Monday, March 17, 2008

The Sky is Falling!

I'm glad I don't have television anymore. I'm lying there in my fancy hotel bathrobe reading my free copy of USA Today and watching CNN, with the sand dunes and ocean in the foreground. CNN is working hard to scare the crap out of everyone: housing prices will continue to drop. A recession? That would be the least of worries because there are way more catastrophic economic possibilities. Another reporter reports that 75% of Americans think we're in a recession now.

Huh? I'm staring at a USA Today article where 5 out of 10 economists asked (kind of like those toothpaste commercials) believe we will be in recession sometime in 2008, while the other half say no, with one not sure. We're not in a recession now. It's not a feeling, it's a well understood definition based on data. Hmmm, I wonder where those 75% of Americans get that feeling? This stuff pisses me off because it's self reinforcing and has a bad effect on business, which effects everyone. Want to cause economic pain and suffering? Just preach economic pain and suffering. The psychology is that direct.

Kill your television.


  1. The whole housing situation really depends on what your current situation is.
    If you speculated (read: GAMBLED) in real estate based on the premise that housing prices would continue to rise meteorically, it's bad news.
    If you've been waiting for prices to become more realistic before buying, then it is good news.

    The bad news is that everyone is being asked to help pay for the speculators that foolishly overextended themselves and now can't (or simply don't want to) pay their debts.

    It is a shame when some people piss in the pool, and then get big brother to force the rest of us to pay for the cleanup. I believe that this is known as "tyranny of the majority".

  2. How is everyone else being asked to pay for it?

  3. Well, you just paid for it when the Fed guaranteed the Bear Stern's mortgage backed securities and let JP Morgan buy Bear Stern's for 1% of what it was worth a few weeks ago. The Fed is also now offering to lend currency directly to other investment banking houses. This is the taxpayers bailing out the big Wallstreet firms to prevent a complete meltdown.

  4. My view is pretty much the same as Joe's, although ideally the housing market would skyrocket in Arkansas while simultaneously collapsing in California ;-)

    What really pisses me off is that it was the same firms that lobbied so heavily against any moves by Congress to regulate what they were doing, while at the same time counting on the government to bail them out if things went bad.

    As for CNN. You are right on target, and I repeat myself when I sat the mainstream media suck.

    I've been quietly stonewalling on getting any sort of cable or satellite TV since moving. The combination of DVDs and high speed internet has so far kept us sufficiently entertained and informed.

  5. I see. I'm a bit behind on the news of the "bailout." I see most of the blame for this mess stands with the original lenders, who allowed themselves to get played. Those of us who are regular old homeowners with standard loans are getting screwed big time.

    My biggest screwage is not the loss of equity (about $100,000), something I'm willing to ride out, but the squeezing of the capital markets. For example, interest rates are going down, but home loan interest rates aren't following. This means I'll get hosed when it's time to refinance.

    Curiously, I've gotten a massive increase in credit card applications for myself and the business. When I'm approved for one, the credit limits are huge.

    As for the government, they seem assured that a massive correction in the housing market is alright, including foreclosures and the evaporation of billions of dollars of wealth, but they're afraid for financial markets. They're willing to save their bacon but not that of homeowners, which seems schizophrenic.

    "No one is sure how much chaos would ensue if a big counterparty like Bear went bust. The Fed clearly did not want to find out—it even agreed to grease the deal by making $30 billion available to fund some of Bear’s less liquid assets, which would otherwise damage JPMorgan Chase’s balance sheet." The Economist

  6. Basically, you can make stupid financial decisions without risk - if enough other voters make the same stupid decisions.

    Build your home on a flood plain, or below a levee that you don't pay enough to maintain, and when the flood comes, the taxpayers will bail you out (do you really think that Katrina "Victims" in LA will ever stop receiving government checks?).

    Choose to have more take-home income from your job and forego medical benefits (as many unions have been doing for the past decade), or choose to take a job with higher pay, but no medical benefits, and then expect the government to create a free health care system for you.

    Buy a home that you can't afford - can't afford to pay more than the interest (if that), or even buy several such homes as investment properties, driving up the cost of housing - and when the home doesn't increase in value enough so that you can use your equity to pay it off, ask the governemnt to bail you out.

    Lend money to people who can't afford to pay it back, and get rich - on paper - and then expect the government (that's us taxpayers) to bail you out when the house of cards collapses.

  7. As to losing money (on paper, or in reality) in a home as the market price declines:
    consider that some of us pay almost $20k a year in rent to live around here.

    If you've been living in a house for 5 years and can sell for $100k less than you bought it for, then you've simply been paying the same amount for housing that I have (less your mortgage interest deduction - which I'm sure is greater than my "renter's credit" deduction).

    Having some bargain (foreclosed) houses on the market should be a good thing, overall. It should allow some people to get out of high rent situations and become homeowners (which is supposed to be a public good), and also leave them with more cash to spend in their local economy.

    If we could, as a region, get back to the 1/4 of your take home pay goes to housing "standard", rather than the 1/2 of your take home pay "standard" that exists today for many renters and more recent home buyers, it would be good for the economy.

