A traveler wandering through the desert spots a watery oasis. He moves toward it in hopes of quenching his thirst and taking a dip in the cool clear water. It's only a mirage of course, but in the traveler's mind it clearly exists. His belief in the mirage is strengthened by the only thing he has to hang on to. Hope.
Financial markets have recently been influenced by hope. Hope that the recession will end soon. Hope that the worst is behind us.
After an apocalyptic fourth quarter, the first half of 2009 resulted in a rather beefy improvement in equities with speculation (aka hope) that the recession had bottomed out and that there is light at the end of the tunnel. Interest rates rose in May and June as government debt soared and a new fear took hold, inflation. But is that fear real yet? Isn't our immediate fear deflation?
In the long term, the massive government spending that is taking place no doubt will have negative effects, but in the near term, deflation is the enemy. Starting with real estate, the value of assets has declined the past couple of years. Bank lending continues to decline because it is foolish to lend on a declining asset. This is evident in the Fed's weekly H.8 report which shows that bank credit actually fell $59 billion last week, and fell $83 billion over the past two weeks. Without credit, markets for these assets are stifled. And the negative loop continues.
Until credit loosens, inflation cannot appear. So in the near-term, deflation and low interest rates abound. The benefactors in the second half of the year will continue to be first time home buyers who can now afford homes (which values have deflated) and qualify for loans at low interest rates. Also, the handful of homeowners who still have equity in their homes and can take advantage of refinancing.
So with every bit of bad news, there is a silver lining. Low interest rates are what we have to look forward to for the second half of the year.
Saturday, June 27, 2009
Tuesday, May 5, 2009
Mortgage Lending and the Search for the Bottom
Housing statistics are like a good news - bad news thing now. The good news is that there are more sales taking place in markets that have been hammered like Phoenix. The bad news is that prices are falling and don't seem to want to stop. What does this mean for the housing market and real estate lending?
The obvious conclusion is that the number of sales is increasing because the prices are coming down to a reasonable level. We are actually seeing multiple bids taking place for homes at the lower end of the market. First time home buyers can finally afford to buy a home which is a wonderful silver lining that doesn't get much attention in the media. Real estate investors are also able to buy some of these low end homes, often at trustee sales or from banks. These investors make repairs and rent the homes for a profit.
These two players in the market (first time home buyers & real estate investors) are able to win because of the funding available to them. For first time home buyers, they are primarily utilizing FHA loans with a low down payment (3.5%) to secure their financing. Government guaranteed loans are about all that is left and first time home buyers are often the biggest users of these loans.
Real estate investors don't have many financing options available. With excellent credit, income they can document, and a significant down payment, they can secure a Fannie Mae or Freddie Mac loan. More often than not, they pay cash or get a private money loan with an even larger down payment (40% or more) and high interest rate. But because the sales prices are so low (I have seen many sales between $20,000 and $50,000) they have enough cash to purchase the property without financing or put down such a large down payment that their debt service is low enough to generate positive cash flow.
What about everyone else? The player that is absent from this market is the move-up buyer. There are a couple of factors keeping this player from participating. First, they already have a house that they are unable to sell. In the past, move-up buyers could sell their existing home for a profit and use that profit as the down payment for a newer, nicer home. That's not the case today. In fact, if they bought their home after 2003, it is likely that they owe more on their mortgage than what the home is worth today. Even if a move-up buyer can overcome their first challenge, their second challenge is the lack of jumbo mortgages available (loans over $417,000).
Outside of the activity in the lower end homes with first time home buyers and investors, the rest of the market continues to be sluggish. Where is the bottom? If you were looking for an answer to that question in this article, you will be disappointed. I don't know. However, homes are finally priced at affordable levels. So it is reasonable to infer that prices may stabilize soon. The wild card is employment and income. If unemployment continues to be an issue, and it likely will, and incomes continue to decline, and they likely will, then housing still has further to fall. Once it does stabilize it will be a very long time before they rise again.
Unfortunately this is what banks and lenders are thinking when they analyze their lending guidelines. They are afraid to give loans secured by a declining asset. So they don't lend, and people can't buy, and the negative loop continues.
