Before we elected a new president 113 days ago and expected him to reverse a 15-year tsunami of misjudgment, miscreance, and missteps, we stored up confidence and trust in economists.
Bullish or bearish, notwithstanding, they managed our disappointment in their pronouncements and forecasts with a dismissive flourish and a slight adjustment to their predictive models.
In a story that just appeared in The Atlantic, Gregory Clark, a professor of economics at the University of California at Davis, described some of his concerns with the profession of Academic Economists.
In this story he also used a paper on online dating (one of mine) to show how economists are working on irrelevant topics. And while I think that the dating market is an important topic to study, and even more to try and improve, I think that his overall criticism is worth paying attention to.
Here is the text:
Dismal scientists: how the crash is reshaping economics With the chattering classes consumed by concern for the devastated value of their 401K funds, and their suddenly precarious lifestyles, there has been much anger and scorn directed at those former masters of the universe, financiers.
But the shock to the world of finance has been echoed by a shock to the world of academic economics that is just as profound.
In the long post WWII boom, as free market ideology triumphed, economists have won for themselves a privileged place inside academia.
First there is the cash. It astonished some when Washington University, a school with an economics department of modest prestige, hired economists David Levine and Michele Boldrin by offering salaries well in excess of $500,000. But most high ranked economics departments have professors earning in excess of $300,000. Not much by the pornographic standards of finance, but a fat paycheck compared to your average English or Physics professor.
It is not just the stars. Journeyman assistant professors in economics routinely come in at $100,000 or more. And, unlike the hard sciences, they do this fresh from their PhDs, without a publication to their name and without years of low pay as post-docs.
The high salaries have been accompanied by dramatic declines in the teaching burden. The research demands of our advanced science leave little time for the classroom. In good universities faculty typically teach only two courses a year – one of which has to be a graduate seminar. The masses in the Econ 1 classes are often abandoned to the tender mercies of graduate students.
Then there is the economics “Nobel” Prize. Not a real Nobel, but a prize funded by the Bank of Sweden in honor of Alfred Nobel, with all the royal trappings of the Nobel. That makes economics star players really attractive to universities. When Edward Prescott of Arizona State won the Nobel he was paraded at half time at a football game. There is nothing like a Nobel for luster and fund-raising.
Why did academic economics generate so much prestige? Sure, modern economics is technically demanding. But so, for example, are theoretical physics and archeology, and physics and archeology professors are (relatively) dirt poor.
The technical demands helped limit the supply of economists. But what drove demand was the unquenchable thirst for economists by banks, government agencies, and business schools – the Feds, the Treasury, the IMF, the World Bank, the ECB. Economics had powerful insights to offer the world, insights worth a lot of treasure. Economics was powerful voodoo. Any major university or research institute wanted to arm itself with this potency.
The current recession has revealed the weaknesses in the structures of modern capitalism. But it also revealed as useless the mathematical contortions of academic economics. There is no totemic power. This for two reasons:
(1) Almost no-one predicted the world wide downtown. Academic economists were confident that episodes like the Great Depression had been confined to the dust bins of history. There was indeed much recent debate about the sources of “The Great Moderation” in modern economies, the declining significance of business cycles.
Indeed as we have seen this year on the academic job market, macroeconomists had turned their considerable talents to a bizarre variety of rococo academic elaborations. With nothing of importance to explain, why not turn to the mysteries of online dating, for example.
I myself was so confident of the consensus of the end of the business cycle that I persuaded by wife after the collapse of Lehman Brothers to invest all her retirement savings in the stock market, confident that the Fed would soon make things right and we could profit from the panic of a gullible public. The line “Where is my money, idiot?” is her’s.
(2) The debate about the bank bailout, and the stimulus package, has all revolved around issues that are entirely at the level of Econ 1. What is the multiplier from government spending? Does government spending crowd out private spending? How quickly can you increase government spending? If you got a A in college in Econ 1 you are an expert in this debate: fully an equal of Summers and Geithner.
The bailout debate has also been conducted in terms that would be quite familiar to economists in the 1920s and 1930s. There has essentially been no advance in our knowledge in 80 years.
It has seen people like Brad De Long accuse distinguished macro-economists like Eugene Fama and John Cochrane of the University of Chicago of at least one “elementary, freshman mistake.”
