Throw out The Bums!
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 Krugman and 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.”
A question comes to mind when you hear a rant along the lines of this one from Mike “Mish” Shedlock, one of the very smartest economic critics out there in blogland:
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.
Weigh In
This is a conversation, not a conclusion. Speak up.
We look forward to hearing from you. You’re in housing. Your the ones who’ll deal with the economics, the politics, the consequences of this line of thinking.
It’s important you voice your thoughts.
$75 Billion to $275 Billion for Housing Fix: Will it Work? Will it Help New Home Construction?
Can policy trump flagging confidence?
Photo: Courtesy of Reuters
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.
- Here’s a link from the Journal to a transcript of President Obama’s prepared remarks detailing the new housing plan.
- Here’s a break-out of the plan toplines in bullet-point form, also from the WSJ.
- Here’s the version provided by the White House, from a link on The Big Picture blog.
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.
Here’s how housing economist/commentator Calculated Risk phrases his objection to part 2 of the plan:
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.
Here’s the New York Times’ David Leonhardt on that sensitive issue:
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.
Sometimes We Expect Too Much
This is a week old now, but in light of the fact that President Obama will be announcing details of his housing rescue plans, probably with a background of stock fever charts, it’s worth revisiting.
Credit: The Daily Show with Jon Stewart
Focus Shift: Measuring Stimulus
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.
An increasing number of smart people suggest that nationalization — or the term Calculated Risk has coined to quell free-market-minded fears that we’re headed straight for Bolshevism: pre-privatization – of the banks may be the only way for U.S. society to get its arms around the problem. The problem being — like many homeowners under water on their mortgage — that banks owe more than they’re assets are worth thanks to the free-fall in assets.
Here’s a clip of Senator Lindsey Graham, R-S.C., speaking with George Stephanopoulos on ABC’s “This Week” yesterday.
And here’s a smart economist, Nobel Prize winner, Princeton professor and New York Times columnist Paul Krugman, on where nationalization or pre-privatization might fit into the context of ways society may have to meet its enormous challenge.
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.
Obama’s Next Move on Housing Crisis
Here’s a Bloomberg report on plans to use $50 billion in TARP money to try to stabilize the tide of foreclosures and declining home prices. President Barack Obama is expected to unveil the plan on Wednesday this week.
Bloomberg video on Obama’s plan for a housing rescue.
Credit: Bloomberg/YouTube
Steeeeeeeee-Rike Three! Mortgage Buy-down In Doubt
Question one: can somebody hook us up here with those leaks coming out of the Administration’s team on what’s happening next in housing?
Question two: what’s a Fix Housing First Coalition to do if its last best hope for a compelling get-off-the-sidelines-and-buy program from the government goes by the boards?
It seems that although even a framework to address foreclosure mitigation and homeownership wealth destruction via house price declines is said to be more than a week from announcement, parts of what will and what won’t be part of the program are already decided.
What won’t apparently be in the comprehensive housing program Treasury Secretary Tim Geithner mentioned during his financial system rescue address on Tuesday is a humdinger mortgage-buy-down program aimed to spur sales.
Here’s Calculated Risk picking up on a Reuters report and adding a dash of CR-itude.
Housing policymakers weighed but have for now shelved one plan that would have seen the government stand behind low-cost mortgages of between 4 and 4.5 percent, sources said.
I need more details on the subsidies, but at least the dumb idea of buying down mortgage rates has apparently been shelved.
Before one dismisses the Obama initiative on mortgage re-terming out of hand, have a look at the orginally reported Reuters story on what’s afoot.
This is worth a healthy debate:
U.S. Treasury Secretary Timothy Geithner this week outlined a plan to take up to $1 trillion in bad assets off the banks’ books in the hope of restarting lending.
He also vowed the administration would spend $50 billion to combat foreclosures.
Geithner said on Thursday the administration would soon put a housing program in place that uses “a mix of incentive and persuasion” to get mortgage companies to rewrite loans.
“The key elements of the strategy are going to bring mortgage interest rates down to help avoid the foreclosures that we can reasonably expect to avoid,” he said.
Late mortgage payments and home foreclosures hit record highs last year. Foreclosure filings eased last month, but were still 18 percent higher than a year ago, industry research firm RealtyTrac said on Thursday.
Still in all, guess who’s taking credit for the the demise of Fix Housing First’s push for the $15,000 home buyer tax credit? Why the National Multi Housing Council, of course.
NMHC Chief Bibby
The NMHC, which pitched itself against the National Association of Home Builders in debate over the merits of home buyer tax credits, took an opportunity to pour salt in home builders’ wounds in its victory lap press statement regarding the new stimulus package.
NMHC actively worked with lawmakers as they negotiated the final compromise, urging them to remain focused on the critical needs for which this legislation was intended:
- to create jobs;
- to provide relief to the millions of Americans who are experiencing severe economic stress as a result of losing their job and are in need of affordable housing; and
- to address the foreclosure crisis.
