Posts Tagged ‘ economics ’

Enough Already

The republic did not dissolve last night. We had a vote, and the majority ruled. Moreover, by the yardstick currently in vogue, we became “socialist” as early as the 1930s or as late as the 1960s. I remember communism and totalitarianism. I spent a long time studying them. Using such terms to describe American politicians cheapens the suffering of people who lived and often died under such systems. Unless and until you are willing to cast the least of your brothers and sisters into the street to die without medical attention, you have bought into “socialism,” American style. If you are not personally prepared to pull that plug, to watch people die without medical intervention, make peace with the fact that you will pay a tax to provide universal health care, either in the form of higher insurance premiums to pay for emergency room care, or in the form of government subsidies to help people buy insurance. Pick your poison.

While we’re on the subject, how did the move to take the country to war in Iraq, and subsequently to fund that war off-budget for years, elude all of us who are now so concerned about the deficit?

Why Mortgages Don’t Get Renegotiated

As I have watched the second bubble of my adult life decimate the value of my home, one question has eluded me: why would lenders that want to maximize profit not bargain with their mortgage customers? After all, businesses renegotiate debt as a matter of course, and arguably lenders stand to profit more from cutting a deal and keeping a customer than from foreclosure, which drives down asset values. As an example close to home, a foreclosed house in my neighborhood is about to be auctioned. It’s a nice place. The person who was living there took pretty good care of it, and there was no vandalism or stripping as happens so often now in foreclosures here. The real estate agent who has the listing on the house draws attention to the fact that the house sold in 2006 for $416,000. The agent’s logic speaks to the persistent madness of the bubble–what bearing does the 2006 sale price have on the current or future value of the home? Absolutely none. But I digress. The reason I wanted to cite the 2006 sales price is because today, the lender that owns the house is willing to accept $99,000 as the minimum auction bid on the house. Sure, it will probably sell for more than that–the listing is currently at $275,000, down from $299,000–but assuming the lender’s ex-customer owed $300,000 on the property, the bank is now willing to accept 33 cents on the dollar. It makes no sense. If they had instead met the borrower halfway, might both parties be better off? Of course.

So why does this continue to happen? I’ve been asking myself and friends this question, but got no decent answer. Greed and evil would seem to be great explanations, but greed would seem to make a lender play a good game, then blink rather than foreclose and become the owner of a sharply less valuable property. I can’t think of any other business in which lenders deliberately and consistently devalue their assets. Finally, the good folks at Slate provided an answer:

If foreclosure is so costly, why don’t lenders avoid this cost through renegotiation? Renegotiations aren’t happening because so many mortgages are securitized. In the old days, if you wanted to renegotiate your loan, you just called your bank. Now you have to deal with the loan servicer, who acts on behalf of the thousands of mortgage-security holders who have a right to a share of your payment. The loan servicer gains little and loses a lot if it attempts to renegotiate a loan. Securities holders don’t trust servicers and threaten to sue them if they renegotiate loans; servicers usually don’t lose much money if the mortgage defaults.

Finally, an answer. Yes, the securitization of the housing market, the market perversion that wiped out billions of dollars of taxpayer wealth and that has cost billions more in taxpayer bailouts, is the gift that keeps on giving. The fact that nobody really owns our homes makes it impossible for the people who receive our mortgage check to cut a deal with us. They are free to foreclose, but face legal action if they try to renegotiate mortgages. This is exactly the opposite of what we need. What can we do? Fortunately, the authors of the Slate article propose an elegant, market-friendly, and fair solution:

The solution to this problem is for the government to force renegotiations to occur. A simple plan could do this. The plan would give all homeowners who live in a ZIP code where house prices have dropped more than 20 percent the option to have their mortgage reduced to the current market value of the house. In exchange, these homeowners would yield to their lenders 50 percent of the future appreciation of the house. To avoid any gaming and future moral hazard, both the current and the future value of the house will be determined by multiplying the purchase price and the variation in the housing price index. So if you bought your house for $300,000, and the average house in your ZIP code has lost 20 percent of its value, then your new house is assumed to have a value of $240,000. If your mortgage was $280,000, now it is $240,000 (the new value of the house). You are no longer underwater.

It’s beautiful, but you should read the rest of the article to see just how much sense it makes. We are going to have to do something like this, because otherwise the lenders are simply going to continue to run home values into the ground. They are on autopilot, which is scarier than just thinking they were stupid or evil.

