Category: Markets, Business, and the Economy

So by now everybody knows American businesses have exported a lot of jobs in places like call centers to relatively low-wage countries. They call it “offshoring,” and over 1,600,000 people are employed that way in India alone. The companies who employ these workers freely admit that these jobs are sent overseas to save money — not to insure that work is done at hours that it would be difficult to find American workers to do it. While these jobs pay less than they would in the United States, the workers still receive a wage that is competitive if not high by local standards.

In addition to sending 1.6 million American jobs to India, we have sent the stress and dysfunctional work environment that goes with those jobs. As a result, many of the workers are experiencing increased rates of “sleep disorders, heart disease, depression and family discord”. These problems cost an “estimated $9 billion in lost productivity in 2005” which “could grow to a staggering $200 billion over the next 10 years”.

I wonder how this will effect the bottom line. mmYeah.

In closing: one man’s idea of how to fund Medicare For All — and please don’t forget his consulting fee; canned goods and a blood pressure check; Forbes’s A Short History of Pigging Out is 9 pages long; Krugman on Unions; maybe I should stop being ad-free, as some bloggers are making money; An interesting analysis of “free” trade; the FBI is planning the world’s biggest biometric database despite the fact that biometrics is a not-ready-for-prime-time science, promising to only use it for good; heaven knows that database could never experience a security breach — thanks to Bruce Schneier for pointing out the top 10 data breaches of 2007; and more Schneier-ific items, where should airport security begin and don’t be terrified.

There’s a lot of talk today about how “Worsening Credit Crisis Leading to Meltdown of Financial System and Severe US Recession” (it’s long and written by economists, but please at least read the first paragraph) and “New Wave of Mortgage Failures Could Create a Nightmare Economic Scenario” and just to top it all off, banks have billions of dollars of undisclosed risk — they may not even know for certain how bad it is because much of it was kept off-balance-sheet. Huh. I thought we had tighter accounting rules in the post-Enron world.

Now, I have not been as angry at the banks and the Fed as many writers have been. I know enough about economics and modern banking to know that there will be no way out of this mess that does not involve banks. Who do you think is going to provide the money to refinance all those crappy mortgages so people can keep their homes? It’s not the government; they can’t afford it. It’s not Fannie and Freddie; they don’t give loans. It’s banks and other mortgage providers.

But now? Now I am mad. Robert Shiller wrote this piece for the New York Times. You can find a no-registration version here and here and links to other people’s thinking on it here. I’m only going to directly quote a few paragraphs. After telling us that indeed, a 30% decline in housing values has precedent and could happen, he posits that “This crisis should be an occasion for some inspired thinking about fundamental changes in our real estate institutions. The actions that have already been taken are not impressive.” Then he lists the measures taken in the early 1930s, without which “the Great Depression would have been much worse than it was, and we would be in a more vulnerable situation today”:

In 1932, the National Association of Real Estate Boards proposed and Congress created the Federal Home Loan Bank System, modeled after the Federal Reserve System…. This was an ambitious plan: these banks were to be a special lender of last resort for real estate, discounting mortgages so that troubled banks and loan associations could keep issuing mortgages.

Also that year, the real estate appraisal industry pulled itself together to become a truly professional organization, founding the Appraisal Institute, which established national standards.

In 1933… Congress modified bankruptcy law to allow insolvent wage earners to file to protect themselves from eviction from their homes. This was a democratization of bankruptcy law: the new statute led the way to the current situation, in which individuals and businesses both have access to important bankruptcy arrangements.

Later in 1933, after Franklin D. Roosevelt became president, Congress created the Home Owners Loan Corporation to sponsor loans for those having trouble making payments, replacing short-term mortgages — then typically five years with a final balloon payment that was often hard for homeowners to afford — with much more sensible 15-year ones that were fixed-rate and self-amortizing. In 1934, Congress created the Federal Housing Administration; it insured mortgages and insisted they be 20-year fixed-rate and self-amortizing.

