The View From 1776

Can Government Fix the Over-Built Housing Market?

Why did we get a massive over-building of single family homes and a plethora of bad mortgage loans?

Posted by .(JavaScript must be enabled to view this email address) on 03/29 at 01:10 AM
  1. There was an article that came out yesterday that has charts of how much money people took out of their homes in refi's when the recession started in 2001.
    http://www.financialsense.com/Market/wrapup.htm

    When you add personal debt that the charts make so obvious, as being a huge amount coming from housing, to city and state, $2.2 trillion, and to Federal Debt which increased $400 billion to almost $10 trillion, we have just with that, $25 trillion in debt and some say Debt to GDP (total from all sources) 275%.

    The important thing to notice is that this personal, city and state debt is 150% larger than Federal debt and that is where this crisis is based. It is why the Fed is in a panic. They can't control this debt and its affect on the financial system. They can only try to keep the financial system from imploding as assets, which must be 10% of loans, keeps getting lowered as home values drop.

    People that refinanced and took home equity loans out to the max, are now under water and many are just mailing the keys to the lender and going and renting. They spent the money and can't make the credit card, car, boat, and other loans AND the mortgage payment. Now they can't get anymore equity from the home, they simply walk away. That is adding homes to the market at the same time banks are having to tighten loan qualification.

    The Fed is going to probably try to "inflate" the values. If copper, lumber, and all the things that go into a home go up 100% then the new home prices will go up and make resales so popular they can get the glut of homes sold though population growth and immigration.

    At the same time those prices go up for base materials due to global demand and falling value in the dollar, retail is forced to cut prices as much as possible to get shoppers into the stores and even that isn't working in most cases. So a combination of inflation and deflation will probably be with us for a while until inflation forces a lot of changes like it is doing now in food and energy. The more we "have to have," something like food and energy, the more likely it will be affected by inflation. This may take years before we get back to normal.
    Posted by JanPBurr  on  03/29  at  09:53 AM
  2. I
    Posted by .(JavaScript must be enabled to view this email address)  on  03/29  at  10:50 AM
  3. continued

    The market and the people involved thought that this 'game' could continue forever. And the surprising thing is that people that we would think of as intelligent and in the know, like two Federal Reserve chairmen, thought everything was just fine, that people could continue to push up prices and spend money like there was not tomorrow. To them it was just a bit of "irrational exuberance". Eventually, though, the cost of borrowing money increased, ending the party and forcing many people to give up their houses because they could not afford their escalating mortgages.


    All this frenzy eventually led to overbuilding, which then put downward pressure on the value of properties. In many cases the value of the property became lower than the mortgage. As a result lenders would instigate foreclosure proceedings and called in their loans for fear of losing their money, further exacerbating the situation.

    Like all bubbles the housing bubble burst, last year, sending shock waves through the financial markets, which had packaged and buried many of the bad housing loans in the derivatives they had devised and sold to unsuspecting investors. Some of the big institutional investors did know what was taking place but thought that since this was a brave new world, as they imagined, the market was immune to the shocks this activity might cause.

    One thing that has suffered through all this is, trust. Banking and financial markets operate on trust. Members trust each other to tell the others about the possible risks involved. They generally support each other in times of financial upheavals. But this time it's different. It's as though a line was crossed and a bond was broken. In the old days derivatives involving things like subprime loans were consider "junk". This time they were peddled as if they were prime and classified as AAA. Those who held large positions on those derivatives had the rug pulled out from under them. That trust will take time to rebuild. One other major fallout from all this is that many credit markets and sources of venture capital have dried up, vehicles that are essential for keeping the economy going.
    Posted by .(JavaScript must be enabled to view this email address)  on  03/29  at  10:52 AM
  4. Very good summary of current events. If we are really going to look for a starting point, it has to be 1913 and the Federal Reserve Act which was flawed to begin with in that it put power in the hands of a few (greedy? or Power hungry?) elite. Since it is a "committee" overseeing a "private company" that manages the U.S. currency supply, it is also subject to all the problems any corporation can have over time as people come and go who have different agendas.

