"Trickle Down Hardball"

Progeny of "Trickle Down Economics"

Want today's housing market -- at least in many locales -- in a (sober) nutshell?

Here it is:

Home Sellers now divide into two groups: those with equity, who can afford to sell; and those who are underwater, and can't.

The ones who can afford to sell, are -- but are having to seriously discount their price to do it.

Those who are underwater need to do a short sale, which for the most part banks are blocking.

When that happens, most underwater homes ultimately become bank-owned foreclosures.

Step 2

Home Sellers who can sell further break down into two groups: those who turn around and buy something else; and those who don't (either because they become renters; move to assisted living, if they're older, etc.).

The former group, having just been on the receiving end of a "hardball market," feel no compunction about playing hardball themselves as Buyers.

So, they do.

They make aggressive offers on the properties they're interested in, and drive very hard bargains.

Multiply this dynamic by millions of Buyers and Sellers nationwide . . . and you've got a pretty fair understanding of today's housing market.

The Trickle-Down Case for Indulging Wall Street

Colbert Interview with Eliot Spitzer

I'm not a Stephen Colbert regular, but I did catch his interview the other night with "disgraced former New York Governor Eliot Spitzer" (that's now Spitzer's official moniker, by the way).

Colbert's cut-to the chase question: even if Wall Street is full of inept crooks and greedheads, as most everyone outside of Wall Street now agrees, isn't short-circuiting their gaudy gravy train just a case of "cutting off our noses to spite our faces?"

In other words, Colbert asked, don't Wall Street-types spend their multi-million dollar bonuses on drivers, cooks, tailored clothes, second (and third, and fourth) homes, expensive restaurants, etc. ???

And if that spending vanished, wouldn't all those other individuals and businesses suffer?

I have a two-part answer to that.

First, to the extent that it's necessary to stimulate our economy (to offset the catastrophic financial damage Wall Street engineered), my preferred instruments for doing so . . . would hardly be the very same people who caused the catastrophe.

Not only does that offend any moral person's sense of justice, it literally encourages more of the very same behavior!

Personally, I would like to now spend a few years without the term "moral hazard" dominating the Op-Ed pages and blogosphere.

Give it to "the Bernie's!"

If the goal is simply to put money in the hands of people who will spend it, why not pluck Bernie Madoff, Bernie Ebbers (Worldcom), Jeff Skilling (Enron), and other scoundrels from their jail cells and bestow upon them the billions being showered on Wall Street?

To paraphrase Ben Stein's stump speech, let's instead lavish the money on the people who are the true backbone of this country: the servicemen and women serving abroad, and especially their families sacrificing back home.

And while we're at it, let's earmark a little of Wall Street's money to care for soldiers who've sustained life-altering combat injuries.

Second, it's far from clear that handing out financial "goodies" -- to anyone -- is advisable.

Just as there's no free lunch, there's no such thing as "free stimulus."

Basically, it's just added to our national credit card -- a credit card balance that already comes to something like $35,000 for every man, woman, and child in the U.S.

If open-ended, poorly targeted stimulus (deficit) spending worked, Japan's economy would be the world's most robust now.

Instead, Japan is entering its second (or third) "lost decade," depending on who's counting.

The bottom line?

Saddling our economy with crushing debt to enable -- and then mitigate the consequences of -- still more Wall Street greed and misbehavior is to compound one mistake with a second, equally big one.

Floyd Norris: 'Save This Store'

Trickle-Down Economics, Wall Street-Style

Floyd Norris, one of my favorite financial writers, ran a post earlier this week noting a recent London jewelry store burglary where the average bauble cost $1.5 million.

That prompted this observation, "It will be hard for stores like this to stay in business if governments refuse to support bankers in the style to which they have become accustomed."

In response, I posted this comment:

I used to think that obscene Wall Street pay would finally be stopped when shareholders stood up and said “no more.”

Then I thought it would be stopped once Wall Street had effectively emptied the government’s coffers.

Now I think it will stop only when the government’s coffers have been emptied, its debt is maxed out, and no creditor countries will lend it any more.

How far away is that point?

Do we really want to find out?

--Ross Kaplan, Comment on "Save This Store"; Floyd Norris, The NY Times (8/12/09)

The beauty of the Internet is that there's always a "last, last word," after the previous "last word."

Here's mine:

I'm starting to think that Wall Street VIP's will be obscenely paid until the last sun in the last solar system flames out.

Escalator Short-Circuit

"Trickle Down" Economics to 'Bubble Up'?

Soft drink aficionado's may recall "Bubble Up" as a long-ago rival to 7-Up.

It may also be the best label for today's, post-crash, post-Trickle Down economy.

Notwithstanding the latest, dire Case-Shiller statistics, Realtors in many cities nationally are reporting more and more instances of multiple offers for deeply discounted, bank-owned foreclosures.

The phenomenon is the logical result of several, reinforcing developments: record low interest rates; a passel of incentives aimed at new home buyers, ranging from the federal government's $8,000 tax credit to local programs that in some cases are even more generous; and dirt-cheap housing prices that compare favorably with the rental market, even after factoring in the fix-up costs associated with many foreclosures.

Which begs the $64,000 question: will emerging strength in the bottom rungs of the market "bubble up" to the middle and higher rungs of the housing market -- and indeed, the overall economy?

The short answer: possibly, but not directly, and not in the way(s) you'd necessarily expect.

Escalator Short Circuit?

If the housing market is an escalator, anything that strengthens the lower rungs theoretically benefits the higher rungs, too.

That's so because entry-level Buyers allow "move-up" Buyers to, well, move up. In turn, owners of middle-bracket homes who can suddenly sell their homes can graduate to Buyers of upper bracket housing (assuming their jobs and credit scores hold up in the Recession -- see below).

Unfortunately, today the linkages between the various parts of the housing market are attenuated, for three reasons.

One. By definition, banks, not individuals, own the foreclosed homes being snapped up. As a result, when a deal closes, the Seller doesn't automatically become a Buyer for another home. Rather, the bank-owner simply credits "cash" on its books and debits "REO" (real-estate owned).

Assuming that the home is sold below the banks' carrying cost for the home -- a safe assumption -- the difference is booked as a loss. And a loss diminishes the bank's capital, and with it, presumably, its ability (and appetite) to lend.

Two. Financing costs for upper bracket homes are still abnormally high. In a market where "conforming" loans (under $417k) can be had for under 5%, jumbo loans still cost around 6.5%. The difference on a million dollar home: an extra $10,000 a year.

Three. A 20% down payment on that $1M home -- preferred by lenders, and the threshold for avoiding mortgage insurance -- is a cool $200,000. Assuming that that money was in stocks, it's likely to have shrunk to something like $150k today, even after the recent stock market rally.

In a tighter credit environment, closing that gap with a bigger mortgage may not be feasible.

None of the foregoing is to say that strong activity in the foreclosure market isn't beneficial. It's just that the benefits are indirect, and not necessarily immediate.

Specifically, shrinking the supply of foreclosures on the market removes a major depressant on home prices; outlays for home repairs, contractor labor, etc. increase economic activity and improve the housing stock; and creating a new class of homeowners with hard-earned "sweat equity" bodes well for future "move-up" housing demand (today's sweat equity is tomorrow's down payment).

Now if there was only a name for this new economic era that didn't have the word "bubble" in it . . .