Oddly Together

Foreclosure Fallout will Last 9 Years

Wall Street Journal’s number of the week is startling. “107: How many months it would take to sell banks’ current and shadow inventory of foreclosed homes.” If Journal reporter Mark Whitehouse is right, banks will need 9 years to clear their foreclosure inventory. But I wonder. Could it be longer?

The problem is this: Foreclosed homes typically sell for much less than their value—or at least as measured by what someone owes on the mortgage. Foreclosures, which in recent months accounted anywhere from 25 percent to one-third of home sales, pull down existing values. Homes in neighborhoods with foreclosures lose value.

Two Post-Bubble Disasters
For homeowners (let’s ignore investors, banks and other post-bubble casualties for now), the housing bubble’s collapse is not one but two disasters. The first is the subprime mess, where homeowners borrowed more than they could afford, something many folks didn’t understand until their ARM (adjustable-rate mortgage) or, worse, principal payments kicked in; many late-bubble borrowers took loans for which they only paid interest up front. Years later, principal payments drove up monthly mortgage obligations by double or more. This phenomenon precipitated the foreclosure problem, with millions of homeowners defaulting on their mortgages and rapid decline in home values (if there’s no demand for something, prices tend to fall).

The second disaster is foreclosure fallout’s ongoing impact on home values. In July 2009, I likened the econolypse to an atomic blast, with fallout, mainly in the form of debt, spreading across the American economy. Foreclosure fallout is devastating. As foreclosures continue, they push more homeowners underwater, meaning they owe more than the property’s value. Already, according to combined analyst estimates, one in four US homes is worth less than the mortgage note. As foreclosure fallout spreads and drives down existing home values, more homeowners are either forced to default or do so voluntarily, putting even more foreclosed properties for sale and further driving down existing home values. Its a vicious, virtuous cycle that must someday reach equilibrium, but the US housing market hasn’t yet achieved that state.

According to RealtyTrac, in September, the average foreclosed home sold for $170,814. One in every 371 homes received a foreclosure notice during the month. By comparison, the average selling price for new homes was $257,500, according to the US Census Bureau. A year earlier: $290,300. Additional Context: For 10 of the 12 months in 2007, average selling price was over $300,000. Inventory is another measure of the problem, and these figures often don’t account for the full load of foreclosures. According to the Census Bureau, there was eight months of new home inventory in September.

Healing is Risky Business
Foreclosure is exerting some negative pressure on house pricing, although it’s not the only factor at work, just the most recent with influence. Home prices have fallen 25 percent in many US regions from housing-bubble over-inflated values; it’s a necessary correction. Fundamentally, there is a problem of too much debt. Thirteen days ago I asked question “Should Barrack Obama bail out Americans?“—to which I answered “Yes.” The American government should aggressively intervene, buying up consumer credit card and mortgage debt for pennies on the dollar. This debt is a cancer, or you could call it cholesterol blocking consumer spending, which is the lifeblood of the American economy. A false, credit-driven economy created the debt but no longer exists to purge it. Drastic action is necessary.

America should look to Japan’s decades-long economic problems and learn lessons about what not to do. Perhaps the US government would have chosen a different stimulus package if more economists also were  sociologists. Too much economic theory is too far removed from human behavior or that of companies, which reflect the human beings who run them. Companies exhibit greed and self-preservation behavior that defies some economic math. Any stimulus package that fails to account for corporate or individual human behavior won’t be effective enough.

But the statistics, and even my intervention recommendation, simplify something complex. The housing market isn’t an independent entity, even though  yo-yo “it’s better, no it’s worse” news reports take too narrow and too singular a perspective. A sick or injured person is one way to look at the housing market. A change in temperature or blood pressure can have disastrous effects on someone seriously ill, and medicine or other interventions to heal can cause these or other side effects that might set back recovery or even kill. The housing market is that sick person.

