Saturday, September 27, 2008

...And Fat, Bloated Merchant Banks

Sometimes you have to laugh to keep from crying. Read along here. Sing along here.

Part 1:

and 2:

Whocouldanode? (apologies to Calculated Risk)

Reasons not to buy into the bailout here (anything by Roubini, who was one of the few voices in the wilderness all along, is recommended) and here (Yves Smith has plenty of good stuff and links to others).

fools While everyone on Capitol Hill has been pissing themselves over Paulsen's and Bernanke's "revelation" this week, my husband and I have been recalling many a kitchen conversation over the last 4 years during which we berated Greenspan for
stoking the housing bubble and for egging on the consumer to implode with debt ("take out ARMs!"), while the "free-market" priests and witch doctors gleefully built their pyramid schemes under the fond gaze of the least regulating government since Grover Cleveland. Not being one to hesitate to use a bullhorn on the deck of the Titanic to proclaim "I told you so", I thought I'd re-print a couple posts from the summer of 2005. All the country seemed on fire with excitement then. The journalists were praising the skyrocketing housing market to the skies. Toxic debts were piling up and being hidden in snazzy new vehicles, and the variety of immoral and should-have-been-illegal mortgage packages were mutating and breeding like viruses. People couldn't spend enough, what with all the credit card offers spilling over the transom each day. Home equity loans were spinning like well-oiled machines. Meantime, I'm looking at my paycheck, which had been stagnant for over 3 years by then, and looking at my daughter, and husband, and friends, who had been in and out of UC (some are still on it or getting by with under-the-table work), and I'm wondering just where sellers are getting all these people to buy houses I can't afford. The median income was around $50,000 yr., yet the median house price was over $250,000. The numbers just didn't make sense. When housing prices are no longer tied to people's income, the only way anyone can get into a house is by using the ledgerdemain so helpfully created for us by Greenspan's and Paulsen's friends. We saw that the rocket ride was unsustainable, and we also saw that once housing prices started to decline, people who paid outrageous prices would be stuck upside-down in houses not worth the money they paid, let alone housing that could earn them a profit at sale. As I said, we saw all this years ago, and waited for the plane to fly into the building.

Well, now it has. And Mssrs. Paulsen and Bernanke and all the other oracles of the market either never saw it coming, in which case we'd be insane to trust them with $700 billion, or they were lying to us about it all along,
in which case we'd be insane to trust them with $700 billion.

Housing, Housing, Everywhere, And Not A Buck To Spend

July 25, 2005

What does a seller do when customers can no longer afford to buy a product, but the product still sits on the shelf, needing to be moved? Say, the odd house?
Would cutting the price sound too unlikely?

A lot of hard-nosed economists and real estate experts have pooh-poohed the idea of a housing bubble, and The Oracle of Nuthin' Much hasn't been able to characterize the current madness as more than "froth". Baba%20Yaga's%20house The likelihood of the floor collapsing from under the housing market has been hard for many to imagine, mostly based on the idea that a bubble will burst only if there are no more buyers to be found, although there are folks cautioning that economic problems could loom with or without a drop in prices. And then the news came down: the housing market has porked up in front of our eyes like a fat man drowning his sorrows in Cheetos and Haagen Daaz:
"The nation's roaring housing market set its second record in three months as sales of existing homes climbed at an annual rate of 4.4 percent in June, to 7.33 million, according to a report released today.
Low mortgage rates and strong demand drove the frenetic sales activity, which far exceeded analysts' expectations. Median prices rose at their highest pace in almost 25 years, up 14.7 percent from June 2004, to a record $219,000. Average sales prices climbed 9.4 percent, to $268,000."
Gleefully, we read that the median price of a home nationally has gone up over 40% in 3 years, and despite this, people are falling all over themselves to take out mortgage applications at an historic rate, at historically low interest. The fact that they increasingly take chances on "creative" financing that more closely resembles a carny con game isn't given much white space. And the connect between long-term interest rates, that ultimately determine mortgage rates, and the decision by China to let the value of the yuan rise, is glanced at but not really examined. Besides opening the door to higher mortgage rates at a time when the cost of housing has gone astronomical, it could also lead to higher cost of living across the board, including energy, cars, and all those cheap-ass goods lining the aisles of Wal-Mart and Target that we've gotten so addicted to. Don't even think about that trip to Europe. The exchange was bad enough before, but already the Euro and pound have risen in response to China's news. And what with the minimum credit card payments going up, there will be less and less discretionary income, made worse by the fact that people already fail to save anything worth mentioning. But you'd never know, from the tone of this article and scores like it making the rounds, that the average American wasn't making a couple hundred thousand a year and casting around in heart-breaking desperation for someplace to spend all that lucre.

