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I read a lot of economics blogs and columns, in part because I am a masochist but I also really like to see what economists are saying or not saying about housing. At Marginal Revolution today there is a discussion about theories behind the involvement of Fannie and Freddie in the mortgage market. The post states that the old consensus was that the GSE's were in place to make housing more affordable. EPIC FAIL ALERT. The notion that Fannie Mae, Freddie Mac, and the Federal Reserve have ever made housing more affordable is ludicrous and comical. If you define affordable as low interest rates then you can definitely argue that they succeeded but you are ignoring the most important factor in whether housing is affordable: your income.
We used to consider housing affordable if you spent roughly 25 percent of your gross monthly income on housing. During the peak of the housing boom, Fannie Mae was routinely backing loans at 65 percent of people's gross monthly incomes. If you expand your definition of affordable to mean, "at the cusp of bankrupting you" then well done, Fannie. You made housing more dangerously affordable than ever.
What we have in many parts of this country is a mismatch in the supply of housing with what consumers can actually afford, you know, given their crappy job prospects. The government inflated housing bubble changed what we view as affordable and made a 3 bedroom house in the suburbs with granite countertops seem like a public good. It's not. We have a vast amount of homes that are affordable to a small amount of people. This cannot be fixed by government intervention, it will require rising incomes and economic growth which will increase demand for what is currently, unaffordable housing.
HUD projections show that in my region, housing demand will be for homes in the $125,000 to $200,000 price range. This is affordable given our median income levels and these are the homes that are actually selling right now. What we have is a plethora of homes priced from $250,000 to $350,000 that even if you have 20 percent to put down (a modern miracle), once you factor in taxes and insurance you would need income in excess of $72,000 a year to afford. This is assuming that you don't have any other debt. If you have a car payment, student loan, and an average credit card balance this ups your income requirement to $100,000 a year to afford the payment. Better get on the The Ladders website.
On the other end of affordability we have many families that are working class, what is quickly becoming a class of the working poor. They may have combined incomes of $45,000 per year and they have consumer debt and spend virtually all of their incomes monthly. For this family, an affordable house carries a mortgage payment of $1125 including taxes and insurance. For this family, a home that costs $150,000 is affordable. Unfortunately, many of these families are living in $250,000 houses because they qualified for twice what they could actually afford with the help of Fannie, Freddie, and the Federal Reserve.
We have a number of housing problems which are exacerbated by our poor economy. People underwater on their mortgages are trapped unless they say screw it and walk away and why wouldn't they; what incentive do they have to stay? Do you really think people struggling to stay afloat are going to put the virtue of their word over a rational economic decision? Didn't think so.
A bigger problem exists for unemployed homeowners. Because economies tend to have local and regional agglomeration characteristics in particular industries, you end up with a lot of unemployed people in one area with similar skill sets. If these unemployed people were mobile, as in able to sell their house and not take a complete financial schlacking, they could move to where their skills might be employable. Unfortunately, we have a labor force that is very immobile right now which makes unemployment even worse. Being a renter right now has tremendous advantages, particularly if you can move to take advantage of opportunity.
Perhaps, the Banks should become landlords and turn short sales and foreclosures into rentals. This would slow down the decline in housing values because the properties wouldn't go to market and then drag down appraisals for the next two years for other homes in the area. Bankers would make great Slumlords, they wouldn't even require training.
Showing posts with label Federal Reserve. Show all posts
Showing posts with label Federal Reserve. Show all posts
Tuesday, August 24, 2010
Housing Will Save Us!!! Oh Wait, Nevermind.
The Geniuses of the Federal Reserve (wouldn't that make a totally un-sexy calendar) have declared that a double dip recession is becoming more likely following a weak housing report and high unemployment. Can you remember the last time that economic news didn't include the phrases "weak housing" and "high unemployment"? Why is it then that every news release about the economy seems to be written with an underlying tone of surprise like economists and media types are really saying, "I can't believe that housing is still weak and people are still unemployed, the economy seems so robust."
The coverage of Charles Evans, Chicago Federal Reserve Bank President, can be found here. Here is a quote from the article:
"Many economists worry that, without housing as an engine of growth, the economy could take much longer than usual to recover."
I have to call Bullshit on this statement. Housing as measured by fixed residential investment has contributed on average 4.1 percent to GDP since 1929. It is actually a very small part of our economy when compared to consumer spending, government spending, and private investment. It is not an engine of economic growth, it is a symptom of economic growth. Economists should know better. When consumers feel good about their job security and have rising wages, they invest in housing. Therefore, housing sector growth lags economic growth not the other way around. When did we quit recognizing this and start treating housing as a bigger component of our economy than it actually is?
If you don't want to take my word for it because I blog under the name Turdy and swear like a sailor, take a look at this graph I created tracking the private sectors housing investment over time as a percentage of GDP.
What should jump out at you from this graph is that housing rebounds after the trough of the recession historically. The fact that intelligent economists at the Federal Reserve and serving as Obama's Economic Advisors are arguing that housing can and should lead us out of the recession are bullshitting you. It is distracting you from what is really wrong with our economy; businesses have so little faith in our economy and face so much uncertainty about government policy that they are paralyzed. As long as this is the case, there will not be economic growth.
It must make you wonder how a sector that directly contributes such a small share of GDP could facilitate the destruction of the larger economy. The answer is that the housing bubble fueled indirect contributions to GDP through lax lending standards and consumers use of their homes as ATMs. Housing didn't gain that much in share of GDP during the bubble, it reached a peak of 6.1 percent in 2005 which was a 50 year high but still only 2 percent over its long term average. During this same period however, consumer spending on goods and services grew because people felt wealthier which led to increases in goods manufacturing and spilled over to other sectors of the economy. When the bust occurred, the reversal of the positive spillovers was catastrophic for manufacturing, retail, and other major sectors of the economy.