I'll try and finish on something more positive next time.
The obvious conclusion is that the number of sales is increasing because the prices are coming down to a reasonable level. We are actually seeing multiple bids taking place for homes at the lower end of the market. First time home buyers can finally afford to buy a home which is a wonderful silver lining that doesn't get much attention in the media. Real estate investors are also able to buy some of these low end homes, often at trustee sales or from banks. These investors make repairs and rent the homes for a profit.
These two players in the market (first time home buyers & real estate investors) are able to win because of the funding available to them. For first time home buyers, they are primarily utilizing FHA loans with a low down payment (3.5%) to secure their financing. Government guaranteed loans are about all that is left and first time home buyers are often the biggest users of these loans.
Real estate investors don't have many financing options available. With excellent credit, income they can document, and a significant down payment, they can secure a Fannie Mae or Freddie Mac loan. More often than not, they pay cash or get a private money loan with an even larger down payment (40% or more) and high interest rate. But because the sales prices are so low (I have seen many sales between $20,000 and $50,000) they have enough cash to purchase the property without financing or put down such a large down payment that their debt service is low enough to generate positive cash flow.
What about everyone else? The player that is absent from this market is the move-up buyer. There are a couple of factors keeping this player from participating. First, they already have a house that they are unable to sell. In the past, move-up buyers could sell their existing home for a profit and use that profit as the down payment for a newer, nicer home. That's not the case today. In fact, if they bought their home after 2003, it is likely that they owe more on their mortgage than what the home is worth today. Even if a move-up buyer can overcome their first challenge, their second challenge is the lack of jumbo mortgages available (loans over $417,000).
Outside of the activity in the lower end homes with first time home buyers and investors, the rest of the market continues to be sluggish. Where is the bottom? If you were looking for an answer to that question in this article, you will be disappointed. I don't know. However, homes are finally priced at affordable levels. So it is reasonable to infer that prices may stabilize soon. The wild card is employment and income. If unemployment continues to be an issue, and it likely will, and incomes continue to decline, and they likely will, then housing still has further to fall. Once it does stabilize it will be a very long time before they rise again.
Unfortunately this is what banks and lenders are thinking when they analyze their lending guidelines. They are afraid to give loans secured by a declining asset. So they don't lend, and people can't buy, and the negative loop continues.
I'll try and finish on something more positive next time.
Sunday, March 15, 2009
Is it OK to Walk Away?
Is a home an investment or simply a dwelling where we reside? Should I give the lender the keys to the house the moment it is worth less than the balance of the mortgage? Is it okay to walk away?
Here's the dilemma. The Jones family lives in a beautiful home in a Phoenix suburb. They have children whose only memory of home is that house. They refinanced the home a few years ago when values were high and pulled some cash out. The cash was used for a variety of things. As home prices have fallen, and fallen, they find themselves with a loan balance that is two hundred thousand and fifty dollars more that what the home is actually worth today. Fortunately, both Mr. and Mrs. Jones fall into the 90% of people who are still employed and are capable of making the mortgage payment.
Mr. Jones looks at the situation and decides action must be taken. Men are problem solvers and this "upside down" issue needs to be addressed. It seems foolish to pay the lender a quarter of a million dollars more than what this home would fetch on the market today. If the lender won't write-down the principal balance, then let's mail them the keys and rent a house in the same neighborhood. A logical and practical solution.
Mrs. Jones views things differently. She doesn't want to move. This is her home. This is where she wants to continue to raise her children. This home is not an investment. The decision should not be based as if it is an investment. If the payment is affordable, then she wants her family to stay put.
This debate is likely taking place in thousands if not millions of households. I am aware of this particular debate, because I know the Jones's. That's not really their name. It has been changed to protect the delinquent. My own opinion is that people should keep their homes if they can still afford them. I will admit that I have not been placed in their situation, at least not yet. I don't envy their dilemma.
