Legislative Update XXIV

Congress is actually passing stuff again! Though still not health care.

The House of Representatives voted for the biggest overhaul of federal student loan programs since their creation; the measure ends subsidies for private lenders, boosts Pell Grants for needy students and creates grant programs to improve community colleges and college graduation rates. The House also passed a resolution of disapproval for Rep. Joe Wilson's "You lie!" outburst during President Obama's speech to Congress.

The Senate passed a big boost in spending for housing and transportation projects, and to allow guns on Amtrak.

And, yeah, both houses voted to defund ACORN to appease paranoid conservatives.

Moral Obligation

Megan McArdle explains why she thinks that people do-to some degree-have a moral obligation to repay their debts (lengthy excerpt warning):

Four weeks ago, I bought a grill on my credit card. It was not the best grill Home Depot had--indeed, because I am cheap, and also have never longed to rotisserie in my very own back yard, it was the cheapest grill they had in stock, except for tiny tabletop camping models.

It's a nice grill. But I've since realized that our landlords have an old, broken grill that we might have been able to repair with enough duct tape, saving me almost $200. Meanwhile, I've discovered that I can't sell the grill for a profit, because Home Depot seems to have a large number of very similar grills in stock which they are willing to offer to buyers for a mere $200. For that matter, I can't even sell it for the value of the loan with which I financed it. The equity in my grill has dropped by about 50%. Given all that, I don't see why I should be required to pay back the credit card company. After all, they knew when they loaned me the money that I might not pay it back, and I suspect they also knew that I might not like my grill as much as I expected to. Hell, the dirty bastards may well have known that I was going to end up underwater on my grill loan. I don't see why I have any obligation to repay them.

This seems to me to be approximately the logic behind the people saying that folks who took out stupid loans don't have any sort of moral obligation whatsoever to make good their debts. The loan company didn't have your best interest at heart, the logic goes, so why should you take care of them at any cost to yourself?

Well, imagine you're the one I borrowed the grill money from. I doubt almost anyone reading this would be plunged into bankruptcy by the loss of $200. So why should I pay it, when you knew just as well as I did that the grill would depreciate and I might be better off without it?

Call me bourgeois, but I think that when you sign your name to a document promising to repay money you've borrowed, you have an obligation to repay the money you've borrowed.

{...}

Undoubtedly many of my readers think that that sort of thing is different because we don't have a moral obligation to repay our debts to corporations the way we do to people. This strikes me as fundamentally wrongheaded in two ways. First, the bourgeois belief that an honorable man repays his debts if he is able is one of the unnoticed underpinnings of a stable, prosperous democracy. Countries that believe that one can pick and choose whom one is obligated to repay on the basis of how good a person the lender is, how tight their relation to you, or whatever, are low-trust societies with extremely high transaction costs and underdeveloped markets. If you think you're only obligated to repay regular folks like yourself, then no one but your close friends and family will lend you money. This makes capital formation tricky.

She makes a reasonable argument, but there are a few things I think she's missing. First of all, her personal experience is not really analogous to a homeowner handing over their keys and walking away from their home and whatever debt they have remaining on their mortgage. Obviously, someone may opt to pay for a $200 grill they don't really need, whereas a home mortgage payment can be a crushing burden on a family's finances, especially when the interest rate has shot up or the home's value has declined dramatically. But let's leave that aside and take her argument at face value; that there is a moral obligation, at least to some extent, to repay one's debts. This is actually not a proposition that I disagree with completely, though I don't think I've been clear about that in the past. It's clear that many or most people feel some compunction to repay their debts as a matter of principle, or honor. After all, few things seem as irresponsible or dishonorable as borrowing money from someone in good faith and willfully failing to pay that money back.

But the reason I've been so opposed to speaking of a moral obligation to repay debt is because the obligation to behave morally or honorably only ever seems to be imposed upon the debtor, and not the lender. McArdle misses this when she argues that there should be no distinction between paying back debts to corporations and debts to family or friends. The existence of a moral obligation to pay is not premised on who the lender is; it's premised on how the lender behaves towards you. That's why most of us would make every effort to repay family and friends, who we can presume will for the most part lend to us and treat us in good faith. But you can expect no such treatment from a bank or corporation, which not only will hound you for your debt to them if you fall behind (as they are legally entitled to do) but also alter the terms of your agreement, slash your credit limit, raise your interest, and report various sundry things to the credit reporting bureaus and then take their time correcting what they've wrongly reported (among other things.) This is why it seems so strange to impose upon debtors a moral obligation that doesn't exist for lenders; if we're talking about obligations that go beyond something other than a straight business transaction, then there should be reciprocity, right?

