Mish's Global Economic Trend Analysis

Yet Another Piss Poor Idea to Stimulate Housing: Tax Breaks for Rental Units Proposed by Peter Orszag, Vice Chairman at Citigroup Global Banking
Regarding Foreclosures: How Dark will Social Mood Become?
Ben Bernanke Fans Fires of Protectionist Legislation to Senate Joint Economic Committee; Expect Global Depression if Obama Signs On

Yet Another Piss Poor Idea to Stimulate Housing: Tax Breaks for Rental Units Proposed by Peter Orszag, Vice Chairman at Citigroup Global Banking

Posted: 06 Oct 2011 09:17 PM PDT

It is depressing to see an endless parade of foolish and/or self-serving ideas to "fix" the housing market.

Here is yet another one, this time from Peter Orszag, vice chairman of global banking at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration.

Please consider the self-serving plea of Peter Orszag posing as Boomberg news: U.S. Can Rent Its Way to a Housing Recovery

No matter what the government might try to do to break the housing-economy cycle, the deleveraging process will still be painful and take some time. But that's not an argument against action; just because a headache can still hurt some even if you take aspirin doesn't mean you should skip the aspirin. One thing the Obama administration could do now -- probably with Republican support -- would be to attack the oversupply of housing stock by allowing a tax write-off for investors who buy empty properties and rent them out.

Plea to Help Citigroup Unload Property

It should not be difficult to read between the lines. This is nothing more than a plea to help Citigroup. I am sick and tired of tax breaks for anything to promote anything, especially self-serving interests of banks.

Seen vs. Unseen

Orszag only looks at the "seen" (alleged help for housing but in reality nothing more than unwarranted help to Citigroup to unload distressed properties)

Government interference in the free market always creates distortions and for that reason alone government ought to get the hell out of the way.

One easily identifiable "unseen" (except to those like Orszag who really don't give a damn) is that tax breaks for rental houses would put multi-unit rental property owners at a disadvantage. Many of them are struggling already.

The second easily identifiable "unseen" (except to those like Orszag who really don't give a damn) is that multi-family unit construction is on the rise. Orszag's proposal might squash that.

The third easily identifiable "unseen" (except to those like Orszag who really don't give a damn) is that the best thing for housing (but not Citigroup) is for home prices to fall to the point where there is genuine demand.

Actions designed to prevent prices from going where they need to go (just to benefit banks like Citigroup and Bank of America) are the wrong thing to do.

I am quite sure I missed more "unseen" problems as well. Thus I have a far better idea than Orzag's. Let's stop all this government intervention in the free markets and stop all the self-serving bank bailout proposals in disguise at the same time.

Extreme Positions Wrong

At one extreme we have self-serving "help for bank" schemes proposed by Peter Orszag and the bank lobby. At the other extreme we have socialist insanity proposed by the likes of Michael Moore. Both extremes are wrong.

Best Thing to Do is Nothing

The best thing to do is clear: nothing. The free market will solve this on its own accord.

Moreover, were it not for the Fed manipulating interest rates, the SEC giving its blessing to the big three rating agencies, Citigroup and other banks hiding assets off balance sheets in a massive use of leverage, and absurd promotion of the "ownership society" by president Bush, Barney Frank, and nearly everyone in Congress, we would not be in this mess in the first place.

Who Should Bear Consequences for Economic Decisions?

I finished the above post hours ago and just received an email from a reader saying the same thing in a different way. Thomas Doniger of Doniger & Fetter writes ...

Hello Mish

Of late, the columnists and bloggers seem to have forgotten that assuming a mortgage or refinancing one's home is a voluntary economic decision. Those who are "underwater" are there as a result of a decision they made. These people did not enter these transactions in reliance on any disposition or securitization of their mortgage and cannot complain they were misled by the same. Why should the taxpayer or society as a whole share the risk these people took? Would the taxpayers or society as a whole have shared in the upside of these investments if the real estate market had continued to rise and the mortgagors sold their properties at a substantial gain? No bail out is appropriate or even fair. Most home mortgagors were not genuinely deceived or the victims of fraud -- they bet on a rising real estate market and lost. That risk, over which society had not control, should not be socialized.

Thomas Doniger
Doniger & Fetter
Los Angeles, CA

Those Who Take Risks Should Face the Consequences (Good or Bad)

A couple of bloggers - including me - have never wavered from the Libertarian stance that the best thing to do is nothing.

Otherwise, Thomas is correct. History proves that government intervention invariably makes matters worse.

Philosophically, morally, and ethically those who take risks should be the ones who pay the price. That applies to Wall Street, to Main Street, to banks, to bondholders, and to homeowners foolishly buying property at inflated prices.

In regards to homeowners, the law provides an exit, actually several exits: Bankruptcy, walking away, and short sales.

However, I repeat my advice: please consult an attorney who specializes in real estate law before taking any action. Laws vary state by state, and mistakes can be extremely costly.

Please see House is Gone but Debt Lives On; Expect Huge Surge in Deficiency Lawsuits for one of the things that can go wrong if you fail to seek proper legal advice.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Regarding Foreclosures: How Dark will Social Mood Become?

Posted: 06 Oct 2011 11:11 AM PDT

There were a number of interesting comments to my post "Does Anyone Really Know What is Going on with Foreclosures?"

Here are a couple in particular worth citing.

Greg Fielding writes ...

I'm in the business and, of the bunch, Laurie Goodman's analysis makes the most sense. And, she gets bonus points for having generally been right about all of this (unlike Zandi).

