Here are some article I strongly recommend reading (excerpts are provided below):
- “California crisis by the numbers – 12, 5, 30, 2, 732, 5.5, 121“, John Chiang (Controller of the State of California), San Francisco Chronicle, 11 February 2009
- “The Great Depression – Just the Facts, Ma’am“, Paul L. Kasriel, 9 February 2009
- The Real Lesson Of The New Deal“, Bruce Bartlett, Forbes, 13 February 2009
- “My Preferred Fiscal Stimulus” by Greg Mankiw (Professor of Economics at Harvard), 5 February 2009
- “No one home: 1 in 9 housing units vacant“, US Today, 13 February 2009
Update: Here are my two favorites articles.
(a) “Failed Banks Pose Test for Regulators“, New York Times, 14 February 2009 — And the bank failures have just begun. Emphasis added.
The rising tide of foreclosed real estate is so overwhelming that the agency, which had shrunk to a relatively tiny 4,800 employees from as many as 15,000 in the last period of bank meltdowns in the 1990s, is in the midst of a military-scale buildup as it undertakes one of the greatest fire sales of all time.
… When regulators took over the First National Bank of Nevada last year, they faced a showdown with the Terrible Herbst, the mustachioed cowboy who boasts of being the “best bad man in the West.” … The family-owned Herbst chain, auditors at the Federal Deposit Insurance Corporation concluded, did not generate enough sales at its Reno-area gas stations to support the repayment of the nearly $10 million loan, leaving auditors with three bad choices: Move to take over those stations and put the government in the gambling business. Cut off any flow of additional loan money. Or sell the loan at a steep loss. Simply cutting off additional advances of cash from the loan, was ruled out because the business might close, making it nearly impossible to collect any of the outstanding principal.
The resolution of the case turned out to be a windfall for Terrible Herbst. The government put the loan on sale, and who should buy it directly from the government but the Herbst family, at a discount of more than 50%. The government ate the loss, but at least it collected on some of the bad debt, the F.D.I.C. official involved in the deal said.
Executives at Terrible Herbst, who said they never formally refused to pay off the loan in full, were hardly disappointed. “It worked out just fine,” said Sean Higgins, the company’s general counsel. “At least for Terrible Herbst.”
(b) “Freddie Max Extends Moratorium on Foreclosure Sales“, 13 February 2009 — Defaults in were higher in the 1930’s but with a lower rate of foreclosure, due to measures like this. Mass evictions were politically unacceptable back then — just as they are today.
Freddie Mac today announced it is immediately suspending all foreclosure sales involving occupied single family and 2-4 unit properties with Freddie Mac-owned mortgages through March 6, 2009. The suspension does not apply to vacant properties. The extension will provide servicers with more time to help troubled borrowers find an alternative to foreclosure.
Excerpts from these articles
(1) “California crisis by the numbers – 12, 5, 30, 2, 732, 5.5, 121“, John Chiang (Controller of the State of California), San Francisco Chronicle, 11 February 2009 — One of the most remarkable statements by a public offical I have ever seen. But that’s not the amazing thing about this. The public read this and shrugged! Its’ like the ending of Thelma and Louise, everyone smiling as we zoom off clif. Excerpt:
No, these are not lottery picks or a plot-twisting code on the TV show “Lost.” But they do tell a story of how the Golden State – once revered for its pioneering leadership – is now so desperate that it no longer pays its bills, or cares for the sick and elderly. These numbers also indicate what kind of California – one that offers opportunity or shackles us with debt – is on the horizon.
This is moral hazard — so long talked about — made tangible. The hundreds of billions so carelessly burned by the Bush Administration have created an expectation that fecklessness and folly will be rewarded with free money — so vital entities like California see no reason to adapt for hard times.
(2) A brief history of the Great Depression by economist Paul L. Kasriel: “The Great Depression – Just the Facts, Ma’am“, 9 February 2009 — The best summary I have seen of the consensus forecast of economists about this economic downturn, why they believe late this year will be the trough.
