Four Years Late and Billions of Dollars Short

Mass re-financing is in the news lately, a program where the federal government will guarantee the loans of homeowners who have established credit worthiness but have homes so far underwater no mortgage company will touch them. This is a radical concept for some, as it could put the government at risk for billions of dollars if people start defaulting. That alone will probably kill the bill, as the government is currently afraid to buy three-ply toilet paper if it will increase the debt.

The real problem is the whole idea is too late. This idea should have been crammed down the banks’ throats as a condition of TARP, with the banks accepting most of the risk. It’s not like the banks haven’t extended themselves in a similar manner before.

Remember when Donald Trump was bankrupt? The Donald certainly doesn’t. Trump has claimed various levels of bankruptcy four times and come out ahead each time. Why is that? It’s not because he’s smarter than everyone else; one look at his hair tells you that. No, The Donald got so far into the banks they couldn’t afford for him to go tits up, so he pretty much got to dictate terms. (Sound familiar?)

What the banks and government fail to recognize—or just don’t care about—is that we’ve been in the same situation for the past four years, with one exception: it’s not one guy who owes a massive amount of money, it’s a lot of people who owe a little. True, loans in the $100,000 to $300,000 range seem like a lot of money to us, but to these guys $100,000 is an office decorating expense. They’d rather throw thousands of people into the street than say, “Let’s find a win-win here. We won’t make quite as much, but we won’t have to sell a $250,000 home for $100,000, either.”

But they won’t. And no one will bring it up to them now, because government has no place telling banks how to run themselves. All government does is make sure they stay afloat when their Ponzi schemes fall apart on them.

The Underpants School of Economics

The Beloved Spouse has reminded me of one of our favorite South Park episodes. In it, the boys’ friend Tweak is unable to sleep at night because of the Underpants Gnomes, who creep into his drawers and steal his, well, drawers.

Stan and Kyle and Cartman follow the Underpants Gnomes to their secret lair. (I forget whether Kenny was dead yet.) After a brief discussion, the head gnome shares his plan for wealth with the boys:

1. Underpants

2. ???

3. Profit

This is eerily like how the Republicans want to get the economy running again:

1. Austerity

2. ???

3. Prosperity (at least for some)

The Beloved Spouse wondered what George Carlin would think of this. (What other blog delivers such a wealth of cultural references?) She thinks it might go something like this:

Scenario:

The Worker

Out-of-work man.

Unskilled, no formal training. Construction. Warehouse work.

Married. Four kids. Wife works at low end department store.

Does odd jobs to keep the family afloat.

Rents a house.

Our Government

Is in charge of big projects that benefit the entire country.

Has lots of infrastructure that needs repair or replacement.

Has lots of new projects that need doing.

The Idea

Government hires this man to work on a project.

Government pays him a decent wage.

The man now has money to pay his bills, and  can now afford to buy more things for his family.

The family can go to the dentist, buy new shoes, have a vacation, buy a better car, buy a washing machine and dryer, go to the movies, etc.

Every time a dollar goes into this man's pocket, he probably spends all of it.

Every dollar that he spends goes to buy stuff or services.

That creates demand for stuff and services

Manufacturers make more stuff when there's demand for more stuff.

Service industries expand their services when there's more demand for services.

That means more jobs for folks in manufacturing, sales, services, etc.

Bonus! Our country now has safer roads, bridges, schools, etc.

The Outcome

Profit

This is such an elegant and obvious solution it’s hard to see how it can be argued with, except on the grounds of intellectual dishonesty (Paul Ryan, Eric Cantor) or severe mental impairment (Rick Perry, Michele Bachman). Trickle-Down economics hasn’t worked, and it’s not going to. Reagan’s economic Rasputin, David Stockman, knew it wouldn’t work when he implemented it, and admitted as much after he was safely out of government service. Trickle-Down economics is like standing a pyramid on its head; inherently unstable and unreliable.

What we need is Percolate Up economics. Give the above construction worker with four kids some money and he’ll spend it right now, on food or housing or car repairs. Give that money to someone in the highest earning one percent and he’ll either bank it, or, if he does buy something like a car, it will be a BMW. I’m all for free trade, but Germans have their economy better under control than we do. They’ll be fine.

