Left Behind

The Great Recession of 2007-2008 took out some one in every sector of the economy.  Worst hit, however, was the housing sector where the financial contagion was hatched by folks betting on the forever upward trend in real estate prices.  Prices and sales of homes have plummeted. However, the government focused clearly on reviving the same group of people that were most responsible for the damage.  Both the Bush and Obama administrations have raptured Wall Street while leaving US families behind.  Granted, many homeowners jumped into loans they could not afford and bought houses at price levels that should’ve sent them clear warning symbols.  But remember, even the most sophisticated investors–like AIG and Lehman Brothers–got sucked into the mortgage and housing madness.  You can’t exactly expect every home owner to read through the fine print and look for trends in underlying home values using the Case-Shiller Index. Buying a home is an emotional process.  Investing is supposed to be the cautious practice.

So, what’s really different between this housing crisis and the two previous, similar crises that happened during the Great Depression and Savings & Loan crisis is that there is no vehicle to redress homeowners’ wiped-out balance sheets and foreclosure problems.  There has been largess all over the place for banks and other financial institutions.  During the 2008 elections, then-candidate Hillary Clinton emphasized the important role of the HOLC during the Great Depression and argued that something akin to it should be considered today.  The purpose of the HOLC was to renegotiate mortgages so that people could stay in their homes.  The HOLC was dismantled in 1951 when the last of its assets–dating from as late as 1935–were liquidated.

There were some efforts by the Obama administration that accompanied the Bush 43 TARP program to try to get private financial institutions to renegotiate loans in lieu of foreclosure, but those programs have failed miserably.  At least the SEC is beginning to look into possible criminality leading to the financial crisis like the role of rater Standard & Poor’s in overrating toxic mortgage-backed securities. Still, the victims of these practices have had little to no relief.  The NYT reminds us today that many homeowners need help. We should be further reminded that the overall economy will not improve until the housing market stabilizes.

Tens of millions of Americans are being crushed by the overhang of mortgage debt. And Congress and the White House have yet to figure out that the economy will not recover until housing recovers — and that won’t happen without a robust effort to curb foreclosures by modifying troubled mortgage loans.

Instead of pushing the banks to do what is needed, the Obama administration has basically urged them to do their best to help, mainly by reducing interest rates for troubled borrowers. The banks haven’t done nearly enough. In many instances, they can make more from fees and charges on defaulted loans than on modifications.

The administration needs better ideas. It can start by working with Fannie Mae and Freddie Mac, the government-run mortgage companies, to aggressively reduce the principal balances on underwater loans and to make refinancing easier for underwater borrowers. If the president championed aggressive action, and Fannie and Freddie, which back most new mortgages, also made it clear to banks that they expect principal reductions, the banks would feel considerable pressure to go along.

The housing numbers are chilling. Sales of existing homes fell in July by 3.5 percent, while prices were down 4.4 percent in July from a year earlier. In all, prices have declined 33 percent since the peak of the market five years ago, for a total loss of home equity of $6.6 trillion.

There’s no letup in sight. Currently, 14.6 million homeowners owe more on their mortgages than their homes are worth, and nearly half of them are underwater by more than 30 percent. At present, 3.5 million homes are in some stage of foreclosure. Nearly six million borrowers have already lost their homes in the bust.

There are 10 states where basically no one is buying a house. That’s a pretty good indicator of a still sick market. What’s most appalling is that on top of these statistics comes the story about how much money the creators of both the housing bubble and the housing crash were bailed out by both the FED and the Federal Government.  The FED’s main purpose is to stabilize the financial system and thet basically did what they had to do under the charter they were given, but the numbers are beyond astounding.   None of these institutions were punished for their bad decisions or fined.  The SEC and the FED seem toothless in the face of such perfidy.

Citigroup Inc. (C) and Bank of America Corp. (BAC) were the reigning champions of finance in 2006 as home prices peaked, leading the 10 biggest U.S. banks and brokerage firms to their best year ever with $104 billion of profits.

By 2008, the housing market’s collapse forced those companies to take more than six times as much, $669 billion, in emergency loans from the U.S. Federal Reserve. The loans dwarfed the $160 billion in public bailouts the top 10 got from the U.S. Treasury, yet until now the full amounts have remained secret.

Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages. The largest borrower, Morgan Stanley (MS), got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress.

“These are all whopping numbers,” said Robert Litan, a former Justice Department official who in the 1990s served on a commission probing the causes of the savings and loan crisis. “You’re talking about the aristocracy of American finance going down the tubes without the federal money.”

The FED is mandated with stabilizing the financial system.  It’s sole connection to borrowers is to ensure truth in lending laws are applied which still leaves borrowers stuck reading the fine print.  The  Federal Government, however, has a completely different mandate.  There’s a lot of fuzziness surrounding the idea of  promoting the general welfare.  I’m pretty sure that letting business put a market on steroids then helping them recover while letting home owners swing in the wind isn’t promoting any one’s general welfare.   However, the government has chosen to stabilize mortgage investors while still leaving the actual market for houses in a declining state.  Then, they wonder why the economy is so bad.  Folks with declining incomes and wealth do not go on spending sprees.  They retreat.

