Thursday, November 13, 2008

From Irvine, CA: ARM recasts are the next financial bomb waiting to go off.

Irvine Housing Blog: "The ARM Problem"

The biggest problem are not the resets themselves, but the recasts. Let me explain a recast. Many ARMs allow you to choose your monthly payment:
  1. A"fully amortizing" payment, which is a normal mortgage payment.
  2. An "interest only" payment, which holds the principal balance the same.
  3. A "minimum" payment, which is a portion of the interest. In this case, the remaining interest is capitalized into the principal balance.
  4. A "catch up" payment, an extra-principal payment which lets you catch up to the amortization schedule (you generally cannot exceed this with other extra-principal payments because of prepayment penalties).
If you make the fully amortizing payment, you are vulnerable to the rate increasing. But if it decreases, you are happy. And, otherwise, you have few surprises. But it's what happens to you if you use one of the other two options without the "catch up" that gets really ugly. If you haven't caught up to the amortization schedule by a certain point, usually 5 years into the mortgage, your payment schedule is recast so you will finish paying the mortgage off in the remaining term. This means all of your payments go way, way up. This can even happen to you if you pay the fully amortizing amount but the rate increased. A recast can also happen if your principal balance increases by more than a certain amount, typically 25%.

The purpose of these so-called "option" ARMs was to give people with highly variable income a chance to manage their payments. If you had bad cash flow, you could pay interest only or even less for a while and catch up later when you got a big windfall. But real-estate agents and bankers got the brain-dead notion that people could buy a house with an option ARM, pay the minimum, and then refinance into a fixed when the house "inevitably" appreciated 20%. For their part, people who really wanted to buy a house went along with it, much to their eventual sorrow.

You'll also see in the blog post I have linked an example of $1.2M Irvine house that fell in value by a third, leaving an overleveraged borrower screaming for help from the government. That's freaking awesome. I mean, I have a lot of sympathy for average borrowers in average situations getting screwed in an average manner. Sure, let's help them out. But my patience is tried when someone who could clearly afford to rent a nice but not awesome place goes out on a limb for a fancy house, partially motivated by speculative greed, gets burned, and expects taxpayers (including me) to bail them out.

That's what frosts me most about the coming option ARM recast bullshit. I could get on board with helping an overextended Joe the Plumber (though not Joe the Plumber himself, because he's an asshole) not lose his modest starter home (which went for about $600,000 in Seattle a few years ago, but anyway). I mean, I could've probably barely afforded a house, but I stayed a renter because I thought it more responsible, and I knew the skyrocketing nonsense was not sustainable. And this is how I am rewarded for my discipline. My house is pretty nice, but I am going to have to dig deeper to keep all you yuppie scumbags in Bellevue and Redmond in your dream homes. That doesn't give me the warm happy happy.

I understand, though, that the alternative is worse, so sure, let's do it. But you numb nuts better not give me any lip next time I agitate for affordable housing in the Seattle area. We helped you; next it'll be your turn.

Wednesday, November 12, 2008

Joe Nocera pwnz0rs the Right, hopes Obama is more like FDR than...not...I guess.

Blog post at "Executive Suite": Where is FDR When We Need Him?

Joe Nocera is a well-connected business columnist.

Syndication test -- please ignore.

This is a test of some syndication. Please ignore.

Tuesday, November 11, 2008

In Utah, you can be both Gentile and Jew.

Story: Holocaust survivors are tired of being polite about Mormons baptizing dead Jews.
(courtesy: the author of Four Year Plan, via Facebook.)

Full disclosure: I was a Mormon when I was a child, between about 9 and 17. I participated in the rite of proxy baptism when I was about 13. Fortunately from the perspective of this article, all 15 of my proxies were named José, so I'm reasonably sure they were not Holocaust victims. In retrospect, I am not terribly sure that none of those I was baptised for really wanted to become Mormons, nor do I think they were even jazzed up about being given the name for Jesus' father, when they already had a perfectly good Mesoamerican name for themselves.

Obviously, I have recovered from this altogether obnoxious sect, and moved on to something even more obnoxious: Episcopalianism. Of course, the set that finds Episcopalianism obnoxious is somewhat, but not completely, distinct from those who find Mormonism obnoxious. Those poor self-proclaimed orthodox Protestants must really have it rough, being annoyed by nearly everyone, including other self-proclaimed orthodox Protestants.

But while I find the third group is obnoxious as well, there's very little outside of Christian Reconstructionism that approaches proxy baptism in unmitigated tackiness. I may hold forth at length about it when I have more time.

My napkin says the war on drugs makes no fiscal sense.

If you consider only incarceration, the cost of putting someone into jail for drugs for 2 years is highly variable, but it a reasonable median figure is about $46,000. This counts only the time they serve for their sentence. This does not count the amount of money spent while the person is in the court system, though in the case of problem drug use, some amount of that will probably be necessary whether you put the drug users in jail or not.

