Catastrophe hath Greenspan wrought

[FRED]

Catastrophe hath Greenspan wrought

What happens when you let ideology determine banking policy and allow in the name of free markets an out-of-control credit machine to run full tilt for years on end pouring out bad debt into the economy like water from a fire hose?

All housing price declines in CA to date are asset inflation based price declines. The asset price inflation was created by excess credit in the form of ARMs when the Fed Funds rate was dropped to close to 1% and LIBOR, on which ARMs are based, followed it down to 2.5%. This drove mortgage rates down along with monthly payments and credit standards allowing more buyers to afford higher home prices. As the credit is withdrawn, homes remain un-affordable even as prices decline because monthly mortgage costs and credit standards are rising – the asset bubble process in reverse.

Barely half the ARMs made during that period have reset. Deflation of the credit boom portion of the 2002 - 2006 asset price inflation has a long way to go.

Yet all this price decline to date has occurred while the CA economy was growing and unemployment was either flat or falling. As of Jan. 2008, unemployment is rising in 58 of 58 counties in CA.

Home prices are correlated to incomes. The ongoing asset price deflation will be amplified by falling incomes as unemployment rises as the recession develops. The chart below shows the correlation between rising unemployment and falling housing prices in the past and projects the impact of rising unemployment (annual rates) going forward.

The unemployment situation in California is not yet as bad as in 1991 but will be considerably worse than in 1991 by the middle of 2009.

Here's an animation that shows the CA unemployment trend county by county, month by month, Dec. 2006 to Dec. 2007. Dark blue indicates rising unemployment.

Lights out in California

[jimmygu3]

Re: What doom hath Greenspan wrought?

Oh, jeez, now the British have even more of a reason to feel superior. Over here in the States we all live in trailer parks and camp out in vacant lots, burning piles of garbage to keep warm. And due to our lack of national healthcare, it appears that many of us have even worse teeth than the Brits. :rolleyes:

I like the BBC, but this story paints a picture that is not representative of America. I think the Soviets used to show propaganda films of our homeless people, too, implying that it was the norm.

If people were defrauded into a time-bomb mortgage, let's prosecute the offenders and award compensation to those who were injured. If people just made a crappy choice and didn't ask questions or read the papers they signed, they are stuck with the consequences of their actions. They are also eligible for unemployment insurance, welfare, food stamps, government housing, and the help of charitable organizations.

I see crowds of people outside my local Home Depot looking for manual labor work in construction and landscaping. They are 99% latino and my guess is that most are here illegally. But they are not too proud to stand out there and they are willing to work hard. If I were homeless, I would get there at 7 in the morning and explain to the first contractor that came by that I am an American citizen and that I will bust my ass to prove to him that I'm the best worker he's ever seen for $10 an hour. $80 to $100 a day, 6 days a week adds up to almost $2000 a month. More than enough to get an apartment, some basic necessities, and save for a car. Maybe even enough to 'rent to own' a foreclosed-on house!

But many Americans think they are above that and choose the self pity route. I have talked to many homeless people and they are almost without fail unwilling to put in a real day's work. Back when I was making $8/hour and living in a nice apartment, I talked to a homeless guy who said he quit his $15/hr job because he deserved at least $20. Choices and consequences.

"Surly" Jimmy

[FRED]

Re: What doom hath Greenspan wrought?

Oh, jeez, now the British have even more of a reason to feel superior. Over here in the States we all live in trailer parks and camp out in vacant lots, burning piles of garbage to keep warm. And due to our lack of national healthcare, it appears that many of us have even worse teeth than the Brits. :rolleyes:

I like the BBC, but this story paints a picture that is not representative of America. I think the Soviets used to show propaganda films of our homeless people, too, implying that it was the norm.

If people were defrauded into a time-bomb mortgage, let's prosecute the offenders and award compensation to those who were injured. If people just made a crappy choice and didn't ask questions or read the papers they signed, they are stuck with the consequences of their actions. They are also eligible for unemployment insurance, welfare, food stamps, government housing, and the help of charitable organizations.