Economic recovery will rely on the consumer in this recession as it has in EVERY RECESSION IN OUR HISTORY. Before people buy houses, they need to be able to pay for necessities like transportation, food, and child care. When they feel secure in their jobs and have wage growth, they will start investing in more long term investments like housing but we are nowhere near that point. It is a colossal waste of time for everyone to worry about propping up the housing market and suggesting that it will grow our economy. We have already paid the price for the fallacy of this argument, why must we continue on the same path?
The coverage of Charles Evans, Chicago Federal Reserve Bank President, can be found here. Here is a quote from the article:
"Many economists worry that, without housing as an engine of growth, the economy could take much longer than usual to recover."
I have to call Bullshit on this statement. Housing as measured by fixed residential investment has contributed on average 4.1 percent to GDP since 1929. It is actually a very small part of our economy when compared to consumer spending, government spending, and private investment. It is not an engine of economic growth, it is a symptom of economic growth. Economists should know better. When consumers feel good about their job security and have rising wages, they invest in housing. Therefore, housing sector growth lags economic growth not the other way around. When did we quit recognizing this and start treating housing as a bigger component of our economy than it actually is?
If you don't want to take my word for it because I blog under the name Turdy and swear like a sailor, take a look at this graph I created tracking the private sectors housing investment over time as a percentage of GDP.
 |
| Data from Bureau of Economic Analysis, Graph and Data Analysis by Turdy, Design based on Calculated Risk Blog |
It must make you wonder how a sector that directly contributes such a small share of GDP could facilitate the destruction of the larger economy. The answer is that the housing bubble fueled indirect contributions to GDP through lax lending standards and consumers use of their homes as ATMs. Housing didn't gain that much in share of GDP during the bubble, it reached a peak of 6.1 percent in 2005 which was a 50 year high but still only 2 percent over its long term average. During this same period however, consumer spending on goods and services grew because people felt wealthier which led to increases in goods manufacturing and spilled over to other sectors of the economy. When the bust occurred, the reversal of the positive spillovers was catastrophic for manufacturing, retail, and other major sectors of the economy.
Economic recovery will rely on the consumer in this recession as it has in EVERY RECESSION IN OUR HISTORY. Before people buy houses, they need to be able to pay for necessities like transportation, food, and child care. When they feel secure in their jobs and have wage growth, they will start investing in more long term investments like housing but we are nowhere near that point. It is a colossal waste of time for everyone to worry about propping up the housing market and suggesting that it will grow our economy. We have already paid the price for the fallacy of this argument, why must we continue on the same path?
Wednesday, July 14, 2010
Why Financial Reform Won't Work: Part 1
I have been ranting about financial reform legislation and how it won't work and will probably have horrible unintended consequences but before today, I didn't spell out why I feel that way. Today, I decided to spell it out after I received a email from Barack Obama's people telling me to call Senator Grassley and convince him to vote for the combined bill. The email came in with the subject of Urgent and claimed the legislation is the "boldest overhaul of the financial system since the Great Depression." I like the use of the word boldest in this sentence because bold does not equate to intelligent, well designed, or effective. Once, my co-blogger after drinking for twelve hours, stole a golf cart at a NASCAR race and proceeded to drive in small circles turning left and screaming, "Guess who I am? I'm a NASCAR driver." This was a bold move, one of his boldest. It does not qualify as one of his most intelligent or positive moments and it could have landed him in jail. Sometimes bold moves, while funny as hell, are not good ideas.
What I hate most about the legislation is the creation of a Consumer Financial Protection Bureau. You might wonder why I could hate something that sounds so innocuous and the answer lies with where it will be housed: The Federal Reserve. We are supposed to be comforted by the fact that it is an autonomous bureau with a single director. Look, there is no independent agency or bureau in all of Washington D.C., I don't care what they are intended to be. Furthermore, how autonomous were you when you lived under your parents roof?
The Federal Reserve is one of the 5 major players that created the crisis we find ourselves in and they have no business being anywhere near a bureau intended to protect consumers. They fueled the crisis, failed to recognize it, and then sold consumers down the river in the bailout mess. Putting a Consumer Protection Bureau there is like assigning lions to be security detail for gazelles.
Another key element of the package is regulatory control and accountability for the ratings agencies. The problem with this is that the regulators have to understand what the agencies are doing and what the products are they are actually rating. Half the instruments Wall Street are trading are so convoluted that people within the firms trading them don't know what they are. How could a regulator possibly know what the ratings agencies are doing or what they are rating? Someone smart enough to get it isn't going to work as a regulator, nope, they will go to work on Wall Street inventing new instruments of debt and new ways to sell it. Don't even get me started on the corruption inherent in regulation anyway.
It's very simple; Consumers need to protect themselves. If we have gotten so collectively stupid that we think the government can protect us than we are totally screwed as a nation. The government couldn't protect us from September 11th, then the government created the conditions for the housing crisis, and I'm not sure if you noticed; the government can't fix the economy either. The best the government can do to help the consumer is encourage financial education in the schools and mandate more economics courses for our students. Even that won't solve the problem. When people want to do stupid things (think NASCAR story above), they will find a way to do them.
The email from Barack's people claimed that the bill would end the exploitation of the consumer by ending hidden fees and pages of small print. The pages of small print you get with a loan application are there because of regulations, trust me when I say we would have preferred to not send you fifty pages of documents to get your loan approved. If you think there is small print now, just wait.