For example, underwater mortgages partially explain why unemployment remains near 10 percent and more than 20 percent when adding underemployment. Fluidity, Americans’ ability to flow from a city with high unemployment to another where there are jobs, is a characteristic common among recent economic downturns. Fluidity stimulates recovery. People stuck in their homes, unable to sell, can’t easily move to localities where there are more jobs; underwater home owners have little to no fluidity. Freeing people to move would likely help reduce national unemployment but have negative effects on some localities from which people flee, such as less money for public services and schools because of lower tax base. The point: No matter what the cure, negative effects are likely somewhere else and any attempted cure could easily set back recovery or kill the patient.

It may be that the cure will require 9 years of rehabilitation. If so, the US economy will limp along for some time. Meanwhile, China’s economic miracle will increasingly define commerce and global politics. From a purely political protectionist perspective—the desire to keep America and its citizens safe—there is no Homeland Security agenda more important than economic recovery.

[Photo Credit: Charles Zoller; courtesy of the George Eastman House Collection]

[Editor’s Note: This post was moved from joewilcox.com to Oddly Together on May 21, 2011.]

Do you have an econolypse story that you’d like told? Please email Joe Wilcox: oddlytogether at gmail dot com.

Should Barack Obama Bail Out Americans?

My answer is yes. Artificially created debt is cholesterol clogging the arteries of consumer spending. The economy that created the debt is gone. Only by surgically removing debt can Americans freely spend, thus pumping fresh blood to the heart of the U.S. economy. But, hey, I’m no economist, although in 2005 I rightly predicted the housing bubble’s collapse and much of the aftermath. Surely such insight is worth something.

TARP (Troubled Asset Relief Program) succeeded in bailing out the rich and made them richer—six days ago Wall Street Journal reported that “about three dozen of the top publicly held securities and investment-services firms—which include banks, investment banks, hedge funds, money-management firms and securities exchanges—are set to pay $144 billion in compensation and benefits this year.” The paper describes the amount as a “record high”. The rich are richer, while most other Americans are poorer: At least one in five homes is worth less than the mortgage value; unemployment is stuck above 9 percent (not counting another 10 percent to 12 percent underemployed); and consumer spending spurts and sputters month-to-month.

The problem is this: Between 2002 and 2007, Americans amassed huge amounts of debt spurred on by an artificial economy sustained by greed and fear. While mortgage lenders and investment banks bear much of the responsibility, they’re not alone. Many Americans treated rising home equity values as ATMs. They cashed out equity to buy new cars, big-screen TVs and smaller items. Between 2001 and 2005, for example, consumer spending (spurred on by home equity ATMs) and new construction accounted for about 90 percent of U.S. GDP growth. More typically, consumer spending accounts for 60 percent to 70 percent of US economic activity, depending on which analyst does the estimates. A family that cashed out $50,000 in equity from their home during the bubble years contributed to economy-lifting consumer spending, but from debt. Since the bust, their $400,000 home might be worth only $300,000. Not only is the equity ATM gone, but they owe more than the property is worth.

I defined the situation in July 2009 post “Reich’s Right: No Economic Recovery in Sight”:

The boom gone bust left many, perhaps most, Americans in some kind of debt. Equity and billions of dollars in mortgaged-back spending are gone. Here’s the problem: The bubble was an artificial construct that created real debt. The equity and investment tools were mirages. They didn’t exist, because their values were arbitrary and not fixed to real assets. Yet they left behind real damage—economic devastation on the order of atomic blasts, with radioactive fallout continuing destruction. Recovery can’t come while fallout continues to spread across the economy…Americans have so much debt, and no longer the means to repay it.

The fictitious economy that created the debt is gone. The U.S. economy will limp along as long as Americans, whose spending is the country’s lifeblood, are burdened by debt.

The Foreclosure Bubble Deflates
Worse, there’s a bill that the United States has yet to pay for half a decade of debt-driven consumer spending and housing bubble mortgage lending. The housing market’s collapse has yet to exert its full impact on consumer spending, because millions of Americans in foreclosure stopped paying their mortgages, which freed up cash to spend on consumable goods and frivolities. But when forced out of their homes into the rental market, these people will suddenly have to pay for someplace to live (assuming they don’t end up homeless). Many of these foreclosure loafers will see their monthly expenses increase by one-third or more. Multiply the added monthly spending burden to millions of Americans and tepid consumer spending suddenly retracts; bad could be way worse.

