Don't Cry Little Debt Baby

Oh how sweet. A little debt baby! And getting started so early too. You are going to grow up to be such a good consumer. Oh yes you are!

Welcome to the world your daddy helped to create, honey! How? Why my dear, with his eager participation of course. That and a bit of denial and a large helping of self-justification. You see, your daddy, like so many others, realized that saving was hard work. Too damn hard, in fact. And let's face it, it takes a lot of self-discipline, sacrifice, and a modicum of modesty to actually save for retirement (and your future) and oh but those granite counter tops are just so expensive! And then of course he fell for the lie (not just once, but twice) that the stock market and even our houses could do the saving for us. Your daddy thought it was a new paradigm, a brave new world, that "it was different this time" -- he thought he could spend all of his earnings on frivolous things like vacations to exotic climes, a new BMW every couple of years (for use when your daddy wasn't driving the obligatory Prius that advertises oh-so-well his "concern" for the Earth and how environmentally responsible he was), all those nights out eating the ever so trendy Asian Fusion food, etc. You know, stuff that white people like.

So your daddy, like so many other people his age, believed what he wanted to believe. He took on more and more debt, spent more and more of his "trapped" equity, and believed, because it felt so good to do so, that there would be no consequences of the adverse type because, after all, everyone was doing it. And how else could he "keep up with the Joneses"? And now that the world your daddy helped to create is crumbling, Congress and the Fed and all the other spineless men who have their thumbs so deep in the pie that it's coming out their ears have further impoverished this country in a vain attempt to artificially prop up house prices, bail out the failed financial institutions that, to a great extent, enabled this problem and basically to keep the financial orgy going just a little bit longer because your daddy will be damned if he has to actually save for what he wants, and wants now.

But guess what, sweetheart? You will still get an inheritance! That's right... an inheritance! It's just that it won't be the sort of inheritance you were counting on. And what is that wonderful inheritance? Why, what you and your generation and the generations to come will inherit is your daddy's generation's debt of course. You get to pay for their lifestyle!... a lifestyle they couldn't afford themselves. And it will only cost you your livelihood and standard of living. Sure, you might not ever be able to afford a house without first selling your children off for slavery. You might not be able to afford the luxury of getting sick. But be confident that it will all be for a good cause -- it was the debt they needed (really) and that they were entitled to. And have no fear because it's all part of your daddy's plan, it's all well thought out. Believe me. Because even though the plan was devised by the corrupt men on Wall Street and in Congress and in the investment banks and even by Mr. "Yes We Can" (and Mrs. Yes You Will) and sold to the dumbed down and overly medicated American public as "a good thing", it's still your daddy's plan because he helped let it happen. Your daddy didn't so much as lift a finger to oppose the bailing out of the people and institutions that created this mess, he didn't object to the propping up of artificially inflated property values, he looked the other way when the American people were bribed by its own government to buy new cars and new houses, and he busy that day when our so-called "free" markets were so manipulated that even a banana republic dictator would be impressed. No, for people like your daddy, it's just not practical to tell the truth in times like these.

So try not to be too harsh on us. When you are old enough to fully understand, please don't pee on your daddy's grave no matter how much you might want to... Yes, your daddy saw this coming a long time ago, there were plenty of warning signs and plenty of nay-sayers shouting to be heard over the din of delirium, but he just chose to ignore them because he was having just too much of a good time at your expense. You don't know it yet, but you will learn soon enough that it is easy for people like your daddy to believe what they want to believe; it is easy for us to only pay attention to the things that support our preconceived notions and to believe the things we most want to be true. So we find it easy to believe that what we've done is the right thing to do and you will too. When things get tough for you, just remember we were entitled to what we wanted now, pop an Abilify or three, or whatever the drug du jour is when you are an adult, and you too will soon be a believer.

