Category Archives: Economics

Home Equity

Leave a reply

Remember when all the pundits were saying how bad it was that people were tapping their home equity lines to pay for things like fancy cars and European vacations?  That was then, this is now:

Falling real estate prices are eating away at home equity. The percentage of their homes that Americans own is near its lowest point since World War II, the Federal Reserve said Thursday. The average homeowner now has 38 percent equity, down from 61 percent a decade ago.

The latest bleak snapshot of the housing market came as mortgage rates hit a new a low for the year, falling below 4.5 percent for a 30-year fixed loan. But even alluring rates have failed to deliver any lift to the depressed housing industry.

The Fed report is based on data from the first quarter of this year. Another report last week found that home prices in big cities have fallen to 2002 levels.

Normally, home equity rises as you pay off the mortgage. But home values have fallen dramatically since the price bubble burst in 2006. So, many homeowners are losing equity even though the outstanding balance on the loan is getting smaller.

 

Not So Desperate Housewives

Leave a reply

The latest article from Rolling Stone's Matt Taibbi, the preeminent Wall Street basher, is titled The Real Housewives of Wall Street and it's a doozy.  First there's the story of two wives of Wall Street bigwigs who put together a company in 2009 to take advantage of federal bailout funds:

It's hard to imagine a pair of people you would less want to hand a giant welfare check to — yet that's exactly what the Fed did. Just two months before the Macks bought their fancy carriage house in Manhattan, Christy and her pal Susan launched their investment initiative called Waterfall TALF. Neither seems to have any experience whatsoever in finance, beyond Susan's penchant for dabbling in thoroughbred racehorses. But with an upfront investment of $15 million, they quickly received $220 million in cash from the Fed, most of which they used to purchase student loans and commercial mortgages. The loans were set up so that Christy and Susan would keep 100 percent of any gains on the deals, while the Fed and the Treasury (read: the taxpayer) would eat 90 percent of the losses. Given out as part of a bailout program ostensibly designed to help ordinary people by kick-starting consumer lending, the deals were a classic heads-I-win, tails-you-lose investment…

In the case of Waterfall TALF Opportunity, here's what we know: The company was founded in June 2009 with $14.87 million of investment capital, money that likely came from Christy Mack and Susan Karches. The two Wall Street wives then used the $220 million they got from the Fed to buy up a bunch of securities, including a large pool of commercial mortgages managed by Credit Suisse, a company John Mack once headed. Those securities were valued at $253.6 million, though the Fed refuses to explain how it arrived at that estimate. And here's the kicker: Of the $220 million the two wives got from the Fed, roughly $150 million had not been paid back as of last fall — meaning that you and I are still on the hook for most of whatever the Wall Street spouses bought on their government-funded shopping spree.

But this exploration into the adventures of two wives of Wall Street scions leads to bigger questions:

And then there are the bailout deals that make no sense at all. Republicans go mad over spending on health care and school for Mexican illegals. So why aren't they flipping out over the $9.6 billion in loans the Fed made to the Central Bank of Mexico? How do we explain the $2.2 billion in loans that went to the Korea Development Bank, the biggest state bank of South Korea, whose sole purpose is to promote development in South Korea? And at a time when America is borrowing from the Middle East at interest rates of three percent, why did the Fed extend $35 billion in loans to the Arab Banking Corporation of Bahrain at interest rates as low as one quarter of one point?

Even more disturbing, the major stakeholder in the Bahrain bank is none other than the Central Bank of Libya, which owns 59 percent of the operation. In fact, the Bahrain bank just received a special exemption from the U.S. Treasury to prevent its assets from being frozen in accord with economic sanctions. That's right: Muammar Qaddafi received more than 70 loans from the Federal Reserve, along with the Real Housewives of Wall Street.

I'm still waiting for the Feds to launch JERP – Jon's Economic Relief Program.  When they do I'm hitting the beach baby.