It has seen Treasury Secretary Timothy Geithner, guided by Larry Summers, one of the most respected economists of our time, produce a bailout plan for the US financial system stunning in its faltering vagueness.
Bizarrely, suddenly everyone is interested in economics, but most academic economists are ill-equipped to address these issues.
Recently a group of economists affiliated with the Cato Institute ran an ad in the New York Times opposing the Obama’s stimulus plan. As chair of my department I tried to arrange a public debate between one of the signatories and a proponent of fiscal stimulus — thinking that would be a timely and lively session. But the signatory, a fully accredited university macroeconomist, declined the opportunity for public defense of his position on the grounds that “all I know on this issue I got from Greg Mankiw’s blog — I really am not equipped to debate this with anyone.”
Academic economics will no doubt survive this shock to its prestige.
Will we be as well paid? A recent article in the Wall Street Journal suggests the days of the $500,000 economics professor may have passed.
But more importantly, will the focus of academic economics change? That is hard to tell. But I would rate the chances of Chrysler producing once again a competitive US automobile at least as high as the chances of academic economics learning any lesson from this downturn. (What was the price of that Chrysler stock we bought, dear?)
Looks as if the asset value of economic analysis may be in flux, perhaps worth pennies on a 2006 dollar. We say, let’s learn more about dating.
In blogland, there seems to be an assumption about “the bums.” The bums are “Them” in the “Us-Them” war that is all aboil as economic turmoil intensifies and the downturn’s byproduct of personal pain engulfs more people each day.
A macroeconomic debate–whether or not to declare the largest U.S. banks insolvent, zero out equity shareholders’ investment, and put government in charge of their restructuring and future resale–instantly has become so pervasive that one almost wishes the NFL were still ruling Sunday afternoons so that we’d have something else to talk about. It’s become water-cooler fodder, as current as Oscar gossip.
Still, many of us are so bad about talking about bank nationalization. We don’t know enough about it–even when Nobel Prize winning New York Times columnist and Princeton economist Paul Krugmanand others try to dumb it down for us–to know whether or not it’s a good thing for us, for the country, etc. For instance, nothing in the words Krugman uses below flies over our head; it’s the entirety and immensity of what he’s talking about that baffles us.
The case for nationalization rests on three observations.
First, some major banks are dangerously close to the edge — in fact, they would have failed already if investors didn’t expect the government to rescue them if necessary.
Second, banks must be rescued. The collapse of Lehman Brothers almost destroyed the world financial system, and we can’t risk letting much bigger institutions like Citigroup or Bank of America implode.
Third, while banks must be rescued, the U.S. government can’t afford, fiscally or politically, to bestow huge gifts on bank shareholders.
How are we really to get our minds around the concept of Roubini Reality, which appears to assert that the past 15 years of societal, cultural, corporate, and political behavior, trajectory, and design were but a hallucination from which the world is being shaken roughly awake?
For understanding, we turn to insight sherpas, which is where we hear about “the bums.” The bums are the scoundrels who are to blame. They are 24 individuals and the entire American population of consumers, according to a self-laudatory slide show Time Magazine has assembled. They are the chicanerous imbeciles who ran all the banks, according to many commentators. They are the three-faced prevaricators in the home building sector who overborrowed, overbuilt, and overcharged for houses, when in fact, apparently they should have been expected to sit patiently, not building and not finding new customers until the boom ran its merry course. They are the unscrubbed and the unscrupulous populace who opted–undeserving and now caught red-handed–for homeownership.
Now, above all, they are government officials–a hybridized mix of idiocy, incompetence, and criminality–who, according to the champions of economic Us-Them warfare, are bent on using malevolent powers, not only to help all “the bums,” but to stick “Us” with the enormous, multi-generational invoice for the help–which, by the way, won’t help.
“The bums,” in other words, are “Them.” “Us,” the good guys, are most often referred to in these polemics as “taxpayers,” or “the taxpayer.”
Geithner is attempting to bail out his banking buddies, no more, no less, and he does not give a damn what it costs taxpayers to do so. And while everyone and their brother has hopped on the Nationalization Train (please see The Nationalization Train Has Left The Station), I think there are at a bare minimum a half dozen questions that need to be addressed first (please see Nationalization Revisited).