Wall Street Bets on You Dying–What Could Possibly Go Wrong?

Jan Buckler and Kathleen Tillwitz of DBRS, bringing you the market crash of 2015.

Jan Buckler and Kathleen Tillwitz of DBRS, bringing you the market crash of 2015.

I know you haven’t recovered from the housing bubble yet, but hey, good news–Wall Street has figured out the next big thing! As the New York Times reported this week,

The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.

Doesn’t that sound great? It should work as well as, say, packaging mortgages together into bonds. Now, if you’ve been keeping track over the past 10-plus years, Wall Street gave us the dot com bubble that burst and destroyed your nest egg, regardless of whether you were day trading or prudently investing in a diversified portfolio. Then, just as you may have recovered from those losses, Wall Street sold us the housing bubble that sent millions of our retirement plans into  the crapper and crippled our economy. Should that chasten the Masters of the Universe? Of course not. No, we’ve earned another trip to bubble country. How much will this cycle of madness cost us? By us, of course, I don’t mean Wall Street, because they will make money regardless of the outcome, feeding off Tom Wolfe’s crumbs:

The earlier the policyholder dies, the bigger the return — though if people live longer than expected, investors could get poor returns or even lose money. Either way, Wall Street would profit by pocketing sizable fees for creating the bonds, reselling them and subsequently trading them…

Critics of life settlements believe “this defeats the idea of what life insurance is supposed to be,” said Steven Weisbart, senior vice president and chief economist for the Insurance Information Institute, a trade group. “It’s not an investment product, a gambling product…”

Undeterred, Wall Street is racing ahead for a simple reason: With $26 trillion of life insurance policies in force in the United States, the market could be huge…

“We’re hoping to get a herd stampeding after the first offering,” said one investment banker not authorized to speak to the news media…

Let’s mark this week as the beginning of the next bubble cycle, but let’s also note that documenting the madness of this “industry” that has become a casino will do us no good. Wall Street is moving forward without a shred of shame or even irony–we’re talking about betting on when our most vulnerable, the sick and the elderly, will die (talk about your death panels!). And when it’s over, we can blame the poor and minorities who were stupid enough to gamble, in this case on the life insurance policies that should be there to save their families from catastrophe. And then we can extend Wall Street the capital to retool for the next iteration of this winning formula.

Fair Price Comparisons for Electric Cars

Journalists unfortunately are not serving us well when covering the development of electric cars. Rather than taking a clear look at the issue, reporters–who are, after all, like the rest of us–too easily fall into fallacies that serve the automotive and energy status quo. A recent Washington Post article is a textbook example. The article begins talking about the promise of the Chevrolet Volt, but quickly gets to a criticism:

The problem is GM will likely have to price the vehicle far higher than a comparable family car with a gas-powered engine, putting it out of reach for many consumers, particularly if oil prices remain low.

This is a false comparison because it assumes that retail gas prices reflect the actual cost of using that fuel. In fact, while retail gas prices are kept artificially low in the United States, the hidden costs of gasoline–from the military forces required to secure oil supplies to environmental and health effects–could well make the true price of a gas-driven car much closer to the cost of owning and operating a plug-in electric vehicle. There may be good metrics for a proper comparison out there, but damning the Volt because it retails at $10,000 more than “comparable” gas cars is crappy analysis. How about considering the differences in maintenance for a car that requires no oil changes, spark plugs, fuel injectors, air filters, transmission fluid, or timing belts?

The article then goes on to talk about competing strategies, such as more efficient hybrids from other companies and the luxury-first approach that Tesla took. Tesla’s model is based on the idea of having the first generation of these cars start as luxury models for early adopters. The argument holds that those early adopters will make the technology cheaper over time, paving the way for mass adoption as was the case with DVD players and flat screen TVs. As the Tesla CEO said, “We didn’t start with a Honda Civic because it would be a $70,000 to $80,000 Honda Civic.”

Fair enough. But we have a lot more at stake in the mass production of electric cars than we did in the development of the DVD. Moreover, the Volt’s critics are missing the fact that the Volt is coming in at just $10,000 over other family cars. By doing so, Chevy is showing Tesla that GM can leapfrog the luxury step and deliver the true game changer–a mass-production EV developed and built in this country. For the value of moving our country that much faster toward the day when we abandon the internal combustion engine, that much faster toward the day we no longer need to send our troops to secure Middle Eastern oil, a $10,000 tax credit or other incentive would be money well spent.