Same as it Ever Was Pt. II

William Cohan over at The Atlantic (I am really starting to like that magazine) has a nice article, entitled "An Offer He Couldn't Refuse" (but the online version is entitled "The Final Days of Merrill Lynch"), describing the events leading up to and during the purchase of Merrill Lynch by Bank of America; a transaction which was, for all intents and purposes, forced upon BofA by the thuggery of Bernanke and Paulson and, by extension, the Fed and U. S. Government (and, by extension, the U.S. citizenry -- you and me). I won't excerpt out the juicy bits for you, but this quote is central to the real issues of the legality and Constitutionality of what Bernanke and Paulson did:

"...it also sounds an awful lot like what happens in a banana republic or in Putin's Russia, when the captains of industry did favors for the government in exchange for economic subsidies. How do you stop from going down the slippery slope and becoming like Putin's Russia?"

There is decent discussion about the vast amount of "moral hazard" wrought by Bernanke and Paulson (not just with regard to the Merrill deal, but also the GM bail out, TARP, etc.), the sanctity of contracts, and how the markets can function properly if the rules can change whenever the Fed or government decides to change them or if big risk-takers can bet on being bailed-out.

PS - The graphic in the online version of the article is just part of the full graphic in the print version. The full graphic is priceless as it shows Lewis being forced into eating from a bowl of bubbling, green, malignant, toxic sludge.

Same as it Ever Was

One thing that has angered me so much about the housing bubble was how something as basic and necessary as a home was now treated like an investment and a cash machine. This change in attitude towards such a basic need was, of course, all just one small part of an unfortunate transition towards a society where jobs are transitory, where people likely face having more than one "career", lost pension plans, layoffs, outsourcing, bankrupt social security and Medicare, and all the rest. In response we became a nation of self-proclaimed investors and traders. We allowed ourselves to be convinced that 401Ks, IRAs, ROTHs, stocks, bonds, REITs, etc. and, oh of course, houses were viable proxies for retirement savings. There was (almost) no risk because we were so willing to believe what we wanted to believe: it was "different this time", it was a "new era", stock market valuations no longer mattered, debt no longer mattered, the development of "wealth creation technology", "almost all if not all of those gains are here to stay", "Fifteen percent is pretty much in the bag", "buy now or be priced out [of the housing market] forever", etc, etc, etc. And it had the added benefit (some might say delusion) that we could "live it up" and spend 100% of our earnings since our houses and Wall Street were saving for us.

I have absolutely no problem with people who choose to invest or trade. But I think there are some things that are just too important to people, our communities, and society to risk being treated as an investment (and therefore prone to becoming a bubble or speculative mania) and housing is definately one of them.

You see, the problem with investing is that sometimes you lose. It has to be so; there are always two sides of a trade; someone wins and someone loses. We seem to have forgotten that inconvenient fact or, rather, we no longer take personal responsibility for that fact -- we are entitled to a profit don'tchyaknow. We seem to have allowed ourselves to believe all the hype and garbage that bankers, realtors, Wall Streeters, Fedsters, and everyone else with a vested interest, would like us to believe... that we can all be winners if only we bring "a bucket of money and a box of stupid" to the bargaining table. And what's worse is that The System has become so dependent on debt and investment dollars, the transition from a nation that produces to one that consumes has been so complete, that losses can no longer be tolerated and certain businesses are believed to be "too big to fail". Hence, massive bailouts of the very people and institutions that got us in to the current economic mess and a recession that has been called the "worst since [the] Great Depression".

Which (finally) leads me to my point (if I even have one): you would think that now, finally, we would understand the folly of our ways and, you know, try and fix things at least as far as housing is concerned. But you would be wrong. You see, the debt-based consumption economy in combination with the "too big to fail"/bailout mentality means that reckless risk-taking is officially encouraged by even the highest echelon of government. We are content to just pretend that everything is now fixed, everything is ok, and while no one is looking, conduct business as usual but just disguise it a bit and pretend it is a fix because, after all, if it blows up we can just bailout the system with taxpayer dollars and burden future generations with more of our debt... they won't mind:

Much to their dismay, Americans learned last year that they “owned” Fannie Mae and Freddie Mac. Well, meet their cousin, Ginnie Mae or the Government National Mortgage Association, which will soon join them as a trillion-dollar packager of subprime mortgages. American taxpayers own Ginnie too...