    The next point would be FDR and going off the gold standard that they thought limited the supply of money that government felt it needed to "stimulate" the economy(that didn't work, it took a war economy to get things going).

    From that point on, government stimulus in each down turn combined with massive spending on social projects created inflation that led to the next step, totally leaving the gold standard even internationally as the dollar was collapsing.

    That led to dependence on foreign oil to prop up the dollar faster than would have occurred had we not made the deal in 1971 with OPEC we did.

    That brings us up to your points and the charts on the site I listed show how the 2001 recession exploded personal debt which doubled in just a few years and savings plunged. However, much of it wasn't based on greed.

    It was based on under reporting real inflation and the need to spend more and more to maintain, not grow a standard of living for middle class consumers. While the reports seem rosy, underneath people kept having to spend more on food, energy, and imports as the dollar fell in value as more oil was sold in euros, first by Saddam and then by Iran and our trade deficit rose with loss of manufacturing here.

    So, another factor would be the U.S. business and tax policies that drove more and more business from the U.S. to other nations. That trend is now expanding into R&D, high tech mfg., financial services, pharmaceuticals, and investment. Billions are now flowing out to be invested in other nations, even now, in bonds. Where the U.S. bond used to be the "safe harbor," now, due to inflation, other country's bonds are being sought.

    This has been the slow and gradual expansion of debt and bad policies begun in the depression, with good intentions, but still very bad long term results.
    Posted by JanPBurr  on  03/29  at  11:25 AM
  5. I think you are sort of right. But it all goes back to the culture and makeup of America.

    I think if you went back in time to change America and get rid of all the institutions you don't like, America would turn out the same.
    Posted by .(JavaScript must be enabled to view this email address)  on  03/29  at  11:58 AM
  6. Perhaps you don't believe in consumer protection laws because that is a liberal idea. Nevertheless, consumer protection laws enacted by states could have prevented much of the predatory lending and other unethical mortgage practices that led to the subprime debacle.

    I think The View would agree that it is the constitutional right for states to enact such laws. But state laws to protect consumers from bad lending were prevented, in 2003, from being enacted by an obscure federal agency know as Office of the Comptroller of the Currency (OCC). As was explained to me "the OCC has been in existence since the Civil War. Its mission is to ensure the fiscal soundness of national banks. For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers."

    The Bush administration used this agency to stop the 50 states from make laws to protect consumers, thus over riding their constitutional rights. The administration was more interested in keeping Wall Street happy and realizing its "ownership society".

    The OCC appears to be a precursor to the Federal Reserve, which is also despised on this blog.
    Posted by .(JavaScript must be enabled to view this email address)  on  03/29  at  01:27 PM
  7. I agree David on both counts. We need state regulation and we need to keep the Fed from blocking that but, that is what you get when you centralize power and have two parties, both bad for the nation, at war with each other.

    Each trying to please a "base" instead of doing what is right for the health of the nation.

    Now, regarding culture, that is true as well. It is normal for a culture to rise, peak and fall. It is what it does when it falls that will determine what the rest of its existence is like. We could deteriorate into anarchy or some type of rogue government or a democracy that just wallows in misery and a low standard of living.

    Remember we had a similar culture of "greed" in the 20's that led to the depression. Depression are just stronger corrections than a recession and are normal cleaning agents for a society going too far in some direction.

    However, we have tried to avoid those normal cleansing periods by injecting stimulus in that protects some of the bad agents. We have done that for decades and created this bubble of personal debt, that is driving this problem.

    The Culture of Debt by individuals, cities, states, and federal government are all tied together and reflect the overall culture of the people and the lack of correction over the decades that would have limited that risk.

    I have talked to many people and their impression was that we didn't have to worry, they said, because the government had learned out to avoid those kinds of times. They claimed the government could control the economy enough to avoid serious recessions.