Here's the dilemma. The Jones family lives in a beautiful home in a Phoenix suburb. They have children whose only memory of home is that house. They refinanced the home a few years ago when values were high and pulled some cash out. The cash was used for a variety of things. As home prices have fallen, and fallen, they find themselves with a loan balance that is two hundred thousand and fifty dollars more that what the home is actually worth today. Fortunately, both Mr. and Mrs. Jones fall into the 90% of people who are still employed and are capable of making the mortgage payment.
Mr. Jones looks at the situation and decides action must be taken. Men are problem solvers and this "upside down" issue needs to be addressed. It seems foolish to pay the lender a quarter of a million dollars more than what this home would fetch on the market today. If the lender won't write-down the principal balance, then let's mail them the keys and rent a house in the same neighborhood. A logical and practical solution.
Mrs. Jones views things differently. She doesn't want to move. This is her home. This is where she wants to continue to raise her children. This home is not an investment. The decision should not be based as if it is an investment. If the payment is affordable, then she wants her family to stay put.
This debate is likely taking place in thousands if not millions of households. I am aware of this particular debate, because I know the Jones's. That's not really their name. It has been changed to protect the delinquent. My own opinion is that people should keep their homes if they can still afford them. I will admit that I have not been placed in their situation, at least not yet. I don't envy their dilemma.
Monday, March 2, 2009
Stock Market Death Watch
As I write this, the Dow Jones Industrial average is at 6820 and falling. I have not witnessed a bear market like this in my lifetime. In fact, people twice my age haven't witnessed anything like this in their lifetimes either. I hear comparisons of this economy to 1982. I was only nine years old at the time, the same age as my oldest son is now. Back then I was more interested in Star Wars than the economy. I won't try to make comparisons with that recession, rather I tend to believe that this recession will represent a fundamental change in our economy.
As humans we tend to make assumptions and predictions based on our own experiences. Some people may look at the '82 recession and make predictions based on what happened then. Others may look at the Great Depression, and draw comparisons there. It appears the Obama administration is attempting to define their legacy as the New Deal Part 2. In the media I hear people cry to the government for help. Save UAW jobs in Detroit, save Citi, save me, save you. Instead of trying to preserve our economic fortunes of the past, perhaps we need to acknowledge the fundamental changes that are occuring. Like farmers moving from rural areas to cities to accept industrial jobs a century ago, this change will require a great number of people to get out of their comfort zones.
Changing jobs is difficult. Changing industries is more difficult, not because former mortgage loan officers are incapable for becoming nurses (just as an example, they certainly are), but because it requires one to try something that they don't know how to do yet. Individuals are not born to do a particular job. They can do any job as long as long as they have an open mind and the willingness to learn. A great example is Daniel Seddiqui. The 26 year old from Utah is 24 weeks into his journey to work 50 different jobs for one week each in all 50 states. In this journey, Daniel has worked as a corn farmer in Nebraska, a wedding coordinator in Las Vegas, a park ranger in Wyoming, and a cheesemaker in Wisconsin just to name a few. Every week he learns a new skill and is getting an education well beyond anything he could pay tuition for at a University. Perhaps government hand-outs need to instead be hand-ups to provide training and education for those individuals that are willing to adapt.
Adapting doesn't have to be as drastic changing industries. Perhaps it can be as easy as adjusting a product to fit the current environment. Hollandia International makes high-end beds. They made a custom bed for a client that contained a safe where he keeps a gun close by while he sleeps. Hollandia has adapted that concept to the recession and now markets a SAFE-T Bed so you can keep your cash in your mattress and feel secure about it. Brilliant! The Dow has dropped another 3 points since I started writing, so cash in the mattress sounds like a good investment in this deflationary environment.
Obama and Congress have a choice to make when they create bail-outs and programs to assist those that cry out for help. They can spend our money in an attempt to preserve the past, or they can accept the fundamental changes that are occuring and attack them head on with programs to help retrain individuals that are willing to adapt.
