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September 11, 2008

Comments

How can there be THAT many more people with professional degrees, that the net is +.03?

How can there be THAT many more people with professional degrees, that the net is +.03?

Good question. The answer seemingly lies in the group referenced in the article, but not (curiously) shown on the chart - those without a HS degree, i.e., the lowest group educationally and economically.

The WSJ article states, if I read it right, that this group grew, as did their incomes, from 2000 to 2007, but that there has been a downturn in 2008, which is not reflected in the chart. (Why did the WSJ omit showing that group? Perhaps - I whisper - because showing it might have undercut the thrust of their argument.)

If I have it right, this is disingenuous (that word again!) of the WSJ. But I'm only speculating, and may have missed a much simpler, and less troubling, interpretation.

"the whole country suffers when we are collectively distracted by stupid things."

uh-huh. And I scroll down a few posts and see a false claim that Sarah Palin "tried to ban books".

I like jokeblogging as much as the next guy, but
it usually works better when the humor is intentional.

My boss at Safeway was right. It was a mistake to quit and go to college.

I like jokeblogging as much as the next guy, but
it usually works better when the humor is intentional.

Better trolls, please.

Btw, whenever I see a comment of mine dated September 11, it feels like I'm quoting Rudy Giuliani. Man, that's creepy.

"How can we help to ensure that people who don't have professional degrees see their inflation-adjusted earnings go up over time, rather than down?"

Stop importing people without professional degrees?

Stop deficit spending, so inflation goes away again?

I think this is not tremendously difficult, except for the fact that the things you'd have to do aren't in the interests of professional politicians.

I'd rather append this to a foreign policy post, but in the absence of one on the sidebar, other things that that matter include how great our dealings wtih Pakistan, and their deal with the Taliban, is going.

OT - in case anyone was wondering how the Foxnewsification of the WSJ news pages was progressing, take a look at the front page today with the picture of Obama and the headline right below it.

BB,

1. We could subsidize subsistence farming in Mexico rather inexpensively, or, we could actually PAY people without degrees more. This is not difficult.

2. So I guess it's OK to throw all those Milton Friedman claims about inflation being a monetary phenomenon in the garbage? I never particularly liked his stuff anyway.

ironic that someone with the handle "abc" would not find the idea of banning books a serious issue.

WTF is a "professional degree"? If I got an engineering degreee, and I am a practicing engineer, does that make engineering a "professional degree"? Is a Ph.D in history a "professional degree" if one is a historian, but not if one is a history teacher?

I'm a little confused by this distinction. It's not quite distinct.

WTF is a "professional degree"?

answer

I hate to think what the 2008 figures will show -- 2008 has been a very, very bad year economically.

And since this is an economics thread, I don't feel the least bit secure and neither should you -- unless you are a valued member of our Too Big to Fail Economy.

First it was Bear Stearns. Now Freddie and Fannie.

The airline and auto industry are already lining up.

Too Big to Fail. Forget you and me -- except you and me wind up paying for the big guys.

WTF is a "professional degree"?

Ah, that takes me back a few years, to my days of litigating whether a claim against a funeral director was a claim for "professional malpractice" Good times . . .

The Michigan Supreme Court thought that funeral directors qualifed as "professionals," although they were not entitled to the benefit of the statute of limitations for professional malpractice: Dennis v Robbins Funeral Home, 428 Mich 698; 411 NW2d 156 (1987)

Ugh -- how do I see the front page of the WSJ without going to the grocery store?

Try "Today's Front Pages" at the Newseum website, Doctor S.:

Wall Street Journal

Ugh -- how do I see the front page of the WSJ without going to the grocery store?

Go to the library? Try this link (pdf; not sure it will work since I'm a subscriber and thus have access to the online version).

Phil - cool, didn't know they did that.

"How can we help to ensure that people who don't have professional degrees see their inflation-adjusted earnings go up over time, rather than down? And one of the things we, as citizens, ought to worry about is: which candidate is most likely to do this?"

I don't see that either candidate has a good handle on what should be done. Neither has any good track record on economic issues. McCain is blinded by his idealogy and Obama is no better. Obama actually thinks that President Reagan is a better model than is President Clinton to emulate.

Neither of them understand the key role that our government has come to play in our economic lives since the New Deal era well enough to defend and improve this on relationship.

They both begin with the assumption that the conservative criticism of liberal economics as dangerously flawed is basically correct.

This is of course not true, but Obama will not defend liberalism and of course McCain will do what he can to turn back the clock.

FNA and FRE are good examples of this. McCain/Palin recently wrote an opinion piece in the WSJ saying that they will totally privatize them. Obama, when asked, has refused to stand behind maintaining the government backing for these GSEs.