Herein lies the problem. The FHA’s standard insurance program today is notoriously lax. It backs low downpayment loans, to buyers who often have below-average to poor credit ratings, and with almost no oversight to protect against fraud. Sound familiar? This is called subprime lending—the same financial roulette that busted Fannie, Freddie and large mortgage houses like Countrywide Financial...

On June 18, HUD’s Inspector General issued a scathing report on the FHA’s lax insurance practices... The FHA’s reserve fund was found to have fallen in half, to 3% from 6.4% in 2007—meaning it now has a 33 to 1 leverage ratio, which is into Bear Stearns territory. The IG says the FHA may need a “Congressional appropriation intervention to make up the shortfall.”

...at the FHA, the [mortgage] down payment requirement remains a mere 3.5%. Other policies—such as allowing the buyer to finance closing costs and use the homebuyer tax credit to cover costs—can drive the down payment to below 2%.

Then there is the booming refinancing program that Congress has approved to move into the FHA hundreds of thousands of borrowers who can’t pay their mortgage, including many with subprime and other exotic loans...This program is intended to reduce foreclosures, but someone has to pick up the multibillion-dollar cost of the 30% loan forgiveness. That will be taxpayers.

In some cases, these owners are so overdue in their payments, and housing prices have fallen so dramatically, that the borrowers have a negative 25% equity in the home and they are still eligible for an FHA refi.

A few weeks ago a House committee approved legislation to keep the FHA’s loan limit in high-income states like California at $729,750. We wonder how many first-time home buyers purchase a $725,000 home. The Members must have missed the IG’s warning that higher loan limits may mean “much greater losses by FHA” and will make fraudsters “much more attracted to the product.”

...Is anyone on Capitol Hill or the White House paying attention? Evidently not, because on both sides of Pennsylvania Avenue policy makers are busy giving the FHA even more business while easing its already loosy-goosy underwriting standards.

Source.

When does We the People get fed up? Or are we just a nation of hypocrites who will tolerate any wrong as long as we think we can profit by it?

Take a Look in the Mirror

As I am just catching up on reading the news from the last few weeks (I was traveling abroad), I saw this quote over on the Ben Jones blog:

If society just followed the advice of its grandparents, there wouldn't be an ongoing crisis with foreclosures that helped trigger the nation’s economic woes, according to the author of a new book. Shari Olefson, a Tampa, Fla., attorney…says simply blaming Wall Street, government regulations or predatory lenders — all who share culpability — is just shifting responsibility away from those who bought the homes.

I don't know how many times I got creamed by readers when I expressed that very same opinion on this blog.

If you want to know who is most to blame for this housing (and the ensuing economic) mess, just look in the mirror. You know who you are. You ignored that little cautionary voice in the back of your head, didn't stop to think for yourself, you let your friends/relatives/neighbors do the thinking for you when you said to yourself "everyone else is doing it, so..." and agreed to pay that stupid/ridiculous price for your house. Blame the enablers all you want, but at the end of the day the final responsibility rests on the shoulders of those who decided to "pull the trigger".

Fiscal Crisis Brings Prop 13 Up For Discussion (Again)

Well, this is certainly blogworthy and so I am forced to break this hiatus.

It seems that the fiscal crisis in California -- Californians' long overdue day of reckoning -- is fueling discussion regarding the viability of Proposition 13.

It's about time! But don't get too excited. Talk like this has happened before following other crises, but there was always some new boom just around the corner to derail any serious reconsideration of Prop 13; the last one being the .com bubble. I can only hope that there won't be another boom anytime soon to distract determined discussion of at least seriously modifying Prop 13. But it'll never happen, of course; Californians form opinion using their pocketbooks and not their brains.

The Quiet Coup

Please check out this article in The Atlantic by a former chief economist at the IMF.

Fellow Americans, you have been duped long enough. Considering to whom the government is giving your hard-earned money, how do you feel about having just paid your taxes? When do you finally say "enough is enough"? When you no longer have anything left to lose? By then it will be too late.

Summary:

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

Open Thread

We desperately need a new thread. Discuss what you want.