This Economist article frames an argument discussing the positives and negatives of home ownership, and exposes some myths about it as well. I think it's a good read for anybody considering the merits of home ownership as well as policy makers in favor of housing subsidies. I believe, as the article states, that lots of Americans have become too dependant on their home equity as a source of investment and savings to the extent that many do not invest in other assets.
This is potentially a bad idea for several reasons: 1) insufficient diversification 2) as more people buy and sell homes more often, the housing market becomes more volatile 3) by purchasing homes "on margin" any downard shift in the housing market is magnified in terms of losses incurred.
Fortunately for many, there have been relatively few dramatic downward shifts in the housing market. As we see from the crash of the recent housing bubble, downward shifts do happen. People should take the necessary precautions to ensure that when housing market downturns occur, they have other savings.
Monday, April 20, 2009
Let them pay
Goldman wants to pay back their government funds. As long as the government's newly imposed restrictions on how banks can choose to run their business applies to any acceptor of government funding, this is likely to trigger other banks to do the same (even if they are not in as good a shape as Goldman). It is likely the opposite of the government's intention when the funds were issued. Persuading all banks, regardless of relative strength, to accept the bailout money was intended to camouflage bad banks from their healthier cousins. Forcing the healthy banks to reject bailout money by placing restrictions on them post-hoc is going to expose those bad banks sooner than they otherwise would be. This is likely to be a good thing if we are to identify and resolve the problem of insolvent banks with zombie asset on their balance sheets.
Division in America
I think that the "tea parties", if they were intended to be a legitimate protest were laughable in terms of execution and ideology. More unfortunate than the embarrassment I feel for those who participated in the wearing of pointy triangle hats and tea-bag touting, is the hypocrisy of prominent conservatives (hannity, et al) who go from dismissing all criticism of the Bush administration as "un-American" or "emboldening terrorists" to supporting protest of the Obama administration as "Patriotic".
It's the division and polarization of America that I find most dangerous. Where the fuel for the hatred comes from, I'm not sure. There are some obvious candidates, like Fox News or Conservative Talk Radio of Rush Limbaugh and his ilk, but I believe that these are mere symptoms of something deeper. When only 85% of Americans obtain a high school diploma and only 27% receive a bachelor's degree, I think illogical anger is an expected result.
I have long denied being a democrat, but I'm not republican either. I'm a laissez-faire capitalist with liberal social values. While I do not agree with many of the conservative criticisms of Obama (comparing him to Hitler is a big stretch), I have my reservations about any politician who believes he can solve any problem by taxing and spending. My beliefs stem from what I see in the federal budget, anecdotes, and my personal experiences with government agencies. There is a ton of waste in all government operations, and government bureaucracies are often ineffectual. I think that it is in the best interest of all citizens if government makes itself as scarce as possible while providing services that are not well managed by market incentives, e.g. Health care, military, basic welfare, etc.
In some cases, government is not just inefficient but grossly distorting to an otherwise healthy market. One example is the mortgage incentives given to Fannie and Freddie (by Congress) for issuing subprime mortgages that lead to the financial crisis we're in now.
As for taxes, I can agree with a progressive tax system, but I don't agree with wanton spending at the expense of American taxpayers (even the rich ones). The more we tax rich people, the more we will be a) pushing more money into tax shelters or b) driving away wealthy citizens who can pick and choose the jurisdiction in which they want to live. This is happening at a local level in the NYC tri-state area -- lots off people list their primary residence as Jersey (even if they live in the city) to escape city income taxes and lower their state taxes.
I'm not saying I personally want to pay less taxes -- I don't mind paying taxes that go to well thought out, worthy causes. Most taxes are paid by rich people anyway. My gripe is that the government does a lousy job with taxpayer money, and they have no incentives to get better at it. Bad politicians end up landing jobs in the private sector firms (the ones that lobbied them in office) and Good politicians cozy up to their largest donors so they can keep winning elections. Nobody looks out for the little guy.
It's the division and polarization of America that I find most dangerous. Where the fuel for the hatred comes from, I'm not sure. There are some obvious candidates, like Fox News or Conservative Talk Radio of Rush Limbaugh and his ilk, but I believe that these are mere symptoms of something deeper. When only 85% of Americans obtain a high school diploma and only 27% receive a bachelor's degree, I think illogical anger is an expected result.
I have long denied being a democrat, but I'm not republican either. I'm a laissez-faire capitalist with liberal social values. While I do not agree with many of the conservative criticisms of Obama (comparing him to Hitler is a big stretch), I have my reservations about any politician who believes he can solve any problem by taxing and spending. My beliefs stem from what I see in the federal budget, anecdotes, and my personal experiences with government agencies. There is a ton of waste in all government operations, and government bureaucracies are often ineffectual. I think that it is in the best interest of all citizens if government makes itself as scarce as possible while providing services that are not well managed by market incentives, e.g. Health care, military, basic welfare, etc.