Citigroup is struggling to remain independent even as it knows full well, that without still more government intervention, it is worthless. In fact, Citigroup is less than worthless because without more taxpayer cash infusions it cannot survive.
To hell with Citigroup. Bust it up and sell it. It’s the best possible outcome for everyone involved.
The question to Mish is who is “everyone involved?” We wonder this partly because when you subtract equity holders and homeowners who both stand to lose a great deal when and if this eventuality takes place, how many tax payers are there left as beneficiaries of such a smart move?
You’d think from much of the cant out there among the bloggers that the “taxpayer,” or “Us” is a group entirely discrete from “Them,” the verminous, villainous, numbskulled, dimwitted perpetrators of the crash.
The point is, many, many of “Us” are “Them.” If you can’t understand and explain to someone who doesn’t understand why it’s best economics practice to nationalize the banks; why it would be the most effective housing strategy to write-down the face value of the principal of mortgage loans to going market value; why home prices must fall into their 80-year lockstep with cost-to-rent and household income to restore order to the universe … then maybe you are not “Us” after all.
Maybe, you’re “Them.”
Clearly, though, two insights are becoming ever more apparent through the hyperbolic din that is the blogosphere. One–an old one that comes from Jesuit teaching–is that telling the difference between scholarship and plagiarism comes down to one simple thing: footnotes. The other is that, when it comes to declaiming economic theory or criticism, passion minus discipline eerily resembles a dangerous streak of extremism.
We, the author, candidly believe that while we know we’re going to get stuck with the tax bill like the rest of “Us,” we must acknowledge there’s a dollop or two of “Them” in there as well.
Not only is Citigroup a black hole from which no taxpayer dollars can escape, but Geithner’s brain is a black hole from which no intelligent thought can escape.
The White House on Friday insisted it’s not trying to take over two ailing financial institutions, even as stocks tumbled again. On Wall Street, talk of nationalization of Citigroup Inc., and Bank of America Corp., prompted investors to continue to balk, worried that the government would have to take control and wipe out shareholders in the process.
Spare me the sap.
Geithner is attempting to bail out his banking buddies, no more, no less, and he does not give a damn what it costs taxpayers to do so. And while everyone and their brother has hopped on the Nationalization Train (please see The Nationalization Train Has Left The Station), I think there are at a bare minimum a half dozen questions that need to be addressed first (please see Nationalization Revisited).
Citigroup is struggling to remain independent even as it knows full well, that without still more government intervention, it is worthless. In fact, Citigroup is less than worthless because without more taxpayer cash infusions it cannot survive.
To hell with Citigroup. Bust it up and sell it. It’s the best possible outcome for everyone involved.
Doesn’t exactly sound as if a good course in media training, which is what many of Geithner’s critics have suggested, is going to improve prospects much in Mish’s mind.
One way to characterize 2008′s sequence of economic and operational convulsions is shock.
Now, news can continue to be bad, and the series of negative headlines can continue, but, collectively, we’ve begun to shield ourselves from shock taking over.
To be sure, the Obama administration is taking action to help the economy, but it’s trying to mitigate the slump, not end it. The stimulus bill, on the administration’s own estimates, will limit the rise in unemployment but fall far short of restoring full employment. The housing plan announced this week looks good in the sense that it will help many homeowners, but it won’t spur a new housing boom.
What, then, will actually end the slump?
Well, the Great Depression did eventually come to an end, but that was thanks to an enormous war, something we’d rather not emulate. The slump that followed Japan’s “bubble economy” also eventually ended, but only after a lost decade. And when Japan finally did start to experience some solid growth, it was thanks to an export boom, which was in turn made possible by vigorous growth in the rest of the world — not an experience anyone can repeat when the whole world is in a slump.
So will our slump go on forever? No. In fact, the seeds of eventual recovery are already being planted.
Consider housing starts, which have fallen to their lowest level in 50 years. That’s bad news for the near term. It means that spending on construction will fall even more. But it also means that the supply of houses is lagging behind population growth, which will eventually prompt a housing revival.
Or consider the plunge in auto sales. Again, that’s bad news for the near term. But at current sales rates, as the finance blog Calculated Risk points out, it would take about 27 years to replace the existing stock of vehicles. Most cars will be junked long before that, either because they’ve worn out or because they’ve become obsolete, so we’re building up a pent-up demand for cars.