There is so much unfinished business left over from the 2007-2008 financial crisis it’s hard to know where to start the complaints.   It’s one of the major reasons for budget shortfalls all over the country.  But, you wouldn’t know that if you listen to political rhetoric.  Again, undoing the damage that caused the problems from the start would be a lot more judicious than creating additional ones. We don’t need deficit commissions.  We need to deal with the root causes of the current deficit.  That would be too many wars, too many tax cuts, and way too many people who don’t have jobs and homes because Wall Street broke the economy.

Those who forget the past are condemned …

(cross-posted at the Confluence)

I’m having difficulty digesting a lot of the news and hoopla surrounding this financial crisis.  There are some things that are really worrying to me.  It’s not so much the crisis itself, which I actually understand, but the responses.  I am reminded of the saying that those who forget the past are condemned to repeat it.  I think this basically sums up much of why I feel so desperate when I watch the response to this crisis unfold on TV. It’s time to stop the blame and start the problem-solving.

First, what really bothers me is the inability of ANY of the politicians to either REALIZE how they contributed to this or understand what lead to this.  A recent post by myiq2xu mentioned a speech by Senator Obama who offhandedly referred to the period of deregulation of industries that went on during the 70s.  He has been hammering his every talking point with the Republicans did this to us.  Useful, I suppose when trying to get elected based on something other than your credentials, but disingenuous at the very least.  I keep wondering if he JUST doesn’t know the history of deregulation or he’s purposefully lying to us.

The deregulation of the telcom industry, the airline industry and the banking industry came about during the Carter regime.  When I was a fresh out of grad school economist, I worked for a bank then a Savings and Loan.  The Monetary Control Act of 1980 (okay, i’m dating myself) was a response to the problem of traditional banks and thrifts hemorrhaging deposits to Money Market Accounts.  The root of deregulation started with Jimmy Carter’s administration. Hasn’t any one told him this or does he just like to go on misspeaking?  The fight against the deregulation against Fannie and Freddie–probably the biggest contributors to this latest moral hazard problem–was led by the Democrats also.  Why can’t we just be honest about this and say that each of the parties had a hand in this and learn from the past?

Second, I lived through the S&L crises and the economy that prevailed in the early 80s.  My first house loan had an interest rate of 17.67% which got discounted to a beneficent 12.67% because I worked for the thrift that gave me the loan.   House loans aren’t even half that at the moment.  Two other folks besides me got house loans that month from the biggest thrift in the heartland.  I’d say that was a credit crunch, wouldn’t you? I also worked the money desk at that time and remember the interbank loan (Fed Funds rate) bopping between 4% and 21% on any given day.  Both of these rates are a far cry from the current rates as is the unemployment rate which sat between 12 and 13% for some time.  Remember, these were the morning in America years of the early 80s.  We currently have a 6.1% unemployment rate.

My father lived through the great depression.  At that time, the unemployment rate peaked between 25% to 29%.   The foreclosures that happened during that time occurred because no one had jobs and no one had unemployment insurance.  When they closed the banks, there was no FDIC so, you lost your life savings.  Today, we have unemployment insurance, the FDIC, and various other types of insurance that minimize the loss you experience on your deposits –even money market funds.  You may experience paper losses, but you will not loose EVERYTHING!  There are safeguards against much of the worst situations experienced during the depression.  I’m not sure that given today’s economy, which is sluggish and experiencing problems but is not as bad as either of these two periods, we need this rush to judgment. Why aren’t we thinking this bail-out plan through more?

Which brings me back to today.  We solved many of the problems of the previous financial crisis with government intervention.  The HOLC bought up many defaulting mortgages, renegotiated them when possible, and held on to the properties, insuring they wouldn’t drive land and house prices down further.  During the S&L crisis, the RTC bought out S&Ls, unwound the assets, and sold the sellable ones while holding onto the bad stuff, until the market turned around.  The government can afford to hold paper losses on its books.  Private industry cannot.  Government can help put a bottom price on these markets.  This is what it needs to do.  It does not need to end the alternative minimum tax, change the taxes on corporations, or fund ACORN and La Raza.

Which brings me to one more point,  when do we stop turning these unprofitable behemoths into megacompanies that become too big to fail?  Haven’t we learned anything in the past about this?  Why are we creating more Freddies and Fannies?  It is not fair to the taxpayer for the profits to be privatized, but the losses to be turned to the public.  During the last 30 years, we’ve allowed mergers to create these giant companies that are behaving more and more like monopolies.  This is not good for a free market system.  If we are allowing them to become so big and letting them get away with extraordinary profits during good times, than making them subject to public largess if they fail, what is the difference between this and just nationalizing them altogether?  Didn’t we learn these lessons during the trustbusting years of Teddy Roosevelt?  Isn’t the basis of our monopoly law the Sherman Anti-trust regulations that were set up in the 19th century?  Why have we forgotten the excesses of the gilded age?

Yes, it’s broken.  Yes, it needs to be fixed.  But can some one in Washington just pick a few history and economics textbooks so we’re not condemned to relearn the lessons of the past and do it with everyone’s tax dollars?