Green Shoots!

Housing prices were up 4.6% in August compared to prices in August 2011.  This is the biggest increase in six years.

A housing rebound is essential to an economic rebound, they are inextricably linked.  This is very encouraging news.

I hope the Prez mentions this at the debate.  You can be sure that if prices had dropped 4.6%, Mittens would mention it.

You Ask the Wrong Question, You Get the Wrong Answer

From Paul Krugman* today:  “By the way, in saying that our prolonged slump was predictable, I’m  not saying that it was necessary.  We could and should have greatly reduced the pain by combining aggressive fiscal and monetary policies with effective relief for highly indebted homeowners:  the fact that we didn’t reflects a combination of timidity on the part of both the Obama administration and the Federal Reserve, and scorched-earth opposition on the part of the G. O. P.”

This brings us back to Rick Santelli on February 21, 2009, when he famously asked, “Do we really want to subsidize the losers’ mortgages?  This is America!  How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills?”

The answer to that was a resounding “Hell, no!” and the start of the Tea Party,  but Santelli asked the wrong question.  He should have asked “How many of you people want to lose 30, 40, 50% of the value of your homes?  How many of you people want to lose your jobs because of the worst economic meltdown since the Great Depression?  How many of you people want to then lose your homes because, just like your neighbor now, you won’t be able to pay your bills?”

The truth is that because we got so obsessed with “moral hazard,” so determined not to coddle those damn “losers,” we all became losers.  If we’d loved our neighbor a little more, we would have all been better off.  Instead of lifting them up, we dragged ourselves down.

With all our politicians who constantly quote the Bible at us, where was Mike Huckabee or Michele Bachmann or Rick Santorum reminding the self-righteously righteous that the rain falls equally on the good and the bad?

* “The Optimism Cure,” NYT

You’ll Be Better Off Four Years From Now

From “Cleaning Up The Economy,” Paul Krugman, NYT:

“The forces that have been holding the economy back seem likely to fade away in the years ahead.  Housing starts have been at extremely low levels for years, so the overhang of excess construction from the bubble years is long past — and it looks as if a housing recovery has already begun.  Household debt is still high by historical standards, but the ratio of debt to G.D.P. is way down from its peak, setting the stage for stronger consumer demand looking forward.

“And what about business investment?  It has actually been recovering rapidly since late 2009, and there’s every reason to expect it to keep rising as businesses see rising demand for their products.

“So…the odds are that barring major mistakes, the next four years will be much better than the past four years.”

Both Mitt and Obama know this.   The business cycle hath certainly taken away, but it’s about to giveth.  Mitt wants to waltz in and preside over — and take credit for — the coming better years.  Obama is thinking, “Hey, Mitt, you didn’t build that!”

Vote for the Guy with the Trekking Pole

From “Obama’s First-Term Report Card,” Nicolas Kristof, NYT:

“On a backpacking trip once, I slipped on a steep ice sheet and began sliding uncontrollably toward the edge of a cliff overhanging an icy river.

“Luckily, my son pulled me to safety with his trekking pole.  Am I better off now than I was when I was sliding toward the abyss?  Duh!

“That’s a useful starting point in any assessment of President Obama.  In many ways, his first term has been disappointing:  the economy remains weak, housing is a mess and, for a man with a silver tongue, he has been a wretched communicator.  Then again, we’re incomparably better off than when were tumbling toward another Great Depression.”

Kristof then goes on to give Obama a report card, with a B in the Economy, an A- in Education, a B+ in Other Domestic Issues, a B+ in Foreign Policy, and an F in Communications:

“A president’s central job is not policy wonk but national team captain.  There Obama failed us.  He has not made the case for his policies, nor has he comforted the nation as Franklin Roosevelt did in his fireside chats.  Presidents always campaign in poetry and govern in prose, but the prose doesn’t have to be chilly Latin!”

Green Shoot Alert!

