The Secret of the Weak Recovery: We Had a Fucking Housing Bubble with Nothing to Fill the Gap It Created

Monday, May 6, 2013 by Beat the Press / CEPR
by Dean Baker

The problem with economics is not that it's too complicated; the problem is that it's too damn simple. This problem is amply demonstrated by all the heroic efforts made by economists to explain the weakness of the current recovery.

We've had economists tell us that the problem is that we are now a service sector economy rather than a manufacturing economy. The story is that inventory fluctuations explain much of the cycle. Since we don't inventory services, we will have a slower bounceback in terms of production and employment. (There is a simple problem, since we don't inventory services, the downturn should also be less severe in a service dominated economy. How does this story fit with the worst downturn since the Great Depression?)

We've also been told that the problem is underwater homeowners who can't spend like the good old days because they are underwater in their mortgages. The problem with this one is that we only have around 10 million underwater homeowners, the vast majority of whom have relatively modest incomes. The emphasis is on "only" because, while 10 million is a lot of people to be underwater, it is not a lot of people to move the economy.

The median income for homeowners is $70,000. (Median is probably appropriate here rather than average, since it is unlikely that many wealthy people are underwater.) Suppose that being above water would increase consumption by each of these homeowners by $5,000 a year. This is a huge jump in consumption for people with income of $70k. (Do we think these homeowners are saving an average of $5,000 a year now?) This would lead to an increase in annual consumption of $50 billion a year or less than 0.3 percent of GDP. This would be a nice boost to output, but it would not qualitatively change the nature of the recovery.

Today we have Robert Samuelson telling us that the reason employers are not hiring is uncertainty:

"Businesses have become more risk-averse. They’re more reluctant to hire. They’ve raised standards. For many reasons, they’ve become more demanding and discriminating. These reasons could include (a) doubts about the recovery; (b) government policies raising labor costs (example: the Affordable Care Act’s insurance mandates); (c) unwillingness to pay for training; and (d) fear of squeezed profits."

Hmmm, they're worried about squeezed profits when the profit share of income is at its highest level in more than 60 years? The story of the Affordable Care Act raising costs could at best only explain the behavior of a small group of businesses (firms with close to 50 employees who do not currently provide health care insurance).

But there is a simple way to test the idea that firms would otherwise be hiring but are deterred due to uncertainty about the future: look at the length of workweeks. The logic is simple; increasing hours per worker and hiring more workers are alternative ways to meeting increased demand for labor. Adding work hours involves none of the commitments that apply to hiring addtional workers. If uncertainty, as opposed to lack of demand, is keeping businesses from hiring, then we should be seeing a big increase in the length of the average workweek.

We don't. The length of the average workweek fell by 0.2 hours to 34.4 hours in April. This compares to an average of more than 34.5 hours in the 2006 and 2007. In short there is no evidence that employers are seeing the sort of demand that would justify increasing the size of the workforce but are being kept from doing so because of the concerns raised by Samuelson.

If none of these stories, or any of the others that economists develop to stay employed, explain the length of the downturn, what does? Well, it's pretty damn simple, we had a housing bubble driving the economy before the collapse and there is nothing to fill the gap created. The bubble led residential construction to soar to more than 6.0 percent of GDP at the peak of the boom in 2005. It is now a bit over 2 percent of GDP implying a loss in annual demand of more than $600 billion. The $8 trillion in housing wealth created by the bubble led the saving rate to fall to almost zero due to the housing wealth effect (people increase annual spending by 5-7 cents for each dollar in housing wealth). With the saving rate hovering near 4 percent, we have lost close to $400 billion in annual consumption demand.

The cumulative loss of annual demand is more than $1 trillion. What did we think would replace this demand? Investment in equipment and software is actually close to its pre-recession level measured as a share of GDP. Furthermore, this component of investment has never been a much larger share of GDP, even in the Internet bubble years. Why would anyone expect it to expand rapidly at a time when many firms still have large amounts of excess capacity? (Structure investment is depressed because there was a bubble in non-residential construction as well, leading to large amounts of excess capacity in most areas of non-residential construction.)

Do we somehow think that consumers will spend at the same rate after they have lost $8 trillion in housing wealth as when they had this wealth? Why? Net exports could fill the gap, but the dollar has to fall. Net exports could fill the gap, but the dollar has to fall. (I repeated that one in case any economists are reading.) The value of the dollar is the main determinant of our trade deficit, if we want a lower deficit then we will need a sharp decline in the dollar, which has not happened.

This only leaves the government sector to fill the gap with deficits, which our Serious People types have demanded that we hold down. So, based on the good old intro econo that tens of millions have been subjected to, we know that this recovery will be slow and weak. We simply lack a component of demand to fill the gap created by the housing bubble.
If it seems absurd that economists can't see something this simple, readers should realize that this is a common problem. Just last Friday Robert Samuelson had a useful column that pointed out the huge imbalances that persist in the euro zone and pointed out that the region's crisis is far from over. While he is exactly right, the amazing part of the story is that competent economists somehow did not see these imbalances developing.

As I pointed out, several of the current crisis countries already had incredible trade deficits long before the crash as the world's leading economists were celebrating the "Great Moderation."

Current Account Balance as a Percent of GDP

Country	2003	2004	2005	2006	2007	2008
Greece	-6.533	-5.785	-7.637	-11.388	-14.609	-14.922
Portugal	-6.433	-8.327	-10.323	-10.685	-10.102	-12.638
Spain	-3.508	-5.248	-7.353	-8.961	-9.995	-9.623

                                           Source: International Monetary Fund.


How did the folks at the European Central Bank think that these deficits would fall to a sustainable level without some sort of disastrous crisis? This one should have been simple, but the world's leading economists all missed it.

I recall back in the 1990s and the last decade when both Republican and Democratic economists wanted to invest Social Security funds in the stock market. (Democrats generally wanted to invest the fund collectively rather through individual accounts.) I tried to point out that both were assuming impossible rates of return given the fact that the stock market was at price to earnings ratios that were far higher than historic averages.

When this issue was highlighted in the debate over President Bush's privatization plan (see the No Economist Left Behind test) Brad DeLong suggested that we do a paper on it for Brookings conference. I didn't think that this simple arithmetic could warrant a Brookings paper, even though the issue was hugely important. To get it in Brad (along with Paul Krugman) added a model of optimal consumption paths given a declining rate of labor force growth. While the model was fine, it had nothing to do with the basic issue that the stock market was over-valued at the time that people were thinking of investing workers' Social Security money in it. The model did add sufficient complexity so that we get the Brookings crew to take the simple argument seriously.

The same story held during the housing bubble years. I had many people ask me why I didn't publish anything in journals on the bubble in the years 2002-2007 when I was writing for CEPR's website and popular publications. The reason is that it was too simple a story for any serious journal.

The basic story was that house prices had diverged sharply from their long-term trend and there was no plausible story rooted in the fundamentals of the housing market that could explain this divergence. While this was certainly compelling in my view, the American Economic Review is not going to publish an article that shows house prices just keeping pace with inflation for 100 years and then suddenly rising by 70 percent in real terms from 1996-2006. It would be necessary to somehow make the story complicated to get economists to take it seriously.

To my view this is the fundamental problem of economics. There is a need to find ways to make economic issues complex even when they can be explained by the simple economics that we teach in econ 101. This is not a pretty picture.

Yet Another Housing Bubble on the Horizon

Those who do not learn from history are doomed to repeat it. The power structure of the United States is comprised solely of short-sighted, greedy cunts who don't have to suffer the failure they commit over and over. We, the people, do. Fuck them!





The "Qualified Mortgage" Rule
by MIKE WHITNEY


The US Consumer Financial Protection Bureau’s rule defining a “qualified mortgage”, which was announced on Thursday, creates vast new opportunities for the nation’s biggest banks to engage in predatory lending practices with impunity. While the corporate mainstream media describes the rule as an attempt to protect borrowers from the risky types of loans that caused the financial crisis, the opposite is true. The real purpose of the rule is to provide legal protection for the banks from homeowner lawsuits, and to lay the groundwork for more reckless lending that could inflate another housing bubble. In other words, the rule was designed to serve the interests of the banks and the banks alone. This is why bankers everywhere are celebrating the final draft. Take a look at this from Forbes:

“We applaud the Bureau for offering a legal safe harbor to lenders when they originate loans that meet the rigorous ‘qualified mortgage’ standards in the rule,” said Debra Still, chairman of the Mortgage Bankers Association, in a statement. “This approach should allow lenders to offer sustainable mortgage credit to a great number of qualified borrowers without having to risk unreasonable and overly punitive litigation and penalties.” (Could New Tighter Mortgage Rules Actually Ease Lending?” Forbes)

The banks are happy because they got everything they wanted; blanket legal immunity for garbage mortgages they plan to offload onto US taxpayers, a green light to resume extending credit to high-risk borrowers, and a first-rate public relations campaign that makes the entire coup look like genuine consumer protection.