How soon the remaining foreclosure loafers will be sent packing from their residences is ever-more uncertain. There is a sudden row of controversy about a September surge in repossessions and mishandling paperwork for many foreclosures. According to RealtyTrac, 1 in 371 homes received a foreclosure notice in September. Total number of homes currently in foreclosure: 2,021,675. The number of repossessed homes topped 100,000 for the first time in any month. However, the number of actual repossessable homes is likely much higher, with banks throttling back. Too many repossessed homes coming onto the housing market too fast could overwhelm it with cheap inventory. Such circumstance could further drive down housing prices and make even more neighborhoods undesirable to live because of the number of empty homes. From that perspective, non-paying residents are more desirable than vacant houses.

However, banks and other mortgage lenders may have other reasons for letting foreclosure loafers stay rent free: Fear and denial. Two years following the stock market’s tumultuous atomic blast, no one can safely say how much toxic fallout remains among mortgage-backed investments. The more banks dig into their foreclosure paperwork, the more debt fallout they are likely to find. There is fear of the unknown. It’s sadly ironic. Credit counseling services help consumers get over denial. Often consumers get into real financial problems after ignoring letters and other communications from their creditors. They pretend the debt problem doesn’t exist. Banks’ behavior is about denial, too. Attitude: They can be most hurt by what they know.

All this leads to the expanding controversy about the foreclosure paperwork trail, or lack of it. Major banks and other mortgage lenders suddenly are conceding there are lots of problems with their foreclosure paperwork. What’s disturbing is how endemic are the problems. Besides shoddy paperwork—an unsurprising circumstance considering how often these mortgages changed lenders—many foreclosures were processed by unqualified “robo-signers”. The situation suggests banks wanted to process the foreclosures as cheaply and as efficiently as possible, but I see something else: A lack of desire to thoroughly review the documents, which could reveal the extent of financial exposure everyone wants to deny. Repeated: Banks can be most hurt by what they know and must publicly disclose. Suddenly, economists and other informed onlookers (yes, even journalists) realize that banks might carry many more bad mortgage investments than even the most bearish onlookers considered—right, the same debt banks psychologically sought to deny.

Bank of America and JP Morgan Chase are among the institutions putting temporary holds on foreclosure sales. The suspensions are bags of mixed troubles:

• The actions give a temporary reprieve to people awaiting eviction. Their spending can continue much the same, which in aggregate is good for the U.S. economy.
• However, housing sales could suddenly stall; in any given month, foreclosures and other so-called distressed properties account for up to one-third of home sales.
• Banks are likely to lose millions, perhaps billions, from lost home sales, lawsuits for foreclosure fraud and declining valuations, as shareholders sell bank holdings.
• Banks are likely to reveal millions, more likely billions, in bad mortgage investments that had been obscured by or purposely hidden in shoddy paperwork.

October 14th New York Times editorial “The Foreclosure Crises” nails it: “This latest foreclosure crisis should settle one issue once and for all. The banks that got us into this mess can’t be trusted to get us out of it. The administration and Congress need to act.”

There’s a Bailout that Matters More
The impending crisis is opportunity for the Obama Administration to bail out the rest of America—its citizens. The rich got their bailout and in process kept thousands of fat cat banks from exhausting their ninth lives and clawing down the U.S. and other economies when dying. It’s time for the government to step in and buy up consumer debt for pennies on the dollar. My proposal:

1. The Obama Administration, with support from the post-election lameduck Congress, should empower the Consumer Financial Protection Bureau to aggressively intervene in Americans’ debt crisis.
2. The new agency then should put a temporary suspension on all consumer mortgage and credit card payment obligations acquired before a set date, such as January 1, 2010 or October 1, which is the start of the government’s fiscal year.
3. Banks and credit card holders should be given 60 days to produce documentation on all outstanding consumer debts greater than $5,000 for purchase by the Consumer Financial Protection Bureau. Any debts not produced by the set date would have their interest owed voided, including mortgages.
4. During the same time period, consumers could apply to have reduced any debts greater than $5,000 to any institution.
5. The new agency would buy back debt from banks and credit card holders for 10 cents on the dollar. For credit cards, the government would purchase debt accumulated as interest; citizens would still be responsible for principal payments; option for account suspension would allow reasonable payment plans interest free. For mortgages, the government would assume accumulated interest and lost value, meaning the difference between the home’s market price and amount owed against the title.
6. Government-backed Fannie Mae would assume responsibility for purchased mortgages, much as it has done during the bail out. However, banks demonstrating they can accurately manage paperwork could retain title on the mortgage, which would be refinanced for reasonable interest rate 10 percent below market value (as buffer against continued housing price declines).
7. The U.S. government should recover the 10 cents on the dollar from U.S. consumers, or simply forgive the payment obligations.