As humans we tend to make assumptions and predictions based on our own experiences. Some people may look at the '82 recession and make predictions based on what happened then. Others may look at the Great Depression, and draw comparisons there. It appears the Obama administration is attempting to define their legacy as the New Deal Part 2. In the media I hear people cry to the government for help. Save UAW jobs in Detroit, save Citi, save me, save you. Instead of trying to preserve our economic fortunes of the past, perhaps we need to acknowledge the fundamental changes that are occuring. Like farmers moving from rural areas to cities to accept industrial jobs a century ago, this change will require a great number of people to get out of their comfort zones.
Changing jobs is difficult. Changing industries is more difficult, not because former mortgage loan officers are incapable for becoming nurses (just as an example, they certainly are), but because it requires one to try something that they don't know how to do yet. Individuals are not born to do a particular job. They can do any job as long as long as they have an open mind and the willingness to learn. A great example is Daniel Seddiqui. The 26 year old from Utah is 24 weeks into his journey to work 50 different jobs for one week each in all 50 states. In this journey, Daniel has worked as a corn farmer in Nebraska, a wedding coordinator in Las Vegas, a park ranger in Wyoming, and a cheesemaker in Wisconsin just to name a few. Every week he learns a new skill and is getting an education well beyond anything he could pay tuition for at a University. Perhaps government hand-outs need to instead be hand-ups to provide training and education for those individuals that are willing to adapt.
Adapting doesn't have to be as drastic changing industries. Perhaps it can be as easy as adjusting a product to fit the current environment. Hollandia International makes high-end beds. They made a custom bed for a client that contained a safe where he keeps a gun close by while he sleeps. Hollandia has adapted that concept to the recession and now markets a SAFE-T Bed so you can keep your cash in your mattress and feel secure about it. Brilliant! The Dow has dropped another 3 points since I started writing, so cash in the mattress sounds like a good investment in this deflationary environment.
Obama and Congress have a choice to make when they create bail-outs and programs to assist those that cry out for help. They can spend our money in an attempt to preserve the past, or they can accept the fundamental changes that are occuring and attack them head on with programs to help retrain individuals that are willing to adapt.
Wednesday, February 25, 2009
The Rescuers
I live in a nice house. It's not a mansion, but a nice house. I also live in a nice neighborhood. It's not millionaire row, but its nice. At the peak of the housing market, I was making good money, and I thought very seriously about moving to a larger, more expensive home in the subdivision adjacent to mine. As the market slowed I thought even more seriously about it, because I thought I could find a bargain. In the end, I decided that I was better off in my older, more modest home. What a great decision that was! Six months later I was laid off. Now I have started my own company. Those of you that are self employed understand what it is like to not get a regular paycheck even though you work. Any money I make goes back into my company, and it has been seven months since I have seen a paycheck. I should be the perfect candidate for a government bailout.
Alas, despite the lack of income I have paid all of my obligations on time. I had plenty of savings (and still have some) to get me through this. If I had only known that the federal government would be pushing loan modifications, I wouldn't have wasted my money on something as useless as savings. I would have bought that big beautiful house on millionaire row. I blame my parents for instilling me with financial sense and personal responsibility. Little did they know how useless those virtues would be in 2009.
Now that I have resigned myself to the fact that I won't benefit from any financial rescues, and will in fact be paying for the rescue of others for years to come, I can objectively review the President's announced Homeowner Affordability and Stability Plan. The plan covers three key areas: creating opportunities for homeowners to refinance; encouraging a larger number and more effective loan modifications; and strengthening of the governments commitment to Fannie Mae & Freddie Mac.
Refinancing
The first part of the plan is the affordability initiative. Loans that are currently owned by Fannie or Freddie or in mortgage back securities guaranteed by the government sponsored enterprises will be eligible for a refinance to current interest rates, which are very low by historical standards. A lack of equity is keeping many people from refinancing, so the President's proposal is to allow for loan amounts up to 105% of the current value. That will certainly open up the opportunity for some homeowners to refinance. It will leave out quite a few as well. For example, people who don't have a conforming loan (Fannie or Freddie) currently will not be eligible. Also, if they are so upside down (owe more than the house is worth) that 105% is not sufficient, they won't qualify either. There are a lot of homeowners here in Arizona that fall into that category. Jumbo loans are also not eligible (over $417,000). The Mortgage Bankers Association has argued that the 105% limit should be removed from the plan. Their argument is that Fannie Mae and Freddie Mac already have the liability for the existing loans no matter what the loan to value ratio is. Therefore it is in their best interest to refinance these loans to lower rates regardless of how much the value of the home has declined. That's a pretty valid argument, especially since there is already a precedent set in the form of FHA and their streamline refinance program.