The same story can be told for durable goods and assets throughout the economy: given time, the current slump will end itself, the way slumps did in the 19th century. As I said, this may be your great-great-grandfather’s recession. But recovery may be a long time coming.
The closest 19th-century parallel I can find to the current slump is the recession that followed the Panic of 1873. That recession did eventually end without any government intervention, but it lasted more than five years, and another prolonged recession followed just three years later.
You can see, then, why some Fed officials are so pessimistic.
Let’s be clear: the Obama administration’s policy initiatives will help in this difficult period — especially if the administration bites the bullet and takes over weak banks. But still I wonder: Who’ll stop the pain?
Krugman and the greatest economic minds of the present day are calling for nationalization of the banking system, at least for a brief, pre-privatizing moment. The Big Picture’s Barry Ritholtz observes yet another eloquent call for a bank take-over, despite banks themselves and the Obama Administration’s current insistance this is not the way to go.
The list of pros vs. cons on bank nationalization make the kicker refrain — you like it when your Nobel laureate economists can quote from Credence Clearwater Rivival — doubly poignant.
If the administration ever gets to the point where its housing initiatives — i.e. foreclosure mitigation can actually target principal reduction, nationalization would be a way to go.
Word is Treasury Secretary Timothy Geithner will speak next week to address details of the bailout plan that have remained in a cloud of uncertainty since early Presidents’ Day week.
Clamor for nationalization — temporary, shock-and-awe style “pre-privatization” — grows. Expectations soar. So many who know so much will swoop like the feathered hord in Hitchcock’s “The Birds.” We won’t hear the end of what’s wrong with every idea, every program, every strategy out of Washington, D.C., until these people who either never sleep or don’t have employment right now can get something to take their brains out of suggestion-box mode and get out and do something.
Credit President Obama for elevating expectations to unreachable heights. We haven’t elected anybody in recent history who we’d permit to disappoint us so deeply.
So, we turn for solace and a smile to Indexed–life amplified to stick figures for the hard of doing-the-math. X and Y axes are your friends here.
This one's called: "And that's not always so bad."
The Obama housing rescue plan announced today is a bet that the answer is yes. From foreclosure-afflicted Mesa, Arizona, the President unveiled a plan to commit from $75 billion to $275 billion of U.S. Treasury and Federal Reserve funds on policy actions whose goal is to end a wealth-destructive stalemate between lenders and homeowners with troubled or potentially imperilled loans.
In an effort to break the forward momentum of a foreclosure tsunami economists and housing analysts predict could reach upwards of 8-to-10 million homeowners and deflate the value of millions of others’ No. 1 asset, the President and his team have designed a plan that has three principle elements aimed at helping 9 million people stay in their homes, as reported today in the Wall Street Journal.
The Obama administration’s plan has three main elements: an effort to help homeowners refinance; another effort to help stabilize the housing market through a $75 billion initiative aimed at reaching up to four million at-risk homeowners; and a third element that aims to drive down mortgage rates.
“The effects of this crisis have also reverberated across the financial markets,” President Obama said. “When the housing market collapsed, so did the availability of credit on which our economy depends.”
The administration pledges government money to separately entice homeowners, mortgage companies, and mortgage investors to rework loans. It would help a variety of homeowners, including those whose mortgage is more than the value of their home.
The housing plan is part of a broader effort by the government to address the volatile economy, and it comes after Congress passed a major stimulus package and the Treasury Department released its plan to shore up the banking sector.
Economists and housing experts’ concerns with the plan will take one of two essential points of objection. 1) While it may slow the damaging rate of foreclosures and ease the impact of adding new supply to an already glutted market of existing home inventory for sale, the plan does nothing to spark or prime the demand pump; and 2) While it may help homeowners who bought their homes in good faith and have gone underwater on their loans due to their home’s value declining, the plan aids too many people who took unscrupulous advantage of an easy-money era, either on the borrowing side or the lending side.
For homeowners there are two key paragraphs: first the lender is responsible for bringing the mortgage payment (sounds like P&I) down to 38% of the borrowers monthly gross income. Then the lender and the government will share the burden of bringing the payment down to 31% of the monthly income. Also the homeowner will receive a $1,000 principal reduction each year for five years if they make their payments on time.
