Baker: Stimulus worked, but it was too small

Two-fisted liberal pride!  Don't ever back down!  The GOP watered down the stimulus with 1/3 tax cuts and cut the overall amount from more than $1 trillion that was required to about $700 billion.  

Sums up Dean Baker: "In other words, we were trying offset a loss of $1.4 trillion in annual demand with a stimulus package of $300 billion a year. Surprise! This was not enough."

Even so, the stimulus helped avoid a second Great Depression.  

My progressive comrades: don't ever apologize, don't ever make excuses. THE STIMULUS WORKED.  The fact that it couldn't do more is entirely the fault of Republicans.

Now read below to get the numbers.

Why the stimulus just couldn't do it

By Dean Baker

February 20, 2014 | CNN

When President Obama proposed his stimulus in January 2009, the economy was in a freefall, losing more than 700,000 jobs a month. The immediate cause of the plunge was the freezing up of the financial system after the collapse of Lehman Brothers, but the deeper cause was the loss of demand after the collapse of the housing bubble.

The bubble had been driving the economy both directly and indirectly. The unprecedented run-up in house prices led to a record rate of construction, with about 2 million homes built at the peak in 2005.

In addition, the $8 trillion in housing equity created by the bubble led to an enormous consumption boom. People saw little reason to save for retirement when their home was doing it for them. The banks also made it very easy to borrow against bubble-generated equity, which many people did. As a result, the personal saving rate fell to 3% in the years 2002-07.

The bubble also indirectly enriched state and local governments with higher tax revenue. And there was a mini-bubble in nonresidential real estate, but that came to an end in 2008 as well.

The economy had already been in recession for nine months before the collapse of Lehman because the bubble was deflating, but the Lehman bankruptcy hugely accelerated the pace of decline. This was the context in which Obama planned his stimulus package before he even entered the White House.

At that point, most economists still did not recognize the severity of the downturn, just as they had not seen the dangers of the housing bubble that had been building over the previous six years.

The Congressional Budget Office projections, which were very much in the mainstream of the economics profession, showed a combined drop in GDP for 2008 and 2009 of 1%, before the economy resumed growth again in 2010. This is with no stimulus. By contrast, the economy actually shrank by 3.1% in those years, even with the stimulus beginning to kick in by the spring of 2009.

Given this background, it was easy to see that the stimulus was far too small.  It was designed to create about 3 million jobs, which might have been adequate given the Budget Office projections. Since the package Congress approved was considerably smaller than the one requested, the final version probably created about 2 million jobs. This was a very important boost to the economy at the time, but we needed 10 million to 12 million jobs to make up for jobs lost to the collapse of the bubble.

The arithmetic on this is straightforward. With the collapse of the bubble, we suddenly had a huge glut of unsold homes. As a result, housing construction plunged from record highs to 50-year lows. The loss in annual construction demand was more than $600 billion. Similarly, the loss of $8 trillion in housing equity sent consumption plunging. People no longer had equity in their homes against which to borrow, and even the people who did would face considerably tougher lending conditions. The drop in annual consumption was on the order of $500 billion.

The collapse of the bubble in nonresidential real estate cost the economy another $150 billion in annual demand, as did the cutbacks in state and local government spending as a result of lost tax revenue. This brings the loss in annual demand as a result of the collapse of the bubble to $1.4 trillion.

Compared with this loss of private sector demand, the stimulus was about $700 billion, excluding some technical tax fixes that are done every year and have nothing to do with stimulus. Roughly $300 billion of this was for 2009 and another $300 billion for 2010, with the rest of the spending spread over later years.

In other words, we were trying offset a loss of $1.4 trillion in annual demand with a stimulus package of $300 billion a year. Surprise! This was not enough.

That is not 20/20 hindsight; some of us were yelling this as loudly as we could at the time.  It was easy to see that the stimulus package was not large enough to make up for the massive shortfall in private sector demand. It was going to leave millions unemployed and an economy still operating far below its potential level of output.

We are still facing the consequences of an inadequate stimulus. The reality is that we have no simple formula for getting the private sector to replace the demand lost from the collapse of the bubble.

Contrary to what Republican politicians tell us, private businesses don't run out and create jobs just because we throw tax breaks at them and profess our love.  If the government doesn't create demand, then we will be doomed to a long period of high unemployment -- just as we saw in the Great Depression. The government could fill the demand gap by spending on infrastructure, education and other areas, but in a political world where higher spending is strictly verboten, that doesn't seem likely.

The one alternative, which has been successfully pursued by Germany, is to reduce the supply of labor through work sharing. Companies reduce all their employees' hours and pay so everyone keeps their jobs. The government then pays the workers part-time unemployment benefits -- cheaper than paying someone full-time unemployment.

Germans have used this route to lower their unemployment rate to 5.2%, even though their nation's growth has been slower than ours.

Some bipartisan baby steps have been taken in this direction; we will need much more if we are to get back to near full employment any time soon. In a world where politics makes further stimulus impossible, work sharing is our best hope.

MB360: FIRE sector is back, big time

MB360 gives us great stats to illustrate starkly the so-called financialization of the U.S. economy: 

In 1947, the FIRE side of the economy made up roughly 10 percent of GDP. Today it is 21 percent.  On the other hand manufacturing in 1947 made up 25 percent of GDP while today it is closer to 11 percent.

