Market Economics

Nolm left an interesting comment about the mortgage "bail-out" situation. Here's my view on American economics.. with the caveat that the only economics class the university requires engineering majors take is Econ 101. K?

I did get an A in the class though.. lol

Nolm said...
When I read your opinion on this issue... my first thoughts are that it rings quite true and my gut reaction is I'd be pissed atF my tax dollars helping others out of their naively self inflicted situations.

I don't actually think the cause of the situation has anything to do with the solution. Some people are irresponsible. Some people just honestly had a bad situation. In terms of policy, it's impossible to seperate any particular class of borrower.

I'm not so interested in preventing undeserving people from benefitting from my tax dollars. I'm more interested in involuntarily having part of my income going to people who cannot pay back money that they borrowed - for whatever reason they can't pay it back.

Fundamentally, what sort of economic system does this nation have? That's the bottom line.

I'm going to play devils advocate here for a minute...
...and ask you to articulate on what I could say are conflicting ideologies:

Tom's Position 1 (as interpreted by yours truly): Higher earners should accept a higher tax burden for the greater good of society. To paraphrase some of your posts as I've read them 'once you're wealthy you're wealthy... and everything over a certain threshold is semantics'. You cite yourself and John's situation, with your Friday Fine Dining and semi-seriously eyeing off 911's and Audi R8's. You can afford comfortable lifestyles and high quality leisure activities. You compare this to your Donald Trump's and Tiger Woods' of the world and ask what's the tangible difference – in quality of life terms- is in getting $1 million, $10 million or $100 million per year after tax?

This is sort of a tangential point, but it's come up in a different way recently (unrelated to your comment). It's still somewhat related, so I should probably spell it out.

When I post about things we do, or things we're considering, I'm not "bragging" in any sense, nor trying to rub anybodies nose in anything. It's simply what it is, and I try to be clear about how it all happens... and it all happens because of John - not me. I'm a garden variety code monkey, and while I do pretty well, comparatively speaking, John is the big fish.

We're also very conservative financially, believe it or not. Are we actually considering 911's or R8's? No.. not really. We (and by we, I mean John) could go write a check today and head off on a road trip, but we are somewhat financially paranoid... John more than I probably. When I post about those things, it's more a playful thing than anything else, and something of an inside joke between me and John.

We live way way way below our means, and that's for a reason. We're not completely hording money, and we do like to splurge on meals and vacations and such, but you don't get to this position in the first place by being reckless financially. We want to retire completely in 10 years, instead of going nuts now and having to work into our 60's.

Thing is, there needs to be a balance, and I think we're erring a bit on the conservative side. Dying with a lot of money is a waste in my view. Being sensible (as nebulous as that term is) to balance planning for the future with enjoying life now seems like a good idea. That's why I do things like post pictures of cars and such. John reads my blog (obviously), and the way you get him to do things is by incremental persuasion.

Yes, wealth over a certain amount is semantics. I totally believe that to be true, having been in a position where I had literally zero money, to where I really have no concern about money.

So, should I not post about anything that we think about, consider, or do, because of the way it appears to other people who read this? I don't see why not.

And the house? That's totally serious. I think if we (and by we, I mean John) can swing it, why not establish the semantical lifestyle now?

When I met John, he was far worse than he is now, in terms of being financially conservative. He was living in a 1100 sq/ft 3 bedroom house that was built 60 some odd years ago. I helped push him to buy a nicer house, and it is quite nice, and it did nearly make him have a nervous breakdown... but he did buy it, and will make a nice profit if/when he sells it. It just doesn't work for the sort of lifestyle that I think we can, and should, have.

I can't make him do anything he doesn't want to do, but hopefully we can figure out that balance between being fiscally irresponsible and ending up old and poor, and enjoying life while we're young enough to take advantage of what money can do. John works insane hours, and has been for quite a few years, and it would suck if he worked himself into an early grave without even taking full advantage of what he's earned... and honestly, it wouldn't suck for me either. I honestly would like a 911 Turbo.. LOL

This blog isn't all politics and religion.. it's personal too, and I try and make it interesting, even if I fail a lot at it. I'll probably post about cars and houses and vacations and world class dinning. It's not intended to create any sort of class distinction. It's just talking about what we're doing, and what we're thinking about. Some people understand that, some don't.

More on topic, do I think we should pay more in taxes than lower income people? Sure, and it's true.. paying a bit higher rate in taxes doesn't turn wealthy people into poor people. The impact is negligible compared to what would happen if the burden was shifted downwards.

Tom's Position 2: The use of taxpayer money to provide relief from the current mortgage crisis is bad mmkay?