The proposal may seem to some people as extreme, but I say no less outrageous than the bank bailout (e.g. TARP) was viewed in late 2008. If not this intervention, the Obama Administration should consider doing something to achieve the same objective. Aggressive action is necessary because the artificial credit economy that produced the debt no longer exists and likely won’t for decades (hopefully never). By bailing out Americans, the Obama Administration can surgically remove artery clogging debt, shock the economy’s heart and start pumping the consumer spending lifeblood. If consumer spending accounts for as much as 70 percent of consumer spending but consumers can’t spend because they’re burdened by debt, how can the economy recover without changing the dynamics—either removing the debt or shifting the economy to another driving force?

Of course banks and credit card companies will balk at such drastic intervention. But it’s to their benefit, too. Banks would perhaps benefit more, by unloading toxic mortgage debt, whether securities or title holdings. By removing their debt and the fear that other banks and investment institutions have hidden liabilities, the Obama Administration could clear the arteries blocked from lending. For all TARP’s claimed successes, it’s marred by one glaring failure: Two years after the crash, credit markets are still largely blocked. Uncertainty about hidden debt and fear over taking on collateral damage has caused banks to withhold credit, even with the Federal Reserve holding interest rates near zero. Banks are unwilling to take the risk but are all too willing to reap other investment-related benefits from the Fed’s low-interest lending policies.

What About Moral Hazard?
Aggressive intervention on behalf of debt-ridden Americans also is a way of imposing some accountability on banks even while liberating them from consumer debt burden. Perhaps such action could address the problem of moral hazard, which contributed to the housing bubble and continues in other facets because the instigators got bailed out by the U.S. government rather than suffering financial ruin. In Cato paper “Moral Hazard and the Financial Crisis”, Kevin Dowd offers definition: “A moral hazard is where one party is responsible for the interests of another, but has an incentive to put his or her own interests first: the standard example is a worker with an incentive to shirk on the job.” He adds:

Many of these moral hazards involve increased risk-taking: if I can take risks that you have to bear, then I may as well take them; but if I have to bear the consequences of my own risky actions, I will act more responsibly. Thus, inadequate control of moral hazards often leads to socially excessive risk-taking—and excessive risk-taking is certainly a recurring theme in the current financial crisis…

Measures that rein in moral hazard are to be welcomed and will help to reduce excessive risk-taking; measures that create or exacerbate moral hazard (such as massive bailouts?) will lead to even more excessive risk-taking and should be avoided. In short, a key yardstick that should be applied to any proposed reform measure is simply this: Does it reduce moral hazard or does it increase it? The bottom line? If someone takes a risk, someone has to bear it. If I take a risk, then we want to ensure that I be made to bear it. But if I take a risk at your expense, then that’s moral hazard and that’s bad.

Fear that the U.S. government might someday intervene again creates risk that could help check bad behavior. I agree with Kevin. The major objective of any future financial regulations should be to decrease moral hazard. In the not so distant past, banks lent money solely from their own funds and typically held mortgages to maturity. They assumed the risk. But once banks could tap into outside capital to lend and they could sell off mortgages as investments, risk passed on. Strange, it seems, that one institution passing off risk to another failed to realize that the other institution might act similarly, by unloading risk in equally questionable mortgage investments.