Income Inequality

Leave a reply

Whether or not you agree with Joseph Stiglitz's take on income inequality in the US, I think you'll find his commentary to be thought provoking:

Alexis de Tocqueville once described what he saw as a chief part of the peculiar genius of American society—something he called “self-interest properly understood.” The last two words were the key. Everyone possesses self-interest in a narrow sense: I want what’s good for me right now! Self-interest “properly understood” is different. It means appreciating that paying attention to everyone else’s self-interest—in other words, the common welfare—is in fact a precondition for one’s own ultimate well-being. Tocqueville was not suggesting that there was anything noble or idealistic about this outlook—in fact, he was suggesting the opposite. It was a mark of American pragmatism. Those canny Americans understood a basic fact: looking out for the other guy isn’t just good for the soul—it’s good for business.

The top 1 percent have the best houses, the best educations, the best doctors, and the best lifestyles, but there is one thing that money doesn’t seem to have bought: an understanding that their fate is bound up with how the other 99 percent live. Throughout history, this is something that the top 1 percent eventually do learn. Too late.

1980

Leave a reply

This past Tuesday night was a busy one at the day job – we had our annual awards dinner and we rolled out a new name and logo for the organization.  The organization was founded in 1980 and as I prepared for my emcee duties I decided to do a little research so that I could do a little retrospective on what the world was like 31 years ago.  It was fun, especially since I was in 8th grade in 1980 and while I do remember things like seeing Jimmy Carter on the news, I was your average self-absorbed teen and really wasn't aware of what was going on in my parents' day-to-day lives as they made their way through life.  Here's a taste of what I found using various sites online — I'm not going to vouch for absolute perfection on the numbers, but they're all close enough to give you a sense of what was going on at the time:

  • Soviet Union was in Afghanistan
  • US boycotted the Moscow Olympics
  • Pink Floyd’s Another Brick in the Wall was top song
  • A bunch of people tuned into Dallas to see who shot JR Ewing and Bo and Luke Duke were driving around being chased by the dumbest sheriff ever born.
  • First fax machines were available in Japan
  • Average 30 year mortgage rate was 15.28%
  • Yearly rate of inflation was 13.58%
  • Median value of a house in NC was $36,000 ($101,000 in today’s dollars)
  • Average monthly gross rent in NC was $205 ($577 in today’s dollars)
  • Gallon of gas cost $1.19 ($3.35 in today’s dollars)
  • NC unemployment rate in March, 1980 was 5.2%

The first time I ever signed my name to a mortgage was in 1993 and I remember the loan officer telling me and my wife that we were really lucky to be able to get our sub-9% mortgage, and telling us what a wonderful thing PMI was so that we didn't have to put down more than 10% for our loan. I remember agreeing with him because I could remember my mom and stepfather talking about their wonderful 16% note just 14 years earlier (mainly because I was bored to death sitting at the closing for that purchase when I was a self-absorbed teenager).  I also remember sweating bullets as we were asked uncomfortable questions about payments that were a week late on store charge cards a couple of years earlier, and even about some late payments I'd had in college. You can imagine my shock when I started reading about no-look loans, and you can also probably imagine why I'm not particularly sympathetic to those who get their panties in a twist when mortgage rates bounce up a scootch to 4.7%.  It's all a matter of perspective.

Ammo for Those of Us Who Hate the Incentive Game for Biz Recruiting

5 Replies

I'm going to state up front that until Congress legislates them out of existence the incentives that governments now routinely dangle in front of businesses in an effort to locate their operations in their state/county/municipality those inducements are a necessary evil.  I'm not going to sit here and say that my local/state reps are wrong for playing the incentive game because if they didn't play then we wouldn't be in the game at all. Still, I don't like the rules of the game at all and that's why when I saw this article from David Cay Johnston come across my feed reader I was most interested in reading it.

Johnston is reading a book called Investment Incentives and the Global Competition for Capital, a book that looks at what governments around the world are giving away in incentives, and he believes that the authors' estimate of $70 billion/year in giveaways by state and local governments in America is on the low side. Oh, and the Canadians and Europeans are doing a much better job minimizing the costs of these projects.  From the article:

"Estimating aggregate state and local subsidies in America is a difficult proposition because of the lack of transparency at all subnational levels of government," Thomas writes.

Thomas estimates American state and local government giveaways to business have grown to $70 billion per year. I am confident that his estimate is on the low side, for reasons that will become apparent.

While competition to give money to companies is a worldwide problem, the problem is much worse in the United States, Thomas shows. He estimates that American state and local subsidies to relocate existing businesses are six times the location subsidies in the 15 original EU members.