Instead of giving a few people a lot of money through tax cuts, give a little money to each of a lot of people. Every dollar you give them will bring between 1.5 and two dollars back as it works its way through the economy after he buys a washing machine that allows Sears to order more, which allows whoever makes Kenmores (it’s not Sears, you know) to hire more washing machine builders n who can then fix their leaky roofs and basements, thus putting some construction guys to work. And on and on.

As for the alleged deficit hawks who think only government spending adds to the debt and tax cuts are somehow revenue neutral, look at your own finances. A dollar spent is no more damaging to the bottom line than a dollar not taken in.

I’ll talk about job creators another day.

 

Class Warfare. Again.

Republicans have their kickers in knots because noted Socialist Warren Buffet has advocated raising taxes on the super-rich. “Class warfare!” is the rallying cry from Fox News and its ilk. (Is there any way for “ilk” to sound complimentary? Certainly not when used in conjunction with “Fox News” or “Tea Party” or “child molester.” Not saying Fox news and the Tea Party are child molesters. I just tried to think of the worst thing I could call someone, since “Fascist” lost all meaning when Obama was declared one by Lyndon Larouche’s acolytes.)

Apparently the Right believes class warfare can only happen by pitting one class against the rich. This is not true, though that is traditionally how it has been done, primarily because the poor do not have anything anyone else wants. Ah, but this is the Twenty-First Century, where Brave New World is as passé as “See Dick run” and Ayn Rand has replaced Thomas Jefferson as the paragon of rational political thought. Conservatives have found one thing the poor have that’s worth taking.

Money.

Taking money from people who don’t have any is not just hard to do, it’s hard to advocate. We’re not quite ready for the Al Swearengen approach of “hit them over the head, take their money, and throw their bodies in the creek,” though we’re headed down that slippery slope. No, for this we have to resort to a tried and true conservative meme: these people are screwing you, and we’re your only friend.

Conservatives have a revered tradition with this approach. For years blacks were the enemy, taking white jobs, sleeping with white women, and looking better with shaved heads than any white man. Immigrants had their day, but vilifying them has lost its sheen since the economy became so bad even Mexicans don’t want to come here anymore. Now it’s the poor’s turn, except no one can say “let’s take money from the poor” without invoking Dickensian images even from those who think a Dickensian is someone whose work pants aren’t Levis or Wranglers.

“How can we take money from the poor and get the middle class to think it’s a good idea?” Oh, how this must have tortured many a conservative soul late into many sleepless nights. Then some 60-watt bulb noticed that almost half of all Americans don’t pay income tax, and boom! Inspiration.

All real Americans hate freeloaders, and in tough times everyone (except the rich) are expected to contribute. Never mind that most of those non-taxpaying goldbricks are seniors living on Social Security who don’t draw enough benefits to pay tax. Most of the others either make so little money the standard deductions wipe out their Gross Adjusted Income, or programs like the Earned Income Credit or Child Tax Credit bring them under the line. (Note: Republicans repeatedly vote for these programs, and have expressed no interest in undoing them.)

While the poor don’t always pay income tax, they do pay Social Security and Medicare taxes. (If they’re lucky enough to have jobs.) These are regressive taxes, especially Social Security, thanks to the cap, which means there are poor people in this country who pay no income tax, yet still pay a higher percentage of their wages in overall taxes than do the rich.

Conservatives have no sense of irony. They fail to realize a flaw that is implicit in their argument: we now live in a country where almost half the people don’t make enough money to pay income tax.

Does that bother anyone but me? Of course, I’m one of those who still thinks the banks and financial institutions were responsible for the current mess, and refuses to blame the public workers and unions because it was their unreasonable salary demands and lack of work ethic that caused mortgage-backed securities and credit default swaps to lose their (perceived) value and become exposed for the Ponzi schemes they always were, thus precipitating the Great Recession of 2008. Silly me.

Our Leadership At Work

Two conjoined headlines from today's Washington Post:

Senate again blocks jobs aid

Move leaves more than 1.2 million people without support checks, millions more could lose benefits.

• Congress votes to spare doctors Medicare cuts

Bastards.