(3) An important explanation of government’s role during a depression: “The Real Lesson Of The New Deal“, Bruce Bartlett, Forbes, 13 February 2009 — “Deficits were too small, not too large.” Bruce Bartlett is a former Treasury Department economist and the author of Reaganomics: Supply-Side Economics in Action and Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy.
(4) Worth reading, but for the opposite reason, is “My Preferred Fiscal Stimulus” by Greg Mankiw (Professor of Economics at Harvard), 5 February 2009. He would like to increase taxes on oil. Imagine what a member of OPEC, or any oil exporter, would think of his proposal. “If you want higher oil prices, we can oblige — and keep the proceeds, since it is our natural resource — not yours.” Even Harvard Professors can exhibit the “one world = our world” thinking paradematic of the post-WWII era, now fading away with each headline
(5) It is sad that two years into this financial crisis so much nonsense is still written about housing. The fundamental problem is over-supply: we built far too many homes. As I have said so many times, this is an intractable problem. To see its dimensions read “No one home: 1 in 9 housing units vacant“, US Today, 13 February 2009 — Excerpt:
A record 1 in 9 U.S. homes are vacant, a glut created by the housing boom and subsequent collapse. … Census numbers show:
- More than 14 million housing units are vacant. That number does not include an estimated 4.8 million seasonal or vacation homes, most of which are occupied part of the year.
- The combined vacancy rate of almost 15% is higher than during previous recessions: 11% in 1991 and 9.4% in 1984.
- About 3% of owned homes are vacant. In normal times, “maybe 1% should be vacant,” Myers says.
- More than 9% of homes built since 2000 are vacant compared with about 2% for older homes.
- Homes priced at $500,000 or more are just as likely to be empty as homes that cost less than $100,000.
Historically, vacant housing was more of a concern in cities that have poor neighborhoods. Now, it has hit suburbs and new subdivisions. “You have abandoned vacant housing in Detroit but you also have it in Henderson, Nev., and Mesa, Ariz. (suburbs of Las Vegas and Phoenix),” Retsinas says.
Afterword
Please share your comments by posting below. Per the FM site’s Comment Policy, please make them brief (250 words max), civil, and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
For information about this site see the About page, at the top of the right-side menu bar.
For more information from the FM site
To read other articles about these things, see the FM reference page on the right side menu bar. Of esp interest these days:
Other posts about housing:
- Diagnosing the eagle, chapter I — the housing bust, 6 December 2007
- A vital but widely misunderstood aspect of our financial crisis, 18 September 2008 — Too many homes.
- Destroying houses in order to boost home prices , 16 December 2008
The Department of Lead Balloons has struck: “Obama and protectionism – the jury is still out“, David Atkins, National Post, 13 February 2009.
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Fabius Maximus replies: This refers to the “buy American steel” language in the stimulus bill passed by the House. The final version more closely follows the Senate’s language, which requires following our trade agreements.
FM: “This is moral hazard — so long talked about — made tangible. The hundreds of billions so carelessly burned by the Bush Administration have created an expectation that fecklessness and folly will be rewarded with free money.”
What a bizarre obvservation! California will be $10 billion short on its regular budget, according to the article, by July, and is hoping for federal government help. The treasury has alreayd given $1/2 trillion to the large banks who created and hold 40% of the nation’s bad debt and is about to give them $2 trillion more. Which is really moral hazzard?
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Fabius Maximus replies: The former created the latter. California is but one of the long line seeking federal aid, so your implication that we can easily afford a bailout misses the point. States, municipalities, the auto industry, the insurance industry, education institutions (via student aid and loan programs), but individuals (in a hundred different forms). Worse, since we might be still in the early innings of the downturn, the line has just begun to form.