The truth is, when I was a loan officer, my customers didn't read the disclosures I sent them. They looked at two things: their monthly payment and their closing costs. They signed fifty pages of disclosures without reading them. Most of my customers would get their loan package and call me and ask for the Cliff Notes, which I was more than happy to provide them. If you really ever read a loan package and understood everything in it, you probably would not want to get a loan. There is a clause in most loan documents that if you make any material changes to your home without notifying your mortgage company they can call the note due and demand full payoff. How many people know that? How many people know that and tell their mortgage company that they turned a bedroom into a stripper lounge?
I don't have the answers on how this gets better but I think it starts with us getting smarter, which is not too promising and quite frankly, makes me fear for the future.
What I hate most about the legislation is the creation of a Consumer Financial Protection Bureau. You might wonder why I could hate something that sounds so innocuous and the answer lies with where it will be housed: The Federal Reserve. We are supposed to be comforted by the fact that it is an autonomous bureau with a single director. Look, there is no independent agency or bureau in all of Washington D.C., I don't care what they are intended to be. Furthermore, how autonomous were you when you lived under your parents roof?
The Federal Reserve is one of the 5 major players that created the crisis we find ourselves in and they have no business being anywhere near a bureau intended to protect consumers. They fueled the crisis, failed to recognize it, and then sold consumers down the river in the bailout mess. Putting a Consumer Protection Bureau there is like assigning lions to be security detail for gazelles.
Another key element of the package is regulatory control and accountability for the ratings agencies. The problem with this is that the regulators have to understand what the agencies are doing and what the products are they are actually rating. Half the instruments Wall Street are trading are so convoluted that people within the firms trading them don't know what they are. How could a regulator possibly know what the ratings agencies are doing or what they are rating? Someone smart enough to get it isn't going to work as a regulator, nope, they will go to work on Wall Street inventing new instruments of debt and new ways to sell it. Don't even get me started on the corruption inherent in regulation anyway.
It's very simple; Consumers need to protect themselves. If we have gotten so collectively stupid that we think the government can protect us than we are totally screwed as a nation. The government couldn't protect us from September 11th, then the government created the conditions for the housing crisis, and I'm not sure if you noticed; the government can't fix the economy either. The best the government can do to help the consumer is encourage financial education in the schools and mandate more economics courses for our students. Even that won't solve the problem. When people want to do stupid things (think NASCAR story above), they will find a way to do them.
The email from Barack's people claimed that the bill would end the exploitation of the consumer by ending hidden fees and pages of small print. The pages of small print you get with a loan application are there because of regulations, trust me when I say we would have preferred to not send you fifty pages of documents to get your loan approved. If you think there is small print now, just wait.
The truth is, when I was a loan officer, my customers didn't read the disclosures I sent them. They looked at two things: their monthly payment and their closing costs. They signed fifty pages of disclosures without reading them. Most of my customers would get their loan package and call me and ask for the Cliff Notes, which I was more than happy to provide them. If you really ever read a loan package and understood everything in it, you probably would not want to get a loan. There is a clause in most loan documents that if you make any material changes to your home without notifying your mortgage company they can call the note due and demand full payoff. How many people know that? How many people know that and tell their mortgage company that they turned a bedroom into a stripper lounge?
I don't have the answers on how this gets better but I think it starts with us getting smarter, which is not too promising and quite frankly, makes me fear for the future.
Friday, July 2, 2010
Return to the Scene of the Crime
I haven't blogged in awhile, not because I am uninspired but rather, I have been busy turning parts of this blog into a book. Well that and I took a vacation back to the land where all the debauchery described here occurred.
Returning to the place where I worked as a loan officer for three years and lived for twice that time brought mixed emotions. My hope was to avoid running into any of my previous costumers or real estate contacts, unless of course by choice. That mission was accomplished. I didn't want to see old customers because I was in fear of getting physically or verbally assaulted because of the loans I had done for them. and frankly, I feel sorry for a lot of people who are trapped in the sandbox where I made a ton of money for awhile and then fled.
I was struck immediately by the impacts of the housing crisis on the entire region and while it should have come as no surprise, I still was shocked to see predictions I had made long before coming to pass. My friend and co-blogger, A.Hole, and I met my friend and real estate agent, Judy Moody, for happy hour. Of course, we drank a lot and as to be expected, talked about real estate and gossiped about former colleagues we still didn't like. I heard stories of homes purchased for $800,000 in 2006 selling at short sale for $350,000. One of these homes was purchased by a gentleman that only earned $50,000 a year. Obviously, he was the beneficiary of a liar's loan but he was just one of thousands who purchased a home he couldn't afford in a highly speculative market.
Economics 101 as it applies to housing is that housing demand is driven by employment. In theory, people need income to buy a home. The housing boom took this fundamental tenet of economics and spit on it. In the area where I lent money, we had very little employment and most of it was tied to tourism. A great number of people in the sandbox are reliant upon unemployment in the winter as their jobs are seasonal but, the vast majority of people were self employed or directly employed by industries associated with housing. This includes a plethora of self employed individuals, real estate agents, and construction contractors. Our housing boom was driven by people on the other side of the bridge purchasing second homes and investment properties and our local speculators, who behaved like they were players in the gold rush. People who had no business owning one home found themselves temporarily exercising domain over small, crappy housing empires. It couldn't last.
A number of things conspired to cause the decimation of the housing market in the sandbox. Fannie Mae, the Federal Reserve, and government policies were the catalyst but, the local developers and real estate players pushed the market over the edge.
