The Housing Bubble Was No Mystery

I've not posted about the economic crash recently, although I've made references to it in other posts along the way.  Today I read a short comment on from Dean Baker at the Center for Economic and Policy Research.  He was responding to the announcement from Federal Reserve Chair Janet Yellen that there will be a new committee in the FED to study and seek to avoid another destabilizing economic crisis like the recent ones, including the Great Recession. 

Reporting on this announcement, the New York Times continues to imply the oft-reported impression that the coming of that crisis was a mystery that no one could see.  Baker's contention is that many people did see it coming, including seeing all the obvious signs of the housing bubble.  Rather than not seeing these foreboding signs, what accounts for the FED's unreadiness and lack of preventive intervention was "an extraordinary level of incompetence."  Former FED Chair Alan Greenspan himself admitted to responding wrongly to danger signs, having been blinded by a false ideology of market economic systems.

Here are Baker's remarks.

September 13, 2014
It Really Wasn't Hard to See the Dangers Posed by the Housing Bubble 

At its peak in 2006, the housing bubble had caused nationwide house prices to rise more than 70 percent above their trend level. This run-up occurred in spite of the fact that rents had not outpaced inflation and there was a record nationwide vacancy rate.

The dangers of the bubble also should have been clear. Residential construction peaked at almost 6.5 percent of GDP compared to long period average of close to 4.0 percent. The housing wealth effect had led to a consumption boom that pushed the saving rate to near zero.

Also, the flood of dubious loans was hardly a secret. The National Association of Realtors reported that nearly half of first-time homebuyers had put down zero or less on their homes in 2005. The spread of NINJA (no income, no job, and no assets) loans was a common joke in the industry.

These points are worth noting in reference to an article discussing the Fed's efforts to increase its ability to detect dangerous asset bubbles. An asset that actually poses a major threat to the economy is not hard to find. It kind of stands out, sort of like an invasion by a foreign army. The failure of the Fed to recognize the housing bubble and the dangers it posed was due to an extraordinary level of incompetence, not the inherent difficulty of the mission.

Reviewing the Foreclosure Fraud Settlement

When the news broke about the settlement with the large mortgage servicing banks, led by the National Association of Attorneys General in cooperation with about a dozen federal agencies, I was happy and hopeful that the long months of work to get this done had come to a fruition about which I could be proud.  I knew it was possible, however, that the banks, partly through dragging their feet and partly through lobbying efforts, had gotten their way and avoided penalties for their despicable role in creating the housing bubble and unconscionably pushing foreclosures through without documentation or serious efforts to modify mortgages.

Probably both situations are partly true.  The reviews of the settlement by colleagues I have worked with in this effort have not been very favorable.  Today I will look at the criticisms from Dean Baker of the Center for Economic and Policy Research in light of the goals I previously highlighted in a July 2011 posting.  There I wrote the following.

Among the key items of our agenda are:

• broad availability of principal reductions to reset the housing market and remove the risk of more foreclosures;
• remedies for all who have been harmed by fraud or other criminal acts, whether they have already suffered foreclosure, are in process, or are facing impending foreclosure;
• the end of dual tracking, with simultaneous loan modification discussions and foreclosure procedures;
• all possible efforts for loan modifications and other non-foreclosure procedures should precede the initiation of foreclosure procedures;
• criminal prosecutions for criminal acts; and
• regulatory regimes to keep this kind of mortgage fraud from being repeated.

Baker's criticisms, which he calls the "big three" among many others that can be made, address a number of the points above.

He says first that it is not clear which loan modifications, principal reductions, and short sales will count toward the $17 billion amount the banks agreed to.  Will cases already completed or in progress count?  If so, then what does the dollar number mean about what banks will be expected to do now that the settlement has been agreed.  This raises the question whether there is "broad availability" of solutions, especially principal reductions, for homeowners.  If they can count what they have already done, and this pitifully small number has been set aside for the banks' total requirement, then most families facing foreclosure will not find any help in this settlement.

Second, Baker says, the banks may count loans they "service," not only loans they own.  So any principal write-downs or short sales in cases of serviced mortgages will not come out of the banks' own money.  They will be taking the money from owners of mortgage-backed securities or other purchasers of mortgages.  Obviously, it will be in their interest to use this legal caveat to avoid charging themselves any financial cost for their role in this crisis affecting so many homeowners.  In that sense, the agreement does not penalize the banks.  It allows them to use court authority to penalize investors.