That is, unless you paid attention. The bottom line is that, even in these delusional times, you have to be able to come up with the money, or a reasonable facsimile, before you can buy a house.

People in sweaty markets have been playing one end against the other, utilizing creative methods of buying property that, in a saner time and place, they wouldn't have touched with hazmat equiment. But the scent of blood is in the air, and the old tricks aren't enough anymore. Lack of affordable housing has finally started to affect the middle class, and when they can no longer afford to buy housing, all the hot condos and yupscale gated communities in the world aren't going to help the vultures running this show. Let's take a look at what we're seeing now, and what it bodes for the future.

From a December 9, 2004 story in WaPo on the sitch in the D.C. area, one of the worst for overpriced housing:

"The region's home prices are rising faster than its wages, worsening the affordable housing crunch, especially for low- and moderate-income workers such as parking attendants and firefighters, according to a report released yesterday by the Fannie Mae Foundation and the Urban Institute...The region's wages rose 9% on average from 2000 to 2002...but median home prices went up 37% during that time."
We've seen the impact of this before, where the very police paid to protect a community are unable to live there---the "coolie effect", where the hoi-polloi, with their embarassing social awkwardness and inability to afford tasteful furnishings, are blessedly banished unseen to another quarter when the need for them is over. But by their commutes ye shall know them:

"(the new economy) is not housing workers close to their jobs. That leads to lengthy commutes and less time at home for employees, the report said, as well as worsening congestion and pollution that could make the area less attractive to prospective employers..."
So in one of those reverses of fortune so beloved by ironists, a long commute, much like driving large cars in the 70's during the oil crisis, may soon become the hallmark of the less-affluent, rether than its opposite. Add to this the fact that people who do opt for the big plunge into debt are spending so much of their income on their mortgages (often more than 50%) that they can't even afford the simplest pleasures, and more and more of their assets turn out to be merely paper illusions in a creditor's shell game.

"The report recommended that localities promote dense development, which is less controversial than it once was, and require that affordable units be built in the most popular housing markets..."
That will make life more attractive and livable: cramming more and more of the working class into more and more crowded living conditions, while the upper crust gets to slink off to their landscape-challenged developments and bloated McMansions. They think we have problems with agression, crime, and quality of life issues now? And if that isn't enough to divide us, there's this:

"(the report said)recommendations will be difficult to implement because they require people to "reach across lines of race, class and political jurisdiction."
Right. In our "classless" society, about the only institution less integrated than the local church is the local neighborhood. Yet these are the recommendations of Fannie Mae, that government bastion of probity and trustworthiness.

Over a week ago, Jill Barton reported on the dismal fortunes ahead for working people in another overheated market, Florida:

"The red-hot housing market in booming cities across the country has made the dream of owning a home out of reach, not only for low-income families but also for white-collar professionals...
Real estate experts warn that housing prices in many markets are too quickly outpacing the incomes of most workers...
In California, the situation has long been the worst: Only 17 percent of households could afford a home with a median price tag in April,...By May, the median home price in California climbed to $522,590 -- more than double the price in most other states. To buy the typical home with monthly payments of $3,067, a California family would need to earn about $122,700 to qualify for a conventional loan.
The average family in Florida earns nearly $44,000, which fell 26 percent short of the amount needed to finance a median-priced home last year....
(Nationally) ...the typical household earns about $56,323, enough to buy a home costing $250,900 and 133 percent of what's needed to afford the median-priced home of $188,800..."
So to be able to afford these insane costs, people are ready to impoverish themselves or take chances that their lives will hold no nasty surprises like accidents, illness, or other unforseen impacts on their incomes:

"Buyers are choosing (interest-only loans,) adjustable-rate mortgages that keep payments low for a few months to a few years, or 40-year mortgages that allow them to stretch payments over an additional 10 years."
And in the St. Petersberg Times, they report:

"The double whammy of soaring home prices and low-cost housing being replaced by high-end condominiums is slamming the door on the dream of homeownership for many Tampa Bay area residents. It isn't just low-income residents who are being priced out of the market; increasingly, middle-income families are struggling to find an affordable place to live.
...average home prices in Florida have risen 70 percent since 1999, reaching a median sales price last year of $218,600, while the median wage was only $25,670...Developers are snatching up mobile home parks and aging apartment complexes - places that provided affordable shelter for those of limited means - and replacing them with expensive townhomes and condominiums. Displaced residents are struggling to find any other place to live. modest neighborhoods are replaced and property values rise, housing within the reach of working people like teachers, police officers and employees in the tourist industry will disappear..."
And here is the coup de gras:

"Unless the problem is resolved, bankruptcies and homelessness are real possibilities for far too many Floridians."
And not just in Florida.