The Federal Deposit Insurance Corporation, a radically new invention intended to prevent runs on banks from depleting resources for home mortgages, among other calamities, was also created in 1934. And in 1938, Congress created Fannie Mae, which eventually led to the huge securitization of mortgages.

Now, leaving aside for the moment that a 20 year mortgage was an innovation 70 years ago, and now 30 years is standard, leaving aside how anemic the governmental response is to a crisis that the rest of the world is worried about. Let me tell you the part I am truly angry about:

Congress is already on track to eliminate the provision — Section 1322 of Chapter 13 of the bankruptcy law — that prohibits courts from adjusting terms of first mortgages.

This makes me mad because part of the problem is that the bankruptcy reform bill passed back in 2005 is what pushed so many families into Chapter 13 bankruptcies in the first place.

Oh, and because “Minorities hit hardest by housing crisis” and disproportionately have sub-prime loans, remember that the problems facing middle America are only worse for people of color in America. Remember all the hoopla about encouraging minority home ownership a few years ago? As recently as October of 2006 President Bush himself was encouraging minorities along with everyone else to go out and buy a house.

Administration policies fed the housing bubble, which in turn fed the mortgage mess we are currently trying to dig out of. Their proposals have been nothing more than media hype, and Congress has done little better. When you can look back at Herbert Hoover and say he did a better job with a similar problem, that’s really pathetic.

In closing: Brilliant at Breakfast points out Barney Frank on jobs and wage stagnation in our “service economy”; the Archcrone borrows the drum I’ve been beating to point out that universal health coverage is not the same thing as universal health care; if you haven’t been to my professional site, you have probably missed Teller’s House of Mystery and Imagination; it turns out kids will eat healthy food if you serve it to them; one Seattle Post-Intelligencer writer asks “If not now, when?“And finally, a must read article on social mobility. A mixed bag of researchers from “the American Enterprise Institute, the Brookings Institution, the Heritage Foundation and the Urban Institute” found that it just doesn’t exist anymore! Don’t zone out before this paragraph (emphasis mine):

[Julia B.] Isaacs [of the Brookings Institution] said she was surprised at finding that the personal income of American men—including white men—has been almost perfectly flat for the past three decades. One of Isaacs’ studies indicates, in fact, that most of the financial gains white families have made in that time can be attributed to the entry of white women into the labor force. This is much less true for African-Americans; in 1968, when the sample group was first surveyed, black women were far more likely to already have income-producing jobs.

So, when you hear so-called “family values” sorts talking about how “all today’s problems are because mom is out working instead of taking care of the kids at home”? They are not only saying “all today’s problems are because mom can actually leave a bad and/or abusive marriage,” they are in fact saying “all today’s problems are because American families have too much money.” Somehow, that does not jive with my experience. How about yours?

How the economy is doing these days largely depends what data you want to look at. I’ve been saying that for quite a while now. More to the point, others share my opinion. Here’s Reality Based Educator. Here’s Tyler Cohen. Here’s the BondDad. They all boil down to “How can you say there’s no inflation when commodities are so high and food/fuel prices go up every time I turn around?” and “How can the GDP be so spectacular when the dollar is worth less than a loonie?” and “If everything is so wonderful, how come we have a ‘credit crunch’ and foreclosure crisis?”

And that’s just up until yesterday. Today we can add little data points like 47 million Americans without health insurance, including 3.4 million children who had coverage at the beginning of the Bush Administration. And we can add up to 12,000 pink slips at Chrysler. And in the same quarter that we had almost 4% GDP growth? We had 30% growth in foreclosures, almost double levels from last year. CNN tells us “More than 635,000 foreclosure filings were reported nationwide – one for every 196 households. The filings include everything from default notices to auction sale notices to actual bank repossessions.” Think about that. You live in a neighborhood of a couple hundred houses? Odds are really good you have a neighbor in foreclosure. Apparently the economy is great unless you are a human being.