As one cheery bankster quipped, “This was the Superbowl of rules”.

Indeed. It’s a big victory for the banks, but a major defeat for consumers. And the aftershocks will be felt for years to come, because (as we said in an earlier article) housing sales are already above trend and prices are back to normal which means that the only way the banks can reduce their huge backlog of 5 million distressed homes (which will face foreclosure in the next few years) is by creating another housing bubble. And, as we all know, housing bubbles require lax lending standards so that people who are not really creditworthy, end up borrowing hundreds of thousands of dollars that they’ll never be able to repay. This is what the new rule is really all about; it provides new opportunities for predatory lending, but with one notable difference from before, that is, if the loan meets the pitiable standard of a qualified mortgage, then the losses from the defaulting loan will be paid by taxpayers. That’s why the bankers are celebrating.

So, ignore the PR-hype about the banning of “deceptive teaser rates” or “no documentation loans” or “protecting the consumer”. That’s just a smoke screen to confuse you. The meat and potatoes in this rule, is what it doesn’t say. Here’s a clip from the Wall Street Journal that sums it up perfectly:

“Do qualified mortgages have a minimum down payment or credit score requirement?

No. Instead, the rules focus primarily on documenting a borrower’s ability to make monthly payments.” (“What the CFPB Measures Mean For Borrowers”, Wall Street Journal)

Have you ever heard anything more ridiculous in your life?

Didn’t we just go through a massive housing implosion which sent the financial system and the real economy into a 4-year death spiral? And now the agency which is supposed to protect consumers from another similar catastrophe is allowing the banks to issue mortgages that will be guaranteed by the government to applicants who don’t have the wherewithal for a lousy 5 or 10 percent down payment (No “skin in the game”) and whose credit scores will not be used to help decide whether they’re capable of repaying the loan or not?

What sense does that make? Does CFPB Director Richard Cordray think that he’s protecting consumers from the ravages of predatory lending by abandoning traditional standards and criteria for issuing a mortgage? Is that it?

Or is Cordray just another “captured” regulator doing the banks’ bidding? (It was clear that Cordray was another malleable bank toady back in Oct 2012 when this issue first arose. See: “Consumer Protector Caves to the Banks“, CounterPunch)

The media is making a big deal about the “ability-to-repay” provision of the new rule which requires banks to see that borrowers have sufficient assets or income to pay back the loan. But, once again, it’s all fluff. Banks don’t operate on the “honor system”. They’re going to stretch the new QM rule as far as possible, fitting borrowers into loans that will certainly fail sometime in the future. The losses for those loans will then be passed on to taxpayers. This is the same scam that took place during the subprime mortgage crisis. The banks booked profits on all manner of junk loans to high-risk borrowers figuring that the losses would be shifted onto investor groups who purchased the (subprime) bonds in the secondary market. The same nightmare is about to unfold again, only this time the banks won’t get stuck with the tab. Here’s an excerpt from an article in the New York Times that explains:

“As regulators complete new mortgage rules, banks are about to get a significant advantage: protection against homeowner lawsuits … some banking and housing specialists worry that borrowers are losing a critical safeguard. Industries rarely get broad protection from consumer lawsuits, and banks would seem unlikely candidates given the range of abuses revealed during the housing bust.” (“Banks Seek a Shield in Mortgage Rules”, New York Times)

Can you believe it? Even the business-friendly NYT is shocked that the CFPB is giving the banks legal immunity. (“Safe harbor”) Why? Why would the government agree to insure the activities of private industry (through Fannie and Freddie), especially when that industry has shown that it is loaded with crooks and criminals? This is corporate welfare at its worst and, unfortunately, it creates a powerful incentive for the banks to game the system and recklessly extend credit to anyone who can sit upright and sign a mortgage application.

Here’s more from the NYT:

“The Consumer Financial Protection Bureau, the fledgling agency that is shaping the rules, faces a crucial but difficult task. Banks are pressing for a strong version of the legal shield. They also want qualified mortgages to be available to a broad range of borrowers, not just those with pristine credit.”

Of course they do. That’s how they make their money, by creating toxic loans that are passed along to Uncle Sam. How else are the banks going to boost profits in an economy where unemployment is 7.8%, underemployment is tipping 14%, where wages are shrinking, and where the net wealth of the average American has plunged by a harrowing 40 percent in the last decade?

Business investment?

Don’t make me laugh. The only way the banks can survive is by attaching themselves parasitically to the US government and sucking for all they’re worth. Bad loans are simply the modus operandi, the means by which they extract fluid from their victim. Cordray and Co. appear to be only-too-eager to assist them in this task. Here’s more from the Times:

“Big financial institutions have faced an onslaught of litigation since the downturn, although mostly by the government, investors and other companies instead of borrowers. In February, five large mortgage banks reached a $26 billion settlement with government authorities that aimed, in part, to hold banks accountable for foreclosure abuses.”

Okay, so now we’re getting down to brass tacks. The banks want the new rule to shield them from future losses that will naturally accrue when they start ripping people off again. Right? This is why they fought tooth-n-nail to keep Elizabeth Warren off the CFPB board, because they knew she wouldn’t play ball with them. So they turned to “rubber stamp” Cordray instead, who has performed admirably executing Wall Street’s latest big heist with the skillfulness of a paid assassin.

Way to go, Rich.

There’s one more tidbit in the new QM rule that’s worth noting, a provision that states that “loans would be deemed qualified mortgages if borrowers are spending no more than 43% of their pretax income on monthly debt payments.”

“43% pretax income”?

You gotta be kidding me. That means that borrowers can qualify even if they’ll have to fork over 50% or more of their weekly paycheck. How many of those loans are going to get repaid?

Not many, I’d wager. This bill is a joke. Cordray has set up taxpayers for some hefty losses just to ingratiate himself with the Wall Street Bank Mafia. It’s shocking.

Can you see what’s going on?

The banks don’t want to act like banks anymore. They don’t want to hold capital against the loans they issue, they don’t want to keep loans on their books, and they don’t want to pay the losses when the loans blow up. The just want to keep printing private money (credit), booking profits on that money (loans), and then dumping the red ink on Uncle Sam. That’s how the whole thing works.

The QM rule was designed to work hand in hand with the Fed’s $40 billion per month purchases of mortgage backed securities. (MBS) This is key to understanding what’s going on.

The Fed, in concert with the Obama administration and the big banks, has replicated the same conditions that existed just prior to the last big bubble. The Central Bank will play the same role as investors in the secondary market (from 2003 to 2007), that is, the Fed will buy up all the garbage MBS the banks can produce. All the banks have to do is to find mortgage applicants who meet the wretched “no down payment, no credit score” requirements of the CFPB, and then “Let ‘er rip.”

All the pieces are now in place for another humongous, economy-crushing housing bubble. This isn’t going to end well.

Grand Theft Wall Street

What You Should Know About the FHA Bailout

by MIKE WHITNEY

 

The Federal Housing Administration (FHA) needs a bailout, but don’t expect the media to tell you why. Instead, they’ll give you some baloney about how the agency was used to “stabilize the housing market” following the government takeover of mortgage giants Fannie Mae and Freddie Mac in September of ’08. While there’s some truth to this, it misses the larger point, which is that FHA was used to generate as many toxic mortgages as possible to keep the money flowing into the big Wall Street banks and to prevent housing prices from plunging even further leaving bank balance sheets deeper in the red. That’s what really happened; the FHA was looted to save the banks. It’s another example of grand theft Wall Street. Now take a look at this from Bussinessweek:

“The agency’s financial report last year projected that loans issued before 2009 would result in $26 billion in losses, $14 billion of that from a subset of loans in which sellers were allowed to cover the down payment on behalf of the buyer, often by inflating the price of the house. Congress banned seller-funded down payment loans beginning in 2009.

Still, the risk of many of those mortgages has been transferred to the agency’s more recent books of business because they have been refinanced under FHA’s streamline program, which waives many underwriting requirements to enable borrowers to take advantage of low interest rates. More than 17 percent of all FHA loans were delinquent in September.” (“FHA Said to Set Stage for Treasury Draw as Losses Mount”, Businessweek)

$26 billion here, $26 billion there; pretty soon you’re talking real money.