I don't know if anyone here really appreciates the significance of this. But without the GSEs survival in their current form and without the unequivial government backing you can kiss middle class homeownership goodby.

There simply is no substitute for them. Period.

I don't see that anything will change. Politicians say they care about common folk during elections but once in office promptly forget all about their promises and focus instead on keeping power.

Hilzoy - thank you once again for a most thought provoking article with excellent links to help me understand complex issues.

I found the NYT article to be really down-to-earth and easy to read and understand. It scares me that so much of the political rhetoric is either so far over the had of "professionals" like me or so far beneath my feet...

Insert "God Save the Queen" or some appropriate music here.
Jen smith

"...guarantees fatter paychecks every year." Wow, I suppose we can debate ad nauseum on pay, cost of living, merit increases, performance or even contract negotiation. I've been at various levels of the work force for over 30 years and ain't nobody guaranteed me nutt'n. I guess it all began with something like forty acres, a chicken in every pot and the check's in the mail. Or is it I'm from the gov'mnt and I'm here to help you. I'm waiting for the candidate that will swear to keep their greasy fingers out of the economy.

Couldn't agree more with this post. Here is an interesting contrast in educational policies (and, perhaps more importantly, where the candidates are "coming from" in their feelings and how they approach problems) from the NY Times yesterday:

http://www.nytimes.com/2008/09/10/us/politics/10educate.html?_r=1&scp=1&sq=obama%20looks%20to%20lessons%20chicago&st=cse&oref=slogin

http://www.nytimes.com/2008/09/10/us/politics/10schools.html


I guess it all began with something like forty acres...

Actually, mentioning 40 acres invokes this. Though I'm not surprised that you would take this as evidence of the government's failure to you...

Go read Haidt. Issues matter little to conservatives and those who lean that way.

Steve

Obama actually thinks that President Reagan is a better model than is President Clinton to emulate.

Show me the quote. Because I am hoping that when you go look up the quote that you think meant this you will realize that you are very very wrong.

They both begin with the assumption that the conservative criticism of liberal economics as dangerously flawed is basically correct.

This needs a cite as well. For both candidates, preferably.

Obama will not defend liberalism

This one is really good, especially given http://www.huffingtonpost.com/2008/08/28/barack-obama-democratic-c_n_122224.html>convention speech in which Obama vigorously defended liberalism in a manner that cause several conservative columnists to complain that it was just http://rossdouthat.theatlantic.com/archives/2008/08/obamas_night.php>liberal boilerplate.

As for FNA and FRE, I will just note that government "backing" with little to no accountability and no government benefit is more about corporate welfare than actual help to the middle class. So unless you are contending that the government should fully absorb FNA and FRE, I am afraid I don't follow your point.

Obama actually thinks that President Reagan is a better model than is President Clinton to emulate.

Show me the quote. Because I am hoping that when you go look up the quote that you think meant this you will realize that you are very very wrong.

They both begin with the assumption that the conservative criticism of liberal economics as dangerously flawed is basically correct.

This needs a cite as well. For both candidates, preferably.

Obama will not defend liberalism

This one is really good, especially given http://www.huffingtonpost.com/2008/08/28/barack-obama-democratic-c_n_122224.html>convention speech in which Obama vigorously defended liberalism in a manner that cause several conservative columnists to complain that it was just http://rossdouthat.theatlantic.com/archives/2008/08/obamas_night.php>liberal boilerplate.

As for FNA and FRE, I will just note that government "backing" with little to no accountability and no government benefit is more about corporate welfare than actual help to the middle class. So unless you are contending that the government should fully absorb FNA and FRE, I am afraid I don't follow your point.

The government hasn't failed me in part due to my measured expectations. Those who dream otherwise are destined to have their hopes dashed, as will surely happen to Obama's 'followers' unless they happen to be a union boss.

socaratic me, Thanks for making my point.

Conservative critics call Obama a 'liberal', like that is a bad thing.

Obama never defends himself by claiming that yes he is a liberal and that liberals can trust him to fight for liberal ideals. Why does he do this? Because he accepts the conservative framing as unchallengable.

This is completely opposite from what conservatives do, of course, They embrace the destruction of liberalism with every breath they take.

And regarding FNM and FRE: I didn't expect anyone here would be knowledgeable enough to see beyond the conventional wisdom. But I was hoping to see some hint of understanding on the issues involved before my expectations were confirmed.

I think I figured out how the net is positive though all but professionals have lost! The professionals are the group (on the chart) with the highest income, in an era of rampant inequality. I suspect the +0.3% may be in mean terms, rather than median terms. Do MBAs count as "professional degrees"?