    Even now, the majority are saying that the government will turn this around in a month or two and we will bounce back stronger than ever. Yet, most economist say this will last for years for most. There may be stock rallies but they won't last. We may be range bound for a decade like we were in the 70's.

    The economists who two years ago warned of this are still saying things could get worse before better or at least stagnate for years at this level after a brief rally for a few months. Yet, they were laughed at then. While not being laughed any more, they are still being told that in spite of all their correct predictions, they are still wrong that things won't turn around rapidly.

    Well, maybe they will finally be wrong. Time will tell.
    Posted by JanPBurr  on  03/29  at  06:57 PM
  8. Jan,

    At least we agree on something.
    Posted by .(JavaScript must be enabled to view this email address)  on  03/29  at  11:31 PM
  9. You would find, David that many things you feel are needed, are, but, need to be done by the states so that a situation like this, as worst, only occurs in some states and doesn't drag the whole nation down. That is why a Republic was chosen.

    It wasn't chosen because a Republic is more efficient even when at its best (though it usually will be over the long run). It was chosen because the added costs in the short run of having each state work out its social, moral, economic and cultural issues reduced the risks that come with centralized power that usually become, at some point, confined to the hands of a few elite that then run the nation according to their own agenda.

    The risk of a Central Bank of the kind we have, was fought against for over 100 years. Again, not because we didn't need a sound monetary policy but because of what the founders saw in the Bank of England and the Rothschild banking dynasty that kept trying to gain power through banking here.

    The control of the money supply can literally trump legislation and regulation. The supply of money and control of who it goes to can create booms and busts and then use the busts to gain more power as the people in desperation to end the bust surrender voluntarily more power from the states to the centralized power.

    You might be surprised at how much many people would agree with the need for caring for education, the sick the poor, the workers, etc. as long as it wasn't at the federal level. For 70 years we have been centralizing power and every decade, as a result, we have lost manufacturing, economic power, ability to save, and now have even the infrastructure we had been so proud of in rampant decay because we don't have enough money and productivity to pay for the maintenance of it.

    The tax payers are so deep in debt they can't even pay more taxes to get us out of debt in the government because they have had to borrow just to maintain their standard of living in many cases due to hidden inflation, wages not keeping up with inflation and the illusion that they were "saving" because home values were rising. That is what a "Central Bank" of the type we created can do to a nation over several decades. Remember, this isn't something new. This has been headed for acceleration for decades. It only needed a 9-11 and President like we have and Congress like we have to start the acceleration process.

    I fault this administration for many things but, either party would have got us to about the same point. For no other reason than we had reached critical mass during the Clinton years but, it needed a catalyst and 9-11 was probably it. Remember all of the job growth peaked two years to one year before Clinton left office. The nation was already headed for trouble. It just needed an event to magnify it and push it over the edge.
    Posted by JanPBurr  on  03/30  at  12:13 AM
  10. Jan,

    I appreciate what you have to say but I am bothered by the fact that you always go back in time for blame, to put blame on what is happening presently. It is like always blaming your parents for the mistakes you are making today.

    This present administration has made enough mistakes on its own to warrant it be singled out for screwing thinks up without using excuses from the past. For instance, you can't blame the New Deal for 9/11 or the Iraqi war. You can't blame FDR for the highest per capita prison population in the world or the subprime debacle, not matter how hard one blows wind.

    A society is organic and always on the move and changing. However, much of the arguments made here is as though society in America is a static entity, which should function only on principles that were established more than 200 years ago. Thinking that way, in such an archaic manner, is a sure way to run America aground.
    Posted by .(JavaScript must be enabled to view this email address)  on  03/30  at  11:44 AM
  11. David, I go back into time because the groundwork for what any current administration does is based on what previous ones did. We have been in this trend for 70 years and much of the current decisions are based on the 1971 decisions. There is no way to correct those decisions without a long, hard recession.