You're Welcome

Wells Fargo Bank has reported a surge in profits for the first quarter of 2009. I am a Wells Fargo mortgagee who has never missed a payment, so I am taking full credit for this good news. I realize the stage coach division has been down recently; I’m just trying to pick up the slack any way I can.

The Sobotka Corollary to the Yankee Principle

The New York Yankees have been, and continue to be, adamantly against revenue sharing in baseball. They have by far the largest revenue base, and the largest payroll. What the Yankees, in their New York hubris, fail to grasp is they need the other teams to be competitive. Eventually even New Yorkers would look elsewhere for entertainment if the American League evolved into a baseball version of the Harlem Globetrotters and Washington Generals.

The same is true of the economy as a whole. Capitalism has been very, very good to America. The churn of companies rising and falling is accepted as part of the cost of doing business. Regulation of business is viewed as a necessary evil by most, pure evil by others. Entrepreneurial spirit is valued above all else, unless the government can be talked into underwriting some expenses.

What is too often forgotten on Wall Street and K Street is that not everyone can be a tycoon. I’m not talking about those who try, but fail: you pays your money, you takes your chances. I’m talking about the people who, for whatever reason, choose not to play. People who are content to put in their forty hours, go home, and play with their kids. Pay for their home and retire without having to worry if the price of dog food will starve them.

A pure capitalist sees these people as having no value. They’re weak, and exist only as overhead to slow the engine the entrepreneur is trying to drive. This is why ardent laissez-faire capitalists are ultimately mistaken. Deluded, even.

Not everyone can be a titan of industry, even if they wanted to. Someone has to actually build the cars. Unload the ships. Mine the coal. Even as our economy becomes more service based, we still need people to work retail sales, repair appliances, and cut hair. Cops and fireman and teachers aren’t nice to have; they’re critical.

To a capitalist, these people are overhead, a drag on the bottom line. Yet automakers sell a hell of a lot more cars to these folks than they do to business owners. The board of directors of Consolidation Coal aren’t going into the mines any time soon, and it’s a safe bet Rick Wagoner couldn’t hook up a transaxle if his life depended on it. The entrepreneurs provide vision and, we hope, leadership, but it’s still the people fixing potholes and washing windows who actually get these things done.

I’m not so naïve to believe this is going to change anytime soon; money talks. But until there’s some fundamental recognition of the value of the non-capitalist in a capitalist society, we’re going to end up where we are now every thirty to eighty years, no matter how smart the Masters of the Universe like to think they are. I’m not advocating class warfare, though it may sound like it to some. I’m not even pushing for common courtesy. It’s just common sense.

(Explanation of the title: Season Two of The Wire dealt with the loss of stevedore jobs on the Baltimore Harbor. The union leader was named Frank Sobotka.)

Life on Planet Republica

Senator Judd Gregg (R-NH) wrote today in today’s Washington Post:

[Obama’s budget] shows very clearly where the president and the Democratic majority want to take our country: sharply to the left

With all due respect, Senator Gregg, have you seen the 2008 election results? Did you watch the campaign? That’s exactly what they said they would do, and that’s why they’re the majority today. That’s what most people want.

Reaganite Republicans have grown so fossilized in their thinking that accepting reality is now considered to be a leftist principle. The prime precepts of their alternative budget are to cut taxes, freeze most spending for five years, halt stimulus and slash federal health programs for the poor and elderly. This is basically saying the fiscal policies that exacerbated the current situation can fix it if we just do them to a greater degree. Yes, the bursting of the housing bubble brought this on, but the uneven expansion of the Bush era, a lack of reliable spending on infrastructure maintenance, and weakening of the social safety net have made the current recession much deeper than it needs to be. All they left out was a loosening on bank and financial regulations. That should fix things right up.

These guys honest to God don’t get it. For weeks I thought liberal-leaning commentators were overexuberant when predicting the Republicans were on their to becoming a rump party. If they keep this up, I’m not so sure.

The Lights Are On, But Nobody's Home

I normally have far more regard for Midwestern sensibility than I do for the ADD-addled decision-making processes used on the coasts. I’m going to have to reevaluate that, if Jay Emler gets his way.

