US: More Text Messages Than Phone Calls
Professor Mark J. Perry's Blog for Economics and Finance
This bailout is a terrible idea. Here's why.
From Americans for Tax Reform: No matter what one thinks of the financial bailout package, we ought to at least agree how we got here. Below are the real actors behind the mortgage panic of 2008:
The SEC's ban on short selling is a perfect illustration of the dangers of regulators taking a cartoon view of the world, where evil villains are responsible for all the chaos in fair Gotham. In their monomaniacal focus on the manipulative potential of short selling, Cox and his his minions have completely overlooked its benefits, and implemented policies that have inflicted substantial collateral damage on other portions of the financial market, including parts of the market that could facilitate fixing problems at the institutions allegedly protected by the regulations–banks.
Gas prices are approaching $3 per gallon in Missouri and Oklahoma.
The Housing Bubble in 4 Easy Steps, from the Mises Institute:
As always, economist Thomas Sowell puts the current situation into perspective - here are some key points from his most recent column "Bailout Politics":
1. Looking backward, home buyers paid too much, and lenders wrote contracts that exposed them to the homeowners’ losses. With home values declining by something like $2 trillion, we are in a mad scramble to divide the loss between homeowners, lenders and taxpayers. In the meantime, homeowners and lenders are exercising their last line of defense: denial. Many homeowners are refusing to sell their homes at prices that can attract buyers. Many lenders are refusing to sell their mortgage-backed securities at prices that can attract buyers. All this denial gets in the way of the normal price discovery process, leaving stranded assets held by owners who think they are worth more than potential buyers.
New banking data were released today from the Federal Reserve on bank loan volume through September 17 (for weekly data and August for monthly data), showing that "Total Loans and Leases at All Commercial Banks" reached an all-time high of $7.026 trillion (reported weekly) in mid-September, going over $7 trillion for the first time in history (see graph below).
In May, I posted about tariffs on hangers from China, enacted to protect the only remaining domestic supply of hangers, M&B Hangers in Leeds, Alabama, and to "punish" Chinese manufacturers for "dumping."
Barney Frank: "The private sector got us into this mess. The government has to get us out of it."
Based on a suggestion yesterday from a student in my MBA class (MGT 551 Business Economics), the graph above shows the declining share of disposable personal income (data) spent on food (data), clothing (data), and shelter (housing and household operation) since 1929. From a high of almost 59% in 1933, the percent of disposable income spent on food, clothing and shelter today has continually fallen, and today (2007) is only 33%.
In the 1980s, the government did not need a strategy to decide which bad loans to take over; it dealt with anything that fell into its lap as a result of a thrift bankruptcy. But under the current proposal, the government would go out and shop for bad loans. These come in all shapes and sizes, so the government would have to judge what type of loans it wants. They are illiquid, so it's hard to know how to value them. Bad loans are weighing down the financial system precisely because private-sector experts can't determine their worth. The government would have no better handle on the problem.
For decades, starting with Jimmy Carter's Community Reinvestment Act of 1977, there has been bipartisan agreement to use government power to expand homeownership to people who had been shut out for economic reasons or, sometimes, because of racial and ethnic discrimination. What could be a more worthy cause? But it led to tremendous pressure on Fannie Mae and Freddie Mac -- who in turn pressured banks and other lenders -- to extend mortgages to people who were borrowing over their heads. That's called subprime lending. It lies at the root of our current calamity.
Uncovering the roots of the disastrous home mortgage bubble that popped last year will keep economic historians busy for decades. Yet, one factor has so far been largely overlooked: the bipartisan social engineering crusade to drive up the rate of homeownership by handing out more mortgages to minorities.
Intrade. Is it over for McCain?
Politicians will bend to any new wind that blows through, but this past week of financial turmoil has shown there's a strong whiff in the air for the values of the greatest generation. This was the 20% generation. In the post-war years, young couples knew they'd somehow have to save 20% of the down payment on a home mortgage. That's thrift, an archaic word I think is still in most dictionaries.
So far, Main Street has shown a surprising amount of resiliency given the problems of Wall Street. Even if the economy eventually succumbs to recession, as now appears more likely, it will bounce back before long. It always has.
The chart above shows spending on food and clothing as a percent of disposable personal income back to 1929, falling from more than 1/3 of personal income in the 1930s and 1940s to only 13.48% by 2007.
Bottom Line: The good old days are now, and it's nothing like the Great Depression. Nothing.