Near-zero interest rates by the Fed and TBTF bank bailouts are direct federal government aid to the FIRE sector.  It's called socializing risk and privatizing rewards.  

Meanwhile, bizzaro conservatives assure us that if only Americans would stop being so lazy and collecting food stamps, then our economy would turn around. [Facepalm].  Foks, this is government-sponsored upward redistribution of wealth.  

If only the Tea Parties would brandish their pitchforks over the real redistribution problem in America!

Long live the reemergence of the FIRE economy: Over the last decade GDP is up $5.2 trillion while the total credit market debt owed is up $24.5 trillion.

Posted by mybudget360 

August 27, 2013

The current economy is juiced on the rivers of easy debt.  An addiction that is only getting worse.  Want to go to college?  You’ll very likely go into deep student debt given the rise in college tuition.  Want a home?  Prices are soaring because of speculation but you’ll need a bigger mortgage to buy.  Want a modest car? A basic new car that has four wheels will likely cost $20,000 after taxes after fees are included.  Need gas for that car?  The price of a gallon has quadrupled since 2000.  Combine this with the reality that half of Americans are living paycheck to paycheck and you can understand why the debt markets continue to grow at an unrelenting pace.  Here is some food for thought; in the last 10 years, GDP has gone up $5.2 trillion however, the total credit market has gone up by $24.5 trillion.  An increasingly large part of our economic growth is coming from massive leverage.  This is why the market sits fixated on the Fed’s next move regarding interest rates even though in context, rates are already tantalizingly low.  The FIRE economy is driving a large portion of corporate profits yet most Americans are left in the cold winds of austerity.

GDP being driven by FIRE

More and more of our growth is coming from a massive expansion of debt:

The total credit market is now roughly 4 times the size of our annual GDP (inching closer to $60 trillion in the US).  While some think that this growth is natural and easy, in reality most of it is coming from growth in the financial services side of the economy.  The banking system is currently operating in a way that really does not benefit the typical Americans family.  Take a look at two employment sectors over the last few years:

In 1947, the FIRE side of the economy made up roughly 10 percent of GDP.  Today it is 21 percent.  On the other hand manufacturing in 1947 made up 25 percent of GDP while today it is closer to 11 percent.  It comes as no surprise especially as we now see big banks and hedge funds crowding out the real estate trade.  Prices in real estate continue to rise at levels last seen during the bubble yet the homeownership rate continues to fall.  We keep adding more and more Americans as “non-workers” and then wonder why we have 47 million on food stamps:

The number of Americans not in the labor force is booming because of demographics but also because people are dropping out of the workforce.  This certainly doesn’t coincide with some of the data being produced from other channels.

The reason why most Americans are not feeling the recovery trickle down to them is that the FIRE side of the economy is capturing a large share of the profits (more fuel for the growing income inequality trend).  Just take a look at how much of the recent growth has come courtesy of financial engineering:

Corporate profits as a percent of GDP are at generation high levels.  Yet GDP growth is weak (especially if you consider how much growth is coming from FIRE activity).  This is reflected in stagnant household income growth and the reality that wealth continues to shift into the hands of a very few Americans.

Redoing the last bubble

The problem with all of this is that we are simply redoing the last bubble.  This is a similar variation of our last bubble (i.e., financial sector deep into speculation, quickly rising real estate, no income growth, leveraging on debt, etc).  The finance and real estate side of the economy is driving profits and speculation, yet we see that for most Americans, the gains are simply not there.  This is just part of the financialization of our current system.  It is odd that big banks and firms are so interested in rental real estate yet they can extract money from Americans via this measure because the Fed is basically offering zero percent rates to member banks.  In other words, it is a riskless trade so why not grab all the real assets you can while the Fed continues to devalue the purchasing power of Americans?

The FIRE economy is back in a big way.  Of course you shouldn’t be surprised that this isn’t helping most Americans prosper.

Black: Lenders & appraisers hyper-inflated housing bubble

Once again, two-fisted ex-regulator Bill Black takes a baseball bat to the kneecaps of the myth that "stupidity" and "greed" were to blame for the mortgage crisis.  And if that doesn't work, let's blame it all on the FMs.

Fraud.  We don't say it, you certainly won't hear it in the mainstream media, but it's there, and it remains unpunished and undeterred.

Two Sentences That Explain the Crisis and How Easy It Was to Avoid

By William K. Black

July 9, 2013 | Huffington Post

URL: http://www.huffingtonpost.com/william-k-black/two-sentences-that-explai_b_3566112.html

Bill Black: Loan fraud caused the Great Recession

Sorry, I hate to be that guy who keeps bringing up stuff that happened, like, six years ago, but getting the history right on the financial crisis that caused the Great Recession matters, 'cos this is gonna happen again.

