Not over yet

By Creature

NYT:

The national Case Shiller index for the first quarter, also released Tuesday, also showed a 19 percent decline compared the first quarter of 2008, the biggest drop in the index’s 21-year history. The national index covers all United States houses.

It's hard to imagine that, at this point, we are still in "biggest drop" in history territory, but we are.

Republicans' housing victim-blaming

By LindaBeth

Merits and analysis of Obama’s housing plan aside, I’m particularly interested in this bit of Republican rhetoric I’m seeing.

From Politico.com:

The GOP, perhaps predictably, was less enthusiastic. House Republicans released statements, suggesting Obama’s plan rewarded irresponsible borrowers at the expense of the vast majority of homeowners who pay their monthly bills on time.

[...]

He objected most to the main theme of the foreclosure plan – using monetary incentives to spur lenders and borrowers to do the right thing.

“The biggest outrage is that the president’s plan actually will use taxpayer money to pay people to do what they are already supposed to do – pay their mortgage,” Shelby said. “It also uses taxpayer money to pay banks to do what they should already be doing – modifying mortgages.”

So the mass job layoffs aren’t their fault, but people who are struggling to pay their mortgages are “irresponsible” and aren’t “doing what they’re supposed to do” by paying their bills–in other words, their non-payment is “their fault”? I guess in their perspective, you ought to be able to pay your bills with or without a job!

The Republicans seem willing to say that the economic downturn (and thus layoffs, increased credit card rates, and lower lines of credit) is beyond people’s control, but the impact of the economic downturn (housing foreclosures) somehow isn’t.

Their rhetoric also removes any blame for the abusiveness of the mortgage industry on the industry and solely in the hands of “irresponsible” Americans.

I also find it interesting that they claim that this is what the mortgage industry should be doing anyway, yet they don’t want any regulation making them do it and in the absence of such regulation, don’t want the government to incentivize good behavior they “ought to” be doing anyway? If it’s less advantageous to them financially, why on earth would they do it? Since when did the financial industry grow a conscience?

(Cross-posted to Speak Truth to Power)

Stimulating consumerism, encouraging debt

By Michael J.W. Stickings

I realize that part of what the economy needs is more consumer spending on big-ticket items, and so I understand why Republicans pushed successfully for a $15,000 tax credit for homebuyers to go along with a tax incentive for carbuyers, both now part of the Senate's stimulus package, but is encouraging more spending at a time when jobs are being lost and the credit market has dried up really such a great idea? I mean, you can give people any sort of incentive you want, but what if they still can't afford to buy those big-ticket items? Ten percent of a new house, up to $15,000, is nice and all, but there's still the other 90 percent to consider.

And so while the tax credit might help shore up the housing market by keeping prices up -- and perhaps even reduce foreclosures by allowing people to take out smaller mortgages -- it's not clear to me how this helps fix what truly ails the U.S. economy and the financial sector, namely, too much risky lending and borrowing, and spending, at a time of global economic restructuring. Indeed, it seems to me that encouraging people to make such big-ticket purchases could actually make the situation worse than it is already by putting more and more people into more and more debt from which they'll have more and more difficulty getting out, leading to more and more foreclosures, more and more repossessions, and more and more bankruptcies.

Take the example of buying a new flat-screen, high-def TV. If you go to your local Best Buy, or a similar store, you might find a TV you want for, say, $2,000. But maybe that's beyond your budget. Or maybe you just don't need a new TV when you're already having trouble paying the bills, and maybe you're worried that you'll shortly be losing your job. Maybe you should put some money away or spend it on your kids. But what if some sort of credit were being dangled in front of you? What if, say, that TV would only cost you $1,800? Ah, now it's more reasonable. And maybe you think, what a great deal. Ten percent off. I'd better take the offer before it's off the table. Who doesn't want a high-def TV? But then, once you buy it, you still have to find the $1,800, and, given your current financial situation, you'll probably have to put it on credit. But you're already maxed out, or close to it. And what if the incentive encourages you to buy and even more expensive TV? What if that $2,500 one is the one you really want, and, well, if you can get it for $2,250, that's a pretty good deal. So why not? It's all going on credit, after all, and what's a few hundred more dollars?

I realize it's not a perfect analogy -- a TV isn't a house or a car, and you don't need to access as much credit to buy one (unless it's some super-expensive one), credit that has dried up -- but yet get the point, I'm sure. While quick-fixes to stimulate the economy are appealing, and certainly so to politicians, who must ultimately answer to constituents, encouraging Americans to buy more, and to go deeper into debt, is reckless and irresponsible, and certainly not the answer to the economy's woes.

