Saturday, December 06, 2008
"First" of the Day: Home foreclosures
The Mortgage Bankers Association said its latest survey, released Friday, showed that 10% of mortgages on one- to four-family homes were at least a month overdue or in the foreclosure process in the third quarter. That is up from 9.2% three months earlier and 7.3% a year ago. The current level is the highest since the trade group began such surveys four decades ago. —James R. Hagerty and Deborah Solomon reporting in "Rising Number of Homeowners in Trouble"
I had scarcely finished my little post explaining the further convulsions to be expected in the home real estate market when the Mortgage Bankers Association released its findings for July through September.
Aside from finding that 10% of all mortgages were either overdue by at least a month or in foreclosure, the report revealed two more "firsts" hidden in that statistic.
- For loans 90 days or more past due but not yet in foreclosure, the rate "jumped by 45 basis points, the highest increase in this category ever recorded in the MBA survey."
- "the percentage of loans in foreclosure, 2.97 percent, hit a new record in the period from July to September," according to Charles Heller.
Let's see what the percent of foreclosures comes to in absolute numbers. Two-thirds of the 111.7 million occupied housing units have a mortgage, or 74.5 million units. If 2.97% of them are in foreclosure, that translates to 2.2 million homes.
Think of the number of homes lost in Hurricane Katrina—estimated at 275,000 (said to be 10 times the loss in any previous natural disaster)—and then consider the number of homes lost in the next-to-last quarter of the Bush administration—a most unnatural disaster. Do you think FEMA will help?
Friday, December 05, 2008
Michael Moore speaks to the problems of the auto industry
Michael Moore, documentary filmmaker and scourge of corporate executives, was on the Keith Olbermann show a couple of nights ago. He was there to talk about the plea to Congress by the Ford, GM and Chrysler executives ("the Big Three") to save them from themselves.
Moore had a message for Congress that more people should hear. Here's the video. (The Moore interview begins at 1:30.) I've provided a partial transcript below for those who'd rather read—
Moore castigated the Senators for their treatment of the "car guys" compared with their treatment of the "Wall Street bankers and thieves," who've also been before Congress lately. Then he let the car guys have it.
Concerning the security of the loan the automakers want—
GM wants $18 billion dollars. The total worth of all the common stock in GM right now is a little less than $3 billion. Now why would we give them $18 billion when they're only worth $3 billion?
If my house were worth $100,000 and I came to you and said, "Hey, Keith, why don't you loan me like $700,000. I'll put up my house as collateral" .... It makes no sense.
The nation's oil problem should be viewed as a national crisis on the order of
I think that if we're really serious about trying to fix the transportation problems of this country and all the other problems that surround it in terms of lack of oil and running out of oil, we have to really treat this like a crisis.
And so I would encourage Congress to do what Franklin Roosevelt did at the beginning of World War II where he just said to the Big Three "You're not building cars any more because we have a crisis. You've got to build tanks and planes"--and the other things that they needed in World War II
This new President and this Congress has to say to the Big Three—
"I'm sorry but this car thing isn't working out. We're running out of oil. So you need to build hybrids, electrics and we need mass transportation. So you gotta build trains and subways and light rail and all this. And that's gonna be the policy of this country.
"And we're going to tell you what to do because we just gave you (collectively, if they get the $34 billion)--if we're going to give you $34 billion we're gonna own your ass...."
A capital idea! All the workers I know say they could use a little ass.
Olbermann: .... The thing sounds so good. Obviousy it can't happen. Why wouldn't it happen? Who's benefitting from the idea that that would not happen? That we wouldn't get 21st century mass transit and greener cars and the rest of that?
Moore: Well, there's not as big a profit in that.
You see, this is what's so amazing, for instance, about the GM proposal: "Give us $18 billion and as part of our proposal"—this is what they gave Congress yesterday—"we're going to eliminate another 20 to 30 thousand jobs."
In other words, we're gonna give our taxpayer money to the car companies so they can throw more people out of work.
That's been their big idea for the last 30 years. They've been throwing people out of work by the tens of thousands for the last 3 decades. And nobody ever stopped to say, "Gee, who's going to buy the cars if everybody's been thrown out of work." It's just been insanity.
The money needs to go to infrastructure but it must not go to the people running these companyies.... They need to be fired and removed. The government needs to get in charge of these things. It's our money and we should be able to call the shots!
Well, I gotta go. I hear shots over by the ramparts.... Oh, I forgot. The counterrevolutionaries have all the guns.
Thursday, December 04, 2008
"Jingle mail" and a little Holiday ditty
As the times change, language hurries to catch up. The financial debacle of the early 1990s known as the "savings and loan crisis," or "S&L crisis," gave birth to the phrase "jingle mail."
I'll attempt a definition—
jingle mail n. Mail received by a mortgage lender from a property owner that contains the keys to the property. The owner thereby signals that he or she has abandoned the property and does not intend to contest foreclosure.