I'm just going to quote two-fisted regulator Bill Black verbatim, because there is only so much condensing I can do:

The ultra brief version is (1) by 2006 roughly 40 percent of total mortgage loans originated were "liar's loans," (fyi, roughly half of all loans called "subprime" were also liar's loans -- the categories are not mutually exclusive, (2) the incidence of fraud among liar's loans is 90 percent, (3) an honest real estate lender would not make pervasively fraudulent loans because doing so would inevitably cause the firm to fail (absent a bailout), (4) liar's loans, however, are optimal "ammunition" for "accounting control fraud", (5) investigations (and logic) have confirmed that it was overwhelmingly lenders and their agents who put the lies in liar's loans, (6) no lender was ever required or encouraged by the government to make or purchase liar's loans -- the opposite was true, the government discouraged such loans and industry documents confirm this fact, (7) liar's loans make an excellent "natural experiment" because even Fannie and Freddie were not encouraged to make these loans -- because they did not aid them in meeting the "affordable housing goals", (8) Fannie and Freddie, eventually, purchased enormous amounts of liar's loans for the same reason that the investment banks (not subject to the CRA or any affordable housing goals did) they created massive (albeit fictional) short-term accounting income, which flowed through to the bonuses of many Fannie and Freddie executives. Let me put these data in another format -- by 2006, lenders were making over two million fraudulent liar's loans annually. Fraudulent liar's loans grew massively because lenders (and purchasers) created perverse incentives to make and purchase massive amounts of these fraudulent loans.

This level of fraud is massively greater than during the S&L debacle, where accounting control fraud never became a dominant national lending strategy. Liar's loans grew so rapidly, and became such a large share of the market that they constituted the loans "on the margin" that hyper-inflated the financial bubble, which drove the Great Recession.

A liar's loan, by the way, is a low-documentation or no-documentation home mortgage loan. This is not the same as a subprime loan, where the lender (usually a bank) knows the borrower has bad credit, sketchy employment history, etc., and therefore gives the borrower a higher rate of interest to compensate the lender for taking such a risk.  

So, the whole line that "lenders were greedy" during the housing bubble is only half true. Mobsters and bank robbers are also greedy, you could say. I'm greedy. You're greedy. Children are greedy with cookies and crayons. The difference is that robbers and banksters are also criminals. Financial fraud and lending fraud are crimes.

Besides the media and of course Wall Street actively covering up this fraud, Dubya and especially Obama deserve the most blame and contempt for referring zero fraud cases to the Justice Department for criminal prosecution. Sums up Black:

One of our mantras in white-collar criminology is: "if you don't look, you won't find." The Frontline documentary begins the process of explaining what those of us who are aware of what a real investigation is and what it requires have been saying for years -- neither the Bush nor the Obama administration has been willing to conduct a real investigation of the elite banksters whose frauds made them wealthy and drove the financial crisis and the Great Recession. This is one of the hallmarks of crony capitalism. It cripples our economy, our democracy, and our integrity.

[...] Any bank that is too big to fail and to prosecute is a clear and present danger that should be promptly shrunk to the point that it can no longer hold the global economy hostage in order to extort immunity from the criminal laws for the controlling officers who became wealthy by being what Akerlof and Romer aptly described as "looters."

The OCC's Tragic Response to the Frontline Expose: The Untouchables 

By William K. Black

January 26, 2013 | Huffington Post

URL: http://www.huffingtonpost.com/william-k-black/frontline-banking-crisis_b_2557146.html

Consumer Financial Protection Bureau sells out

Yeah, and the GOP says that Obama is so unfriendly to business.  My ass!  He's trying to help Wall Street banks re-inflate the housing bubble, that's what he's doing!  Unfortunately, the Consumer Financial Protection Bureau seems more like a fig leaf for advancing TBTF banks' interests.

The Consumer Financial Protection Bureau’s First Big Sellout

By Mike Whitney

October 18, 2012 | Counterpunch

So now we know why the banks fought tooth-and-nail to prevent Elizabeth Warren from heading the Consumer Financial Protection Bureau (CFPB). It’s because they were already planning their next big coup and didn’t want Warren in a position where she could make waves.

Here’s the story from the Wall Street Journal:

“Federal regulators are considering giving mortgage lenders protection from certain lawsuits…

The potential move, which would be a partial victory for mortgage lenders, is part of a broader effort to write new rules for the U.S. housing market in the wake of the mortgage meltdown. The proposal for the first time would establish a basic national standard for loans, known as a ‘qualified mortgage.’ (“Home Loans May Get Shield”, Wall Street Journal)

Why is this an issue? Have the banks suddenly forgotten how to write mortgages? Of course not. Historically, the ratio of defaulting mortgages has been very small, around 2%, mainly because the banks thoroughly investigate applicants before lending them money.

So, why do they want the government to clarify something they already know? Do they really want more “onerous regulation”?

More from the WSJ:

“As part of its deliberation, the Consumer Financial Protection Bureau is considering providing a full legal shield for high-quality loans that qualify, mandating that judges rule in lenders’ favor if consumers contest foreclosures, these people say….

The shield against lawsuits would be a welcome move for mortgage lenders. Seven major U.S. banks have spent more than $76 billion on mortgage-related costs and litigation since 2008, according to Credit Suisse Group.

Ahhh, so that’s it. The banks want blanket legal protection when they boot people out of their homes.  Nice.  They want the CFPB to stipulate what’s meant by “qualified mortgage” so they can twist its meaning like a pretzel and not be challenged in court. Of course, consumer groups don’t like the idea of immunity– the so-called “safe harbor” provision–because they think that it will pave the way to more reckless and predatory lending. But mealy-mouth CFPB director, Richard Cordray, disagrees. As he told the Senate Banking Committee last month,

“It doesn’t do anybody any good for us to develop an elaborate set of protections if nobody’s going to then lend money to consumers….We absolutely don’t want to make a judgment that’s going to freeze up or further constrict credit in the mortgage market.”