Even Wall Street is having a rough time, since “Now that 307, or 61% of S&P 500 companies, have reported, the headline numbers are far from encouraging. Earnings have contracted 5.3% from a year ago, S&P says, the worst performance since the fourth quarter of 2001.” Oh but wait, if you don’t count a couple bad sectors, “Eight of the 10 sectors posted 8% or greater earnings growth; five were in the double digits.” And his analysts think next year could have profit growth — not revenue growth, actual profit growth — of anything between 6.5% and 15%. The low number is still more than 50% greater than the “good” GDP number announced yesterday, the highest one is almost 4 times higher. Oh no, the CEO might have to make do with a smaller yacht. Keeping in mind we still have a trade deficit, where the heck is the money to fuel these profits coming from?

In closing: don’t get me started again about vouchers; the New Company Towns; perhaps mining laws should be revisited more often than once every 135 years, “A House bill, the Hardrock Mining and Reclamation Act, would permanently bar the sale of federal lands to miners and would require them for the first time to pay royalties of up to 8 percent of gross income from mining, which would go to a fund to clean up abandoned mines. It would also establish new permitting and environmental rules”; and yes I know I put it in today’s Daily Three, but Schneier is right on again about how “unusual” is not the same thing as “criminal”.

It is fitting to discuss the American economy on a day when three Americans have won the Nobel Prize in Economics. Here’s what Tim Iocono thinks about that.

Speaking of expert opinions, I’ve been hearing a lot over the last day about a superfund to help provide liquidity in something called SIVs. Now, I’ve followed the markets for some years now and yet I don’t know much about these things. And the first several things I saw on the matter didn’t even mention what the letters stand for — which makes me wonder if the journalists know what the heck they are. Luckily for us all, the BondDad was kind enough too run down what these are and what the problem is. Oh, and SIV stands for Structured Investment Vehicle.

The American mortgage problem continues to have international repercussions as Japanese brokerage Nomura Holdings decides to get out of the mortgage backed securities business in the United States. Actually, I enjoyed this item in my local newspaper yesterday. A now unemployed mortgage broker explains what happened: programs that allowed people to buy homes with nothing down; mortgage brokers that were using programs with such shoddy documentation that there are “brokers who have never made a fully documented loan”; an industry that would rather hire some young recent graduate than somebody with actual experience in bad times.

No discussion of the American economy today would be complete without addressing the anniversary of 1987’s Black Monday. Could it happen again, MSNBC asks. My answer? A big drop in the Dow could happen over the course of several weeks — remember that we are at Dow 14,000, it was just over 8000 in September of 2001. But it won’t happen in one day. There have been too many changes in the way the stock markets work since then: trading curbs; an increase in electronic trading; the rise of online trading, enabling Joe Average to put in a market order that goes much more quickly to execution than it could in 1987.

Now oil is trading at roughly $85 per barrel. Oh, and the dollar is flirting with new lows, which is making the oil problem worse. Breathe. Today, Marc Faber was on CNBC and he said what I have maintained for quite a while: the core inflation rate does not reflect what you and I see when we pay our bills. The day of reckoning is coming when it will no longer be able to hide inflation in the statistics.

A couple items on wealth and the lack thereof: this very nice article on the problems of getting out of the “underclass”; paired with EconoSpeak asking what a service economy does to the middle class (answer, nothing good!). Well, there is a little silver lining, American toy manufacturers are having a mini-boom as people avoid Chinese toys.

And one last thing, Presidential Candidate Mike Huckabee is for a tax simplification program that boils down to a flat, national retail sales tax. For the record, I’d like to point out that a retail sales tax puts the entire tax burden on Joe and Jane Average. Corporate profits would be completely untaxed. Now then, corporations use taxpayer-funded services and facilities too. They ship things on our roads. They call the fire department and the police department in emergencies. They benefit from the actions of our government, whether it is our Coast Guard preventing drugs from getting into the country and workplace, or the Department of Education providing funds to teach future employees to read. Do you think it’s fair for them to be exempt from taxes?