This is not so good. The Obama administration doesn’t understand that there were two types of speculators during the housing bubble: flippers (they are excluded), and buyers who used excessive leverage hoping for further price appreciation. Back in April 2005 I wrote: Housing: Speculation is the Key
[S]omething akin to speculation is more widespread – homeowners using substantial leverage with escalating financing such as ARMs or interest only loans.
This plan rewards those homebuyers who speculated with excessive leverage. I think this is a mistake.
Another problem with Part 2 is that this lowers the interest rate for borrowers far underwater, but other than the $1,000 per year principal reduction and normal amortization, there is no reduction in the principal. This probably leaves the homeowner far underwater (owing more than their home is worth). When these homeowners eventually try to sell, they will probably still face foreclosure – prolonging the housing slump. These are really not homeowners, they are debtowners / renters.
An assumption within this $75-to-$200 billion bet is that this massive redistribution of money, debt, and equity among those who struggle to pay their loans doesn’t backfire. If people who are capable of paying off their mortgages suddenly start mailing it in to get some of the government beneficence, the cure could start a massively more lethal sickness. Society depends, somewhat fragilely on the fact that most responsible homeowners covet a good credit rating, and regard paying their mortage as fulfilling an unbreakable promise. This ethic will get a good test as aid to so many homeowners seems only a missed monthly payment or three away.
A plan that does not aim to help all underwater homeowners, or anywhere close to all of them, has many advantages. About $500 billion worth of mortgage debt is now underwater, and the number may eventually get close to $1 trillion. A plan that tried to put this debt back above water would be vastly more expensive than the one Mr. Obama announced today. It would also deliver less bang for the buck, since a great majority of underwater homeowners are likely to continue making their monthly payments.
Likely to get high marks from most ideological sides of the spectrum are the initiatives to increase funding to Fannie Mae and Freddie Mac aimed at stoking liquidity and getting banks to resume lending, per the WSJ sum up.
· Promoting Stability and Liquidity: In addition, the Treasury Department will continue to purchase Fannie Mae and Freddie Mac mortgage-backed securities to promote stability and liquidity in the marketplace.
· Increasing The Size of Mortgage Portfolios: To ensure that Fannie Mae and Freddie Mac can continue to provide assistance in addressing problems in the housing market, Treasury will also be increasing the size of the GSEs’ retained mortgage portfolios allowed under the agreements – by $50 billion to $900 billion – along with corresponding increases in the allowable debt outstanding.
· Support State Housing Finance Agencies: The Administration will work with Fannie Mae and Freddie Mac to support state housing finance agencies in serving homebuyers.
· No EESA or Financial Stability Plan Money: The $200 billion in funding commitments are being made under the Housing and Economic Recovery Act and do not use any money from the Financial Stability Plan or Emergency Economic Stabilization Act/TARP.
The Associated Press reports on how Wall Street investors reacted initially to Obama’s new housing strategy. After the wild, gravity-borne gyrations that occurred in the moments U.S. Treasury Secretary Timothy Geithner opened his mouth last week to speak about what would happen with TARP money, a flat market is a virtual Wall Street thumbs up on the plan.
Clearly, if Obama’s plan can at least fulfill its promise of keeping 9 million people in homes they own, it will redound to stabilizing the most treasured asset among those who account for two-thirds of the U.S. economy, consumers.
Most denizens of housing — be it in for-rent, for-sale, market rate or low income — would count that as a good place to start.
I challenge you to produce one single article Charles Barron ever wrote that would support the wild, socialistic ideas you suggest in your 02/16 piece.
Were you to dump all the ink for 02/23′s magazine, and only reprint the negative letters and emails you will get this week against your scribblings, it would require a double issue to put a dent in the pile.
This is no Plan you are proposing. Its Stalin communism. What were you thinking? How could you sign the piece?
Still, it aims at the crux of the displacement going on in how people get, use, and lose money. Is there a clearer way to state this set of facts?