Baker's third criticism addresses the last four of my points in the list above.  He says that thus far there is little evidence that the abuses that have led to and perpetuated this crisis have stopped.  He cites a case in San Francisco County, CA, in which an audit in the past month revealed a steady pattern of continued incomplete, falsified, and otherwise illegal documentation in foreclosure filings.  Fully 84% of the hundreds of filings had at least one violation of the law.  This matter of changing the way things are done is why North Carolina United Power continues its organizing strategy to audit county records to look for cases of foreclosure fraud.  Citizens, and public officials who will rise to their calling as public servants, must continue to gather data and press the case for changing the way of doing business when it comes to banking, mortgage, and foreclosure.

Defending Our Homes and Communities from NC UnitedPower on Vimeo.

Attacking Health Care, Medicare, Social Security: Class Warfare Waged by the Wealthy

Dean Baker reiterates two of his key ideas in this critique of a recent article full of poor analysis of the economy, published in a major newspaper.  First, the high cost of health care is the major cause of the deficit and a major contributor to economic problems for most Americans.  Second, the political struggle over who gets the most financial benefits from government economic policies is not a philosophical debate--it is a political war waged by lobbyists trying to allow a very small group of citizens to keep more of their wealth at the cost of the rest of us.  It is not philosophical.  It is class warfare waged by the wealthy.

It is also worth noting that, at least in the U.S. case, the projected long-term budget problem is due to our broken health care system. If our per person health care costs were comparable to those in any other country then we would be looking at long-term budget surpluses, not deficits.

While the health care industry is incredibly powerful in the United States, making cost reductions difficult, it is in principle possible to open the sector to trade, which would allow people in the United States to take advantage of the more efficient health care systems in other countries. Unfortunately the NYT and most other major media are such hardcore protectionists when it comes to the health care industry, they do not allow the topic of freer trade in health care to even be discussed.

Finally, this piece tell us that at its core this debate is about philosophy:

“Everywhere, though, the debate is about much more than just partisan advantage or the next election. It is a philosophical debate.”

The only evidence for this assertion is a quote from Republican Senate leader Mitch McConnell. There is nothing obvious philosophical about this debate. The issue is whether we are going to cut benefits like Social Security and Medicare that the overwhelming majority of the working population depends upon now or expects to in the future. The protection of these programs is supported by large majorities of every demographic and ideological group. Even large majorities of self-identified conservatives and Tea Party supporters are opposed to cuts in these programs in poll after poll.

Of course paying for the programs will require some amount of additional tax revenue (presumably mostly from upper income taxpayers) and also restructuring of the health care system in ways that will hurt the incomes of insurers, drug companies, medical instrument manufacturers, and doctors. These powerful interest groups will fight the effort to reduce their incomes in any way they can.

Since they are a small minority of the population it is understandable that they would want to confuse matters by turning this into a debate over philosophy. However there is nothing obviously philosophical about whether we should pay more than necessary for prescription drugs and medical equipment so that some people can get very rich.

Deficits and Politics

For those of you who are as irritated as I am by the smoke screens about deficits that are used to hinder economic reforms, Dean Baker named the problem again this week. Are "tax and spend" liberals in Congress causing deficits? Of course, Congress is causing deficits, but not in the ways that their critics claim.

Take the wars in Afghanistan and Iraq. The completely unnecessary war in Iraq has helped to build a trillion dollars into the deficit. Congress gave in and colluded with the Bush administration and the Project for the New American Century agenda to waste this money in the name of empire.

How about the housing bubble? Laissez-faire economic philosophies said that the banks, the mortgage industry, the credit default swap system, and all the "new economy" would be self-correcting and self-policing, leading to continued prosperity. I guess maybe they were deluded by their own self-serving greed. There goes another trillion dollars to the deficit thanks to the "talent" running the finance industry.

Baker gets it right, but thanks to bad reporting most people can only see the smoke screen.

Trade and Health Care Costs

I am not what you might call a "free trader," because what usually goes under the name of free trade is really a way of giving advantages to the parties (whether corporations, oligarchies, nations, or private businesses) who already have the greatest financial power. Breaking down "all" trade barriers gives the wealthy an open door to expand their economic power. Theoretically, it opens doors to small businesses, weaker economies, and entrepreneurs to gain access to larger markets, too, but that remains mostly in the realm of possibility when the big players are capable of exploiting the opportunities with greater speed and organizational prowess.