As Flies To Wanton Boys, Are We To The Gods (Pop Music Lyrics Edition)
June 10, 2005
"Lord, if you won't take care of us,
Won't you please please let us be?"
--Randy Newman, God's Song

voodoo The Oracle of Nuthin' Much speaks:
"Over the past year, the pace of economic activity in the United States has alternately paused and quickened. The most recent data support the view that the soft readings on the economy observed in the early spring were not presaging a more-serious slowdown in the pace of activity. Consumer spending firmed again, and indicators of business investment became somewhat more upbeat. Nonetheless, policymakers confront many of the same imbalances and uncertainties that were apparent a year ago."
That's life, that's what all the people say.
You're riding high in April,
Shot down in May
But I know I'm gonna change that tune,
When I'm back on top, back on top in June.

--Frank Sinatra, That's Life

Or, for those of us less poetically inclined, who knows what tomorrow may bring? Not the Geezer-in-Residence, though you'd never know it by the genuflections the press makes in his direction every time he shows his face in a quasi-official capacity and babbles some incomprehensibly contradictory bushwa. He goes on to assure us, as he has more recently, that while a housing bubble is unlooked for, a bit of froth on the old cappucino can probably be expected. Or maybe not. In fact, who really knows? Not him--his job is to sit back and inhale the incense from the offerings we light to him every time the market gets a little jittery. So, what other pearls of cluelessness does the Oracle grace us with?
"Excluding a large but apparently transitory surge in bonuses and the proceeds of stock option exercises late last year, overall hourly labor compensation has exhibited few signs of acceleration. Thus, the rise in underlying unit labor costs has been mainly the result of the slower growth of output per hour. At the same time, evidence of increased pricing power can be gleaned from the profit margins of nonfinancial businesses, which have continued to press higher even outside the energy sector. Whether that rise in unit costs will feed into the core price level or will be absorbed by a fall in profit margins remains an open question."
You'd never know that these were human beings whose lives he so blithely stuffs into such bloodless econ-numbnuts babble. In other words, excluding some fat cats' golden parachutes, wages didn't go up, and where the cost of employing the peons rose, it wasn't because they were paid more, but because the lazy slobs slacked off. After squeezing the working man and woman out of a raise, and hiking retail and wholesale costs to consumers, it's still a crapshoot as to whether it will all even out or whether business will come out on top. And he gets paid for this. But let's turn our attention to that perennial favorite, the housing market:
"It appears that a substantial part of the acceleration in turnover reflects the purchase of second homes--either for investment or vacation purposes. Transactions in second homes, of course, are not restrained by the same forces that restrict the purchases or sales of primary residences--an individual can sell without having to move. This suggests that speculative activity may have had a greater role in generating the recent price increases than it has customarily had in the past.
The apparent froth in housing markets may have spilled over into mortgage markets. The dramatic increase in the prevalence of interest-only loans, as well as the introduction of other relatively exotic forms of adjustable-rate mortgages, are developments of particular concern. To be sure, these financing vehicles have their appropriate uses. But to the extent that some households may be employing these instruments to purchase a home that would otherwise be unaffordable, their use is beginning to add to the pressures in the marketplace."
People are speculating on houses, and artificially raising purchase prices. They can't afford them. Who knows what may happen if they have to sell and can't get back what they invested? Long-term interest rates have stayed low though he keeps raising short-terms. Lawdy, me, whatever could be the matter? He later slips the possiblility of large-scale bankruptcies in there and then glides right past it as if someone broke wind at the luncheon and the only polite thing to do is to pretend you didn't hear it. He ends with this cryptic statement:
"...despite some of the risks that I have highlighted, the U.S. economy seems to be on a reasonably firm footing, and underlying inflation remains contained...Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability."
Yes, I'm so fucking reassured...watching the price of ticky-tacky cheeseboxes spiral sky-high while dime-a-dozen 3rd tier lawyers and marketing managers cream themselves over their latest acquisitions of preening McMansions and Jurassic SUVs. Meanwhile, this dementia victim is still selling the mythology of the Bush economy.

Please, God, send a miracle. Or lacking that, at least someone who isn't nearly brain-dead.

Friday, September 19, 2008

The Evils of Regulation, Vindicated

Thank you, Ronald Reagan, for your refusal to live in the real world. Thank you, Alan Greespan, for sleeping through your job. Thank you, free-market Bacchae, for your blind eviscerations of the delicate regulatory structures on which our economic system depended. And thank you, George Bush, for once again breaking the toy Daddy gave you. Faith in the ideology of greed has been vindicated. The result of your undimmed decades of predation shines forth radiantly in the new sepulchre of our future, fashioned so hastily and so late by people who never gave two good goddamns about the people being ground down by those predations all these long, wasted years gone by. Hope your golden years are better than this: