I agree with the editors of the Washington Post. Time-shifting the purchase of homes from next quarter to this quarter is a bad idea:
OFFICIAL unemployment is hovering perilously close to 10 percent, and about a third of the jobless have been out of work for at least six months. Therefore Congress was right on Thursday to extend unemployment benefits, for reasons of social justice and economic stimulus.
Alas, the congressional leadership decided to weigh down this worthy measure with another that might not have passed on its own and that certainly would not have deserved to: an extension and expansion of the wasteful tax credit for homebuyers. President Obama is expected to sign the bill Friday.
Until now, Congress merely offered $8,000 for first-time house purchasers. That incentive, passed into law in February and set to expire at the end of this month, would now extend to deals signed by next April 30 and closed by June 30. In addition, those who already own a home can get a taste of government cash, too: If you want to “step up” into a bigger, better place than the one you’ve had for the past five years or more, Uncle Sam will help out with $6,500. The total projected cost is $10.8 billion.
It should be added that these measures are an additional fiscal stimulus which is something that should be counted by the advocates of fiscal stimulus as a means of bolstering the economy.
Among the many reasons the home buyers’ credit is an awful idea is that it encourages the incurring of private debt. If your problem is alcohol, drugs, or gambling, the solution to your problem typically isn’t alcohol, drugs, or gambling. Unless you’re Zorba the Greek. Now our problem is debt and we’re already it incurring it with increased public debt. I can understand the argument for that although I’m skeptical of it.
But why try to pump air back into the deflated bubble when it was the bubble that caused our problems to begin with? Those resources should go to other sectors of the economy, sectors better able to provide robust, sustainable growth. What sectors? We’ll never know unless we stop pumping air back into the bubble.
Another particularly awful thing about the home buyers’ credit as a stimulus is its sharp phase out range. Between $75,000 and $95,000, ever additional dollar of MAGI for a first-time home buyer reduces the tax credit by 40 cents. Combine that with the normal state, federal, and payroll marginal tax rates, and you get a total marginal tax rate of somewhere around 80% for someone who’s planning on buying a house and is in the phase-out range.
Can anyone imagine that the rebate is not simply a re-do of the failed social experiment of encouraging home ownership by people financially incapable of incurring the liability, and a sop to the home builders and realtors lobby? After all, if your world view is that this is all Wall Street’s fault you easily repeat your past mistakes, and feed your voting base.
In addition, as C4C showed, this will be like a light switch………and then we will have the foreclosures.
Yeah, lets redo what got us into this mess in the first place. Change you can believe in!
It wasn’t realtors who said, “Hey! I’ve got a great idea! Let’s bundle together a bunch of loans that are likely to default, then leverage those loans at 30 to 1!”
“It wasn’t realtors who said, “Hey! I’ve got a great idea! Let’s bundle together a bunch of loans that are likely to default, then leverage those loans at 30 to 1!—
That is correct, but off point. (Naturally) If you look back to the nacient period of the problem: 1995 – 1999, it was lenders, under threat of regulatory repercussions if they did not grant credit to uncreditworthy borrowers, who said to themselves……..”we are making bad loans; they are likely to default. We need to bundle them together and sell them off our balance sheets to protect our shareholders.” Hence they lobbied to be able to do so to Freddie. And so it happened. Where was the outrage? Where was the regulatory oversight?
And so the wheels were set in motion.
Bear Stearns became the first big Wall Street packager and seller for this garbage. I had thought the original MBS was issued in 1998. My memory fades, but I believe it was our very own Dave Schuler who discovered that it was first 1995 or 1996.
Do some homework and get a clue Alex if you want to comment intelligently.
Alex,
So…there is no overs-supply of housing? Prices don’t need to come down to clear the market? We need to try to get back to those unreasonably high prices…for the realtors?
Drew,
I have seen this frequently asserted but never demonstrated. Do you have a good source?
Steve,
Oh, god no. I think that homeownership is a silly ideal and I favor strangling not only the new homebuyer credit, but also the mortgage interest deduction until their eyes bug out. I’m merely pointing out that a mere crash in the housing bubble would not have caused nearly as much pain in society if Wall Street hadn’t behaved like a bunch of drunk frat boys at the roulette table.