From “Housing Passes a Milestone,” David Wessel, WSJ:

“Nearly seven years after the housing bubble burst, most indexes of house prices are bending up.

“Economists aren’t always right, but on this at least they agree:  A new Wall Street Journal survey of forecasters found 44 believe the housing market has reached its bottom; only three don’t.

“For some time, housing has been one of the biggest causes of economic weakness.  It has now — barely — moved to the plus side.

“From here on, housing is unlikely to drag the U. S. economy down further.  It will instead reflect the strength or weakness of the overall economy:  The more jobs, the more confident Americans are about keeping their jobs, the more they are willing to buy houses.”  Italics in original.


Just Because Merkel Should Cave Doesn’t Mean She Will

Eduardo Porter has a well-written and rational story up at the NYT, “Germany Will Pay Up To Save Euro.”  He writes convincingly about how letting the euro zone fall apart will be much more expensive and painful for Germany than saving it.  So he concludes that after holding out for the best terms she can, Merkel will cave.

Porter is intellectually focused on labor costs and export prices, but the Germans viscerally don’t want to bail out a bunch of foreigners whom they see as lazy and corrupt.  He’s arguing numbers on an issue that will be decided by emotion.  The Germans see themselves as the pig who built his house of bricks, and those who hurriedly built their houses of straw and twigs so they could party deserve to get eaten by the wolf.

If countries always did what made sense, we wouldn’t have had our housing crash, the government would have bailed out the sub-prime market and kept housing prices from imploding.  We’ve lost a helluva lot more national wealth than a housing fix would have cost.  And that was the American government refusing to help Americans, not Germany refusing to help a bunch of  racially inferior foreigners with their crappy non-Aryan genes.

The Wrong Question

Back on 2/19/09, Rick Santelli called for a Tea Party in Chicago in July, asking his viewers,”Do you really want to subsidize the losers’ mortgages?  This is America!  How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay the bills.”  Santelli deserves the credit — or the blame, depending on your point of view — for inspiring the Tea Party movement.

But he asked the wrong question.  What he should have asked was, “Do you want your house to lose 30% of its value?  Do you want to lose your job?”  Because if we’d helped our neighbors back then, we would have been helping ourselves as well.  Instead, we were so concerned that bad behavior might be rewarded that we punished ourselves.

The banks never should have been bailed out without agreeing to pass that relief along to mortgage holders.  The government should have backed up the sub-prime mortgages that were failing.  If the government had bought up all the sub-prime mortgages — performing and non-performing — it still would have ended up costing us a lot less as a country.

Essentially, we cut off our noses to spite our faces.  A lot of people lost houses with prime mortgages, responsible people who had been doing just fine, who did not buy houses they couldn’t afford, but lost their jobs and couldn’t use the equity they thought they had in their homes to tide them over because that equity got wiped out.

If we’d loved our neighbors instead of begrudging them that extra bathroom (!?), we’d all be better off today.

We’re suffering from the moral hazard of moral hazard.  The rain falls on the just and the unjust, people.  It’s been raining hard in this country for almost five years.

Greed Is Not Good

We all know that part of the housing meltdown was caused by people buying houses that they couldn’t afford.

But what’s gotten far less attention is that many people who qualified for conventional mortgages were steered into more expensive sub-prime mortgages.  Some of these sub-prime borrowers ended up losing homes they could have afforded if they’d just gotten the prime loans their incomes and credit histories justified.

I have known for a long time about this unfair treatment of less sophisticated borrowers (disproportionately minority and less-educated) because of the lure of higher commissions on sub-prime loans.  But I didn’t know how dramatic the difference in commissions was.

In his column in the NYT today, “A Banker Speaks, With Regret,” Nicholas Kristof interviews a former banker with Chase who says that commissions on sub-prime loans were sometimes seven times higher than those on prime.  That was an enormous incentive to saddle a prime client with a sub-prime loan and set him, and all of us, on the path to ruin.