McCainonomics: Red faces, voters who Whine, and Blue homeowners
Posted: July 11, 2008 Filed under: U.S. Economy | Tags: Economic policy, energy policy, global economics, Gramm, mccain, whining US Voters 9 CommentsWhile John McCain is calling the U.S. economy a shambles, Economic Adviser Phil Gram says buck up 
America and quit whining. He says it’s ALL in our head.
So which of these guys has the correct answer? Well, on the one hand there’s this guy trying to get elected president, so what else is he going to say? Then on the other hand, we’re really not technically in a recession yet so Phil has a point. They are both right and they are both wrong which is something only an economist could say and I couldn’t resist living up to the old joke. Okay, I’ll break it down into a few more stylized facts.
Our growth rates is somewhere between 0 and 1, our unemployment rate is pretty much where it should be, and most of the economic indicators are mixed, at best. We’re in a very slugglish growth period, but there still some major economic indicators that are showing neutral or positive. That doesn’t mean that all of us are living the same reality, however. The real answer to the question depends on WHO you are and WHERE you live. The economy is stagnant at the moment, and we’re in for a period of time where Americans are going to have to get use to making some tough choices and not seeing forward momentum. We’re basically all working and staying pretty much in the same place. Our clothing is costing us a lot less. We’ve got electronic gadgets galore and they are all really cheap. Have you priced computers, dvd players, or stereos recently? They’re all pretty cheap and just about any one can get to them. However, health care, driving, and eating are going from cheap to pricey.
The question of high energy prices and the segments of America that aren’t doing so well come mostly from globalization of the world economy that brings both good developments and bad. This is not going to reverse. As the economy adjusts, all buyers will win from global trade but those whose jobs go abroad will loose, and some will loose big time. We buy cheap stuff from the Chinese, they turn around and buy cars and they want gas. This increased demand for gas means higher gas prices. The Chinese also take jobs away from the manufacturing sector because Chinese labor comes extremely cheap and doesn’t require a pension or health plan. Those folks working for those companies that are outsourcing to other countries are miserable. While the USA has a relatively low unemployment rate of around 5%, places like Michigan and Pennsylvania have 10% unemployment rates. They are suffering. So, if you’re in the medical sector, you’re going to be happy as a clam. If you’re in manufacturing, prepare for a new career. Also, the government has grants out there to retrain folks loosing jobs from NAFTA. If you can prove it’s from NAFTA, go get it now!
438,000 jobs have been lost bringing unemployment to 5.5 percent. This is not a bad situation now, but if it continues, chances are we will be looking more like recession. Economists consider this rate to be close to the rate that represents what it should be if we are operating at capacity. The big question is: WILL IT GO UP?
So what about the financial crisis? How widespread is the mortgage problem? The housing crunch is wrecking the construction industry in places like Miami, Las Vegas, and Los Angeles. However, down here in New Orleans, the construction industry can’t find enough workers and is booming like never before. So Housing Foreclosures are a major problem in places like California, Nevada, and Florida. Many of these foreclosures are for house flippers. These folks are speculators and can whine all they want but that’s business and that’s what you get when the market moves against you. However, folks that were suckered into bad loans by mortgage brokers are a different matter. These folks are loosing their homes for banks that were looking for high fee income and basically put people into mortgages they couldn’t handle. Government regulation and help is required here. We’re not likely to get that as long as Dubya is in office. He’s threatening to veto the current bill. (All of the sudden our prez (the BIG spender) goes fiscally responsible on us!) I’m waiting for both McCain or Obama to come up with specific plans here. Hillary Clinton was the only one who spoke to this situation and her answer was a moratorium on rates. I think we’re going to need some federal bonds to fund some of these folks. It’s something similiar to what we did during the Great Depression to keep families in their homes and off the street.
So there are several markets that are a huge mess. The automobile industry and some sectors of manufacturing and the financial industry which has spilled into the housing industry, But again, most of the impact from these sectors is hitting some states hard and other states not so much at all.