In closing: John Edwards points out that Hillary Clinton hasn’t so much as won a primary yet; needless to say China is not happy about the Dalai Lama visiting President Bush and receiving a Congressional Gold Medal; Qwest was approached about wiretapping Americans months before 9/11 and punished for refusing; it’s fun to work at the USDA!; the Farm Bill matters because you eat food; thank goodness, a new designer of clothes for people like me, who are too short for petites; permission to fly in or over the United States is now required; and finally, when economics and markets news source TheStreet.com is running a piece on your First Amendment right to peaceably assemble, we have a big problem in the civil liberties department.

Not a lot of people paid attention to the fact that GDP growth has had little impact on wages during the Bush Administration. In fact, CNN glossed over the fact that most families saw income and earnings decline.

Admittedly, everyone is fixated on housing and mortgages, mortgages and housing: How are Joe and Jane Average going to fare? What can be done for them? Do we need a rate cut? I mean really? Can housing really trash the whole economy? Is there precedent for that? How bad will things be for the guys holding the mortgage paper? With home sales tumbling down to 2001 levels, will commercial real estate fare any better than residential?

As for the Fed, although a lower interest rate will (at least theoretically anyway) stimulate more loans — which would be good for housing — to do so means they will have to ignore inflation. What inflation, you may say. The official numbers have been stable for quite some time. That may have to change. Food prices have been rising at the commodity level. Wheat is at a record high, milk prices have doubled in the last two years (making it pricier than gas in some areas). Other agricultural commodities are up as well. Since food is specifically not included in the “core inflation” number, economic gurus feel safe ignoring it. At some point, these rising prices must be considered by the Fed.

But the unkindest cut was barely covered outside the financial news, and frankly isn’t as obvious as the rising price of a loaf of bread and a jug of milk. Our economy only added 38,000 jobs in August, the lowest number since June of 2003 (ironically, the month I began writing ShortWoman). That’s far, far below the 150,000 jobs we would need to keep up with new people entering the job market, and even far far below the 120,000 jobs expected. These figures are admittedly from payroll processing firm ADP and not the Bureau of Labor Statistics, but it seems to me that ADP ought to have a pretty good idea of how many people are taking home a paycheck in August who weren’t in July. The ADP number is always lower than the BLS number, so there is controversy about which is more accurate (does ADP undercount, or are the BLS numbers inflated?). The BLS number is only expected to be 65,000. This is despite the fact that there were more help wanted ads in August, and despite the fact that workers actually feel comfortable negotiating better terms with their bosses.

The only bright spot is that these numbers should reflect the official layoff numbers, released monthly by Challenger, Grey, and Christmas. Corporate layoffs were up 85% to 79,000, including over 30,000 in financial services and housing, each. Yes, each. Forbes put the whole situation very succinctly: Good Luck Finding A Job.

I am planning a piece on “service jobs” in the next few days, probably after the BLS version of the job creation numbers are released. It will probably be posted over at Central Sanity with a pointer over here.

In closing: wrong house, sorry about the threatening to shoot you in the head, ma’am; a must see chart; Andrew Sullivan on banned books; the money quote is “Anyone who objects to single-payer health care on the grounds that it’s ‘bureaucratic’ is invited to navigate the phone tree at my HMO. Kafka would consider it ‘over the top.'”; new research suggests that when we are told that something is false, we only remember the “false” part for a little while; if you haven’t seen it yet, check out Pete Abel on Project Vote Smart; definition of irony; follow-up on Tony Snow; bipartisanship? Isn’t that where you kiss and make up and then act surprised to find a knife in your back? And finally, if only it were a nice Tom Clancy novel, New Book Details Cheney Lawyer’s Efforts to Expand Executive Power.

Over the last couple weeks, I have seen many accusations that government — the Fed, Congress, the President, the FHA, etc. — are going to bail out investors and leave delinquent mortgage holders to drown in debt. Even Jimmy Carter has been accused of caring more about investors than homeowners; I challenge you to show up to a Habitat for Humanity work site and say that. While I see the frustration that leads to this conclusion, it neglects certain realities of our mortgage mess.

