Posts Tagged 'housing'

To ask or not to ask, these are the questions …

I certainly hope this Hamlet-inspired edition of the question column pleaseth the millions and not be caviare to the general … remember to check out this post on, where we’re building a nice little community and getting some great answers on these columns and a lot of other interesting discussions, too …

1. Something is rotten in the state of [Dagblog] …

Let’s just say you knew someone who always had fairly bad body odor. Would you tell them and how would you approach the subject? (No, Genghis this isn’t about you; I enjoy your particular scent. But I once had this problem with a dormmate in college, and I feel bad that we never said anything to the poor chap.)

2. A dream itself is but a shadow …

So the other day I found this video tape of a high school video I made for an English class extra credit assignment I did with a couple of friends. While watching it, I felt like I remembered events from that day of filming, but how much of my ‘memory’ do you think was real and how much was me thinking I remembered the day because I was watching the video? In other words, do you think we have our entire lives stored in our memory banks, there for retrieval if we could only find a trigger?

3. O most pernicious woman! O villain, villain, smiling, damned villain …

Do you think Sarah Palin runs in 2012? If so, how far does she make it – early primaries, late primaries, nomination, White House?

4. When sorrows come, they come not single spies, but in battalions …

What was the saddest moment in your life (Mine: Visiting my grandfather in the hospital after his stroke … That was my first true understanding of death and dying)?

5. To be honest as this world goes is to be one man picked out of ten thousand …

Have you ever cheated? At what? Have you ever been caught?

6. Doubt that the stars are fire; doubt that the sun doth move; doubt truth to be a liar; but never doubt I love …

Is romantic love anything more than chemicals and hormones in your brain firing through a certain mechanism that gives you pleasure? If it is, what else is it? If it isn’t, does the fact that you feel that way make romantic love any less meaningful? What about other forms of love (child-parent, friend, etc.?) … are those, too, purely biological and chemical emotions?

7. We go to gain a little patch of ground, that hath in it no profit but the name …

If you had the means, do you think this is a good time to buy a house?

8. Neither a borrower nor a lender be …

OK, we know there is blame to go around on all sides, but if you had to give a percentage to it: How much blame for our current economic mess lies with the people who took on too much debt and signed ridiculous mortgages without reading (or caring about) the fine print and how much lies with the banks that made the loans?

9. This above all: to thine own self be true …

When you were a young child, what did you want to be when you grew up? If you’re not that now, why not?

10. The rest is silence …

Which option do you think best describes what happens after you die: a) Nada/You become fertilizer b) Heaven/hell/purgatory (some sort of traditional unearthly afterlife) c) Reincarnation d) Other (please explain)?

Obama will mean the end of capitalism!!! (Whoops, too late) …

The day after Obama won the election, a Republican friend of mine on Facebook joined a group that planned on getting together on Inauguration Day to mourn ‘The End of Capitalism as We Know It’*.

Members of the group were waxing bitter in the message board, complaining about how Obama was a socialist who was going to destroy the U.S. economy.

I had to laugh … and cry.

Cry because these people were so caught up in their own right-wing economic philosophies (many of which I actually agree with) that they couldn’t even for one moment take the time to appreciate the historical significance of what this country’s voters had just done.

No matter what your politics, every one should be able to do what John McCain eloquently did on election night: Recognize that this country has taken a large, profound step to move past its racist beginnings (and recent history) and elected a candidate that preached unity and bipartisanship and re-engaged vast segments of the American people by inspiring a renewed sense of hope and idealism.

But many of Obama’s opponents don’t even want to give him a fighting chance. They believe he is doomed to fail and his liberal agenda will cause the collapse of the American empire and its glorious capitalist experiment … which is why I also had to laugh when I read those messages.

That experiment has already failed. The empire is already collapsing. Socialism is already here … And it all happened under a Republican administration.

Just today, Treasury Secretary Hank Paulson generously let the American people know that after careful deliberation, the $700 billion he asked for from Congress is now going to be put to a vastly different use than was originally intended.