We successfully argued against overly generous homeownership incentives, such as $15,000 homebuyer tax credit and federally subsidized 4 percent mortgages, as provisions that would do more harm than good and possibly re-inflate the housing bubble.
NMHC is in the process of analyzing the final legislation to update our side-by-side comparision chart with the apartment-related elements of the package. A partially updated version reflecting the tax title, which has been released, is available here.
In times like these, you know who your friends aren’t.
Carry Back Ache
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.
Here’s the Wall Street Journal on the tax carry back item.
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’s coalition to have their day in the sunshine.
From Bloomberg: U.S. Lawmakers Agree on $789 Billion Stimulus Plan
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.
Second Day Lead
It’s popular economics to say that every time the government acts, things get worse.
An almost 400-point decline in the Dow yesterday served as further proof–the more Washington does, the faster the financial spiral whirls. We’ve written here that the magnitude of the initiative from the Fed or Treasury or Congress or the Administration becomes roughly equivalent to the degree of destabilization and gravity reflected in the marketplace.
This is why an insight like the one we see in The Big Picture blog this morning comes as a blast across the bough of our assumptions about what’s doing what to whom.
Barry Ritholz reminds us simply:
Both the NYT and the WSJ seemed to focus on the lack of details as the cause for the selloff. But that conclusion is belied by the “sell the news” reaction immediately as Geithner began speaking. No one could have digested anything iin that milli-second.
I have a decidely different take. Wall street was hoping for another multi-billion, no strings attached, taxpayer funded giveaway. Instead, they got something much tougher than they expected.
Hence, the selloff/tantrum.
They wanted their candy and didn’t get it…
We don’t believe Ritholz morphed over night into an apologist for the new President’s team or his fledgling rescue plans.
We do believe he’ll take aim at the deficiencies of a plan and its execution when the moment calls for it. But this moment, the morning after Tim Geithner faced an audience about as tough as anybody will have to stand up in front of and laid out a “framework,” called for trying to see through veils of both hastily applied misinterpretation and the freight of impulsive ideology.
Some of this blog’s most illuminating posts come when Ritholz is on the run and can’t take time to run off at the mouth.
Have another look at Geithner in action, and follow Bloomberg’s tracking of stocks simultaneously.
Credit: Link is to AOL Video/distributed by Bloomberg.
Housing Strategy Due in Two Weeks
Tally-ho. The Senate passes an $838 billion stimulus bill that now needs to get reconciled in conference with an $820 billion bill the House passed two weeks ago. Today Treasury Secretary Tim Geithner proposes a shock-and-awe program of spending into the trillions of dollars until lenders, investors, and mattress stuffers feel they can belly up with money pour into the ailing economic pipeline.
Housing industry players were angling for inclusion in these packages, but it seems they’ll get their day in the sun once TARP II and Stimulus 2.0 are water under the bridge.
The Wall Street Journal reports: Obama Pushes Stimulus Plan, Aims to Help Homeowners
Mr. Obama declined to detail the administration’s specific plans for the housing crisis, saying he didn’t want that strategy to get “buried” on the day U.S. Treasury Secretary Timothy Geithner announced his broad financial-market rescue. He said he would make an announcement on housing “in the next couple weeks.”
“Unless we address this in a serious way, we are not going to be able to get the economy back where it needs to be,” Mr. Obama said.
As debate continues about the best way to get home buyers off the sidelines even as layoffs pile up and consumer confidence plummets, a Harvard economics professor compares and contrasts a $15,000 tax credit vs. a 4% mortgage buy-down.
One of the great problems with any interest rate subsidy program is that costs accrue only over time, and initially reside off-balance-sheet. Remember the old fiction that Fannie Mae and Freddie Mac were providing a service to homebuyers at no cost to the government? Some proponents of interest-rate subsidies even suggest that as long as the subsidized lending rate is higher than the current Treasury rate, the government is actually making money off the deal. Such logic conveniently forgets default risks and other costs. Financing trillions of dollars of mortgages would require the government to borrow trillions, pushing interest rates up and raising the cost of the national debt. Borrowing to bet is generally not a good financial strategy for governments.
Standard economic reasoning tells us that if the market has priced 30-year mortgages appropriately, so that their rates reflects default risks and other costs, then the gap between the market rate and the subsidized rate reflects the cost of an interest rate subsidy program.
Current mortgage rates are about 5.35 percent, which is 135 basis points above one proposed subsidized rate. Americans today have about $10 trillion worth of mortgages. If everyone refinanced into the subsidized rate, this would mean an ongoing annual subsidy of $135 billion a year, which would last as long as the mortgages do. The great virtue of the tax credit over the interest rate subsidy is that a one-time cost of $35 billion or $50 billion is a lot less than a perpetual $135 billion annual subsidy stream.
One way or another, get the U.S. Mint printing presses in good working order.