As most of you know, in the old days Joe and Jane Average would save money for a sizable downpayment before even looking at real estate. Then they would go down to the bank with a couple years worth of tax forms and a few months of bank and brokerage statements. The bank would look at a credit report and call their boss to make sure they make enough money (according to “Modern Real Estate Practice”, housing expenses should not exceed 28% of monthly income, and other debts combined with housing should not exceed 36%), and even call the current landlord to make sure they pay on time. The money came from the bank’s depositors, so the bank was careful.

FHA guarantees changed the picture by being an “insurance policy” for certain buyers — but these buyers still had to have certain qualifications, and a host of disclosure laws apply to any loan that FHA touches. Fannie Mae and Freddie Mac took advantage of the fact that mortgages can be sold and assigned. They basically said to the bank “Listen, you can wait 30 years for that mortgage to mature, or we can pay you a hefty percent of the interest you would have earned today, taking a lot of risk off your books, letting you book a profit on the mortgage now, and giving you enough money to write a new mortgage to somebody else.” Of course they would only buy loans that met certain criteria: loans below a certain amount; interest rates below a certain rate; a certain amount of equity; a bunch of disclosure forms that had to be signed by the borrower before the loan even closed. They also have (in theory anyway) the ability to blacklist lenders that they consider “abusive.” These rules have eased and tightened over the years. Since the loans were still backed by real houses, lived in by real people who met real qualifications, nobody saw a problem.

Fannie and Freddie weren’t the only ones buying mortgages and mortgage backed securities. But the new players — banks, brokerages, institutional investors, hedge funds — were held to lower rules than Fannie and Freddie. They figured that the paper was still backed by real houses occupied by real people, so what’s to worry about? The housing bubble continued to grow larger, fed by mortgage brokers who only cared about closing the next deal, because after all somebody else would be holding the bag when it blew.

I would be remiss if I did not address the demand side at this juncture. Rising prices convinced Joe and Jane that they needed to act quickly; they didn’t want to be priced out of the market, and they didn’t want to miss what was increasingly presented as a sure-fire investment opportunity they could live in. However, the economy being what it was, they didn’t have a large downpayment. And they qualified for a mortgage based on their combined incomes, regardless of the fact that one of them could easily lose their job (or in Jane’s case, require maternity leave). No problem, said the friendly loan officer.

Friendly loan officer got them a loan, but at a higher interest rate. Or he got them an Adjustable Rate Mortgage that started off low, but would get higher — he reassured them that by the time it adjusted, they would surely be making more money, right? Or he got them a loan with a prepayment penalty — did you know that in some states it is legal to have a prepayment penalty equal to all the future interest payments?

But Joe and Jane weren’t making more money later. Between stagnant job creation, wages that never did keep up with inflation, rising health care costs, and skyrocketing gas costs, they were really behind the 8-ball. They couldn’t refinance because they were effectively making less money. They couldn’t sell the place because it was worth less than the mortgage amount. Even if they could sell or refinance, they faced a prepayment penalty of several thousand dollars they didn’t have.

It is also worth noting that in this environment, some unscrupulous people who never had any intention of owning a home committed fraud which left whoever owned the mortgage in trouble.

When the assorted investors who owned mortgage backed securities realized what was going on — that massive foreclosures were headed their way — the market for these products dried up. Because there was no longer a functioning market in which to sell mortgages, it became very difficult to write new mortgages almost overnight. This of course was very very bad news for people like Joe and Jane who — before this mess — actually had a chance of getting refinanced. Wall Street matters because they are the ones who can lend Joe and Jane the money to keep their home.

When Mr. Bernanke lowered the Discount Rate (not the prime rate, that is controlled by banks), he was effectively saying “Look, if you banks need to borrow some money it’s ok, we’ll lend it to you. When he authorized “injecting liquidity” he was saying “Here’s some money. There’s Joe Average’s loan application. You think you can figure this out?” So far, this is (slowly) working and markets are stabilizing. Mr. Bernanke still insists he won’t be bailing out investors who made bad judgements, but he stands ready to lower the rates that banks charge one another when they need to borrow short term.

