Clear Differences on Foreclosures

The Republican and Democratic presidential candidates have always differed on a number of issues, but recent news has revealed a clear separation on how to treat foreclosures and the economy. According to statements reported in today’s NY Times, John McCain says he is not in favor of a vigorous government response to the mortgage crisis. In contrast, both democratic candidates favor programs varying between $30 billion (Clinton) and $10 billion (Obama).

In a statement that comes close to being a lie, McCain said yesterday “it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.” In truth, he seems only to believe half this statement. As documented later in the same article, McCain supports the Fed’s recent move to provide $29 billion in loan guarantees to support the Bear Stearn’s bailout. So, either the Bear Stearns episode was not a bailout in McCain’s view or rewarding those who act irresponsibly is fine, as long as they are wealthy investment firms and not mere citizens who are struggling to keep their homes.

Drive-Through Windows, the Large Muscle Hierarchy, & Spending

The picture above was taken on March 17, 2008 at a local Dunkin’ Donuts during the lunch hour. Six cars in the drive-through line are visible from this angle, and none of them has yet to reach the speaker box where the driver can place an order. Also note the many parking spaces available for patrons ambitious enough to leave the car and walk into the store. The red car to the left is mine.

In Going Broke I suggest that physical effort is a major deterrent to many acts of spending and that the contemporary retail world has been designed to reduce the effort involved in spending. In particular, I propose the following Large Muscle Hierarchy:

1. Sitting is better than walking.


2. Walking is better than climbing stairs.

Cars put us at the top of this hierarchy. We are in the extremely desirable seated position, expending very little effort. Furthermore, we can move great distances in comfort and—when retail stores provide drive-through facilities—exchange money for goods and services. All without walking. The effects of all this convenience can be seen in our bank balances and waistlines.

Quick Help for the Powerful

The economic news over the last few days has been dizzying. On Sunday (!) the Federal Reserve Board announced a plan to lend money to Wall Street investment firms and approved a deal that allowed J P Morgan Chase to buy the failing Bear Stearns Company for pennies on the dollar. Today, the Fed announced yet another decrease in interests rates. Once again, Heaven and Earth move quickly—at great taxpayer expense—to help the wealthy and powerful who gamble in the stock market, but the wheels of government move much more slowly—if at all—for the less powerful who are losing their homes and jobs, are without adequate health care, or are burdened by enormous debt.

The Fed’s actions may have been important and completely justified, but there is something very wrong with this picture. The suffering at the bottom of our economy seems to get very little attention, while the ups and downs of Wall Street grab the headlines.

Ben Bernanke, Kingmaker

Yesterday the stock market shot up over 400 points, the largest one-day gain in over five years. Why? Because Ben Bernanke, the Federal Reserve Chairman, offered up $200 billion in loans to the top 20 investment banking firms in the country. Banks have been caught in a credit crunch caused by the subprime mortgage mess and need liquidity—cash that can be used to make investments. The stock market got all excited yesterday and went on a big run, and as I write this the Dow is up again this morning.

I am struck by two aspects of this story. First, there is the dizzying power of being able to move such enormous sums of money with the flick of a wrist. In contrast, the $170 billion economic stimulus package was hotly debated before Congress and the President would sign off. Of course, the rebates of the stimulus package are permanent disbursements, and the Fed is offering loans. But the imbalance in oversight and accountability is daunting. Those who serve the banking industry can move government funds quickly and with impunity. Those who serve the individual consumer must summon a great effort to do so.

The second and most important observation is that the Fed’s action is another short-term fix. There is still great worry about underlying value of mortgages in the US, and Bernanke’s action is another demonstration of the government’s responsiveness when it comes to the quick fix. But there is far greater reluctance to take on the true causes of economic instability. Why? Because some of these problems are difficult to solve (e.g., health care) and the solutions to others will be attacked by the powerful banking and business interests (e.g., mortgage lending and credit card industry reforms, wage and job security increases). Unfortunately, I have little faith that free markets will correct the kinds of problems we face today. We need a serious change of direction, away from the highly leveraged consumer-driven economy of the recent past, and it is unlikely that change will come without strong leadership.

Upside Down and Unemployed

The bad economic news just keeps coming...

An Epidemic of Negative Equity
The real estate bust has engendered a new catch phrase: upside down. To be upside down is to owe more on your mortgage than your house is worth—to have negative equity. The value of your home is always supposed to be higher than the amount of your mortgage, but as real estate prices have dropped, many people—particularly those who had little equity to begin with—have found themselves upside down.

This week we learned that 10 percent of homeowners now have zero equity or are upside down. Long before the foreclosure crisis began and before the label upside down had been introduced, this particular form of financial checkmate was anticipated in “The New Road To Serfdom: An Illustrated Guide to the Coming Housing Collapse,” a May 2006 Harper’s piece by Michael Hudson. [The article is here, but only Harper’s subscribers will be able get at it.] Of course, the worry is that any economic bump—and there appears to be no shortage of them—will bring disaster to the upside downers, and without any equity to lose, many homeowners will be tempted to cut their losses by walking away from their mortgages.