I don't know how many homeowners have already sent their lenders a piece of jingle mail, but the number has certainly been growing. And 2009 promises an upsurge—
- Many adjustable-rate mortgages (ARMs) are just now reaching the point where the low-cost "teaser rate" ends and the homeowner is faced with a payment significantly higher than he or she can afford.
- As jobs and incomes decline, even homeowners enjoying a fixed-rate mortgage will be unable to keep up their payments.
- As these foreclosed homes reach the market, the surplus will force prices to fall even further. As a consequence, more and more homeowners will find their mortgages "upside down" and they themselves "underwater"—which means that their home will be worth less than the amount owed on the mortgage (or mortgages). Some owners—especially those who have bought the home as an investment rather than as a residence—will make the "business decision" to walk away from a bad investment. In most states they have nothing to lose but their credit score.
On that latter point economist Nouriel Roubini recently tried to sober up the conservatives at the American Enterprise Institute (AEI)—
... home prices have already fallen by about 20 percent from the peak. Given the excess supply number and other factors I would expect home prices are going to fall another 20 percent for a cumulative fall of 40 percent from the peak.... —something we haven’t seen since the Great Depression.
Now this fall in home prices is important for 3 reasons. As long as it occurs, residential construction is going to keep on falling.... Secondly there is a huge wealth effect coming from a fall of $6 trillion of housing wealth. But the most important factor I think is that right now ongoing is that with such a fall in home prices, by the end of next year about 40 percent of all households with a mortgage are going to be underwater—negative equity with the value of their homes below the value of their mortgages. So, about 21 million out of the 51 million houses that have a mortgage will be underwater by the end of 2009. And there’s a huge incentive to walk away from your home....
Now, not everybody is going to walk away. Let’s be even conservative. Let’s assume that only 1 out of 5 people that are underwater are going to walk away. If you do the math ... you get additional losses for the financial system of the order of $400 billion dollars. This is on top of all the other write-downs that have already had been made through subprime-kind of a writedown. So that’s another huge loss for the financial system.
This is just assuming that only 1 out of 5 people underwater are going to walk away. If it’s more like 40 percent [who walk away], then the loss is another $800 billion. So you’re in a situation in which you can wipe out a good chunk of the capital of the financial system.
If the real estate market has the potential to wipe out "a good chunk of the capital of the financial system," just wait till you hear about credit-default swaps (CDSs).
If you are sober, you may wish to get drunk. And after you've quaffed your wassail, you may feel like singing. So here's a little ditty to go a-caroling. It's sung to the tune of "Jingle Bells" —
Piling on the debts
For a granite counter top
And cherry cabinets
Has turned into a flop
The bankers get bailed out
Which makes their spirits bright
The people hold the bag
Will they put up a fight?
Oh, jingle mail, jingle mail,
The keys are on the way
It’s no fun to own a house
Whose mortgage I can’t pay-ay
Jingle mail, jingle mail,
Jingle all the way
It’s no fun to own a house
Whose mortgage I can’t pay.
Several years ago
Alan Greenspan was our guide
And soon Miss Fanny Mae
Was seated by our side
The ARM was lean and lank
With a teaser rate to boot
Collateralized by the bank
Systemic risk was moot
Oh, jingle mail, jingle mail,
I don't know who composed this song. It was left by "regiomontanus" (which means, maybe, "Mountain State" or "Montana area") in a comment to Roubini's post. It's the only copy that Google knows of, so perhaps "regiomontanus" is the author.
Announcement of the Day: It's a recession! (12/02/08)
Tuesday, December 02, 2008
Announcement of the Day: It's a recession!
The Business Cycle Dating Committee of the National Bureau of Economic Research met by conference call on Friday, November 28.... The committee determined that a peak in economic activity occurred in the U.S. economy in December 2007. The peak marks the end of the expansion that began in November 2001 and the beginning of a recession. The expansion lasted 73 months; the previous expansion of the 1990s lasted 120 months.
—text of the National Bureau of Economic Research (NBER) statement announcing that the U.S. recession began a year ago.
If economics were acknowledged to be the politico-religious activity that it is—its practitioners split into various factions, some claiming to represent "orthodox" fields of economics—the NBER might be viewed as the orthodox wing's College of Cardinals.
As the world waited ... and waited ... for an announcement of a recession, the day has finally arrived when the Cardinals have sent up a smoke signal to announce that such an event has been detected. The decision was reached by our leading economists not in a room of polished oak, leather and brass lit by Tudor sconces, as would seem appropriate to the occasion, but on the telephone in a conference call.
What took them so long?
I've been documenting indicators of dire economic troubles for the U.S. at least since 2005. Yet it has taken a full year after the avowed beginning of this nebulous event known as a "recession"1 for the Cardinals to decide that something was seriously wrong with the U.S. economy. If it takes that long to declare, is it really that important? And are these the "scientists" that Presidents, legislators and business leaders want by their side, we wonder?