Mr. Emler is the chairman of the Kansas Ways and Means Committee. The article I read doesn’t say if he’s a Republican or a Democrat, which is fine by me; I can’t be accused of bias by either side. His plan for Kansas’ share of the economic stimulus money is to bank it for a rainy day. Honest to God.

"When [the stimulus] runs out, we're going to be in a world of hurt . . . so I'd rather see this go into a fund that we would not be able to access except for emergencies," Emler said. "While this is a 'stimulus' package, that's not how I run my personal life. I don't know a whole lot of people who go out and spend if they realize that in two years they're not going to have money."

It doesn’t say what Mr. Emler considers to be an emergency. I guess if he was in debt and his roof blew off he’d just sit in the rain until times got better. The money helps no one if Kansas sits on it. It’s a stimulus, and it only stimulates if it’s in use. Saving it for a rainier day is the surest way to ensure you’ll need it later.

The almost willful inability of some presumably intelligent people to grasp the simplest concepts is astounding, if those concepts run counter to their pre-conceived notions. Forget conservative and liberal. There is no more dangerous philosophy than believing you already know everything you need to know to successfully confront a previously unseen situation.

Not as Sub-Prime as You Think

Republicans like to say the Community Reinvestment Act caused all the trouble in the sub-prime mortgage market, as “those people” had to be given mortgages they were never going to be able to pay off. That’s bullshit, but it’s still the kind of thing they like to repeat ad nauseum under their current sole political philosophy, which can be summed up as, “Tell big enough lies often enough and maybe people will believe you.”

I hate to pile on in their hour of darkness—and it doesn’t get much darker than your party chairman feeling he has to apologize to Rush Limbaugh—but it occurred to me over the weekend that I have a sub-prime mortgage. It’s true. Me, Mister Middle-Aged White Guy, didn’t have 20% down when I bought my house three years ago. I was able to come up with 10%, and my credit score was over 700; a fifteen-year second trust loan had to be taken out, at a considerably higher interest rate.

Well, the fifteen-year loan was paid off last week, in almost exactly three years. You are not bailing anyone out on my account, including me. I suspect I am not alone here. There are as many reasons for people to need sub-prime loans as there are sub-prime loans. Some of them should never have been made; that’s on the lenders. The government never told them they had to lend money to people who couldn’t pay it back.

Sub-prime mortgages became a crisis because banks were lined up to issue non-documented loans to people who never should have been considered. Pitching a $400,000 mortgage to a chambermaid making $14,000 a year hardly qualifies as sound business practice. Nor does buying securities consisting of bundles of such loans without performing the due diligence necessary to make sure those were performing loans.

I’m old enough to remember when the lenders kept loan defaults from becoming a problem by not lending unless they were damn sure you could pay it back. Lenders stopped doing that, and started believing in their own Ponzi scheme. That’s where the problem was. Not with the overwhelming majority of borrowers.

And sure as hell not with me. So let’s be careful who we tar with the sub-prime brush.

Stimulating Conversation

I’ll keep this simple, in case a Republican reads it.

The American economy is like your house. When credit was loose and largely unsupervised, you bought this house, probably paid a little more than you should have. Times were good and credit was easy, so you bought a BMW for yourself and an Escalade for the wife to chauffer the kids in. Big screen HD television. Nice summer vacation and flew away for a week every Spring Break. Kids all have Wiis and iPods. Mom has a treadmill and Dad has a custom-fitted set of Calloways. The interest on the debts is an irritant, but not a deterrent. Household maintenance, never glamorous, is neglected.

Now it’s winter. The roof leaks. The furnace doesn’t work. The foundation has cracks that affect the plumbing and the toilets don’t flush. The house is rapidly becoming unlivable, due in large part to your neglect.

What do you do?

If you’re a Republican, you rummage through the attic and find your principles of fiscal conservatism. Debt is bad. These things will take care of themselves over time.

If you’re a sapient life form, you swallow hard and realize the only way to get out of the hole your profligate spending has dug for you is through more spending. Not spending on just anything. Fix the roof. Re-seal the foundation. Repair the plumbing. Get a new furnace. Pay the increased medical bills you incurred because your seven-figure house was an unhealthy hovel. Yes, it’s more debt, and you don’t have a good idea how you’ll pay it back yet, but it won’t matter if you can’t get over this current hump.