We know this type of debt relief will spark a chorus of complaints about the government helping one class of homeowners, some of whom may not need help, some of whom may not deserve it. But to solve our national economic problems quickly, we have to admit that mistakes were made by bankers, by the government and by homeowners. Getting our economy back on track, and getting our financial system fixed, is far more important than assigning blame or waiting around for a solution that is perfectly fair.
This Barron’s plan resolves perhaps the most vexing problem in the complicated approach outlined by Secretary Geithner last Tuesday, which puts him in a no-win situation: If the government pays too much for toxic securities, it hurts taxpayers; if the government pays too little, or helps vulture investors pay too little, it hurts the very banks it is trying to help.
Effectiveness of any plan, it turns out, is only part operational. The other part is a mix of philosophy and psychology. Ultimately, priorities shape themselves around deciding whose psychology needs the most influencing, and how do you influence it.
Barron’s plan will engage the publication’s readers in the conversation, which is what should happen. That conversation needs to be as rich as it can be until, ultimately, the answer is found.
When it’s the stated mission of the $790 billion stimulus program to create or save jobs–2.5 million to 3.5 million if you’re the President, and fewer if you’re Economy.com economist Mark Zandi–it begs a question. How can you and will you measure whether you’re succeeding?
Who and what will determine whether a job has been created or saved as a consequence of the program? How much time past, say, the next six to 12 months, will a job have to have been created or save to qualify as counting toward the effectiveness of this program?
These will be some of the questions that challenge the Obama Administration during the next few weeks, months, and possibly, years.
Meanwhile, success for Treasury Secretary Tim Geithner will come if and when he can get the markets (i.e. investors, inwestors, however you say it) to believe they can venture back into the arena even as he gets Wall Street to take its medicine.
The fiscal stimulus plan, while it will certainly help, probably won’t do more than mitigate the economic side effects of debt deflation. And the much-awaited announcement of the bank rescue plan left everyone confused rather than reassured.
There’s hope that the bank rescue will eventually turn into something stronger. It has been interesting to watch the idea of temporary bank nationalization move from the fringe to mainstream acceptance, with even Republicans like Senator Lindsey Graham conceding that it may be necessary. But even if we eventually do what’s needed on the bank front, that will solve only part of the problem.
If you want to see what it really takes to boot the economy out of a debt trap, look at the large public works program, otherwise known as World War II, that ended the Great Depression. The war didn’t just lead to full employment. It also led to rapidly rising incomes and substantial inflation, all with virtually no borrowing by the private sector. By 1945 the government’s debt had soared, but the ratio of private-sector debt to G.D.P. was only half what it had been in 1940. And this low level of private debt helped set the stage for the great postwar boom.
Since nothing like that is on the table, or seems likely to get on the table any time soon, it will take years for families and firms to work off the debt they ran up so blithely.
One way or another, part of the job for the fledgling Administration will be to offer ways to measure wins and losses so that people can get a sense of whether their sacrifice and contributions are paying off. You can only manage what you can measure.
President Barack Obama’s signature sound bite in pitching the biggest government program since the New Deal is: Don’t make perfection the enemy of the absolutely necessary.
Gear Engaged
As details of a compromise $789.5 billion stimulus plan continue to emerge, it’s clear already that a Senate-backed plan to fund a jolt to home-buying demand with a 10%–up to $15,000–tax credit for home purchases over the next year did not survive the cut as “absolutely necessary.”
We talked early today with Kenneth Gear, who as executive director of the Fix Housing First coalition of companies led a concerted charge to make a shock-and-awe home-buying stimulus program part of the package that Congress would hand over to the President by next Monday. Gear, as you might expect, was crestfallen about the fact that the final bill “appears to have picked up the House language for a home buyer tax credit.” That means that first-time buyers of new or existing primary residences would be eligible for a $7,500 tax credit for a purchase through Sept. 1, 2009. Apparently, still under consideration is the possibility this amount might be elevated to $8,000.
Gear did not hide his disappointment. “First off, we’re hopeful that this bill [the one Congress has cobbled together] will stimulate the economy, but we have some doubts it will. It still doesn’t get to the root cause. The market’s still in a free-fall. It’s not going to stop the vicious circle of home price declines, because you’re not giving enough of an incentive to spur demand.”
Here’s what Wachovia Securities housing analyst Carl Reichardt says to sum up the impact of the scaled-down tax credit for home buyers.