Explain to me why would anyone in their right mind would allow the seller to pay the down payment? A down payment is intended to prove that the loan applicant is capable of saving money which is a traditional way of determining creditworthiness. Letting the seller put up the down-payment turns the entire process on its head. It’s completely self defeating. It just shows the extent to which the FHA was bending the rules to prop up housing prices to accommodate their Wall Street overlords.

And did you catch that bit about “More than 17 percent of all FHA loans being delinquent in September?” That’s just more proof of fraud, isn’t it? Typically, banks only see delinquency rates of about 1 or 2 percent. The only way you get 17 percent delinquency rate is you’re grabbing people off the streets and signing them up for 30-year loans without checking their credit history. It’s such an obvious scam, it’s laughable. I assure you, even a cursory investigation of loan applications during this period would expose widespread fraud in the mortgage origination process. But, of course, we don’t do criminal investigations anymore because –as Mr Obama says, “I want to look forward, not backward.”

Of course no one in the media would dare to suggest that the FHA was involved in a vast criminal conspiracy to rip off taxpayers. Heaven forbid! But that’s what it amounts to when you issue mortgages to people who YOU KNOW will never be able to repay the debt. It’s premeditated robbery. The FHA was allowing the banks to report record profits and take hefty bonuses on loans that they knew would eventually blow up and be charged to taxpayers. The media calls that “stabilizing the housing market”. I call it raping the public.

Is that too harsh? Maybe there are some skeptics reading this who think that the folks who were in charge at the time (Treasury Secretary Henry Paulson and Fed chairman Ben Bernanke) were doing the best they could under very difficult circumstances? Maybe they think that using FHA to guarantee junk mortgages was the only way to keep the ailing housing market on life support, after all, the country was in the throes of the worst financial crisis since the Great Depression, wasn’t it?

Sure, it was, but that’s what makes the FHA swindle so grotesque, because even in the middle of an economic meltdown, the people in charge only pursued the policies that further enriched their thieving friends. In order to prove that point, we only need to browse the archive at Bussinessweek, where a 2008 article titled “FHA-Backed Loans: The New Subprime”, lays out the basic facts in black and white. Here’s an excerpt:

“The same people whose reckless practices triggered the global financial crisis are onto a similar scheme that could cost taxpayers tons more.

As if they haven’t done enough damage. Thousands of subprime mortgage lenders and brokers—many of them the very sorts of firms that helped create the current financial crisis—are going strong. Their new strategy: taking advantage of a long-standing federal program designed to encourage homeownership by insuring mortgages for buyers of modest means.

You read that correctly. Some of the same people who propelled us toward the housing market calamity are now seeking to profit by exploiting billions in federally insured mortgages. Washington, meanwhile, has vastly expanded the availability of such taxpayer-backed loans as part of the emergency campaign to rescue the country’s swooning economy.

For generations, these loans, backed by the Federal Housing Administration, have offered working-class families a legitimate means to purchase their own homes. But now there’s a severe danger that aggressive lenders and brokers schooled in the rash ways of the subprime industry will overwhelm the FHA with loans for people unlikely to make their payments. Exacerbating matters, FHA officials seem oblivious to what’s happening—or incapable of stopping it. They’re giving mortgage firms licenses to dole out 100%-insured loans despite lender records blotted by state sanctions, bankruptcy filings, civil lawsuits, and even criminal convictions.

As a result, the nation could soon suffer a fresh wave of defaults and foreclosures, with Washington obliged to respond with yet another gargantuan bailout. Inside Mortgage Finance, a research and newsletter firm in Bethesda, Md., estimates that over the next five years fresh loans backed by the FHA that go sour will cost taxpayers $100 billion or more. That’s on top of the $700 billion financial-system rescue Congress has already approved. Gary E. Lacefield, a former federal mortgage investigator who now runs Risk Mitigation Group, a consultancy in Arlington, Tex., predicts: “Within the next 12 to 18 months, there is going to be FHA-insurance Armageddon.” (“FHA-Backed Loans: The New Subprime”, Businessweek)

How do you like that? And that was written back in November 2008, so a lot of people knew what was going on even then. Our point is that the FHA was NOT used to “stabilize the housing market”, that’s complete industry-fabricated PR hogwash. It was used to turbo-charge asset prices and to shovel more money to crooked bankers. Here’s more on the story from CNBC’s Realty Check:

“The FHA losses stem from business it did between 2007 and 2009, when the rest of the mortgage market retreated dramatically. $70 billion in claims are attributable to just those three years when seller-funded downpayment assistance was still allowed. That was prohibited in 2009.

The FHA, which requires just 3.5 percent down payment on a loan and which had lower relative credit score requirements, went from just 2 percent of the market during the height of the housing boom to nearly 40 percent at the height of the crash, insuring $330 billion worth of mortgages in 2009 alone.” (“To Stem Losses, FHA Mortgages Get More Expensive”, CNBC)

Same old, same old, right? The FHA rubber stamped hundreds of billions in mortgages even though they knew the underwriting was shoddy and that the losses would eventually be dumped on Uncle Sam. And who was the primary regulator when all this hanky panky was going on?

Why, none other than Ben Bernanke. The very same Ben Bernanke who just last week said we need to loosen lending standards so the banks can issue more bad loans. It’s true. Check out this clip from a speech that the Fed chairman gave last week in Atlanta:

“It seems likely at this point that the pendulum has swung too far the other way, and that overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery…” (“Challenges in Housing and Mortgage Markets”, Federal Reserve)

Sure, let’s return the Golden Era of Crappy Lending circa 2006. Let’s get those subprime boiler rooms up-and-running again so we can blow the system to Kingdom Come one more time. Can you believe this man is still Fed chairman?

Congress should ignore Bernanke’s blabbering and standardize mortgage applications requiring 10 percent down, proof of employment, and minimum 620 credit scores. These should be the ironclad rules of lending from which the banks may not veer one iota from or face criminal penalties and a revoking of their license. Enough of the bubbles, already!

According to a recent audit, the FHA has a $16.3 billion deficit, which doesn’t sound too bad considering that agency has grown by 30 percent since 2009 and presently insures $1.1 trillion in mortgages. But then if you read the fine-print, you discover that–just this year–the agency “introduced the claim-type prediction model to separate REO claims and pre-foreclosure claims”.

What does that mean? It means they’re fudging the numbers to make things look rosier than they really are. The fact is, this is just Phase 1 of multi-phase bailout that could run into hundreds of billions of dollars, mainly because the FHA is STILL slapping its seal of approval on high-risk loans. Just get a load of this clip from The Atlantic:

“Today, the agency is still targeting low-income borrowers, pushing them into mortgages with ruinous consequences. For example, in the first quarter of FY 2012, an estimated 40 percent of FHA’s business consists of loans with either one or two subprime attributes — a FICO score below 660 or a debt ratio greater than or equal to 50 percent. These subprime loans are overwhelmingly risk layered with a loan to value ratio (excluding financed mortgage insurance premium) of equal to or greater than 95 percent and a loan term of 30 years.

As these delinquencies from 2008-2010 turn into foreclosures — a kind of post-bubble second wave — they’ll put downward price pressure on already-battered neighborhoods, and the nascent housing recovery could quickly reverse course, dragging the economy.” (“The Next Housing Bailout? Big Trouble Brewing at the FHA”, The Atlantic)

Can you see what’s going on here? The banks can’t make money by lending because too many people are still broke from the housing bubble and aren’t interested in borrowing more money. So they’ve focused on weasaling the government instead, using their agents inside the system to pull the right levers so more public money is diverted to Wall Street. And it’s all done via bad loans, that’s the strategy in a nutshell. Once they get the government to underwrite their garbage mortgages, they crank out as much funny money (credit) as possible and dump the bill on John Q. Public. So far, the plan has worked like a charm, and it will probably continue to work for some time to come. After all, who’s going to stop them? Obama?

Don’t make me laugh.

Wall Street and the Politics of Finance

A System of Economic Exploitation and Domination

by ROB URIE

 

In the early days of the Obama administration there was an opportunity, at least in theory, to reconsider the role of finance in Western economies. The financial part of the economic crisis that the banks created left them vulnerable and dependent on visible public support. And while Mr. Obama came relatively late to this history, his decision to wholly revive finance capitalism will haunt the economies of the West until banks are returned to their useful social function as utilities.

