Posts Tagged ‘Housing Crisis’

Whither the Middle Class?

This rather dystopic picture of the future by Douglas Copeland made an interesting point about the reality of widespread, structural unemployment.  (And this is particularly apparent in Florida, which was heavily over-invested in all manner of real estate related gigs, and is now filled with formerly successful real estate agents, mortgage brokers, construction managers, etc.):

Remember travel agents? Remember how they just kind of vanished one day?

That’s where all the other jobs that once made us middle-class are going – to that same, magical, class-killing, job-sucking wormhole into which travel-agency jobs vanished, never to return. However, this won’t stop people from self-identifying as middle-class, and as the years pass we’ll be entering a replay of the antebellum South, when people defined themselves by the social status of their ancestors three generations back. Enjoy the new monoclass!

Of course, there will be no “monoclass.”  There will be a smallish number of super-necessary specialists, not least in the medical field, as well as not-so-necessary and well-connected government people and probably lawyers too.  The rest will be scraping buy.  It will be more like Mexico and the rest of Latin America, and it will be quite unlike the stable, peaceful and prosperous middle class identity and structure of the America of yesteryear.


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Sorry kids, it’s been a busy week (out in the non-blogging world), but I found a few interesting things to share.

Lying Eyes had a nice piece on the limits of markets.

Jonah Goldberg notes that the taboos on criticizing Obama (and his manifest arrogance) are becoming the stuff of ordinary observation.  This breaking of taboos on criticizing bad politicians from “victim” groups is a healthy one.

The gang at Alt Right note the not-terribly-surprising interest of neocons in embracing gay marriage.

Larry Auster’s hippy past comes to light without shame or regret (or much explanation). Incidentally, this guy criticized John Kerry’s service record back in the day, as if he were the second coming of Audie Murphy.  It’s apparent that Larry served in the marijuana trenches of Colorado during the Vietnam War. And he banned me for noting the contradiction and absurdity of his highly judgmental grandstanding on the physical courage of a man, a man whom I do not particularly like, who at least spent some time on the Two Way Range.

Hillary Clinton suggests Serb minority in Kosovo might be oppressed (this after supporting her husband’s genocidal war of Muslim Kosovar liberation that left the Serbs to the tender mercies of the KLA terrorist regime run by head terrorist, Hacim Thaci).  For some reason, I think admitting that this was a huge mistake, the equivalent of Soviet “liberation” of the Poles in World War II, is quite unlikely, as are American promises of protection to the Serbs, who are the whipping boy of Europe.

In other news, Serbs will be Serbs:  young toughs were battling the cops this week in the street to stop a gay pride parade in Belgrade.  Honestly, I don’t support thuggish violence, but at least these people still have enough blood in their veins to know that Euro-decadence is the harbinger of national decline.  Conservatives in America react with a little venting and then a shrug at this and much else.  In a just world, no one beats up gays, and gays do not go out into the street in their bondage gear and expect to be treated as if they were anything but a dangerous, antisocial subculture.  (Sadly, Paladino in New York does not have the guts to defend his first instinct on this issue.)

I was happy to see the Chilean miners be freed  from their long ordeal.  It’s truly great news.  To his credit, their president mobilized national and international resources to help, including America’s NASA, and thereby showed a self-confidence that is often absent in the prickly, insecure Third World.  (Of course, Chile is probably the least Third World of all such countries, not least due to the stability and economic growth of the Pinochet years.)

Everyone is in a tizzy about the fraud of mortgage lenders being addressed now by BofA’s moratorium on foreclosures.  These issues, frankly, are interesting only to lawyers, and I’m one of them, and even my eyes glaze over at the details.  Mortgages and foreclosures are far too technical, as is our old-fashioned regime of property transfer and registration.  Once payments are stopped and a workout cannot be had, the rest is all details. No one has alleged anyone had their house taken when they were making timely payments; it’s all a question of whether some highly technical documents that no one reads or understands were signed by the right bureaucrat or not. The whole thing is a tempest in a teapot.  Since post-foreclosure any title is good against the world, contrary to the hype, this should all blow over.  More important, how much national wealth do we want sacrificed so that a completely outdated and overly expensive process is conducted with scrupulous regard for the defense bar.  That said, if you’re of a Machivellian bent, now is a great time to stop paying on your house; you could probably live their for four to five years with minimal efforts at defending from the bank, particularly in hard hit areas like California and Florida.