    Since no current administration wants to cause it, they do things to delay it but, any thing that delays it will also make it worse.

    Bush's main mistake was the prescription drug plan. Iraq would have probably happened no matter who was in office because Iraq was jeopardizing the dollar and our economy. All the talk by democrats, is mostly just that, talk. The DNC party leaders knew exactly why we were going to war with Iraq to save the dollar. Their continued funding even by a democratic Congress is because they know what leaving could do to oil sales if the Shiites gain power and thus do to the dollar's value.

    Bush had nothing to do with that. Those things started before he took office. As you probably recall, Saddam's sales switch to euro's occured after Clinton bombed him and before Bush took office.

    It is like people in debt, they do things that aren't wise but because they can't see any other option due to the debt they have. Human nature controls nations just like it does people. Human nature runs in waves of 5 up 3 down. The five up have 3 up and 2 mild corrections, the 3 down are two down with a mild up turn between the two down waves. This has gone on for centuries. It is based on human nature and optimism and how it leads to pessimism which in turn bottoms and leads back to optimism. Then after about 3 generations the people who remember the last really bad time, are gone. The new generations having never experienced a really bad depression or hard times, make the same mistakes over their forefathers did. This is magnified, of course, the larger the nation or economy and presidents and Congress has little control over it.
    Posted by JanPBurr  on  03/30  at  04:13 PM
  12. David, you said
    However, much of the arguments made here is as though society in America is a static entity, which should function only on principles that were established more than 200 years ago.
    =============================

    Principles never change from sound moral, ethical, adherence to them.

    What you are referring to is what the society does as it operates from sound principles such as a Republic that allowed each state to progress in whatever manner suited them as long as they maintained the sound principles all societies have to be based on if they are going to be economically sound. Having the same foundation doesn't stop you from change. It is like any "house" built on a sound foundation. It can be one or two or three stories. It can have traditional features or a "cottage" design or be pueblo or log or brick.

    A society built on sound principles can do that too but, it must alway remain ethical, moral and decentralized if it is going to preserve the freedoms so cherished by Americans.
    Posted by JanPBurr  on  03/30  at  04:18 PM
  13. Sorry Jan but I am tired of your repetitive arguments .
    Posted by .(JavaScript must be enabled to view this email address)  on  03/30  at  10:11 PM
  14. Why, because they don't fit your view of the world? They are based on nation after nation that has found itself in the same boat. Human nature doesn't change. It has been the same for thousands of years.
    Posted by JanPBurr  on  03/30  at  11:19 PM
  15. "Human nature doesn
    Posted by .(JavaScript must be enabled to view this email address)  on  03/31  at  09:46 AM
  16. Human nature, David, is what drives all nations. It is what drives stock markets. You track human nature in how it is showing up in stock markets to know when and where to invest.

    Man goes through cycles. Some are short term and some are about 70 years in length although it isn't the number of years as much as the number of people alive that remember the last severe correction in a nation's history. 70 years has been about the period between major reversals here in the U.S.

    The two controlling factors that drive it the most is pessimism and optimism. The five waves (3 up two down) in a bull market are marked by 3 waves in the correction (2 down 1 up) and these "cycles are named and numbered so that you can track (not predict so much) the "history" of human nature in investing. I am sure you have notice that the markets move between two trend lines, an upper and lower and when they pass those lines they soon head back down to the lower trend line and sometimes very rapidly. That is just human nature at work.

    Democracies go through cycles too. They are usually quite successful at first but then soon start moving toward "voting the people more benefits." That works so they accelerate the action but, find the tax burden difficult for lower income people so they start a process of trying to move taxes to the more productive members of society and then create a divide and other problems and eventually the society begins to decline. At some point it has collapse and has to start over. The nation doesn't disappear, it just isn't as productive. It can even change the form of government it has or it may just languish with what it has with government constantly trying to manipulate things to keep from having a total collapse.

