Our Banana Republic

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In 2002, I taught the Argentine film La hora de los hornos (it was a media and narrative class–I wasn’t just proselytizing radical leftist ideology). The second most famous scene from the movie starts at 3:14, but it is very disturbing.

I thought the film would get students to think about the degree to which our visual culture prevented us from seeing the reality of everyday life.

But many of the students simply dismissed the film as irrelevant. Notably, they dismissed the many stats about inequality in Latin America and Argentina as unimaginable–impossible. In the US, the film didn’t have the same power. One student–who I think fancied herself quite worldly due to her family trip to Patagonia once (perhaps not incidentally, she was gunning for a Fox News internship at the time)–said something like, “if I lived in a country where 5% of the country had 40% of the wealth, maybe I’d be that angry, too. But I don’t.”

Of course, she does.

Or close to it anyway: in 2002, the top 10% of earners took 40-some % of earnings, and that number has neared 50% in 2006. Read more →

Better Give Up Trying to Fix Housing Crisis Before Principal Reductions Hit

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I’m fairly amused by this story, presented by the NYT as “reporting.” It claims the Obama Administration has tried “just about every program it could think of to prop up the ailing housing market,” and faced with the failure of “just about every program,” economists and analysts are contemplating just letting the housing market crash.

As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.

When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve.

The story goes on to quote from:

  • Anthony B. Sanders, a professor of real estate finance at George Mason University
  • Howard Glaser, a former Clinton administration housing official with close ties to policy makers in the administration … whose clients include the National Association of Realtors
  • White House Spokeswoman Amy Brundage
  • Housing analyst Ivy Zelman
  • Michael L. Moskowitz, president of Equity Now, a direct mortgage lender that operates in New York and seven other states
  • Sam Khater, a CoreLogic economist
  • David Crowe, the chief economist for the National Association of Home Builders

    • That is, no one speaking as a homeowner and not even any advocates for homeowners. Which may be why all these experts fail to consider the sheer scope of what an addition 10% drop in home values will do to the economy. Sure, the article raises the specter of massive walk-aways.

    The further the market descends, however, the more miserable one group — important both politically and economically — will be: the tens of millions of homeowners who have already seen their home values drop an average of 30 percent.

    The poorer these owners feel, the less likely they will indulge in the sort of consumer spending the economy needs to recover. If they see an identical house down the street going for half what they owe, the temptation to default might be irresistible. That could make the market’s current malaise seem minor.

    Yet it doesn’t connect the degree to which the already-stinky housing market contributes to long term unemployment. And it doesn’t get that the decline in home values has done far more than just stifle consumer spending, but has bankrupted real people.

    Now, to be fair, all this “reporting” article serves to do is give credibility to the stupidity of “extend and pretend.” I’m all in favor of ending the “pretend” part.

    But one assertion in the article is simply false: that the Administration has tried everything. Heck, the article itself even quotes Bill Gross calling for refinancing US-backed loans (here’s a HuffPo article describing Gross’ plan).

    And even that ignores the really basic things the Administration hasn’t tried: like cramdown.

    Nevertheless, the NYT considers it news that the housing industry would like a reset that will likely doom millions of Americans.

    Why Not Hire the Woman Who Wrote the Book on the Struggles of the Middle Class?

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    Apparently, Obama decided to use his Labor Day weekend radio address not to pay tribute to all that organized labor did to create the middle class in this country, but to try to persuade voters that he is doing enough to save it.

    On Monday, we celebrate Labor Day. It’s a chance to get together with family and friends, to throw some food on the grill, and have a good time. But it’s also a day to honor the American worker – to reaffirm our commitment to the great American middle class that has, for generations, made our economy the envy of the world.

    That is especially important now. I don’t have to tell you that this is a very tough time for our country. Millions of our neighbors have been swept up in the worst recession in our lifetimes. And long before this recession hit, the middle class had been taking some hard shots. Long before this recession, the values of hard work and responsibility that built this country had been given short shrift.