I put "all" in scare quotes above because so-called free trade and so-called free markets are never really free. Deregulation opens up paths of freedom for capital, that is for the financially powerful, but it often keeps up the barriers that would benefit common people. The unseen hand of Adam Smith's market is not strictly pursuing the common good. It is often the unseen hand that writes the fine print in legal documents, adds unrelated earmarks to legislation which benefit a few, holds the cigar and cocktail in the backroom where portentious decisions get made without considering the good of the average person.

Dean Baker calls the bluff of the "free traders" by bringing up health care. He proposes,

Suppose that people in the United States paid twice as much for our cars as people in Canada, Germany, and every other wealthy country. Economists would no doubt be pointing out the enormous amount of waste in the US auto industry. They would insist that we both take advantage of the lower cost cars available elsewhere and take steps to make our own industry more efficient.

For some reason, economists do not have the same attitude towards health care.

He goes on to discuss how the economics of health care is working against the U.S. Too many people in the U.S. operate under the misconception that "America has the best health care system in the world." Obviously the residents of the US have better health care than many places in the world, but the World Health Organization's most recent rankings of the health care systems of the nations of the world places the US at 37th out of 190, barely in the top 20 %. The right-wing free market advocates will pick at the WHO ranking system, pointing out potential problems with the statistics they consider, but taking pot shots does not make the glaring problems go away, especially the growing problems of lack of access.

So paying twice as much for less is not a good deal. If you want to read the rest of Baker's article, you can find it here.

Bailout 15: The Myth of the American Free Market

Dean Baker hit a homerun today when commenting on the constant claims that the U. S. free market is endangered by government intervention. He points out that the market is not free. It is structured in a way that money is transferred regularly from some to others.

American Style Capitalism: Tax Joe the Plumber to Give Handouts to Robert Rubin

The media are busy perpetuating a myth that the United States has been a beacon of "free market" capitalism. This is a lie. The United States never had free market capitalism and certainly the system in place over the last three decades hardly qualifies.

The U.S. put in place policies designed to transfer income from the poor and middle class to the wealthy. This is most evident now with the hundreds of billions of dollars being spent bailing out the banks. For the last three decades, the banks and their top executives, made vast fortunes using a free government insurance policy called "too big to fail," under which bond holders and other creditors could lend money to the banks knowing that the government would honor their debts if they ever got into trouble.

It is an outright lie to call this a "free market." This is a huge government handout. This insurance policy is enormously valuable and the banks did not have to pay a penny for it. The banks are ardent opponents of free market capitalism. None of them have advocated that they be allowed to collapse.

So, the issue over different types of capitalism that is coming up at the G-20 summit is whether the government exists primarily to redistribute money to the wealthy or to serve some other social end.

Bailout 9: Will Obama's Advisers Learn from Their Own Mistakes?

The New York Times printed a good editorial expressing the reservations I share with many people about the President-Elect's chosen economic advisers. Larry Summers helped to craft the deregulation of derivatives. Timothy Geithner played a role in scheming the strange and problematic bailouts of financial institutions in the past couple of months. Neither one of them gave early warning of the housing bubble that has caused our current crisis. Will they do better next time? We must make sure our representatives know we are concerned, and let Mr. Obama know that he needs to be listening to more than the same people who were architects of a building in ruins.

Obama's critics jumped all over a phrase he used in a conversation with a plumber's assistant in Ohio. He remarked that everyone in financial difficulty, from top to bottom, would benefit together if we "spread the wealth around." Dean Baker points out that Secretary Paulson, Chairman Bernanke, and the Bailout planners are busy with their own plans to "spread the wealth around." Who is using government to transfer wealth from some citizens to others? Wells Fargo, a beneficiary of the bailout (announced that ten top executives of Wachovia) the bank they were able to buy because of the bailout, would be eligible to receive an average of $10 million each for severance. That money is coming from somewhere. I thought the banks were out of funds. Oh, yeah--taxpayers have to pay it. Talk to your representatives.

Bailout 8: Who Needs a Pay Cut?

In discussions of General Motors, Ford, and Chrysler during recent days, many people have sought to name the problem that has brought these automakers into such serious difficulties. Of course, the precipitating events have to do with the decline of wealth among U. S. car buyers because of the drop in home values after the housing bubble deflated. The general economic crisis that includes layoffs and fear of layoffs also led to an unprecedented drop in auto sales.

These immediate and serious causes are part of the picture, but there are other reasons. Many people believe that the next credit crisis will come in consumer debt. People have been living as if they can buy more and more things they can't afford, and lending institutions have allowed it. This is again related to the housing price bubble. If consumer debt got too large, the paper wealth of the ever increasing real estate market was the counterbalance. People could refinance consumer debt with home equity loans. So as credit card debt gets tight, people can't or won't buy a car.

