2010 January 02 Saturday
Obama Foreclosure Prevention Extends Crisis
Finally the New York Times reports the obvious about US government policies aimed and preventing mortgage foreclosure.
The Obama administration’s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good.
The American people, American corporations, and US governments have too much debt. We can not get out of the financial crisis by finding ways for people to continue shouldering too much debt. People who make too little that they never should have gotten mortgages in the first place should be foreclosed on. People who have lost their jobs and have little prospect for being able to start paying should also be foreclosed on. It isn't nice. Life is cruel. But debt liquidation is necessary for a sustained economic recovery.
Postponing the inevitable is a bad idea when the postponement prevents needed adjustments.
“The choice we appear to be making is trying to modify our way out of this, which has the effect of lengthening the crisis,” said Kevin Katari, managing member of Watershed Asset Management, a San Francisco-based hedge fund. “We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway.”
The road to economic recovery is paved with bankruptcies and foreclosures.
Overall, the problem is not just Obama's policies, but the general situation. This article says that according to leading economists, for this new decade the economic growth in the US will be less than 2 % per year in average.
Speaking at American Economic Association's mammoth yearly gathering, experts from a range of political leanings were in surprising agreement when it came to the chances for a robust and sustained expansion:They are slim.Many predicted U.S. gross domestic product would expand less than 2 percent per year over the next 10 years. That stands in sharp contrast to the immediate aftermath of other steep economic downturns, which have usually elicited a growth surge in their wake."It will be difficult to have a robust recovery while housing and commercial real estate are depressed," said Martin Feldstein, a Harvard University professor and former head of the National Bureau of Economic Research.
The problem is that when the annual foreign trade deficit is more than 5 % of the GDP (where imported oil is less than half this annual deficit), it follows that the US is employing a lot less people than what it would have been in the absence of trade deficit. If the trade deficit disappears, then the employment will quickly decline to less than 5 % and internal growth will resume in the US. The housing bubble merely delayed this economic collapse, since Americans were simply extracting artificial money from speculative investments and consume it in order to stay alive, instead of getting this money from their jobs. Actually during the 1990s the same cash extraction was from the stock market which was steadily going up, and this bubble got replaced by the real estate bubble during the 2000s. It can be argued that the new bubble is the government printing money and giving it to people, and believe it or not, this is temporarily working because when the government "extends" the unemployment benefits by printing money, people have at least something to eat, but when this new bubble ends, there will be chaos in the streets. But sooner or later, there will be a lot of pressures for protectionism and trade barriers. On the other hand, if the US currency declines another 35 %, then this will be the end of Japanese cars in the United States, and a lot of manufacturing will be revived here. The real cause of the decline in the US dollar is not the low interest rates, but the trade deficit.
If the house can be resold and reoccupied quickly foreclosures should occur. In areas where foreclosed houses sit vacant for years it would be better to reduce the principal balance for people who have steady income. Houses that sit empty attract crime and cost the city money to look over. It can be difficult to get adjustments on mortgages that get securitized because there are many owners. That why it should be allowed to be adjusted in bankruptcy court like most other loans.
C-SPAN's Q&A program today had a couple who released a film on the mortgage meltdown. My favorite line from the film clips was a quote from a rating analyst who emailed a colleague that he hoped they were gone "when the house of cards collapsed".
not the low interest rates, but the trade deficit.
Wolf-Dog, the two are intimately tied together and both involve China. China's policy of artificially lowering the price of the Chinese currency drives both. The low exchange rate on the renminbi makes Chinese imports cheap driving the trade deficit. The Chinese method of forcing the exchange rate by buying fed t-bills introduces massive competition for US debt driving down interest rates.
But in the end, the real cause of the decline in the $US is the run-up in oil prices which creates less demand for $US and more demand for the currencies of oil exporting nations.
"real cause of the decline in the $US is the run-up in oil prices which creates less demand for $US and more demand for the currencies of oil exporting nations."
I don't think the currencies of oil exporters like Saudi Arabia and Iran are in high demand.
When a country runs a trade deficit,with oil or other goods, it's currency should decline so it will export more and import less. That is why the dollar is falling against the other major currencies. It would be also be falling against China's if they were not buying massive amounts of US treasuries to prevent their currency from rising against the dollar. China's buying US debt also lowers US interest rates.
By tying their currency to a falling dollar China is not just preventing the US from reducing it's trade deficit. It is also hurting the trade balances of countries whose currencies are rising against the dollar. In doing so China is increasing the demand for trade sanctions against it by many countries around the world.
"When a country runs a trade deficit,with oil or other goods, it's currency should decline so it will export more and import less. That is why the dollar is falling against the other major currencies."
What the hell does "trade defici" mean? If there's trade there cannot be deficit.
Trade implies exchange: Japan sends me cars and I send them Florida oranges, IN EQUAL VALUE. "Trade deficit" is an absurd concept that leads people to imagine all sorts of things. If we instead say, "Budget Deficit", now that would be a real concept that would simply mean "we have imported more than we have exported" or "we have spent more on something than we shoul've"
"Trade Deficit"... I'm surprised people still use that to mean something.
no I don't,
You are a moron.
If we buy more than we sell, we export money. That exported money is a trade deficit. Duh! ::rolls eyes::
The exported money has the effect of reducing our domestic money supply. (At least in the short term.) This then allows our irresponsible central bank to increase the money supply more rapidly without inflation. (At least without inflation in consumer goods prices. Asset prices inflated like crazy.)
I totally agree with you Bob, if we buy more than we sell we export money, and that exactly means trade deficit.
You're absolutely right.
I have a different take on why the US gov't has decided to Double Down On The Dumb.
Many local US jurisdictions (municipalities, villages, towns, etc.) use property
taxes to fund most local services (police/fire, education, etc.). Should the
federal gov't allow the housing market to normalize, rather than sustaining the
unsustainable bubble, local jurisdictions will quickly reach a services funding
crisis. After all, many don't have the luxury of running ongoing deficits,
and they have to use something close to real accounting principles rather than
the black magic the feds use. Once the locals finally realize they've been had,
they're likely going to decide they need new representation at several levels
of gov't, including federal. Congress simply can't allow that to happen, and
they'll do *whatever* it takes to prevent it - economy be damned.
It's all about the Incumbents. Economics doesn't really enter into it.