Public anger over outsized paychecks, predatory practices and freedom from liability for several decades of straightforwardly criminal behavior aside, banks and the debt based economy they produce force the most destructive elements of capitalism onto a fragile world. Ironically, finance capitalism produces monumental wealth redistribution, the great boogieman of capitalist economists, and serves to justify acts of human and environmental devastation that, when viewed on their own, are quite obviously insane. And while this tendency can be attributed to capitalism in general, financial leverage adds a structural element to economic production that amplifies the worst tendencies of capitalism. The existing system of global finance must be gotten out of the way before less destructive modes of economic life are possible.

Andrew Haldane of the Bank of England has pulled together a critique of Western economics that is one step in the direction of understanding what banks have wrought. A central point in Mr. Haldane’s thesis is that economists in the West have simply forgotten what was formerly known about the role of bank money creation in structuring the broader economy. Economist Mike Hudson knows this history and has gone a long way toward recovering it and adding new insights. Likewise Steve Keen (Primer on Endogenous Money) has taken the heat  for formalizing what thoughtful economists understood in a general sense a century ago.

But ultimately economics is only a framework for understanding the material facts that must be addressed.
A purposefully irrelevant discourse has surrounded wealth distribution in capitalist economies for eons. Most people don’t consider banks to distribute, and redistribute, wealth, but they do. An intuitive understanding of this can be got to as follows—banks create money by making loans. (Mr. Keen provides the most straightforward explanation of the mechanics in his Primer, link above). When banks were heavily regulated, bankers earned regular bourgeois livings. When banks were deregulated, suddenly bankers had all of the money for themselves. They accomplished this (1) by creating a whole lot more money than they previously had (Haldane) and (2) by creating ‘innovations’ like securitization and off-balance sheet financial garbage dumps like SIVs (Structured Investment Vehicles) that allowed bankers to keep more of the money that they created.

The structural problems created by debt based money are (1) debt shifts real wealth from borrowers (labor) to lenders (financiers) and (2) this system is intrinsically unstable and ultimately, economically destabilizing. As Mr. Hudson argues, bank loans are predominately used to buy existing assets like houses and stocks and bonds rather than to invest in economic production. With mortgage loans in particular, rising debt inflates house prices, in turn requiring borrowers to commit ever-greater proportions of their future economic production to pay for them. But to fully understand how economically destructive this set of relationships is, it must first be understood how finance capitalism is economically destabilizing.

The late economist Hyman Minsky developed a range of theories around his insight that “stability is destabilizing” in an economic system with bank money creation. The theory states that during times of relative economic stability banks compete for profits by lending increasingly to marginal borrowers. In the later stages of a financial epic this leads them to make loans on the basis of rising asset values, e.g. home loans that can only be repaid while home prices continue to rise. (‘Margin’ loans made by Wall Street firms to their customers are behind every financial crash in modern history).

In the housing ‘boom’ of 1998-2006 bankers drove house prices higher by making loans to people who could only repay them if house prices continued to rise. When house prices began to decline in 2006, the gig was up and the banking system and the economy imploded. What wasn’t reconciled, despite the implosion, is the banking sector’s claims on future economic production. People who borrowed money to buy a house overwhelmingly still owe it against declining house prices. And ‘Ponzi’ finance, the term Mr. Minsky used to describe loans that can only be repaid when asset values are rising, is unambiguously ‘predatory’ in that bankers understand, or should understand, that incomes alone are insufficient to repay the loans.

Put another way, bankers don’t care if someone borrowed $250,000 against a house that is now only worth $100,000—the loan amount to be repaid is $250,000. But because the house price has declined to $100,000, bankers can now buy two and one half of these houses for the original loan amount. And because the borrower must repay the full $250,000 plus interest and fees for a house now only worth $100,000, this represents a transfer of their future economic production to bankers of $150,000 plus interest and fees. When this is aggregated across all of the borrowers and all of the bank loans, it represents a massive transfer of wealth from the people who produce it to a group of people who have been given the right to create money at the push of a button— Wall Street.

Andrew Haldane argues that bank balance sheets across the West have expanded by the largest amount in human history in recent decades. This means banks have been making loans, and in so doing creating money, at the fastest rate in human history. In the early stages increased lending led to increased economic production fulfilling the capitalist rationale for finance capitalism. When banks were fully deregulated in the late 1990s bank lending led to financial boom-bust cycles, first in financial assets and later in housing. (S&L deregulation did the same in the 1980s). With financial profits now leading overall corporate profits higher, finance receives its largest proportion of economic ‘production’ in modern history (Corporate Profits as % of GDP, 2^nd graph), this as the rate of overall economic growth is the weakest since the 1930s.

The residual issue not well understood by mainstream economists is the ‘debt deflation’ that existing debt causes because it must be repaid from declining incomes for houses that are worth less than the loan amounts against them. (Note to housing ‘bulls’: don’t confuse policy particulars with ‘natural’ economic activity. Banks were forced to stop foreclosing on delinquent homeowners in 2011-2012 because they were doing so illegally. The recent ‘mortgage settlement’ allowed illegal foreclosures to resume with government protection). And while average incomes have been rising, median incomes continue to decline. Generally, median incomes represent the income of labor and average incomes (right tail of Pareto or ‘power law’ distributions) the incomes of finance.

Whatever the visceral anger toward Wall Street, the reasons why finance capitalism must be ended and banking returned to its social purpose as a utility are analytical. While financial crashes like that of 2008 are emblematic of systemic instability, it is the transfer of social wealth from labor to finance that is most socially, economically and politically destructive. The focus of official Washington on restoring the existing system as a means to restore economic vitality gets it exactly wrong. And calls to simply re-regulate the banks ignore that while the banks were regulated financial profits accrued that allowed them to buy deregulation from a compromised political system.

Finance capitalism can’t be fixed because of its inherent contradictions. There is no ‘natural’ reason why banks, rather than public institutions, have the right to create money—that is a political outcome. And the political power of finance capitalism is more than just capture of the political system, it lies in the everyday power over the way that the world is set up—the relation between ‘natural’ needs like shelter, transportation, education and healthcare and the debt system used to ‘buy’ them that converts an increasing proportion of the product of our work to financial profits.

It is this last point that mainstream economists, liberals and most progressives don’t get. By focusing attention on the nominal political system, the politics surrounding economic conditions are left hidden. The calls to ‘get the money out of politics’ also need to get the politics out of money. Finance capitalism, and capitalism more broadly considered, is a system of economic domination. And economic domination is political. As the saying goes, ‘economic democracy is a prerequisite for political democracy.’ And economic democracy requires institutions in the public interest.

From an Unlikely Source, a Serious Challenge to Wall Street

Saturday, July 21, 2012 by Rolling Stone

by Matt Taibbi

 

Something very interesting is happening.

There’s been so much corruption on Wall Street in recent years, and the federal government has appeared to be so deeply complicit in many of the problems, that many people have experienced something very like despair over the question of what to do about it all. 

But there’s something brewing that looks like it might be a blueprint to effectively take on Wall Street: a plan to allow local governments to take on the problem of neighborhoods blighted by toxic home loans and foreclosures through the use of eminent domain. I can't speak for how well the program will work, but it's certainly been effective in scaring the hell out of Wall Street.

Under the proposal, towns would essentially be seizing and condemning the man-made mess resulting from the housing bubble. Cooked up by a small group of businessmen and ex-venture capitalists, the audacious idea falls under the category of "That’s so crazy, it just might work!" One of the plan’s originators described it to me as a "four-bank pool shot."

Here’s how the New York Times described it in an article from earlier this week entitled, "California County Weighs Drastic Plan to Aid Homeowners":

Desperate for a way out of a housing collapse that has crippled the region, officials in San Bernardino County … are exploring a drastic option — using eminent domain to buy up mortgages for homes that are underwater.

Then, the idea goes, the county could cut the mortgages to the current value of the homes and resell the mortgages to a private investment firm, which would allow homeowners to lower their monthly payments and hang onto their property.

I’ve been following this story for months now – I was tipped off that this was coming earlier this past spring – and in the time since I’ve become more convinced the idea might actually work, thanks mainly to the extremely lucky accident that the plan doesn’t require the permission of anyone up in the political Olympus.

Cities and towns won’t need to ask for an act of a bank-subsidized congress to do this, and they won’t need a federal judge to sign off on any settlement. They can just do it. In the Death Star of America’s financial oligarchy, the ability of local governments to use eminent domain to seize toxic debt might be the one structural flaw big enough for the rebel alliance to fly through.

The plan only makes sense in the context of America’s overall economic paralysis. Right now the economy is stuck in a standstill, largely because of the housing bubble. Five or six or ten years ago, when Wall Street was cranking out trillions of dollars of cheap home loans so that they could later be chopped up, pooled, and sold to unsuspecting investors in the form of high-grade securitized bonds, millions of ordinary people jumped on the housing comet, buying big houses for big money.