The bigger point is that the number today doesn't make any difference. If Uncle Sam can keep home prices propped up, then the total numbers could be smaller. But, if prices continue to slide, the total numbers could be far worse than even Lauri Goodman expects.

In the details of the Amherst report, she states that her 10.4M foreclosures assumes a 5% decline in prices. However, a 10% decline could trigger a "death spiral" where the number of foreclosures would be much greater.

Point is, social mood will drive this over the next 5 years, and it's impossible to say just exactly how dark social mood will become.

In response, Patrick Pulatie replied ....

The spiral is inevitable, with all things considered. Case Schilling predicts 17% further drop, and I think that is optimistic. In fact, I see much more of a drop, from 30-50% in many areas. Factor in further decrease in wages, the 3.5m excess units of housing, lack of new family formation, increasing deaths in the pre baby boom generation, and baby boom generation, lack of qualified buyers, and many other issues, and the spiral is real.

The government simply needs to get out of the housing business, privatize Fannie and Freddie with no guarantees, or let it fail, and quit trying to prop up prices. Let the market take care of business.

To which Greg Fielding responded

Agreed. The quicker Uncle Sam gets out of the way, the quicker we hit bottom and the quicker consumers can actually begin to recover.

Mish on Social Mood

Anyone correctly citing "social mood" in their analysis is going to get a closer look from me, especially if it's not done for that purpose.

Thus I invite you to read Why 1 in 5 homes with a mortgage could default in the coming years by Greg Fielding at the Bay Area Real Estate Trends blog.

How dark will social mood become?

I don't know, nor does anyone else. Much depends on protectionism, tariffs, and other misguided policy decisions by Congress and the Fed.

If Congress adopts misguided protectionist legislation on the Yuan (which in my opinion would raise prices and cost up to 2 million jobs), then social mood can get much darker than it already is. Please see Ben Bernanke Fans Fires of Protectionist Legislation to Senate Joint Economic Committee; Expect Global Depression if Obama Signs On for a discussion.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Ben Bernanke Fans Fires of Protectionist Legislation to Senate Joint Economic Committee; Expect Global Depression if Obama Signs On

Posted: 06 Oct 2011 09:10 AM PDT

The one and only thing former Fed chairman Alan Greenspan was consistently right about was free trade. In contrast, Fed chairman Ben Bernanke is fanning the fires of protectionism right where he can do the most damage, in front of the Senate Joint Economic Committee.

Please consider this short exchange between Senator Robert Casey Jr., Democrat, and Fed chairman Ben Bernanke.

Link if video does not play: JEC Hearing (10-4-2011) - Exchange Between Chairman Casey and Fed Chairman Bernanke on China

Bernanke Says Yuan "Undervalued by Significant Amount"

Casey repeatedly tried to get Bernanke to quantify the magnitude of the effect the undervalued Yuan has on the US economy, jobs, and the trade deficit.

Bernanke ducked the question directly but did cite several studies by the IMF and various think tanks that the "Chinese currency is undervalued by a significant amount."

Bernanke Says "China Blocks Normal Recovery Process"

When pressed about jobs, Bernanke did not answer directly.

However Bernanke did state "The concern now is the Chinese currency policy is blocking what might be a more normal recovery process in the global economy. In particular we now have a two-speed recovery where advanced industrial countries like the US and Europe are growing very, very slowly and emerging-market economies are growing quite quickly. In a more normal, balanced recovery would have some more demand shifted away from the emerging-markets towards the industrial economies. The Chinese currency policy is blocking that progress."

Distortions Everywhere

Bernanke is partially correct. However, so is China when China accuses Bernanke and the Fed of manipulating interest rates. Moreover, actions by Japan, the ECB, and the Swiss National Bank are all "distortionary".

So were the actions by the Fed and Congress to bail out banks. One dozen wrongs do not make a right, and Bernanke failed to point those things out. Moreover, and more importantly Bernanke failed to warn about the consequences of foolish protectionist legislation.

Shades of Smoot-Hawley

As a self-proclaimed "student of the great depression" it certainly would have been fitting for Bernanke to mention something about Smoot-Hawley and how tariffs greatly magnified problems in the Great Depression.

Instead, Bernanke gave Casey all the ammo he needed to ram through ill-advised legislation. The fact of the matter is the tariffs that Senator Casey seeks will not bring a single job back to the United States.

Depending on the exact nature of the bill and how carried away Congress gets I estimate such legislation will cost somewhere between 500,000 and 2 million jobs minimum. Please see Trade War Threat Looms Once Again; Senate Takes Up Bill to Punish China for Manipulating Currency; How Many Jobs Would Tariffs Create? for my rationale.

I wrote that piece on October 2, wondering if such legislation might pass. Thanks to the complete lack of common sense by Ben Bernanke and his fanning of protectionist legislation instead of defusing it, I now think passage is odds on. If so, expect a global depression if Obama signs the bill.

Solution to the Global Trade Problem

I presented my solution to the trade dilemma on July 8, in Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold's Honest Discipline Revisited

For a followup please see Global Trade Wars, Smoot-Hawley, and Peak Oil Followup to 12 Predictions from Michael Pettis

By the way, all this talk about "fair trade" is nothing but an excuse to protect favored industries. The US and Europe with their agricultural and energy policies are among the worst.

Lower prices are a benefit to all consumers. Lower prices also provide jobs to the industries that transport and stock those goods, as well as to the industries (restaurants etc.) that serve the transportation workers. No jobs will be saved by forcing prices higher. Those are the simple facts of the matter.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Thursday, October 6, 2011

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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