Much like the Tragedy of the Commons, where everyone acting in their self interest brings about a negative outcome for themselves and the greater good, real estate developers went nuts. With no consideration to the sustainable supply of certain types of housing in the region, condo developers saturated the market with units that demand could not possibly keep up with. Planned urban developments went up everywhere, even where they shouldn't. Development in a protected wetland was possible if you knew the right people; no one thought about whether they should do it, they just doled out favors and protected the fat cats of the region. The spoils of the boom went to the early developers and investors who amassed wealth at an unprecedented rate. Seeing the gains to these early entrepreneurs, every Tom, Dick, and Harry wanted in on the splendor. The last to get in are suffering the most as profits were driven out and then the market collapsed completely, much like the species crash of an unsustainable animal population. The housing market is very Darwinian, but the fittest in this case were those who got in first and then had the good sense to the get the hell out while the gettin was good and those who had political ties to avoid silly things like zoning laws and environmental regulations that the unconnected were subject to.
At a particularly drunken happy hour at a bar by the Bank of Hell ruled by the Mortgage Devil, I got in an argument with people who had invested in a condo development on what they call a river. Growing up on the Mississippi, I felt the need to point out that their so called river looked like a polluted ditch and bore no resemblance to a real river. They argued with me and then realizing I wouldn't change my stance that not all waterfront property is created equal, they changed their tactic to arguing that the new condo development would appeal to young professionals. I responded, "To attract young professionals you must have jobs and this town doesn't so I think there is a pretty major flaw in your understanding of the demand for these units." No amount of Ketel One keeps me from making sound economic sense but these people were having none of it. They told me I didn't understand real estate and they would prove me wrong. Yeah, right. I went by the project and one whole building is sitting sheathed without Tyvek, unfinished and blighted. The other condo building they actually finished has a vacancy rate that appears to be 90%. As I predicted, young professionals go where the jobs are and are not swayed to deviate from their economic self interest by a creek filled with litter and surrounded by crime.
The entire region looked sad to me despite the flood of tourists from Pennsyltucky, New Jersey, Washington D.C., Baltimore, and surrounding cities. The housing market in the sandbox looks to be at least a year away from even the seeds of recovery and with the economy still struggling, financial distress for people underwater in their homes or turning their second homes into rental properties is nowhere near over. A glance at the rental listings for the area show how the flood of housing units for rent has depressed rental prices. Great for renters? Perhaps, if they could find a job.
Buying at the beach became the American Dream with the help of incentives from the Federal Government yet, our government is accepting no responsibility for its contributions to the crisis. Even those people in the sandbox who have encountered economic ruin due to their belief that the housing market was a never ending path to wealth blame the "Greedy Bastards on Wall Street." Ummm, people want to make more money, duh. That is only a problem when the government provides incentives to do so at the expense of common sense, economic sustainability, and future economic growth.
If the government gives your kids free reign in a candy store for a decade, you will get a bunch of fat kids with cavities. What happens when you give adults these same incentives but trade the candy store for the housing market, oh yeah, an incredible bust and recession.
On a positive note, if you are independently wealthy and require no employment, I can guide you to some tremendous values in a resort community. If however you want to live at the beach but need income to support the habit, I got nothing.
Returning to the place where I worked as a loan officer for three years and lived for twice that time brought mixed emotions. My hope was to avoid running into any of my previous costumers or real estate contacts, unless of course by choice. That mission was accomplished. I didn't want to see old customers because I was in fear of getting physically or verbally assaulted because of the loans I had done for them. and frankly, I feel sorry for a lot of people who are trapped in the sandbox where I made a ton of money for awhile and then fled.
I was struck immediately by the impacts of the housing crisis on the entire region and while it should have come as no surprise, I still was shocked to see predictions I had made long before coming to pass. My friend and co-blogger, A.Hole, and I met my friend and real estate agent, Judy Moody, for happy hour. Of course, we drank a lot and as to be expected, talked about real estate and gossiped about former colleagues we still didn't like. I heard stories of homes purchased for $800,000 in 2006 selling at short sale for $350,000. One of these homes was purchased by a gentleman that only earned $50,000 a year. Obviously, he was the beneficiary of a liar's loan but he was just one of thousands who purchased a home he couldn't afford in a highly speculative market.
Economics 101 as it applies to housing is that housing demand is driven by employment. In theory, people need income to buy a home. The housing boom took this fundamental tenet of economics and spit on it. In the area where I lent money, we had very little employment and most of it was tied to tourism. A great number of people in the sandbox are reliant upon unemployment in the winter as their jobs are seasonal but, the vast majority of people were self employed or directly employed by industries associated with housing. This includes a plethora of self employed individuals, real estate agents, and construction contractors. Our housing boom was driven by people on the other side of the bridge purchasing second homes and investment properties and our local speculators, who behaved like they were players in the gold rush. People who had no business owning one home found themselves temporarily exercising domain over small, crappy housing empires. It couldn't last.
A number of things conspired to cause the decimation of the housing market in the sandbox. Fannie Mae, the Federal Reserve, and government policies were the catalyst but, the local developers and real estate players pushed the market over the edge.
Much like the Tragedy of the Commons, where everyone acting in their self interest brings about a negative outcome for themselves and the greater good, real estate developers went nuts. With no consideration to the sustainable supply of certain types of housing in the region, condo developers saturated the market with units that demand could not possibly keep up with. Planned urban developments went up everywhere, even where they shouldn't. Development in a protected wetland was possible if you knew the right people; no one thought about whether they should do it, they just doled out favors and protected the fat cats of the region. The spoils of the boom went to the early developers and investors who amassed wealth at an unprecedented rate. Seeing the gains to these early entrepreneurs, every Tom, Dick, and Harry wanted in on the splendor. The last to get in are suffering the most as profits were driven out and then the market collapsed completely, much like the species crash of an unsustainable animal population. The housing market is very Darwinian, but the fittest in this case were those who got in first and then had the good sense to the get the hell out while the gettin was good and those who had political ties to avoid silly things like zoning laws and environmental regulations that the unconnected were subject to.