There remains one question: What about Americans’ responsibilities? Should they be so lithely set free from their debts? If the U.S. government hadn’t let off the major instigators of the econolypse, I might answer no. But the rich got their bailout and now huge post-econlypse paydays by earning fat bonuses. They live in lofty cloud homes far above the economic fallout. Jack and Jane American deserve something, too, particularly since they can’t easily or quickly work off their debts given current circumstances. Meanwhile, their inability to spend hurts the entire American economy. It’s time for a bailout that matters at the supper table.

Photo Credit: Chuck Kennedy, courtesy The White House

[Editor’s Note: This post was moved from joewilcox.com to Oddly Together on May 20, 2011.]

Do you have an econolypse story that you’d like told? Please email Joe Wilcox: oddlytogether at gmail dot com.

‘The China Question’ Revisited

In March 2009, I asked “The China Question,” highlighting shocking parallels between the 1920s and `00s (the “Naughties”). Both decades similarly started off and ended, with boom and bust. Other parallels show how quickly an empire collapses—the Brits during early last century and quite possibly the yanks during this decade.

I resurface the post in context of incessant chatter about China’s increasing global economic dominance and America’s growing mountain of debt. Additionally, the United States is close to entering a double-dip recession, if it’s not there already. Recent economic indicators are disconcerting. China has largely exited the global recession fairly unscathed, while the United States is an economy divided: Public companies are reporting record profits, while the American public struggles to relieve record debt. 

Looking at America’s debt through the spectacles of US Securities: $1.65 trillion to China and Japan. Interestingly, the United Kingdom: $350 billion, up from $180.3 billion in December 2009. That now puts the UK at No. 3, a change that happened this year. The data is from US Treasury.

The America era can end, and as suddenly as the British era. That change took just four years. The historical parallels I observed 17 months ago are even more relevant today. Please click on the link above—here it is again—and read this post. As I write, Oddly Together is hosted with Tumblr, which offers no easy way for bringing older posts to the front page; posts appear in timeline fashion. So I’m writing this short post referring to the other I want you to read now and to reflect on its early 2009 context and relevance for today.

Photo Credit: ernop

Do you have a global economics story that you’d like told? Please email Joe Wilcox: oddlytogether at gmail dot com.

Barack Obama’s Three Mistakes

I voted for Barack Obama and still have much hope for his presidency. But from my humble perspective, his priorities were out of order coming into office. Healthcare should have been second to financial reform. The Financial Crisis Inquiry Commission hearings now underway started more than a year too late.

I see that the Obama Administration made three fundamental mistakes during its nearly first 14 months, which have undermined early momentum:

1. Obama’s transition team lost its grassroots momentum during the transition to the White House.
2. The new administration failed to seek financial reform when there was the political and public will for radical and effective change.
3. The Obama White House made health-care legislation its top domestic agenda when litigation—starting by repealing the McCarran-Ferguson Act of 1945—could have been much more effective.

Pulling Out the Grassroots
The Obama political campaign ran one of the most effective marketing campaigns in US history. Advertising Age named Barack Obama marketer of the year in 2008. Successful brands typically take ownership of a single word. In Nov. 5, 2008, AdAge story “What Marketers Can Learn From Obama’s Campaign”, Al Ries explains how Obama came to own “change”. He writes: 

Mr. Obama’s objective was not to communicate the fact that he was an agent of change. In today’s environment, every politician running for the country’s highest office was presenting him or herself as an agent of change. What Mr. Obama actually did was to repeat the ‘change’ message over and over again, so that potential voters identified Mr. Obama with the concept. In other words, he owns the ‘change’ idea in voters’ minds.

President Obama kept up the “change” concept coming into Office. But he didn’t effectively hold onto the concept’s most important collateral: People. The Obama campaign effectively used social media tools to engage and marshall supporters. In Janaury 2009, PR agency Edelman released report “The Social Pulpit: Barack Obama’s Social Media Toolkit”. The report explains, and to my reading surprisingly effectively, how the Obama campaign converted “everyday people into engaged and empowered volunteers, donors and advocates through social networks, e-mail advocacy, text messaging and online video.” Change was Barack Obama’s message, but social media tools were the means for marshaling volunteers and voters.