And here's Johnston's take on what's going on here in America:

But what takes the breath away is the increasing size of the welfare given big businesses as governments compete to shower gifts on companies with capital to invest, even when it means hardly any new jobs.

Back in 1967 I got onto the front page of my local weekly with my first exposé, which dealt with tens of thousands of dollars going to a building contractor that had bid low and charged high for a new county courthouse. Thomas showed that today's state and local welfare for businesses requires mechanized shovels to scoop up the cash, compared with spoons for the giveaway I wrote about 44 years ago.

Many investment incentives cover 30 to 45 percent of a factory's cost, Thomas showed. He said that the biggest recent American incentive had a net present cost of $734.3 million. That paid a fifth of the cost of a ThyssenKrupp steel mill that opened this year near Mobile, Ala. It turns out stainless and high carbon steel.

He gives our fair state of North Carolina a little attention in his pillorying of server farm deals which he points out generate very few jobs:

Then there are the North Carolina subsidy deals for Dell and Google, whose motto is "Don't be evil." Tar Heel state officials will not say what the total cost is, nor will the companies. They claim that letting loose the electricity discount figures would involve proprietary secrets.

Oh, please. Anyone in the server farm business can just look at the dimensions of the building and come up with a rough calculation of how much power it will use. Are North Carolinians dumber than Forrest Gump, or will they demand a full accounting?

It is curious how the government collects and discloses finely detailed data on how much tax money goes to the disabled, the poor, and the elderly, and to educate the young, but when it comes to welfare for big business, it just cannot seem to find the resources to gather and analyze the costs.

Strange, too, that many of these obscured, but gigantic gifts come through the good offices of politicians who pose as champions of the taxpayer and enemies of welfare, or at least of welfare for those who actually need it.

Here's the coup de grace for those of us who thought that perhaps Dell closed the 4-year old Winston-Salem plant because of a decline in the popularity of desktops:

Thomas tells how Dell moved a factory from Ireland to Poland in 2009 and then months later closed a four-year-old factory built in large part with North Carolina tax dollars. The Irish taxpayers gave €53.5 million to Dell, while North Carolina gave as much as $242 million. But when the Poles offered €54 million more, it was enough to get Dell to move about 1,900 jobs to Lodz. 

There's no mention of the claw back provisions that led to the city getting back a bunch of dollars (not all of them mind you), but it's still informative to see how we might be getting played.

Last point: I think the reason that NC appears so often in the article is that our state is being quite aggressive in pursuing businesses in an effort to replace the hundreds of thousands of manufacturing jobs its traditional manufacturing base has bled over the last 20 years.  And as I said at the beginning I think this is a necessary evil in the current environment, but that doesn't make it a smart way to govern in the long haul.

Happy Days Will Be Here Again. Eventually.

Leave a reply

Wells Fargo economists say that the economy is improving (h/t to Ed Cone for the link), but that North Carolina has a very long slog in front of it in terms of job creation.  No surprise to anyone who's been paying attention, but interesting just the same:

North Carolina, which had become accustomed  to outperforming the national economy, has underperformed the nation for much of the past decade.  The unemployment rate, which had remained comfortably below the national unemployment rate from 1975 to 2000, has been at or above the national rate for the past decade. Moreover, job growth has been seriously lacking and nonfarm employment is actually lower today than it was at the tail end of the long 1990s business expansion…

North Carolina’s economy also appears to be  on the mend, although a surprisingly weak employment number for the month of November has raised some questions as to how much conditions have actually improved. Private sector payrolls had increased in 8 of the first 10 months of 2010, before plunging by a nation’s worst 11,500 jobs in November. On a year-to-date basis, private sector jobs are now roughly even with where they were one year ago, which is well off the 35,000 jobs we expected to be added this year…  

North Carolina is also facing more structural issues than the nation is. Not only is the state still reeling from the aftermath of the housing  boom, which has weighed on employment in construction and financial services, but it is also dealing with the ongoing restructuring of its industrial base. Manufacturers have eliminated 318,000 jobs across North Carolina over the past decade, with many of the losses occurring in the state’s smaller metropolitan and rural areas. When financial services, technology, tourism and construction were booming, many of these displaced workers could be absorbed in other jobs in the Triangle or Charlotte. Today, however, these industries are growing more slowly and displaced workers are remaining unemployed for longer periods of time…

Jerks Like These

3 Replies

My personal take on the collapse of the housing sector of our economy is that we have wasted way too much time trying to place blame on our own perceived bogeymen.  It's human nature: when something goes wrong the first thing we want to do is figure out whose fault it is and then yell for them to be punished severely. 

