Showing posts with label Housing Crisis. Show all posts
Showing posts with label Housing Crisis. Show all posts

Wednesday, June 9, 2010

Vicious Cycle

While budget infernos sweep state and local budgets, government bureaucrats fiddle away at deficits by making minor cuts and taking the easy road of tax increases. I’ve used the microcosm of the local Palm Beach County budget activity to make this point before, as it probably reflects what is going on in some municipal and state finances throughout the United States. PBC’s “recommended” 13.4% increase in property tax rate is designed to “make up” lost revenue” from falling property values. A future stream of required higher tax payments just devalues property further, begetting yet more future increases.

On the other side of the ledger, the “tough” spending cuts include cremating indigents when they die, rather than burying them, “saving” $100,000 (this, mind you, in a budget of some four billion dollars). Other cuts, of course, are aimed at the people who need help the most. Meanwhile, more than $1 billion is earmarked for “general government, interfund transfers, other, and internal services.” Make systemic changes to the way the County operates? Not a chance.

Thursday, May 7, 2009

How’s My Driving?

When I posted my penultimate entry, the blogger “dashboard” indicated that it was my one-hundredth one. This made me ask: where had my blogger journey taken me? So, I did a cursory review of the entries, beginning with the first posted on Wednesday, November 14, 2007. Little did I know at the time we were only at the beginning of an historic political and economic era.

The latter was showing only the tip of a sub-prime mortgage iceberg. In fact, the market report for that day was as follows: “Stocks soared on Wall Street last night as investors returned to the bombed-out financial sector following positive comments from investment banks Goldman Sachs and JP Morgan about the impact of the ongoing sub-prime mortgage crisis. The Nasdaq tech stock index, meanwhile, recorded its biggest gain in more than four years closing up 89.52 points or 3.46% at 2,673.65, while the Dow Jones closed up 319.54 points or 2.46% at 13,307.09.” These now seem like Halcyon levels for both indices.

The ensuing “Great Recession” as it has euphemistically been called, along with Obama’s historic rise to the Presidency, have been the two most significant events of this period. As one of my intensions has been to give a personalized view and account of my times, a fair number of my blog entries during the last 535 days relate to these topics, perhaps more than I had originally envisioned.

No doubt there will be more as momentous political and economic winds continue to blow. Government had to step in to become the “spender of last resort” in this perfect economic storm, but we will inevitably face the unintended consequences of fighting a credit bubble with a new credit bubble. President Obama’s choices (who I supported in these pages from his primary battles to his election campaign) were between worse or worst and I get the sense we are winging it on a daily basis, hoping the economic implosion can be morphed to an explosion as the latter will be necessary to raise the revenue to retire the debt being created. A society cannot borrow itself into prosperity and a common thread in my postings has been the observation that borrowers and lenders, Ponzi schemers and investors in those schemes, are all complicit in this crisis. Government cannot protect people from themselves but we need regulations that make predatory lending and investing practices more difficult, all fodder for future postings.

I have been asked what I meant by the title of the blog. In my first entry, I credited a publisher I admired at McGraw Hill, Curtis Benjamin. To quote from that entry, “Benjamin labeled increasing specialization ‘the twigging phenomenon’ – the tree of knowledge constantly developing new limbs as scholarship and scientific discoveries blaze forward. I wonder how Curtis Benjamin would see the Internet world, the ultimate in customized, personalized, specialized publishing. No doubt he would see it as an opportunity. Hence, an opportunity for me to use the medium to muse about my life, interests and experiences over time.”

So, the blog was intended as musings about la·cu·nae (-n) or la·cu·nas: An empty space or a missing part; a gap. And they are solitary musings of a microscopic nature. I like to think of it as dealing with the irregular numbers between zero and one, of which there are more than whole numbers. The whole numbers from one to infinity are left to mass media and those blogs and web sites positioned for large readership.

Consequently, it also leaves me free to address my own personal interests so other entries have dealt with my life as a publisher, friends and family history, travels and boating, photography, and my interest in music and literature. To some extent I feel the gravitas of the economy and politics have encroached upon writing more on those other topics.

As I said to I said to a blogger friend, Emily, “I’ve always thought of myself as a jack-of-all-trades, master of none…. My on-and-off-again blog reflects my disparate interests and …so, I’m afraid your readers may be disappointed by the content. You have a central passion and your blog reflects that focus so well.”

I make that observation as my blog has been “picked up” by some others, all with a “central passion.” So, if you arrive here through another blog site, I might be dealing with an altogether different subject at the time. I’ve also been asked why I haven’t activated the “comments” feature. Perhaps I haven’t wanted to get into a public debate on my views. They are what they are. But, in the profile part of the blog I have provided an email contact for those who want to communicate.