The problem is, if you bought a house for $300,000 then, it might be worth $200,000 now. When you’re $100,000 in debt, you’re not rushing out to buy washing machines, new cars, new DVD players. As Paul Krugman put it in his column today:

There’s no mystery about the reasons the economic recovery has been so weak. Housing is still depressed in the aftermath of a huge bubble, and consumer demand is being held back by the high levels of household debt that are the legacy of that bubble.

Then there’s the other problem. Even if you manage to keep making your payments on your house, your neighbor might not. Whoever used to live next door has left after a foreclosure: there are squatters building a meth lab in the basement now. Two more houses are being boarded up down the street. So now the value of your house is getting lower and lower every day. No matter how fast you make your payments, your debt situation is still going to be moving in the wrong direction.

Instead of letting everyone be slowly ground into dust under the weight of all of that debt, the idea behind the use of eminent domain is to pull the Band-Aid off all at once.

The plan is being put forward by a company called Mortgage Resolution Partners, run by a venture capitalist named Steven Gluckstern. MRP absolutely has a profit motive in the plan, and much is likely to be made of that in the press as this story develops. But I doubt this ends up being entirely about money.

“What happened is, a bunch of us got together and asked ourselves what a fix of the housing/foreclosure problem would look like,” Gluckstern. “Then we asked, is there a way to fix it and make money, too. I mean, we're businessmen. Obviously, if there wasn’t a financial motive for anybody, it wouldn’t happen.”

Here’s how it works: MRP helps raise the capital a town or a county would need to essentially “buy” seized home loans from the banks and the bondholders (remember, to use eminent domain to seize property, governments must give the owners “reasonable compensation,” often interpreted as fair current market value).

Once the town or county seizes the loan, it would then be owned by a legal entity set up by the local government – San Bernardino, for instance, has set up a JPA, or Joint Powers Authority, to manage the loans.

At that point, the JPA is simply the new owner of the loan. It would then approach the homeowner with a choice. If, for some crazy reason, the homeowner likes the current situation, he can simply keep making his same inflated payments to the JPA. Not that this is likely, but the idea here is that nobody would force homeowners to do anything.

On the other hand, the town can also offer to help the homeowner find new financing. In conjunction with companies like MRP (and the copycat firms like it that would inevitably spring up), the counties and towns would arrange for private lenders to enter the picture, and help homeowners essentially buy back their own house, only at a current market price. Just like that, the homeowner is no longer underwater and threatened with foreclosure.

In order to make MRP work, Gluckstern and his partners needed to find local officials with enough stones to try the audacious plan. With so many regions in such desperate straits thanks to the housing mess, that turned out to be not as hard as perhaps might have been expected.

First in line was San Bernardino County in California, not coincidentally located at ground zero of a subprime bubble blown to gigantic proportions by Southern Californian mortgage giants like Countrywide and Long Beach. San Bernardino is more or less a poster child for the mortgage crisis; more than half of its homeowners are underwater on their homes, unemployment is past 12%, and the county recently had to file for bankruptcy.

It’s not surprising, then, that local officials like Acquietta Warren, mayor of the city of Fontana, were receptive to the eminent-domain plan.

“Sooner or later,” Warren told the New York Times, “all these people who are upside down on their homes are just going to leave the keys out on the door and say forget it. This was supposed to be the promised land, and now we have people waiting in some kind of hellish purgatory.”

San Bernardino County officials, along with two of its bigger cities (Fontana and Ontario), have set up the legal mechanisms needed to condemn and seize home loans, but the details of the plan haven’t been completely worked out yet. Still, officials say about 20,000 homeowners in San Bernardino would be eligible for the program; how many will get to use it is unknown.

In the meantime, other counties in other parts of the country are considering the plan. MRP has been courting local officials in Nevada, Florida, and in parts of the Northeast. In New York, officials in Suffolk County on Long Island, where 10% of homes are underwater, are seriously considering the plan.

The role of MRP and the presence of businessmen like Gluckstern in this whole gambit is going to tempt some reporters to pitch this story as a purely financial story, and certainly it does have interest as a business headline.

But MRP’s role aside, this is also a compelling political story with potentially revolutionary consequences. If this gambit actually goes forward, it will inevitably force a powerful response both from Wall Street and from its allies in federal government, setting up a cage-match showdown between lower Manhattan and, well, everywhere else in America. In fact, the first salvoes in that battle have already been fired.

For instance, the Wall Street trade association, SIFMA, this past week issued a denunciation of the eminent domain plan that includes a promise of a legal challenge. “We believe the MRP proposal is unlikely to survive a judicial challenge,” one of SIFMA’s lawyers wrote. Other trade groups are lining up to describe the tactic as illegal or "unconstitutional."

More insidiously, however, SIFMA pledged that its members will not allow future home loans originated in counties that use the eminent domain tactic to participate in something called the To-Be-Announced (TBA) markets for mortgage-backed securities. Explaining this would require a sharp detour into a muck of inside-baseball mortgage terminology, but the long and the short of it is that SIFMA is promising to make it difficult for any community that tries this tactic to obtain private mortgage financing in the future.

Essentially, SIFMA is promising a kind of collusive financial lockout of uncooperative communities. The threat would appear to be a high-handed form of redlining that raises serious antitrust questions, but in a way, that kind of response is to be expected.

Ultimately, the MRP tactic will be a fascinating test case to see exactly how much local self-determination will be allowed by the centralized financial oligarchy and its allies in the federal government.

If through boycotts, collusion, federal pressure and other forms of encirclement, local governments can be stripped of their right to condemn blighted property, we’ll know that the guts have been cut out of the very idea of regional self-rule. It will be fascinating to watch. At the very least, this story has the potential to be the first true open, pitched battle between Wall Street and the homeowners and communities who have been the primary victims of financial corruption.

Tune in for more on this front soon.

Editor's note: Readers interested in learning more about this would do well to read North Carolina congressman Brad Miller's piece on this in American Banker. Miller is not necessarily a proponent of the exact mechanism proposed by MRP, but he is intrigued by the general idea of using eminent domain to address the blighted-loan problem, and seems particularly interested in the strategic possibilities of addressing the problem at the local level. He writes:

The biggest banks have used their political power in Washington to defeat any effort that would effectively reduce foreclosures, such as allowing judicial modification of mortgages in bankruptcy, allowing a federal agency to use eminent domain to buy mortgages, or providing teeth for the chronically ineffective Home Affordable Modification Program, because those efforts would also require the immediate recognition of losses on mortgages.

But Wall Street's power in Washington may be as useless in defeating a proposal in San Bernardino County as strategic nuclear weapons are in fighting an insurgency. No wonder Wall Street is panicked.

Also, here's a piece Miller wrote a couple of years ago in The New Republic suggesting the use of eminent domain through the use of a public vehicle similar to FDR's Home Owners' Loan Corporation, or HOLC.

Again, there's going to be a lot of heated discussion about this, and it's sure to get ugly in the near future. This idea will be portrayed as radical and unrealistic, but in reality it's neither terribly radical nor even all that new. What it is, more than anything else, is uncomfortable. Anyway, more on this to come.

The Recession Politicians Don't Want to Talk About

The Real Story of the Housing Crash
by DEAN BAKER

The economy is certain to occupy center stage in the presidential race this fall. Unfortunately neither Governor Romney nor President Obama are likely to give us an accurate account of the economic problems we are now facing.

Romney’s efforts seem intended to convince the public that President Obama has turned the country into the Soviet Union, with government bureaucrats shoving aside business leaders to take the commanding role in the economy. He will have lots of money to make this case, which he will need since it is so far from reality.

Corporate profits are at their highest share as a percentage of the economy in almost 50 years. The share of profits being paid in taxes is near its post-World War II low. The government’s share of the economy has actually shrunk in the Obama years, as has government employment. Perhaps Romney can convince the public that the private sector is being crushed by burdensome regulation and taxes, but that has nothing to do with reality.

Unfortunately President Obama’s economic advisors have not been much more straightforward with the American people, never offering a clear explanation of why the economy has taken so long to recover. They have pointed out that economies often take long to recover from the effects of a financial crisis like to the one we experienced in the fall of 2008, but that is not an explanation for why we have not recovered.

The basic story is actually quite simple. The housing bubble had been driving the economy prior to the recession. It created demand through several channels. A near-record pace of housing construction added about 2 percentage points of GDP to annual demand or more than $300 billion in the current economy.