Huh?  I thought Cordray was the head of the CONSUMER Financial Protection Bureau? So why is defending the banks’ position?  The banks don’t need more defenders. They own the whole bloody system already.

More from the WSJ:

“Lawsuits aren’t the only worry for mortgage lenders. Banks have also kept underwriting standards tight in recent years due to uncertainty about whether they’ll be forced to buy back loans made in the housing boom.

This is ridiculous. No one has been picking on the poor-abused bankers. The banks have merely been asked to repurchase the crappy mortgages they made that exhibit “substantive underwriting and documentation deficiencies”. That’s all.  Similarly, if they lent money to people who clearly didn’t have the ability to repay the debt, then the borrower should be able to plead his case before a judge. That’s fair, isn’t it? Only the banks don’t want “fair”; they want immunity. And Cordray wants to help them get it.

Again from the WSJ:

“By law, the new mortgage rule will exclude exotic varieties of loans that fed the housing boom—such as ‘option’ adjustable-rate mortgages that allow the amount owed to increase even when borrowers makes payments, and ‘interest-only’ loans, which don’t require principal payments for several years.

Don’t kid yourself; if the banks get their qualified mortgage-safe harbor provision, we’ll see a whole new regime of “no doc”, “no down”, “E-Z-Pay”, “liar’s loans” that will send profits into the stratosphere and inflate another monster housing bubble faster than you can say Alan Greenspan.

Keep in mind, the big banks are already making record profits on their loan book. Take a look at this clip from the Los Angeles Times:

“JPMorgan Chase & Co. and Wells Fargo & Co., the nation’s largest home lenders, each reported double-digit quarterly earnings growth Friday. The big jump in profit was thanks largely to a surge in their mortgage businesses, fueled by low interest rates and waves of refinancing.

At Wells Fargo, mortgage business revenue rose 55% to $2.8 billion during the third quarter from $1.8 billion in the year-earlier period. …JPMorgan’s mortgage business posted a 71% increase to $2.4 billion from $1.4 billion last year. This led the bank to beat expectations with an overall profit of $5.7 billion.” (“Banks see a housing rebound”, Los Angeles Times)

Not bad, eh, and yet they’re still whining about legal immunity. Go figure?

Did you catch this in the LA Times:

“The U.S. attorney in Manhattan has accused Wells Fargo of defrauding a government-backed mortgage insurance program, in another major civil case brought in the wake of the housing bust and financial crisis.

The mortgage-fraud suit, filed by U.S. attorney Preet Bharara, seeks “hundreds of millions of dollars” in damages for claims the U.S. Department of Housing and Urban Development has paid for defaulted loans “wrongfully certified” by Wells Fargo.

The suit alleges the San Francisco banking giant falsely certified loans insured by the government’s Federal Housing Administration.

‘As the complaint alleges, yet another major bank has engaged in a longstanding and reckless trifecta of deficient training, deficient underwriting and deficient disclosure, all while relying on the convenient backstop of government insurance,’ Bharara said in a statement.

Adding ‘accelerant to a fire,’ Bharara said, was Wells Fargo’s bonus system that rewarded employees based on the number of loans it approved.

The lawsuit alleges the bank failed to properly underwrFite more than 100,000 loans it certified to be eligible for FHA insurance. When Wells Fargo discovered problems with the loans, it failed to notify HUD, which administers the FHA program, as required, the suit said. The action alleges more than 10 years of misconduct.

“The extremely poor quality of Wells Fargo’s loans was a function of management’s nearly singular focus on increasing the volume of FHA originations — and the bank’s profits — rather than on the quality of the loans being originated,” Bharara’s office said in a statement.(“Feds hit Wells Fargo with mortgage-fraud suit”, Los Angeles Times)

There you have it; another heartwarming story about our good friends, the bankers, always looking out for the public’s interest.

The banks don’t need full legal immunity. What they need is tough-minded regulators breathing down their necks 24-7, ready to slap them into leg irons and drag them off to the hoosegow for the slightest infraction. That’s what they really need.

But, then, you already knew that.

Baker: What politicians won't say about U.S. economy -- MUST READ!

It's evident that Obama doesn't want to blame the bad economy on G.W. Bush, although he has every right to talk about the s**it sandwich that he was served up by his predecessor: two costly foreign occupations; 7 million jobs lost; and a burst housing bubble that removed $1 trillion a year from the U.S. economy.  I'm not sure most Americans understand the size of the hole we must dig ourselves out of.

Recently Obama got creamed by the media for saying the private sector was doing "fine," but in certain ways, it's doing better than just fine, as Dean Baker points out: corporate profits are at a 50-year high, and corporate taxes being paid are at a post-WWII low.  Gains in U.S. productivity are far outpacing gains in workers' wages.  And we have the best rating among larger countries for the ease of doing business.  Although my man Joe Stiglitz says our economy has hidden structural defects that the housing bubble only covered up, most economists, including my man Paul Krugman, believe the fundamentals of the U.S. economy are sound.  The problem is a gaping hole in aggregate demand.