Alex –
Denial is always a good defense, eh? How’s this: before entering the private equity business I was a lender. So I was there in the rooms, in a major bank, as CRA discussions and what to do about it were had. In fact, talk to any lender of that era and you will hear the same. If not, they certainly were not in any position of relevance or significant responsibility.
Lenders knew the loans violated all standard underwriting practices, and the obvious question was, how do we manage our balance sheet? In fact, the emergence of securitization followed naturally the practice of loan syndication as a major bank activity, turning illiquid bank loans (that stayed on a single lender’s balance sheet) into things that were traded among banks like corporate bonds or equities, with ratings and day to day price changes etc. That was a 1990 – 1995 phenomena and was well established between banks by 1995. And then came securitization……
Now, being in denial, I’m sure you will reject that. Feel free, but ignorance and denial are unbecoming.
The excesses that followed are well documented. But those, like you, who choose to focus on the latter day events fascinate me. Its like a boulder that starts falling from a mountain at 10,000 feet and ultimately crashes into the village at the bottom. People like you want to rant about what happened in the last 3,000 feet of the boulder’s journey and why something wasn’t done……………..but have no interest in what set the boulder in motion.
I know the answer. Political bias and gain. A pity, given that good social policy is rarely arrived at with that motive.
I noted in a post awhile back that a recent PBS documentary is worthwhile watching. The title: “The Warning.” It documents the whole securitization phenomenon, that market’s lack of transparency and regulation, and how powerful interests fought a lowly bureaucrat’s efforts to highlight the problem. Here’s a hint and preview: it references the nacient activities I cited. It culminates with with the collapse of LTCM, in 1998. Oh, and two of the most powerful naysayers now have powerful posts in the Obama Administration. Comforting, eh?
But let’s see….1998. Hmmm. 1998?? Not quite the narrow narrative of the Bush/Wall Street greed of the 2000’s, right?
That said, there is a parallel. The 2003 efforts to reign in Fannie and Freddie fell flat. Barney Frank: No!!!!!! Chris Dodd: No!!!!!!!! Maxine Walters: No!!!!!!!
Do your homework, Alex. The CSPAN tapes of the 2003 – 2004 hearings have it all, in their own words.
There is blood on many people’s hands over a significant period of time (that is, both parties, multiple Congresses and Administrations, multiple private interests, multiple social initiatives) in the general issue of EZ credit and loose regulation and its effects on financial markets. The root causes of the current situation are just that: EZ credit, politics, and the related issues spawned in the mid – to late 90’s. But please, spare all intelligent and informed people on this blog: Wall Street has been greedy since it was formed. It was greedy in the 20’s, 30′, 40’s…….Its greedy now. It will be greedy in 50 and in 100 years.
Find something less simple minded to blame than Wall Street greed.
According to Edward Leamer (head of UCLA Anderson School Economic Forecast) most of the major U.S. recessions had their start in the housing market.
Drew,
My query was directly with respect to CRA, and I have yet to see any documentation that there would have been actual sanctions had bad loans not been issued. The law doesn’t say it, and I haven’t heard anyone but lenders claim that there would have been a problem. I cannot find any documentation of any lender being sanctioned for failing to issue bad loans. If you have some, please provide.
I know lots of people in the lending industry, due to my business, and from what everyone tells me the primary motivation for issuing bad loans was the fact that the mortgage broker got a commission for every loan completed, regardless of whether the loan was paid off, so mortgage brokers had every incentive to lie and cheat their way in their mortgage applications, and the lenders rarely asked for documentation to back up the applications.
Despite this, all I ever hear is, “Well, we HAD to issue bad loans!” If you have real, actual documentation that the government was actually sanctioning lenders for not issuing them, please provide it. Like I said, I’ve heard it often asserted, never documented.
This part I’m aware of. What I haven’t seen is any proof that the government coerced folks into bundling, buying and trading bundles of bad loans, etc.
No, not comforting at all. The Obama Administration is more in bed with the financial sector than the Republicans, and that is awful.
Yup, and that was very, very bad. I remember Daniel Gross railing about it on Marketplace at the time.
And yet, we keep bailing it out, bailing it out, bailing it out. Like we have a tumor that we keep cutting back to size instead of just excising, in the hopes that “it won’t grow as big this time.”
Since its founding, Wall Street has been by and large a hotbed of gambling and market distortion that adds little of actual VALUE to the economy. But we keep piling taxpayer dollars into it, and we keep giving them their tax and regulatory advantages, and every time it crashes, we don’t do a damn thing to address the root idiocy.