And that brings me to Mr. Bush’s proposals, which — surprise surprise! — include a tax cut. Another component would be lowering FHA requirements. If it works as described, and helps people refinance into lower cost FHA loans without putting undue risk on the FHA, that will actually help. However, the most complete description I saw of the proposal would still require 3% equity and “steady employment”. This will absolutely not help people whose homes are worth more than they owe. Absolutely not on the table (at least from the Administration’s side) would be letting Fannie and Freddie increase their portfolios. For that matter, “not under consideration” is tightening rules on disclosure of ARM calculations or capping of prepayment penalties at the federal level.

The Seattle Times calls the proposal “limited“, and I am inclined to agree.

Cross-posted at Central Sanity.

Before I get going, I’d like to let people know that until August 25, you can log your opinion about the focus for BlogHer’s Global Health initiative. You do not need to be a member to vote. But on to the round-up!

Barbara Ehrenreich starts the show with “Smashing Capitalism”, in which she amusingly shows us signs of the poor leading a revolution by not paying their mortgages and then failing to go shopping. At least at Wal-Mart. Somehow, Target is doing just fine thank you very much.

Speaking of mortgages, foreclosures are up 9% month-over-month and almost double year-over-year. the All Spin Zone says “duh.” Democrats are falling over themselves trying to propose solutions. Here’s a creative answer, converting foreclosures to “own to rent” contracts. I’m not sure it would work — state laws are in play — but it’s interesting.

Fed action is probably not enough to make the problems go away. And that is not just because Mr. Bernanke cannot wave a magic wand and cause thousands of homeowners to have enough money to pay the mortgage. It’s because the market for “commercial paper” — buying and selling bonds, mortgages, and other debts — is broken. And don’t get to thinking “oh boo hoo for the rich fat cats who trade that stuff!” The paper doesn’t trade as it should, so new money for new loans does not exist. That includes the new loan for equipment at your workplace that would mean adding people to the payroll to run it. That includes the refinanced mortgage on Joe and Jane Average’s place.

And that brings us to the Wall Street side of the problem. Jim Cramer arrives fashionably late to the party with advice “Don’t Buy Fannie Mae!” Really, Jim? Thanks, but I think a lot of us had figured that one out. Then we have Dave Johnson, who points out that “The unwinding of the housing bubble takes us way beyond mortgages and into the financial markets of Wall Street.” Speaking of which, investors flush a half a Trillion with a T dollars to bail out just one bond and loan fund. Does that give you an idea how big this problem could be? And coming full circle, the BondDad points out that a lot of real human beings who work in the financial services industry — Americans with mortgages of their own to pay — are going to lose their jobs before all is said and done.

As usual, I will watch the job “creation” numbers with interest when they come out.

In closing: reader Jukkou-san sent World Clock; amazingly enough the strangest thing you will ever read about Karl Rove, even if it is about his dad; it’s still the economy, stupid; George Lakoff seems to think that Centrist really means someone who is willing to pretend that cutting the baby in half makes everyone happy, and he is wrong; Steven Levitt on how things have changed in the beverage world; must read item on the United Nations Population Fund and the anti-contraceptive nuts who want to undermine them; the USDA, organic food, and you; I don’t know what to make of the Daily Show’s Iraq correspondent; Bill Nye booed for telling the truth about the moon…. wait for it…. in Waco; Daily Kos is late to the impeach Gonzo party; oh no! “Immigration crackdown threatens bumper U.S. apple harvest” and farmers may actually have to pay American citizens to pick apples!; so you want a DeLorean; sorry, Senators, you don’t get to pick the leader of a sovereign nation.