As I said in A situation report about the global economy, as the flames break thru the firewalls (26 January 2009):
FM: “The hundreds of billions so carelessly burned by the Bush Administration have created an expectation that fecklessness and folly will be rewarded with free money — so vital entities like California see no reason to adapt for hard times.”
Fabius, you, I and anyone who hasn’t spent the last three decades on Kwajiline Island shooting missiles knows good, full and well that GWB still had the toke master attached to his uni-nostril 24/7 when the State of California made the legislative and regulatory decisions that led to their present discomfiture.
California has spent mooney like it was oxygen for decades. California has chased it’s tax base away for decades. California has rendered itself supine in the energy markets since the late 1970’s/early 1980’s. California has chosen to issue bond debt beyond any reasonable expectation of compensitory revenue since at least Pete Dukmejian was governor; if not Jerry Brown.
You’re becoming transparent, Fabius. You are so in the tank for the current Democratic leadership that I hope you’re breathing Nitrox. I’d hate to see you suffer from the bends. Have you pondered re-Christening your blog Fan-boy Maximus.
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Fabius Maximus replies: You misread the post. I did not say or imply that California’s problems — or those of the banks, the auto industry, over-indebted households, etc — were Bush’s fault. Rather, the baml bailouts raise expectations of easy money for all — reducing the incentive for others (like California) to make fast and severe adjustments to the downturn. Why bother when the greater the red ink, the more free money received?
“You are so in the tank for the current Democratic leadership that I hope you’re breathing Nitrox.”
How can that be! This guy says “obviously this is simply a Republican party-line site.” That pitch was easy to knock out of the park, just like yours. After reading the following material, you can post your retraction and apology in these comments; no groveling required.
Look at the FM Reference Pages on the right-side menu bar; click on Obama, his administration and policies. You will see 27 posts, including the following:
* Our metastable Empire, built on a foundation of clay, 3 March 2008 — We elect leaders with vast ambitions, but can no longer afford them.
* How long will all American Presidents be War Presidents?, 21 March 2008 — In the 7th year since 9/11 the only debate about the Long War is which nations America should fight. We see this even the speeches of the most “liberal” candidate, Senator Obama.
* Is Obama running for the office of Chief Shaman?, 6 June 2008 — Weirdness from our next President.
* These days all American Presidents are War Presidents (part 2), 13 September 2008
* The evil of socialism approaches!, 22 October 2008 — Economic crisis and a leftist President. Can socialism be avoided, or is it our destined fate?
* America gets ready for new leadership (or is it back to the future?), 14 November 2008
* “Don’t Let Barack Obama Break Your Heart” by Tom Engelhardt, 21 November 2008
* Obama proposes a new New Deal – like Japan, will we burn money to keep warm?, 8 December 2008
* Obama supporters mugged by reality (and learn not to believe in change!), 9 December 2008
* The transition between Imperial reigns: what will it mean for America?, 16 December 2008
* Lind explains why Obama’s foreign policy will fail, 14 January 2009
* About Obama’s coronation – wisdom from Fred, 23 January 2009
* Change you should not have believed in, 10 February 2009
Veterans of the Japan financial meltdown in the late 80s say America is making the exact same mistakes that led to Japan’s lost decade of non-stop recession. (“a HREF=”http://www.nytimes.com/2009/02/13/business/economy/13yen.html?_r=1&em” rel=”nofollow”>In Japan’s Stagnant Decade, Cautionary Tales for America”, Hiroko Tabuchi, New York Times, 12 February 2009)
Obviously I disagree with you vehemently about AGW, but when people on the left claim you’re in the tank for the movement conservatives because of some of the things you write, and when people on the right claim you’re in the tank for Obama because of other things you write…well, you must be doing something right.
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Fabius Maximus replies: This site is (I thought obviously so) in the service of Truth, Justice, and The American Way. Not everybody outgrows their childhood dreams.