Second, I think McArdle gives too much credit to this obligation as a means to keep the credit economy flowing smoothly. What really keeps credit flowing are the legal obligations that bind those who enter debtor-creditor relationships. Yes, most of us feel some moral obligation to repay our debts, but we also know that if we don't, our lender will send us nasty letters, call us repeatedly, report our late payments to the credit bureaus, and they may even sue us for the debt. Since most people want a good FICO score on their credit record, don't want to be called at all times of day, and don't want liens imposed on their property, they'll continue to pay even if they feel no moral obligation to do so. Of course people in worse financial circumstances may decide for whatever reason that they'd rather face these consequences than attempt to keep paying on the debt. They may even enter bankruptcy at some point, despite the fact that most people are still embarrassed and/or ashamed of admitting that they can't pay their debts. And it's true that some people will decide that-even if they can pay the debt-they simply don't care about their credit score, don't mind the phone calls and nasty letters, or have no property to speak of that they're worried about losing. But such is the system of incentives, not obligations, that lies at the heart of our credit economy. Lenders-for the most part-have incentives to lend and to treat their customers/borrowers decently, so that those people (and businesses) will want to lend again from them in the future.  Borrowers have incentives to pay their debts back in a responsible and timely manner, so they can borrow again in the future and so they can avoid the negative consequences of failing to pay back their debts. 

Liberals like myself would like to see a more balanced system of incentives, so that the lender's incentive to treat their borrowers decently is roughly equal to the borrower's incentive to pay that lender back. To us this means mostly balancing the playing field between lenders and borrowers, such that both enter a credit transaction as something approaching equals and will have an incentive to fulfill meet the obligation to each other they've both contractually assumed. This is why talk of a moral obligation that somehow is imposed only on one party in the transaction is annoying and frustrating to me. Such an obligation is an impediment to a business relationship between equals and-more frequently-is used as a rhetorical tool by people on the right who want mostly to protect the interests of corporations that have no desire to level the playing field or let people off the hook for even unconscionable debts.

And beyond that, it just seems silly to start talking about anybody's obligation to do anything by anybody in our present economy, where home lenders fudged numbers to produce more loans, banks sold bad mortgage-backed securities left and right,  credit ratings agencies rated themwilly-nilly, and execs at giant financial institutions pay themselves billions in bonuses with taxpayer money. Compared to that, the morals of credit cardholders and homeowners seems a small concern.

Obligation

Echoing Ezra, why is it a moral failing when a homeowner walks away from a home they can't afford, but a sound business decision when a corporation walks away from a contract they're losing money on?

In Plain Language

This is exactly why I read John Cole every single day.

Housing Program Guidelines Out

The Obama administration has unveiled the new housing assistance program. The guidelines (found on the program's official website) are not entirely clear, but the NY Times breaks it down for you in this graph here. Essentially the program is aimed at two classes of borrowers, strong borrowers whose mortgage balances are high in proportion to the value of their home because of a drop in value, and "at-risk" borrowers whose home value has dropped and who are struggling to make payments. But there are losers too; the program will not cover loans over $729, 750, or owners who owe more than 105% of the value of their home. As that article notes, estimates are that the program could save 600,000 to 2.6 million homes from foreclosure, though of course for many it will only stave off the inevitable. 

More on the Mortgage "Cram Down"

Professor of Law Alan Schwartz takes to the pages of the NY Times to criticize expanding the power of judges to "cram down" secured debts in a bankruptcy case to home loans. He has three main points, which we'll break down here:

First, the proposal would swamp bankruptcy courts. There are only about 300 bankruptcy judges, and they are already busy with an increasing number of bankruptcies. Clearing millions of new mortgage cases will take a long time and thus have little immediate effect on the foreclosure crisis. In addition, the flood of new cases would delay the resolution of business bankruptcies, to the detriment of the economy.

This doesn't quite sound right to me. Many people already enter bankruptcy in a last ditch effort to avoid having their homes taken away from them; the automatic stay that follows from filing a bankruptcy petition buys them time to try and get their debts and finances in order so that hopefully they can figure out a way to continue paying for their mortgage while having their payments on other debt reduced. For these people, it simply means that the bankruptcy judge now has to figure out how to deal with the mortgage debt in addition to the rest of the debts that are being restructured in a Chapter 13. Now I'm sure there are many people who might be advised to enter bankruptcy for the primary purpose of saving their home, who wouldn't have already before the cram down provision is enacted, but I'm not sure if that's "millions" of new cases. Maybe.

Second, many debtors will be disappointed. Consider the parties’ incentives. Debtors will argue for low home values while lenders will argue for the opposite, to minimize their losses. Lenders will win many of these valuation contests: they have more expertise than individuals in making their case and greater resources.

This seems like an odd argument. For one, property is always being valued in a bankruptcy case. Judges frequently must oversee the valuation of property to determine how much the secured portion of the debt attached to that property should be. Sure this is more difficult for a home than it is for a car, but that's not much of argument against it by itself, so how is debtor disappointment alone a persuasive argument? Debtors almost always face creditors who know something more about the value of their property than they do. And I don't know how any of this is more disappointing than losing your home.

