Category Archives: Economics

Times Change and So Do Places

2 Replies

An item that blew my mind came across one of my news feeds.  It’s an interview with Rick Weddle, the president and CEO of Research Triangle Park, that he gave after a presentation to Detroit’s TechTown
leaders.  Here’s the part that grabbed my attention:

mm:  RTP is famous for bringing together
government, university and business leaders from across the state. How
did North Carolina’s leaders get so many competing factions on the same
page?

Weddle:   First, they were really in the tank and
they realized they had to do something differently. They realized the
existing industrial base was failing, was not sustainable and wouldn’t
be creating the kind of jobs they needed going forward…

…In North Carolina they were able to get the captains of
industry to support and call for support for these research
universities and the collaborative aspects of the park. We were
capitalized in 1959 by private fund drives. More money was raised from Forsyth County  near Winston-Salem
than in the Triangle. That is fascinating when you think about it.
Money was raised all across the state and more money was raised outside
of our region to capitalize the RTP. And that was the richest region at
the time. Now it’s the poorest region because they hung onto their
industrialism. Interestingly enough those captains of industry found it
easier to do RTP in another region while they still milked their cash
cow in their home area. (Emphasis mine)

This reminded me of a conversation I had with my Mom when we first moved here from DC.  Mom had grown up in Winston-Salem and she said that when she was growing up in the 50s and when she left town after graduating Wake Forest, Winston-Salem and Charlotte were essentially the same size and if you had asked anyone to bet on which city would go on to become the larger city most people would have bet on Winston-Salem.  Goes to show what happens when leaders don’t read the tea leaves right.

By the way, Winston-Salem’s current leaders are doing the kinds of things that Weddle recommends.  They’re working with Wake Forest to develop a world class bio-tech center and they are trying to cooperate regionally with Greensboro and High Point to build a new industry base to replace the decimated textile and furniture industries.  So while this region might have suffered over the last 20-30 years there are good signs that the future will be brighter.

It Might Be 39 Cents, Give or Take Three Dollars

Leave a reply

Ed Cone pointed to an article in WSJ about Morgan Stanley’s quarterly loss and the infusion of $5 billion their getting from China Investment Corp.  Ed focused on the cash infusion from another foreign entity (he also pointed to this earlier story), but my eye was caught by these two paragraphs:

Morgan Stanley, the second-largest U.S. investment bank by market
value, reported a net loss for the quarter ended Nov. 30 of $3.59
billion, or $3.61 a share, compared with year-earlier net income of
$1.54 billion, or $1.44 a share. The loss significantly exceeded the 39
cents a share loss estimated by analysts polled by Thomson Financial…

A loss was expected, but the red ink proved much deeper than analysts
had thought, illustrating how rapidly the market for loans and
securities tied to subprime mortgages deteriorated in November.
Analysts said the company has conservatively marked the mortgage assets
down to about 25 cents on the dollar in an effort to put its problems
behind it, and Morgan Stanley Chief Financial Officer Colm Kelleher
said he is "absolutely confident" that the write-offs accurately
reflect the values the bank sees.

In the past we’ve seen companies hammered on the Street for missing earnings estimates by a penny or two per share; amazing to see how quickly we’re becoming accustomed to seeing loss estimates that are so far off that if plotted on a globe the estimate would be the North Pole and the real number would be the South Pole.  It’s like they’re saying, "We know we’re in deep sh– but we don’t know if it’s at our knees or our neck."  And we trust these jokers with our money; I don’t know if that makes us or them the fools.

And to the point Ed was making about foreign investment I’d like to add this observation: I’ve read and heard many hard-core Iraq war supporters say that we need to continue fighting over there or soon we’ll be speaking Arabic (I heard one guy say Muslim instead of Arabic which I guess means he speaks Christian).  I’d posit that the way things are going these days which language any of us speaks in the future will be determined by which bank we work for or do business with.

