The Dixie Cup Bail Out
The bail out begins. The collapse continues.
Let me begin by saying that prescience goes a long way when it comes to credibility. In 2004 I wrote an essay in response to the cheerleading our economic recovery was getting. In it I spoke briefly about the phenomenon of cashing out equity in your house to pay off our debt, and posed the question:
… equity cash outs are a one time solution, though they carry a more sinister consequence: people no longer own their homes. If you’ve just refinanced your home to pay off the credit card you’re charging groceries to and you lose your job what then?The ‘what then’ is, of course, to default on your home and declare bankruptcy. I hope that you’ll give what I say now a measure of credibility for seeing this coming.
When Bush, trying to play compassionate conservative, gave his ‘save these folkses homes’ press conference on the Friday of the Labor Day weekend he made a nebulous plea to the mortgage industry to prevent people from losing their homes. Democratic legislators had already presented similar, nay identical, proposals, but don’t laud them for it just yet. Don’t laud them at all, actually, since this has nothing to do with helping people keep their houses. If Democrats cared so much about people losing their homes they could have done something about this two years ago when I saw it coming. Or right around the time the Center for Responsible Lending released the study now being cited, back in December of 2006. Or before the summer when economic analysts saw it coming. the Plenty of people politicians have no interest in listening to saw this coming. Stepping in now has a much more fiscal motive, and it’s all too little, too late.
I was recently asked when I would buy a home, this being a rather bad time to be doing it. I answered that I would wait until a couple years after a housing crash, since that’s when homes will have been sitting on the market for a while without a buyer. Prices for homes start to drop when growth in the number of homes for sale consistently exceeds the number of homes sold. This might happen for a number of reasons, such as over production of homes by builders, banks selling seized properties, or a decrease in the number of people that can afford to buy homes.
An interesting subplot to the subprime mess is the increase in home ownerships during a time of increasing poverty and falling real wages. This is the kind of thing that should set off warning bells (and did, see above), but I guess if I were a lender and I saw someone taking two jobs to just get by, I might say, ‘Here’s someone who will sign anything I put in front of them to get into a home’ too. Bush was right when he said people should remember that subprime mortgages allowed people who wouldn’t otherwise be able to own a home to get a finger hold on that dream. Bush fails to note that the economic growth he presides over doesn’t much provide for actual working families, ensuring most people don’t have the pay check muscle to pull themselves out of debt.
It’s my ideal home buying time that the Republocrats want to prevent, because a recession in the housing market tends to make people nervous. I won’t bore you with financial jargon, and instead will break this down into two simple human behaviors that are driving this bail out.
First, lenders who see $164 billion go up in smoke tend to start to count their own funds a little more carefully. This is a big problem for Wall St executives and the politicians they fund, since our current economy is driven on pretty much debt and stock market speculation. It sure isn’t driven by rising wages and increased buying power of the American worker. A credit crunch means businesses will have a harder time getting loans to expand, buy each other out, and make money.
Second, a housing market failure is a much bigger deal than just the value of homes being foreclosed on. For one, most people’s net worth is primarily made up of their house. It’s where we pump our savings, it’s a nest egg people have come to bet on in their silver years. For another, a housing market failure is a good indicator that a lot of other things are wrong. People default on mortgages because they can’t afford to pay the bill, and of all the bills you can skip paying, anyone who’s had to choose which bill to pay and which not to pay knows the mortgage is the one you always pay. When people aren’t paying their mortgages it means they are, in a very real sense, out of money.
People who are out of money become a whole separate problem for politicians.
Don’t be fooled and think that just because someone is elected to office, has a PhD, or otherwise seems in some way to know something you don’t, that they are immune to doubletalk mind control, influence, or simply going into denial the way normal people do. When presented with an unthinkably terrible problem, many of us will freeze up for five to seven minutes and choose to read about a goat. It happens to everyone.
In attempting to stave off a wave of foreclosures, and the economic ripples this will create, the Republocrats are attending only to the latest indicator of a failing economy. The economy itself remains curiously unexamined. Great mountains of congressional transcripts will be produced decrying the fact that people can’t afford to pay their mortgages, but not a sticky note will be used to ask why over two million people are likely to default on their mortgages this year alone. You can tell what someone cares about based on how much time they spend on it. Look at your congressional delegation and ask which they care more about: people without enough money, or preventing a housing market contraction. Alternatively, ask: when these people were poor and making their mortgage payments, how much did anyone care?
posted by Justin # 9/07/2007 02:27:00 AM 