“The hundreds of billions so carelessly burned by the Bush Administration have created an expectation that fecklessness and folly will be rewarded with free money”
“P” is for Party!
“A” is for All Right!
“R” is for Right Now!
“T” is for Tonight”!
“Y” is for Y’all Come!
Yay PartyI!!!!
A very sensible response to current headlines.
FM: “Even Harvard Professors can exhibit the “one world = our world” thinking paradematic of the post-WWII era, now fading away with each headline”
As they say “You can always tell a Harvard man, but you can’t tell him much.”
Perhaps Prof. Mankiw’s difficulty results from his psychological denial of our evolving into a world where a Harvard education will no longer be so important?
Comment #3: “You’re becoming transparent, Fabius. You are so in the tank for the current Democratic leadership that I hope you’re breathing Nitrox”
Oh please! We are evolving into a situation where Guelf vs. Ghibelline will matter more than Democrat vs. Republican.
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From Wikipedia: The Guelphs and Ghibellines were factions supporting, respectively, the Pope and the Holy Roman Emperor in central and northern Italy during the 12th and 13th centuries. The struggle for power between the Papacy and the Holy Roman Empire had arisen with the Investiture Conflict of the 11th century.
FM:”The fundamental problem is over-supply: we build far too many homes. As I have said so many times, this is an intractable problem.”
Err, we ‘built’ too many homes. Among the problems of nations in the world, war, disease, natural disaster, the problem of ‘too many homes’ just really ought to be solvable. It reminds me, I used to go this shop called ‘Herb’s Discount Software’, and Herb’s store would be packed with weird old disks for the Commodore 64 and old DOS games and other obscure stuff. Herb told me his secret to life — “Everything has a price” he said.
The prices of all these homes just has to hit bottom sooner rather than later. All the government efforts just make this worse because sellers hold out thinking that maybe the Fed or Obama can reinflate the housing bubble but while we wait all this housing stock just deteriorates.
Sellers need to ‘lose hope’ of ever recovering their initial investment. When they have lost all hope of making their bubble values back, then they’ll settle for what they can get and we can build economy based on moving into these cheap houses.
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Fabius Maximus replies: I do not understand your point. Most problems are “solved” over time. Economic problems tend to be self-correcting. The variables are duration of the process, amount of suffering, and lasting damage to the economy.
As for the rest, you miss the point. Excess capital investment in non-movable perishable goods (like houses; vacant homes tend to deteriorate rapidly, by natural or human forces) tends to disappear rapidly. Changes in price and psychology have relatively little effect. When the excess is gone, valuations will return to more historically average levels.
Thanks for noting the typo; it has been fixed.
Ah, yes, Harvard. I’ve heard of it. “The Stanford of the East,” I believe.
“The budget for that division is increasing to $1 billion this year, from $75 million last year. Nearly $700 million of the increase is set to go to contractors like RSM McGladrey of Minneapolis, which provides temporary workers to help the agency close banks. These workers come at an hourly rate of $50 to $250” (NY Times article describing “stress” on FDIC handling new foreclosures)
1) Here’s a neat example of “disaster capitalism” at work — private companies specifically set up to profit from natural or social disasters.
2) Just above this quote is a much grander instance of the same — pending deals with private equity sources to take over major portions of the FDIC’s newly acquired portfolio of failed mortgages. This follows the model of the Savings and Loan bailout, in which private investors picked up shopping malls and commercial developments at bargain basement prices, guaranteeing them spectacular profits within a few years.
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Fabius Maximus replies: That’s wonderful news. Having us profit from the use of our money would be communism!
Ah, yes, Harvard. I’ve heard of it. “The Stanford of the East,” I believe.
No, Arms Merchant, Harvard is the Rice of the North. Sheesh!
FM:”Fabius Maximus replies: I do not understand your point. Most problems are “solved” over time. Economic problems tend to be self-correcting. The variables are duration of the process, amount of suffering, and lasting damage to the economy.”