Anecdotal Economics

Leave a reply

A couple of personal observations that lead me to believe that ye olde economy here in the US of A is swirling down the toilet:

  • My in-laws have had two get-togethers in Charleston, SC in the last month.  For the first get-together my brother-in-law used his SUV to cart his family the roughly 500 miles from their home in Northern Virginia to Charleston.  This last week, remembering the money he spent on gas last month, he squeezed his three kids into the back seat of his Honda Accord to make the trip.  Anyone who’s traveled with three kids under the age of seven knows what kind of sacrifice that is.
  • I’ve actually heard real estate agents say this housing market really sucks. That’s like getting my wife to admit that I might be right about something we’re arguing over.
  • A guy I know who owns (owned?) a mortgage brokerage had to go out and get a "real job".
  • My bank is offering CDs with rates that almost require more than one hand if you were counting points on your fingers.  Since banks aren’t generally in the business of offering up anything with lucrative margins you just know that inflation is up there too.
  • I’m not getting two dozen pieces of mail daily trying to pimp home equity loans to me.  Something is seriously amiss.
  • My Google Alert for "stagflation" is generating lots of links.
  • Attendance at church seems to be up.  People are scared, or maybe they’re scouting out the locations for future food lines.

At This Point I’ll Take Any Good News

2 Replies

What with all the bad economic news lately I’ll take any good news I can get.  Here’s some from PTI:

For the first time in two years, more passengers are flying out of Piedmont Triad International Airport than in the year before.The growth rate isn’t much: just one-third of 1 percent. But that’s better than the airport’s recent history.In the previous two years, boardings at the airport dropped by about 200,000 passengers.

Scary Numbers

2 Replies

An article in the New York Times titled Blame the Borrowers? has a few scary numbers embedded in it.  This paragraph knocked my socks off:

Figures from the Federal Reserve Board show that the share of subprime
mortgages in default is more than 14 percent. And researchers at the
Center for Responsible Lending say that 64 percent of foreclosures
filed during the 12 months ended June 30 involved subprime loans. A
September report from Banc of America Securities said that 93 percent
of completed foreclosures this year involved adjustable-rate loans that
were made in 2006, pooled and sold to investors.

Interesting item to note from that article is the study of the assumption that subprime borrowers are predisposed to default.  They compared the default rate of borrowers in the NeighborWorks America program, "a nonprofit organization created in 1978 by
Congress to deliver financial aid and training to troubled urban
communities" with those of the overall mortgage business and found the following (quoting directly from the article):

  • "As of June 30, the most recent figures available, 3.34 percent of
    NeighborWorks’ borrowers were at least 30 days’ delinquent on their
    loans, only slightly higher than the 2.63 percent delinquency rate on
    prime loans recorded in that period by the Mortgage Bankers Association."
  • "Compared with subprime loans over all, the NeighborWorks loans really
    outperform. Its 3.34 percent delinquency rate is well below the 14.54
    percent on subprime loans nationwide."
  • "The NeighborWorks loans that went into foreclosure during the second
    quarter of 2007 totaled 0.56 percent, while subprime loan foreclosures
    came in at 2.45 percent during that period. The foreclosure rate for
    NeighborWorks loans was a little over double the 0.25 percent rate for
    prime loans in the period."

The number that shook me the most is that 64% of foreclosures included
subprime loans.  That means that 36% didn’t, and since subprimes are a
minority of the market the fact that such a large chunk of foreclosures
come from supposedly prime borrowers is even scarier to me than the 64%
who are subprime.  According to this March 1, 2007 article in Fortune
subprime mortgages made up 13.5% of the mortgages originated in the US
in 2006 (that’s up from 2.6% in 2000).  The article also states that the
subprime market was $600 billion in 2006, out of an overall $3 trillion
mortgage market.  It doesn’t take a rocket scientist to figure out that
even if the prime market sees a default rate that "only" rises to say 5%, then you’re talking a really big number.  And considering what’s happening to US banks already, that really big number is truly threatening.

FortunenumbersHow threatening these mortgage defaults are is still being worked out. To the left is another set of scary numbers from Fortune’s special report on the meltdown in the financial sector (click on it to enlarge).  This ain’t looking good.