I may be a social liberal, but I’m a fiscal conservative. I don’t buy anything I don’t have the money for. My only current debt is a mortgage payment. (I’ll have a car payment again someday, but the current Honda is paid for.) I have a big screen HD TV that I saved up for before I bought it. I have well established the bona fides for my distaste for debt. Yet I am also a sapient life form, and I recognize what has to be done here. It goes against my ideology, but I live in a brick-and-mortar world, not some theoretical construct, so I will swallow hard and accept reality, because no problem can be fixed until you recognize it.

Is that simple enough, you Joe the Plumber loving, redneck, willfully ignorant motherfuckers?

Dodging the Bullet

I’ve been negligent about this blog for a couple of weeks. It’s not my fault. (You’re scratching your head, thinking, “He’s apologizing for that? People look forward to King neglecting this blog.”) Every time I start to write something, it has to do with the current politico-economic sodomy we’re currently experiencing and I get so worked up I’ve written six hundred words before I’ve gotten to the point and the adrenaline rush is making the argument harder to hold to hold together and…

Yeah. Like that.

Suffice to say, there are too many people who just don’t get it. Democrats and Republicans. The list of what’s pissing me off can’t be typed before I have to leave for work in nine-and-a-half hours. So consider yourself lucky.

For now.

Throw Money at It

That’s the standard Republic Party reply when Democrats come up with a program. “Those tax and spend Democrats just want to throw money at the problem.” Let’s see how well that argument holds up.

Since the Depression, Democrats have preferred government-sponsored job programs for economic stimulus. The Depression was full of them: WPA, TVA, Rural Electrification. Whatever kept people working and off welfare. Build roads, bridges, buildings. Run phone and electrical lines. Keep people busy while preparing the nation for the eventual good times, because having to play catch-up can stifle an economic rebound faster than anything.

This approach has benefits. First and foremost, the money wasn’t just flowing one way. People who are working pay taxes, as opposed to just taking in money like those collecting unemployment insurance and welfare. (Republics shouldn’t have to be reminded of this.) Same thing for the companies who get the contracts to actually do the work.

Even better, the program doesn’t have to work as well as expected in order to reap its rewards. Even if the economy doesn’t recover as much as you’d like, you’ve still fixed the roads and bridges, laid cable and fiber (the 21st Century equivalent of electric and phone lines). These are tangible benefits that will be there, ready and waiting, when things finally do get going again.

The Republic Party, on the other hand, likes to put checks in the mail, in the hope that people will spend them on goods and services. This approach, which owes much to the “trickle down” school of economics, is unreliable at best. Sometimes it’s a downright fallacy, as is so much of trickle down theory.

Let’s take this year’s example, where millions of people got $300 checks. What was the root of the economic problem? Overextension of credit. What did a lot of people do with the money? They paid bills. A worth endeavor, but hardly stimulating to the manufacturing or sales segments of the economy. Even worse, when it didn’t work, all we had to show for it was a bugger deficit.

Getting real work to take place will create a “bubble up” economy by putting the money in the hands of the people who need it most, and will be most likely to recirculate it in the desired manner, namely those who actually need it to make ends meet. Why this remains such a revolutionary concept is the real puzzler.

Putting people to work to accomplish something, or sending checks and hoping for the best. Who’s really throwing money at the problem?

The System's Broke, Now So Are You

Yesterday Lehman Brothers went underwater faster than Galveston. Merrill Lynch was helicoptered to safety at the last minute. AIG is stalled on the railroad tracks, hoping the engineer of the oncoming train isn’t text messaging anyone. All of us are riding the tiger, and we might as well wait until he gets tired; he’ll eat us if we jump off at the wrong time. (Thus ends the strained metaphor section of today’s essay.)

Free market, laissez-faire capitalism is at the heart of the American economic myth, and the country has profited from it We’re in the process of being reminded the free market ain’t free, and it’s not just those who reach for the brass ring and miss who get ground up in the wheels of its machinery.