What can we make of all this news.  Well, America and the world are having a reckoning with their loose money fiat regime unleashed barely 70 years ago after World War II.  This whole system is unsustainable, and now the real gap between our perceived (i.e., paper) wealth and real wealth is more and more apparent.  The name of the game is deleveraging, which means paying back debts individually and collectively.  And that means pain, austerity, and, due to our nation of welfare addicts, instability in the transition. In such times, anything is possible, both in foreign and domestic affairs.  The best one can do is try to hedge.  And this means being prepared for uncertain times, i.e., anything from the Dust Bowl 30s to the Somalia 90s. And the best way to do that is to reduce debt, sock away some cash (literally, under the mattress), buy tangibles, adopt a minimalist personal philosophy, and be prepared for anything.  America may have sold its soul for granite countertops, but right now a few gold coins, an AR-15, and a month or two worth of stored food and some tradeable stuff like a generator will do a hell of a lot more for you than a stainless steel refrigerator or a jet ski.

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Probably the scariest revelation I’ve had in recent years is coming to undesrtand how little the experts at the top know what they’re doing, even as greater and greater trust is placed in them.  As I’ve gotten older, friends have become CEOs, high level government officials, partners in law firms, and the like.  While most are conscientious and careful, they are also generally, as a group, aware of their limitations.  They are also aware that the public’s expectations and concomitant esteem for their respective roles is grossly out of proportion to their talents.  But the academic economists, some of whom have moved laterally to advising hedge funds and the like, are as cocksure as the most precocious graduate students, replete with “six sigma” predictions and prognostications.  And, as a consequence, a great many pension funds, homeowners, home builders, government authorities, foreign investors, FDIC insured banks, and other major institutions were long on housing well after the conditions for a major bubble had emerged.  And they were cheered on by numerous economists and their explanations of “impounded information” and “efficient markets.”

The cause, in part, has to do with the empirical blindness of many economists, who eschew deep historical, data-driven inquiry for elaborate–indeed “perfect”–models, viz.:

The mainstream of academic research in macroeconomics puts theoretical coherence and elegance first, and investigating the data second,” says Mr. Rogoff. For that reason, he says, much of the profession’s celebrated work “was not terribly useful in either predicting the financial crisis, or in assessing how it would it play out once it happened.”

“People almost pride themselves on not paying attention to current events,” he says.

In the past, other economists often took the same empirical approach as the Reinhart-Rogoff team. But this approach fell into disfavor over the last few decades as economists glorified financial papers that were theory-rich and data-poor.

Much of that theory-driven work, critics say, is built on the same disassembled and reassembled sets of data points — generally from just the last 25 years or so and from the same handful of rich countries — that quants have whisked into ever more dazzling and complicated mathematical formations.

Consider the view of economists on something like free trade, for example.  The free trade theory–a theory of comparative advantage–has been elaborated on by such diverse economists as Adam Smith and Ludwig von Mises.  But respond that a particular country did well and prospered under protectionism–such as the US in the late 19th Century–and they will say that the country would have done even better with looser tariffs.  Perhaps.  But what fact would prove or disprove this theory?  What kind of theory is it that can absorb any data set and not be adjusted thereby?  This is not real scientific inquiry.  It’s ideology . . . or religion.

It’s like Eliot Yeats said:  The best lack all conviction, while the worst are full of passionate intensity.

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I wrote this in March and it’s more true than ever:

Bailouts are bad for many reasons. But the two worst are that they cost a ton of money, and, second, they get government in bed with business. As a result, we’re becoming increasingly numb as a people to the idea that a $1T here and a $1T there is no big deal, just as we’re getting used to the idea of the government has any business directing how private companies should spend their money. The bailout is an anti-capitalist virus that attacks our public finances and our commitment to corporate independence. We must let these companies fail or we’ll destroy free market capitalism. That is the real systemic risk.