I’ve averaged a posting almost every five days for one and one half years. Sometimes it feels more like a responsibility than fun and that’s when I back off and post laconic entries, maybe more suitable for Twitterdom than a blog. But I never intend to Twitter as can’t imagine anyone wanting to follow my daily minutiae.

Concluding this summary of my “first hundred entries,” I reiterate an inspirational passage that cuts to the heart of the matter. Just reading the words again makes me more sanguine about the next hundred. This is from the 70-year old classic by Brenda Ueland, If You Want to Write; A Book about Art, Independence and Spirit: “At last I understood that writing was about this: an impulse to share with other people a feeling of truth that I myself had. Not to preach to them, but to give it to them if they cared to hear it. If they did not – fine. They did not need to listen. That was all right too…. You should work from now on until you die, with real love and imagination and intelligence, at your writing or whatever work it is that you care about. If you do that, out of the mountains that you write some mole hills will be published…. But if nothing is ever published at all and you never make a cent, just the same it will be good that you have worked.”


Thursday, March 19, 2009

So we beat on…

If the present financial crisis is the moral equivalent of war, it is appropriate that we have a “New-New Gettysburg Address” written by Jeff Mathews. It begins with “Four or five years ago our Investment Bankers helped bring forth on this continent, and around the world, a new banking system, conceived in Leverage, and dedicated to the proposition that all persons working for Investment Banks can create enormous Wealth for themselves with almost no Risk except to Taxpayers.”

From Naked Capitalism an interesting, but rather technical explanation of the Federal Reserve’s attempt to prop up housing prices through its "shock and awe" announcement yesterday of buying long term debt (created by the Treasury!). One has to wonder whether China’s Prime Minister Wen Jiabao is now more than “a little worried” about their $1 trillion holdings of US debt and about being attached at the hip to US currency.

Finally, here is an insider’s view of the day-to-day workings of AIG. As an outsider, it’s like watching a car wreck in slow motion. Unfortunately, we’re all in this collision. A summary is at the Zerohedge blog, but within is a link for detail.

Unless we have job creation, the Fed can drive mortgage rates to zero without much benefit. People borrow because of confidence, not merely because rates are low. Since the recent Fed move is acknowledged to be their weapon of last resort, one has to wonder what the Fed knows that we don’t. But the last time we had artificially low rates and relatively strong employment we began the very leverage bubble that is now in the process of deflating. “So we beat on, boats against the current, borne back ceaselessly into the past.” (F. Scott Fitzgerald from The Great Gatsby).

Saturday, March 29, 2008

“He that goes a-borrowing goes a-sorrowing”

Here is another maligned minority ready to blame others for its own actions, and expecting the taxpayer to foot the bill: “FORECLOSURE VICTIMS INVADE BEAR STEARNS HQ, PICKET JP MORGAN.” It’s not that our hearts do not go out to those people, but why should those not in foreclosure pay for another person’s poor judgment or even avarice?

Lost in the recent high stakes financial shenanigans are the savers, people who did not avail themselves of “easy money,” to buy homes beyond their economic reach. Or those who refused to be seduced by home equity loans to buy into the American dream of vacations, new cars, the easy, beautiful life which assaults us in an continuous loop on the media. Or those in retirement who are dependent on their savings and social security to see them through. They are everything our government is not: responsible, truthful, balancing their budgets at all costs.

How can we punish savers? Let’s start by giving them investment options based on chimerical ratings that are established by rating agencies paid by the very institutions they are rating. Then let’s ratchet down their income from CDs as we try to bail out an economy of credit excesses. Let helicopter dollars rain down on all [] to encourage more spending! But, that’s not enough; let their government take an unprecedented $29 billion dollar risk, ultimately at the taxpayer’s expense, to bail out the bond and equity holders of Bear Stearns (an action rationalized as needed to save our entire financial system). Let’s also talk about eliminating a more progressive graduated income tax in favor of a flat tax so, when savers spend their savings, which have already been taxed once when they were first earned, let’s tax them again via a national sales tax. While we’re at it, let’s also undermine the dollar and introduce inflation so their savings buy less. Then, finally, as social security benefits are adjusted by inflation, let’s artificially understate the real inflation rate to further erode their benefits!

What would Ben Franklin say today, “he that goes a-saving goes a-slaving?”