I'm not sure that this would be a bad thing. Europe gets by just fine with lower levels of home ownership. I think that just taking Fannie and Freddie out of the system abruptly would be too much of a shock, but I worry a lot about the economic distortions of our policies promoting home ownership.

Do MBAs count as "professional degrees"?

Yes. And, as a current non-MBA accounting student, let me assure you that there is no more annoying group of ************* in the world.

socratic me,

Let me explain the issue a bit concerning Fannie and Freddio from outside of the conservative point of view that dominates the current media coverage.

1) Without them we have no thirty year fixed rate mortgages. We are the only nation in the world with such loans at affordabe enough prices for middle class home ownership.

2) Real estate has been a major source of jobs and wealth for millions of Americans working the building trades. Now just because tradesmen do not spend time on blogs does not mean their point of view is not equal to yours and I doubt if any of them are willing to give up their livelyhoods just for the sake of your contempt for corporate profits.

3) Nationalize them and your bring all their obligations onto the government books. This is what the conservatives want because it feeds into their desire to destroy government programs by denying them tax funding and instead rely on treasury borrowing. For thirty years the free market provided the capital required for FNM and FRE to provide the mortgage market needed so that we can enjoy the lifestyles we have today.

4) A few years of greed and lack of proper regulation does not invalidate the massive benefits that the full 70 year history the GSEs have played in our economy.

5) We cannot afford to nationalize them without deep cuts in other programs and we cannot afford to do without them. We have no choice, if we want the future to be any better than the past, than to rehabilitate them, send them back out in the same basic form as before, and then closely regulate them so this doen't happen again.

Mathematically, you can't just average the individual medians.

The average of 5 medians is not the same as the median of the 5 populations combined.

Ken,

1) The fact that we are the only country with affordable, 30-year fixed rate mortgages (not quite true, but it's in the right direction) should give you pause before determining that they are crucial to economic health.

2) Yes, housing has been a source of economic wealth. The problem is that it can not continue to be so at the rate it has been. We were building houses much faster than we could occupy them. If you are determined to keep housing playing the same role it was, you will destroy the economy.

3) Running Fannie and Freddie as they have been also led to a pair of companies that have an unworkable business model.

4) No, it doesn't invalidate anything. It does call into question whether the future should, or even can, be like the past.

5) The days where it made sense to let the GSEs be neither fish nor fowl are long gone, if they ever existed. Bring them on the books, explicitly guarantee the debt, and run them as government agencies. Or, turn them into private entities and send them on their way. The current situation means only that, if there is a crisis, government ends up with the debt on its books at a higher interest rate than it would otherwise need to pay, or it lets them collapse, with all of the problems that brings. This is stupid.

2) Yes, housing has been a source of economic wealth.

The economist Robert Schiller disagrees. In his book Irrational Exuberance, he talks about how the long term rate of return on housing in the US is actually very very small. People can easily overestimate the benefits of home ownership because most people don't have a good handle on dealing with inflation or really understanding all the little extra costs (closing fees and commissions plus maintenance and repair).

The problem is that it can not continue to be so at the rate it has been. We were building houses much faster than we could occupy them. If you are determined to keep housing playing the same role it was, you will destroy the economy.

There is already a large glut of housing -- growing the housing supply much faster than the population's need for housing grows is fundamentally a bad idea. It might go well for a while, but sooner or later, the two numbers have to balances, and when they do, you'll see a major real estate crash. Like now for example.

WTF is a "professional degree"? If I got an engineering degreee, and I am a practicing engineer, does that make engineering a "professional degree"? Is a Ph.D in history a "professional degree" if one is a historian, but not if one is a history teacher?

I'm a little confused by this distinction. It's not quite distinct.

It's a standard in our culture. I'd google if I wasn't aware, but that's me.

Or try Wikipedia. It's quite distinct.

Hope this helps.

I agree with this. I was referring, rather, to Ken's claim that housing has been a source of jobs.

I scroll down a few posts and see a false claim that Sarah Palin "tried to ban books".

Hush...a satiric genius has graced this thread! abc is right, of course. Her Honor the Mayor of Wasilla didn't try to ban books from the library. She merely asked the librarian - rhetorically - how she would feel about removing certain books the mayor had in mind from the library. The librarian said she wouldn't do it, and then in an entirely separate incident a short while later, Palin fired the popular librarian. Why would anybody think this has anything to do with banning books? (a public outcry got the librarian reinstated, but she eventually quit rather than having to keep dealing with Palin).

In all seriousness, this has as much to do with a petty dictatorial instinct as with disappearing books from the library and local bookstores. The librarian wasn't the only official Palin fired for 'disloyalty'.

Thanks Freedom-Loving conservatives, for keeping us honest.