The $8 trillion in ephemeral housing wealth created by the bubble led to a huge surge in consumption. Tens of millions of people borrowed against bubble-generated equity or decided that they didn’t need to save for retirement. When house prices were going up 15-20 percent a year, the house was doing the saving. The result was a huge consumption boom on the order of 4 percent of GDP or $600 billion a year.

In addition, there was a bubble in non-residential real estate that followed in the wake of the housing bubble. This raised non-residential construction above its normal levels by close to 1 percent of GDP or $150 billion a year.

Adding these sources of demand together, the bubble generated well over $1 trillion in annual demand at its peak in 2005-2007. When the bubble burst, this $1 trillion in annual demand vanished as well. That is the central story of the downturn.

To recover we must find some way to replace this demand; however that is not easy. People will not go back to their old consumption patterns because they know they need to save more. Tens of millions of people have much less wealth than they expected at this point in their lives after they saw the equity in their homes largely vanish. Tens of millions of baby boomers are approaching retirement with almost nothing but their Social Security to support them.

Given the huge loss of wealth from the collapse of the housing bubble it is not reasonable to expect consumption to rise to fill the demand gap. It doesn’t make much more sense to expect investment to do the job. Historically, investment in equipment and software has been close to 8 percent of GDP. It is pretty much back to that level today. To fill the demand gap created by the collapse of the housing bubble the investment share of GDP would have to nearly double to 14 percent.

This would be almost impossible to imagine at any time, but it is especially far-fetched at a time when much of the economy is operating far below its capacity. Businesses are unlikely to spend a lot of money expanding their facilities when the existing capacity is sitting idle regardless of how nice we are to job creators.

Over a longer term we can expect that net exports will fill the demand gap. If we bring our huge trade deficit close to balance by selling more abroad and importing less it will provide a substantial boost to demand. However this will require that the dollar fall in value relative to the currencies of our trading partners, making U.S. products more competitive. That is a process that will take time. With many of trading partners also in severe slumps, we cannot expect any major improvement in our trade balance in the immediate future.

This leaves government as the only remaining source of demand. This is not a question of whether we prefer the government or the private sector. We need the government sector to fill the gap in demand because the private sector will not do it. And that will be true no matter how much we love the private sector and its job creators.

Until we get our trade deficit closer to balance we will need large government deficits to fill the gap in demand created by the housing bubble. That is the simple reality that neither party seems anxious to tell the people.

On the History of the U.S. Economy in Decline

Plutonomy and the Precariat
by NOAM CHOMSKY

The Occupy movement has been an extremely exciting development. Unprecedented, in fact. There’s never been anything like it that I can think of. If the bonds and associations it has established can be sustained through a long, dark period ahead — because victory won’t come quickly — it could prove a significant moment in American history.

The fact that the Occupy movement is unprecedented is quite appropriate. After all, it’s an unprecedented era and has been so since the 1970s, which marked a major turning point in American history. For centuries, since the country began, it had been a developing society, and not always in very pretty ways. That’s another story, but the general progress was toward wealth, industrialization, development, and hope. There was a pretty constant expectation that it was going to go on like this. That was true even in very dark times.

I’m just old enough to remember the Great Depression. After the first few years, by the mid-1930s — although the situation was objectively much harsher than it is today — nevertheless, the spirit was quite different. There was a sense that “we’re gonna get out of it,” even among unemployed people, including a lot of my relatives, a sense that “it will get better.”

There was militant labor union organizing going on, especially from the CIO (Congress of Industrial Organizations). It was getting to the point of sit-down strikes, which are frightening to the business world — you could see it in the business press at the time — because a sit-down strike is just a step before taking over the factory and running it yourself. The idea of worker takeovers is something which is, incidentally, very much on the agenda today, and we should keep it in mind. Also New Deal legislation was beginning to come in as a result of popular pressure. Despite the hard times, there was a sense that, somehow, “we’re gonna get out of it.”

It’s quite different now. For many people in the United States, there’s a pervasive sense of hopelessness, sometimes despair. I think it’s quite new in American history. And it has an objective basis.

On the Working Class

In the 1930s, unemployed working people could anticipate that their jobs would come back. If you’re a worker in manufacturing today — the current level of unemployment there is approximately like the Depression — and current tendencies persist, those jobs aren’t going to come back.

The change took place in the 1970s. There are a lot of reasons for it. One of the underlying factors, discussed mainly by economic historian Robert Brenner, was the falling rate of profit in manufacturing. There were other factors. It led to major changes in the economy — a reversal of several hundred years of progress towards industrialization and development that turned into a process of de-industrialization and de-development. Of course, manufacturing production continued overseas very profitably, but it’s no good for the work force.

Along with that came a significant shift of the economy from productive enterprise — producing things people need or could use — to financial manipulation. The financialization of the economy really took off at that time.

On Banks

Before the 1970s, banks were banks. They did what banks were supposed to do in a state capitalist economy: they took unused funds from your bank account, for example, and transferred them to some potentially useful purpose like helping a family buy a home or send a kid to college. That changed dramatically in the 1970s. Until then, there had been no financial crises since the Great Depression. The 1950s and 1960s had been a period of enormous growth, the highest in American history, maybe in economic history.

And it was egalitarian. The lowest quintile did about as well as the highest quintile. Lots of people moved into reasonable lifestyles — what’s called the “middle class” here, the “working class” in other countries — but it was real. And the 1960s accelerated it. The activism of those years, after a pretty dismal decade, really civilized the country in lots of ways that are permanent.

When the 1970s came along, there were sudden and sharp changes: de-industrialization, the off-shoring of production, and the shift to financial institutions, which grew enormously. I should say that, in the 1950s and 1960s, there was also the development of what several decades later became the high-tech economy: computers, the Internet, the IT Revolution developed substantially in the state sector.

The developments that took place during the 1970s set off a vicious cycle. It led to the concentration of wealth increasingly in the hands of the financial sector. This doesn’t benefit the economy — it probably harms it and society — but it did lead to a tremendous concentration of wealth.

On Politics and Money

Concentration of wealth yields concentration of political power. And concentration of political power gives rise to legislation that increases and accelerates the cycle. The legislation, essentially bipartisan, drives new fiscal policies and tax changes, as well as the rules of corporate governance and deregulation. Alongside this began a sharp rise in the costs of elections, which drove the political parties even deeper into the pockets of the corporate sector.

The parties dissolved in many ways. It used to be that if a person in Congress hoped for a position such as a committee chair, he or she got it mainly through seniority and service. Within a couple of years, they started having to put money into the party coffers in order to get ahead, a topic studied mainly by Tom Ferguson. That just drove the whole system even deeper into the pockets of the corporate sector (increasingly the financial sector).

This cycle resulted in a tremendous concentration of wealth, mainly in the top tenth of one percent of the population. Meanwhile, it opened a period of stagnation or even decline for the majority of the population. People got by, but by artificial means such as longer working hours, high rates of borrowing and debt, and reliance on asset inflation like the recent housing bubble. Pretty soon those working hours were much higher in the United States than in other industrial countries like Japan and various places in Europe. So there was a period of stagnation and decline for the majority alongside a period of sharp concentration of wealth. The political system began to dissolve.

There has always been a gap between public policy and public will, but it just grew astronomically. You can see it right now, in fact. Take a look at the big topic in Washington that everyone concentrates on: the deficit. For the public, correctly, the deficit is not regarded as much of an issue. And it isn’t really much of an issue. The issue is joblessness. There’s a deficit commission but no joblessness commission. As far as the deficit is concerned, the public has opinions. Take a look at the polls. The public overwhelmingly supports higher taxes on the wealthy, which have declined sharply in this period of stagnation and decline, and the preservation of limited social benefits.

The outcome of the deficit commission is probably going to be the opposite. The Occupy movements could provide a mass base for trying to avert what amounts to a dagger pointed at the heart of the country.

Plutonomy and the Precariat

For the general population, the 99% in the imagery of the Occupy movement, it’s been pretty harsh — and it could get worse. This could be a period of irreversible decline. For the 1% and even less — the .1% — it’s just fine. They are richer than ever, more powerful than ever, controlling the political system, disregarding the public. And if it can continue, as far as they’re concerned, sure, why not?

Take, for example, Citigroup. For decades, Citigroup has been one of the most corrupt of the major investment banking corporations, repeatedly bailed out by the taxpayer, starting in the early Reagan years and now once again. I won’t run through the corruption, but it’s pretty astonishing.