Finally, the proposal worsens economic uncertainty. A major cause of the financial crisis is that many banks do not know what their assets — and particularly home mortgages — are worth. Valuing homes is simple when prices are stable. An appraiser can look at prices in a neighborhood and plausibly infer that a particular house is worth about as much as similar houses there.

But even experts do not know how to value individual houses when a large number of them are in default, and thus potentially for sale, and cash is tight for prospective buyers. Under the president’s proposal, however, bankruptcy judges who are not experts at valuation would be required to price individual houses. Valuation thus will likely be a shot in the dark, inevitably affected by a judge’s personal sympathies. The arbitrariness of valuing single homes in bankruptcy will further increase the already considerable uncertainty regarding the value of the banks’ “toxic assets.”

This argument is a little more compelling. But I don't see how the end result of a judges' valuation (affixing the mortgage debt at a certain amount) is that much more harmful than the end result of having to foreclose on the home and sell it at a steep loss. If anything, I would think that fixes the value more quickly and with more certainty than waiting for the foreclosure process to produce a buyer who pays far less than the house was worth at the time it was bought. Now of course the buyer of a foreclosed home pays cash right then and there for the home, whereas the debtor in a Chapter 13 has to manage to make it through 3-5 years of scheduled payments to survive bankruptcy (and even then will continue paying on the house for a longer term.) But that's a price I'm willing to have lenders pay to help keep people in their homes.

More on Housing Proposal

Via Matt Yglesias, Andrew Jakabovics and David Abramowitz provide a pretty good explanation of how the proposal offered by the White House will work.

White House Tackles the Burst Housing Bubble

The burst housing bubble, which kicked off the economic crisis we find ourselves in now, is the problem the Obama administration is not attempting to solve with a proposal to help homeowners who are underwater and/or facing foreclosure:

The plan, which is more ambitious than expected, would spend $75 billion to help keep as many as four million families in their homes, and would help as many as five million more refinance their mortgages to take advantage of lower interest rates.

“The plan not only helps responsible homeowners on the verge of defaulting, but prevents neighborhoods and communities from being pulled over the edge too,” the White House said in a fact sheet.

[...]

The plan would seek to entice lenders into lowering rates, and would offer homeowners a chance to shave thousands of dollars off their mortgages. The government would offer homeowners principal reductions of $1,000 a year for five years if they stayed current on their payments, and would give $500 to loan servicers if they modified loans before borrowers fell behind in their payments.

Or, if a lender lowered interest rates so that buyers were spending 38 percent of their monthly income on mortgage payments, the government would provide matching funds to lower that payment to 31 percent of income. The White House said such a reduction could equal $400 in monthly savings on a $220,000 mortgage.

The plan is necessary because, despite the fact that lenders acknowledge the foreclosure crisis and the importance of preventing further foreclosures, they seem incapable of working with homeowners on the scale necessary to even begin to address the problem.

Democrats in Congress are also working on a modification of bankruptcy law that would permit judges to "cram down" home loans in a Ch. 13 proceeding. In a op-ed I encourage you to read, Tom Evslin points out why this is also an important step in efforts to allow people to hang onto their homes (though there are those who have objections to the idea.)

UPDATE: From McClatchy, an article on the carrot (modification) and stick (cram down) approach of the Obama administration.

1 in 10 Homeowners Behind/In Foreclosure

In early October the Wall Street Journal reported that 1 in 6 homeowners are "underwater" on their homes, meaning they owe more debt on their homes than their home is worth. Today the Washington Post reports that a record 1 in 10 Americans are either behind on house payments, or already in foreclosure:

The Mortgage Bankers Association said Friday the percentage of loans at least a month overdue or in foreclosure was up from 9.2 percent in the April-June quarter, and up from 7.3 percent a year earlier.

Distress in the home loan market started about two years ago as increasing numbers of adjustable-rate loans reset to higher interest rates. But the latest wave of delinquencies is coming from the surge in unemployment.

And on that front, more bad news:

With the economy deteriorating rapidly, the nation’s employers shed 533,000 jobs in November, the 11th consecutive monthly decline, the government reported Friday morning, and the unemployment rate rose to 6.7 percent.

The decline, the largest one-month loss since December 1974, was fresh evidence that the economic contraction accelerated in November, promising to make the current recession, already 12 months old, the longest since the Great Depression. The previous record was 16 months, in the severe recessions of the mid-1970s and early 1980s.

The alarming job decline suggests that consumers and businesses have pulled back sharply on spending in response to the worsening credit crisis. That has put pressure on Congress and the White House to come up with a stimulus package that would substitute for the missing private-sector outlays.

Over all, the losses since January now total more than 1.9 million, with most coming in the last three months.

So tighten your belts, buckle your seat-belt, brace for impact...however you want to put it, our economy is in the toilet and it's not likely to get better anytime soon.