    And if you are paying too much interest on a loan that is now much more than the value of the house, the lender has every incentive to refinance your loan to something manageable, so you don't simply walk away and leave them with a tremendous financial loss. This is their consequence for making poor/stupid/risky business decisions.

  8. "If you've been living in a house for 5 years and can sell for $100k less than you bought it for, then you've simply been paying the same amount for housing that I have (less your mortgage interest deduction - which I'm sure is greater than my "renter's credit" deduction)."

    Except that if you're renting, you should be saving money with the savings versus a mortgage. With that money you can make investments that, on average, are as good as being a home owner. It's totally a lifestyle choice whether to buy a home or not, not a financial one, IF you're properly investing your money as a renter.

    In the long run, both renters (non real-estate investors) and home owners (real-estate investors), should have a pretty stable investment.

  9. "Basically, you can make stupid financial decisions without risk - if enough other voters make the same stupid decisions."

    There are a lot of things like this that are done by our society for the "common good." They're rewarded with our tax code.

    Having children is a common good and is rewarded (although paradoxically, being married is penalized).

    Owning a home is a common good.

    Owning capital is a common good.

    Childless renter wage earners are considered the bottom of the barrel, if we look at what our society rewards.

    The question lately is what else is a common good? Most fiscal conservatives are against any additional benefits, including free health care. But at what point does a problem become so onerous that it falls into the realm of common good?

    Some Republicans, especially large business owners, believe health care is big enough to be considered worth investing in as a common good, in some kind of nationalized scheme. Other Republicans despise them for even considering this, yet where do you draw the line? Do we want to be a society that turns people away at emergency rooms? At what point is the current system so onerous that mainstream Americans can no longer afford it?

    If it doesn't get fixed, the number of uninsured or under-insured people will increase. For small business, it's already impossible to offer insurance for employees and it's getting so expensive that it's hard to justify self-employment itself with such huge living expenses. Yet, half of economic activity in this country comes from small business. Is that a common good? What's the alternative? Economic collapse?

  10. The healthcare insurance system in the US is so completely and utterly broken that there is no choice but to have the government intervene in some way or another. The discussion at this point should be what that form should take, not whether or not intervention is necessary.

    The only people who don't yet realize this are either:

    A) So rich it doesn't matter to them how much their healthcare costs.
    B) Are working for an employer that hasn't yet completely dropped their insurance benefits.
    C) Already getting some form of medical benefits from the government.

    Anyone who has actually tried to find insurance on their own realizes just how broken things are at this point.

  11. Are most people really saving money by renting vs paying a mortgage?

    With just a few thousand dollars down - let's call it the same amount I'd need as a security deposit/first & last,and a mortgage at my current rent, I could purchase a house similar to the one I rent, and just a block away. The house is currently listing for $260k.

    Unfortunately for me, this is not a realistic option, as I am not senior enough in my current job to be able to sign a long term contract, like a mortgage. I know that I might need to move as soon as next year in order to have a job.

    If I were irresponsible, I could probably convince someone to lend me the money (I have good credit, and the VA will guarantee my loan) to buy that house. But what if I lost my job and wasn't able to make the mortgage payment, or had to move to a new job and had to sell it in a hurry? This is a risk that I am not prepared to take at this point.

    If I wanted to run an even greater risk, I could have (I don't know if these are still out there) taken out an interest only mortgage on a larger house, gambling that the house would increase in value, and thus build equity for me. Again, I weighed the risk and decided that it was a bad idea.

  12. Socialize medicine? Heaven forbid.

    Grover Norquist and other ultra-conservatives want to kill all social wellfare programs. The idea is to run up a big enough deficit that the Fed Gov't has to basically declare itself bankrupt and scrap everything but defense and the state dep't. and then create a permanent underclass of wage earners who work for the wealthy. Since part of the deal is to get rid of a capital gains tax and inheritance taxes, you can have a wealthy class that never pays a dime to support the country because all of their income is from investments.

    Frankly, if our industries want to compete with other industrialized nations, we are going to have to nationalize healthcare because the cost of insurance is pricing US made goods out of the market. A number of Republican businessmen who own or run manufacturing companies have finally come to this realization.

  13. Medical savings accounts are a preferential option to insurance. First, the insurance companies spend a lot of money on paperwork - paperwork that has nothing to do with actually providing care. They also force Doctors and hospitals to deal with these mountains of paperwork.
    Second, when we are spending the insurance company's money, we have no real idea of how much anything costs, and no real reason to try to save money.
    Third, we now have a system where the person who needs treatment isn't in a position to decide what treatment they can receive.
    fourth, no matter how long or how much you pay in to the insurance company, they can always cut you off whenever they decide to - i.e. whenever you become unprofitable for them.

    Government run medical care is not much more efficient - especially if you have an uncommon ailment.