Modifications
The second key to the plan is to increase the number of and the effectiveness of mortgage loan modifications. Many people have fallen behind on their mortgage payments and the only thing that will save them from foreclosure is a lender that is willing to change the terms of the loan and make the payment more affordable. Obama's plan calls for lenders to modify mortgage payments down to 38% of the borrower's gross income. In addition, the government will match dollar for dollar a reduction of the payment to 31% of the borrower's gross income. There are additional incentives that can be paid to the lender if the modification is successful (meaning the borrower makes the payments and stays in the house) as well as incentives for the borrower (beyond being able to keep their house) in the form of principal reductions for successfully paying their modified payment on time. It's a positive to get some guidelines on what has been a messy and confusing subindustry called "Loan Modifications." Lenders will continue to struggle with the problem of filtering true hardship cases versus those individuals that look to take unfair advantage of the lender and taxpayer. And the borrowers with the true hardship cases are not likely to comprehend how the plan works anyway. If they claim to have not understood their original mortgage that got them in trouble, how are they going to understand this?
Low Rates
The final part of the plan will likely be the most effective. That is because it is simple. The Treasury will continue to purchase Fannie & Freddie mortgage backed securities and increase their portfolios. The fact that the government is buying mortgage backed securities is keeping mortgage rates low. That is great for those that can refinance. It is really great for first time homebuyers that can now finally afford to by a home because of the devaluation that has occurred.
Meanwhile, I will continue to pay my mortgage on a timely basis. I even have one of those evil adjustable rate mortgages. My rate is lower than any fixed rate you can get now, and it is scheduled to go down again in a couple of months. An adjustable rate mortgage doesn't seem nearly as "evil" as the government taking my money to pay down someone else's mortgage.
Alas, despite the lack of income I have paid all of my obligations on time. I had plenty of savings (and still have some) to get me through this. If I had only known that the federal government would be pushing loan modifications, I wouldn't have wasted my money on something as useless as savings. I would have bought that big beautiful house on millionaire row. I blame my parents for instilling me with financial sense and personal responsibility. Little did they know how useless those virtues would be in 2009.
Now that I have resigned myself to the fact that I won't benefit from any financial rescues, and will in fact be paying for the rescue of others for years to come, I can objectively review the President's announced Homeowner Affordability and Stability Plan. The plan covers three key areas: creating opportunities for homeowners to refinance; encouraging a larger number and more effective loan modifications; and strengthening of the governments commitment to Fannie Mae & Freddie Mac.
Refinancing
The first part of the plan is the affordability initiative. Loans that are currently owned by Fannie or Freddie or in mortgage back securities guaranteed by the government sponsored enterprises will be eligible for a refinance to current interest rates, which are very low by historical standards. A lack of equity is keeping many people from refinancing, so the President's proposal is to allow for loan amounts up to 105% of the current value. That will certainly open up the opportunity for some homeowners to refinance. It will leave out quite a few as well. For example, people who don't have a conforming loan (Fannie or Freddie) currently will not be eligible. Also, if they are so upside down (owe more than the house is worth) that 105% is not sufficient, they won't qualify either. There are a lot of homeowners here in Arizona that fall into that category. Jumbo loans are also not eligible (over $417,000). The Mortgage Bankers Association has argued that the 105% limit should be removed from the plan. Their argument is that Fannie Mae and Freddie Mac already have the liability for the existing loans no matter what the loan to value ratio is. Therefore it is in their best interest to refinance these loans to lower rates regardless of how much the value of the home has declined. That's a pretty valid argument, especially since there is already a precedent set in the form of FHA and their streamline refinance program.
