualified dividend tax rate, which is 5% or 15% depending upon the income tax bracket into which the investor falls. For investors with personal income tax brackets of 25% or higher, they will pay a 15% dividend tax on their qualified dividends. For investors in a lower income tax bracket, they will pay a 5% dividend tax. Qualified dividends must be paid between January 1, 2003 and December 31, 2010.
    Non-Qualified Dividends: A non-qualified dividend is any dividend that doesn’t meet the test of qualified dividends (see above). The dividend tax on these dividends is the same as an investor’s personal income tax bracket. If you’re in the 35% tax bracket, for instance, you’ll pay a 35% dividend tax on non-qualified dividends.
    Sunset of Dividend Tax Relief Scheduled for January 1st, 2011

    Under the current dividend tax law, so-called qualified dividends will no longer be taxed at the same rate of long-term capital gains, but instead revert to individual tax rates.”

    I think this is fine, but like I said, companies such as B.H. (which has a large amount of stock held by its founder) can avoid this tax by simply not paying one. what I would do is to keep the current tax rate on dividend income, but make reinvested dividends exempt from income taxes. When the stock is sold, the capital gains tax would apply. This would encourage more companies to pay them and also encourage reinvestment, both of which are good things. People who live off their dividends would still pay the income tax. With bond yields in the toilet, it is good for retired investors to get more income from their stocks. (Of course stocks in IRAs and 401ks are already exempt from income tax for dividends.)

    Interest income is another source of income for taxation(internet information):

    “Interest income is earned on deposits at banks and credit unions, on money market funds, on bonds, and on loans, such as seller-financed mortgages. Interest is taxed as ordinary income, subject to the ordinary income tax rates.
    Interest on US Treasury bonds and savings bonds are taxable on your federal return, but are tax-free at the state level.

    Interest on municipal bonds are tax-free at the federal level. Municipal bond interest are tax-free at the state level if you invest in a bond issued in the same state in which you reside. Some municipal bonds are private activity bonds. Interest on private activity bonds is tax-free for the regular tax, but is taxable for the alternative minimum tax.”

    Right now, our savings are paying little or no interest so my next suggestion wouldn’t do me much good. However, I’ve always considered it to be totally unfair that when the government inflates the currency and interest rates go up, the government then taxes you on the increased interest, most of which only allows you to keep the purchasing power of the money you earned. I think that every year, the interest income should be indexed to inflation. Only interest above the inflation rate should be taxed.

    I would also favor allowing indexing of long term capital gains on property held more than 5 years to inflation with the provision that the indexed capital gain would be treated as ordinary income, and not given the preferential treatment of the capital gains rate:

    “Short-term capital gains are taxed at the investor’s ordinary income tax rate, and are defined as investments held for a year or less before being sold. Long-term capital gains, which apply to assets held for more than one year, are taxed at a lower rate than short-term gains. In 2003, this rate was reduced to 15%, and to 5% for individuals in the lowest two income tax brackets. The reduced 15% tax rate on qualified dividends and long term capital gains, previously scheduled to expire in 2008, was extended through 2010 as a result of the Tax Reconciliation Act signed into law by President George W. Bush on May 17, 2006. This was extended through 2012 by President Barack Obama on Dec 17, 2010”


    I am not really wild about the idea of a separate capital gains rate, but I’m also against the government inflating asset values and then taxing the false gain. The indexing of true long term gains to inflation would solve the problem. There are already tax breaks for selling a residence in place, and certain classes of tangibles aren’t eligible for the lower rate (from the internet):

    “Calculating Capital Gains Tax on the Sale of a Collectible

    Uncle Sam takes a tax bite out of almost every asset sold and collectibles are no exception. Indeed, collectibles are currently subject to one of the highest rates of federal taxation on investment property. Capital gain from the sale of a collectible is taxed at 28 percent.

    What is a collectible?

    What is a “collectible?” Of course, collectibles include stamps and coins, precious metals, fine wines, glassware, and other commonly collected items.

    It’s important to keep in mind that less obvious items are often “collectibles.” For example, a collection of political campaign buttons and badges can be a collectible. If an item is an antique, it is probably a collectible.”

    These items (especially non-numismatic gold and silver coins) are often bought as inflation hedges. The government obviously hates this, and so taxes them at a high rate. My program would protect such savings from government theft by inflation and taxation.

    Of course this program will never become law because it is too fair to too many groups.


    • well, I might not agree with Joe on everything, but at least he has a plan, which is more than can be said for most of D.C.

  • Let me address this from a New York perspective

    The greatest profits come from buying in a neighborhood that is universally considered to be skanky just before perception starts to turn.

    22 years ago in New York that meant buying homes in the meat packing district.

    That district went from super skanky to uber hip in 22 years and those that bought 22 years ago have earned better than a 15X on their investment (look it up)

    On the other hand, Park Avenue on the Upper East side was already considered to be prime 22 years ago and thus the people that bought 22 years ago on Park Avenue haven’t earned anywhere near that type of return.