At a particularly drunken happy hour at a bar by the Bank of Hell ruled by the Mortgage Devil, I got in an argument with people who had invested in a condo development on what they call a river. Growing up on the Mississippi, I felt the need to point out that their so called river looked like a polluted ditch and bore no resemblance to a real river. They argued with me and then realizing I wouldn't change my stance that not all waterfront property is created equal, they changed their tactic to arguing that the new condo development would appeal to young professionals. I responded, "To attract young professionals you must have jobs and this town doesn't so I think there is a pretty major flaw in your understanding of the demand for these units." No amount of Ketel One keeps me from making sound economic sense but these people were having none of it. They told me I didn't understand real estate and they would prove me wrong. Yeah, right. I went by the project and one whole building is sitting sheathed without Tyvek, unfinished and blighted. The other condo building they actually finished has a vacancy rate that appears to be 90%. As I predicted, young professionals go where the jobs are and are not swayed to deviate from their economic self interest by a creek filled with litter and surrounded by crime.
The entire region looked sad to me despite the flood of tourists from Pennsyltucky, New Jersey, Washington D.C., Baltimore, and surrounding cities. The housing market in the sandbox looks to be at least a year away from even the seeds of recovery and with the economy still struggling, financial distress for people underwater in their homes or turning their second homes into rental properties is nowhere near over. A glance at the rental listings for the area show how the flood of housing units for rent has depressed rental prices. Great for renters? Perhaps, if they could find a job.
Buying at the beach became the American Dream with the help of incentives from the Federal Government yet, our government is accepting no responsibility for its contributions to the crisis. Even those people in the sandbox who have encountered economic ruin due to their belief that the housing market was a never ending path to wealth blame the "Greedy Bastards on Wall Street." Ummm, people want to make more money, duh. That is only a problem when the government provides incentives to do so at the expense of common sense, economic sustainability, and future economic growth.
If the government gives your kids free reign in a candy store for a decade, you will get a bunch of fat kids with cavities. What happens when you give adults these same incentives but trade the candy store for the housing market, oh yeah, an incredible bust and recession.
On a positive note, if you are independently wealthy and require no employment, I can guide you to some tremendous values in a resort community. If however you want to live at the beach but need income to support the habit, I got nothing.
Monday, May 24, 2010
Too Small to Succeed: The Plight of Jello Salad and Small Banks
I spent a good chunk of my weekend contemplating the future extinction of Jello salad. It started at a friend’s birthday party for her daughter when her grandmother made a pineapple Jello salad and the kids couldn’t get enough of it. I don’t make Jello salad, in fact, I don’t even make Jello, unless it is for shooters but I’m even getting too old for that. So this party had me thinking that as grandparents die off so will Jello salad, because it is only loved by the very old and the very young and very few in my generation make the stuff. I find this kind of sad, although the truth is that I don’t even like Jello salad, probably because my mom shoved it in my yapper at every kind of celebration when I was a child. If I fell off my bike I was told, “Here have some Jello salad, you will feel better. It will fix you right up!” You are probably wondering what this has to do with the mortgage and banking industry. Well at first glance, absolutely nothing but, it made me realize that Jello salad is like small banks, neither one will be probably exist in twenty years.
A glance at the FDIC bank failure list shows a number of regional and small community banks shutting their doors. I guess they are too small to succeed, while their larger national counterparts are benefitting from the notion that they are too big to fail. Our government is helping to decide who the winners and losers are and we are footing the bill.
Some of these failures are due to market forces, particularly small community banks in rural places where populations are declining and so are economic prospects. Bad investments by banks can also account for a portion of the closures, particularly those regional banks that put a considerable amount of their resources into financing home builders and commercial developers in places like Nevada, California, and Florida.
What seems odd to me is that smaller banks that didn’t take on the kind of risk that plagued the banking industry during the housing boom are failing at a much higher rate. By all accounts, they were still lending more responsibly than the rest of the industry and since many of them subjected loans to traditional underwriting by committee, they should have been more insulated than the big banks using Fannie Mae products to get nearly anyone a loan. Perhaps, a larger portion of the failures are those banks that in response to the increasing competitiveness of the banking industry and its consolidation, were encouraged to take on more risk than realistic for their asset size and local economic conditions. I still question however, that all these explanations can account for the higher failure rate. I'm sure the rest is explained by the collusion of the large banks to receive bailouts and pass on risk and exposure to the small banks.
This is on my mind because of the proposed financial regulations that will do precious little to insulate us from having another financial meltdown in the future. With the loss of small banks, we are losing tremendous information and relationships that can help foster economic growth and stability in a region. Bankers who know their customers can assess risk better than automated underwriting; tools such as credit reports, which are not always reflective of risk, cannot replace the knowledge found in a more personal banking system. The consolidation of the banking and mortgage industry which has been going on for twenty years is speeding up thanks to the housing crisis, and I’m sure the largest of the banks couldn’t be happier about it. Couple this with the melding of banking and the insurance industry and we are at more risk than ever.
So when small banks go, so does competition in the industry, leading to a cartel of banks…oh yeah, we have that already, it is called the Federal Reserve. The impact on consumers will be profound in terms of fees for everything from overdrafts, wire transfers, stop payments, and on and on. Cartels do not price competitively, they don’t have to. Will customers appreciate the convenience of large banks; of course they will. What I fear customers won’t recognize is that a less competitive banking industry can hamper our future economic growth and lead to greater risk in our financial markets.
If you haven’t read Barbarians at the Gate or Liar’s Poker I recommend you go out and get them right now. What I take from these two books is that particularly in financial markets, the consolidation of power and resources creates greater incentive for rent-seeking and collusion, leaving taxpayers more at risk to anti-competitive and harmful behavior. From junk bonds to mortgage backed securities, a very small group of players are determining behavior in financial markets and where wealth flows. Think of it this way, if you only had to answer to people just like you with the same incentives and goals you would probably behave however you wanted without fear of repercussions, there would be no reinforcement mechanism to check your asshole behavior. Ever go out drinking with a bunch of drunks? Yeah, its like that. Banks, Wall Street, the Federal Reserve, and the government agencies that are there to check them represent this giant club of assholes who have no incentive to check one another’s power.