Greenspan admits he was wrong

This is old news by now, but in congressional testimony, Greenspan admitted to a "flaw" in his belief in deregulation. Amazing.

Mr. Greenspan conceded: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.”

On a day that brought more bad news about rising home foreclosures and slumping employment, Mr. Greenspan refused to accept blame for the crisis but acknowledged that his belief in deregulation had been shaken.

I'd say that he came pretty late to that realization. I know the average American tends to blithely give credence to American leaders when they talk about the glories of free market capitalism. We've even had most of our Democratic leaders buying into the idea that as little regulation as possible is the most beneficial to the economy. Unfortunately, those few brave voices who said otherwise couldn't convince people of that when everybody was starry-eyed from the apparently booming economy. I say apparently because as you've learned by now, all that growth was based on fake money. I've never believed in the kind of deregulation those free-marketers tout. I mean, even with nothing but the examples of elecricity and tuition deregulation here in Texas, we can see that that kind of deregulation is a disaster. We pay above US average rates for electricity and have suffered from a 53% increase in tuition since deregulation.

Ah, but is there a valid defense in claiming that it was impossible to foresee this economic train wreck coming? Uh, not really. Paul Krugman pretty much got it right on.

Of course, some people still deny that there's a housing bubble. Let me explain how we know that they're wrong.

That column was from August 2005. Of course, there were many who derided him at the time, namely nitwits like those at Powerline.

Well, take whatever lesson you want from this post. Just don't forget next time to listen to people who refuse to admit that the world is approaching perfection and we're about to enter utopia.

Help for Homeowners

The Treasury Department, catching in breadth in the midst of the global economic downturn, is now apparently setting it's sights on a plan to help faltering homeowners directly:

A senior Treasury official says the department intends to get a program to help struggling homeowners revise mortgages up and running soon.

Neel Kashkari, who is heading the government's $700 billion financial rescue effort, told Congress the Treasury is working hard on the plan. It could include setting standards for changing mortgages to make them more affordable and giving loan guarantees to banks that meet them.

Kashkari told a Senate hearing that ''we are passionate about doing everything we can to avoid preventable foreclosures.''

And that's it for details. More to come soon, I'm sure.

Change the Law

At the other end of the global financial crisis are those mortgage backed securities that are tanking, and at the root of that are the homes being foreclosed on. Home equity loans, lax borrowing standards and the bursting of the housing bubble have now left one in six homeowners "under water" on their loans:

The relentless slide in home prices has left nearly one in six U.S. homeowners owing more on a mortgage than the home is worth, raising the possibility of a rise in defaults -- the very misfortune that touched off the credit crisis last year.

The result of homeowners being "under water" is more pressure on an economy that is already in a downturn. No longer having equity in their homes makes people feel less rich and thus less inclined to shop at the mall.

And having more homeowners under water is likely to mean more eventual foreclosures, because it is hard for borrowers in financial trouble to refinance or sell their homes and pay off their mortgage if their debt exceeds the home's value. A foreclosed home, in turn, tends to lower the value of other homes in its neighborhood.

And more foreclosures means more trouble for economy, as faltering banks become the reluctant owners of homes that they can only sell at a loss. Eric Nguyen, a student at Harvard, says in an op-ed in today's NY Times that it's time to reform bankruptcy law to make it easier for homeowners to keep their homes:

While the bankruptcy code Congress amended in 2005 allows a judge to modify mortgage terms for an investment property in order to make the monthly payments affordable, it expressly prohibits modification of terms on a primary residence without the foreclosing bank’s permission. A court can insist that creditors give more time and better terms for people in bankruptcy to pay back loans on cars, boats, rental property and vacation homes — but not on the family home.

For parents with children, of course, there is little relief in keeping the car but losing the home. Data that I have analyzed from Harvard’s 2001 Consumer Bankruptcy Project, a survey of 1,250 people who had recently filed for bankruptcy, indicate that a key reason families with children file is to keep from losing their houses. Having young children nearly doubles the likelihood that the average family in bankruptcy will continue making mortgage payments — to keep the children in the same school and stay in the same neighborhood.

Bankruptcy laws should be flexible enough to allow some parents who will regain their financial footing to continue to make house payments, while denying the same relief to financially irresponsible investors. In addition to helping families, this would help reduce the depressing effect of foreclosures on house prices. And it would cost the taxpayer nothing.

As Nguyen points out, Congress passed on a change in the bailout plan that would permit judges to modify the terms of mortgages that would allow those in bankruptcy to make more modest payments but keep their homes. They may presently feel like they have bigger fish to fry, but no rescue of Wall Street and the global financial system should take place without changes to bankruptcy that benefit the average homeowner as well. Not only is it the right thing to do, it's good for our economy as well.