Other people address the environmental and energy-efficiency issues in relation to the Big Three automakers. These companies resisted alternative energy sources, even killing previous progress on electric vehicles. They resisted fuel efficiency standards and majored on building larger gas-guzzler vehicles. Unlike some other automakers, they did not keep up the pace of developing new and better technology for automobiles. They failed to adopt a business model by which they could make strong profits from selling smaller, more efficient cars. When the volatility of gasoline prices struck, driving transportation costs higher and higher, they found themselves stuck with large numbers of vehicles that people were less and less interested in owning.

Among many other reasons given, some people have blamed the automakers' problems on unionized workers. Certainly the benefit plans and retirement plans for these workers are expensive. But most of the attacks on the union workers' wages hid or ignored important facts.

For instance, the highest paid auto workers in the U. S. last year worked for Toyota building Camrys, not for GM. The worker pay differential between companies selling cars in the U. S. is changing. That does not, however, mean that all non-union auto factories in the U. S. are paying comparable wages. It does mean that it is possible to pay high wages, comparable to or greater than the union wages paid to GM workers, and make great profits.

Second, it targets union workers and not other potential candidates for pay cuts in the industry. Who else is getting good pay in the auto industry? Why not cut their pay? As Congressional questioners wondered, why not cut corporate jets for the executives?

Dean Baker makes this point well when he addresses the case of Robert Rubin, an economist who is having a great deal of opportunity to speak about how to solve the current economic crisis. Rubin worked in the Clinton administration, and his allies are being named as Obama advisers. But in January of this year, he said that the economy's struggles would not lead to any serious problems, and certainly no economic meltdown.

Baker points out that Rubin was interim CEO of Citigroup, and that he remains an executive and a director of the corporation that the government bailed out again over the weekend. He was part of the leadership who oversaw the bad loans and the risks of an inflated housing market. Even farther back, he was a central figure in U. S. economic institutions during the dot.com bubble that led to the last recession. Baker asks why with all the hoopla about GM autoworker wages, no one is asking whether Robert Rubin will be taking a pay cut. Who needs a pay cut when corporations are struggling? Why not the executives who helped lead the corporation into their crises?

Bailout 6: Don't Stop Paying Attention

In the past week, a couple of reminders have come around that caught my attention. We have to recall that the deep causes of this financial downturn lie in unregulated and deregulated management of capital and in the "bubbles" created by wishful thinking about dot-com businesses and inflated housing prices. Risk trading, debt swapping, and all that mess played with other people's money, and the banks and large money companies thought they could keep bleeding the low- and middle-income people for greater and greater profits. One of the better places to read and hear about the economy is a blog called Planet Money. I also get plenty of good insight from Truthout, as the comments below will illustrate.

The first reminder came from Dean Baker, and I heard it elsewhere, asking whether any executives have had their pay cut. Are CEOs and executives whose companies have been bailed out by our taxes had to feel any of the pain? We are not getting any such reports.

Second came the reminder in an article posted on Truthout that banks getting an influx of taxpayer money seem to be planning to keep on paying out dividends as if nothing has happened. Dividends come from profits, and profits come from a good economy. If the dividends come from taxpayer bailouts, then what's up with that? I don't pay taxes so stockholders can make dividend income. If I have to pay to keep banks from failing, that is one thing. But dividend income is another.

Is the Treasury Department looking out for the public interest here? We have to keep watching and calling for accountability.

Bailout 3: The Cranky Economist Speaks

Another comment on the "bailout" from cranky economist Dean Baker:

Congressional support for the bailout was a big victory for those who want to redistribute income upward. The bailout is about taking money from the schoolteachers and cab drivers and giving it to incredibly rich Wall Street bankers, who are so incompetent that they drove their banks into the ground.

This upward redistribution was done under the cover of crisis, just like the war in Iraq. But there is no serious crisis story. Yes, the economy is in a recession that is getting worse, but the bailout will not get us out of the recession, or even be much help in alleviating it.

Baker goes on to make a case that the reason for the bailout is a false claim of imminent freezing of the financial system. Instead, it is an empty threat by the banks to avoid being taken over by the Federal Reserve. Baker says the Federal Reserve would not allow the financial system to freeze, but would keep it going by seizing control of the banking system. Wall Street hates that idea. But you and I would still have access to ATMs, and small businesses would still have access to loans to keep themselves liquid. The ones to lose would be the executives and large financial stakeholders.

We're being scammed again by mythical weapons of mass destruction.