An executive who was an up-and-comer in an industry sector I once covered for a living used to say, "A revolution is coming, and in times of revolution, it's best to be a peasant." If the 1990s and first five or so years of the current decade prove anything, it's that the truth of the phrase "the consumer is king" carries baggage with it. If the consumer is king, then he or she is not a peasant. If the consumer is king when the revolution occurs, there may be hell to pay.
Consumers wanted wealth, and they got it. Owning a house became a relatively pain-free way to go on vacations, buy cars and great new electronics, put in pergolas and fancy trees in the back yard, and send kids to costly colleges. More people owning houses swelled municipal tax coffers, improved roads, increased store traffic and e-commerce, and boosted income and sales tax to support various levels of government agendas. Incomes went up, and there was money not only to buy stuff, but to invest via 401(k) mutual funds and through other investment channels. The consumer was king. We got more. We got service. We got results. And for a while, we got the satisfaction of the fantasy that it could go on and on forever.
Like any consumer packaged good–a cold remedy or a cleaner or a shelf-stable microwaveable dinner entree–a share of equity, or the ownership in an asset has fine print. The packaging boasts of the wonders of the performance, or the effectiveness, or the deliciousness of the product, while the almost illegibly tiny print shows the side effects, or the conditions of when to use or not use it, or the calorie count of the item. Since consumers became king, we trained ourselves to read the finer and finer print to learn of all the caveats and disclaimers and restrictions each consumer product comes with, but we did not–in a generalized way–learn to do the same with the products that comprise our financial well-being.
As kings of consumption, we stopped paying attention to the flip-side of how financial products and services worked. We'd become so accustomed to the way they were performing when home prices were appreciating, and liquidity was bulging, and capital simply could not find enough places for investment opportunity that we stopped thinking like peasants.
Home builders, prone to the same failing, got themselves into fixes in the same way, only on a grander scale. Joint venture structures were like exotic loans, which basically deferred the obligation to repay as they assumed greater and greater asset value with every sunrise. We empathize with TOUSA's embattled CEO Tony Mon because he was using the same set of growth, opportunity, and risk assumptions almost everybody else was using. We admire Art Falcone because, if nothing else, he's a master–not only of timing, but of the fine print on his deals. See the wonderfully-reported classic story of a rise and fall in "A Tale of Two CEOs," on page 24.
As the global capital complex de-leverages–which is what is happening and must happen to reset the basic worth of many, many asset classes–tertiary and secondary markets that subsist as after-markets for rolled-up original loans go away. While they're away, credit is very tight because banks are using their access to Fed funds to de-leverage rather than to lend money. Buyers of new homes are going to have to have more money, more documentation, and more job stability than ever to qualify.
To stanch falling home prices and values, individuals need to start behaving like peasants, put their household balance sheets in order, and de-leverage their financials. For a while or longer–for most of us–the house once again has become a forced savings vehicle rather than a wealth-building one. According to the fine print on mortgage contracts, equity investments, and every other product we consumers have purchased, the revolution has begun.