Olly olly ox unfree!

By Carl

The dynamic of the American economy is a quasi-free market.

Or rather, it was.

The underlying mechanism of a free market goes something like this: I have a need, say, food. Company A determines there's money to be made in supplying me with food, but only at a price a) I'm willing to pay and b) they can actually make some profit at.

If Company A is the only game in town, they can charge pretty much whatever they want, because they know I need to buy food. Company B realizes there's a boatload of money to be made in food, so it opens up a store and competes with Company A. This drives down the price, since Company B and Company A will now engage in a war for my business. It's not a profit until someone actually earns it.

The rational consumer, of course, will pay the least amount of money he possibly can for food, so long as the quality is comparable from Company A to Company B. Meanwhile, Company A and B will try to maximize their profits, either by charging as much as possible or by cutting their costs to produce food by as much as possible, or both. Again, this is rational.

Supply competes to fulfill demand, and if there's not enough demand, Company A or B goes out of business or tries to create more demand for their product by expanding markets or finding some other advantage for their product.

This scenario assumes a few things that may not always be true, and indeed, one basic assumption has not been true for some time now, ever since the late 80s, early 90s.

This scenario assumes a limited amount of money for the consumer. So long as personal credit markets were tight, this was how free markets worked: people had limited income, so voted for products based on whether they could afford them or not.

The twin barrel gun that shot huge holes in the capitalist system were mortgages and credit cards.

Now, both serve a purpose, when used wisely. After all, if it takes 30 years to pay off a mortgage with a reasonable cushion for your day to day living expenses, then it stands to reason it would take about 30 years to save enough to put down cash on a house, perhaps longer, since you'd be paying rent.

Likewise, credit cards allow us to buy things that we need, but can't afford to pay for right now that would take an awful lot of time to save up for, like kitchen appliances or TVs.

All this posits that eventually you'll earn enough money to pay these bills back.

Right now, that's not the case, and we're at the tail end of a cycle that could be devastating to the global economy, not to mention American independence.

Consumer debt, including mortgages, is higher than it has ever been, rivaling the national debt in magnitude.

That's unheard of, but here's the kicker: not only is it higher than the current savings level for Americans, but there's speculation now that, at present income levels, there is no way America (as a whole) will ever earn enough money to pay down their personal debt.

What happened over the past twenty odd years is probably going to go down in history as mankind's greatest economic folly.

First, let's look in the mortgage market. People started borrowing more and more of their purchase price (you used to have to put down 20%, then 10, and then five, and now, nothing), because banks were having a hard time lending money to people after the recession of the early 80s.

The housing market had collapsed, you see.

By lending more and more money, banks were setting up a vicious cycle, where people had little to no equity to lose in their houses. Rather than homestead and be satisfied with the house they had, they would trade up.

Why? It really didn't cost them anything. What this triggered was a housing market that slowly caught fire, as prices scaled upwards when people started to trade up in house size and price. This attracted more and more buyers, who were offered easier and easier credit as banks were forced to compete with cutthroat lending policies.

All this was fine, so long as housing prices continued to spiral upwards. Sure, we'd had adjustments in housing prices, but over the long run, a house was the best investment anyone could make. You were guaranteed to make money.

Over the long term, however. What we started seeing was people taking advantage of some of these teaser loans that banks felt compelled out of greed to offer: five year adjustable rate mortgages with ultralow interest-only payments until the five year adjustment period had passed.

By then, people moved on and bought a new house with -- you guessed it! -- a five year adjustable rate mortgage.

In other words, they kept playing a shell game with the bank's equity.

But notice what else happens here: as people spend less and less income and provide less and less equity in their houses, they are free to spend more and more disposable income on other things: Nike sneakers, iPods, computers, flat screen TVs.

All paid by with credit cards. So long as a consumer was able to make the minimum monthly payment, no one would deny them more credit, despite the fact that not only did they have no real equity to look to in case things fell apart, but they're incomes weren't keeping pace with even the minimal inflation that the economy was suffering.

So people stretched a rubber band in two directions at the same time, and it's only now those bands are breaking. There are a combination of factors, to be sure, as to why the rubber bands chose now to break, but underneath it all, they had to break sometime, so why not now as opposed to two years ago, or two years from now?

The solutions for this are not pretty. It's a little like trying to solve a jigsaw puzzle when thirty percent of the pieces are missing. Bottom line is, there ain't no going back to a time when this nation was healthy, not anytime soon, and certainly, business will never been "usual" again.First and foremost, don't buy any solution that says we can "spend" our way out of this with lower taxes and more economic activity. People can't afford the debt they have already, and they've been conditioned to spend more using debt. They probably don't even remember how to save a buck or two!