I see crowds of people outside my local Home Depot looking for manual labor work in construction and landscaping. They are 99% latino and my guess is that most are here illegally. But they are not too proud to stand out there and they are willing to work hard. If I were homeless, I would get there at 7 in the morning and explain to the first contractor that came by that I am an American citizen and that I will bust my ass to prove to him that I'm the best worker he's ever seen for $10 an hour. $80 to $100 a day, 6 days a week adds up to almost $2000 a month. More than enough to get an apartment, some basic necessities, and save for a car. Maybe even enough to 'rent to own' a foreclosed-on house!

But many Americans think they are above that and choose the self pity route. I have talked to many homeless people and they are almost without fail unwilling to put in a real day's work. Back when I was making $8/hour and living in a nice apartment, I talked to a homeless guy who said he quit his $15/hr job because he deserved at least $20. Choices and consequences.

"Surly" Jimmy

Ej writes in:

Interesting discussion. As part of our ongoing effort to de-brainwash our members, I offer the following.

Agree that the BBC is dramatizing here, as is the way of the British media. No, not everyone in the US is living in a tent but then the story doesn't say that, either. If you travel you will not see citizens living this way except in 3rd world countries. To a British or European viewer the idea that a developed country has any of its citizens living this way is shocking. It says that the US has no fundamental respect for its citizens as human beings and in matters of public policy is totally impractical. What European and developed Asian countries have learned over the centuries is that the political economy needs to provide a floor below which citizens cannot fall or else the whole society suffers; at a certain point the health and well being of a nation's citizens is a public good. That floor cannot be too comfortable, of course, so that no citizen wants to be at that level for long. The floor must come with strings attached, and with a powerful social stigma, but if no floor is provided the next development is a crime, gangs, and worse.

Most people who are "homeless" are mentally ill. Lack of a home is not their problem; put them in one on their own and they'll probably burn it down. They are the result of deinstitutionalization, yet another bad idea based on pedantic free market ideology. The report Deinstitutionalization A Rocky Road To Nowhere says: "Deinstitutionalization, the name given to the policy of moving people with serious brain disorders out of large state institutions and then permanently closing part or all of those institutions, has been a major contributing factor to increased homelessness, incarceration and acts of violence." Further, the fact that many "homeless" prefer life on the street over institutionalization not relevant from a policy standpoint. As a friend told me recently after she came across a "homeless" man urinating in front of her building the other day, "You know, this is not working for him and it's not working for me."

Agree that young Americans are not willing to work for the kind of wages and under the poor working conditions that are acceptable to many immigrants from 3rd world countries. One way to solve that problem is to turn the USA into a 3rd world country too so that we have parity in poor jobs and working conditions. That is the policy road that we are on. In the future if we keep at current policies we can look forward to seeing our children in line with immigrants from 3rd world countries fighting over dangerous jobs that pay nothing. I don't think that's what we want.

It's natural to compare one's personal experience to others'. Members here are at least well educated enough to write and express themselves. I seriously doubt that many of the people in the tent camp shown in the video are as well educated and so cannot compete as effectively in the job market. I but I bet that for the most part the people shown in the video are losers in the sperm lottery; they were not born to strong families and communities and have operated the whole of their lives with major educational and developmental handicaps. A society that operates as if everyone was born on 3rd base only reinforces the problems of inequality; it's the flip side of communistic policies that attempt to produce equality of result, a pernicious idea that guarantees the lowest common denominator dominates. Balanced policy produces incentives for intense competition while at the same time maintaining the public good of a minimum level of health and promoting social mobility.

[jimmygu3]

Re: What doom hath Greenspan wrought?

Ej writes in:

Interesting discussion. As part of our ongoing effort to de-brainwash our members, I offer the following.

Agree that the BBC is dramatizing here, as is the way of the British media. No, not everyone in the US is living in a tent but then the story doesn't say that, either. If you travel you will not see citizens living this way except in 3rd world countries. To a British or European viewer the idea that a developed country has any of its citizens living this way is shocking. It says that the US has no fundamental respect for its citizens as human beings and in matters of public policy is totally impractical. What European and developed Asian countries have learned over the centuries is that the political economy needs to provide a floor below which citizens cannot fall or else the whole society suffers. At a certain point the health and well being of a nation's citizens is a public good. That floor cannot be too comfortable, of course, so that no citizen wants to be at that level for long. The floor must come with strings attached, and with a powerful social stigma, but if no floor is provided the next development is a crime, gangs, and worse.