Unfortunately, a lot of the higher prices are due to those high food and gas prices which are not a function of a bad U.S. economy, they are a function of problems in the global economy. There is also a continuing pattern since the 1980s that has left the rich getting richer and the poor and middle class getting poorer. The income inequality problem is worsening in this country and it looks as though it will continue. This is why it is essential that everyone has access to quality education at all levels. We should consider allowing more students attend university on the taxpayer’s dollar. Aid should definitely be mean income tested. It is much cheaper to send a teenager to school than it is to house him in a jail for the rest of his life.
These are some steps we can take to solve some of these things. First, as long as U.S. business has to pick up the tab for worker’s health insurance, the U.S. worker will not be competitive. We need universal health care paid for by individuals/taxpayers on an ability-to-pay basis. Second, all agriculture price supports, set aside programs, and subsidies, especially to ethanol, should be halted. Third, we all need to conserve energy and switch to other fuels sources (with the exception of ethanol made from things that are food). If we are making biofuels, then we need to use garbage or chicken fat or some byproduct, not food itself.
So, which of the candidates are up to the challenge? I don’t think either of them are, but I’m waiting.
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Dakinikat,
You hit another bullseye with this post. I am glad that you mentioned that HRC had policies to deal with most if not all of the problems you wrote about.
My brother who lives in a small town in North Louisiana could get a job in N.O. but can’t afford to live there and pay for his home up North.
I’ve offered to let him live with me in Baton Rouge during the week but even with that he couldn’t afford the gas for the daily commute.
He is an experienced contractor/carpenter/electrician/plumber, but no one is building up there in North LA.
We are looking for something for him here in Baton Rouge. I know this is not PC but the last construction job he had in Baton Rouge, most of his co-workers were illegal and the foreman wanted to pay him cash as well.
He insisted on a paycheck with the appropriated deductions…needless to say he didn’t last long there.
We recently had a terrible hailstorm in Baton Rouge and 38,000 homes had roof damage. I was able to hire my brother to re-roof my house. That kept him afloat for another month.
I’d hate to see him lose his home when he owes so little on it. I am praying for a miracle for him and for all those people who are in the same situation.
One thing that bothers me is that Congress is not concerned with the children of foreclosure. What they must be going through.
Another question I have is: “Why is no one laying this mortgage crisis at Dub-ya’s feet?”
It was his campaign platform to increase home ownership in the U.S. so everyone could “own a piece of America.”
This idea of “owning a peice of America” was in HIS every stump speech and in HIS every State of the Union Address.
It was HIS policies that allowed for predatory lending because HE wanted people to buy houses, and now that it has blown up in his face, no one is blaming HIM for it.
Am I off base on this?
Daki, I am a lurker at a few blogs and read your comments at Riverdaughter, which led me here. Just wanted to let you know that I now lurk at your blog. This post is very interesting and in light of that, what is your take on how the government is going to handle the latest two subprime mortgage lenders who are in serious financial difficulties.
anyway, love your blog and will continue to visit on a semi regular basis. Thanks.
Hi HT! Thanks for unlurking and Hi Blue Dawg –always good to see you!!
HT–I’m going to assume you’re speaking of FNMA and FMAC… commonly known as fannie mae and freddie mac. This are two quasi-agencies set up to provide housing loans and as such are treated differently than banks like Countrywide or Wachovia which are also problematic at the moment.
Countrywide and Wachovia are on the watch list at the moment and are borrowing funds from the FED itself. Fannie Mae and Freddie mac are now doing this also. This allows them to cover shortfalls in liquidity. However, if they do not look like they will recover and their capital or ownership portion of their balance sheet continues to fall, these entities will be handled differently. Countrywide and Wachovia will be chopped up and sold off to other banks or bidders since they are privately owned. Fannie Mae and Freddie Mac will require something different and will have to be bailed out directly by the taxpayer. Stockholders in both companies will undoubtedly loose most of their investments. I’m not sure if they’ll auction off the assets or not since this is somewhat new territory and their is some federal responsibility for their bad loans. My guess is they’ll have to find a re-capitalization scheme that includes both the private and public sector. Right now, I think there could be interest from the some foreign entities in some of these assets because the petro countries hold so many dollars, they could potentially buy some of the assets and a discounted rate. It is also possible that the bad assets will be stripped from the lenders, held by the fed and refinanced by the taxpayer while the entities are allowed to continue with only their best assets and tougher regulations. There would be some kind of pay back for this.