    For a decade, middle class families felt the sting of stagnant incomes and declining economic security. Companies were rewarded with tax breaks for creating jobs overseas. Wall Street firms turned huge profits by taking, in some cases, reckless risks and cutting corners. All of this came at the expense of working Americans, who were fighting harder and harder just to stay afloat – often borrowing against inflated home values to pay their bills. Ultimately, the house of cards collapsed.

    So this Labor Day, we should recommit ourselves to our time-honored values and to this fundamental truth: to heal our economy, we need more than a healthy stock market; we need bustling main streets and a growing, thriving middle class. That’s why I will keep working day-by-day to restore opportunity, economic security, and that basic American Dream for our families and future generations.

    First, that means doing everything we can to accelerate job creation. The steps we have taken to date have stopped the bleeding: investments in roads and bridges and high-speed railroads that will lead to hundreds of thousands of jobs in the private sector; emergency steps to prevent the layoffs of hundreds of thousands of teachers and firefighters and police officers; and tax cuts and loans for small business owners who create most of the jobs in America. We also ended a tax loophole that encouraged companies to create jobs overseas. Instead, I’m fighting to pass a law to provide tax breaks to the folks who create jobs right here in America.

    Aside from being a pretty big snub to Labor (what about your promise to pass EFCA, oh ye savior of the middle class?), Obama’s focus on the plight of the middle class reminded me of one big thing he has thus far refused to do to help the middle class: hire the woman who, literally, wrote the book on the problems faced by the middle class.

    I guess Obama thinks he can save the middle class with neither experts on it nor those who have traditionally fought for it?

    Elizabeth Warren Drops Harvard Course at Last Minute

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    Following closely on the reporting that Wall Street has resigned itself to having Elizabeth Warren recess appointed to head the Consumer Finance Protection Board, the WaPo reports that she has backed out of teaching a Harvard class at the last minute.

    “I’m writing to let you know that Professor Jerry Frug will be teaching your Contracts class this term instead of Professor Elizabeth Warren,” law school dean Martha Minow wrote to students on Tuesday, according to an e-mail obtained by The Washington Post. “Professor Warren regrets that she will not be able to teach you this fall and we regret the last minute change.”

    Of course, Dawn Johnsen canceled over a year of law school classes before she got hung out to dry by the Administration. So while this is an intriguing development, don’t count any consumer protection chickens yet.

    SEC to Ratings Agencies: Really, We Mean Business

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    Yesterday, the SEC told ratings agencies they mean business. They will prosecute agencies for fraud.

    In the future.

    It did so in a report of investigation into explicit fraud on the part of Moody’s in which the SEC declined to prosecute for jurisdictional reasons.

    At issue is a programming error that caused Moody’s to give credit ratings up to four notches higher to some complex debt products than the products deserved. Moody’s discovered the coding error in January 2007. But then ratings committee members in Europe decided not to downgrade the credit ratings for those products because doing so–admitting the coding error–might make Moody’s look bad.

    In this particular case we seem to face an important reputation risk issue. To be fully honest this latter issue is so important that I would feel inclined at this stage to minimize ratings impact and accept unstressed parameters that are within possible ranges rather than even allow for the possibility of a hint that the model has a bug.

    The Financial Times learned of and reported Moody’s decision in May 2008 after which, in July 2008, Moody’s ‘fessed up to the problem.

    Internal Moody’s documents seen by the FT show that some senior staff within the credit agency knew early in 2007 that products rated the previous year had received top-notch triple A ratings and that, after a computer coding error was corrected, their ratings should have been up to four notches lower.

    But in the interim period, as part of a registration application to be a recognized ratings agency, Moody’s made the following representations to the SEC:

    Accordingly, Exhibit 2 to the MIS application provided the procedures and methodologies used by MIS to determine credit ratings and, among other things, stated therein that the “Relevant Credit Rating Process Policies” included the MIS “Core Principles for the Conduct of Rating Committees.” The actions of the rating committee that evaluated the affected credit ratings for the CPDO notes did not comply with these Core Principles. Most notably, the Core Principles stated that “Moody’s will not forbear or refrain from taking a rating action based on the potential effect (economic, political or otherwise) of the action on Moody’s, an issuer, an investor, or any other market participant.” The Core Principles also stated that “[i]n arriving at a Credit Rating, the [rating committee] will only consider analytical factors relevant to the rating opinion.” Because the committee allowed concerns regarding the potential reputational impact on Moody’s to influence decisions not to downgrade the affected CPDOs, the process did not comply with the procedures listed in the MIS application. [my emphasis]

    In other words, Moody’s promised to the SEC that it did not do what it had done in 2007, choose not to downgrade the credit rating of an entity because doing so would hurt Moody’s.