On the other hand, a moderately priced detox and rehab facility costs about $800 per day. A heroin user assisted with clonidine or Suboxone usually stays about 3 weeks, for instance. That's $17,600. People on meth may stay a bit longer. People on other drugs will probably stay less time. I would say a nice round figure is about $18,000.

Not only have you already saved $26,000 per person. You could argue that rehab doesn't stick very well, and I would agree. You might have to send them back at $18k/pop, and that starts to add up. On the other hand, prison doesn't stick very well, and the second sentence is often 5 years or more. Now we're talking about $115k for you hardline people, whereas I'm still just spending $18k.

This doesn't take into account other factors. The untold billions spent on interdiction, which itself leads to more jail and another $23,000 per person-year. The violence inherent to a business forced underground by the law. The development of highly organized terrorists intent on protecting what they have. And the costs to all of us in diverted law enforcement and other social resources are difficult to measure, but probably spiral up over a trillion dollars very quickly.

Meanwhile, say a person is half-likely to succeed in rehab and stay clean. If they make median income, we will get about $8,000/year back in taxes from them. Cut that in half, and the drug users themselves pay for their own rehab in just over 4 years.

Let's think about this as adults, please. Yes, drugs have very bad consequences for their users and society. Even marijuana, often regarded as harmless by its proponents, can cause certain people psychological trouble. Yet, our current policy is inhumane, ineffective, and imbecilic.

It's inhumane because the drug users most at risk for causing us problems are often suffering from an undiagnosed mental illness and are self-medicating. Throwing them in jail for this is cruel beyond measure. If you're going to seriously suggest we spend more to throw them in jail than it costs to treat their pain because of a moral position, we'll I'm sorry, but you're a fucking asshole.

It's ineffective because I can cruise to several key points in my city and pick up any drug I want in a matter of minutes. It will take me a few hours to figure it out exactly, but interdiction is a sad joke, despite the unfathomable amount of money we spend on it. The worst part, though, is civil forfeiture laws that give police departments a serious incentive to be corrupt.

It's imbecilic because we just can't afford to be throwing this kind of money away any more. But I love how conservatives preach "fiscal conservatism" and spend trillions on bullshit like this and sinkholes like Iraq.

The answer is not more money--it's total, unequivocal legalization combined with reasonable safety regulation and significant-but-not-stiff taxation. The taxation can also help pay for rehab if my napkin math is off.

The key point is, though, no one serves another day in prison for drugs, and no one is turned away from rehab. If they want it, they can have it--free. If they want a swank joint, then they can pay, but otherwise, we will.

Because it's the only alternative to this madness we have now.

EDIT: $40 billion. I found an offline source that says every year, governments at all levels pay $40 billion on the War on Drugs. $30 billion of it is incarceration. $10 billion on other stuff. That is nearly TWO MILLION three-week stints in rehab. In ten years, we could have the problem of drugs effectively controlled.

My proposal pays for itself. You could raise a ridiculous shitload of money with a 25% excise on recreational drugs. You don't want to go too much higher, because you don't want to encourage bootlegging, though tax bootleggers are not nearly as harmful from a crime perspective as today's drug gangsters. But even that is only half what my state charges on cigarettes, so I think it will work.

Monday, November 10, 2008

Peter Schiff: Tool

I'm going to do this post in the style of Penn & Teller: Bullshit! (Warning: foul language.)

Look at this fucking asshole. He seems to think that deficits under Obama's tenure would be a novel thing. Numb nuts doesn't seem to realize that it was George Fucking Bush who ran up a trillion dollars in deficits during his last year alone. He's run up more than FOUR GODDAMNED TRILLION in deficits during his eight years in office. That's roughly 4.5% of GDP. One dollar out of twenty in the economy sucked into the public debt black hole.

And for what? What was bought for our 4 trillion? I mean, a real socialist might actually do some good, such as--Jesus fucking Christ!--fix some infrastructure, fund energy research, that sort of thing. You know, instead of blowing up brown people.

Anyway, an article by Schiff is what really blew my stack. A gigantic wank fest of praising Reagan, worshipping Mammon, and generally being a clueless douchebag.

Where to start. Oh, Reagan. I'm so fucking tired of hearing about how great Reagan was. Well, actually he was great--if you were the son of a wealthy tax deadbeat like Irwin Schiff. No wonder Peter got a great head start in life--while your mommy and daddy were upholding the virtues of good citizenship with their pocketbook, Peter's daddy was HOLDIN' OUT. I hope Peter visits his dear old dad on Saturdays. I'm sure the pat downs and security checks are annoying, but it's well worth keeping up with dear old Dad.