In 2005, Citigroup came out with a brochure for investors called “Plutonomy: Buying Luxury, Explaining Global Imbalances.” It urged investors to put money into a “plutonomy index.” The brochure says, “The World is dividing into two blocs — the Plutonomy and the rest.”

Plutonomy refers to the rich, those who buy luxury goods and so on, and that’s where the action is. They claimed that their plutonomy index was way outperforming the stock market. As for the rest, we set them adrift. We don’t really care about them. We don’t really need them. They have to be around to provide a powerful state, which will protect us and bail us out when we get into trouble, but other than that they essentially have no function. These days they’re sometimes called the “precariat” — people who live a precarious existence at the periphery of society. Only it’s not the periphery anymore. It’s becoming a very substantial part of society in the United States and indeed elsewhere. And this is considered a good thing.

So, for example, Fed Chairman Alan Greenspan, at the time when he was still “Saint Alan” — hailed by the economics profession as one of the greatest economists of all time (this was before the crash for which he was substantially responsible) — was testifying to Congress in the Clinton years, and he explained the wonders of the great economy that he was supervising. He said a lot of its success was based substantially on what he called “growing worker insecurity.” If working people are insecure, if they’re part of the precariat, living precarious existences, they’re not going to make demands, they’re not going to try to get better wages, they won’t get improved benefits. We can kick ’em out, if we don’t need ’em. And that’s what’s called a “healthy” economy, technically speaking. And he was highly praised for this, greatly admired.

So the world is now indeed splitting into a plutonomy and a precariat — in the imagery of the Occupy movement, the 1% and the 99%. Not literal numbers, but the right picture. Now, the plutonomy is where the action is and it could continue like this.

If it does, the historic reversal that began in the 1970s could become irreversible. That’s where we’re heading. And the Occupy movement is the first real, major, popular reaction that could avert this. But it’s going to be necessary to face the fact that it’s a long, hard struggle. You don’t win victories tomorrow. You have to form the structures that will be sustained, that will go on through hard times and can win major victories. And there are a lot of things that can be done.

Toward Worker Takeover

I mentioned before that, in the 1930s, one of the most effective actions was the sit-down strike. And the reason is simple: that’s just a step before the takeover of an industry.

Through the 1970s, as the decline was setting in, there were some important events that took place. In 1977, U.S. Steel decided to close one of its major facilities in Youngstown, Ohio. Instead of just walking away, the workforce and the community decided to get together and buy it from the company, hand it over to the work force, and turn it into a worker-run, worker-managed facility. They didn’t win. But with enough popular support, they could have won. It’s a topic that Gar Alperovitz and Staughton Lynd, the lawyer for the workers and community, have discussed in detail.

It was a partial victory because, even though they lost, it set off other efforts. And now, throughout Ohio, and in other places, there’s a scattering of hundreds, maybe thousands, of sometimes not-so-small worker/community-owned industries that could become worker-managed. And that’s the basis for a real revolution. That’s how it takes place.

In one of the suburbs of Boston, about a year ago, something similar happened. A multinational decided to close down a profitable, functioning facility carrying out some high-tech manufacturing. Evidently, it just wasn’t profitable enough for them. The workforce and the union offered to buy it, take it over, and run it themselves. The multinational decided to close it down instead, probably for reasons of class-consciousness. I don’t think they want things like this to happen. If there had been enough popular support, if there had been something like the Occupy movement that could have gotten involved, they might have succeeded.

And there are other things going on like that. In fact, some of them are major. Not long ago, President Barack Obama took over the auto industry, which was basically owned by the public. And there were a number of things that could have been done. One was what was done: reconstitute it so that it could be handed back to the ownership, or very similar ownership, and continue on its traditional path.

The other possibility was to hand it over to the workforce — which owned it anyway — turn it into a worker-owned, worker-managed major industrial system that’s a big part of the economy, and have it produce things that people need. And there’s a lot that we need.

We all know or should know that the United States is extremely backward globally in high-speed transportation, and it’s very serious. It not only affects people’s lives, but the economy. In that regard, here’s a personal story. I happened to be giving talks in France a couple of months ago and had to take a train from Avignon in southern France to Charles De Gaulle Airport in Paris, the same distance as from Washington, DC, to Boston. It took two hours. I don’t know if you’ve ever taken the train from Washington to Boston, but it’s operating at about the same speed it was 60 years ago when my wife and I first took it. It’s a scandal.

It could be done here as it’s been done in Europe. They had the capacity to do it, the skilled work force. It would have taken a little popular support, but it could have made a major change in the economy.

Just to make it more surreal, while this option was being avoided, the Obama administration was sending its transportation secretary to Spain to get contracts for developing high-speed rail for the United States, which could have been done right in the rust belt, which is being closed down. There are no economic reasons why this can’t happen. These are class reasons, and reflect the lack of popular political mobilization. Things like this continue.

Climate Change and Nuclear Weapons

I’ve kept to domestic issues, but there are two dangerous developments in the international arena, which are a kind of shadow that hangs over everything we’ve discussed. There are, for the first time in human history, real threats to the decent survival of the species.

One has been hanging around since 1945. It’s kind of a miracle that we’ve escaped it. That’s the threat of nuclear war and nuclear weapons. Though it isn’t being much discussed, that threat is, in fact, being escalated by the policies of this administration and its allies. And something has to be done about that or we’re in real trouble.

The other, of course, is environmental catastrophe. Practically every country in the world is taking at least halting steps towards trying to do something about it. The United States is also taking steps, mainly to accelerate the threat. It is the only major country that is not only not doing something constructive to protect the environment, it’s not even climbing on the train. In some ways, it’s pulling it backwards.

And this is connected to a huge propaganda system, proudly and openly declared by the business world, to try to convince people that climate change is just a liberal hoax. “Why pay attention to these scientists?”

We’re really regressing back to the dark ages. It’s not a joke. And if that’s happening in the most powerful, richest country in history, then this catastrophe isn’t going to be averted — and in a generation or two, everything else we’re talking about won’t matter. Something has to be done about it very soon in a dedicated, sustained way.

It’s not going to be easy to proceed. There are going to be barriers, difficulties, hardships, failures. It’s inevitable. But unless the spirit of the last year, here and elsewhere in the country and around the globe, continues to grow and becomes a major force in the social and political world, the chances for a decent future are not very high.

Reinflating a New Housing Bubble?

The Banks New Shell Game

by MIKE WHITNEY

 

 

Have housing prices hit bottom?

Many analysts are saying, “Yes”.

Economist Bill McBride is one of the yea-sayers. Bill runs Calculated Risk, the Number 1 economics’s blog on the Internet. Here’s what McBride said in a post on February 2, 2012:

“There are several reasons I think that house prices are close to a bottom. First prices are close to normal looking at the price-to-rent ratio and real prices…. Second the large decline in listed inventory means less downward pressure on house prices, and third, I think that several policy initiatives will lessen the pressure from distressed sales…

Of course these are national price indexes and there will be significant variability across the country. Areas with a large backlog of distressed properties – especially some states with a judicial foreclosure process – will probably see further price declines.” (“The housing bottom is here”, Calculated Risk)

McBride is a very disciplined analyst who doesn’t make off-the-cuff remarks he can’t back up with facts. He always sifts through the data thoroughly before he draws his conclusions, which is why his observations have to be taken seriously.

The same is true of Hale Bonddad over at The Bonddad Blog, another reliable source of information. In a Wednesday post covering this week’s Case-Shiller Report, Bonddad draws attention to a datapoint that was entirely glossed-over by the media,  that housing prices rose in February for the first time since Obama’s $8,000 home-buyer credit in 2010. Bonddad thinks the sudden upturn indicates that we’ve hit the bottom. Of course, he doesn’t base his judgement on the Case Shiller index alone. He also takes a look at the data from Trulia, FHFA, Housing Tracker, the Census Bureau, and Core Logic, after which he concludes that, ”All of the list prices indexes and all but one of the median/mean sales price indexes appear to have bottomed.”

The breadth of Bonddad’s research is impressive and persuasive.  (See the whole post here: http://bonddad.blogspot.com/2012/04/housing-overview-part-2-prices.html.)

Ivy Zellman is another market-watcher who thinks we’ve touched bottom. Zellman is CEO of Zellman and Associates. She made a name for herself by calling the housing bubble in 2006, and has been pessimistic about the sector ever since. (Until now, that is.) Here’s what she said in an interview on CNBC earlier in the week:

“It’s been six long years and I believe the fundamentals are now at an inflection point where confidence is really starting to come to fruition…. Inventories are down considerably in a lot of the hottest markets, we’re seeing rapid rent inflation, and consumers are less negative…I think we’re at the beginning of a very admittedly tepid recovery. But we’re coming from such an anemic base that the numbers could actually be pretty big going into 2013. We’re looking for about a 20% increase, and we think that we’ll continue to upward as job growth gets better and household formation continues to rise from very depressed levels.”