I don’t have the answer but I know that the proposed regulations won’t work. My gut feeling is that half ass regulations will only make it worse. I want a competitive banking industry, which is impossible with the Federal Reserve and the government involved in the capacity they are working towards. This I know for sure: Clever people will always find a way around regulations and the more time goes on, the more damaging their escapes prove to be for taxpayers.
For the last twenty years, the comparative advantage of the United States has been in making debt, not creating wealth. Clever people will figure out how to make debt look like something it isn’t and it will continue to finance our economic growth much like junk bonds and mortgage backed securities have in the past. This is what we are good at as a country and the expense of it gets more burdensome every year.
Like I said, I don’t have all the solutions. Perhaps, we can save Jello salad with a few cookbooks and some help from our Grandmas, but I think small banks are on the verge of extinction. With the power of the banks and their links to Wall Street, the Federal Reserve, and the U.S. Government, there is no hope for small banks and all the Jello salad in the world won’t make it better.
A glance at the FDIC bank failure list shows a number of regional and small community banks shutting their doors. I guess they are too small to succeed, while their larger national counterparts are benefitting from the notion that they are too big to fail. Our government is helping to decide who the winners and losers are and we are footing the bill.
Some of these failures are due to market forces, particularly small community banks in rural places where populations are declining and so are economic prospects. Bad investments by banks can also account for a portion of the closures, particularly those regional banks that put a considerable amount of their resources into financing home builders and commercial developers in places like Nevada, California, and Florida.
What seems odd to me is that smaller banks that didn’t take on the kind of risk that plagued the banking industry during the housing boom are failing at a much higher rate. By all accounts, they were still lending more responsibly than the rest of the industry and since many of them subjected loans to traditional underwriting by committee, they should have been more insulated than the big banks using Fannie Mae products to get nearly anyone a loan. Perhaps, a larger portion of the failures are those banks that in response to the increasing competitiveness of the banking industry and its consolidation, were encouraged to take on more risk than realistic for their asset size and local economic conditions. I still question however, that all these explanations can account for the higher failure rate. I'm sure the rest is explained by the collusion of the large banks to receive bailouts and pass on risk and exposure to the small banks.
This is on my mind because of the proposed financial regulations that will do precious little to insulate us from having another financial meltdown in the future. With the loss of small banks, we are losing tremendous information and relationships that can help foster economic growth and stability in a region. Bankers who know their customers can assess risk better than automated underwriting; tools such as credit reports, which are not always reflective of risk, cannot replace the knowledge found in a more personal banking system. The consolidation of the banking and mortgage industry which has been going on for twenty years is speeding up thanks to the housing crisis, and I’m sure the largest of the banks couldn’t be happier about it. Couple this with the melding of banking and the insurance industry and we are at more risk than ever.
So when small banks go, so does competition in the industry, leading to a cartel of banks…oh yeah, we have that already, it is called the Federal Reserve. The impact on consumers will be profound in terms of fees for everything from overdrafts, wire transfers, stop payments, and on and on. Cartels do not price competitively, they don’t have to. Will customers appreciate the convenience of large banks; of course they will. What I fear customers won’t recognize is that a less competitive banking industry can hamper our future economic growth and lead to greater risk in our financial markets.
If you haven’t read Barbarians at the Gate or Liar’s Poker I recommend you go out and get them right now. What I take from these two books is that particularly in financial markets, the consolidation of power and resources creates greater incentive for rent-seeking and collusion, leaving taxpayers more at risk to anti-competitive and harmful behavior. From junk bonds to mortgage backed securities, a very small group of players are determining behavior in financial markets and where wealth flows. Think of it this way, if you only had to answer to people just like you with the same incentives and goals you would probably behave however you wanted without fear of repercussions, there would be no reinforcement mechanism to check your asshole behavior. Ever go out drinking with a bunch of drunks? Yeah, its like that. Banks, Wall Street, the Federal Reserve, and the government agencies that are there to check them represent this giant club of assholes who have no incentive to check one another’s power.
I don’t have the answer but I know that the proposed regulations won’t work. My gut feeling is that half ass regulations will only make it worse. I want a competitive banking industry, which is impossible with the Federal Reserve and the government involved in the capacity they are working towards. This I know for sure: Clever people will always find a way around regulations and the more time goes on, the more damaging their escapes prove to be for taxpayers.
For the last twenty years, the comparative advantage of the United States has been in making debt, not creating wealth. Clever people will figure out how to make debt look like something it isn’t and it will continue to finance our economic growth much like junk bonds and mortgage backed securities have in the past. This is what we are good at as a country and the expense of it gets more burdensome every year.
Like I said, I don’t have all the solutions. Perhaps, we can save Jello salad with a few cookbooks and some help from our Grandmas, but I think small banks are on the verge of extinction. With the power of the banks and their links to Wall Street, the Federal Reserve, and the U.S. Government, there is no hope for small banks and all the Jello salad in the world won’t make it better.
Friday, May 14, 2010
Abolish The Fed, But Keep the Money
I have met some very interesting people through Facebook and email since starting this blog. Apparently, I have also triggered the fascination of a guy obsessed with whores who may be taking our name a little bit too literally. If you are that guy, let me reiterate: WE DO NOT HAVE SEX FOR MONEY. As I told you, we have networked with people we can't stand for money and we accepted money for our tiny role in the destruction of the economy, but neither one of us wants to sleep with you for any amount of money.