Economy still tightening

You feeling the squeeze yet? If you are, you're not alone. Millions of Americans are right there with you. Starry-eyed predictions that the mortgage crisis would quickly pass and America would be in good shape by the end of the year (last year) have proven to be ridiculously false. Not only that, the housing market is still falling further:

A widely watched housing index released Tuesday showed home prices dropping by the sharpest rate ever in the second quarter.

The Standard & Poor's/Case-Shiller U.S. National Home Price Index tumbled a record 15.4 percent during the quarter from the same period a year ago.

The monthly indices also clocked in record declines. The 20-city index fell by 15.9 percent in June compared with a year ago, the largest drop since its inception in 2000. The 10-city index plunged 17 percent, its biggest decline in its 21-year history.

No city in the Case-Shiller 20-city index saw year-over-year price gains in June, the third straight month that's happened.

And don't let anybody tell you it's bottomed out yet. It hasn't. It may be that it's slowing down, but it's still got further to go. It's a hard, hard hit for people who bought homes thinking they were rock-solid investments and a source of income, only to be rudely awakened when the American economy could no longer stand the strain of all that debt. And the news is not going to get better for a while. From Business Week Online:

Still, the loudest complaints on Main Street relate to rising commodity costs and inflation, especially expensive fuel and food. Gasoline prices have become a key issue in the Presidential campaign. U.S. consumers are spending less as retailers and restaurants struggle.

So have inflation worries finally replaced credit conditions atop the list of investors' biggest concerns? Is the credit crunch finally waning? Not a chance.

An August survey of economists conducted by the National Association for Business Economics did show an uptick in worries about energy prices and inflation, to 16% and 15%, respectively. However, 46% of economists said the credit crunch and the state of the financial system was their top worry.

Here's the thing: there is not going to be a point at which the housing market has bottomed out and the only direction is up. The problem is that utterly, fundamentally, the money has disappeared. Or rather, I should say, the illusion of money has disappeared. There was no real equity in those houses to begin with. Well, there was, but the banks told people that it's not actually just more debt. The illusion of money disappeared, but the debt didn't. When a new administration comes into office (because the current one obviously has no qualms with corporate misbehavior) it's almost certain that credit and lending regulations will be tightened with the probability of more legislation being passed. The circumstances that allowed this crash to occur are not likely to be present again for a long, long time. There have been other recessions, but despite the rhetoric issuing from this administration, this one is bad. We haven't seen the worst, and we have no way of knowing when we'll recover. The problem is really that the US's sources of income are pretty narrow. We make a lot of money off services. We no longer manufacture and export like we did, which is what helped us recover from the Great Depression and brought us our enormous post WWII prosperity.

Here's a fact: the economy will be given negative stimulus from the housing sector until housing demand is growing and high again. Here's another fact: according to the studies I've read and quoted in one of my other posts, If they quit building homes today, there would be enough of a surplus to last for two years or so (and longer if demand slows down even further). But it's a self-reinforcing cycle: the harder it is to get credit for a home, the fewer homes are sold. The fewer homes that are sold, the more the housing sector detracts from the market. This can last quite a while until other segments of the economy begin to make up for it and pump enough cash in to cause growth. If that occurs. I mean, it's not a given we'll recover. Cambodia was rich too, a long time ago.

Using that example, it may be that the death knell of the credit driven society is sounding. We may never borrow our way to prosperity again. The best time to make a commitment will be at our lowest point. That way the fewest people will be hurt. If this change does occur, we will be living in a vastly different society from the one our parents did. Of course, until consumer good prices come in line with consumer earnings, we may see sales of our luxury toys (like big screen lcd tvs) falling off sharply to reach the point where people actually have to save up money in advance to buy them. Wouldn't it be amazing? Inconvenient as hell, yes, but much more resistant to the kinds of slowdown we're seeing now. Our society may become merely as rich as the aggregate real wealth of it's people, not the aggregate amount of debt we can get into. Strange, I know. We'll see.

How banks convinced people to go broke

I posted recently on the opacity of credit score calculation, and Xanthippas linked to an article refuting the idea that people are mainly to blame for what happened to them as a result of signing up for sub-prime mortgages. None of this is to say that people are not responsible for making their own decisions, but rather that as things currently stand, people do not have the means or information to make truly good decisions. Not only that, but according to this article from the NY Times, the banks deliberately tried to convince people that borrowing on the equity in their homes was a good idea.

“Live Richly.”

That catchy slogan, dreamed up by the Fallon Worldwide advertising agency, was pitched in 1999 to executives at Citicorp who were looking for a way to lure Americans to financial products like home equity loans. But some in the room did not like it. They worried the phrase would encourage people to live exorbitantly, says Stephen A. Cone, a top Citi marketer at the time.

Still, “Live Richly” won out. The advertising campaign, which cost some $1 billion from 2001 to 2006, urged people to lighten up about money and helped persuade hundreds of thousands of Citi customers to take out home equity loans — that is, to borrow against their homes. As one of the ads proclaimed: “There’s got to be at least $25,000 hidden in your house. We can help you find it.”