I would hazard that the wait for the announcement, assuming that the Cardinals aren't simply congenitally enfeebled, was itself an effort to control (and presumably to advance) the economy.
There are several possible economic benefits in the delay. The most important is that if they declare a recession when a normal person might notice one, they may fear that everyone will get depressed and stop spending and investing, which is sort of what a recession is anyway. So they must wait until they're sure that everyone is depressed and has stopped spending and investing before they depress anyone further.
Second, the delay itself generates a lot of economic activity. As when the Pope is dying, the news media gather to speculate ... and speculate ... whether the economy has entered a recession. Widgets and commemorative gold coins can be sold during the commercial breaks. And it's good for the economists as well. They make a mint going from talk show to talk show to offer their expert opinions on whether the economy is in recession. Others are off to conferences to speak to business leaders, and some get invited to the White House. Why spoil a good thing by stating the obvious?
Then there may be political considerations in the delay. Why ruin your chance for an invitation to the White House by contradicting a President who's on TV telling everybody that the economy is "basically sound"? No economist who hopes to get ahead, I dare say.
Another political drawback of an early announcement is that once a recession has been declared, it begs the question of what political leaders intend to do about it. What they normally do about it, of course, is to consult with economists.
It is on these occasions that one school of economic thought has the opportunity to sweep past its rivals and become politically dominant. Will the President turn to monetarism or neo-Keynesianism, neoclassical economics or something less orthodox such as the Ron Paul-style laissez-faire economics of the "Austrian school"? The only real constraint on our Dear Leader is that he not be seen in the company of socialists, since all the other systems more or less assure the well-being of the upper class—the argument among them concerning to what degree.
Is this a recession or a depression?
Well, now that we have a recession, I am personally holding out for a depression. But I will get no satisfaction from the Cardinals. They write in their Q&A—
Q: Does the NBER identify depressions as well as recessions in its chronology?
A: The NBER does not separately identify depressions.... The most recent episode in the United States that is generally regarded as a depression occurred in the 1930s. The NBER determined that the peak in economic activity occurred in August 1929, and the trough in March 1933. The NBER identified a second peak in May 1937 and a trough in June 1938. Both the contraction starting in 1929 and that starting in 1937 were very severe; the one starting in 1929 is widely acknowledged to have been the worst in U.S. history.... [J]ust as the NBER does not define the term depression or identify depressions, there is no formal NBER definition or dating of the Great Depression.
The Cardinals acknowledge that some momentous economic event occurred that began in 1929. Just what it was they're either not sure or not prepared to say. So let's just call it the "Great Recession."
The Great Recession
Economic statistics can be fun if you don't take them too seriously, but at best they're an abstraction. The more imaginative among us can perhaps use them to weave a tale of reality, but I hardly see why that's necessary since I can look out the window.
The day before Thanksgiving, a quite cold day, I passed an old man by the road gathering firewood. Not the sort of thing you expect to see in a First World country. I drive by the temporary labor offices and see there's not enough room inside for the waiting-for-work to stay warm. They stand outside and shiver. For Food Stamps you need to call and make an appointment—if you can reach the switchboard, that is. "For sale" and "foreclosure" signs provide the Christmas decorations. And I live in a zone that is reasonably prosperous and unaffected, by comparison with the rest of the state.
Meanwhile the federal government spends billions by the week in pointless wars in Iraq and Afghanistan and wastes almost as much through its efforts to privatize and conceal them.
How long must this situation be endured? Let's turn to the College of Economic Cardinals to find out—
Q: How long does the committee expect the recession to last?
A: The committee does not forecast.
Well, if the Cardinals aren't telling, Chris Isadore has gotten a few members of the economic priesthood to speak out of turn—
... several economists said the real concern is that there is no end in sight for the downturn.
Some suggested that the best case scenario for the economy is that it would reach bottom in the second quarter of 2009. And even if that happens, that would still make this recession the longest since the Great Depression.
And to think that we just now noticed!
The Depression Chronicles – 1: Bankruptcies (4/19/08)
1The NBER also tells us what a recession is—
A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.
So we're somewhere past the peak and heading for the trough, though some individuals and corporations have raced ahead and are already at the trough. Take that as you will. [back]
Monday, December 01, 2008
"First" of the Day: Planning to buy a car
This month, according to preliminary figures released this week..., just 1.9 percent of the respondents said they planned to buy a house and only 3.7 percent said they expected to buy a car.
In the more than 40 years that the survey has been conducted, the previous low reading for car purchases was 4.5 percent.
Moreover, the survey also asks whether the person plans to buy a new car or a used one, or is not certain. This month only 1.3 percent said they planned to buy a new car, also the lowest ever.
—Floyd Norris reporting in "Americans Have Lost Their Appetite for Spending"
If you're thinking of buying a used car, try to find one that will really hold up and for which you can find used parts at the junk yard. I recommend the 1980 Ford Fairmont, but some people still swear by Buicks.
Buying a used Mercedes (2/08/05)