And finally, a bit of follow up from Friday Follow-up’s paragraph on Real ID. When it came up on David Farber’s Interesting People list, I offered the only reply, nothing I didn’t say before, but:

I read the CNN article about Real ID yesterday, and found it interesting. First, they point out that some Americans would need a passport “to have a picnic in a national park.” While that is an interesting issue, “for all federal purposes” means those same Americans would also need a passport to do business in person with other federal entities such as the Social Security Administration offices, federal courthouses, and IRS offices. Will they need a passport to pick up a registered letter at the Post Office? I sincerely hope there is not an impending catch-22 with the State Department, since strictly speaking one should need a Real ID compliant card to get a passport. All these things seem much more important than “a picnic in a national park” to me.

Second, why is CNN suddenly on about a law passed 2 years ago?

Corrente offered an interesting commentary called “When internal passport controls go into effect, will DHS “Behavior Detection Officers” profile us like DEA does now?” And more, alert the media, Bruce Schneier said something that shows he doesn’t get it: “This sounds tough, but it’s a lot of bluster. The states that have passed anti-REAL-ID legislation lean both Republican and Democrat. The federal government just can’t say that citizens of — for example — Georgia (which passed a bill in May authorizing the Governor to delay implementation of REAL ID) can’t walk into a federal courthouse without a passport. Or can’t board an airplane without a passport — imagine the lobbying by Delta Airlines here. They just can’t.” Sorry, Mr. Schneier. They already did. They can and did specify using a federally approved ID for federal purposes. If Congress can’t get its act together and get this thing repealed, our only hope is that some judge will realize it impairs citizen’s First Amendment right to seek redress in the courts.

Well if you are, I wrote this post for you.

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.

Friday, the official employment numbers came out, and economists have been arguing about what they mean since then. According to the BLS, there were 132,000 new jobs added to the economy in June, and a revised gain of 190,000 from a previously reported 157,000 in May, and a gain of 122,000 instead of 80,000 in April. Also, “modest” gains in wages, “modest” economic growth, and steady unemployment at 4.5%. Now, please remember that most economists agree that it takes 150,000 to 200,000 new jobs per month to just keep up with new people joining the workforce. Oh, and let’s not forget that May and June are the months when young people leaving school are seeking full time employment.

According to Reuters, “Strong jobs growth bodes well for economy”. However, Max of Max Speaks points out that those young people I was talking about actually have sharply declining employment rates. He does not go on to rub our noses in the fact that these young people without jobs do not count in the unemployment rate because they did not lose full time jobs. This item from economist Dean Baker points out that employment rates among workers aged 25-54 has been steadily dropping too. That is a huge demographic! He concludes:

It is very difficult to think of any reason why hundreds of thousands of prime age workers (both men and women, the declines are roughly equal) would suddenly drop out of the labor market, other than limited job opportunities. While this situation is not disastrous, the data on EPOPS is not consistent with a strong labor market.

Ouch, logic hurts.

The Center for American Progress goes so far as to say that the current levels of job growth look good because of “diminished expectations”. Via Brad DeLong we have Fed may be questioning labor-market tightness, which again points out that “The low unemployment rate reflects in part a recent drop in the ‘participation rate’ — the share of working-age people either on the job or looking for work….” This article and several others are quoted by the Angry Bear — oh my I can’t imagine what his biases might be! — who points out that the job gains are largely sector driven, and the wage gains reported not really worth reporting. He even asks “Did they outsource their reporting to Lawrence Kudlow?”

The short version of the story is that more and more economists are losing their rose-colored glasses, putting away the Kool Aid, and really looking at the economy.

In closing: Star Trek: Hidden Frontier; I hope to say more about the upcoming debate about farm subsidies this week; the BBC reports that the Navy is saying maybe something bad did happen in Falluja; Sara Taylor, political football in the Battle Royale between Executive Authority and Congressional Subpoena; amazing how “tax and spend” a libertarian leaning conservative becomes when he faces the hard truth that somebody has to pay to keep roads moving; a handy timeline of dangerous Chinese products in 2007, broken down by month, is a lot longer than you would think; and finally, CNN reports on the Kami-kaze legacy.