  14. Actually, Medicare is incredibly efficient when compared to private pay insurance.

    Medical savings accounts are a joke. They allow companies to buy high dollar plans and then expect employees, who can't save money in the best of times, to plan in advance, and set money aside from their paychecks for medical care. What ends up happening is that the employees don't save at all or not enough and end up either not seeking routine treatment that could save major medical expenses in the future or have to seek medical care and then drive themselves into bankruptcy.

    Further, a number of employers that offer the high MSA's put the plan in place and keep the cost savings for themselves. The employee then has to decide to take a pay cut to put money aside for future medical care.

    One of the largest causes of US bankruptcy is medical bills.

  15. "With just a few thousand dollars down - let's call it the same amount I'd need as a security deposit/first & last,and a mortgage at my current rent, I could purchase a house similar to the one I rent, and just a block away. The house is currently listing for $260k."

    I was in that same position when I bought my first house. $1000 for rent or $1200 for a mortgage. As a first time home buyer I got a loan with 5% down, which was around $6,000!

    In the case you're in, it certainly makes sense to buy a house. However, the house you're looking at is probably half the county average home value, so most people would be looking at something a bit more. Most people don't want a "starter house," they want their dream house on day one, which is one reason why we're in this mess.

    But yes, the concept was that if you want to rent, the payment should be considerably less and that extra money could be invested for the same return as owning a home.

  16. The argument about administrative costs is a good one. Medicare is an incredibly efficient system as far as administrative costs. It's something like 5% with everything added. Regular health insurance is 17%. Worse, those administrative costs are repeated for every private insurance company, and separately for each individual state. You could probably save a load of money by just allowing insurance companies to write policies nationally, instead of the wasteful state-by-state scheme we have now.

    As for savings accounts, my big issue with them is that there's a disincentive for preventive care, which saves money. There's also a disincentive to get treatment until your problem has advanced, which is more expensive as well. It's like companies that lump in their sick days and vacation days; employees come to work sick, because their sick days are now a benefit with value that they don't want to give up.

    There are two scenarios for bankruptcy for me (three if you include the business failing): earthquake with the house falling down and serious illness that far outstrips our meager insurance. Both are insurance related.

  17. There are at least two types of medical savings accounts.
    The one that I see offered (for example, where I work) allows you to set aside money - before taxes - but you have to spend it all on medical care before the end of the year.
    Now, that's just stupid. It doesn't allow you to save up for the big emergency that we need to prepare for, and it means that you have to plan, at the start of the year, how much you'll spend on your medical needs.
    While this is fine for planning for Timmy's braces, or your Lasik surgery, it is not really a medical savings account. It is merely a way to make it simpler to deduct known and planned medical expenses from your taxable income.

    A true medical savings plan would allow you to put as much money as you wanted into a tax-exempt investment account (like a 401K or IRA, broadly speaking), and then take it out for medical needs. If you wanted to withdraw the money for non-medical purposes, you'd have to pay the tax penalty. If you willed it to someone, they could either add it directly to their medical account (tax-free), or it could be taxed as if you were taking it out for non-medical purposes.
    This would basically allow individuals to have the option of self-insuring - an option that many larger corporations are allowed to take advantage of.

    Back to housing. The outrageously high cost of housing in the bay area is the result of several factors, some the result of conspiracy, some the result of chance. There are supply and demand issues, with the housing supply kept artificially low in many areas (especially those close to where people work) due to local zoning restrictions and other factors. Prop 13 also hurts us here because it encourages people to stay in their homes rather than moving, because the newly purchased home will have higher taxes, even if it is of a lower market valkue than the previous home.
    Since home buying is basically done on the auction system, what we have is a problem where too many people had too much credit available to them (by too much, I mean that they couldn't reasonably make the payments), and so bid up the prices of homes to outrageous levels. Even if they couldn't pay off enough of the loan to actually build equity in the house, rising home prices increased the paper value of the house, thus giving them paper equity, and allowing them to sell or refinance into a (slightly?) better position.
    It resempbles a pyramid scheme because it continues top work as long as there are fresh suckers joining the bottom of the pyramid.
    This has caused the price of a house to skyrocket, just as an irresponsible speculator will bid up the price of an ebay item far beyond it's actual value.
    What's happening now is that the pyramid is collapsing under it's own weight. The bubble should be BURSTING - allowing most of those who made sound decisions to ride out the problem (refinance their existing home loan, or buy a home now that prices are becoming more reasonable), and restricting the worst pain to those individuals and companies whose poor decisions are what caused the problem in the first place.
    Of course, the government is here to ensure that those who did the most pissing in the pool will be the first ones to get showers, and access to new and cleaner pools - because they have the most to lose right now. This leaves the rest of us stuck in a dirty pool, and having our taxes going to help clean up the people who actually created the mess.

  18. There was an interesting article in Harpers that basically said there are "bubbles" that naturally develop in our economy as large amounts of excess cash look for easy, high returns.

    The bubble built itself up in the 90's and then collapsed. The second trend that we have now is "FIRE," finance, insurance, and real-estate. Easy money. Once that pops, the authors premise was that it would be green energy.

  19. Looks like we need a BDG debate club :)

  20. I thought this was the BDG debate club!