Thus Romney's recycled Republican campaign mantra of "unleashing the private sector" is especially deceitful.  Where is all the pent-up demand supposed to come from that business investments are going to meet?  In other words, who in the world has the purchasing power to buy all the stuff that "unchained" U.S. companies are ostensibly going to produce once Romney has slashed their taxes and chainsawed their regulators?  

The truth is that we're in for a long, painful recovery that could be made a bit shorter and less painful with more government spending.  The multipliers of that gov't consumption would grow the economy and replace the spending with more tax revenue, rather than continuing to slash, slash, slash government while the economy shrinks in unison.

The Story of the Housing Crash Recession That Politicians Don't Want to Tell

By Dean Baker

June 19, 2012 | Yahoo! Finance

The economy is certain to occupy center stage in the presidential race this fall. Unfortunately, neither Governor Romney nor President Obama is likely to give us an accurate account of the economic problems we are now facing.

Romney's efforts seem intended to convince the public that President Obama has turned the country into the Soviet Union, with government bureaucrats shoving aside business leaders to take the commanding role in the economy. He will have lots of money to make this case, which he will need since it is so far from reality.

Corporate profits are at their highest share as a percentage of the economy in almost 50 years. The share of profits being paid in taxes is near its post-World War II low. The government's share of the economy has actually shrunk in the Obama years, as has government employment. Perhaps Romney can convince the public that the private sector is being crushed by burdensome regulation and taxes, but that has nothing to do with reality.

A Better Explanation

Unfortunately, President Obama's economic advisors have not been much more straightforward with the American people, never offering a clear explanation of why the economy has taken so long to recover. They have pointed out that economies often take long to recover from the effects of a financial crisis like to the one we experienced in the fall of 2008, but that is not an explanation for why we have not recovered.

The basic story is actually quite simple. The housing bubble had been driving the economy prior to the recession. It created demand through several channels. A near-record pace of housing construction added about 2 percentage points of GDP to annual demand or more than $300 billion in the current economy.

The $8 trillion in ephemeral housing wealth created by the bubble led to a huge surge in consumption. Tens of millions of people borrowed against bubble-generated equity or decided that they didn't need to save for retirement. When house prices were going up 15 percent-20 percent a year, the house was doing the saving. The result was a huge consumption boom on the order of 4 percent of GDP or $600 billion a year.

In addition, there was a bubble in non-residential real estate that followed in the wake of the housing bubble. This raised non-residential construction above its normal levels by close to 1 percent of GDP, or $150 billion a year.

A Bubble Generated

Adding these sources of demand together, the bubble generated well over $1 trillion in annual demand at its peak in 2005-2007. When the bubble burst, this $1 trillion in annual demand vanished as well. That is the central story of the downturn.

To recover we must find some way to replace this demand; however, that is not easy. People will not go back to their old consumption patterns because they know they need to save more. Tens of millions of people have much less wealth than they expected at this point in their lives after they saw the equity in their homes largely vanish. Tens of millions of baby boomers are approaching retirement with almost nothing but their Social Security to support them.

Given the huge loss of wealth from the collapse of the housing bubble, it is not reasonable to expect consumption to rise to fill the demand gap. It doesn't make much more sense to expect investment to do the job. Historically, investment in equipment and software has been close to 8 percent of GDP. It is pretty much back to that level today. To fill the demand gap created by the collapse of the housing bubble, the investment share of GDP would have to nearly double to 14 percent.

This would be almost impossible to imagine at any time, but it is especially far-fetched at a time when much of the economy is operating far below its capacity. Businesses are unlikely to spend a lot of money expanding their facilities when the existing capacity is sitting idle regardless of how nice we are to job creators.

Boosting Demand

Over a longer term we can expect that net exports will fill the demand gap. If we bring our huge trade deficit close to balance by selling more abroad and importing less, it will provide a substantial boost to demand. However, this will require that the dollar fall in value relative to the currencies of our trading partners, making U.S. products more competitive. That is a process that will take time. With many of our trading partners also in severe slumps, we cannot expect any major improvement in our trade balance in the immediate future.

This leaves government as the only remaining source of demand. This is not a question of whether we prefer the government or the private sector. We need the government sector to fill the gap in demand because the private sector will not do it. And that will be true no matter how much we love the private sector and its job creators.

Until we get our trade deficit closer to balance, we will need large government deficits to fill the gap in demand created by the housing bubble. That is the simple reality that neither party seems anxious to tell the people.

MB360: Boomers have no savings, live on SS

We shouldn't let grumpy old Boomers, who are over-represented in the Tea Parties, lecture younger generations about responsibility, work and savings, because they have no savings and rely on Social Security for almost all their income.

We'll still take care of you old timers, because we're well-raised and we're all in this together, but please: no more sanctimonious lectures.

The Coming Demographic and Financial Disaster – Median income of Americans 65+ is $19,167. What happens when less affluent youth move back home and clash with older generations?

Posted by mybudget360

February 2, 2012

What happens when a society that prides itself on a middle class and self-sufficiency suddenly starts losing both? For over a decade the middle class in the US has been shrinking. This isn't some speculation but is reflected in the stagnant household income data. You also have a giant demographic train in that many baby boomers are now retiring in mass. Over 10,000 baby boomers enter into retirement each day and many have an inadequate amount of savings (if any) to get them through the leaner years. Couple this with a less affluent younger generation and you have a recipe for financial and social turmoil. Many of these younger Americans, many saddled with large student debt, are moving back home with parents that have seen their entire home equity evaporate. Do you think these are happy households especially when the median income of those 65+ is $19,167?