In some cases, government is not just inefficient but grossly distorting to an otherwise healthy market. One example is the mortgage incentives given to Fannie and Freddie (by Congress) for issuing subprime mortgages that lead to the financial crisis we're in now.
As for taxes, I can agree with a progressive tax system, but I don't agree with wanton spending at the expense of American taxpayers (even the rich ones). The more we tax rich people, the more we will be a) pushing more money into tax shelters or b) driving away wealthy citizens who can pick and choose the jurisdiction in which they want to live. This is happening at a local level in the NYC tri-state area -- lots off people list their primary residence as Jersey (even if they live in the city) to escape city income taxes and lower their state taxes.
I'm not saying I personally want to pay less taxes -- I don't mind paying taxes that go to well thought out, worthy causes. Most taxes are paid by rich people anyway. My gripe is that the government does a lousy job with taxpayer money, and they have no incentives to get better at it. Bad politicians end up landing jobs in the private sector firms (the ones that lobbied them in office) and Good politicians cozy up to their largest donors so they can keep winning elections. Nobody looks out for the little guy.
Castles made of sand
Economist article blames federal subsidies for housing bubble. I agree emphatically. In fact, I believe the financier's aggressive (some say greedy) actions in creating CDOs for risky mortgages were the market's natural reaction to the aggressive lending by Fannie and Freddie and that the housing bubble actually has little to do with financiers' actions. There was some misinformation due to the miscalculation of risk on the part of the credit rating agencies, but this is part of the problem inherent in basing risk forecasts on past performance. We need a new way of predicting the future.
Investment predictions
My new long term investment strategy is to wait until the next big fallout of the financial markets before investing. I still don't think we have hit the bottom. Housing prices are still in decline, meaning foreclosures are sure to mount, and jobs continue to be lost faster than they are being created. I have not tested if there is typically a lag in these statistics being reflected in asset prices or vice-versa, but my intuition tells me that there is likely to be a lag between unemployment rising and company earnings falling. This, therefore implies that when lower earnings are reported the stock prices will fall more. There is the potential that markets predicted lower earnings than were actually reported, and therefore this rebound is justified, but I do not think this is likely.
I predict the Dow will return to its low of 7000 later this year and will continue lower before bouncing back, likely in mid 2010.
I predict the Dow will return to its low of 7000 later this year and will continue lower before bouncing back, likely in mid 2010.
Thursday, April 9, 2009
Who is looking out for us?
Dear Sir,
I'm an American of modest means, yet I do not believe that higher taxes on the rich will benefit me or my family. My disabled grandmother, who had a stroke several years ago, is living off of her meager Social Security pension and requires help in all of her routine daily tasks (eating, moving, bathing, etc). She cannot afford to pay a professional to care for her, so my mother drives to her house 3 times each day to help. Her only asset is her house, in which 2 of her children still reside. If she opts for publicly subsidized healthcare via the Medicare program, she would have to turn over her house to the government. Laws stipulate that even if she signs over her house to her children who reside there, the government can still claim it if she opts for Medicare.
My point is, that even though the government has subsidized health care for elderly/disabled people like my grandmother, they haven't done a very good job of improving their livelihoods. Throwing more taxpayer dollars at the problem would not necessarily make things easier for us of modest means unless there is some accountability in government and incentives for our representatives to improve standard of living. While more funding may help, funding itself will not find its way to those most in need while politicians remain self-interested. Poor politicians can ignore public sentiment while getting cozy with the private sector to land a job after their first term. Career politicians must consider their campaign contributors before they can help the electorate to whom they owe their service. Therefore, who is looking out for us?
I'm an American of modest means, yet I do not believe that higher taxes on the rich will benefit me or my family. My disabled grandmother, who had a stroke several years ago, is living off of her meager Social Security pension and requires help in all of her routine daily tasks (eating, moving, bathing, etc). She cannot afford to pay a professional to care for her, so my mother drives to her house 3 times each day to help. Her only asset is her house, in which 2 of her children still reside. If she opts for publicly subsidized healthcare via the Medicare program, she would have to turn over her house to the government. Laws stipulate that even if she signs over her house to her children who reside there, the government can still claim it if she opts for Medicare.
My point is, that even though the government has subsidized health care for elderly/disabled people like my grandmother, they haven't done a very good job of improving their livelihoods. Throwing more taxpayer dollars at the problem would not necessarily make things easier for us of modest means unless there is some accountability in government and incentives for our representatives to improve standard of living. While more funding may help, funding itself will not find its way to those most in need while politicians remain self-interested. Poor politicians can ignore public sentiment while getting cozy with the private sector to land a job after their first term. Career politicians must consider their campaign contributors before they can help the electorate to whom they owe their service. Therefore, who is looking out for us?