It’s a really interested situation. We haven’t seen this kind of thing go on in the financial market since the great depression when the government really stepped in big time. You better believe the Fed will exact some pretty steep oversight penalties and future regulation requirements if they do this, as well they should.
Dakinikat,
Can you address my assertion that this morgatage meltdown is George’s mess? My partner and I kept saying “this is a bad idea” since Bush began promising “record home ownership” under his administration. He started harping on this way, way back when, before he stole the election.
I am doing research on this and have come up with some references. It is as if his speeches have disappeared from the internet!
My spousal equivalent worked in the mortgage industry for a reputable company for 18 years and toward the end he warned his company about their increasingly lax underwriting procedures as did many of his coworkers. Their comments fell on deaf ears.
The company is now bankrupt and hundreds lost their incomes, insurance, 401ks and severance in one day. Some were so distraught that others banded together and called or emailed everyone everyday for weeks.
They felt betrayed by the company because they warned their superiors and threw up red flags and they were told not to worry because the company was simply following government guidelines and it was flush and on solid ground.
Now those people feel even worse because they see the amount of forclosures and wonder if they had a hand in financing those peoples homes. And no amount of reassuring them that they were simply following company policy is small consolation.
They were cogs in a wheel and they were duped just like many homeowners.
This is a direct quote taken from GWB’s address to the Rebulican National Convention in 2004: Before his Second Term!
“Another priority for a new term is to build an ownership society, because ownership brings security, and dignity, and independence. Thanks to our policies, homeownership in America is at an all-time high. Tonight we set a new goal: seven million more affordable homes in the next 10 years so more American families will be able to open the door and say welcome to my home.”
Notice he notes that “thanks to our policies, home ownership in America is at an all-time high.” and he set a goal to increase it even more…
And the bubble was just around the corner waiting to burst…because of HIS policies!
Source: American Rhetoric Online Speech Bank
http://www.americanrhetoric.com/speeches/convention2004/georgewbush2004rnc.htm
And now Obama is saying it is all in our heads, too…
http://www.msnbc.msn.com/id/25657232/
Ignore my last post… I completely misread that article. I am an idiot this morning. haha
Blue Dawg:
In a manner, you can blame both George Bush and Allen Greenspan for some of the mess. There was a mild recession at the beginning of his first term. Then, 9-11 happened and it appeared that recession might go deeper. Because of the shut down of Wall Street for a week, the already weak stock market from the Dot.com meltdown, and the response to the public to 9-11( sit home and fret mightily), they let interest rates go down and stay down for a long time. This enabled what is called a ‘bubble’. Because rates were very very low, speculation in assets (this for banks is lending to high risk customers) became less risky. Historically low rates fueled growth in the economy but also led to poor lending practices. Because the banking system was allowed to put some of their riskier units into holding company units that were separate from the bank itself, they were not watched as carefully as the bank itself. Additionally, you had the rise of the mortgage derivatives that allowed banks to offlay the risk to a re-insurance market. This is where Priztker, Obama’s finance chair comes in, her family’s money was absolutely key to the development of these derivatives. Because of the cheap rates, many of the lenders got loosey goosey with their underwriting practices, something you describe. So yes, you can blame both Greenspan and Bush to a certain extent for keeping rates low. A lot of it also was that speculators had no place to go after the dot.com bubble, and went to the housing bubble. Now that that is gone, they’re in food and oil, riding the upward momentum on those two assets. That is why you’re seeing some call in congress to control speculators now.