    Financial Times first reported of SEC’s investigation into Moody’s in May 2010–almost two years after Moody’s admitted they had been gaming their ratings. But yesterday, SEC basically said they weren’t going to prosecute Moody’s for making false representations to the SEC because–given that the financial products being rated and the decisions not to downgrade their ratings all took place in Europe–it wasn’t sure it had jurisdiction to prosecute.

    Mind you, the Financial Reform bill has made it explicitly clear that the SEC can prosecute ratings agencies for stuff they do overseas.

    The Commission notes that, in recently enacted legislation, Congress has provided expressly that federal district courts have jurisdiction over Commission enforcement actions alleging violations of the antifraud provisions of the Securities Act of 1933 or the Exchange Act involving “conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors” or “conduct occurring outside the United States that has a foreseeable substantial effect within the United States.”

    So the punchline of this report–showing that Moody’s clearly was cooking the books but concluding that because the books were cooked in Europe, SEC isn’t sure it can do anything–is a stern warning to ratings agencies going forward:

    This report serves to caution NRSROs that, where appropriate, the Commission will utilize recent legislative provisions granting jurisdiction for enforcement actions alleging otherwise extraterritorial fraudulent misconduct that involves significant steps or foreseeable effects within the United States. The Commission also cautions NRSROs that they should implement sufficient and requisite internal controls over policies, procedures, and methodologies used to determine credit ratings.

    Nothing To Be Done But Blame Republicans

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    Jake Tapper hammered Robert “a recovery that got our economy moving again” Gibbs yesterday on whether the Administration is not doing more for the economy because of political paralysis. After four attempts to avoid answering the question or focus exclusively on blaming Republicans, Gibbs finally suggested there wasn’t all that much the Administration can do to stimulate the economy.

    Q Is the reason the President is not pushing for a bolder move on the economy because he doesn’t believe there is one, or because he doesn’t think he could get it through Congress?

    MR. GIBBS: Well, Jake, I think you will hear the President — you heard him today after meeting with his economic team, and you will hear him over the course of the next several weeks outlining a series of ideas, some of which are stuck in Congress and some of which we continue to work through the economic team, that will be targeted measures to continue to spur our recovery and to create an environment in which the private sector is hiring.

    Q But these are smaller-bore type proposals. These aren’t $787 billion stimulus packages.

    MR. GIBBS: No, they’re not. But let’s understand — when you mention small bore — some of you probably saw this article today — “Small businesses sit in holding pattern.” “Small businesses have put hiring, supply buying, and real estate expansion on hold as they wait out the vote on a small business aid bill that is stalled in the Senate earlier this summer.” Right?

    As the President said in the Rose Garden, 60 percent of our job losses have come from small business. Small businesses are waiting for the Senate to act on a bill that would cut their taxes and provide them greater loans and investment opportunities with which to expand.

    The Republican Party talks a lot about their support for and their helping of small business, and I think the question that the President put toward them today is, if that’s what you support, why are you standing in the way of something that small businesses acknowledge would help with their hiring, with their purchasing, and with their expansion?

    Q Okay, but the question I asked was, do you think — does the President think that there should be a bolder move taken beyond a $30 billion small business lending initiative —

    MR. GIBBS: Well, again, I think —

    Q — and there aren’t the votes for it, or he just didn’t think there is such a thing?

    MR. GIBBS: I think, Jake, I think the President mentioned several ideas today that he believes are important to continue that recovery that we will pursue. I think these will be areas and initiatives that are targeted towards spurring recovery and creating an environment for hiring, not some —

    Q But does that mean he believes that that is the right approach, or he believes that it’s the only politically possible approach?