Modifications
The second key to the plan is to increase the number of and the effectiveness of mortgage loan modifications. Many people have fallen behind on their mortgage payments and the only thing that will save them from foreclosure is a lender that is willing to change the terms of the loan and make the payment more affordable. Obama's plan calls for lenders to modify mortgage payments down to 38% of the borrower's gross income. In addition, the government will match dollar for dollar a reduction of the payment to 31% of the borrower's gross income. There are additional incentives that can be paid to the lender if the modification is successful (meaning the borrower makes the payments and stays in the house) as well as incentives for the borrower (beyond being able to keep their house) in the form of principal reductions for successfully paying their modified payment on time. It's a positive to get some guidelines on what has been a messy and confusing subindustry called "Loan Modifications." Lenders will continue to struggle with the problem of filtering true hardship cases versus those individuals that look to take unfair advantage of the lender and taxpayer. And the borrowers with the true hardship cases are not likely to comprehend how the plan works anyway. If they claim to have not understood their original mortgage that got them in trouble, how are they going to understand this?
Low Rates
The final part of the plan will likely be the most effective. That is because it is simple. The Treasury will continue to purchase Fannie & Freddie mortgage backed securities and increase their portfolios. The fact that the government is buying mortgage backed securities is keeping mortgage rates low. That is great for those that can refinance. It is really great for first time homebuyers that can now finally afford to by a home because of the devaluation that has occurred.
Meanwhile, I will continue to pay my mortgage on a timely basis. I even have one of those evil adjustable rate mortgages. My rate is lower than any fixed rate you can get now, and it is scheduled to go down again in a couple of months. An adjustable rate mortgage doesn't seem nearly as "evil" as the government taking my money to pay down someone else's mortgage.
Sunday, February 15, 2009
Light in a Dark Economy
On the weekends my wife, Jen, goes to WalMart to do the weekly grocery shopping. Meanwhile, I hang out with our two sons for a few hours. Today we played whiffleball. When Jen returned she commented that WalMart seems to be getting more and more congested with shoppers as of late. I wasn't surprised. The chain is just about the only retailer that actually performed well in the fourth quarter of '08. When times are tough, shoppers will be more price sensitive, and WalMart has the reputation for having the best prices. Of course, that's common sense. This got me wondering, what other "common sense" winners might there be in a tough economy? Let's put it this way, with unemployment rising, what are the growth areas for jobs?
1. WalMart Greeter - So I already established that WalMart has more customers, so they need a nice elderly person to greet them. If you are over 65, this job is for you.
2. Mortgage Loan Workout Specialist - Mortgage loan modifications are the service du jour. Since most homeowners no longer have equity, it's the new refinance.
3. TARP application reviewer - There is a backlog of 2,000 applications for bailout funds. Since the government is only getting through about 50 per week, that means that banks are waiting at least 9 months before they get a response on their TARP fund requests.
4. Keynesian Economist - The passage of the stimulus bill is based on the assumption that government spending will stimulate the economy. Well, that depends on what the money is spent on. Tax cuts help, as does some of the spending, at least temporarily. Regardless, if you know formulae for fiscal multipliers by heart, then you are sure to get a job as a White House economic advisor.
5. Liquor Store Owner - Cheap vices do well in recessions. Alcohol and cigarettes are sure to be good sellers with the light supply of discretionary income. Local governments won't mind since those items come with a hefty sales tax.
6. Security - More liquor stores are also likely to get robbed. So anything related to security should do well. Cameras, alarm systems, and rottweilers should all sell well.
7. Gun Sales - Also related to security, but the criminals will also be buyer them. But they will likely be buying on the black market.
8. Repo Man - duh!
9. Attorney - I'm not sure on the specifics here, but lawyers will always find a way to fleece the public.
10. Federal Bureaucrat - There are tons of examples, but here is just one. In the recent stimulus bill, there is an appropriation for $2 billion dollars described as "Extra money for the Office of the National Coordinator for Health Information Technology." Really? "Extra Money?" Well I'm sure some of that extra money will go to hiring some highly productive bureaucrats.
So there you go. When you thought there was only darkness in this economy, I have shown you the light.