J. Michael Neal: "I think that just taking Fannie and Freddie out of the system abruptly would be too much of a shock"

What about the airline industry?

What about the auto industry?

Couldn't you make the same argument about them?

When does it end?

JMN: "Europe gets by just fine with lower levels of home ownership."

Turb: "People can easily overestimate the benefits of home ownership."

I think it's worth pointing out that politicians of both Democratic and Republican stripes have it in their self-interest to promote home ownership because it's a key component of "the American dream" that both parties sell.

Selling a different reality just isn't as sexy.

J Michael Neal,

A small historical aberation, caused for the most part by Republican regulators like Greenspan refusing to use the authority granted the fed in 1994 to regulate the lenders and crack down on variable rate, teaser rate, and sub-prime lending, is not enough reason to abandon one of the most successful programs in our nations history.

Niether fish nor fowl? You might use the same arguments against the federal gaurantee of bank debt ie (deposits) as well. They are in exactly the same relationship to the treasury as the GSEs are. Yet no one in their right minds wants to nationalize the banks or eliminate their federal gaurantees.

What caused this mess was the regulators giving speeches instead of taking their jobs seriously:

http://money.cnn.com/2008/03/04/news/companies/senatebank/?eref=rss_politics

"Federal Reserve Vice Chairman Donald Kohn and Comptroller of the Currency John Dugan were among those who said they were aware of the loosening of underwriting standards before the collapse and spoke to banks about it.

"We did recognize the risk in a general way somewhat better than the banks did," Kohn said. "We tried to warn people in speeches and in conversations that we thought they were taking risks. ... It's quite possible we could have been more forceful."

In response, Sen. Jack Reed, D-R.I., questioned whether talking with the banks about risk was the best way to regulate them."

The free market is a great way to raise money but it needs the firm hand of honest regulators to keep the boom to bust cycles from getting out of hand. That has been the way things worked, for the most part, until we had the conservative idealogy of deregulaton and total trust in the markets replace common sense.

I want to see Obama, or any democrat for that matter, defend the common sense wisdom of the Democratic gaints like FDR and Johnson who left us with the institutions needed to create and maintian wealth for millions of Americans for generation upon generation. Who has the wisdom to recognize this, defend it and expand it? I don't see it in many liberals any more, and it is completely lacking in Obama.

JMN: "Europe gets by just fine with lower levels of home ownership."

Turb: "People can easily overestimate the benefits of home ownership."

-----------

Liberal elitism at its finest.

No wonder we lose elections.

It is elite to point out that homeownership is a complicated economic issue and simple answers like "as many people as possible must own homes" are dumb? Is it elite to point out that buying during a housing bubble was really stupid for most people? I mean, if more people had listened to me, then there would be fewer foreclosures, less stress, fewer ruined credit ratings and messy divorces...

What really kicks me in the pants though is that the most elitist aspect of housing policy we have is the home mortgage deduction. It is a great scam whereby we transfer cash from renters to owners. It distorts the economy, contributes to asset bubbles, is incredibly regressive and encourages environmentally problematic development. But I'm an elitist for wanting to remove this stupid policy that hammers lower income people? Really?

Let me explain the issue a bit concerning Fannie and Freddio from outside of the conservative point of view that dominates the current media coverage.

1) Without them we have no thirty year fixed rate mortgages. We are the only nation in the world with such loans at affordabe enough prices for middle class home ownership.


I think this is mixing up cause and effect. Our problem is with a lack of middle class income, not a middle class lack of access to liquidity. If anything, even the most marginally middle class person had far greater access to liquidity during the pre-2007 housing bubble than was the case during the heyday* of the GSEs decades earlier.

*defined as the time period when the private real estate mortgage loan market was dominated by GSE sponsored loans (much more so than was the case a few years ago), before the rise of the securitized loan model and the growth of the unregulated shadow banking system which is unwinding as we speak.

The GSEs provided a channel for middle class consumers to obtain access to loans at good rates and thereby leverage their future income into the purchase of a home, but this only works on a large scale if we have a large middle class with stable and growing (or at least stagnant) incomes.

In the absence of those things neither the GSEs nor any other system for providing loans (regardless of the duration of the loan or the details of how it is structured) will be able to make middle class home ownership affordable, because there is no substitute for income. At the end of the day the middle class would-be homeowner not only needs to be able to get a loan, they also need to be able to service that debt. If they can’t, they get foreclosed on sooner or later no matter what the loan structure is or who originated it.

The crisis in sub-prime and Alt-A loans is the best example of this problem – it is affecting precisely the very people who did not qualify for a GSE sponsored loan, and were offered liquidity they could not really afford to take on as a bad faith substitute for that missing income. The result was that they only got to "keep" their houses for as long as rising prices enabled them to continuously refinance their loans, which was really just a fancy way of paying too-high of a rent to stay in what was inevitably going to become somebody else's house eventually.