    MR. GIBBS: Well, look, I don’t think there’s any — I think there’s no doubt that there are — there’s only so much that can be done.

    Q Not having to do with politics?

    MR. GIBBS: Not having to do with politics. [my emphasis]

    At which point Gibbs promptly pivoted and adopted the most thread-bare of DC excuses: whocouldanode.

    Q In retrospect, was the stimulus too small?

    MR. GIBBS: Look, we always — I think it makes sense to step back just for a second. If you look at — and I don’t think anybody had — and I think we’d be the first to admit that nobody had, in January of 2009, a sufficient grasp at the sheer depth of what we were facing. I think that’s, quite frankly, true for virtually every economist that made predictions. You had — the chart that I generally show, adding the job losses for the last three recessions up doesn’t get you to the job loss that we’ve seen in this recession alone.

    It took us a long time to get to this point. We got here not simply because of one thing but because of many things. We’ve seen the housing market collapse. We saw what happened to credit markets. We saw what happened to the stability of our financial system. All of that accumulated after many years into one big pothole that — the size of which any stimulus was unlikely to fill.

    I think that for all of the political back-and-forth on the Recovery Act, there should no longer be any doubt — despite some Capitol Hill nonbelievers — that what the Recovery Act did was prevent us from sliding even into a deeper recession, with greater economic contraction, with greater job loss, than we have experienced because of it. [my emphasis]

    Calculated Risk didn’t even have to look outside of the Administration–at least as it existed when people were making predictions about the recovery act–to find an economist who had enough of a grasp on what was happening.

    How about Christina Romer (the chair of the Council of Economic Advisers)? From Ryan Lizza at the New Yorker:

    At the December [2008] meeting, it was Romer’s job to explain just how bad the economy was likely to get. “David Axelrod said we have to have a ‘holy-shit moment,’ ” she began. “Well, Mr. President, this is your ‘holy-shit moment.’ It’s worse than we thought.” She gave a short tutorial about what happens to an economy during a depression, what happened during previous severe recessions, and what could happen if the Administration didn’t act. She showed PowerPoint slides emphasizing that the situation would require a bold government response.

    …

    The most important question facing Obama that day was how large the stimulus should be. Since the election, as the economy continued to worsen, the consensus among economists kept rising. … Romer had run simulations of the effects of stimulus packages of varying sizes: six hundred billion dollars, eight hundred billion dollars, and $1.2 trillion. The best estimate for the output gap was some two trillion dollars over 2009 and 2010. Because of the multiplier effect, filling that gap didn’t require two trillion dollars of government spending, but Romer’s analysis, deeply informed by her work on the Depression, suggested that the package should probably be more than $1.2 trillion.

    So Romer thought the right size was probably about double what was actually enacted (excluding the Alternative Minimum Tax relief).

    And then there are the prominent Nobel prize winning economists in the Democratic party who predicted the stimulus was too small.

    So basically, the Administration’s strategy for limiting the political damage of the dismal economy (to say nothing of doing something to fix it) is simply to blame Republicans, because actually admitting that the Administration fucked up–much less doing something like firing Tim Geithner and starting fresh–is just not palatable.

    A pity for all those struggling Americans who have to pay for the Administration’s arrogance, huh?

    More Stupid Housing Policy on the Way?

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    Great news! My house goes on the market today — at the same price the house next door sold as a foreclosure a few years ago.

    Okay — it’s mostly good news insofar as I don’t have to drive back to Ann Arbor every weekend and instead can start enjoying the beauty of west Michigan.

    But being in the housing market at its bleakest moment does mean I’m following news closely. Like this story, suggesting the Administration may bring back the housing tax credit.

    The Obama administration has not decided whether it should resurrect a popular tax credit for first-time homebuyers, Housing and Urban Development Secretary Shaun Donovan said on Sunday.”It’s too early to say whether the tax credit will be revived,” Donovan said in an interview on CNN’s “State of the Union” program. He said the administration would “do everything we can” to stabilize the shaky U.S. housing market.