Right, Reagan. Reagan was naughty. He talked about how government was the problem instead of the solution, and then proceeded to rubber stamp more government spending than ever fucking seen in peacetime. Mostly the money went to terrorize the Russkies--who might have need terrorizing, but Jesus Christ. Either the government is evil or it isn't.

Schiff makes much of the marginal tax rate reductions, which did a lot to push huge amounts of the tax burden off of the wealthy and on to ordinary schmoes like you and me. Though dealing with the misery of bracket creep was only fair, the end result was ridiculous levels of public debt (though that was just a taste, apparently) and a fatter bank account for the Rockafellas. The Laffer Curve, much touted at the time, was in fact so much horseshit. And not even an original idea--even J. M. Keynes told us that taxing people at 90% might be bad for economic growth. But, that doesn't mean you can drop the marginal rate from 70% to 35% and expect to have a net gain in income. You're not going to lose half, but you are going to lose considerable money. AND VOILA WE HAD DEFICITS. Holy fuckin' shit!

Though I have my own skepticism of Paul Krugman, he exploded this Reagan worship quite eloquently earlier this year. I'll let that stand alone, but let's look at one more thing: Unemployment rates. Unemployment rates, of course, are a lagging indicator, and may continue to rise well into a recovery. But they shouldn't lag too hard, and if the economy is in good shape, they should drop sharply. This is an indicator of whether the economic expansion is evenly distributed.

The worst time to be trying to find a job in recent history was 1982. The national unemployment rate was just under 10%, and even if you had a job, your employer was doing nasty shit like giving you pay cuts instead of increases. All the while, inflation was still spiraling out of control. Paul Volcker was trying to contain this by raising interest rates up into the stratosphere (my parent's mortgage at the time was at 14%--imagine that.) All in all, a miserable time.

But energy policy was adjusted, taxes were lowered, and so Reagan's initiatives did have an impact on the economy. Eventually this led to job creation. But nothing much happened at first. In 1983 it was still about the same. But by 1986, things had softened and it was 7%.

1986 was the year that taxes rates were reduced further. But did a massive wave of jobs get created? Fuck that! The rate of improvement actually flattened, and in 1989 it reached a low of 5.35%. Yes, folks, when I was in high school, people thought that 5.3% unemployment was fuckin' awesome! Dickheads like Alan Greenspan suggested that 5% was "structural unemployment" and you really couldn't do any better any more.

Well, we all bought that shit, and, oooops I fuckin' forgot: We had this little recession at the end of the brilliant Reagan revolution. The recession wasn't all that severe by absolute terms, but the average guy took it in the...uh...shorts. The year Clinton was elected, the rate was nearly 8% again.

But then what happens? Clinton raises taxes! Disaster, right? Nope, I think all of you not only remember that unemployment dropped to unheard of levels (4% in 2000), but we got PAID a lot more than we had before. A lot more in some cases. My income increased nearly 200% (ie, tripled) between college graduation in 1994 and 2000. Of course, that was because of malinvestment in bad technology. Not everything was perfect during the Clinton years, but you can fairly say the benefit was spread more evenly.

What does this tell us? That rising tides do not lift all boats, and that lowering taxes is not the be-all end-all. But you can't expect the son of a fucking tax protestor to know that.

So, seriously, if we survived $1T in public debt from Ronnie, and $4.5T in public debt from Chimpy the Pinhead, it's difficult to imagine how the O-man can screw things up any worse. Seriously. Much more likely is that President-elect Obama will raise taxes on those who have the money to pay them, increase public investment and wage supports, and invest in research that can get our economy rolling sustainably.

I predict high deficits and some pain in the short term, but it is possible we might have a Clinton-like era of nearly universal prosperity. The hope of this eventuality is why Obama won--no one else had it. Let's hope he succeeds, and let's help him do it. And tell assholes like this Schiff character to STFU.

I will post more about Schiff, Austrian-school economists, and what I like to call "Paultards" in future installments.

[PS: Let's give Schiff a little due credit. He predicted the mortgage meltdown. Because, you know, it takes a genius to see that an epidemic of stated-income loans with nothing down on fraudulent appraisals backed by toxic options called credit default swaps is going to end badly. Way to go, Pete!]

Friday, November 7, 2008

The Ground Rules

So what is this blog all about?

Dissatisfaction with the religion of the free market is hardly a new thing. In 1848, Karl Marx and Friedrich Engels wrote The Communist Manifesto. There wasn't much wrong with it on its face--there were very and valid real criticisms of the effect of capitalism on the average person. Unfortunately, when put into practice, there were very real problems with the proposed solution. What tends to happen in these cases is that the lambs mentioned in the previous post promote themselves to the rank of lion and continue the cycle. Many of them (Iosef Stalin, Pol Pot, Hugo Chávez) are little more than gangsters.