Don’t give up on cars.

David Yermack, a professor of finance at NYU’s Stern School of Business, argues in today’s Wall Street Journal that American automakers have run their businesses into the ground by wasting enough money that they could have used that cash to buy the major Japanese carmakers instead. He champions former GM CEO Roger Smith, the Roger of Michael Moore’s “Roger and Me,” as brilliant because he shifted GM money away from cars and into the bargain purchases of Ross Perot’s EDS and the Hughes company that would later become DirecTV. Smith later sold the companies at a tremendous profit, while the bad management of GM’s automotive line has wasted about $1.5 billion a month for the last nine years. Yermack argues that this mismanagement is all the more damnable because so much of the cost of the failure is borne by society. By this logic, it’s foolish to give more money to automakers–we would do better to cut a $10,000 check to each employee and let the companies go bust.

That Yermack is a finance professor is telling. Why should we focus on the value of losing a major manufacturer? After all, Roger Smith was wise because he looked at what would make GM more money, and buying and selling companies will always use less employees than making cars. Efficiency! But such logic is behind the increasingly oxymoronic term “financial services industry.” What does the kind of finance we’ve been practicing really produce in the way of services? In the end, this “industry” got out of the business of providing services on sound commercial terms to keep the economy growing, and merely amassed capital for its own sake and redistributed it on terms completely divorced from reality. And, as Yermack fails to note, his preferred approach has now wasted far more money than the automakers have. To follow Yermack’s argument to its logical conclusion, the US should get out of the finance business because our financial titans have proven over the last 20 years that they cannot succeed without greater and greater injections of taxpayer capital.

As for the idea that we could invest in our automotive sector to build the next generation of automobile, to help us lead the way into the post-internal combustion engine world, Yermack dismisses the notion with one of 13 paragraphs, near the end of the piece. Because GM and the other US automakers fought environmental and fuel efficiency standards for so long, they don’t deserve a break now. This puts Yermack at odds with many environmentalists, including the filmmaker who exposed the industry’s offenses in “Who Killed the Electric Car?“, who are impressed with the Chevy Volt and the promise of an electric future.

The answer may not be to give GM everything it’s asking for, but if we are to bail out the Masters of the Universe who made–and cling to–their obscene compensation for making money off “crumbs,” the least we can do is find a way to buy time for the newly creative forces at GM to survive and, hopefully, help the US lead the world again in research and innovation. Our country is made up of drivers, and China is building highways the way we did beginning with Eisenhower. We should want the Chinese people, who increasingly are adopting the materialistic American dream, to drive American cars, and if they steal the technology to make their own cars, it is in our interest that they steal electric car technology. We simply can’t afford to have the Chinese population pollute the way we have over the past 50 years.

Professor Yermack, get your own house in order first, then tell us to abandon manufacturing.

Clintonista!

Barack Obama’s amazing victory proved so many blowhards wrong, it’s been fun just to sit back and watch the lies deflate: white people won’t vote for a black man–wrong!He can’t win“–wrong! What will be more interesting, and will take more time, is for us to cast off the last iteration of this hokum, generated in the desperate last days of the McCain campaign: that Obama will now join hands with Nancy Pelosi and Harry Reid in a triumvirate of the Left. Gun sales shot up immediately following the election, fueled by dizzy nightmares of taxes rising for Joe Sixpack and jackbooted thugs from the ATF coming to pry guns from freedom lovers’ cold dead fingers. Cue New World Order and black helicopters.

Sorry to break it to the tighty whity Righties, but it ain’t going to happen. There are good reasons for this that have been laying there in plain view for any who wanted to look at Obama’s actual record and at his actual associates. First, Obama didn’t spend much time working with Reid, and even less with the Speaker of the House. He spent much more of his precious little time in the Senate with Dick Lugar working on their loose nukes legislation. Second, Obama has a fairly strong history of disappointing those who insist on painting him as a one-dimensional symbol, from the activists in Chicago to African-American members of the Harvard Law Review. In both cases, Obama acted instead like a real leader for all concerned rather than for a narrower constituency. Past behavior being the best indicator of future performance, some dreamy lefties have some downer days coming.