1. WalMart Greeter - So I already established that WalMart has more customers, so they need a nice elderly person to greet them. If you are over 65, this job is for you.
2. Mortgage Loan Workout Specialist - Mortgage loan modifications are the service du jour. Since most homeowners no longer have equity, it's the new refinance.
3. TARP application reviewer - There is a backlog of 2,000 applications for bailout funds. Since the government is only getting through about 50 per week, that means that banks are waiting at least 9 months before they get a response on their TARP fund requests.
4. Keynesian Economist - The passage of the stimulus bill is based on the assumption that government spending will stimulate the economy. Well, that depends on what the money is spent on. Tax cuts help, as does some of the spending, at least temporarily. Regardless, if you know formulae for fiscal multipliers by heart, then you are sure to get a job as a White House economic advisor.
5. Liquor Store Owner - Cheap vices do well in recessions. Alcohol and cigarettes are sure to be good sellers with the light supply of discretionary income. Local governments won't mind since those items come with a hefty sales tax.
6. Security - More liquor stores are also likely to get robbed. So anything related to security should do well. Cameras, alarm systems, and rottweilers should all sell well.
7. Gun Sales - Also related to security, but the criminals will also be buyer them. But they will likely be buying on the black market.
8. Repo Man - duh!
9. Attorney - I'm not sure on the specifics here, but lawyers will always find a way to fleece the public.
10. Federal Bureaucrat - There are tons of examples, but here is just one. In the recent stimulus bill, there is an appropriation for $2 billion dollars described as "Extra money for the Office of the National Coordinator for Health Information Technology." Really? "Extra Money?" Well I'm sure some of that extra money will go to hiring some highly productive bureaucrats.
So there you go. When you thought there was only darkness in this economy, I have shown you the light.
Monday, February 2, 2009
Why Do People Think that the New Deal Worked?
It is with some sadness that I write this article. Irrelevant to this topic, I must acknowledge that I am an Arizona Cardinals fan and have been through many losing seasons. Our magical ride came to an end with 35 seconds left on the game clock on Super Bowl Sunday. It was the most exciting Super Bowl I have ever watched. It ended with me wanting to cry, and with my eight year old son Dominick actually crying as he sat on the couch in his Larry Fitzgerald jersey. It is cliche to say that we always have next year. But in Cardinal Nation, this is the first time we can hope for next year and actually believe it. After decades of being a loser, the Cardinals are now a force in the NFL.
As far as the economy goes, I am not convinced that there is hope for next year. I have heard so-called experts talk about a recovery in 2010, but they can never explain what will drive the economic growth. They just assume that what goes down will eventually go up. They fail to acknowledge that "what goes up" needs something to lift it.
Congress (at least the controlling party) and President Obama are selling a stimulus plan that uses a Keynesian philosophy of government spending to lift the economy. I have heard several politicians announce that this is their "best" opportunity to pass legislation since the Great Depression. What kind of legislation you ask? Legislation that spends money, and lots of it.
Certainly there are some worthy spending plans that the federal government can use to temporarily lift the economy and have long lasting benefits as well. Infrastructure spending that relates to energy independence and transportation are a good example as long we are smart about the choices of projects (e.g. don't just throw taxpayer money as something because it sounds green). When I read in the paper about the $900 billion stimulus package containing items that may be noble causes, but hardly qualify as "economic stimulus," I realize that very little has changed in our federal government. Does spending $335 million on programs to stop sexually transmitted diseases create jobs? Someone may argue that it does, and perhaps it does create a few, but tell me with a straight face that we'll get $335 million worth of jobs. How about an extra $50 million for that great economic engine, the National Endowment for the Arts? While there are some provisions that will actually create jobs, for example tax relief, much of it is simply a wish list by politicians for their pet projects or quid pro quo for their campaign supporters.