The chart above is based on data from the USDA's Economic Research Service showing "Food expenditures by families and individuals as a share of disposable personal income," from 1929 to 2007. In the entire history of the U.S., it's only been in the last eight years that the percent of income spent on food for Americans was in single digits - since 2000 it's been below 10%. In all previous years, spending on food was in double-digits, and in most years from 1929 to 1952 it was above 20%.
While many pundits are pointing to corporate greed and a lack of government regulation as the cause for the American mortgage and financial crisis, some analysts are saying it wasn't too little government intervention that cased the mortgage meltdown, but too much, in the form of activists compelling the government to pressure Freddie Mac and Fannie Mae into unsound – though politically correct – lending practices.
It’s one of the hidden success stories of the Clinton era. In the great housing boom of the 1990s, black and Latino homeownership has surged to the highest level ever recorded. The number of African Americans owning their own home is now increasing nearly three times as fast as the number of whites; the number of Latino homeowners is growing nearly five times as fast as that of whites.
Based on data from the St. Louis Fed, Total Consumer Credit Outstanding reached an all-time high of $2.572 trillion in July (see chart above). The way the banking system is described in the media, you'd think the supply of commercial bank credit has completely dried up, e.g. do a Google News search for "credit crunch" and you get almost 45,000 results. At least for consumer credit, and at least through July, the supply of consumer credit has never been higher.
1. Barney "Big Un" Baumgartner of Windblown, Wyo., invited the Federal Reserve and the U.S. Treasury Department to take over his business, The Big Un 24 Hour Tow Service and Trophy Taxidermy. He'd be willing to let the government have 80% of his business for a quick cash infusion. He thought something in the neighborhood of $1.8 million should do the trick. That would be enough to gas up his two tow trucks, get some new taxidermy stuffing and clean up that overdue account at the Number 10 Saloon and Casino over in Deadwood, S.D.
What's clear is that a bunch of financial institutions have made mistakes and lost money. What's unclear is why anyone (other than the owners and managers) should care. People make mistakes and lose money all the time. Restaurants fail, grocery stores fail, gas stations fail. People pick the wrong stocks, they buy the wrong cars, and they marry the wrong spouses without turning to the Treasury for bailouts.
Thomas Sowell breaks it down:
1. LA TIMES (9/26/2007) -- Affirmative action enables hundreds of minority law students to attend more elite institutions than their credentials alone would allow. Data from across the country suggest that when law students attend schools where their credentials (including LSAT scores and college grades) are much lower than the median at the school, they actually learn less, are less likely to graduate and are nearly twice as likely to fail the bar exam than they would have been had they gone to less elite schools. This is known as the "mismatch effect."
The UAW doesn't discriminate against foreign car companies, why should McCain or you?
Anyone who has not lived in a liberal inner suburb such as Arlington, Virginia may have a difficult time understanding the emotional freight that the phrase "affordable housing" carries in local politics. It is an issue on which candidates campaign, on which activists make officeholders feel guilty and on which a remarkably forceful social service coalition, anchored by churches and nonprofit organizations, can amass lots of political power. Nobody is ever sure exactly what "affordable housing" means, but nobody running for office ever wants to be on the wrong side of it.
From the NY Times on September 30, 1999: "Fannie Mae Eases Credit To Aid Mortgage Lending":
How the political obsession with "affordable housing" and "home ownership" backfired:
Why then is there such a mess in the financial markets? Much of that mess is due to the very people we are now turning to for solutions-- members of Congress.
When congressional leaders and presidential candidates Obama and McCain call for more government oversight of our struggling financial institutions, go ahead and laugh. You know you want to. The idea that the private sector would be in better shape today if only we demanded more oversight from our politicians is preposterous. Our politicians wouldn't recognize "fiscal responsibility" if it spat in their ears.
The Michigan Department of Labor and Economic Growth's Michigan Talent Bank specializes in "bringing people and jobs together," but there's just one problem: There are almost 750,000 people in Michigan looking for jobs (or at least that's the number of resumes available), but only about 34,250 jobs available, a ratio of almost 22 job seekers per job available.
The chart above (click to enlarge) of Pakistan's Karachi SE-100 Index (data from Global Financial Data) shows what happened when short selling was banned on June 23: a huge but brief 1,300 point rally for three days, followed by a slow 3,250 point market collapse, a drop of more than 26% in less than three months.