Finally, Obama didn’t come all this way–confounding the cynical establishment media and racking up the largest vote for a Democrat since the 1960s–just to lay down for a coequal branch of government. Presidents, Republican and Democrat, generally have found the Congress to be a foe more than a friend, regardless of which party was in charge. Which is why I can’t yet figure out why so many of the people–by my count, nearly half–in Obama’s transition brain trust, starting with Rahm Emanuel, are best known as Clinton Administration people. Perhaps they’re just unavoidable as the most seasoned Democrats around, but in looking at the lineup of advisers at Obama’s first press conference, I had more than a tinge of the cringe I felt when watching the ghosts of the 1990s looming onstage with Hillary Clinton during her Iowa caucus defeat. While many are smart, capable folks, what does it say that Obama is taking advice from one of the architects of the mortgage meltdown, former Treasury Secretary Robert Rubin? Is that all there is to Democratic Washington, no one to go to other than Larry Summers and Robert Reich again?

Of course, none of these people, other than Emanuel, have to actually get jobs in the new administration, and maybe serving in their current roles may help exclude them from contention more than it includes them. I’m just hoping that after the skill Obama showed in defeating the Clintons and besting Bill Clinton’s share of the electorate to put to rest the lame fiction that Clinton was our “first black president,” Obama won’t settle for Clinton II.

Sorry, Joe. No free lunch.

Joe “the Plumber” Wurzelbacher, or “Wurzelburger” if you’re John McCain, is quickly becoming the Clara Peller of this election. Before his 15, or maybe five minutes are up, I thought I’d jump on the bandwagon. Instead of Clara’s “Where’s the Beef?” tagline, Joe said that Barack Obama wants to “redistribute wealth” and that this was a scary prospect. Joe added,

“[…]I’m not trying to make statements here, but, I mean, that’s kind of a socialist viewpoint. You know, I work for that. You know, it’s my discretion who I want to give my money to; it’s not for the government decide that I make a little too much and so I need to share it with other people. That’s not the American Dream.”

The Republicans and Senator McCain in particular have made similar arguments in this campaign and for decades. The problem is that, by the definition Joe offers, both parties redistribute wealth, and thus embrace “socialism.” Or did Joe not notice the $700 billion recently redistributed from taxpayers to lenders? The redistribution argument today wears almost as thin as “ownership society” privatization of Social Security does following the collapse of the market. The one thing Joe and the rest of us can be thankful for is that our Social Security accounts are not in the same shape as our 401(k)s.

If Joe’s not convinced, we can look at the original socialism bogeyman, healthcare. Anyone who proposes providing for 100% health insurance coverage is branded a socialist, usually accompanied by the argument that government involvement would mean a bureaucrat will decide what doctor you see and what care you get. This ignores the fact that we already have a socialized healthcare system, but an extremely inefficient and costly one. It’s socialized because a) medical facilities cannot legally deny care, and b) the costs of the uninsured are passed on to businesses and employees in the form of higher premiums. So Joe is already having money taken away from him against his will, except the money is being taken by an insurance company instead of by the government. And which is more responsive to Joe? A company that sees paying his claim as a loss rather than the service he paid for, or a government agency accountable to him through his elected representatives in Congress?

The latent “socialism” extends further. So McCain says Obama will raise taxes. But to avoid ever being accused of raising taxes, the only place for McCain and “conservatives” to go is to foreign governments to borrow the money. Or did Joe think the Iraq War was free? And cutting pork only gets you less than $20 billion in savings, less than one percent of the federal budget. So would Joe rather pay taxes to fight our wars today, or would he like to finance it with credit from People’s Republic of China and Saudi Arabia? That way, Joe’s taxes never go up, but his and my kids will be paying foreigners for decades to pay today’s bills.

And if Joe likes flat taxes, how about we ask all candidates why they don’t push to extend FICA witholding to wages above $102,000 a year?

We need to get past this, all of us. This republic costs money, and there’s no getting around it. You can’t wish it away, though decades of ideological imperatives have put a premium on hiding this fact from us. The costs are hidden through truly redistributive shell games like hiring illegal immigrants to keep prices and Americans’ wages low. The costs are hidden by comparing costs of electric cars to gas powered cars based only on the retail price of gas at the pump, rather than including the huge associated costs of keeping the oil economy running. Promoting the general welfare costs money. Patriots understand that we are all in it together, and that we all have to pay our share. Believing that doesn’t make you a socialist. It makes you a realist and a good steward, something I always associated with conservative ideals.