    By the same analogy, 22 years ago some people in the Los Angeles area took a chance on a skanky neighborhood that has turned trendy and made good money.

    Those that bought North of Montana did not follow this advice and thus earned comparatively little.

    The relative price appreciation of North of Montana vs other neighborhoods is explainable by this system.

  • Everyone:

    Please be aware that Zillow has greatly increased their house “zestimates” – in my case, my landlord’s rental (the one I rent) has increased $40 thousand dollars in the past month alone.

    How can this possibly be in this economy?

    And apparently, I am not the only one:


    • They haven’t increased the Zestimates, they have changed the formula for calculating Zestimates. Apparently, the Zestimates have gone up in your area, but in other areas they have declined.

      In parts of St. Louis, the listing prices were often half of the Zestimate. Obviously, if a house is listed for $90,000 for six months and does not sell, then a Zestimate of $180,000 makes no sense at all, since no one ever pays MORE than the asking price under any set of normal conditions. I haven’t looked to see if under the new formula the Zestimates for these neighborhoods have become more realistic, but I did read somewhere on the internet that while Zestimates tend to be highly accurate in regard to large tract developments, they tend to be far less accurate in less homogenous neighborhoods.

      I’m surprised that Zestimates are going up anywhere, though. But I think that when Zillow or Trulia say that house prices are increasing in an area that they are often just looking at a zip code as a whole. In other words, if no condos or small houses sell in your neighborhood during a reporting period, but one or more mansions DO sell, some of these online real estate sites may report that as “prices increasing,” which is very misleading, because the mansions may actually have sold at distressed prices.

      • Thank you, Laura for the info.

        Reason why I am flummoxed at the house “value” increase is because unemployment in my locale has actually increased by one percent during the period that Zillow decided that houses here are somehow worth more.


    • Thanks very much for the “heads up”. I wasn’t aware of this.

  • Zillow’s algorithm is screwed. I have been watching my fathers’ house, which they dallied about in the 165K range for a couple of years. They’ve now “readjusted” it to 180K, which is well above appraisal value and not possible to sell at that rate in that market. And my farm? OMG, the Zillow Zestimate is fully 40K off the most recent bank appraisal…so don’t trust Zillow’s estimates. They are just not correct. The best thing you can do is not have your home or property listed on Zillow. Having it there with the crazy numbers makes it harder to sell the property. IMHO.

  • Dr. H.B. Another epic blast! You provide incredible information for those who CHOOSE to make an informed real estate decision. It is pretty easy to see, if someone takes the time to read. That is the big problem, most don’t read and they end up “slam dunked” by the real estate industry, into what has become the “American Nightmare”. There is nothing on the horizon right now, indicating now is a good time to buy. On the contrary, buying home right now, is plain dumb, unless you can piss your money away. Even, sacred Santa Monica has 174 properties in some stage of foreclosure now.

    Dr. H.B., thanks again for all of your helpful insight

  • No doubt we are in a debt hole, but the obstacles are not insurmountable. Of the current 1.2 trillion deficit, about 1/3 has been caused by excess spending (2 wars, part D Medicare, inflated Military, stimulis programs, etc); 1/3 caused by reduced tax rates (Hedge funds are taxed at 15% – WTF); and 1/3 caused be reduced tax revenues due to the high unemployment from the severe recession we are currently experiencing.

    With the political will, spending and tax rates can be tweaked and eventually the economy and employment will improve, albeit slowly. All of the states restructuring and are making significant progress in stabilizing their current and future budgets. With a 14 trillion dollar economy, deficits could be turned around relatively quickly with a little presidential leadership and a more responsive congress.

    Although deficit reduction progress seems somewhat schizophrenic right now, it feels like the current elected representatives know that they need to get the US financial house in order if they wish to retain their House and Senate seats. One hopes that the politicians fear of re-election will be greater than their need to curry favor with large campaign donors in the next election cycle.

  • Do the riots in greece give us an accurate picture of the US, when we have to face our much more size-able and unsurmountable debt problem?

    Why would things go much differently?

  • Lets back up a bit and list some earlier real estate crashes in the US. There was the crash caused by the specie circular by Jackson leading to the panic of 1837. (He said that to buy more than a farms worth of government land you had to pay gold or silver, not paper). A few months later things crashed. This was after Jackson killed the second bank of the United States.
    Then we have the late 1880s southern california boom (a lot like Las Vegas now) The Santa Fe rolled into LA and the train fares fell for a brief moment to $1 from Chicago to LA. People poured in and real estate became the thing to be in, until the music stopped. So given that real estate crashes happen in totally free markets (1837 and late 1880 as examples) as well as in at least some what regulated markets (the current crisis), its clear that real estate is at best a metastable system subject to crashes. Of course a part of this is the con game that is banking at its heart. In the old days if you did not trust the bank you put your money in a hole in the ground instead.

© 2016 Dr. Housing Bubble