I received an email from someone who appreciates my hatred of the Federal Reserve and felt that our shared desire to see the Fed shutdown inferred that I also shared their hatred for money and wanted that abolished too. Umm, no I don't. While I appreciate your desire to make the world a better place and I completely understand your righteous indignation with the banking system, I have to completely disagree with the notion of getting rid of money. Please hear me out....
Our currency has no intrinsic value, it is just paper and crappy metals. BUT, it reduces transaction costs and facilitates exchange, which is pretty damned important. Money has allowed commerce to grow and has made people better off by allowing them to exchange with different people relatively painlessly, in turn, allowing people to have necessities as well as luxuries that they otherwise wouldn't have access to.
Imagine if there was no money and we traded in commodities. We would be forced to specialize in our own "currency", perhaps I would raise goats and chickens to trade for other goods I might need. In terms of portability, goats and chickens would make lousy currency and would require a much bigger purse than I care to tote around. Secondly, they stink. I highly doubt people would enjoy sitting by me at Wrigley Field if I had to bring goats and chickens to buy beer, not to mention, people at Wrigley hate goats. Just sayin.
In the spirit of beer I offer my third and most important defense of money. Imagine my community has a few bars and I want to go get a beer. I load up a few goats and chickens in my horse pulled cart and head off to the bar. Upon entry, the bartender looks at me and tells me he can't serve me. I argue that I'm completely sober and he replies, "No, its not that. Another goat farmer was just here and I finally had to cut him off because I don't need anymore goats." I might offer my chickens only to find he is stocked up on those to. He might tell me what he really needs is some wool. Now I have to go off in search of a sheep herder who needs chickens and goats in the hopes we can trade so I can go back to the bar with wool. I have the added worry that in the time it takes me to track down someone to trade with, another thirsty bastard will show up to the bar with wool, drink my beer and max out the bartenders demand for wool. Complicated? To borrow a line from Mrs. Palin, you betcha. Even worse, I might not ever get that beer.
Money isn't what is wrong with the world. I'm sure that is hard for some people to swallow in the economic disaster we find ourselves in. You can be angry at fraud and corruption but you can't blame money for it. You might argue that it is the love of money that creates fraud and corruption but I don't buy that either. Money doesn't make people behave like assholes...people choose to behave like assholes. Get a bunch of assholes together and you can form a government or a corporation and really do some damage.
I like money and I like beer, and frankly, making change with goats seems awfully messy.
I received an email from someone who appreciates my hatred of the Federal Reserve and felt that our shared desire to see the Fed shutdown inferred that I also shared their hatred for money and wanted that abolished too. Umm, no I don't. While I appreciate your desire to make the world a better place and I completely understand your righteous indignation with the banking system, I have to completely disagree with the notion of getting rid of money. Please hear me out....
Our currency has no intrinsic value, it is just paper and crappy metals. BUT, it reduces transaction costs and facilitates exchange, which is pretty damned important. Money has allowed commerce to grow and has made people better off by allowing them to exchange with different people relatively painlessly, in turn, allowing people to have necessities as well as luxuries that they otherwise wouldn't have access to.
Imagine if there was no money and we traded in commodities. We would be forced to specialize in our own "currency", perhaps I would raise goats and chickens to trade for other goods I might need. In terms of portability, goats and chickens would make lousy currency and would require a much bigger purse than I care to tote around. Secondly, they stink. I highly doubt people would enjoy sitting by me at Wrigley Field if I had to bring goats and chickens to buy beer, not to mention, people at Wrigley hate goats. Just sayin.
In the spirit of beer I offer my third and most important defense of money. Imagine my community has a few bars and I want to go get a beer. I load up a few goats and chickens in my horse pulled cart and head off to the bar. Upon entry, the bartender looks at me and tells me he can't serve me. I argue that I'm completely sober and he replies, "No, its not that. Another goat farmer was just here and I finally had to cut him off because I don't need anymore goats." I might offer my chickens only to find he is stocked up on those to. He might tell me what he really needs is some wool. Now I have to go off in search of a sheep herder who needs chickens and goats in the hopes we can trade so I can go back to the bar with wool. I have the added worry that in the time it takes me to track down someone to trade with, another thirsty bastard will show up to the bar with wool, drink my beer and max out the bartenders demand for wool. Complicated? To borrow a line from Mrs. Palin, you betcha. Even worse, I might not ever get that beer.
Money isn't what is wrong with the world. I'm sure that is hard for some people to swallow in the economic disaster we find ourselves in. You can be angry at fraud and corruption but you can't blame money for it. You might argue that it is the love of money that creates fraud and corruption but I don't buy that either. Money doesn't make people behave like assholes...people choose to behave like assholes. Get a bunch of assholes together and you can form a government or a corporation and really do some damage.
I like money and I like beer, and frankly, making change with goats seems awfully messy.
Tuesday, May 11, 2010
Ben Bernanke Can Suck It
I think this blog has an identity crisis. Some days there are humorous and silly stories, other days we give inside descriptions of the lending industry, and then there is today. Today's post is triggered by my absolute abhorrence of the Federal Reserve, Alan Greenspan, and Alan Greenspan's mini-me: Ben Bernanke.
Now that you know I am completely biased about the Fed you might wonder what egregious event triggered a rant that includes telling Bernanke to suck it. Was it proof that the Fed was a fundamental partner in the destruction of our economy? Nope. Was it the reviving of swap lines with foreign banks to deal with the crisis in Greece? Not that either. The truth is, I am incited by a seemingly innocuous commencement speech delivered by Bernanke at the University of South Carolina and its coverage here.
Bernanke delivered the message to young college graduates that money can detract from happiness and that they should not take high paying jobs just for the money. Instead, they should seek the path of happiness because pursuing money may result in a decline in the thrill over time. WHAT A BASTARD.