More People Out of Work
Speaking of economic bumps, Friday we heard that the nation lost 63,000 jobs in February, the second drop in jobs in as many months and a much larger drop than had been expected. The unemployment rate actually fell, from 4.9 to 4.8 percent, but that was a statistical anomaly. The unemployment figures only include those who are actively looking for work. They do not include people who would like to work but have lost hope and given up looking. This last group also increased in February, so joblessness overall is on the rise. If you put these two news items together—more homeowners without equity and increased joblessness—it seems likely that, at least for the near future, foreclosures and bankruptcy will continue to rise.

Still Going Broke

The week is just starting, but already the news has not been good for the American consumer. Yesterday CNN ran a story, “When Credit Puts You in Jeopardy,” which cited a Demos study showing that overall credit card debt grew by 315 percent from 1989 to 2008. In addition, CardTrack.com is reporting that the percentage of people who are delinquent on their credit card payments is the highest it has been in three years.

Then comes the news that foreclosures were up 57 percent in January over the same month last year. If there was any good news in this report it was that the month-to-month increase in foreclosure had diminshed slightly, but it is clear the foreclosure crisis will continue. Yesterday also brought news that sales of existing homes dropped for the sixth straight month and that prices are continuing to decline. As long as the real estate market is in free fall, more and more people will find themselves trapped in a house that is worth less than the mortgage. If they, like millions of others, get into a financial squeeze, selling the home to get out from under the mortgage will not be an option.

So many people are facing foreclosure that a new cottage industry has cropped up. You Walk Away is a web-based company that sells a “Protection Plan and Kit” to help homeowners through the process of foreclosure. Critics argue that this kind of business is changing consumers’ moral compasses and encouraging irresponsible behavior, but it seems to me that both irresponsible lending and irresponsible escape from obligation are the natural results of an unregulated free market system. The NPR site has a good story on this issue.

On the heels of these discouraging reports comes the news that two bills that would provide relief to holders of subprime mortgages are under attack by the mortgage industry. For a counterbalancing defense of the bills, see Elizabeth Warren’s most recent blog posting.

Finally, today CNNMoney.com is reporting that consumer confidence is at its lowest point in 14 years. In a consumer-driven economy that is very bad news indeed.

Meanwhile, as I write this the Dow Jones Industrials average is up 126 points (1.01%) on the day. Go figure. It seems to me that, more than at any time in recent history, consumers and investors live in two different worlds--worlds that are often in direct conflict. I will have more to say about this in a future post.

Something Happened in the 1970s: The Minimum Wage in Perspective

While looking at some data on the US federal minimum wage, I came across an interesting trend. One of the themes of Going Broke is that something happened in America beginning in the 1970s. The symptoms were dramatic increases in rates of bankruptcy and personal indebtedness that continued right into the 21st Century, but the causes of these signs of soaring of financial misery are far from obvious. I make a case for the combined effects of several modern pressures, and one of these is economic insecurity produced by declining real wages for many workers. Now take a look at the graph below, which I constructed a few days ago.



The red line of the graph shows the actual or “nominal” minimum wage for each year since 1955, and the blue line shows that wage, adjusted for inflation, in 2007 dollars. So, for example, in 1979 the minimum wage was $2.90/hr but it had the equivalent buying power of $8.28/hr today. The overall arc of the blue line shows that, here, too, something happened in the 1970s. From 1955 through 1968, the minimum wage rose sharply, peaking out at $9.53/hr (adjusted for inflation) in 1968, but since the late 70s, the minimum wage has been on a long and jagged slide.

Last year, in the wake of Hurricane Katrina and the Democratic congressional victory of 2006, Congress and the President agreed to a plan to increase the federal minimum wage. Under the new law, the wage will increase in each of three years, topping out at $7.25/hr in the summer of 2009. The graph shows that, when the minimum wage hits this point, it will bring us back to where we were in 1982, when the nominal minimum wage was $3.35/hr. Of course, this really overestimates the increase, because by the time the summer of 2009 rolls around, inflation will undoubtedly have increased, pushing the black horizontal farther down relative to the blue line.

Most states have set their own minimum wages at rates higher than the federal rate, but as this map from the US Department of Labor shows, there are 18 states (blue, red, and yellow below) for which the federal minimum wage applies, including Louisiana and Mississippi, the states most severely affected by Hurricane Katrina. Economists argue about whether increasing the minimum wage has the negative effect of increasing unemployment. But we know that income disparity has increased over the last three decades, and it seems likely that this trend in the federal minimum wage has been a contributing factor.