According to the Mortgage Bankers Association over 50% of mortgage applications last week were for refinancing.   Hopefully this means that lots of the ARM holders, particularly in the prime market, are locking in fixed rates and thus stemming an even greater tide of defaults next year.  But who knows how many people will be unable to secure fixed rate financing and thus face escalating mortgages next year?  Again, even if it’s a relatively small percentage it could turn into a huge number of dollars. 

You ask me the reason the ARMs, especially the sub-prime ARMs are so much trouble is the same reason that high interest credit cards absolutely slaughter most people.  No one sets out to be a bad debtor, but most people have no concept of how hard it is to pay down debt that lays on even 10% each year, much less 20%.  The author of the Times article rightly points out that a big part of NeighborWorks’ program is their 130 loan counselors providing extensive mortgate education to their borrowers.  I don’t think the banks spent much, if any time educating their borrowers since it would have diverted them from churning out even more loans and earning the requisite fees.  Now it’s time for all involved to pay the piper.

But what do I know?  I’m just an English major who has trouble balancing a checkbook.  A big part of my fear is that lots of the "experts" predicted this wouldn’t be a big deal and now they’re all sitting around looking at each other and saying "Who knew?" while the people they called Chicken Littles are sitting around saying "I told you so."  I don’t have a lot of confidence that the people guarding the financial hen house aren’t a bunch of wolves looking for the next meal and average folks like you and me aren’t the hens.  Cluck, cluck. 

Hat tip to Ed Cone for pointing to the Times article and the Fortune special report referenced above.

The Definition of Irony?

Leave a reply

Remember the bankruptcy law that lenders lobbied so hard for two years ago?  According to this article on Bloomberg it’s biting the banks in the butt:

Washington Mutual Inc. got what it
wanted in 2005: A revised bankruptcy code that no longer lets
people walk away from credit card bills.   
       
      

The largest U.S. savings and loan didn’t count on a housing
recession. The new bankruptcy laws are helping drive
foreclosures to a record as homeowners default on mortgages and
struggle to pay credit card debts that might have been wiped out
under the old code, said Jay Westbrook, a professor of business
law at the University of Texas Law School in Austin and a former
adviser to the International Monetary Fund and the World Bank…

Washington Mutual, Bank of America Corp., JPMorgan Chase &
Co. and Citigroup Inc. spent $25 million in 2004 and 2005
lobbying for a legislative agenda that included changes in
bankruptcy laws to protect credit card profits, according to the
Center for Responsive Politics, a non-partisan Washington group
that tracks political donations.   
       

      

The banks are still paying for that decision. The surge in
foreclosures has cut the value of securities backed by mortgages
and led to more than $40 billion of writedowns for U.S.
financial institutions. It also reached to the top echelons of
the financial services industry.

I’m not saying people shouldn’t pay their bills, I’m simply saying that it’s kind of ironic that the same institutions that charge high-risk debtors interest rates that can only be described as usury are being hammered by a law they lobbied for to keep those same high-risk debtors in hoc to them.
   
       

Self-Help Founder’s View on the Subprime Mess

1 Reply

Patrick Eakes, a blogger in Greensboro whom I greatly respect, points to an interview with Martin Eakes, co-founder of Self-Help, in which he discusses the subprime mortgage conflagration.  It’s a Q&A that offers the clearest reasoning I’ve yet read about why some subprime borrowers truly are victims:

Q. Why should anybody, other than those who got the loans, care about subprime lending?

A.
The real damage from a foreclosure is not just to a family that loses
its home, but also to a neighborhood where the family is located.
Nobody wants to live near a boarded-up vacant house. … You have this
spillover effect from foreclosures. That spillover effect is really
quite deadly and causes a spiral that we have to concerned about.

Q. What about personal responsibility? Don’t those who took subprime loans bear some burden?

A.
The mortgage loan process is so complicated today. There is not a
person in America who can honestly say they read every legal form at a
home loan closing. Every borrower, if they’re honest, will tell you
they had to trust some adviser, whether an attorney, broker or lender
to guide them through the mortgage process. … They trusted the wrong
person and got a loan unsuitable for any human being that breathes.