Here is my translation of Bernanke's speech after being run through my bullshit detector and my disingenuousness spotter thingy.
The ass kissing coverage in The Atlantic about this speech made me angry and ill at all the same time; an impact that was reminiscent of doing shots of whiskey in college, not pretty.
As economists, we do talk about utility maximization and yes we accept that this isn't solely tied to money. But, we also recognize the one clever thing Bernanke didn't discuss and the Atlantic writer failed to mention that is sort of important; we maximize our utility subject to CONSTRAINTS!!! Holy crap, that is Econ 101. We maximize our utility relative to constraints, kind of important ones, like budgets.
It is not that I think money buys happiness nor do I discount the importance of happiness; that isn't what makes me angry about the speech. For me, hearing an economist talk about happiness in this manner would be like going to a Grateful Dead concert and getting a lecture on responsible drug usage from Jerry Garcia. I'm just not buying it. Also Ben, you are the Chairman of the Federal Reserve, a tiny little organization that earned record profits in 2009 by dealing in money, as jobs for those happiness seeking graduates were vanishing.
I don't want economists preaching to me about how to be happy, particularly not the one that sucks a little joy from my life every day because of his job and policies. I want psychologists, Oprah Winfrey, and chripy little self-help gurus teaching people about happiness.
I want economists, and particularly Ben Bernanke, to solve problems and raise people's standard of living. I want to figure out how to help developing nations, create wealth, and promote economic security. I don't want one of the unhappiest looking middle aged white men I have ever seen teaching me that the secret of life is happiness. Myself, my friends, and the students at South Carolina already understand that. Even my dog gets it.
Why don't you tell us something we don't know. Here's a suggestion: Tell us if we should be scared that you claimed there was no crisis coming but now you are claiming you know what to do to get us out of it. Then tell us when we are going to recover, I promise that would go along way in maximizing utility.
***********If you are interested, I have opined in print about my fears concerning the Fed, if you care for some snark with your knowledge you can find a reprint of one here.
Now that you know I am completely biased about the Fed you might wonder what egregious event triggered a rant that includes telling Bernanke to suck it. Was it proof that the Fed was a fundamental partner in the destruction of our economy? Nope. Was it the reviving of swap lines with foreign banks to deal with the crisis in Greece? Not that either. The truth is, I am incited by a seemingly innocuous commencement speech delivered by Bernanke at the University of South Carolina and its coverage here.
Bernanke delivered the message to young college graduates that money can detract from happiness and that they should not take high paying jobs just for the money. Instead, they should seek the path of happiness because pursuing money may result in a decline in the thrill over time. WHAT A BASTARD.
Here is my translation of Bernanke's speech after being run through my bullshit detector and my disingenuousness spotter thingy.
Congratulations to you young and important minds on your graduation. I bet you would like to go out and get a high paying job in order to rationalize all the money you and your family spent on higher education. Yeah, well me and my friends sort of helped to make sure there are none of those jobs available. We really weren't trying to screw you exactly, we were just trying to help our friends in the banking industry.
Really I am not solely responsible for your lack of opportunity. You can also thank my predecessor, Federal Reserve Idol, Alan Greenspan. You can also thank the entire federal government, some friends of mine on Wall Street, and some really distorted application of economic logic by a bunch of people who should have known better.
I sense that you might be feeling sad about your futures so let me talk to you about something we all agree on: happiness. Happiness is good and really, it is more important than a job or whether you can afford to pay your student loans. So instead of being sad that you can't get a job what I really want you to do is think about what makes you happy. If its smoking a bong in your parent's basement for hours on end while drinking out of their liquor cabinet and playing your X-Box, then do it. Tell your parents that Ben Bernanke said you have permission to maximize your utility, happiness is important.
(Cut to Bernanke singing "If your happy and you know it...clap your hands)
The ass kissing coverage in The Atlantic about this speech made me angry and ill at all the same time; an impact that was reminiscent of doing shots of whiskey in college, not pretty.
As economists, we do talk about utility maximization and yes we accept that this isn't solely tied to money. But, we also recognize the one clever thing Bernanke didn't discuss and the Atlantic writer failed to mention that is sort of important; we maximize our utility subject to CONSTRAINTS!!! Holy crap, that is Econ 101. We maximize our utility relative to constraints, kind of important ones, like budgets.
It is not that I think money buys happiness nor do I discount the importance of happiness; that isn't what makes me angry about the speech. For me, hearing an economist talk about happiness in this manner would be like going to a Grateful Dead concert and getting a lecture on responsible drug usage from Jerry Garcia. I'm just not buying it. Also Ben, you are the Chairman of the Federal Reserve, a tiny little organization that earned record profits in 2009 by dealing in money, as jobs for those happiness seeking graduates were vanishing.
I don't want economists preaching to me about how to be happy, particularly not the one that sucks a little joy from my life every day because of his job and policies. I want psychologists, Oprah Winfrey, and chripy little self-help gurus teaching people about happiness.
I want economists, and particularly Ben Bernanke, to solve problems and raise people's standard of living. I want to figure out how to help developing nations, create wealth, and promote economic security. I don't want one of the unhappiest looking middle aged white men I have ever seen teaching me that the secret of life is happiness. Myself, my friends, and the students at South Carolina already understand that. Even my dog gets it.
Why don't you tell us something we don't know. Here's a suggestion: Tell us if we should be scared that you claimed there was no crisis coming but now you are claiming you know what to do to get us out of it. Then tell us when we are going to recover, I promise that would go along way in maximizing utility.
***********If you are interested, I have opined in print about my fears concerning the Fed, if you care for some snark with your knowledge you can find a reprint of one here.
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