April 1, 2009 FastCompany story explains “How Chris Hughes Helped Launch Facebook and the Barack Obama Campaign”. Chris created the social media tools vital to the campaign’s eventual success. Chris’ now defunct blog offers insight into how volunteers used My.BarackObama.com to establish “35,000 local organizing groups” in all 50 states.

On Nov. 9, 2008, New York Times’ David Carr predicted that Barack Obama would cash in on his social media capital. From post “How Obama Tapped Into Social Networks’ Power”:

When he arrives at 1600 Pennsylvania, Mr. Obama will have not just a political base, but a database, millions of names of supporters who can be engaged almost instantly. And there’s every reason to believe that he will use the network not just to campaign, but to govern.

But something else happened instead. Chris Hughes left the Obama team early last year. In retrospect, his departure proved devastating to transitioning the social media momentum of the campaign to the presidency. Given the incoming president’s cult popularity, with “change” as his mantra, such transition should have been possible.

“Organizing for America”, continuing from My.BarackObama.com, was supposed to take the presidential campaign’s email list of 13-million volunteers and move the grassroots supporters from campaigning to supporting governing. March 15, 2010 Pittsburg Post Gazette asks: “Is Obama’s grass-roots group losing momentum as it ages?” Reporter James O`Toole writes: “Since the inauguration, OFA has been active, sponsoring workshops and bus tours and encouraging voters to reach out to Congress on a variety of issues…But measuring activity is not the same as measuring effectiveness.”

Campaigning is like warfare. The heroes of war often find living with peace difficult. People campaigning for “change” found making and sustaining change to be a tough task. It’s one thing to sustain a grassroots movement when there is a fixed goal (the election), a single adversary (the political opponent) to rally against, a broad community experience and emotional energy (and the endorphines and satisfaction thus generated).

Dollars and Common Sense
The financial crisis was a unique opportunity to truly organize America. There was shared common goal (recovering lost jobs, homes and savings), a new adversary (the financial institutions considered responsible for the econolypse), a community of injured and emotional energy (anger at Wall Street and large investment banks). There wasn’t the same national emotion about healthcare.

Good marketers succeed or fail around several common principles. One of the most important: Do more than promised. The oft-used term: “Underpromise and overdeliver.” By focusing on healthcare when there was a more immediate crisis for which Americans wanted “change”, the Obama Administration overpromised and underdelivered. But the message of change stuck. Candidate Obama’s message of change resonated among Americans during his early presidency, particularly as recession and financial gloom blanketed the nation. However, his administration didn’t deliver the change many Americans wanted, or felt they needed.

In the vacuum left behind the message of change, a new grassroots movement formed. Republicans like to claim the Tea Party movement as their own, and they’re working hard to instill such public perception about the origins. But it’s a populist movement seeking change—what Candidate Obama promised American voters supporting him. The consistent theme among Tea Party protests is change—and from the perceived socialist agenda of ruling Democrats. There is another important undercurrent: Accountability.

Like the exiting Bush Administration, the Obama camp hasn’t held accountable the financial architects of the “Great Recession”.  In a September 2009 blog post “Why the Dow is So High But Consumers are So Low” I asserted: “The true beneficiaries of government stimulus spending are many of the institutions responsible for the econolypse.” I then asked: “Where is the moral hazard?” Forbes Investopedia defines moral hazard:

The risk that a party to a transaction has not entered into the contract in good faith, has provided misleading information about its assets, liabilities or credit capacity, or has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles.

With regard to the housing bubble there was moral hazard on the frontend—lenders and other financial institutions passing on bad mortgages as sound investments—and on the backend, by the government bailing out—and so not holding accountable—the institutions responsible for the financial crisis.

When Barack Obama assumed the presidency, the financial institutions responsible for the housing bubble, its collapse and related derivative crisis were backed into an alley. Americans were angry, politicians were responsive to taking action and many financial institutions were in such risk of insolvency they couldn’t put up much of a fight against new regulations. Dramatic financial reform was plausible during 2009—and the promise of meaningful, food-in-your-belly change was the rally Organize for America could have used to build from the grassroots campaign foundation an incendiary political movement.