Which is exactly what is happening now. Essentially we used a flood of cheap liquidity during the last decade-plus to cover up the fact that middle class incomes were declining both adjusted for inflation (which has been running well above the officially stated "core" inflation number) and even more so in relation to rapidly rising home prices during the expansion phase of an asset price bubble. Now that the supply of cheap loans has run dry, the bill is coming due.

The technical term for what happens when a bill comes due that we can’t pay is insolvency. The US middle class is insolvent right now, in the sense that we can’t afford to pay our bills, at least not without making dramatic cutbacks in our expenditures – which for many people means admitting that they are not (or at least are no longer) really middle class.

All of this is quite obvious to anybody who takes the trouble to drive through a "middle class" neighborhood these days and look at all the yard sales. People are selling off their household goods (which in most cases were bought on credit by running up the VISA and Mastercard bill) in order to pay for food, gas and health care.

Basically the success the GSE loan model has been a symptom of the strength of the US middle class rather than a cause of it. This may have been different in the early days when liquidity was hard to find in the wake of the great deflationary collapse of our system of credit during the 1930s, but that was a very long time ago. The significance of the US Govt taking the GSEs into custody is not: "Oh Noes, what will the middle class do without Freddie/Fannie?" – if that were the case, then a successful rescue of the GSEs would solve the problem.

The real significance is that the canary (=GSEs) in the middle class coal mine just died from an acute lack of oxygen (=income). Which I take to be sort of the larger point of the top level post by hilzoy.

There is little point commenting when ThatLeftTurn is around.

Ken,

To your points on Fannie and Freddie:

1. Fannie and Freddie are not direct lenders. They purchased loan from private lenders. Yes, because of Fannie and Freddie, interest rates were approximately 25 basis points lower. However, lower interest rates were baked into the prices of homes to begin with.

Let us not forget that home ownership spiked dramatically not only because of lower interest rates but also because of, among other things, relaxed underwriting standards and lenders being more willing to aggressively lend (i.e. second mortgages, no PMI, etc.).

2. Real estate is an investment. Investments carry risk of loss. People who took high loan-to-value mortgages on the expectation that property values were going to increase sufficiently to allow for a future refinancing got caught in an untenable position when property values declined and lender pulled back on the reins.

The real estate market provided construction jobs so long as the demand for new construction was sufficient to support the allocation of labor into that sector. I am not asking anyone to give up their livelihood. What I am asking, if not demanding, is a realistic look at what's going on. No work. No jobs. Ask the thousands of people who have lost their jobs in the financial services industry who were originating the sorts of loans that were going to the sorts of projects that kept your laborers employed. Do they factor into your analysis?

3. Fannie and Freddie enjoyed a line of credit directly from the US Treasury, capital requirements that were less stringent than other financial institutions and the ability to access debt at a very low premium over US Treasuries due to the expectation that the government would guarantee the debt. Please do not associate these entities with the free market. These entities got to the positions they did because of government, not in spite of it.

Also, J. Michael Neal is right. The business model is wholly unworkable.

4. We are not talking about "a few years of greed". We are talking about entities that go beyond their original purpose, secure advantages through the government and become such bloated behemoths that the only way to keep them from causing a near catastrophic economic disturbance is for taxpayers to foot the bill. Yet, you refuse to recognize, acknowledge or debate the real source of the problem here.

I'm sure that the people running Fannie and Freddie who were petitioning the government for the favors they received were thinking of all the good they can do for the people when they were off creating this mess.

5. I'm with J. Michael Neal. Either the entities that remain, in whatever form they remain in, are 1) under the complete control of the federal government or 2) structured in such a way that the units can be spun off and privatized (I prefer the latter but think the former will prevail).

The GSE model, privatize profits and subsidize the losses was problemmatic from the start and people are right to get very upset. Why would you want to bring this monster back?

Couldn't you make the same argument about them?

Personally, I think distinguishing between the auto and airline industries and the GSE's is quite easy since the massive deleveraging that would happen in the event of a failure of either Fannie or Freddie would cause numerous financial problems, the least of which would be the massive decrease in asset values that would occur if the GSE's tried to dump massive amounts of supply (fixed income securities) in a market where there is little or no demand. You would have decreases in collateral value of securities that are currently on margin, forcing the sale of those securities and others as well to make those calls. This would not be happening in one or two isolated instances, but in masse, just like last summer when the subprime meltdown started to take its toll on the markets. This does not begin to address any sort of issues arising from the sort of counterparty risk real or perceived, that brought down Bear Stearns.