Friday, February 8, 2008

Tautological Economics

After the Federal Reserve successfully contributed to a real estate bubble which has yet been allowed to completely unwind, Congress could not resist scoring political points, approving a $168 billion economic “rescue” package, the majority of which will be given to taxpayers as rebate checks. The political tag team of President Bush and House Speaker Nancy Pelosi said the following:

Bush: “This plan is robust, broad based, timely, and it will be effective.”
Pelosi: “We are making history. What has passed the Congress in record time is a gift to the middle class and those who aspire to it in our country.”

While the part of the package that increases the level of expenses that businesses can immediately write off would seem to make sense, as this incentive is almost certain to guarantee investments in new capital equipment and is sure to stimulate job creation, the “gift” part is tantamount to handing a drunk a cheap bottle of wine.

True, it is in keeping with Keynesian economics, the theory being that this handout will be spent by the consumer and will reverberate throughout the economy. As noted in a footnote in a speech given by Ben Bernanke in 2002 before he was Chairman of the Federal Reserve, “Keynes once semi-seriously proposed, as an anti-deflationary measure, that the government fill bottles with currency and bury them in mine shafts to be dug up by the public.” Of course, that was before helicopters so we now have a better method of distributing money to the masses without having to haul our sorry butts off to a mine shaft.

At least Keynes might have been referring to currency already earned, but where is this $168 billion coming from? We’re going to print it or borrow it at the expense of future generations. We will simply increase the deficit. Where will the money go? Maybe we’ll buy some plasma TVs or other electronics at our local Wal-Mart, most of which is made in China, the country that will be lending us the money so we can make those purchases. This would seem to be a form of tautological economics but if it works, why not borrow $1.68 trillion instead of a mere $168 billion? We can use the larger refund as down payments on new mortgages to buy some depressed real estate. Everybody wins!

But getting back to reality, most of the money will probably go to pay off debt, but given the extent of sub prime and foreclosure issues, the rebates will only briefly push back the inevitable. In the 1980s we were able to deal with The Savings and Loan Crisis through the formation of the Resolution Trust Corporation. Shouldn’t Congress be busy addressing our fragile economic system with a more permanent solution than just throwing money at the problem, a temporary fix at best?

Sunday, January 20, 2008

A Perfect Financial Storm?

The downgrade of AMBAC’s financial-strength rating, and the possibility of downgrades of other bond insurers, including MBIA, could be the beginning of a perfect financial storm. These companies jumped onto the sub-prime lending train, along with major Wall Street financial institutions, to profit from the practice of providing credit to less than creditworthy customers, and with the encouragement of Washington to bring the American dream of homeownership to everyone. While the latter is a nice politically correct thought, greedy investors went along for the ride too, buying up “investment property” and homeowners indulged in the practice of using their homes as a piggy bank to buy luxury items. They used cheap money (thanks to the Federal Reserve) and exotic no money down, no interest payment loans, the repayment of which was dependent on future appreciated real estate values. This pot was mixed by mortgage brokers who could now sell off these loans in neat packages through Wall Street firms, with guarantees from the likes of AMBAC and MBIA. Which brings us to the point of this post.

The bond insurers strayed from their main businesses in their greedy pursuit of a piece of the action, and that is their role insuring new municipal bonds. Cities and counties are dependent on reasonably priced debt to make investments in education and infrastructure. The bond insurers made it possible for many municipal bonds to attain AAA ratings, keeping their borrowing costs relatively low. Whether the bond insurers could actually cover a financial Armageddon, even without the CDO mess, is another issue, but so much of finance and investment is really about confidence, and this is what AMBAC and MBIA insurance conveyed.

Now, we are on the edge of a recession or we are already in one, and how deep it will be and how long, no one can tell, even by our Federal Reserve Chairman, Mr. Bernanke (who has not yet acknowledged we are in a recession). Municipal revenues are already under pressure due to falling property values. Add to that mix a severe recession, uncontrolled energy costs ( and their inability to raise capital, or at least at a reasonable cost without the bond insurers, and one has the perfect financial storm for dramatically decreased spending, loss of jobs, and lack of confidence in the financial system all of which just feeds upon itself in a deepening crisis.

Our chicken little representatives on both sides of the isle are clucking an economic stimulus package such as throwing a few hundred dollars at everyone to spend immediately. Maybe we’ll borrow the money from China or one of the other BRIC countries. Why not, we seem to be content to mortgage our future for immediate gratification.

It seems that a better thought out plan is needed to fix the present structural deficiencies of the financial system. It also wouldn’t hurt to find sounder ways to fund this beginning with reducing the financial hemorrhaging of the Iraq war, not to mention getting our troops home. The “guns and butter” approach has failed us before.