Instead, President Obama exhausted his political capital on health-care reform, which Congress recently pushed through under special circumstances. The Financial Crisis Inquiry Commission is now conducting hearings, but to what end? The President could barely get health-care reform legislation passed into law. Exactly how can he marshal the political capital for financial reform, particularly with the harbingers of the econolypse renewed by federal stimulus dollars and flush by moral hazard? They can and will fight back, as the recent scuffle over Wall Street bonuses shows. The time to act was April 2009, not April 2010.

For a no-nonsense, and arguably cranky, perspective on the housing bubble and following financial crisis, I recommend three Matt Taibbi stories published in Rolling Stone:

• The Great American Bubble Machine
• Wall Street’s Bailout Hustle
• Looting Main Street

One Sick Priority
President Obama wasn’t wrong to tackle health-care reform, he should have simply done so after making more concerted efforts to fix the economy. From a marketing and messaging standpoint, supporting the Bush bailout was absolutely the wrong way to go. Exactly what kind of change was there perserving the status quo presumed responsible for financial collapse? Is that what Obama supporters voted for?

Economists charged with solving the crisis were part of the problem fixing it. January 11 The New Yorker story “Letter from Chicago: After the Blowup”  is deeply disturbing reading. With nearly the exception of Judge Richard Posner, nearly all the economists quoted by reporter John Cassidy exhibit some state of denial about the failure of their economic models and/or principles. (Apologies, the archived story requires a subscription.)

I’m no economist, just a lowly journalist, but even I saw this crisis coming. In August 2005, I blogged “Pop Goes the Housing Bubble”. A year earlier, my family shopped for a new home but gave up after my realization that a dangerous housing bubble formed. What I didn’t understand until the bubble burst was how lenders had repackaged bad mortgages as dangerous derivatives. Why can’t the economists lift their noses from mathematical models and look at human behavior, like greed? There lies the truth behind the econolypse’s causes.

The bailout prevented a run on the banks but failed to fix the fundamental causes behind the econolypse. More the problem: The aftermath. Americans had amassed huge debt, but the artificial credit economy that generated the debt was gone. I’ve long believed that the Obama Administration could live up to the promise of “change” by doing something quite radical: Bailing out American consumers instead of financial institutions; buy consumer debt from banks at pennies on the dollar. Consumers free of debt could start spending again and perhaps even jumpstart lending, given the Fed’s lowered interest rates.

Real economic reform would have partly aligned with President Obama’s health-care agenda. The majority of Americans, 64 percent, receive health insurance from an employer, according the US Health and Human Services’ Agency for Healthcare Research and Quality. If people lose their jobs, they typically lose their health insurance. If they return to work parttime, they typically don’t recover health insurance. According to Gallup, the underemployment rate rose in March. On top of the about 10 percent unemployed, another 9.9 percent are working parttime but wanting full-time jobs. Preserving or creating full-time jobs is an effective way of keeping Americans insured.

More numbers: In March, 15 million Americans were unemployed with ”involuntary part-time workers” reaching 9.1 million, according to the US Department of Labor. “These individuals were working parttime because their hours had been cut back or because they were unable to find a full-time job.” That puts the number of Americans losing insurance with jobs as high as 24 million.

President Obama sought health-care reform through legislation, but there was another way. As I explained in August 2009 post “America’s Health Insurance Cartels are the Problem”: “The Obama Administration should treat health-care reform as a matter of litigation rather than legislation,” starting with repeal of the McCarran-Ferguson Act. The legislation allows insurance companies to fix prices at both ends—what the insured pay for coverage and how much doctors and other health-care providers receive for services. Health insurers operate as protected monopolies.

Obamacare is law, with revisions in progress and provisions rolling out over many years, all without the “change” promised during the campaign. As such, the Obama Administration has a real marketing problem. While, according to Gallup, 49 percent of Americans approved of health-care reform after Congress passed the bill, there is overall dissatisfaction with daily life. “Americans’ access to basic necessities, such as health insurance and money for food, has yet to recover to pre-economic crisis levels,” in March, according to Gallup.

In the absence of meaningful change, the Tea Party Movement has started to seize control of the word. Tea Partiers promise to bring meaningful change to aggrieved Americans. However, “change” has recently become a hotly debated word among Tea Partiers because of the “We are Change” movement. The “we are” or “we are not” change drama started playing out about two weeks ago. 