I think it's contrary to our system of economics. The lure of the pleasures of being wealthy is the incentive that drives innovation and progress. People work hard to have a better life as the reward. The mortgage bail-out is not so much "rewarding failure", as the Loon Brigade likes to call it.. it's more a line that you draw between legitimate assistance in the public interest, and artificially offsetting market losses.

An argument could be made, and I suppose Nolm is, that intervening in the housing market is in the public interest. I don't think it is. Beside the problem of re-inflating the housing bubble that contributed to the problem in the first place, it establishes a bad precedent in terms of the roll of government and the fairness of the so-called "wealth redistribution".

My point?
Shelter is one of the fundamental human needs. And while I agree that the difference is vast between the basic subsistence level of shelter and a $450k home, you have to appreciate the government’s position.

The government has a responsibility to the American people to facilitate the basic needs - the food, the water, the shelter, the health care and the security. It is easy to say ‘let these people be foreclosed on and the market will settle itself’.
But where to go while this occurs and in its immediate aftermath? For some people rental housing, in other cases public housing projects, shelters, slums or the gutter.

That's true to a point. If it were the official government position that the government must provide food, shelter, and health care, then there's much less incentive to actually work and earn money. It's only the fear of being homeless and hungry that encourages some people to contribute to society.

Is that taking a dim view of humanity? Maybe, but I think it's true. I'm sure a lot of people would still make the effort to achieve, but the "wealth gap" would morph into a "contribution gap", where the people who actually get things done become resentful of those who simply benefit from everyone elses' labor.

In real terms, we simply can't make a pledge to feed, cloth, and shelter everyone, because that's simply unsustainable in the long run. What we can do is provide a sensible level of social support as more a transitional benefit to those capable of earning a living. The key is to make sure that the fear of being homeless and hungry stays intact. Without that, society will crumble.

Health care, I think, is different. It's simply good economics to have a single payer system that the government runs. It doesn't eliminate the fear of being homeless and hungry from the equation.

Assume the crisis continues to some absolute ‘end-game’ with no intervention of the sort just put on the table by Obama. Assume anyone at risk of foreclosure is foreclosed on. It will put immeasurable stress on the options I listed above that people would deem acceptable to begin with - that is rentals and public housing.

The infrastructure just does not exist for that sheer volume of people to move from private home ownership (or loanership) to other arrangements in such a short window of time.

The rental market will tighten to breaking point, pushing rental prices sky high and providing little relief to people who sought rentals as an affordable respite to their mortgages. Public housing will not be able to cope with the demand either.

So; these people have lost their homes - yes they were greedy to begin with, but there comes a time where that ceases to be the point. Their credit ratings are destroyed. The world economy is in a bad way for a few years to come and lenders have radically tightened their lending criteria. It’s hard enough for you and I to get a loan let alone someone with a fresh mortgage foreclosure on their record.
These people can’t afford to compete in the rental market. And there’s no public housing left.

What do they do?

This is the sort of result that I’m sure Obama and his advisors have seen play out in simulations. They cannot let the country slide that far. Not for the democrat’s or the republican’s sake… but straight out for the quality of life of the American public. The worlds’ biggest economic and military power cannot regress to something that resembles feudal European living standards.

I think that's grossly overstating the situation. The increase is home foreclosures isn't hitting all at once. It's been going on for a while now, smoothing out the distribution, and making it easier to absorb the consequences.

At some point, and I think it's going to take a few more years, the out-of-the-ordinary increase in foreclosures is going to taper off, and return to more usual numbers. Obviously it'll never go away. This will help the adjustment in the living situation, and smooth out the market adjustment in housing. At a certain point, it'll level out on the supply/demand curve.

You make it sound as if the United States is going to have some internal refugee crises. That's not going to happen.

So… how do they avert this?

Well. Timelines are too short for building hundreds of thousands of additional public dwellings. Also – such housing would become surplus, vacant and fall into disrepair when the crisis finally subsides – which it will.

Obama and his advisors realise that there is inherent value in having people in homes they feel a sense of ownership over. People in their ‘own’ homes, take care of the property. There is a sense of pride and responsibility over something they own. They do not treat their property with the same casual contempt they might a rental or public housing. They repair small faults. Do yard work. Make improvements to their asset if they feel it is their asset. These assets collectively are a huge national asset.

Yes their asset has taken a write down. Yes you the tax payer share in this write down. But the crucial thing here is that the assets remain in the hands of the residents. Not property developers, corporations or foreign investors.

But why? The people who paid for the house when it was purchased, the mortgage lenders and the people who own that paper, are the ones who actually own the property. Market forces will determine who eventually owns it. People buy foreclosure properties. John sold some 24 million dollars worth of foreclosed properties last year on his own. That puts a new 'owner' in the house who will do those things you describe. Why should a person who doesn't actually pay back the loan they agreed to pay back, get to stay in the house?