You could try an approach like Lysander Spooner's "Letter to Cleveland," which is a more libertarian approach of voluntary association. But we see how well that worked. No, it seems some sort of government-like thing is necessary to make people mad enough to work hard enough to thwart the will of some bureaucrat. I think you're going to find that I am a lot more like Spooner than Stalin. This is a good thing on many levels. If you're a libertarian sort, you're going to find me mostly sympathetic, but frustrated by your slavish devotion to Horatio-Alger-mongering. Yet, even the Marxists among you will get a fair hearing from me, though it's difficult to take seriously anyone who still clings to Marxism after seeing the ridiculous death and destruction it caused over the last 100 years. If you lead a horse to water and force it to drink, you drown the horse. Let's learn the lesson.

So, my operating premises, which we'll discuss and defend later, are:

1. The "free market" is something that doesn't exist, cannot exist, and probably would be harmful if it did exist.

2. The classical economists are so gung ho on conservative economic principles as you might believe. Consider the following:
By necessaries I understand not only the commodities which are indispensably necessary for the support of life, but whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without. A linen shirt, for example, is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty which, it is presumed, nobody can well fall into without extreme bad conduct. . . .Under necessaries, therefore, I comprehend not only those things which nature, but those things which the established rules of decency have rendered necessary to the lowest rank of people.
Who wrote this, you think? Marx? Engels? No, that was Adam "Invisible Hand" Smith, right there in the book commonly referred to as The Wealth of Nations. Throw this at the next person who criticizes poor people for owning TVs or asserts that health care is something only wealthy people should have.

3. Markets are probably the only efficient way of directing the manufacture and distribution of good and services. "Wait, what," you say. In the future, we'll discuss these seemingly contradictory ideas, to wit: "Markets suck. Except when they rule."

4. Don't be afraid of the government. The government can help organize effort helping those hurt the most by rapacious capitalism. It can certainly do other things, both helpful and not so helpful.

5. Be afraid of the government. The fundamental problem with the government is that it does everything by the threat of violence, and social contract theory is rubbish.

6. Fundamentally, economy is energy. So without sane energy policy, nothing else we do to help the economy matters in the long run.

Eh, that's enough to get started. There will be lots more.

Why this blog?

In the summer of 1989, recently back from my first year of college and somewhat bored waiting for my first internship to start, I was at the record store with a friend and I saw a cassette single of a song I once heard on the radio: "Trouble Me", by 10,000 Maniacs. The town I lived in did not play alternative rock on the radio, alternative rock itself being kind of a new thing. If you're kinda younger, 10,000 Maniacs was Natalie Merchant's group, a kind of mellow New Wave + Folk sound that combined happy, upbeat tunes with very depressing subjects.

The "B" side of the single was something called "The Lion's Share". Unfortunately, Merchant is a lot like Stevie Nicks. She's not the most intelligible when she sings, and although this song is catchy, it's difficult to understand just what the hell she is saying.

I recently lay awake in bed listening to this song on my iPod and I began to pick out parts of the lyrics:

The lambs are bare of fleece and cold; the lion has stolen that, I'm told.

I begin to realize this is an intensely political song about macroeconomics, which is unusual even for 10,000 Maniacs. I download the lyrics. Sure enough, it's a pop-Communist Manifesto:

Can I be unhappy?
Look at what I see: a beast in furs and crowned in luxury.
He's a wealthy man in the poorest land, a self-appointed king,
and there's no complaining while he's reigning.
The lambs are bare of fleece and cold; the lion has stolen that, I'm told.
There must be some creature mighty as you are.
The lambs go hungry (not fair), the biggest portion is the lion's share.
There must be some creature mighty as you are.

Can I be unhappy?
Listen and agree, no words can shame him or tame him.
The lambs are bare of fleece and cold; the lion has stolen that, I'm told.
There must be some creature mighty as you are.
The lambs go hungry (not fair), the biggest portion is the lion's share.
There must be some creature mighty as you are, as you are.

Razor claws in velvet paws, you dunce in your guarded home,
'til a stronger beast will call on you and pounce upon your throne.

Do we pay? Dearly, for the lion takes so greedily
and he knows that what he's taken, it is ours.
That's how the wealth's divided among the lambs and king of the beasts, it is so one-sided.
Until the lamb is king of the beasts we live so one-sided.

Not really so much with the sickles and the hammers, this hidden gem just lays out the fundamental unfairness of unchecked capitalism without suggesting a specific solution. Previous specific solutions being, of course, decidedly unsatisfactory.

Because the lamb never seems to end up king of the beasts.

And that's why this blog is here. We're going to look at why things seem so unfair, but any solution seems to be even more unjust. But we'll look at solutions anyway. The ground rules of the blog and my own personal views will appear in a subsequent post.

(Note: I had to edit this: Blind Man's Zoo was not released until 1989, so I couldn't have bought this single in 1988.)