Not long ago, such loans, which used to be known as second mortgages, were considered the borrowing of last resort, to be avoided by all but people in dire financial straits. Today, these loans have become universally accepted, their image transformed by ubiquitous ad campaigns from banks.

Since the early 1980s, the value of home equity loans outstanding has ballooned to more than $1 trillion from $1 billion, and nearly a quarter of Americans with first mortgages have them. That explosive growth has been a boon for banks. Banks’ returns on fixed-rate home equity loans and lines of credit, which are the most popular, are 25 percent to 50 percent higher than returns on consumer loans over all, with much of that premium coming from relatively high fees.

However, what has been a highly lucrative business for banks has become a disaster for many borrowers, who are falling behind on their payments at near record levels and could lose their homes.

The portion of people who have home equity lines more than 30 days past due stands 55 percent above its average since the American Bankers Association began tracking it around 1990; delinquencies on home equity loans are 45 percent higher. Hundreds of thousands are delinquent, owing banks more than $10 billion on these loans, often on top of their first mortgages.

None of this would have been possible without a conscious effort by lenders, who have spent billions of dollars in advertising to change the language of home loans and with it Americans’ attitudes toward debt.

Please read the rest of the article. This is the kind of thing that should have been known before people went out and bankrupted themselves. You can still, of course, blame people for having been convinced by these articles, but if you do that, blame yourself for being fooled by magic tricks. It's the same thing; convincing people to see what you want them to instead of what really is. It's hard not to be fooled by sophisticated marketing backed by billions of dollars. I try to be as skeptical as I can be, but no matter what we end up having to believe somebody at some point. Therefore it's not too hard to see how millions of people were taken in by the idea that they needed to borrow against the value of their home, especially given that most of these people were already feeling some economic stress in the economy we've continually been told is better than it is.

You can blame the people who were taken in by the scam, but at least realize that it was a scam and the people taken in were victims, not knowing participants. For some reason, there are still people who refuse to believe that these big "respectable" banks would deliberately rip people off. The truth is that they're trying to do it all the time. And we're all so busy working, going to school, and/or raising families we don't have the time to fact-check everything they say. That's why we rely on the government to do it. Governmental oversight is key to keeping things fair for us, which libertarians and other conservatives can't seem to grasp. The government should have been there to shut down this lending before it happened. And since they let it happen, instead of talking about bailouts for lenders, we should be hearing about bailouts for borrowers. Loan forgiveness, or allowing us to "restructure" our debts as would a business, or enforcing lower interest rates on debts, protecting us from exorbitant late fees or overage charges, etc, etc. It should be done. The American people are who this government serves, not big business. Not even billion-dollar banks.

The shrinking suburbs

I was reading this article on CBSNews.com which is about the "decline of suburbia".

Sixty years ago, cheap gas and new highways helped fuel suburbia's rapid rise, creating a new American utopia. But as CBS News correspondent Ben Tracy reports, the triple threat of falling home values, empty nesters returning to the city and sky-high gas prices is driving suburbia to the brink.

Some developments are left half built while other homes look abandoned. Demand for suburban housing is dropping so fast that a recent study predicts that by 2025 there will be a surplus of 22 million large-lot homes in suburban areas.

Of course people are not going to want to believe that the dream of suburbia is over. One argument is that it's not primarily gas prices forcing people to abandon their houses at the moment, it's the credit collapse. People who can't get home loans don't need much credit to get into apartments, and there are plenty of apartments in closer-in suburbs and the city itself. And of course it's not really accurate to make predictions while artificially extending present economic conditions into the indefinite future. We have to assume that the market will bottom out and begin to recover at some point. The question then is if it will ever recover to its highest point.

But does this mean that the decline of the suburbs will stop, or reverse? Certainly not. The decline of the suburban model of living did not begin with the subprime crisis. An article that gives us a much better look at what's going on is this from The Atlantic.

Demographic changes in the United States also are working against conventional suburban growth, and are likely to further weaken preferences for car-based suburban living. When the Baby Boomers were young, families with children made up more than half of all households; by 2000, they were only a third of households; and by 2025, they will be closer to a quarter. Young people are starting families later than earlier generations did, and having fewer children. The Boomers themselves are becoming empty-nesters, and many have voiced a preference for urban living. By 2025, the U.S. will contain about as many single-person households as families with children.

And the author predicts a grim future for much of suburbia:

The experience of cities during the 1950s through the ’80s suggests that the fate of many single-family homes on the metropolitan fringes will be resale, at rock-bottom prices, to lower-income families—and in all likelihood, eventual conversion to apartments.

