Foreclosures Are Driving Up Unemployment

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I’ve written several times about how lucky I feel that I can move. We’re going to take an absolute bath on selling our house (a 30% drop in value for a house bought 8 years ago). But at least we have enough money to get out of that house and move to a new job.

Many people in the states worst hit by the foreclosure crisis–FL, NV, AZ, CA–can’t do that. Which means they have to stick with crappy jobs because there’s no way they can move to where people are hiring.

Which is what Rortybomb explains this IMF paper shows.

This paper looks to analyze structural unemployment by regressing a “skills-mismatch index” (SMI), which quantifies mismatches on education level. as well as regressing foreclosure rates on unemployment rates.They find that structural unemployment is 1%-1.75%, with skills being 0.5%. That means housing hurdles run from 0.5% to 1.25% of unemployment.   So that means the large majority of structural unemployment is housing related.

[snip]

This paper shows that a large majority of structural unemployment is the result of underwater mortgages and foreclosures. In addition, when foreclosures are added into the regression alongside [skills-mismatch index], SMI loses some of  its value, and when a cross term is added skills loses a bit more. Right now, the story is one of foreclosures.So groups that fight foreclosures, say what many over-worked and under-paid community organizers do now, are groups that fight to reduce structural unemployment for everyone. Same with those trying to get cramdown and right-to-rent and better short sales. Which is a worthwhile thing to be doing.

And it’s not just that being in a house that has lost value makes it harder for an individual to move to a job (or a better job). It’s that the crappy housing market is bringing everyone down in areas worst hit by it.

Rortybomb analogizes what the banksters (and, I would add, Treasury) have done by letting the housing crisis fester like it has to a corporation coming into a town and releasing burning chemicals.

Let’s say that Bank of America and drove a truck full of chemicals into a town square and proceeded to burn the chemicals. The toxic fumes of these chemicals caused a statistically significant number of workers to be so sick that they ended up not able to work and detached from the labor force and forced major costs onto municipalities. We’d tax the hell out of BoA for burning those chemicals, right? Externalities and all that.So let’s replace “burning toxic chemicals” with “foreclosures.” It’s the same story. Especially foreclosures that haven’t been reviewed by a judge, or foreclosures where there wasn’t proper representation or where a right-to-rent or modification was available. So why aren’t we taxing the hell out of foreclosures?

The foreclosure crisis is killing entire states. And yet the priority still seems to be focused on rescuing the banksters, not the homeowners.

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Top Culprits for Income Inequality? Exec Pay and Educational Failures

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Tim Noah’s great series on the causes of income inequality got a lot less attention during its second week than its first week. So I thought it worthwhile to focus on what he concluded was causing the dangerous new income inequality in America.

Here’s how he described the relative importance of each of the causes of income inequality he looked at:

Here is a back-of-the-envelope calculation, an admittedly crude composite of my discussions with and reading of the various economists and political scientists cited thus far:

  • Race and gender are responsible for none of it, and single parenthood is responsible for virtually none of it.
  • Immigration is responsible for 5 percent.
  • The imagined uniqueness of computers as a transformative technology is responsible for none of it.
  • Tax policy is responsible for 5 percent.
  • The decline of labor is responsible for 20 percent.
  • Trade is responsible for 10 percent.
  • Wall Street and corporate boards’ pampering of the Stinking Rich is responsible for 30 percent.
  • Various failures in our education system are responsible for 30 percent.

Most of these factors reflect at least in part things the federal government did or failed to do. Immigration is regulated, at least in theory, by the federal government. Tax policy is determined by the federal government. The decline of labor is in large part the doing of the federal government. Trade levels are regulated by the federal government. Government rules concerning finance and executive compensation help determine the quantity of cash that the Stinking Rich take home. Education is affected by government at the local, state, and (increasingly) federal levels. In a broad sense, then, we all created the Great Divergence, because in a democracy, the government is us.

Here’s Noah’s installment on executive pay, in which he argues that things like technology make it easier for entertainers and top execs to maximize their pay, while deregulation allowed the banksters to command huge salaries.

And here’s the one on educational problems. Largely, Noah describes, the problem is that K-12 education isn’t preparing students as well for today’s job market as it used to. In addition, between college costs and the removal of incentives (like the draft) to stay in school, educational attainment stalled for a number of years. As a result, the value of a college education is much greater, so those without a degree do worse by comparison.

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Elizabeth Warren’s Soapbox

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Two weeks ago, I suggested Obama would do well to hire the woman who wrote the book on the struggles of the middle class.

Today, he did that.

This afternoon, I suggested that the White House needed to get their newest employee out on teevee, talking to the middle class.

For the White House, not only do they need to fulfill whatever promises they made to Warren. Just as importantly, though, if they don’t actually use the fact that they finally have someone who can speak for and to the middle class (without the kind of gaffes that Joe Biden inevitably makes) to their advantage they will be really hurting themselves. Is Warren booked for the Sunday shows this weekend? If not, why not?