The problem with assigning blame in the housing meltdown is that there are so many people and institutions to blame, and just about everybody is picking their own bad guy based on their own preconceptions. If you're somebody who sees people who use social services as leeches on the rest of us then you're quite likely to lay the blame at all the people who took out loans they couldn't pay, and you may not even consider that when people took out those loans they could pay them but then lost a job and the situation changed.  If you're somebody who sees the world through a "the Man is out to screw all of us" lens then you're likely to lay the blame at the feet of all the corrupt banksters who are funding their corporate jets by defrauding regular ol' working slobs like you and me.  If you're someone who thinks all government is bad then you're likely to blame the entire fiasco on Fannie and Freddie. Funny thing is, you're all right.

So it would seem that assigning blame doesn't help us much because the entire system has been corrupted, but without at least trying to hold people accountable we set ourselves up to do this all over again. We need to make sure that when we do find people behaving badly that we do whatever we can to make sure they don't do it again and that we let the rest of society know that if they behave in the same way then truly painful consequences await them.  For this reason I don't think it's enough to reach financial settlements with institutions that packaged toxic loans and sold them as if they weren't the crap they really were; I think you have to go after the people who made those decisions and punish them individually.  Of course it will be difficult, but until you hit people where they live you aren't going to do much to prevent it from happening again. 

Probably the biggest mistake we could make would be treating this as a purely legal issue, because until we instill ethical and moral societal norms we will have done nothing to deal with our systemic problems. People who behave ethically do not make loans to people they are almost certain will eventually default, nor do ethical people walk away from a mortgage when their bet on the property value doesn't pan out.  That's why I find people like this guy profiled in today's Wall Street Journal to be our society's true jerks:

When Chris Hanson bought his $875,000 luxury condominium in Scottsdale, Ariz., four years ago, he could afford the $90,000 down payment.

He said he had no difficulty paying the $5,000 monthly mortgage on the three-bedroom unit, which has floor-to-ceiling windows and views of Camelback Mountain. The condo is in a gated complex with a gym and pool.

And, true to his word, he didn't miss a single payment—until last month. Concluding that the home, now worth about half of what he paid, won't recover its value for at least 10 years, Mr. Hanson decided to walk away.

"It's a no-brainer once you do the math," said the 27-year-old real-estate investor.

He plans to let the lender foreclose on the home and rent an even nicer unit in either the same complex or one nearby, which he figures will cost less than half of his monthly mortgage payment…

Mr. Hanson runs an investment firm that buys up foreclosed properties and resells them. He said the company buys two to three homes a week at prices ranging from $15,000 to $1 million; they've recently expanded into distressed multifamily homes. He said he realized months ago his home would take years to recover its value but decided only six weeks ago to stop making payments.

He worried that wrecking his sterling 800 credit score would make it harder to run his business. But, in the end, he said he decided it was worth the risk.

To make my point, Mr. Hanson should have to worry about more than his credit score as a consequence of his behavior.  Part of me would love to see him go to jail, but more than anything I'd like to live in a society that would make his public shame so great that he'd never even consider walking away. Of course as long as man has inhabited the Earth we've had bad apples, but somehow I think our society has enabled far more of them than is even remotely acceptable.

Fannie and Freddie Don’t Deserve All the Blame

2 Replies

From an interesting piece (found via Ed's blog) reacting to the Republican reaction to the Financial Crisis Commission's findings:

After 20 years of free-market fervor, the world of the mid-’00s had become one of overleveraged banks too big to regulate and trillions of dollars worth of derivatives bets that no one had track of — which in turn were helping to accelerate huge flows of capital coming in from abroad — and a Fed and government regulators who weren’t aware or weren’t watching.

And that was the real cause of the crisis, whose aftereffects continue to drag on the economy today. Fannie and Freddie were, like almost every other big player, both culprits and victims, but just two of many.