    Now, policy wonks of all political persuasions have agreed since last year that it was always a stupid policy (and note, this is from  before it was extended to more buyers).

    “It’s terrible policy,” says Mark Calabria of the libertarian Cato Institute.

    “It’s awful policy,” says Andrew Jakabovics, associate director for housing and economics at the liberal Center for American Progress. “It’s incredibly expensive. It’s not well targeted.”

    Home sales have risen dramatically in the past year, but most economists don’t attribute the increase to the tax credit. August single-family-home sales in Southern Nevada, for instance, hit 3,229, up more than 25 percent from a year earlier.

    But economists attribute most of the rising sales to the plunge in prices, not the tax credit. The median sale price of single-family homes was off more than 35 percent from a year earlier.

    “A heck of a lot of people would have bought the house anyway,” says Ted Gayer, an economist at the Brookings Institution.

    According to an estimate by the National Association of Realtors, of the 2 million new homebuyers since the credit was instituted, 350,000 say they would not have bought a house without the tax break.

    “We paid $8,000 to at least 1.5 million people to do something they were going to do anyway,” Jakabovics says.

    The tax break, due to expire at the end of November, is on track to cost $15 billion, twice what Congress had planned. In other words, it will cost $43,000 for every new homebuyer who would not have bought a house without the tax break.

    Unlike Cash for Clunkers, there was no societal benefit tied to the credit (however ineffective C4C was at saving gas). Moreover, the benefit was small enough — given the cost of a house — that it wasn’t helping all that many marginal buyers get into a new home.

    More importantly, as Calculated Risk notes (and has been noting, for over a year), the credit doesn’t affect the underlying problem in the housing market: too few households and therefore too much supply.

    The problem in housing is there is too much supply (at the current price). Incentivizing people to buy existing homes just shuffles households around — it does NOT reduce the overall supply unless the buyer is moving out of their parent’s basement. I doubt that happened very often. Note: It is important to remember that rental units are part of the overall supply, so moving people from a rental unit to homeownership doesn’t help.

    And if the tax credit leads to more new home sales — that ADDS to the excess supply. And that makes the situation WORSE.

    It would be far better for housing and the economy to announce “There will be no further housing tax credits.”

    But, a tax credit is a Republican policy championed by former realtor Johnny Isakson (R-GA) which means it has the plus — in DC terms — of being hopey-changey bipartisan and of being celebrated as a tax cut for market behavior in DC’s twisted sense of morality. And so, we consider re-upping the tax credit.

    And while HUD Secretary Shaun Donovan says the Administration would “do anything we can” to prop up the housing market, they seem to be ignoring the underlying causes of the problem. Read more →

    Extend and Pretend about to Bite the Banksters in the Butt

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    I would be laughing my ass off at this if I weren’t about to put my home on the market for what the house next door sold as a foreclosure several years ago. (h/t CR)

    By postponing the date at which they lock in losses, banks and other investors positioned themselves to benefit from the slow mending of the real estate market. But now industry executives are questioning whether delaying foreclosures — a strategy contrary to the industry adage that “the first loss is the best loss” — is about to backfire. With home prices expected to fall as much as 10% further, the refusal to foreclose quickly on and sell distressed homes at inventory-clearing prices may be contributing to the stall of the overall market seen in July sales data. It also may increase the likelihood of more strategic defaults.

    [snip]

    Some servicing executives acknowledged that stalling on foreclosures will cause worse pain in the future — and that the reckoning may be almost here.

    “The industry as a whole got into a panic mode and was worried about all these loans going into foreclosure and driving prices down, so they got all these programs, started Hamp and internal mods and short sales,” said John Marecki, vice president of East Coast foreclosure operations for Prommis Solutions, an Atlanta company that provides foreclosure processing services. Until recently, he was senior vice president of default administration at Flagstar Bank in Troy, Mich. “Now they’re looking at this, how they held off and they’re getting to the point where maybe they made a mistake in that realm.”

    Extend and pretend always assumed that at some point things would start turning around. But since that’s not going to happen anytime soon, this is like death by a thousand cuts.

    To both the banksters and homeowners.