Median income of the old

There seems to be this misconception that older Americans are simply well off. The data shows us otherwise:

Source: US Dept. of Health

What is troubling about the above data is that during some of the most affluent decades in US history, most Americans have very little income in older age. In fact, most rely on Social Security as their primary source of income:

"Social Security constituted 90% or more of the income received by 34% of beneficiaries (21% of married couples and 43% of non-married beneficiaries)."

How is this even possible? Keep in mind the average Social Security payout is roughly $1,000 per month and this is fixed. Since the government has juiced the CPI data most of these fixed income Americans are seeing their energy and healthcare costs soar all the while they are told inflation is virtually non-existent. Try arguing that after going to the grocery store.

There is also this sense that since many older Americans own their home, they are somehow immune to the housing bubble. That is not true:

"In 2009, 48% of older householders spent more than one-fourth of their income on housing costs – 42% for owners"

Many older Americans still spend a lot of money on housing even if they are owners. Much of this comes from property taxes and costs associated with owning a home. Since many older Americans do own their home this housing bubble crash has harmed their largest asset.

As time presses on more and more of our population is going into retirement. Lower birth rates and more Americans making it into older age conjure up memories of Japan:

Source: Baby boomer stats

-There are approximately 77.6 million baby boomers in the U.S.

-The baby boom phenomenon is responsible for over half of all consumer spending in the United States

-80% of all leisure travel is taken by boomers.

-Every 8.5 seconds a baby boomer in the U.S. turns 50 years old.

-The baby boom generation is the largest generation in American history.

-On January 1st, 2011 the very first Baby Boomers turned 65

Baby boomers tended to also be big spenders (at least they were during the debt bubbles). But what now? The strongest spending group is losing a large part of their wealth with the housing crash and many are exiting their peak earning stages. From the Social Security data, we realize many did not save in what was likely the most affluent times for America. With many younger Americans carrying major debt loads and finding items like pensions disappearing, how will they prepare for retirement? What access to savings do they have? Homes are still expensive for many younger Americans and that is why millions have moved back home:

A society that has preaches independence and pushes out young at 18 will have a hard time dealing with boomerang kids coming back home. Many younger Americans will feel the strain as well especially if they "did the right thing" and went to college but now find a tough employment market and being back home. This demographic train has left the station and nothing will slow it down.

Forbes: 'Every day is Black Friday' in housing sector

"Any sort of self-sustaining [housing sector] recovery, at this point, appears unfathomable."

The U.S. economy won't recover until housing recovers; and housing won't recover until the U.S. economy recovers. It's a perfect Catch-22!

So when's the last time you heard a single national-level politician offer an idea how to address this, the #1 problem our economy is facing right now? If they were waiting for the Fed's low interest rates to save us, they should have given up a year ago.

You know, I could almost respect a mean but frank right-winger who said, "Screw homeowners, banks and markets, let this foreclosure backlog work itself out," who would then be honest that this process could take years, maybe a decade, and in the meantime the U.S. economy would drag and unemployment would be high, no matter what else happened. But where is such an honest ideologue these days? No, instead the free-marketers and tea-party types want to blame our poor economy on excess federal regulation, Obamacare (which has yet to really take effect), and not enough oil drilling and coal mining. And nobody -- not the MSM or the Democrats -- are calling them on it.

The ones who haven't gone mute have gone insane!

'Every Day Is Black Friday' In Housing As Prices Tank, Case-Shiller Shows

By Agustino Fontevecchia

November 29, 2011 | Forbes

URL: http://www.forbes.com/sites/afontevecchia/2011/11/29/every-day-is-black-friday-in-housing-as-prices-tank-case-shiller-shows/

Double dip means time to buy?

The "double dip" in housing is now official. And the premier housing economist Mark Zandi of Moody's Analytics says it's a good time to buy, if you can afford it. Going back to 1986, the buy vs. rent ratio has never been so low.

"I think the arithmetic is such that if you plan to live in your home five or more years, then you should really consider buying a single-family home in most parts of the country at this point in time," Zandi said. "Prices have fallen so far, that single-family housing now is very, very attractive; very affordable [...] and it's now even attractive relative to renting."

"[H]omeownership has been such an important part of the American Dream, because people have used it as a way to save. And it's been a relatively safe way to save. Now of course, as we know as we have seen, there are ups and downs. But in general it's been a pretty good investment."

Just don't try to time the market; base your buying decision on your personal needs and financial wherewithal.

For Many, It's Still A Good Time To Buy A Home

By Chris Arnold

June 8, 2011 | NPR

URL: http://www.npr.org/137029194

Banks, real estate agents, & consumer advocates are all wrong

For the record, I'm in favor of preferred mortgage rates for those who pay 20 percent down on a house. [UPDATE: You can hardly qualify for a loan at any rate nowadays without 20 percent down.] It might sound illiberal of me, but during the Bush years too many darn people bought houses they couldn't afford, or speculated in housing as a leveraged investment, and that's partly why we're in this mess now.

And I'm in favor of proposed regulations that would require banks to hold on to 5 percent of the risk associated with bundled mortgagees, or mortgage-backed securities. Banks have to keep some skin in the game.