For the banks and people trying to sell houses these extra houses are a fundamental problem and cause suffering, but for potential house owners — not having a house is suffering and being in a house is not suffering. These extra houses have the potential to alleviate suffering, and if our goal is to help people they are a positive thing.
FM: “As for the rest, you miss the point. Excess capital investment in non-movable perishable goods (like houses; vacant homes tend to deteriorate rapidly, by natural or human forces) tends to disappear rapidly.”
Yes, these houses are deteriorating rapidly, but they represent the wealth of this nation and a way to make people have better lives. We need to get people in these houses now, before they disintegrate.
FM: “Changes in price and psychology have relatively little effect. When the excess is gone, valuations will return to more historically average levels.”
Selling a house, selling anything is all about price and psychology. Sellers will hold an empty house on the market, even if there are no buyers, if they perceive they have hope in the future of the price rising again. You believe that prices ‘will return to historically average levels’ — a lot of banks and people believe this. If you owned an extra empty house, you’d hang on to it now and wait for prices to go back up.
But what happens after the boom, what happened at Herb’s Discount software was that all the products of the boom all end up cut down in price, and then people come in and look for bargains. This happens when the sellers lose hope of getting their original price and finally settle for what they can get now.
I expect these days the post-bubble value of a middle-class house will find its equilibrium somewhere around the level where someone working at Walmart can afford one. This would be a good thing. Banks might eventually have to settle for this, or hang onto lots full of rotting wood.
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Fabius Maximus replies: This comment is largely an exercise in imagination, ignoring the two primary factors at work.
(1) The worst excess housing supply is largely in areas with population outflows (e.g., Detroit, California’s central valley). Too few jobs; people leave. Housing prices might never recover in any reasonable time frame. There are many historical examples of residential price crashes (from various causes) that lasted for generations, perhaps the most famous being in NYC (with the South Bronx being the extreme case).
(2) Vacant housing is an expensive capital asset to carry. Taxes, interest (called “opportunity cost” for cash purchases), and maintenence can easily total 15%/year — plus the big one you repeatedly ignore — security. No just kids breaking windows, which is expensive. Empty homes are stripped (e.g., plumbing, wiring), and often inhabited by squatters (who inflict additional damage). Preventing the latter is difficult; preventing the former is very expensive.
‘We need to get people in these houses now, before they disintegrate.”
I suggest you call the Blue Fairy. She’s the only one I know with the ability and willingness to help in such situations. As Mclaren notes above, our system is not organized (for good or ill) to produce the outcomes you desire.
CM: “I expect these days the post-bubble value of a middle-class house will find its equilibrium somewhere around the level where someone working at Walmart can afford one.”
An admirable wish, but unrealistic. The opposite viewpoint is that excess housing should be destroyed, bringing prices back to equilibrium. Many social/pschological factors line up on this side — not least being general resentment over others getting something for nothing (or lower class folks moving in next door); and the grand obstacle being that society always needs a large pool of under-housed, under-fed, underemployed people at the bottom, to put fear into those above, and keep wages down.
American War? Do you mean American Way?
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Fabus Maximus replies: Thanks! Typo fixed.
seneca:”The opposite viewpoint is that excess housing should be destroyed, bringing prices back to equilibrium.”
I can believe it. Perhaps America will bulldoze the suburbs to preserve the equity and prevent any further damage to Citigroup/Bank of America balance sheets.
FM:”I suggest you call the Blue Fairy. She’s the only one I know with the ability and willingness to help in such situations. As Mclaren notes above, our system is not organized (for good or ill) to produce the outcomes you desire.”
Grapes of Wrath:”The decay spreads over the State, and the sweet smell is a great sorrow on the land. Men who can graft the trees and make the seed fertile and big can find no way to let the hungry people eat their produce. Men who have created new fruits in the world cannot create a system whereby their fruits may be eaten. And the failure hangs over the State like a great sorrow.