Friday, April 3, 2009
housing prices low, but not low enough
Last night I spent a couple hours trying to compare median salaries to the cost of a mortgage in 1960. Amazingly, I was able to find data (I love the Internets) but I still wish I had seen this article before I wasted my time.
See article in WSJ
See article in WSJ
Financial bailout vs Auto-maker charity
Bailing out "Wall Street" was not a choice. It prevented the systemic breakdown of the global economy, which anybody in their right mind would agree is a worthwhile cause. It was not a handout to "well-heeled moneymen", it is an investment in the future of capitalism across the globe.
While it may not be immediately apparent, every large corporation in the world relies on credit. All manufacturers need factories, retailers need inventory, and newspapers need paper to print on. Where else would they get the capital to invest in such raw materials if not for their ability to borrow money periodically? The most common answer is the credit market -- a market which, prior to the bail out, was nearly nonexistent. Enabling companies to borrow for the sake of investment in these much needed capital goods was the spirit of the banking bail out, and everyone on earth is a beneficiary.
On the prospect of an automotive bailout, we are considering essentially donating taxpayer money to a small group of long unprofitable manufacturers, namely the American automotive industry. The major reason why these manufacturers are unprofitable is due to the contracts in place with the United Auto Worker union (UAW). In those contracts, there are clauses that make it nearly impossible for the companies that employ UAW workers to relocate, downsize, or otherwise reduce the amount of money they are paying their employees. These contracts make the American companies far less competetive than other car makers, like Toyota and Honda, by almost doubling the cost of labor per vehicle.
If we let these companies go bankrupt, then perhaps the union will realize they must reconcile with reality and grant concessions to their employers. On the other hand, if we allow our government to give hand outs to companies that are not profitable, then we are only prolonging the inevitable bankruptcy. We must allow these companies to go bankrupt so that more efficient organizations can take their place, like Toyota or Honda.
The idea that we can use a government handout as "leverage" to get the car industry to make cars we want is short-sighted. Car companies want to make the cars we want (fuel-efficient or otherwise) because we pay them good money to do so. American car companies haven't been giving us what we want because they can't make them without losing money. Therefore, they need to be restructured in order to be capable of giving us the cars we need for the same price their competitors are. Bankruptcy is one way of enabling a restructuring. That's not just sustainable economics, that's common sense.
As for the notion that the inability of GM and its ilk to give us the cars we demand is not the "workers' fault", thereby justifying a bailout, is also illogical. The workers' representatives have placed unreasonable demands on their employers, and now they are realizing that their compensation does not exist in a vacuum. There is a tangible effect on the sustainability of their employment by demanding the lavish benefits and pay they continually extract from their begrudging benefactors.
While it may not be immediately apparent, every large corporation in the world relies on credit. All manufacturers need factories, retailers need inventory, and newspapers need paper to print on. Where else would they get the capital to invest in such raw materials if not for their ability to borrow money periodically? The most common answer is the credit market -- a market which, prior to the bail out, was nearly nonexistent. Enabling companies to borrow for the sake of investment in these much needed capital goods was the spirit of the banking bail out, and everyone on earth is a beneficiary.
On the prospect of an automotive bailout, we are considering essentially donating taxpayer money to a small group of long unprofitable manufacturers, namely the American automotive industry. The major reason why these manufacturers are unprofitable is due to the contracts in place with the United Auto Worker union (UAW). In those contracts, there are clauses that make it nearly impossible for the companies that employ UAW workers to relocate, downsize, or otherwise reduce the amount of money they are paying their employees. These contracts make the American companies far less competetive than other car makers, like Toyota and Honda, by almost doubling the cost of labor per vehicle.
If we let these companies go bankrupt, then perhaps the union will realize they must reconcile with reality and grant concessions to their employers. On the other hand, if we allow our government to give hand outs to companies that are not profitable, then we are only prolonging the inevitable bankruptcy. We must allow these companies to go bankrupt so that more efficient organizations can take their place, like Toyota or Honda.
The idea that we can use a government handout as "leverage" to get the car industry to make cars we want is short-sighted. Car companies want to make the cars we want (fuel-efficient or otherwise) because we pay them good money to do so. American car companies haven't been giving us what we want because they can't make them without losing money. Therefore, they need to be restructured in order to be capable of giving us the cars we need for the same price their competitors are. Bankruptcy is one way of enabling a restructuring. That's not just sustainable economics, that's common sense.
As for the notion that the inability of GM and its ilk to give us the cars we demand is not the "workers' fault", thereby justifying a bailout, is also illogical. The workers' representatives have placed unreasonable demands on their employers, and now they are realizing that their compensation does not exist in a vacuum. There is a tangible effect on the sustainability of their employment by demanding the lavish benefits and pay they continually extract from their begrudging benefactors.
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