    What no one seems to be honestly accounting for is the degree to which this process contributes to weighing the economy down.

    Take a look at this graphic. It’s a version of a graphic that has gotten a lot of play over the last year showing the growth in unemployment rates over time across the country. But this one adds foreclosures and bankruptcy. While it still doesn’t show what I think needs to be shown, it does at least show how foreclosures preceded unemployment in the housing bubble states (as opposed to the Mid-West, where unemployment led to foreclosures). Some of the foreclosure-driven unemployment came through the collapse of the building industry. But as more and more people get stuck in houses, particularly as foreclosures drive down the price of real estate and therefore strand even those who have kept up with their mortgages, it leads to a whole lot less mobility which in turn leads to extended unemployment.

    It sucks to sell a house for foreclosure level prices. But I’m very, very grateful we can do even that, because it means we’re able to move to a new job. But I’m acutely aware we’re paying this price because of a failed policy, one which tried to make homeowners bear all the cost for the shared mistakes of the banksters and the creditors.

    So, yeah, in the not too distant future banksters are going to have to unload their shadow inventory and they’ll end up taking even bigger hits on their balance sheets than if they had not been pretending to be solvent all this time. But unfortunately, all homeowners are going to feel the pain as well.

    I suspect this looming problem might finally convince the MOTUs at Treasury that they have to implement a policy that works this time–for both banksters and the homeowners.

    Chris Dodd’s Newfound Concern about Management Experience

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    Federal bureaucracies which, according to the confirmation hearing questions he asked of prospective directors, Chris Dodd believes require no management experience to run:

    • Securities and Exchange Commission
    • Housing and Urban Development
    • Federal Housing Administration
    • Export-Import Bank
    • National Credit Union Administration
    • Federal Reserve
    • Federal Deposit Insurance Corporation
    • Office of Thrift Supervision (which oversaw AIG and GE, among other TBTF “entities”)
    • Office of the Comptroller of the Currency

    Federal bureaucracy which, according to his recent interviews, Chris Dodd believes can only be led by someone who has what he judges to be adequate management experience:

    • Consumer Finance Protection Board

    Call me crazy, but I don’t think Chris Dodd’s newfound concern about management experience stems from either the recognition that his past confirmation negligence led to failures at (in particular) SEC and OTS or his genuine concern that the CFPB wouldn’t effectively protect consumers’ interests if it were led by Elizabeth Warren.

    What Irrational Exuberance Looks Like

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    Go read this Kevin Drum post. The important takeaway is this picture, showing that home prices had been, except for the last decade, utterly flat since World War II.

    Kevin spends his post providing a bunch of reasons why people are so silly as to believe they’re going to get rich off of their house–things like the difficulty of adjusting for inflation and the rarity of coverage of markets (like Detroit) that have steadily lost value. As I said, go read the post, because it’s a fascinating read. (Admittedly, facing the hopefully imminent reality of losing a third of my home’s 2002 value makes me particularly interested.)

    I’d like to raise another question raised by the graph, though: what the hell were we thinking? How did most of our society–including many “serious” experts–believe that spike was real–or sustainable?

    It’s an important question because those same “serious” experts are treating that gigantic spike as if it should have been treated as real. The guys in Treasury continue their game of extend and pretend so as to spin out foreclosures more slowly, thereby insulating banksters from paying a price from treating this spike as if it were real, all the while suggesting the homeowners were each, individually, responsible for this collective decade of housing insanity. There’s little acknowledgment of how crazy the whole thing was.

    And then consider how central this spike was to sustaining America’s economy. We’ve got entire cities and states whose entire culture of affluence was significantly dependent on this spike. The illusion that America hasn’t been in decline for the last decade relied on this spike. And we have yet to start talking about what we’ll replace the spike with (some Democrats had hoped to build a new bubble on green technology–which would at least have the bonus of providing necessary societal value–but unless Obama unleashes EPA to set new greenhouse limits, the do-nothing Senate looks determined to squelch efforts to invest further in green technology).

    The spike in this graph really seems like a larger lesson about America: its failed media and pundit class, its fundamentally bankrupt finance-based economy, and its failing political culture.