I’m
in no way defending borrowers who lie or cheat or engage in fraud. …
But it really makes me angry when I see people blame the victim. That’s
just not the truth of what’s going on.

Oh, and one more thing: he thinks that the worst is yet to come in the subprime market.

FYI, here’s some info about Self-Help from their website:

Our Mission

Creating and protecting ownership and economic opportunity for
people of color, women, rural residents and low-wealth families and
communities.

The nonprofit Center for Community Self-Help
and its financing affiliates Self-Help Credit Union and Self-Help
Ventures Fund provide financing, technical support and advocacy for
those left out of the economic mainstream. Since its founding in 1980,
Self-Help has reached out to female, rural and minority borrowers
across North Carolina, in Washington, D.C., California, and many other
states.

  • We help borrowers nationwide to build wealth through ownership of a home or business.
  • We strengthen underserved communities by financing nonprofits,
    childcare centers, community health facilities, public charter schools
    and residential and commercial real estate projects.
  • We operate a secondary market program that enables private lenders to make more loans in low-wealth communities.

Over time we have learned, and demonstrated, that low-income
borrowers pose no greater credit risk than others. Our borrowers have
proven their determination to repay their loans, build their
businesses, improve their communities, and build wealth through home
equity.

 

Something’s Gotta Give

Leave a reply

Last night we rolled back into town after spending a week at the beach in Corolla, North Carolina.  Corolla is part of the northernmost developed stretch of the Outer Banks (OBX) and is very popular with folks from Washington, DC and points north.  Most of this area has been developed only in the last 20 years and judging from the traffic on Rt. 12 it doesn’t look like the area can handle much more, but that may not be an issue at least for the short term.

Now that the real estate market in the US is cooling down it will be interesting to see what happens to places like Corolla because I can’t imagine that the current situation can be sustained for much longer.  We saw one 1/2 acre empty beachfront lot next to the beach access we were using that was selling for over $2 million.  That’s just for land.  Across the street from that lot was another that was selling for $800,000.  The houses in that area are built so that multiple families can share the space which means they usually have enough sleeping capacity for 30 people and you aren’t going to build a house that size for much less than $500,000. If you’re spending $1 million for land and another $500,000 or more to build a house then you’re looking at $1.5 million minimum to get into that market.  We (our friends and ourselves) were speculating that over the last 10 years people in the northeast have been leveraging the skyrocketing value of their primary residences in places like the DC metro area to finance their beachside McMansions in OBX.  With those markets now hitting the skids there will probably be a corresponding slow down in places like OBX.

As I’ve written before I’m no economist, thus it’s dangerous for me to write about things like this, but I just can’t see how the current situation in OBX can be sustained.  I guess I’ll just have to sit back and wait for folks like my brother and David Boyd to come embarass me with obvious arguments for how it can.

Money-Money-Money, Mooooney

1 Reply

One of the things I consistently hear from friends and family who read my mind dribblings is that they read everything except for the "boring stuff" about politics and government.  Invariably they say something like "I’m just not as into it as you are" which is fair since I’m interested in lots of boring things, including my navel.  Still, it got me to thinking that maybe I need to be a little more entertaining when I write about that stuff since so here goes my first try:

Today’s topic: War and Money

Important takeaway: We’ve spent a buttload of money on the war in Iraq and it’s not ending any time soon.

Interesting hook: Some folks are putting a $1.2 Trillion price tag on the war, but back in 2003 when one of the Bush administration’s economists predicted the war might end up costing us about $100-200 billion dollars he was canned. The other administration estimates at the time were closer to $60 billion which means they were only off by, oh, $1.14 trillion.

Entertainment Value: Think about what $1.2 Trillion could buy.  If I were writing my typical, boring, wonky stuff I’d write about all the teachers it could pay for, doctors it could provide, yada, yada, yada.  But for fun lets look at the number of the following that you could purchase:

Man that’s a lot of spare change.  Now, if you want to talk about real money take a look at what Fec’s pointing to re. the coming crisis due to the healthcare and retirement costs of the aging (finally) baby boomers. 

Boring? Yes.  Important? Hell yes.