I know it is popular to bash Bush for everything, but in this instance I truly believe it is deserved. I am bashing him and his policies of an “Ownership Society” for the mortgage meltdown. I am convinced of his complicity in this. Bush helped to create this mess and now he doesn’t want to clean it up. Where is his Compasionate Conservatism now? All of a sudden he is Mr. Fiscal Responsibility. I understand the other factors that contributed to our current economic woes (as Dakinikat outlined above). Those are the exact reasons my spousal equivalent and I decided early on (as I stated above) Bush’s “Ownership Society” was a bad idea.
My spousal equivalent’s experience in the insurance and mortgage industry and my degree in Consumer Science led us into some rather interesting discussions on the possibilities that could arise from the housing boom that was to come.
We both agreed that it would bust at some point like the dot com bubble did, because low interest rates couldn’t last and speculators would see a fortune to be made and over inflate home prices and therefore ruin any true gains in home equity. These over inflated prices would thereby, force those dreaming of owning and saving for the purchase a home to put their dreams on hold. We didn’t state our discussion as well as Dakinikat did above but we agree with her assessment.
I have the same poor opinion on the flip-flopping Allen Greenspan. At first he said the bubble couldn’t have been predicted. Then he said it could have been foreseen to some degree, then he said something else, and then he said something else, and he kept flip-flopping so as to not have to take some of the blame. At some point he did give a somewhat tepid mea culpa and then flip-flopped on that. What a way to end a career!
I agree with Dakinikat that government intervention will be necessary. A combination of tax-payer bailout and new or newly enforced regulation will be required. Speculators in many aspects of the market are screwing the American consumer and the American economy. This should prompt swift movement on the part of the government, strict regulation and some commodities should be taken out of the market, so that greedy self-serving Wall-Streeters can never do this to our economy again. Our government will need to take a holistic Global Economy approach to America’s economy and nothing should be off the table.
(As an aside, I am not completely convinced that Dub-ya doesn’t have his hand in the speculation of oil prices, he has wanted to drill in ANWR since he took office, it looks like he might get his desire. Wouldn’t that be a nice legacy for him to leave? Also, he and Dick are heavily invested in oil so they will leave office richer than they ever dreamed. Impeachment should have never been taken off the table! Thanks, Nancy!)
On another topic I did a thesis paper in college entitled, Homosexuality and Housing: Issues and Challenges Facing Gays and Lesbians in the Housing Market. I took a 360 approach to the topic, everything from discrimination in renting to challenges of purchasing and selecting a “friendly neighborhood.” My professor was blown away and took 2 points off for APA errors, and she had to hunt for those. She couldn’t allow me a perfect score for the greater good of the class. However, she did give out copies of the paper to the class to read, but I digress.
One of the points I discussed was a neighborhood in California that was in decline and then gays started moving in and fixing up the neighborhood. At first the neighborhood was resistant as they were afraid of becoming a gay enclave. This happens to some neighborhoods when gays move in and as the neighborhood becomes gentrified, property taxes rise and force some of the poorer residents to move. A neighborhood association was started and the gays and the long term residents struck a bargain.
The gays and younger straights would help older and poorer residents in maintaining their landscaping, painting their homes and helping with minor repairs. Also, the neighborhood association took on the tax assessment problem and worked with the county assessor to ensure that the poorer and elderly resident’s taxes would not go up based on the house next door. Rather than a blanket assessment, as often happens, the houses were individually assessed and the neighborhood is thriving and the residents couldn’t be happier.
I write about this to make a point. There is great disparity in our nation, and it doesn’t have to be that way. As this neighborhood proved, when working together we can achieve anything. It takes a willingness to work, not only for ourselves, but for our fellow man and woman for the greater good and we can all enjoy the benefits. That is what it is going to take to make this nation great again. Joining hearts and hands and working together despite our differences. This will work at the community level, city level, as well as state and federal levels.
To paraphrase Hillary; there is nothing we can’t do, nothing we cannot achieve, when Americans decide to start acting like Americans again!