Second, keep in mind that bankruptcy laws were changed, with the support of McCain and Obama, to limit individual bankruptcies even further. So that debt relief tap has been turned off, for now. Any attempt to revisit that issue will be met with very stiff resistance by banks.

Third, and most important, keep in mind that with no disposable income, as people try to repay their mortgage balances that weren't covered in the sale of their houses, and have to pay real money to have a roof over their heads and food on the table, there's going to be precious little economic boost to be had. Too, rising gas, food and health care costs will sponge up quickly any left over money.


If we hadn't squandered a few trillion in Iraq, there's a chance we might have the funds in place to have some effective solutions that could speed up and perhaps bolster the recovery, as anemic as it will be. You'll hear a lot of short term hype, but fundamentally, the consumer is ruined.

We owed our children better than we've given them. We've ruined their environment, endangered them with our hubris over global warming, and had until this administration passed along a manageable but difficult economic timebomb.

Which just exploded. In our faces.

(Cross-posted to Simply Left Behind.)

Bush league reforms

By Carl


When history looks at the Bush administration from the perspective of the American people, it's overwhelming conclusion will be "who did the policy really benefit, since it clearly didn't benefit the citizenry?"

Too, with today's announcement of "mortgage relief for homeowners," we should anticipate history. An historian's job is not easy, and bloggers should assist him (or her) in any way possible:

The plan hammered out by the U.S. Treasury Department in talks with mortgage industry leaders would bring relief to many of the 2 million homeowners who took out adjustable rate loans with low teaser rates due to move sharply higher in the next year or so.

Officials fear 500,000 Americans are at risk of losing their homes.

The initiative is designed to temporarily hold rates steady for subprime borrowers who could not afford to stay in their homes otherwise. A senior White House official said Bush would discuss the agreement at 1:40 p.m. (1840 GMT) on Thursday.

"No one wins when a house is foreclosed on -- the homeowner loses; the lenders lose; communities and neighborhoods lose; investors lose; and the economy suffers," the official said.

Ah, let's take a closer look at that, particularly in light of Hillary Clinton's analysis yesterday:

Clinton said mortgage lenders and brokers who lowered underwriting standards were also deserving of blame for the housing market mess, as were regulators who failed to provide adequate oversight.

She pinned some of the responsibility on ratings agencies for giving high marks to securities later deemed to be much riskier, and on speculators who bought multiple properties in the hope of profiting from a strong housing market.

She also pointed out that a mortgage was no longer a mortgage, but an "asset" underpinning a securities (a derivative), which could be bought and sold like a commodity.

This action spreads the risk of the loss (see the article I originally quoted) amongst the business community, in particular, away from the banks who lent the money in the first place!

So the lender doesn't lose, meaning there's got to be a better reason why banks and mortgage makers would agree to a rate freeze.

The White House is touting that the agreement will help over a million homeowners who face enormous rate increases in the next twelve months (roughly two million), and many of the 500,000 homeowners already in default on their mortgages:

The official said the plan could help more than a million qualified homeowners with subprime loans avoid foreclosure over the next couple of years. However, private-sector analysts said the numbers would likely be much lower.

"In theory, the plan could help as many as 750,000 subprime homeowners," said Mark Zandi, chief economist for Moody's Economy.com. "In practice, my sense is that it will probably help at best about 250,000 homeowners."

And so how does this plan work?

Under the plan laid out by the investor group, homeowners who have shown they are a reasonable credit risk, but who could not afford their homes with higher rates, would qualify for "fast-track" loan modification and the five-year interest rate freeze.

Borrowers who can afford their current loan terms would get help refinancing, but those who cannot and were poor credit risks would probably still lose their homes.

Ahhhhhhhhhhhhh, there's the "benefit" to banks! The bill does nothing to wipe out the really bad lending decisions that were made by the banks, meaning they can write them off, taking a one-time hit to earnings, once the freeze is in place. This frees up future earnings (and by extension, their stock prices) and bolsters their balance sheets long-term by wiping out the calculations needed to determine the bad debt expenses associated with the truly exploitative loans.

In effect, what this reform is saying is, if you could have afforded your mortgage five years ago under these new terms, then you can keep your house. If not, tough luck, sucker! We take your house AND all the equity you've built up in it, and will sell it off to make our mortgage back.

Yea. Bush "reform"...

(Cross-posted to Simply Left Behind.)