Money that was supposed to be used to buy up bad loans and mortgages rotting away on the balance sheets of banks and gumming up our credit system is now going to be doled out  (in a command-control style, I may add) to buy stakes in troubled banks, as well as potentially help out a number of as-of-yet unspecified companies in as-of-yet unspecified non-financial industries.

(So much for the program’s name: TARP, Troubled Asset Relief Program. Calling it the Tits and Ass Relief Program would have made about as much sense).

Mark my words: The cost of this program will end up far exceeding $1 trillion (though we may eventually get some of that money back). And that’s in addition to the hundreds of billions the Fed has already spent trying to buck up our decrepit financial system.

Instead of facing the consequences of a decade-long U.S. consumer spending binge, which was encouraged and exacerbated by a housing/credit bubble caused by our government’s easy money policies, we are flailing around haphazardly, trying anything and everything to bail our way out of this mess. But all we are doing is throwing good money after bad, and leaving future generations of Americans an enormous, crippling pile of debt.

The most egregious example of this will likely be the auto industry bailout that is quickly becoming a political inevitability. Right now, the best I can hope for is that the money comes attached with some sort of regulatory plan and set of conditions. If changes aren’t made to the auto companies’ operating structure (i.e. mainly, a renegotiated contract with the labor unions), they’ll be facing the same dire situation a few months down the road because they just cannot currently compete with the lower-cost manufacturers in Japan and throughout the rest of Asia.

Do I think an auto bailout is a good idea? No way. I’d much rather see GM and Ford be allowed to go bankrupt, and work to restructure their operations through that process, while we spend the money we’ll be using in the bailout to retrain displaced workers and invest in start-ups pursuing new green energy technologies. But I understand millions of jobs are at stake. I understand that the American people would find it hard to understand why Wall Street and the fat cat elites who work there and produce nothing of tangible value got bailed out while the manufacturing engine of the country was left to wither on the vine.

The fact of the matter is, America has never been a purely capitalistic system. We came to grips some time ago that capitalism without safety nets ends up benefiting the few at the expense of the many, and will eventually destroy itself through social instability. That’s why we have Social Security, and welfare, and Medicare, and public schooling and student loan programs, etc. etc.

But it is still quite ironic that the biggest government nationalization and socialist expansion efforts in decades will be coming at the end of a Republican administration that never pursued the fiscal responsibility platform of the conservative movement and is now too afraid to deal with the nasty flip side of the free market policies it espoused.


*I think that was the name of the group – I can’t find it on Facebook any longer … maybe they, too, realized the insanity of their hypothesis


I’ve had it.

This country has been on engorging on a cheap credit binge for the last decade, stuffing itself on the sugar highs and empty calories provided by ultra-low interest rates and fancy derivatives and zero-down mortgages. Now the chickens are coming home to roost, and everyone is looking for a way to get their butt saved.

It’s bad enough that Congress already spent $150 billion earlier this year on a fiscal stimulus plan that did nothing but allow us to buy IPhones and XBoxes for a few more months. The American people now want more, and it looks like Congress is going to give it to us with another huge stimulus package. It’s money we can’t afford right now and which won’t do anything but provide another very temporary boost to an economy and consumer that needs to retrench for an extended period of time before they can begin to reflate.

But spending money one doesn’t have is the American way. Just ask the country’s beleaguered homeowners now drowning under onerous interest payments, the folks who were too busy picking out Ikea furniture to read the fine print of those adjustable-rate, no-doc mortgages they were signing.  They, too, are soon going to get plenty of help from our friends in Washington.

You see, everyone says we need housing to rebound in order for the economy to recover, so by god, we are going to make the housing market rebound, even if it means the government has to buy up all those nasty little mortgages and restructure them, as Senator John McCain has so magnanimously offered to do (and to hell with the free market and the natural laws of supply and demand).