In other words, the suburbs become slums. But I can see we're still asking why. Why is this happening? I'm not sure there's any one reason that explains it. Here's a column basically arguing that re-urbanization is all about making better use of time and space (not in a Star Trek way!), which is a decent enough argument. We don't want to spend two hours a day in traffic anymore. That's a good enough reason for me, and that's why I live 15 minutes from work. And of course, we all get tired of having to drive to wherever the entertainment is. I live close to work but there's nowhere to go after 9 o'clock in this city except for the Wal-Marts and a couple of restaurants.

Of course this trend is being accelerated right now by three factors: the sub-prime mortgage crisis, oil prices, and the long-term decline of the middle-class. The mortgage situation is just one small part of the overall credit crisis, which has been building for a couple of decades now. Even if things get turned around fairly soon, we're not going to see a return to the easy credit of the past decade, which means home buying is going to be permanently stunted as long as middle-class wages don't grow by leaps and bounds in the coming years, which, much as we'd like to see that, won't happen. Oil prices are simply one part of rising energy costs and despite assurances to the contrary from people who don't believe in peak oil, they're not going to go down. We've seen oil prices fall for three weeks now and prices are still higher than we would have ever believed pre-Katrina. High gas prices discourage people from living an hour and a half from work. Higher credit requirements mean they can't get the huge houses developers can build an hour and a half from the city, and they don't get paid enough anymore to pay in cash. The circle is closed.

Does this mean that in the next 25 years we're going to see a complete reversion to urban living? Naw, probably not. For one thing, nobody is going to move into cities if the cities are like they used to be before suburban living: crowded, dirty, and poor. People want urban living that is spacious and suburbanites moving in aren't going to be as tolerant of the homeless wandering around, or of overly crowded, dirty streets. New urban centers aren't likely to be copies of old ones. If the future development of such areas can be extrapolated from current developments in places like Dallas, it'll be an urban area made to appeal to suburbanites.

On the other hand, you're always going to have the suburbs. The wealthy have, of course, the wherewithal to choose to live in far flung colonies without having to worry about things like the price of gas or cost of road construction. And they can live in the really snazzy urban areas if they want. While new urbanism is driven by those with money, suburbanism will never die as long as there are folks with money who want to live far, far away from the city. And there pretty much always will be those. And of course we're not talking about the decline of all suburbs. Lots of cities have substantial single-family residential housing within a reasonable distance of the urban center. Irving is one example, but most of the cities immediately surrounding Dallas provide similar circumstances. Of course these days that's almost as urban as living in Dallas itself. But of course, the notable difference between those and the exurbs the articles talk about is distance.

The age of the "American Dream" of having a house, two cars, two kids, and a lawn to call your own may be coming to a close. That doesn't mean we won't still live nicely, just that we won't all live like the incredibly wealthy we love to emulate. Some day we'll all be used to it and people will look back and think how incredibly wasteful and foolish we used to be to base our entire lifestyle on everybody having a car.

"Intellectual Usury"

David Brooks, roasted (and not in the funny way.)

Capitol Hill Update

The House of Representatives passed the global AIDS bill, 308-116, which authorized $5o billion in spending over the next five years. While more than the White House requested, there is no veto threat, and the bill moves to the Senate. Also, the House Commerce Committee overwhelmingly approved a bill to allow the FDA to regulate tobacco.

Senate Majority Leader Reid and Minority Leader McConnell announced a bi-partisan effort to tackle the housing crises, but Dem-backed provision that would allow bankruptcy judges to restructure mortgages was killed by a 58-36 vote. But in good news, HUD Secretary Alphonso Jackson announced his resignation Monday amid the wreckage of the subprime mortage controversy. He is accused of tilting the Department of Housing and Urban Development toward Republican contractors and cronies.

The aftermath of the holiday spending season

Last month I wrote about expectations for holiday sales among US retailers and how this reflects general economic conditions. Well, preliminary results are in.

Spending from Thanksgiving to Christmas rose just 3.6 percent over last year, the weakest performance in at least four years, according to MasterCard Advisors, a division of the credit card company. By comparison, sales grew 6.6 percent in 2006 and 8.7 percent in 2005.

[...]Excluding gas purchases, overall holiday sales rose a lackluster 2.4 percent, the credit card company said.

Well, in the comments of my last post on the subject, we discussed how results for Black Friday were actually positive. I made some predictions and considered some possibilities:

Well, there's a few possibilities for this apparent good news. First, let me say that given the credit crunch and higher cost of living expenses than last year plus the fact that real wages still have not grown for the average American, I do not believe that the answer is simply that Americans have more money. But that's my opinion and I haven't seen any numbers that show how much free spending cash the average American has. It is, although unlikely in my mind, possible that over this year Americans have been saving more money than they have in previous years.

If this does not reflect more buying on credit, it's possible that some of these purchases come from money that was not spent earlier this year, and if you read in my post retail sales were down across the board for several months preceding November. Another likely factor is that since people have less money to spend, more people made a point of Black Friday sales than had in the past because they are maximizing what little money they have.

And what does the article say?

Eboni Jones, 32, of Windsor, Conn., epitomized the problem for stores.