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Banking by corporations and limited liability companies is not essential to free markets. Like bankruptcy, all of these arrangements involve shifting some of the harm caused by risk-takers onto those who did not take the risks. There may be good reasons to socialize (i.e,. disperse) risk. People may be improvident or need some paternalistic guidance. A certain amount of risk-taking perhaps should be subsidized, i.e., venture capital, homesteading. But there are other means to amass capital and spread risk–not least debt obligations and insurance respectively–without shielding decisionmakers from personal liability to creditors and others in the case of civil offenses and breached contracts. The possible value of tying corporate decisionmakers and stockholders to the downside of corporate risk-taking should be obvious, considering the heads-I-win-tales-you-lose mess we’ve gotten into under the influences of many factors that have spread risk: limited liability, financial engineering, leverage, and the ethos that on the downside these firms (and investors in the same) are simply too big to fail. I wrote something about this many years ago along these lines here and Hillaire Belloc, to his credit, long ago distinguished between the character of real property and the “paper wealth” with which it shares so little in common as far as social benefits goes. Conservatives who are found of free markets should be rethinking their attitudes towards banking, corporations, and the combination of loose money and weak regulation we’ve recently experienced.

An interesting symposium at the liberal-leaning American Prospect discussed the problems of risk, particularly risk with public consequences. It offered an interesting defense of the welfare state along the same lines as the bailouts; namely, that it frees people up to take certain risks. Of course, like FDIC insurance, bailouts, and bankruptcy, that’s part of the problem when it becomes too generous.

The polymath Richard Posner weighs in, concluding that sensible bank regulation failed, and combined with easy money this brought about the recent crisis:

Finally, let’s place the blame where it belongs. Not on the bankers, who are not responsible for assuring economic stability, but on the government officials who had that responsibility and failed to discharge it. They failed even to develop contingency plans to deal with what everyone knew could happen in a context of escalating housing prices (it had happened in Japan in the late 1980s and the 1990s). Lacking such plans, the government responded to the crisis with spasmodic improvisations, amplifying uncertainty and mistrust and thus retarding recovery.

And let’s not forget to apportion some of the blame to the influential economists who assured us that there could never be another depression. They argued that in the face of a recession the Federal Reserve had only to reduce interest rates and flood the banks with money and all would be well. If only.

Finally, in a tour de force, Allan Meltzer eviscerates the continuing inflationary practices of the unholy triumverate of Obama, Geithner, and Bernanke, viz.:

IN the 1970s, with inflation rising, I often described the Federal Reserve as knowing only two speeds: too fast and too slow. At the time, the Fed’s idea was to combat recession by promoting expansion, printing money and making it easier for businesses and households to borrow — and worry only later about the inflation that resulted. That strategy produced a sorry decade of slow productivity growth, rising unemployment and, yes, rising inflation. If President Obama and the Fed continue down their current path, we could see a repeat of those dreadful inflationary years.

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If we’re going to be spending tons of money on helping banks and dying, mismanaged companies, would it be too much to ask that the redistribution does not go from the productive 25% or so of this country to the risk-preferring .0001% on Wall Street, but that these huge sums actually goes to homeowners in some plan that injected capital into their pockets or forgave their debt in the process? Perhaps such a plan would allow those with reasonable prospects of repayment to pay down 25% of principal or lock in 5% notes over 40 years or something else that actually will not quickly blow up in the government’s face. Wouldn’t this be preferable to the current scheme whereby the housing-induced insolvency for banks is resolved by moving huge sums of taxpayer dollars around from AIG to Goldman or Credit Suisse and then back into the pockets of a few sovereign wealth funds, hedge funds, bank bond holders, and the like?

I mean, I’m not for any of this, but between helping Bear Stearns, GMAC, and AIG with capital infusions and helping average guys who are upside down on their houses, I guess I’d rather just have good, old-fashioned wealth redistribution. After all, the latter arguably would help more people, cut out the middle man in the form of the banks getting direct cash infusions and FDIC leverage, and would at least spread out the benefit of the inevitable inflation that we will face as result of the Treasury’s abject terror at the prospect of a few big banks’ failing. Welfare at least is more transparent and likely to create some Republican (and renter) backlash in comparison to the dishonest claims of “investment,” “emergency,” and Rooseveltian prescience surrounding the bank bailouts.