The works of the roots of the vines, of the trees, must be destroyed to keep up the price, and this is the saddest, bitterest thing of all. Carloads of oranges dumped on the ground. The people came for miles to take the fruit, but this could not be. How would they buy oranges at twenty cents a dozen if they could drive out and pick them up? And men with hoses squirt kerosene on the oranges, and they are angry at the crime, angry at the people who have come to take the fruit. A million people hungry, needing the fruit and kerosene sprayed over the golden mountains.”
At the risk of seeming radical and naive, it seems to me that all these economic and military threads are not addressing the central point: we are getting what the system we have is designed to produce, that is, corruption. The permissiveness around lobbying and revolving doors between private enterprise and government, the campaign contributions and so on, are what led us here, and we will remain here until we change those things. Money is not speech; you can take all the corporate money out of politics and rich people will still be able to say whatever they want. But there has to be a balance of power restored: small government cannot regulate big business anymore than mice can regulate cats.
While it is certainly true that elements in the Democratic party are guilty, since the Coolidge era it’s been the Republicans who are more at fault, let’s say at about a 60% level. But even if that is not true, it still remains that we will get different results when lobbying and corporate money are taken out of politics; when retired military cannot cash out on the arms-manufacturing side; when financial executives cannot change teams like baseball players, promoting weak regulation when in government, then moving back to banks to reap gigantic bonuses.
We should raise military pay, especially at the higher levels, and retirement bonuses as well… and in return for that, impose a complete ban on the types of activities indulged in by a generation of generals who earlier in this decade acted as media shills for the Rumsfeld Pentagon and the arms industry. Similarly, we should raise the pay for government regulators, and regulate that for financial executives, such that there is a rough parity, and little if any incentive to take one side or the other… and then, follow that up by creating impermeable barriers of at least ten years’ duration where you cannot take a position on the other team… that regulators cannot become executives and visa versa.
It needs to be made perfectly clear to the business side that the price of operating in this free society and having the potential to earn great wealth means that it is not permissible to corrupt the political system, period. And it needs to be made equally clear to those who enter government service, whether military or civil, that while they will have great power and competitive salaries, they have thus closed off, forever if not longer, the opportunity to prioritize their own material gain over all else and corrupt the system they have chosen to serve. This is fair, it is rational, and without it, we will get more of the same.
Greg, I don’t think you’re radical or naiive, but constitutional government wasn’t designed to produce corruption. Its foundation was the assumption that we were a thrifty, hardworking, and moral people. Think Covey’s Law of the Farm. Most Americans were farmers, even as late as 100 years ago.
For the past 30 years or so moral education in the public schools has been a joke. Why would we expect anything different?
The only answer now may very well be the heavy hand of threatened punishment. Wishing it weren’t so won’t change it, but I still mourn the loss of our capacity for self-government (literally governing our own passions).
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Fabius Maximus replies: Rather than “the assumption that we were a thrifty, hardworking, and moral people”, the founders’ elaborate seperation of powers, and the extensive limitations on those powers, suggests that their assumptions was that people were inherently prone to corruptions of various sorts. They build on “low but solid ground”, not idealistic beliefs about humanity.
Of course the Founders knew that people are imperfect and structures are needed to restrain corruption and other vices. Their design for achieving this was brilliant
I was thinking rather of John Adams’ quote: “”We have no government armed in power capable of contending with human passions unbridled by morality and religion. Our Constitution was made only for a religious and moral people. It is wholly inadequate for the government of any other.”
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Fabius Maximus replies: Agreed. They spent a great deal of time considering under what circumstances a Republic might work, and the kind of people necessary to maintain it.
A cheerful summary of the financial situation viz stimulus package. “Stimulus Package Explained (Q&A)“, Barry Ritholtz, The Big Picture , February 13, 2009.
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Fabius Maximus replies: It’s a joke, but a dumb one.