But really, who could possibly blame the American people for wanting to be spared the pain of an economic downturn?? They’re just following the lead of our most esteemed industry and financial leaders and watching with green eyes as the government tosses around hundreds and hundreds of billions of dollars like so much loose change.

How fitting that the first ones at the government trough were the Wall Street pigs who cooked up this unhealthy smorgasbord slop and fed it to the ravenous, greedy (but mostly unsuspecting) crowd of American consumers.

Oh, it may seem unseemly that the ones largely responsible for creating this mess would be the first to come begging for help, but The Powers That Be knew the financial system that Wall Street had so cleverly manufactured was so fragile that many of these banks couldn’t fail. They knew that the pyramid scheme would have to be unraveled slowly or the entire economy would shut down.

So in order to prevent exposing the rot in the system to the public, regulators forced Bear Stearns into the hands of the relatively well-capitalized JP Morgan Chase, guaranteed the losses with a $29 billion loan and then lowered interest rates in an emergency session.

But that was just the start. You know the rest of the story. The scope of the problems became obvious, and it was clear the cancer had metastasized to every corner of our financial system. Housing in particular was a disaster, so we nationalized Fannie Mae and Freddie Mac (which should never have been privatized in the first place, as one of the only things scarier than capitalism gone mad, is capitalism with implicit government backing gone mad ).

AIG, too, needed help since it had gotten caught insuring a lot of these failing institutions, so we rescued that firm with $85 billion (and then watched as some of that promised money was immediately spent on a lovely sales retreat, replete with a $23,000 spa bill).

And yet all that government assistance still wasn’t enough, so the Treasury and the Fed went to Congress and pleaded for another $700 billion, and only after getting that pork-laden package passed have they begun figuring out exactly how they are going to use that money to save our banking system and economy.

It is all just so very frightening, but the last straw for me was reading an article about some of those poor, poor folks in the hedge fund industry who are now hoping they’ll also see some of that bailout money. Treasury Secretary Paulson insists the money is just for banks and thrifts, but that ‘plans could change’.

You’ve got to be kidding me!!

I mean, for crying out loud, it was only a decade ago when the government and a bunch of banks bailed out a hedge fund company named (ironically enough) Long-Term Capital Management.

Long-Term Capital, with its use of insane leverage (at least 25x) in highly illiquid, poorly regulated financial instruments, including some of the very same derivatives and mortgage-backed securities that are now causing us grief, was in many ways Version 1. 0 of the current Wall Street mess. And yet we ultimately learned very few lessons from that clear early warning sign (This Working Group document has some great background on the LTCM debacle as well as a number of generally ignored conclusions and recommendations).

Frankly, we missed a golden opportunity to increase supervision and disclosure requirements to help rein in some of the industry’s excesses.

Even worse, the LTCM bailout (and the subsequent lowering of interest rates by then-Fed Chairman Easy Al Greenspan) helped fan the flames and foster the environment that we now find ourselves in by encouraging more ill-advised risk taking while institutionalizing the idea that the government will always be there to cover up for our mistakes.

But there is a price to be paid for that largess. Eventually, we’re going to have to pay for this misguided philosophy. I’m just worried that it’s too late, that we’ve dug ourselves into a hole so deep it will take a generation or more to climb out of.

So it’s time to stop the capital injections and bailout plans, the incessant pumping of liquidity into the markets and the careless printing of money, the debt issuance and the interest rate cuts. We’ve done enough to unfreeze the markets and prevent a systemic collapse. It’s time to let the brutally effective corrective mechanisms of capitalism take care of the rest.

As Obama said during the most stirring moment in his Denver keynote convention speech:


How The American Dream created this American nightmare …

You hear a lot of conservatives nowadays wanting to place blame for the country’s current economic crisis on the Community Reinvestment Act of 1977, which encouraged commercial banks to lend money to borrowers in low-income areas.

The implication is that the CRA, enacted and significantly expanded under two different Democratic administrations, led to the creation and proliferation of the risky subprime mortgages that have brought the U.S. banking system to the brink of collapse.