Zellman was also asked about the 6 million-plus foreclosures that are expected to flood the market in the next few years. She responded that she did not anticipate a “flood”, but that “investor demand” and a “manageable disposition process” (The banks will drag their feet) will allow the market to continue to improve. She also pointed out that lending standards are beginning to ease again (“40% of mortgages being underwritten are below 650 FICO”… (and) “Today, mortgage companies are underwriting loans at 90% and 95% loan-to-value.” In other words, we’re back to Square 1, where people who are a clear credit risk are able to borrow up to 95 percent of the value of the house. Even so, looser lending standards and low interest rates do suggest that Zellman may be right in calling a bottom.

Finally, there’s this from Bloomberg News in an article titled “Housing Declared Bottoming in U.S.”:

“The U.S. housing market is showing more signs of stabilization as price declines ease and home demand improves, spurring several economists to call a bottom to the worst real estate collapse since the 1930s.

“The crash is over,” Mark Zandi, chief economist for Moody’s Analytics Inc. in West Chester, Pennsylvania, said in a telephone interview yesterday. “Home sales — both new and existing — and housing starts are now off the bottom.”…

U.S. home prices compiled by CoreLogic, a Santa Ana, California-based real estate information service, had month- over-month gains in January and February when sales of distressed properties were excluded, said Fleming, the company’s chief economist.

“It’s just a matter of months before we get positive year-over-year numbers in the overall index,” Fleming said in a telephone interview from Washington. “Our data lags the reality. The turnaround is happening in the March, April and May time frame.” (Bloomberg)

So, there you have it; McBride, Bonddad, Zellman and Zandi, all reputable analysts who follow housing closely and know what they are talking about. But are they right, are prices really as low as they are going to go?

The Big Picture’s Barry Ritholtz doesn’t think so. Here’s what he said in an interview with The Daily Ticker:

“So far there’s no evidence that we’ve hit bottom. Prices continue to fall and volumes are anemic despite record-low interest rates …The data is pretty explicit; year-over-year, prices are lower….And, look,  if this is really the bottom, it’ll be the first time in a major boom-and-bust that we didn’t careen past “fair value” to “deeply oversold” condition. The market doesn’t just revert-to-the-mean after a major bubble like the one that just burst.” (In other words, prices should overshoot on the downside)

Ritholtz is also skeptical about the strength of any housing recovery given the “decade long overhang” of foreclosures that will have to be processed and sold and which will presumably push down prices for some time to come. The number of distressed homes in the so called “shadow inventory” is hotly disputed and could be anywhere between 1.6 million to 10.3 million. (Conservative estimates, like BofA, put the number at 6.3 million homes) Obviously, it’s hard to predict a bottom when the amount of supply remains unknown.  The whole thing just becomes a guessing game.

Ritholtz is joined by fellow skeptic Robert Shiller who created the benchmark Standard and Poor’s Case-Shiller home-price index, and who predicted both the dot.com bubble and the housing bubble. Here’s an excerpt from an interview with the Princeton professor on The Daily Ticker

Daily Ticker:   A lot of people have just called the bottom in the housing market in the United States, and there’s been some okay data recently. Is that your take? That finally housing prices are bottoming?

SHILLER: When people phrase is that way, they say ‘we’ve reached the bottom.’ That suggests that we have the expectation of a major turning point right now. But I don’t see that. I don’t see any reason to think that prices are going to start heading up dramatically now…

But it’s not like we’re overpriced anymore. Now the question is whether we’ll overshoot, which is a common thing that happens after bubble burst….the problem is we’ve never had a bubble of this magnitude before…

Historically, if you look at it, interest rates don’t seem to matter very much in determining home prices… The big thing in forecasting home prices is momentum. It’s different than the stock market. So if it’s been going up it will continue going up and if it’s been going down it will continue going down. By that model, which is the most successful forecasting model for home prices, prices will keep going down.”  (“Robert Shiller: A Housing Bottom? What Are They Thinking?”, The Daily Ticker)

If Shiller is right about momentum, then prices still have a way to go. And that’s what the latest Case-Shiller report seems to indicate. In February prices dropped in most major U.S. cities for a 6th straight month, and in 9 of those cities, prices fell to their lowest levels since the bubble burst. So, there still doesn’t appear to be much light in the tunnel, just a slowdown in the rate of decline. In other words, prices are just falling at a slower pace than before.

And there are other factors that could delay a bottom in housing prices, too, like long-term high unemployment, or  the fact that baby boomers are increasingly downsizing as they reach retirement, (and try to sell the family home) or that 42 percent of potential new homebuyers will have to put off the purchase of their first house because of burdensome student loans, or that owning a home has become less desirable in the aftermath of the multi-trillion meltdown which wiped out so many people’s life savings. All of these will probably weigh heavily on future home sales, but not nearly as much as the prodigious backlog of distressed inventory that will eventually have to be dumped on the market. This “pig in the python” is perhaps 4 or 5 times as large as the ”visible” inventory. And, with that much supply, there’s only one way that prices can go…down.

So, how long will the banks be able to keep their stockpile of homes out of view?

Who knows?  What we keep hearing from the realtors we’ve talked to is that inventory has virtually dried up over the last year. Now some of this has to do with the robo-signing flap. Many of the banks decided it would be better to slow their foreclosures until a settlement was reached in the case, which is what they did. But that doesn’t explain why inventories have plunged as much as they have. Just take a look at this list of cities from Redfin which records the year-over-year declines in the number of homes for sale in January:

•Denver (Denver County): -47%
•San Francisco (San Francisco County): -42%
•Phoenix (Maricopa County): -40%
•San Diego (San Diego County): -38%
•Portland (Multnomah County): -37%
•Seattle (King County): -32%
•Orange County: -32%
•Washington DC: -28%
•Los Angeles (Los Angeles County): -27%
•Dallas (Dallas County): -27%
•Las Vegas (Clark County): -16%
•Atlanta (Fulton County): -13%

Does that look normal to you or does it look like the banks are deliberately withholding supply to drive up prices and create the illusion of a market turnaround?

Here’s how housing expert Michael Olenick summed it up over at naked capitalism: “Banks are obviously manipulating the housing supply in an attempt to reignite a bubble to hide their losses, a strategy that’s temporarily working.”

Indeed, it is working. The dropoff in inventory has fueled buyer interest and sales appear to be picking up. I’ve gone to a number of open houses in the last two months and the mood has changed dramatically. The realtors I’ve met are increasingly optimistic about the future.

“The market is really getting hot”, they say. “We’re getting multiple offers on many of the homes that are for sale.”

And what they are saying, makes sense, after all,   prices have gone down, interest rates are low, it’s easier to get financing,(slightly easier, that is) and there are more buyers for fewer homes. Why wouldn’t prices start to stabilize or even go up a bit?

According to Zillow, prices have gone up already! They say they saw “a 5 percent increase in home prices between February and March, the biggest increase since May 2006.”
So, is this it? Have housing prices finally hit bottom?

No way. It’s just more shenanigans by the banks.  The inventory shell game the banks are playing may work for a while, but it doesn’t address the real problem. There’s just too many houses and too few buyers. Eventually, the backlog of distressed homes is going to have to be processed and sold. And when those homes are put on the market, the supply will rise and prices will fall. You can bet on it.

THIS JUST IN: from an article by Abigail Field at Firedog Lake; More proof that the banks are hiding inventory:

 ”Phoenix: RealtyTrac identifies 6,611 “bank-owned” properties there. An Arizona realty website lists only 275 for sale. Similarly, Yahoo real estate claims there’s over 8,000 foreclosure properties in Phoenix, but Realtor.com lists less than 4,000 homes of any type. AZHomeonline.net lists a bit over 4,000, plus 312 foreclosures and shortsales. So are the foreclosures in Phoenix on the order of 300 or 6,600? Makes a wee bit of difference when the non-”distressed” market is about 4,000, don’t you think?

Phoenix isn’t the only place where banks are holding properties off the market. In Portland, Oregon, banks aren’t selling 80% of the homes they own, The Oregonian reports. All the bank owned inventory statewide represents more than a year and half’s supply of houses all by itself, according to a RealtyTrac executive quoted in the piece. If the housing inventory is that distorted in Oregon, what’s it like in the hardest hit states?