    As you know, consumer spending is a function of human nature. Debt is a function of human nature. When the majority of people in any society move in one direction, that drives what happens, good or bad in that nation and its economy and political scene. Greed is human nature and a nation where the people become too greedy shows up in everything that nation does.
    Posted by JanPBurr  on  03/31  at  10:02 AM
  17. I want to know why government can't be considered an agent of the free market like most other agents, like corporations or individuals.

    As we have seen with the subprime debacle and the instability it has caused financial markets, the unfettered market place, without some government intervention, is not the be all and end all or the magic some believe.

    Without government participation in the market it would by an economy that would benefit only the very hardy, which would not benefit the majority.

    It will be fruitless to use the Bush administration as an example of how bad government intervention can be because it did everything it could do to undermine the government's role. And now we see the ruinous results of that undermining, from its incompetence in Iraq on spending to the domestic economy and its disastrous role in the aftermath of Katrina.
    Posted by .(JavaScript must be enabled to view this email address)  on  04/06  at  11:36 AM
  18. Depends on whether you are talking about the government of the people (state and local) or the government of the nation which was to stay out of most of those things.

    We need regulation and even some national standards but, each state should decide how to "intervene" or else you risk putting too much power in a few hands.
    Posted by JanPBurr  on  04/06  at  03:47 PM
  19. "Depends on whether you are talking about the government of the people (state and local) or the government of the nation which was to stay out of most of those things."

    Take the question in the spirt of the heading of this post, "Can Government Fix the Over-Built Housing Market?"

    Somethings local and state government can do things better and somethings the feds can do better. When it comes to the overall economy one has to think federally. If one thinks the states can be and should be totally responsible for their economies they are not living in this world but one of 1776.
    Posted by .(JavaScript must be enabled to view this email address)  on  04/06  at  04:04 PM
  20. Wrong. The worst thing is to have the Fed meddling with the nation's economy.

    Because the economy is thousands of factors, each of the 197 sectors carries a different weight in each state and city. Each one has a different impact on that economy for that state and requires adjustments that apply to the people in that economy.

    You can't have a single organization determining policy when there has to be hundreds of different polices because each state has different tax systems, if nothing else, that impact business and the economy in that state.

    That is why having a Republic is so important. It allows each member of the republic to compensate for all the unique things different demographics, cultures, work ethics, resources, tax systems, climate, etc. do to the economy.
    Posted by JanPBurr  on  04/06  at  05:41 PM
  21. "Wrong. The worst thing is to have the Fed meddling with the nation
    Posted by .(JavaScript must be enabled to view this email address)  on  04/06  at  11:28 PM
  22. Actually, not mine.

    Many economists from the time of the founders until now have expressed this opinion. The risks are too great to have the Fed involved in much of anything. I just read history and the opinions of great minds and relay them.
    Posted by JanPBurr  on  04/06  at  11:50 PM
  23. Doesn't matter. You can't run a national economy on states alone. You also need the tiller of the overarching feds.
    Posted by .(JavaScript must be enabled to view this email address)  on  04/07  at  11:49 AM
  24. Why? We didn't need them before. So why now?

    We grew better as a nation before all the fed intervention.
    Posted by JanPBurr  on  04/07  at  05:50 PM
  25. MACHIAVELLI'S SIX CONDITIONS
    by J. R. Nyquist

    Certain preconditions are necessary for republican government to flourish. Niccolo Machiavelli listed six conditions, and these may be related loosely as follows: (1) That there is respect for tradition; (2) that the town dominate the country; (3) that popular power is institutionalized; (4) that a large middle class exists; (5) that civic spirit has not decayed; and (6) that there is knowledge of these things. If these conditions are not present, noted Machiavelli, men should not attempt republican government because such an attempt will ruin them.
    --------------------

    Those conditions still apply to day. Otherwise the nation will continue the decades long decline it has been in.
    Posted by JanPBurr  on  04/07  at  05:54 PM
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