Today I offer a quartet of items on the economy, granted skewed a bit “left.” Sorry, most of the “right” thinks there’s very little wrong with the economy. And I suppose as long as you don’t look at job creation too carefully, and ignore the number of people living in poverty (new figures on that coming out towards the end of the month, we’ll see if that number continues to go up), and don’t look at the number of people with no/inadequate health insurance when you talk about high total health care costs, and don’t wonder how prices of gold and other commodities can be this high with an official inflation number this low, and don’t wonder how corporate profits can continue to grow at a rate that dwarfs both inflation and GDP growth, the economy does look pretty good.
I was going to write about the sub-prime mess and how we got here, but Amanda Marcotte at Pandagon did a very nice short version of the problem so I will not reinvent the wheel. Adjustable Rate Mortgages are not the whole problem, even though I have been begging readers to refinance them for some time now; ARMs have their place (I even had one back in ’96, when it was clear that interest rates were going down).
The truth is there are two parts to this problem, one on the demand side and one on the supply side. As for the supply side, Ms. Marcotte pretty much nailed it: mortgage brokers wrote paper for people who really couldn’t afford it long term; the mortgage brokers didn’t care, because they were planning on turning around and selling the mortgage; if the homeowner was smart enough to realize he/she needed to refinance, their friendly mortgage broker gets to rinse and repeat; if not then the default is Somebody Else’s Problem. It is worth noting that “somebody else” could well be Fannie Mae and Freddie Mac.
That in turn brings me to Tim Iocono at The Mess That Greenspan Made, who lets us in on the secret that Freddie and Fannie are in no shape to bail out the system. Indeed they helped cause the problem, and are in need of “reform.”
More than hints and allegations, on the demand side of the equation, we have Ownership Society propaganda from a variety of sources including the White House — which specifically considers widespread home-ownership a goal. The head of the Cato Institute actually said “Seriously, [the Ownership Society] should be an emotional issue about liberty and opportunity, not solvency dates.” Forgive me, the biggest investment most Americans will ever make should not be “an emotional issue.” At times even Fannie Mae has been actively advertising the idea that everyone should own a house.* The Washington Post adds “The result has been a range of policies that promote homeownership while generally neglecting renters.”
I would like to specifically spell out the implication: the “housing bubble” and the sub-prime mess are two sides of one coin; without one, the other would not exist. Reduced mortgage standards and “alternative mortgage products” that reduce monthly payments allowed the customers who demanded them to spend way too much on a house. Without these products, buyers could not have paid inflated prices, and would have to save up an appropriate down-payment. Since saving money takes time (and the savings rate in this country has been lousy in recent years), this would have reduced the number of potential purchasers. The combination of fewer buyers and a lower number on the pre-approval letter means sellers would have had to accept reduced offers — or of course choose not to sell.
* There are a number of reasons why a purchased home might not be the right choice for any particular person/family. These reasons include but are not limited to financial instability, familial instability, likelihood of moving within 2 years, lack of interest/skill in home-maintenance, and known future lifestyle changes (having kids, kids moving away, retirement, etc.).
It really was the economy, stupid, might have been the alternate title for Hale Stewart’s article, Why Clinton’s Economy Was Better. I seriously do not know where this guy finds time to write as much as he does. But nevertheless I’m glad he does. Oh my and his charts bring joy to my inner technical analyst! Hmm where was I? Oh, right, Clinton.
Ultra-short version of the article is that by eliminating the budget deficit and starting to pay down the national debt, President Clinton forced investors out of US government bonds and into the stock market. This not only created investor confidence, it provided the capitalization to create good paying jobs. Mr. Clinton’s job creation and unemployment rate numbers are also remarkable when you consider that the Welfare Reform bill of 1996 put thousands more people into the workforce.
The goal of a balanced federal budget is a conservative ideal I can support. We now have anecdotal evidence that it is good for all sectors of the economy. It may not be the right thing in all times — Mr. Bush’s Trifecta of “recession, war, or a national emergency” comes to mind — but under normal circumstances it is a good idea to not spend more money than you have.
And to complete the symphony, we have the Left’s favorite economist, Paul Krugman, and his commentary Why Economists Are Jittery about the Stock Market. Sometimes it is difficult to read things by even the most dynamic of economists; if you can only manage one paragraph or two:
What’s been happening in financial markets over the past few days is something that truly scares monetary economists: liquidity has dried up. That is, markets in stuff that is normally traded all the time — in particular, financial instruments backed by home mortgages — have shut down because there are no buyers.This could turn out to be nothing more than a brief scare. At worst, however, it could cause a chain reaction of debt defaults.
Nor are mortgage-backed securities the only paper that until last week was “normally traded all the time.” Another victim/culprit is “high-yield corporate debt, a k a junk bonds.” Remember junk bonds? Remember what the 80s?
So Mr. Krugman is saying that if nobody is willing to buy these securities, nobody will be able to sell them. If they can’t be sold, the people who own them will have a hard time paying other financial obligations or making new investments. That, in turn, means more defaults and fewer available investment dollars — both of which are bad for both the markets and the economy at large.
If all these items had a central theme, it would be that “too much debt” and “too little cash and cash equivalents” are problems both on a microeconomic and macroeconomic level. It does not matter whether you are Joe Average, a small business, a large publicly traded company, or even the government.