A phone company manager, she waited until Christmas Eve to make a single purchase at a major chain store this season, favoring Web retailers and designer outlet stores offering deep bargains.

Shortly after my Black Friday post, I wrote about the coming credit crunch. Well, it looks like all that credit is finally catching up with the US consumer. Look at this:

Americans are falling behind on their credit card payments at an alarming rate, sending delinquencies and defaults surging by double-digit percentages in the last year and prompting warnings of worse to come.

[...]Experts say these signs of the deterioration of finances of many households are partly a byproduct of the subprime mortgage crisis and could spell more trouble ahead for an already sputtering economy.

[...]But what is coming into sharper focus from the detailed monthly SEC filings from the trusts is a snapshot of the worrisome state of Americans' ability to juggle growing and expensive credit card debt.

The trend carried into November. As of Friday, all of the trusts that filed reports for the month show increases in both delinquencies and defaults over November 2006, and many show sequential increases from October.

Basically we've got a complete picture here. Sales are not going to pick up in the early part of next year. While solutions are being offered to the subprime mortgage crisis, they're not comprehensive and will not serve to keep most people out of bankruptcy and all that goes with it. The credit crunch was coming anyway, but before the supbrime mortgage exploded into a national economic issue, we were still talking about what effect it might have. Now we know. Economists have been fearful for years that at some point Americans' debt would exceed their ability to service it. We have reached that point. The subprime crisis did not create this situation, but did help speed it along.

In March, when the subprime mortgage situation wasn't yet a crisis, I was writing about how Bernanke was giving an optimistic assessment of the economy. Looks like he was totally wrong.

More illegals leaving voluntarily

Or as this story puts it, "self deport".

The couple are among a growing number of illegal immigrants across the United States who are starting to pack their bags and move on as a crackdown on undocumented immigrants widens and the U.S. economy slows, turning a traditional Christmas trek home into a one-way trip.

The article at first implies that one, a majority of illegals who are moving are going back to Mexico, and two, the reason is because of immigration crackdowns in many states. I have no doubt that these two things are connected, but I find it implausible that is the primary reason. The article itself later goes on to give contradictory evidence:

While some illegal immigrants are simply self deporting, others are moving within the United States to avoid federal immigration raids and pro-enforcement measures passed by a patchwork of state and local authorities.

I'm inclined to believe that more people would do that than simply leave. At a certain point, of course, the other, safer, states would simply run out of capacity to absorb them. However, we haven't seen that in any state in the US, ever, so it's not likely that would deter anyone from moving to say, Vermont or New Hampshire.

But although it would be hard to prove one way or another, I'd wager money that the more important reason is the economic downturn the US is suffering, especially in the housing sector. We've blogged about that before in a variety of posts you can see by clicking this link. New data (from Business Week Online) says:

U.S. home prices fell in October for the 10th consecutive month, posting their largest monthly drop since 1991, a widely watched index showed on Dec. 26. The record 6.7% drop in the Standard & Poor's/Case-Shiller home price index also marked the 23rd consecutive month prices either grew more slowly or declined.

And from NPR:

Not too long ago, foreclosures were considered a rare, unhappy event. Now entire cities are plagued by foreclosures — which are at their highest level since the Great Depression. At the same time, new home construction has fallen to the level it was at in 1991

Now couple that with this statistic (from the San Francisco Chronicle):

The National Association of Home Builders estimates that 20 percent of the construction workforce -- about 2.4 million people -- is foreign-born. While it's impossible to know how many are undocumented, some estimates put the number at 50 percent or more.

(It's a year old, but there's no reason to think it would have changed in that year). It's easy to see that there's going to be a strong connection between home construction and immigration. I'm not saying the crackdowns have nothing to do with it, but as with crackdowns on illegal drugs, they weren't showing a lot of success before. There's no reason to think that simply because enforcement got stronger there wasn't enough economic incentive for illegals to stay. After all, they've been being deported and sneaking back for decades already. Nothing much we do is likely to change that.

The point I'm trying to make is that people shouldn't be out there cheering in the streets because some illegals are finally going back home. The problem is not solved at all, and tougher laws and more stringent enforcement aren't the most effective answer. As you can see, it's all about jobs. One final point (from the AP article):

Other returning immigrants cite a slowdown in the U.S. economy as a factor, and the falling value of the U.S. dollar against other currencies, which has eaten into the value of remittances sent to support families at home.

Yeah, it's all about the money. If it's not worth it to work here, they won't. But watch, when in five years, or two or ten, whenever it happens, the US economy turns around and gets supercharged again, if we haven't solved the problem in the meanwhile they'll come back. They'll just come back to make money like they did before. That's an official TWM prediction and warning to lawmakers: do something about immigration before it happens!

Immigrant Homeowners

Via Oliver Willis, a solution for the burst housing bubble presents itself. Or I should say, the solution is already here.