Preliminary news also suggests that the Senate’s proposed $15,000 tax credit for all home buyers was not included in the Stimulus package. Instead, the House’s $7,500 tax credit for first-time home buyers was selected. The House version is essentially the same bill that was included in July’s stimulus plan (the Housing Economic and Recovery Act of 2008) except that it removes the requirement to pay the government back. While this is a marginal positive over the plan established before the Stimulus as it turns the credit into a gift versus a tax-free loan, we believe the Senate’s credit would have been much more impactful to unit demand given its size and its applicability to all home buyers, not just first-time buyers.
Gear says, “We’re not folding up our tent.” He points to generalized verbiage in U.S. Treasury Secretary Timothy Geithner’s remarks on Tuesday that address a “comprehensive program” to address the housing crisis. This would include foreclosure mitigation, and Gear hopes, a mortgage rate buy-down program for home buyers.
Not included in Fix Housing First’s agenda was a push to extend net operating loss tax provisions to allow companies to carry present losses back to prior-year profits to recover taxes paid. That push flopped as well.
Here’s Wachovia’s Reichardt on implications of the way the NOL tax carry back provision looks as it stands right now:
Both the original House and Senate bills included a net operating loss (NOL) carryback provision that would have allowed companies (other than those receiving TARP funds) to carryback their operating losses for 5 years in order to obtain potentially substantial tax returns. Preliminary news indications are that the NOL carryback was removed from the stimulus plan for large companies. Both bills originally included it and we have not observed meaningful public opposition to it until very recently. For HOV, KBH, LEN, CTX and MDC (for which the immediate benefit is minimal), the elimination of the NOL carryback is a negative, in our view. These companies would have been able to amend their 2008 tax returns immediately to request additional tax refunds. For DHI, RYL, PHM and MTH we believe it is also negative, but less so: these companies did not stand to gain immediately, but could have benefited at year-end 2009. For TOL and NVR the elimination of the NOL carryback is from our perspective a positive. The carryback would have provided additional cash to allow for the creation of home capacity at lower margins to continue to compete with these stronger players. TOL and NVR would not have benefited from the carryback extension as they have not generated significant taxable losses. For SPF and BZH the NOL carryback would not have been applicable because they had “ownership changes” which mitigated the ability monetize NOLs.
One doesn’t need to be entirely cynical to see partisan politics at work in the way these pro-home builder measures got squelched when the Senate’s plan met with the House’s.
Now, expectations soar as the nation looks to see what its elected officials mean by “absolutely necessary,” and what effect that will have.
And Ken Gear goes back to work this morning, not giving up his cause.
For those who favor little or no intervention by government in the predicament home builders face, today must have brought a gust of triumph and relief.
For many home builders who were hoping Congress would favor them by funding a tax credit for home buyers of up to $15,000, and an extension of provisions for tax carry backs on prior year profitability from two to five years, today was downright brutal.
Sen. Baucus (D., Mont.) said House and Senate negotiators have agreed to limit the tax break to small businesses only. That means large manufacturers, retailers and homebuilders that lobbied for the provision would be shut out under a deal reached earlier today.
And here’s how the status of tax credit for home buyers is being described:
Tax credits for home buyers will remain a part of the bill, according to senators and aides, but will be sharply reduced from levels included in a successful amendment to the bill by Rep. Johnny Isakson (R., Ga.).
Still, home builders and other housing industry organizations might hold out hope that Geithner’s $2.5 trillion financial system rescue effort will include mortgage rate buy downs and other elements that would jolt demand for residential real estate.
Calculated Risk, which evidently believes that an unadulterated housing price correction anchored firmly to rents and to household incomes is the only way to go, takes cheer from the failure of Fix Housing First’scoalition to have their day in the sunshine.
Asked what a proposed $15,000 tax credit for homebuyers looks like in the compromise plan, Baucus laughed and said, “not much.” He said that proposal has largely been dropped, though he didn’t provide details.
We still need the details on what “not much” means, but this is a little bit of good news.
Welcome to HousingCrisis.com, a unique source for what you need to know about the real estate and construction economy--with helpful news, data, and conversation about your smartest options. We'll highlight exclusive articles, related stories, and linked resources real-time so that you'll have information you need, hopefully a step ahead of the moment you need it.