Either the White House or Warren herself made sure she did the round of news shows to talk about her appointment.

As I said earlier, it pays to be cautious about such things.

But–as Rachel Maddow pointed out–at the very least the White House now has a person who can and will, relentlessly, speak about the concerns and challenges of the middle class.

And that–all by itself–is a vast improvement on what the Administration had yesterday.

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Congratulations and Good Luck to Elizabeth Warren

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I’m cautiously optimistic with the dual appointment of Elizabeth Warren to be Assistant to the President to work at Treasury to set up the Consumer Financial Protection Board.

Frankly, no one knows what this appointment will mean in practice except perhaps Obama, Warren, and Timmeh Geithner. And no one knows how well Warren will negotiate the inevitable bureaucratic battles ahead, particularly with whoever replaces Rahm.

But I’m optimistic for two reasons. First, I have a lot of trust in Warren herself. She’s proven her ability to surprise her opponents in bureaucratic battles thus far. I also suspect (though don’t know for a fact) that she negotiated the Assistant to the President position as protection against anything Timmeh and Larry Summers might try. She seems to have demanded certain things with this nomination. And gotten them. And–as DDay linked earlier–she has expressed confidence that this is a win.

The President asked me, and I enthusiastically agreed, to serve as an Assistant to the President and Special Advisor to the Secretary of the Treasury on the Consumer Financial Protection Bureau. He has also asked me to take on the job to get the new CFPB started—right now. The President and I are committed to the same vision on CFPB, and I am confident that I will have the tools I need to get the job done. [my emphasis]

So given the respect I have for Warren, I take her at her word that she will have the power to make of CFPB what it needs to be.

The other reason I’m cautiously optimistic is because the Chamber of Commerce is screaming like a stuck pig over these developments. Which, in my book, is generally a sign that something good has happened.

All that said, the appointment of Warren just means that both the White House and activists have more work to do. For the White House, not only do they need to fulfill whatever promises they made to Warren. Just as importantly, though, if they don’t actually use the fact that they finally have someone who can speak for and to the middle class (without the kind of gaffes that Joe Biden inevitably makes) to their advantage they will be really hurting themselves. Is Warren booked for the Sunday shows this weekend? If not, why not?

As for the rest of us, one of the reasons I think Warren was successful in negotiating what she sees as a successful resolution to this position is because her broad support was very clear to the White House. A wide group of people made it clear that Warren was the only acceptable candidate for this position.

If we get complacent, it’ll be a lot harder for Warren to do what she’d like to do with the position.

Progressives finally won something from this Administration. Maybe. But we’re only going to be able to keep it if we continue to make noise.

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As the White House Dithers on Warren, 525,000 Homes Have Been Foreclosed On

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TPM captures the current state of play of the rumors that the White House will appoint Elizabeth Warren as interim head of the Consumer Finance Protection Bureau:

Reports coming in that President Obama will name Elizabeth Warren as interim director of the consumer protection bureau created by the new financial regulatory law.

Late Update: Maybe not so fast. Fox was one of the outlets originally reporting this and has now retracted that report, saying they may have “misheard” White House spokesperson Bill Burton on board Air Force One. Reuters says Burton simply confirmed that Warren is “obviously in the mix.”

Later Update: The pool report from Air Force One reads as follows:

on Warren:no announcements but soon. no confirmation of interim appointment. essentially, nothing new

The Boy Who Cried Wolf Update: White House releases statement knocking down the reports:

Elizabeth Warren has been a stalwart voice for American consumers and families and she was the architect of the idea that became the Consumer Financial Protection Bureau. The President will have more to say about the agency and its mission soon.

Kicking Dead Horse Update: White House pool reporter sends supplement to pool report: “For emphasis: Burton did not say anything new about Warren.”

Now, when Obama was asked whether he was going to appoint Warren last week, in addition to talking about what a close friend Warren is of his, he also asserted that it has “only been a couple of months” since the CFPB was created (starting at 22:15).

Now, the idea for this agency was Elizabeth Warren’s.  She’s a dear friend of mine.  She’s somebody I’ve known since I was in law school.  And I have been in conversations with her.  She is a tremendous advocate for this idea.  It’s only been a couple of months, and this is a big task standing up this entire agency, so I’ll have an announcement soon about how we’re going to move forward. And I think what’s fair to say is, is that I have had conversations with Elizabeth over the course of these — over these last couple of months. But I’m not going to make an official announcement until it’s ready. [my emphasis]

That suggests the Administration feels little urgency about getting someone at Treasury who will speak for the needs of consumers as the rest of the agency caters to the needs of the banksters.

I wonder whether the roughly 525,000 homeowners who have lost their homes to foreclosure since the Financial Reform bill was signed think that there’s no urgency to having a consumer advocate at Treasury?

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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 →

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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.

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    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?

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    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.

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    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.

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