Bizarrely, by nearly unanimously opposing the Democratic agenda on Capitol Hill, Republicans have taken ownership of the word “no”. Republicans are now often referred to by the news media and in political circles as the “Party of No”. Talk about strange branding.

With the health-care distraction behind him, President Obama’s challenge is reclaiming “change” and delivering on it. His overall approval rating is around 51 percent, according to Gallup. There is foundation. In the aforementioned November 2008 Advertising Age article, Al Ries writes:

Nazi propaganda chief Joseph Goebbels was the master of the ‘big lie’. According to Goebbels, ‘If you tell a lie big enough and keep repeating it, people will eventually come to believe it’. The opposite of that strategy is the ‘big truth’. If you tell the truth often enough and keep repeating it, the truth gets bigger and bigger, creating an aura of legitimacy and authenticity.

The big truth is change—that change is still possible. But the change America needs most won’t be easily achieved. Financial reform will be challenging so far removed from the crisis. Americans still have mountains of debt, which is declining mostly because of mortgage and other credit defaults, based on data released by the Federal Reserve.  Joseph Carson, AllianceBernstein’s global economic research director, calls the process “debt destruction”. Declining household debt isn’t sign of recovery but ongoing crisis, as jobless Americans or those with onerous mortgages walk away from their debt obligations.

Those obligations are huge, and consumers can’t abdicate responsibility. While greedy financial institutions engaged in destructive lending and investing practices, Jack and Jane consumer played their role. According to Columbia Professor David Beim, US household debt reached 100-percent of GDP in 2007—$13 trillion. This happened before: In 1929, the year the last great financial collapse started. 

There is now one priority for the Obama Administration: Fixing the economy the best way it can and, related, building in accountability that helps prevent the dangerous practices responsible for the econolypse. Is change possible? Barack Obama must start by reclaiming the word and rebuilding Americans’ belief in it. Perhaps it’s time he laid claim to another word. No. And brandished it like a club. Financial reform and economic recovery will require bipartisanship, which will be harder with one party in Washington consistently saying “No”.

Photos courtesy of The White House

Do you have a political story that you’d like told? Please email Joe Wilcox: oddlytogether at gmail dot com.

Why the Dow is So High But Consumers are So Low

Yesterday, I warned that signs of economic recovery are nothing more than a mirage. Today, I’m freaking out because Robert Reich has got an explanation so simple and so obvious. If the former US Labor Secretary’s analysis is correct, as I believe it is, the economy’s in deeper doo doo than even my worst warnings about it.

Continue reading…

Recession and the Recovery Problem

I’m sitting outside the auto repair shop waiting for the brake light switch on my aging Toyota Corolla to be fixed. I’m typing on the Nokia N97 smartphonne, on which I also have been reading news. I had blogged that the N97 would get a second chance. The iPhone 3GS is on ice, so to speak. But my N97 experience is topic for another post.

My topic here is the news I was reading in the New York Times about an analyst report suggesting that the economy is starting to recover. It’s not. But first, the Times asserts: “A measure of supplier deliveries, rising stock prices, an increase in consumer expectations, a jump in building permits and the ‘interest rate spread’ bolstered the index in August.”

Continue reading…

Reich’s Right: No Economic Recovery in Sight

U Cal Berkley prof Robert Reich astutely and concisely sums up the prospects for economic revival in commentary “When Will the Recovery Begin? Never.” I saw it today at Salon, but Robert posted to his blog on July 9.

Other economic observers who talk about a recovery underway go oddly together with reality. There is no recovery now, and there isn’t going to be one in the foreseeable future. I’m no economist. but even I can see what’s going on, as I did about the housing crisis four years ago. Why can’t other people? The housing crisis and current situation are linked in ways few so-called experts are identifying. But Robert clearly gets it.

He writes about two camps predicting recovery. One camp (V-shaped) looks to past recessions as roadmap for faster recovery. The other camp (U-shaped) recognizes how weakened are asset markets, and sees a slower recovery.

Continue reading…