I think the automotive and airline industries would experience some pain, no question, but I don't think you would experience a meltdown of the financial markets anywhere near the magnitude of a GSE failure.

Also, for the airline and auto companies, there are buyers out there for them at some price.

Just my opinion.

Niether fish nor fowl? You might use the same arguments against the federal gaurantee of bank debt ie (deposits) as well. They are in exactly the same relationship to the treasury as the GSEs are. Yet no one in their right minds wants to nationalize the banks or eliminate their federal gaurantees.

Ken, if your understanding is really this shallow, and you don't understand the difference between the explicit guarantee of bank deposits up to $100,000, and the implicit guarantee of GSE debt, I'm not sure what else to say. The former is a formal government guarantee of something, for which it charges the banks insurance fees. The latter consists of vague promises of something, but no one is sure quite what, for which the government charges nothing.

So, no, you can't use the same arguments about FDIC deposit insurance.

"Real estate is an investment."

Hence: "Investments carry risk of loss. People who took high loan-to-value mortgages on the expectation that property values were going to increase sufficiently to allow for a future refinancing got caught in an untenable position when property values declined and lender pulled back on the reins."

Saying that "real estate is an investment" is the only area where I disagree with you, East Coast Libertarian.

I believe most economists caution against viewing your primary residence as an investment when it is, in fact, simply a dwelling. (If it's property value increases, great; if it doesn't, well, it's where you live and that's the purpose it serves.)

For the longest time, rising home values fooled people into thinking that's the way it's supposed to be -- so, geez, what better investment avenue is there?

Re Mortgage loan interest deduction:

"But I'm an elitist for wanting to remove this stupid policy .....? Really?

Yes really. Contra to your assertion this does not increase the cost of home ownership nor penalize renters. Renters get the benefit because the landlord (I was one once) gets the mortgage interest deduction. It is not lost just because the homes or apartments actual occupant does not get it. And the deduction makes housing/apartments more attractive to investors and owner/occupants alike. So more gets built, which keeps the costs down.

Do not trust your pointy headed economist friends on the right (as all economists are wont to be) who say otherwise. They don't have this any more right than they have the claim that tax cuts pay for themselves right.

Conservatives always, always always, start from the assumption that any government subsidy only increases the cost of whatever is subsidized. They do not start from an objective point of view.

There is little point commenting…

Thanks for the compliment, although a lack of commentary is the exact opposite of what I was hoping for.

None of what I posted is particularly original. Anybody who reads Yves Smith and CR/Tanta’s excellent blogs (and especially the dustups in their comments section) on a regular basis has already heard this story 100 times at least. I’m just passing it along.

I believe most economists caution against viewing your primary residence as an investment when it is, in fact, simply a dwelling. (If it's property value increases, great; if it doesn't, well, it's where you live and that's the purpose it serves.)

This is where the rent/own distinction is crucial. It's only a dwelling if you rent. Once you decide to buy, it becomes more than just a dwelling. Once you decide to buy using borrowed money, it becomes not only an investment, but a leveraged investment.

There is nothing inherently wrong with that. Leveraged investments which pay off are one way that people are able to rise economically (really really hard work is the much more common way). But leverage carries risk, and never more so than during a period of large scale de-leveraging or unwinding, which is exactly what is going on right now.

One of the things which is grossly unfair about this is that many of the people who are being burned by this right now were misled by conventional assumptions (e.g. about bankers being cautious and conservative in lending money, or regarding the relative safety and stability of their housing market compared with other leveraged investments such as trading stocks on margin), and those assumptions were rendered invalid by changes (e.g. the shift to securitization of loans, decisions made by the Fed to keep inflating our asset price bubble, etc.) which ordinary people had little or no chance of perceiving or understanding until it was too late.

Housing was converted from a safe, boring, low-risk + low-return investment sector into a anything-goes casino, and noboby bothered to warn Joe Six-pack about this change until after he/she'd already "bet the house" (in the most literal fashion imaginable).

There is plenty of blame to go around for the housing bubble -- and it should have been going around before it burst; but life doesn't work that way.

Anyhow, Joe Six-Pack is feeling enough blame right now, but -- while lenders should not be excused for not requiring proof of employment/income -- I'd be wary of getting a mortgage from someone who didn't see the need to ask for it. If it sound too good to be true . . .

One of the things which is grossly unfair about this is that many of the people who are being burned by this right now were misled by conventional assumptions (e.g. about bankers being cautious and conservative in lending money, or regarding the relative safety and stability of their housing market compared with other leveraged investments such as trading stocks on margin), and those assumptions were rendered invalid by changes (e.g. the shift to securitization of loans, decisions made by the Fed to keep inflating our asset price bubble, etc.) which ordinary people had little or no chance of perceiving or understanding until it was too late.