I’m with Thomas Jefferson: “The end of democracy, and the defeat of the American revolution will occur when government falls into the hands of the lending institutions and moneyed incorporations.â€
We’re already there.
Steve,
What’s his evidence? I’ve seen economists ascribe recessions to everything from excessive inventory, monetary policy, population pressure, the price of gold, sunspots, and the hemlines of women’s skirts….
Start here Alex,
http://www.kc.frb.org/publicat/sympos/2007/PDF/2007.10.11.Leamer.pdf
For those who don’t want to read one of Leamer’s take away points is this:
You can build housing now, but that means you’ll have less building later on. You can build later on, but you’ll have to do less today. You can’t build more houses both now and later.
Further, if you build alot now, you’ll eventually see a sharp drop off in building the future. And if you build a f-cking Hell of alot now, you could very well be laying the seeds for the next contraction.
So, trying to stimulate more building, after we’ve gone through a building a f*cking Hell of alot stage is simply moronic. But the Obamassiah is pursuing this policy anyways. Not because he is a moron, but because he is just like all other lick-spittle crawling politicians.
Steve,
Thanks for the link. I’ll check that out this evening.
I don’t question that overbuilding is a problem, and I think that the governments’ insistence that everyone be a homeowner to be just insane. I’m not sure that it’s the end-all, be-all of the business cycle, though, but I’ll read Leamer’s paper.
Alex –
“My query was directly with respect to CRA, and I have yet to see any documentation that there would have been actual sanctions had bad loans not been issued. The law doesn’t say it, and I haven’t heard anyone but lenders claim……………..etc.”
Since I don’t really know you, or what you do, I’m not exactly sure how to respond. The mechanism was simple, act up and the regulators were on you like flies on shit, and as they reviewed your loans your reserve requirements went up. Very quiet; but very effective. There are no documents to that effect (well, duh). So are you using a high school debating tactic of asking one to prove the unproveable? I do not know. But I live in the real world, and I have both eyes and ears.
“I know lots of people in the lending industry, due to my business, and from what everyone tells me the primary motivation for issuing bad loans was the fact that the mortgage broker got a commission for every loan completed, regardless of whether the loan was paid off, so mortgage brokers had every incentive to lie and cheat their way in their mortgage applications, and the lenders rarely asked for documentation to back up the applications.”
First, I’d be interested in what kind of lenders, and in what position of authority. But in any event, the “mortgage broker train” became a reality far down the timeline from what I have referred to, when the process was out of control. It is undeniably true. I have to ask. Who is surprised?
“Despite this, all I ever hear is, “Well, we HAD to issue bad loans!†If you have real, actual documentation that the government was actually sanctioning lenders for not issuing them, please provide it. Like I said, I’ve heard it often asserted, never documented.”
Once again, Alex, I have to say I traffic in reality. Prove to me Bill Clinton had sex. We can play legalese games if that makes you feel better. But that’s just a cheap debating tactic. Only one of us was there, as a loan originator in a bank. If you insist that the evidence must be on the front page of the NY Times I can’t do anything for you. I’m remined, as I’ve noted on this blog before, “who are you going to believe, me, or your lyin’ eyes.” Also, we need to keep events in a proper time line.
“This part I’m aware of. What I haven’t seen is any proof that the government coerced folks into bundling, buying and trading bundles of bad loans, etc.”
That’s because they didn’t. They left the loan originators with an awful problem. And those loan originators, desperate to unload bad loans, looked for a mechanism. Read: lobbying for Freddie……………. and then Wall Street. It was only later that the gravy train evolved. And that’s where the “Wall Street greed” argument has any merit. But its years after Pandora’s Box was opened.
“Since its founding, Wall Street has been by and large a hotbed of gambling and market distortion that adds little of actual VALUE to the economy. But we keep piling taxpayer dollars into it, and we keep giving them their tax and regulatory advantages, and every time it crashes, we don’t do a damn thing to address the root idiocy.”
I understand the frustration, but “no value” is silly. The rise of the capital markets has been one of the most valuable innovations in the nations (world’s) history. Perfecting their imperfections remains a vexing issue.
“I’m with Thomas Jefferson: “The end of democracy, and the defeat of the American revolution will occur when government falls into the hands of the lending institutions and moneyed incorporations.—
As they clearly are under Obama.