FDR is widely known as one of our greatest Presidents for leading the country through the Great Depression and World War II. The economic devastation of that era was much wider and deeper than what we are experiencing today (so far). He took drastic measures as soon as he took office in 1933 with colossal spending projects in the form of the New Deal to get Americans back to work. And it worked. Well, it worked temporarily. When he tried to pull back on some of the spending in 1937, the economy actually got worse than it was in 1932 before he started. New Deal spending relieved some of the symptoms of unemployment, but it did not solve the root of the problem. It took winning the largest war in world history to bring us out of the Depression.
It is worthwhile to note that the cost of this package well exceeds the entire cost of the Iraq war. Are we spending only to temporarily relieve symptoms as the New Deal did? What we need are businesses to invest in the economy. Business drives a market economy, so the government needs to give us a stimulus package that motivates people to invest in business, and business to invest in the market.
My recommendation to Congress and the President (it's kind of arrogant for me to think that they care about my recommendation) is to pare down this package dramatically to focus on projects that can have a true economic impact within the next 12 to 18 months. Energy independence and grid improvements, transportation infrastructure, and tax incentives are all subjects that will drive our rise from this economic funk. The consequences of wasting money on politician's pet projects are severe. Huge additions to an already out of control national debt limits what we can do in the future and will lead to inflation. Combined with a stagnate economy (stagflation), it will be an ugly situation for years to come. We need to care about what makes up $900 billion. Don't simply be satisfied that it is a big number and assume we need what they're giving us.
As far as the economy goes, I am not convinced that there is hope for next year. I have heard so-called experts talk about a recovery in 2010, but they can never explain what will drive the economic growth. They just assume that what goes down will eventually go up. They fail to acknowledge that "what goes up" needs something to lift it.
Congress (at least the controlling party) and President Obama are selling a stimulus plan that uses a Keynesian philosophy of government spending to lift the economy. I have heard several politicians announce that this is their "best" opportunity to pass legislation since the Great Depression. What kind of legislation you ask? Legislation that spends money, and lots of it.
Certainly there are some worthy spending plans that the federal government can use to temporarily lift the economy and have long lasting benefits as well. Infrastructure spending that relates to energy independence and transportation are a good example as long we are smart about the choices of projects (e.g. don't just throw taxpayer money as something because it sounds green). When I read in the paper about the $900 billion stimulus package containing items that may be noble causes, but hardly qualify as "economic stimulus," I realize that very little has changed in our federal government. Does spending $335 million on programs to stop sexually transmitted diseases create jobs? Someone may argue that it does, and perhaps it does create a few, but tell me with a straight face that we'll get $335 million worth of jobs. How about an extra $50 million for that great economic engine, the National Endowment for the Arts? While there are some provisions that will actually create jobs, for example tax relief, much of it is simply a wish list by politicians for their pet projects or quid pro quo for their campaign supporters.
FDR is widely known as one of our greatest Presidents for leading the country through the Great Depression and World War II. The economic devastation of that era was much wider and deeper than what we are experiencing today (so far). He took drastic measures as soon as he took office in 1933 with colossal spending projects in the form of the New Deal to get Americans back to work. And it worked. Well, it worked temporarily. When he tried to pull back on some of the spending in 1937, the economy actually got worse than it was in 1932 before he started. New Deal spending relieved some of the symptoms of unemployment, but it did not solve the root of the problem. It took winning the largest war in world history to bring us out of the Depression.
It is worthwhile to note that the cost of this package well exceeds the entire cost of the Iraq war. Are we spending only to temporarily relieve symptoms as the New Deal did? What we need are businesses to invest in the economy. Business drives a market economy, so the government needs to give us a stimulus package that motivates people to invest in business, and business to invest in the market.
My recommendation to Congress and the President (it's kind of arrogant for me to think that they care about my recommendation) is to pare down this package dramatically to focus on projects that can have a true economic impact within the next 12 to 18 months. Energy independence and grid improvements, transportation infrastructure, and tax incentives are all subjects that will drive our rise from this economic funk. The consequences of wasting money on politician's pet projects are severe. Huge additions to an already out of control national debt limits what we can do in the future and will lead to inflation. Combined with a stagnate economy (stagflation), it will be an ugly situation for years to come. We need to care about what makes up $900 billion. Don't simply be satisfied that it is a big number and assume we need what they're giving us.
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