Of course, the banks have in reality failed, and they are insolvent. The loss is simply being spread to the taxpayers and the few well run banks through FDIC premiums. None of these measures will replace the huge sums of lost wealth nor lead to more lending–for housing or anything else.  Why?  Because the whole economy is uncertain, malinvested, and buried under huge sums of debt undertaken in times where we collectively foresaw a rosier future, and Obama’s reactive responses to these phenomena increase uncertainty, which is a major impediment to wealth creation and risk-taking economic behavior.

What exactly is propelling this Democratic Tribune of the People to spend so much money and political capital to bail out mismanaged bank shareholders and bond holders, who in effect endorsed the banks’ acquisition of huge positions in MBS and ABS products? I don’t think, like Clinton, he is a kind of globalist pro-capital guy, who wants to help international capital so long as DC gets a slightly larger cut. Judging by his rhetorical clumsiness on this issue, it seems more likely that Obama is acting out of a combination of ignorance, fear, and insecurity. After all, it would take real philosophical vision of free markets or a philosophical commitment to Krugman-style redistribution to stare down Bernanke and Geithner in a game of chicken. Obama has effectively outsourced the most important policies of his administration to these Wall Street lackeys, preferring instead to strong arm Detroit into making flying cars and spending time to gin up exquisitely nuanced youtube videos for the Iranian censors to jam.

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There are probably a million ways to game the Geithner bailout plan, just as the TARP has already led to various unintended consequences, such as the continued provision of generous bonuses by AIG and the Merrill Lynch purchase by BofA. James Galbraith has a good article on this today.

The whole premise of the bailout is that these “toxic” assets comprised of various tranches of bonds secured by mortgages are worth a lot more than the market will presently pay for them.  Is this true?  Yes, their cash flows are in order for now, but there are impending waves of foreclosures and defaults as these loans reset in the next few years. 

The Geithner plan amounts to a bribe to investors.  Invest 7.5 cents, TARP will invest 7.5 cents, and the remaining 85 cents will come from the FDIC. Yes, that FDIC, it being the most important component of stability in our banking system that is supposed to be rock solid in all circumstances. If things go wrong, the 15 cents from the private investors and the TARP are wiped out in the manner of equity, but the FDIC has no recourse other than managing, foreclosing, and then unloading these properties. The FDIC will be in the position of foreclosing upon hapless homeowners, but it will face obvious political pressures to play ball with doomed workouts to help the unlucky. We’ll get to see how good of a landlord Obama is when his role is not “community organizin'” but salvaging value from broke people for the FDIC. My guess: not a very good one.

Under the Geithner plan, banks will sell their “toxic” assets at whatever price they want. Under this scheme, the hope is that somewhere above today’s 30 cents or less in value. The idea is that they’re “really” worth somewhere closer to 60 or 70 cents on the dollar, and that having the banks now take 70 cent (as opposed to 30 cent) losses would be an unnecessary and short-sighted exercise with systemic consequences.

But banks and investors like to make money and avoid losses. That’s in their blood. Why wouldn’t a bank take 7.5 cents of its own deposits to buy certain assets from itself at the requisite 60 or 70 cents, in spite of the fact though the assets are in fact only worth 30 cents, when 85% of the bid price is nonrecouse pain absorbed by the FDIC?  I mean, why not bid 100% if it’s just a question of minimizing losses. That way they can still reduce their collective exposure to 10% or less of what it was, because they would take no losses now and push them off into the future. At most, the gap of 70 cents from actual (i.e., 30 cents) to the $1.00 par value would only cost 7.5 cents to wipe out, and the cost of 92.5% of that shift would be borne on a nonrecouse basis by the FDIC with the remainder by the TARP? Why wouldn’t bank A and bank B do this for one another on a handshake if the self-purchase was too unseemly or prohibited?  What rules would prevent that?

Tim Geithner’s and Obama’s bullishness in general and their talk about the real value of the assets ignores all the impending defaults on the underlying mortgages.  As I already stated, they are probably worth 30 cents at most, and that generous estimate too depends on the continued vitality of home buyers on the scene who will set the market price for the various overpriced and oversupplied 2004-2006 homes. This whole plan shifts the worst banks’ risks on to the most responsible banks and ultimately the taxpayers by giving the FDIC and the Treasury the bill: specifically, at least 92.5 cents of exposure on this plan for every dollar of losses avoided by the banks. Who knew Obama would become the worst banks’ best friend?

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