If buyers can't put down 20 percent, or their monthly mortgage payment is more than 1/3 their net monthly income, then they should buy a cheaper house, or rent. That is the old rule of thumb that was thrown out the window, to our detriment.

Politicians should not save the banks and bondholders (again) by propping up the housing market (again); we need time to let existing houses go down in price and clear the market. 13 percent of U.S. housing stock is currently sitting vacant. We need those thousands of McMansions to be sold at McDonald's prices!

New Rule Pushing Big Down Payments Could Make Homeownership Unaffordable

By Janell Ross

June 2, 2011 | Huffington Post

URL: http://www.huffingtonpost.com/2011/06/02/credit-counselors-survey_n_870011.html

Zillow: Homes fell $1.7 trillion in 2010, same in 2011

This year's estimated decline, more than the $1.05 trillion drop in 2009, brings the loss since the June 2006 home-price peak to $9 trillion, the Seattle-based company [Zillow] said today in a statement.

"It's definitely going to continue into 2011," Stan Humphries, Zillow's chief economist, said in an interview on Bloomberg Television today. "The back half of 2010 looked horrible and 2011 should look like the mirror image of that."

U.S. Home Values to Drop by $1.7 Trillion This Year, Zillow Says

By Hui-yong Yu and John Gittelsohn
December 10, 2010 Bloomberg

URL: http://www.bloomberg.com/news/2010-12-09/homes-in-u-s-poised-to-lose-1-7-trillion-in-value-this-year-zillow-says.html

MB360: 2.2 housing:income ratio wrecked since 2000

The magical 2.2 housing ratio between median nationwide home prices and household income – Nationwide home prices still inflated by 30 percent based on 50 years of household data.
Posted by mybudget360
November 30, 2010

The typical American family is facing the biggest economic uncertainty since the Great Depression and must feel like their lives are in a washer spin cycle. Many unemployed Americans are now entering a stage where unemployment insurance is being cut off which will send tens of thousands of people into the street. The mainstream media won't cover this because they rather gossip about the next tan face to drink themselves into a gutter at a nightclub. 43 million Americans are receiving some kind of food assistance yet this is some kind of recovery? Many are wondering how banks can produce such large profits without actually producing anything real or of substance in the economy. Yet banks are largely casinos that now operate to siphon off real wealth from the economy through bailouts, frauds, and other activities that harm the overall economy. In a decade where banks were unleashed to do what they may with limited regulation and a cozy Fed, we are now left with an economy in tatters but a banking sector that is still healthy based on oversized bonuses. I wanted to gather data over the last 60 years and measure how most Americans are now fairing. The data shows a largely underwater nation.

Let us look at the data carefully:

Back in 1950 the median home price cost a little above 2 times the annual median household income:

1950: $7354 / $3,319 =2.2

In 1960 the ratio remained roughly the same:

1960: $11,900 / $5,620 = 2.1

In fact, over this ten year period the typical household gained buying power when it came to housing. Even in 1970 the ratio became more favorable to US households:

1970: $17,000 / $9,867 =1.7

This was the lowest point at the start of any decade in modern history. After this point, with all the push for deregulation and allowing Wall Street to run rampant prices remained fairly stable only because of the two income household (that is until we hit 2000):

1980: $47,200 / $21,023 = 2.2

1990: $79,100 / $35,353 = 2.2

2000: $119,600 / $50,732 = 2.3

This was sustained via the two income household:

After this point, things went haywire. Incomes went stagnant or dropped yet home prices sky rocketed. Even today after the severe correction the ratio is still out of sync with 50 years of data:

2010: $170,500 / $50,221 = 3.3

In fact, given the current income levels the median nationwide home price should be down to $119,000 (a 30% drop from current levels). Some will argue that we should factor in for inflation. This would only be the case if we also saw wage growth. For the first time in modern history did we see wages stagnant for an entire decade. So the average American family is still looking at inflated assets and that is why we have millions of people sitting in underwater homes:

Just think of what negative equity represents. It represents a household that has over paid for a home. I don't think the desire to own a home has dramatically gone up or down in the last fifty years. Homeownership has always been a big part of the American Dream. But what happened over the last ten years is that banks were able to get their grubby hands on mortgages and convert them into another commodity where they could place large bets and ultimately push losses to taxpayers. People that over paid are paying via foreclosure. What is the penalty that banks are paying? That is why now that banks have raided and had their way with housing, they are looking for other markets to gamble in (with taxpayer money). The above chart shows the millions of homeowners who hold mortgages that are worth more than the homes they are in. Any thinking person realizes that the only way home prices are justified at current levels would be if incomes shot up to make the ratio closer to 2.2. Over half a century of data and never did we have a housing bubble on a nationwide level. All of a sudden Glass-Steagall is repealed in 1999 and a housing bubble takes off with banks leading the way because the line between investment and commercial banking was blurred. Only those who want to deceive themselves would place blame elsewhere.

The average American is going to struggle throughout the next decade. It is hard to see how wages will go up so it is likely that home prices will adjust lower given the magnitude of foreclosures in the pipeline. People might be jumping up and down about the recent job growth but they are occurring in lower paying sectors. So this does nothing to justify current prices. Low mortgage rates are merely a gimmick so banks can use cheap money to speculate on a global scale. Even with mortgage rates at levels we've never seen the housing market remains stalled like an old car. Why? Because the actual sticker price is still inflated based on income levels.