Is there any tracking of just who is getting burned? For instance, what fraction of foreclosures took place on properties where the purchaser imagined they were going to Flip This House, and failed?

I don't have a dog in this fight, just wondering how many people got left standing in in the game of real-estate musical chairs.

J michael neal,

says: "no, you can't use the same arguments about FDIC deposit insurance"

Sure I can.

The bailout of the S&Ls cost the treasury 70+ billion dollars. This was beyond whatever the FDIC had on hand. The insurance is a token. The gaurantor is the UST.

The GSE's for all intents and purposes have always had a gaurantee from the UST just as rock solid as was the gaurantee of the S&Ls. This was understood by everyone from the lowliest clerk working in the back room of a bond clearing house to the gilded halls of the world largest central banks, and everyone in between.

This absolute gaurantee was made evident by Congress and the Treasury to all those who did not already know about it by making it explicit in July.

Granted, the debt covenants specifially declaimed any government gaurantee, but that was always ignored because the UST had given the GSEs a line of credit direct to the Treasury itself. It was in their charters. The line of credit is what gave the GSE's their AAA credit rating. The line of credit amount was just as token as is the FDIC insurance fee. Everyone knows who the ultimate gauantor is in both cases.



I believe most economists caution against viewing your primary residence as an investment when it is, in fact, simply a dwelling. (If it's property value increases, great; if it doesn't, well, it's where you live and that's the purpose it serves.)

That could be right but I view that more in terms of shorter-term buy and flip or buy and refinance (where you cash out in a couple of years) as opposed to a longer-term hold.

I would never encourage a long-term buyer to use short-term strategies to purchase a house (especially some of the types of mortgage options that were offered to borrowers prior to the market downturn). I would also suggest they not worry about value swings in the housing market, which shouldn't matter to people who use the home for their primary residence, pay their mortgage on time and simply carry on with their business.

That said, you still have equity at risk, whether the down payment, the equity paid down off of your loan or any paper equity attributed to an increase in value (assuming it exists). Maybe our disagreement is on nomenclature but I think in principle we are looking at it the same way. I don't look at it in terms of, say, a liquid portfolio of stocks or bonds.

I hope that helps clarify things.

To clarify:

It was Congress who gave Fannie and Freddie the lines of credit direct to the US Treasury by putting them in their original charters.

Not even banks have that.

Renters get the benefit because the landlord (I was one once) gets the mortgage interest deduction. It is not lost just because the homes or apartments actual occupant does not get it.

Ah, so renters get the benefit as well as owners. OK. Then how does it encourage home ownership? Since everyone has to either rent or own, if the deduction really does benefit everyone more or less equally, then it does nothing to encourage home ownership and can be scrapped without impacting home ownership rates. Alternatively, if the deduction helps owners more than renters, than it renters subsidize owners.

And the deduction makes housing/apartments more attractive to investors and owner/occupants alike.

Given that the deduction doesn't apply to mortgages over 500K (maybe $1M, I don't recall exactly), I don't think it plays a significant role in the financing of most apartment buildings.

So more gets built, which keeps the costs down.

People need housing. I'm pretty sure housing will get built no matter what.

Do not trust your pointy headed economist friends on the right (as all economists are wont to be) who say otherwise. They don't have this any more right than they have the claim that tax cuts pay for themselves right.

Can I trust my ultra conservative friends at the Urban Institute?


Is there any tracking of just who is getting burned? For instance, what fraction of foreclosures took place on properties where the purchaser imagined they were going to Flip This House, and failed?
I don't have a dog in this fight, just wondering how many people got left standing in in the game of real-estate musical chairs.

That is an excellent question, which has been a matter of considerable debate at calculatedrisk. IMHO, we don’t really know yet. The answer lies somewhere in the middle ground between the macroeconomic statistics we have right now, and the mass of anecdotal information making it into the press, in the latter case often in a very misleading or poorly framed fashion (Tanta @ CR has written a series posts debunking various NYT stories constructed around the meme of “poor innocent borrowers taken in by snake oil loan salesmen” – which look rather different when examined in detail).

It may be years, or even decades, before enough forensic accounting and economic studies are done to figure out exactly where the fallout came down and who got hit the worst. What is clear at this point is that this is a very large event involving trillions of dollars. I’ve read estimates that the lost equity may eventually come to something like 5-8 trillion, the uncertainty being due in part to the fact that we don’t know how low housing prices will go – they may revert to historic norms in terms of price/income and price/rent ratios, or they may overshoot on the way down and go lower than that. Something this large is bound to have an impact on the US middle class, because there really isn’t anybody else on the scene big enough to take that large of a hit.

Thanks for the clarification, East Coast.