Never mind the fact that CRA-regulated commercial banks originated less than half the total subprime mortgages or that at least as much share of the blame for how things got out of hand has to be placed on the Republican-led repeal of the Glass-Steagall Act, which allowed investment banks and other less regulated institutions to engage in similarly risky lending (and to do so without the leverage restrictions placed on commercial banks).

But conservatives do have a point (even if it’s not the one they really intend to make): This country’s myopic focus on home ownership as the be-all and end-all of The American Dream did indeed help spawn the housing and credit bubble, and the CRA is just another in a long list of government policies that have encouraged home ownership as an important component of economic development and societal stability.

OK, maybe I’m just a bitter renter who’s trying to justify his lifestyle and puny net worth, but I do wonder … is home ownership really that important?

The National Association of Realtors certainly thinks so, and some of their rationale makes sense. For society as a whole, home ownership may in fact offer some advantages, as people who buy their homes are more likely to be invested in their communities and neighborhoods than renters. However, I would think these benefits have diminished over time as the nation has developed and become more settled.

Encouraging broad home ownership probably also acts as an alternative means of reducing income inequality in a capitalist economy, and at the same time instills in citizens the importance of private property rights, both of which lead to increased stability in our society. Given that our national savings rate is negative, home ownership also encourages people to invest and save funds they might otherwise not.

But that capital comes at a cost, an opportunity cost. Homes are static entities, non-productive investments. By themselves, homes don’t create anything of tangible value.

And homes are not particularly good investments, either. Robert Shiller did a hundred-year study and found that homes increased in value about 3% a year on average, not much more than the rate of inflation, with only a couple of temporary periods of dramatic outperformance.

Another study by two professors, Roger Ibbotson and Jack Clark Francis, found that housing increased in value about 8.6% a year from 1978 to 2004. Not bad, but not as good as commercial real estate at 9.5% and well behind stocks at 13.4%. (Granted, you can’t live in a stock).

The math gets a bit better when you account for the substitution costs of renting, but a lot worse when you include the other costs associated with home ownership – and there are plenty of them, such as mortgage interest, insurance, upkeep, refurbishing and property taxes. The WSJ estimated that a $300,000 house could end up costing an owner more than $1 million over 30 years. And that excludes the costs of buying and selling a home, which can add up to as much as 10% of the transaction value and make moving to a location that better suits one’s needs or skills a much more expensive prospect than it’d otherwise be.

A good trader friend of mine, who used to live in a rented NYC apartment, described his St. Louis home as a ‘money pit’ and usually wishes he was still renting.

Unlike with stocks, where diversification is possible and laudable, owning a home often requires a person putting almost of his or her eggs in one basket. And if you bought a home in the last couple of years, that’s a much smaller basket now.

Bottom line: Obviously, every locality is a bit different, but I think owning a home can make sense for people who plan on staying in the same place for about 5-10 years, or who enjoy the responsibilities of upkeep and maintenance (I, however, recoil at the prospect of lawn mowing and do-it-yourself repair projects).

But even in the best of scenarios, home ownership is rarely the best path to getting rich. And as we’ve found out in recent months, making it a key goal for a society – at the expense of other worthwhile goals and values – can lead to a rather unwise deployment of capital and some really nasty unintended consequences.

Pessimism doesn’t pay …

My dad is an eternal optimist, one of those turn-lemons-into-lemonade people. And yeah, it sometimes annoys the living shit out of me.

I am, after all, an in-the-long-run-we’re-all-dead type of guy, a devout half-empty man (I’d call myself an eternal pessimist, but I don’t believe anything lasts forever :) )

Clearly, if optimism is a genetic trait, it skipped a generation. In my life, I fear the worst. It’s what I do. A headache is a brain tumor. A bumpy plane ride, a crash landing. An abandoned suitcase, a ticking bomb. A lover’s quarrel, a relationship killer.