We need to reform the banking system, break up investment and commercial banks, and finally restore sanity in the market. There is a reason the metrics are all off but nothing has been done to change this so we are only a short ways away from another crisis. Ireland for example can be likened to a homeowner that took on too much debt with too little income. So the international banking sector idea of a solution is to extend them a credit line? What they should do is tell the IMF and Euro to shove it, default, and start from scratch and learn from their mistake. Otherwise, they'll be in the same position as Americans who bailed out their corrupt banking sector.

Stiglitz: Gov't, stop interfering; Banks, write down mortgages

Fixing America's Broken Housing Market

By Joseph E. Stiglitz

September 8, 2010 | Project Syndicate

A sure sign of a dysfunctional market economy is the persistence of unemployment. In the United States today, one out of six workers who would like a full-time job can't find one. It is an economy with huge unmet needs and yet vast idle resources.

The housing market is another US anomaly: there are hundreds of thousands of homeless people (more than 1.5 million Americans spent at least one night in a shelter in 2009), while hundreds of thousands of houses sit vacant.

Indeed, the foreclosure rate is increasing. Two million Americans lost their homes in 2008, and 2.8 million more in 2009, but the numbers are expected to be even higher in 2010. Our financial markets performed dismally – well-performing, "rational" markets do not lend to people who cannot or will not repay – and yet those running these markets were rewarded as if they were financial geniuses.

None of this is news. What is news is the Obama administration's reluctant and belated recognition that its efforts to get the housing and mortgage markets working again have largely failed. Curiously, there is a growing consensus on both the left and the right that the government will have to continue propping up the housing market for the foreseeable future. This stance is perplexing and possibly dangerous.

It is perplexing because in conventional analyses of which activities should be in the public domain, running the national mortgage market is never mentioned. Mastering the specific information related to assessing creditworthiness and monitoring the performance of loans is precisely the kind of thing at which the private sector is supposed to excel.

It is, however, an understandable position: both US political parties supported policies that encouraged excessive investment in housing and excessive leverage, while free-market ideology dissuaded regulators from intervening to stop reckless lending. If the government were to walk away now, real-estate prices would fall even further, banks would come under even greater financial stress, and the economy's short-run prospects would become bleaker.

But that is precisely why a government-managed mortgage market is dangerous. Distorted interest rates, official guarantees, and tax subsidies encourage continued investment in real estate, when what the economy needs is investment in, say, technology and clean energy.

Moreover, continuing investment in real estate makes it all the more difficult to wean the economy off its real-estate addiction, and the real-estate market off its addiction to government support. Supporting further real-estate investment would make the sector's value even more dependent on government policies, ensuring that future policymakers face greater political pressure from interests groups like real-estate developers and bonds holders.

Current US policy is befuddled, to say the least. The Federal Reserve Board is no longer the lender of last resort, but the lender of first resort. Credit risk in the mortgage market is being assumed by the government, and market risk by the Fed. No one should be surprised at what has now happened: the private market has essentially disappeared.

The government has announced that these measures, which work (if they do work) by lowering interest rates, are temporary. But that means that when intervention comes to an end, interest rates will rise – and any holder of mortgage-backed bonds would experience a capital loss – potentially a large one.

No private party would buy such an asset. By contrast, the Fed doesn't have to recognize the loss; while free-market advocates might talk about the virtues of market pricing and "price discovery," the Fed can pretend that nothing has happened.

With the government assuming credit risk, mortgages become as safe as government bonds of comparable maturity. Hence, the Fed's intervention in the housing market is really an intervention in the government bond market; the purported "switch" from buying mortgages to buying government bonds is of little significance. The Fed is engaged in the difficult task of trying to set not just the short-term interest rate, but longer-term rates as well.

Resuscitating the housing market is all the more difficult for two reasons. First, the banks that used to do conventional mortgage lending are in bad financial shape. Second, the securitization model is badly broken and not likely to be replaced anytime soon. Unfortunately, neither the Obama administration nor the Fed seems willing to face these realities.

Securitization – putting large numbers of mortgages together to be sold to pension funds and investors around the world – worked only because there were rating agencies that were trusted to ensure that mortgage loans were given to people who would repay them. Today, no one will or should trust the rating agencies, or the investment banks that purveyed flawed products (sometimes designing them to lose money).

In short, government policies to support the housing market not only have failed to fix the problem, but are prolonging the deleveraging process and creating the conditions for Japanese-style malaise. Avoiding this dismal "new normal" will be difficult, but there are alternative policies with far better prospects of returning the US and the global economy to prosperity.

Corporations have learned how to take bad news in stride, write down losses, and move on, but our governments have not. For one out of four US mortgages, the debt exceeds the home's value. Evictions merely create more homeless people and more vacant homes. What is needed is a quick write-down of the value of the mortgages. Banks will have to recognize the losses and, if necessary, find the additional capital to meet reserve requirements.

This, of course, will be painful for banks, but their pain will be nothing in comparison to the suffering they have inflicted on people throughout the rest of the global economy.

Joseph E. Stiglitz is University Professor at Columbia University and a Nobel laureate in Economics.