I bought our ranch home five years ago for $182,000 and it values for about $225,000 today. Luckily, we are in a good area and didn't get caught up in the "too-much home" syndrome. Also, My wife and I view this as the home we plan to stay in.

Nevertheless, we've already re-financed once three years ago and paid off credit-card debt that has climbed back up to unmanageable proportions. (Working on commission, I've had to pay the simplest bills this year on credit cards and don't know when it will end. I'm very afraid.)

I'm just glad I'm not someone who was feeling flush five years ago and went out and bought a McMansion that's now not worth what they bought it for.

"Do not trust your pointy headed economist friends on the right (as all economists are wont to be)"

Sure, don't believe economists. They're "pointy-headed."

And ken likes to pretend he's a liberal.

Turb,

Interest on investment property is 100% deductable. The limit applies to homowners only.

So yeah, it helps get apartment, office, and industrial building all built with mortgage financing get built.

And the sophmoric claim that the prices would be the same with or without the subsidy is best left when one your audience is drug addled enough that they suddenly become enlighteded by this remarkable insight. When sober however it doesn't stand up to scutiny.

The paper from the urban institute is just some guys trying to make a name for themselves by being new shiney and conservative. It's the new black.

Now I know I am not going to convince anyone to look at this issue from the perspective of a old fashioned liberal. Over the last thirty years or so concervative economic thought has been left unchallenged in acedemia and everywhere else so few liberals today are equiped to recognize and defend the benefits of our nations liberal legacy.

It is said a fish doesn't recognize the value of the water he swims in. Well, neither do most liberal recognize the value of the liberal economic legacy that has given us the material abundance we today enjoy. Without it most of us would living in serfdom, few of us would be educated, and perhaps the one or two of us born into great wealth would have the leisure time to enjoy these on line conversations.

Eveyone is so focused on change that no one cares to defend the foundation upon which our nations economic health depends.

"The GSE model, privatize profits and subsidize the losses was problemmatic from the start and people are right to get very upset. "

The exact same thing is often said by conservatives about the US gauranteeing bank depositors. No one takes them seriously on that even though the last government bailout of S&Ls cost the taxpayers over 70 billion big ones.

We hear this every time there is trouble. Conservatives see it as the best time to make their move to rid themselves of another piece of our liberal legacy.

When is Barack going to defend liberalism from these attacks?

The average person does not see the benefit of the government gauranteeing GSEs as much as they see the benefit of the government gauranteeing banks.

I'd like to see our political leaders take a stand here, starting with Obama. But in truth, I don't think he will.

Since BFB shared:

My wife and I decided to buy a new home in April '06 while going through an adoption of 3 children--we felt that the new home would be a better atmosphere for our family, having lined up a renter for the old home until we could sell it, as well as having over 2 years of financial reserves after the purchase.

Shortly afterwards, the renter backed out, the adoption fell through, and we had to sink about half our reserves into fixing the new home and the old home. After recovering from the shock of the failed adoption, we were able to put the old home on the market in March '07. I lost my job in Oct' 07 (and my wife had left hers to take care of the children), and, faced with a rapidly dwindling bank account, we had to choose which house to keep, letting the old home go into foreclosure. I have a new job, my wife finally got one, the sheriff's sale is in three weeks, and we are basically running a month behind on our current home and its bills, trying to catch up from our plunge, which still might end in insolvency.

On the back end, despite the rhetoric on both sides on the finances, the bailouts are helping the banks and investors, and not the people losing their homes (I can't tell you how many times banks have told me that, even with the ads saying they help people in financial trouble, that we are too much trouble to help). Our local county has decided that they will freeze property assessments at the pre-plunge levels, whatever your home is currently worth or bought for, so that they can keep their budget from plunging up to half.

Our old home was appraised at $470k in April '06, and may sell at $250k or less at auction. Our new home, despite about $60k in repairs, was bought for $460k and is now appraised at $370k. According to realtors, any home improvement is now overimprovement (because home prices are being set by foreclosed homes in "as-is" condition), and in a nearby "best place to live in the country" in IL, a home in a $1.5m average community is currently on sale at $700k with no takers, after a year on the market.

I am now paying more attention to income, and, according to published data, my wife and I are in the top 20% of family incomes in the country. We didn't buy either property for investment, and made our decision to buy/sell based on what seemed to be reasonable expectations on values, sales prices, and home sales at the time, along with our financial reserves to weather unlikely years to sell.

That's my anecdote/data point.

Employers are not going to pay more unless they are forced to. What needs to occur is a massive wave of unionization. Workers need to take back the power plain and simple. A business owner is only interested in paying as little as possible, just enough to keep you from starving while they horde all of the wealth.

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