Unfettered capitalism is based largely on the premise of self-regulating markets, and the idea of balancing risk against rewards. Theoretically, it works. We’re seeing it work now, as bubbles in housing and credit positions have burst more or less simultaneously, creating havoc across the economy. In theory, those who made mistakes are being punished financially, and those who were prudent will be rewarded. That’s not how it works in practice.

This is not the place to debate just desserts for those whose greed brought us to this place, nor to argue who should, or should not, get bailed out by the government. All we can do is to make the best of an increasingly bad situation and devise workable plans to see to it such events don’t happen again.

Which means regulation. Public policy has stripped away layers of regulation since Ronald Reagan’s inauguration in 1981. Much of this was necessary. Government regulations created a culture of featherbedding, where no business in selected sectors—commercial airlines, telecommunications, interstate shipping—could go broke, thanks to what amounted to government price fixing. Everyone paid for that, except the shareholders of the protected industries.

The freewheeling, devil-take-the-hindmost attitude that replaced it has swung the pendulum of business too far the other way. It’s never good to see a business go bust, though some deserve to. Our current situation has evolved into a caricature of laissez-faire, where those with the most to gain had little to lose, and those who stood to benefit least may lose most.

Tax laws were made more lenient for brokers of certain investments, because their income depended to a large extent on commissions, never mind they were building their fortunes with other people’s money. Their risk was they wouldn’t get rich; their reward could be to become obscenely rich. Exorbitant bonuses were paid to executives who built short-term profits on dubious strategies, such as buying securities based on mortgages unlikely to be paid. These, and others, have been swept up in the debris of the bursting bubble, but they’ve already cashed in. Their investments will suffer, but a $10 million (or more) nest egg can take a substantial hit before its owner becomes middle class, even by John McCain’s definition.

Those who will be hurt most are those who had the least to gain. People who were in the market hoping for no more than a relaxing retirement, or to send a child to college are seeing those possibilities move farther away every time they open a newspaper. Adding insult to injury, the tightening of credit makes it harder for their kids to get student loans; the potential of getting money out of their houses diminishes with the value of the house.

These are the people who never stood to become millionaires, but who are paying the greatest real price. The nebulous “market” true capitalists reflexively genuflect before has no mechanism of concern for these people; they don’t matter. The excessive regulation of an overlarge government can be blamed for a lot of things, but we forget the uses and benefits of government at our peril. It seems America has to learn the dangers of capitalism run amuck every eighty years or so. Let’s do what we can to make it a little easier on our grandchildren.

The American Dream

The local sports radio station is playing a series of ads promoting the newest get rich quick scheme: foreclosed real estate. There’s a testimonial from a guy who paid $25,000 for a house and sold it a month later for a $65,000 profit. It’s a reasonable assumption he was looking for three more 25 grand specials on his way home from the settlement.

This is great for those who have the cash on hand to pay for these discount houses. Period. No one else. It does not help the economy. The banks took a bath, and the construction industry isn’t going to build something new when you can pick up something almost new – that the original owner worked the bugs out of – for ten cents on the dollar.

It also doesn’t help those who are trying to get into the housing market for the first time, unless they were fortunate enough to have their financing lined up well in advance. More likely they’ll pay the speculator three to five times what he paid for it. His value add? Call me if you think of something.

What we have here is another wedge driving incomes apart. Those with money will make more; those without have probably already lost it through the mortgage payments they were able to make before the ARM went up, or the balloon payment kicked in. No sympathy here for them; they accepted terms they couldn’t afford. That’s life. Others shouldn’t get rich from their misfortune.

This is a golden opportunity for Congress to take action that won’t cost a cent, and will actually do some good. Since housing prices are going to fall anyway, let’s stabilize them and get some new homeowners set up. Impose a confiscatory tax rate on any property bought at a distress sale that is flipped in less than five years. If you bought it to live in, you’re cool. If you bought it solely to get someone else to pay you more for it, then who is it really hurting if you don’t make all that much off of it?

They won’t, though. Know why? Because they have money, and most people figure they will too, someday. They don’t want to lose their opportunity to screw someone else when it’s their turn. It’s what’s made America what it is today.