For a long time, I believed pessimism – in addition to providing the most efficient route to being pleasantly surprised – was also the more appropriate mindset for the modern world. You look around and see the Earth in peril. You see bad things happening to good people, and good things happening to bad people. You see a holy war in the Middle East that never ends, and social security reform in the U.S. that never begins.

You would think that this year, especially, pessimism would be the way to go, what with the U.S. economy teetering on collapse (I put the odds of a multi-year recession at about 50 percent, and of another depression at 10 percent).

But I’ve recently decided that dad was right all along. Pessimism doesn’t pay – literally. And here’s why:

1. Pessimism can actually help lead to the worst-case scenario…

Phil Gramm took a lot of criticism recently for suggesting the American media and public should stop whining about the economy, but negativity can absolutely contribute to, prolong, or intensify a recession. That’s why economists pay such close attention to consumer sentiment surveys – psychology matters. People who think the economy is turning south will act more cautiously, spending less and saving more, which ends up causing more weakness and creating a vicious circle.

A negative outlook can be self-fulfilling in other areas of life as well. I often find that people who dread bad things happening avoid taking the positive proactive measures that could prevent those things from happening, and even at times engage in destructive behavior that increases the likelihood of a bad outcome.

2. However, the worst-case scenario rarely happens…

This weekend, Congress decided to pass a housing bill that helps homeowners facing foreclosure restructure their mortgages and stay in their homes. The bill also has provisions to bail out Fannie Mae and Freddie Mac, the government-sponsored private entities that handle more than $5 trillion in mortgages and helped create the current mess by making loans that should have never been made in the first place.

In an election year, the housing bill was a political inevitability, and probably an economic necessity as well since Fannie and Freddie are indeed too large to fail. The bill has some decent aspects to it, such as the regulation forcing lenders to be clearer about the true costs of a mortgage, and it could help stabilize the moribund housing market.

But the bill is also a travesty because it encourages future risky behavior by reaffirming and institutionalizing the idea that the government will always be there to bail you out. As a recent article in The Economist noted, a government bailout is about privatizing profits and socializing losses, which sucks for people like me who continued to rent partly because I thought the market was overheated, and yet as a taxpayer will end up paying more than a fair share of the bailout costs.

The bill may be a bad one, but it also proves the point that in life, people facing dire outcomes can often rely on the support of loved ones, like friends and family (or a generous government), to help them avoid a bad situation or at least make a bad situation more manageable.

So usually, all that worrying and pessimism accomplishes nothing except for perhaps, say, preventing someone from buying a home in Manhattan that likely would have almost doubled in value by now (pessimism may not pay, but bitterness is groovy)!!!! …

3. And if the worst-case scenario actually does occur, you probably have other things to worry about … or you have nothing to worry about because you’re dead.

My grandfather always said he would never buy stocks because of what happened in the Great Depression. Meanwhile, for the rest of his lifetime, America never had another depression, and the stock market rose by thousands and thousands of percentage points. He basically guaranteed he’d never be rich just so he wouldn’t be desolate.

That’s why I tell almost everyone who has at least ten years to invest to put a nice chunk of their money in stocks or mutual funds. In the long run, the market should be one of the best places to put your money. Yeah, at some point, the American empire is going to come crumbling down, and/or the world will end, but you’re going to have a lot of other concerns if that happens.

I mean, if this current situation does become economic Armageddon, do you think that shoebox of cash under your mattress is really going to do much good? If the economy has gone to hell, those dollars probably won’t be worth much anyway, especially if this time inflation ends up being part of the problem. Sure, that money may buy some loaves of bread for a few more months, but life is still going to suck…

And the same is true in other areas of life. I mean, what’s the point in worrying excessively about nuclear weapons or terminal cancers when being correct basically means you’re dead???

As I see it, pessimists will always be right because eventually shit happens and everything good ends, but in the meantime, the optimists will be having all the fun. So i might as well bring my half-filled glass of lemonade and join the party.

April 2014
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