Again, this is all about market forces. Home prices need to settle at a level that meets the supply/demand curve at some point. Artificially propping them up simply continues the problem, and subsidizing the difference by having taxpayers pay for the write downs is anathema to the economic model that is the cornerstone of our success to this point.

When the crisis subsides, ordinary Americans once again have a tangible asset and – fucking hopefully – have learnt an important life lesson about not living beyond their means.

They'll get that message when they go apartment hunting... If we subsidize their mistakes, that's not nearly as strong a message. Out of control consumption has been a huge American problem for a very long time.

If things are allowed to continue without intervention, you have hundreds of thousands of Americans in dire living circumstances and simultaneously - hundreds of thousands of empty homes.

Again, this isn't a refugee crises. The process is smoother than that, and it'll settle. Some areas are harder impacted than others, but eventually those houses will be sold again.

It brings to mind another absurd statistic I read somewhere a while back - there are now more clinically obese people in the developed world than starving people in the 3rd world.

Homeless people surrounded by empty houses is equally tragic.

People will figure out how to keep a roof over their head. That's kind of been a motivating activity since time immemorial. If the government wants to take that 75 billion dollars and use it for food assistance, and temporary housing, I have zero problem with that. I have a big problem with the money going to offset losses in an investment market, which is what a house actually is.

My retirement account took a 20% hit in 2008. By the same logic, shouldn't the government add monies into my account to offset the loss? That would artificially inflate wealth, and wreak havoc on the financial markets by essentially eliminating risk.. and again, risk is called risk for a reason.

When the housing market bottoms out, the people with all the money will be those like you and John. You could buy… 5, 10, 15 houses with your good credit rating and rent them out to the very people who used to hold their deeds. The purchase price will be low enough that the incoming rent nearly makes the loan repayments for you. And you and John retire young and rich (perhaps I’m not making my case very well by including that… lol).

John owns 5 other homes, and yes the rent pays the mortgages, and they are all rented out right now. That's simply the market at work. He's smart, worked hard, did the right things, and now he's profiting. That's the way rental properties work. He also assumes the risk in owning those properties, and there are risks.

And yes, retiring young and rich is the point. That's a good thing.

But you talk often about the polarisation of wealth as a negative and the increasing socioeconomic stratification of society – if you can find me a situation with more potential for the rich to get richer and the poor to get poorer than this mortgage crisis I’ll buy you a beer.

I don't have a problem with wealthy people. I don't have a problem that there are different economic classes. Having an economic goal is a good thing, and is what drives a society.

My issue has always been the artificial walls that are created to hinder people from achieving what they want. It is true that a very small percentage of Americans own and control the vast amount of wealth, and all I'm really concerned about is whether or not everyone has a fair shot to get their piece. That's why I support things such as anti-discriminatory laws, like the one that Obama signed recently that prohibits wage discrimination on the basis of sex. I also support labor unions, and anti-trust laws, and a fair minimum wage.

In other words, wealthy people don't play fair, because the rules are stacked in their favor. They write the rules. If wealth were truly "distributed" by effort and achievement, then the total distribution would be more uniform top to bottom, instead of stacked overwhelmingly at the top.

You'd still have your rich people and your poor people, after all, you can't be rich if nobody is poor... but there would be far less class distinction because the wealth curve wouldn't be so skewed. In my view, that would demonstrate that it is possible to reach higher, and get there, just by effort and achievement. That would dramatically increase the productivity of society. Right now, most people think they can never get there without winning a lottery... and they're right.

As a result of the wealth inequity, most people simply work to keep their heads above water, without much enthusiasm for the possibilities of the future. And in more basic terms, I think it's much better to have a whole lot of people making good money and living well, then fewer people that are simply hording vast amounts of wealth.

So yes. People are dumb and inherently greedy. But we have to let that go.
America now faces a crisis that needs intervention at a federal level as much as a viral epidemic, or a famine, or a drought would. I think in this instance your tax dollars going towards the resolution is just as important as funding medicaid, VA or foodstamps.

Medi-caid, the VA and foodstamps are vital programs that keep people from dying. In the case of the VA, it's a right earned by the sacrifice of being in the armed forces. Those programs are vastly different than tinkering with the economy.

And of course.. the logical question to me becomes, why do I support the TARP and the "stimulus bill", when I'm opposed to mortgage bailouts? That's easy, and consistent. One encourages and accelerates the free market while being ultimately revenue neutral, while the other one renders the market irrelevant.