Most people who are "homeless" are mentally ill. Lack of a home is not their problem; put them in one on their own and they'll probably burn it down. They are the result of deinstitutionalization, yet another bad idea based on pedantic free market ideology. See Deinstitutionalization A Rocky Road To Nowhere: "Deinstitutionalization, the name given to the policy of moving people with serious brain disorders out of large state institutions and then permanently closing part or all of those institutions, has been a major contributing factor to increased homelessness, incarceration and acts of violence." Further, the fact that many "homeless" prefer life on the street over institutionalization not relevant from a policy standpoint. As a friend told me recently after she came across a "homeless" man urinating in front of her building the other day, "You know, this is not working for him and it's not working for me."

Agree that young Americans are not willing to work for the kind of wages and under the poor working conditions that are acceptable to many immigrants from 3rd world countries. One way to solve that problem is to turn the USA into a 3rd world country too so that we have parity of poor jobs and working conditions. That is the policy road that we are on. In the future if we keep at current policies we can look forward to seeing our children in line with immigrants from 3rd world countries fighting over dangerous jobs that pay nothing.

It's natural to compare one's personal experience to those of other people. Members here are at least well educated enough to write and express themselves. I seriously doubt that many of the people in the tent camp shown in the video are as well educated and so cannot compete as effectively in the job market. I but I bet that for the most part the people shown in the video are losers in the sperm lottery; they were not born to strong families and communities and have operated the whole of their lives with a major educational and developmental handicaps. A society that operates as if everyone was born on 2nd base only reinforces the problems of inequality; it's the flip side communistic policies that attempt to produce equality of result, a pernicious idea that guarantees the lowest common denominator dominates. Balanced policy produces incentives for intense competition while at the same time maintaining the public good of a minimum level of health and promoting social mobility.

EJ,

I totally agree with your point about needing a floor or safety net that's not too comfortable. That's why I think Social Security is a good and essential program, and why the Gingrich/Clinton welfare reform was good (back when political compromise was in our vocabulary). As far as the mental illness side of things goes, I would hope a guaranteed healthcare program would provide the mental healthcare that some homeless people need.

It's been a few years since I have been to or lived in Europe, but I don't remember it being devoid of homeless people (e.g. Amsterdam, Zurich, London). Danes and Brits I know talk casually about getting out of school and going on the dole for a few months until the government makes them get a job. Apparently their 'floor' comes with an air mattress. And with a Euro-style welfare state comes higher taxes and higher unemployment. My hope for the US is that we cherry-pick the best parts of their safety nets, perhaps creating a floor that's not quite so comfy, but better than the status quo.

As far as the baseball analogy, I never asked my dad, but I'm pretty sure I wouldn't have been born at all if he had only gotten to second base. ;)

Jimmy

[World Traveler]

Re: What doom hath Greenspan wrought?

This is an interesting thread. I went through a period in my early-mid '20's of drifting, learning to cope with adult life. I was very poor, had moved to a city where I initially knew no one, and was struggling to pay the bills on a series of low-wage jobs.

I pulled myself back up by attending the U of Houston and getting an MBA/Computer Science specialty.

But there were many hidden advantages that enabled me to do that.

To start, I was unmarried and had no children. The responsibility to care for and support child(ren) really limits one's options. It was the 1970's, so tuition at state universities was very cheap by today's standards and I took on very little debt. I already had an undergraduate degree, thanks to a stable family background and well-meaning parents. The job market in the 1970's was much better for starting out than is the case now, so I was immediately able to get and keep good jobs.

Having lived "in the pits", I find it very hard to judge today's underclass. Many come from poor, disfunctional familes, and the government is much less willing to assist or provide a safety net than it was during my days of living in the pits.

I've speak Spanish and have been to Latin America many times. About 2000, I started seeing the parallels and America's drift toward a Latin American scenario.

It's a bad place to be. The economy is controlled by an elite for their own benefit, with a small middle-class hanging onto their coat-tails for dear life. Not even the rich and well-to-do are safe, their biggest fear is kidnapping for cash (I heard MANY sad stores in Guatemala and Peru).

The poor are exploited and they know it ( I've talked to many poor there). So they are resentful and society is prone to expolsions. The streets are not safe due to so many poor who see a life of crime as better than the alternative of hunger. Everyone despises the cops who are so poorly paid they turn to graft and corruption.

Bottomline, Latino scocieties are basically unstable and prone to periodic blow-ups. No the kind of future we want.