April 22, 2012

The Arc Of The Universe And People’s Intelligence

Readers suggested a topic on GSE proposals. “Principle write-downs at Fannie Mae and Freddie Mac: 1) Are they a go? 2) Who wins and who loses if they are? My recollection is vague, but it seems the Treasury Department summarily slapped federal guarantees onto all of the GSE debt after they collapsed. The upshot is that the U.S. Treasury (however defined — i.e. as the tax base, monetary base, or otherwise) is presumably on the hook for losses, whether due to default or write downs of GSE debt.”

A reply, “The bondholders will get the nice return. The taxpayer will be on the hook for any losses. The government has _guaranteed_ the mortgages, so taxpayers will bear all losses.. But the taxpayer does not hold the mortgages themselves, since they were securitized; the holder of the mortgages (e.g. the bondholder) will get the return.”

The Nevada Appeal. “I recently heard a story that applies to thousands of Nevada homeowners who are facing foreclosure: A young couple were first-time homebuyers. They had a 20 percent down payment, and both husband and wife were moderate wage earners. They were clear about how much they could afford to pay, and they gave the real estate agent the figures. The agent assured the buyers they could make it work. This was in the summer of 2008. But when the figures came back, they were several hundred dollars higher than the couple could afford. Rather than stop the deal, the lender told the couple not to worry. They would close and negotiate a refinance deal in a couple of months. In the meantime, the lender promised the buyers, the company would pay the difference. All verbal. Nothing in writing.”

“In late 2008, their home lost value dramatically. Within a year or so, they went ‘underwater.’ Then disaster struck. The key wage-earner lost his job. His wife was underemployed. They reduced their house payments (the bank would not work with them). The couple finally stopped paying entirely in an effort to feed their family.”

“Bank of America said it would work on a short sale, but reneged. Another branch of B of A auctioned the home to Fannie Mae at the Lyon County Courthouse. Fannie Mae hired someone else to tack a notice on the door of the couple’s home. The notice said they’d have to be out in 14 days. In the meantime, the couple have secured new, full-time jobs, but are about to be evicted from their home. They can’t even rent it. They worked hard and tried to do the right thing. Their credit has been destroyed. They feel they’ve been exploited by corrupt banks and extra-legal/unethical lender practices. The couple run the risk of being put out on the street, the culprits having no accountability.”

“Many Nevada homeowners are still suffering. Will justice ever prevail? Dr. Martin Luther King Jr. once said, ‘The arc of the universe is long but it bends toward justice.’ In this situation, justice seems badly warped. Who will help Nevada’s home-buying consumer? Who has the authority to take on a major corporation and bend the arc toward justice?”

From Scoop News. “Australian economist Steve Keen is amongst a growing group of economic renegades who believe things are so far gone with the global economy that a debt jubilee and a total reset of the financial system is required. He proposes nationalizing the banks and wiping the slate clean because he contends that it is now mathematically impossible for most countries to repay the combination of their sovereign and private debt. He also contends along with economic historian Michael Hudson that the mortgage and consumer credit that western banks have extended is verging on odious, lent recklessly for short term gain by banks more concerned about their profits from the resultant interest and fees than the effect it would have on not just individual consumers but also the nations they are citizens of.”

“If Keen and other proponents are correct the time has arrived for a general debt jubilee to be applied to western democracies including New Zealand. But why should people be absolved from mistakes in their personal financial decisions? What about the prudent amongst us who have paid off their debt or refused to accumulate any of it at all? Surely you cannot reward the reckless, for what kind of message does this send to people and how does it distort future behaviour if everyone thinks they will be bailed out at some point down the track.”

“The way Keen gets around the moral hazard problem is to give everyone a large chunk of cash whether they have debt or not. Keen doesn’t mention a figure but consider how your own and the nation’s situation would change if say every adult over eighteen got $100-200,000.”

“This leads to the other major criticism of this jubilee concept, that it would be hyper inflationary. After all we are talking in New Zealand’s case about the government creating hundreds of billions of dollars out of thin air. This would not necessarily be inflationary if a number of other things were done concurrently. The idea isn’t just to pay off debts and restart the current credit system – it is to completely reform and re-regulate credit to prevent the same lunacy of the GFC happening again.”

The Macau Daily Times. “While Mainland China has already successfully brought the growth rate in personal income above that of the national GDP, Macau is yet to bridge this gap and make individuals prosper alongside the entire economy, which, according to prominent mainland economist Wang Tongsan, is essential to the stability of the society as a whole.”

“Asked of what he considered to be the economic solution for Macau, Wang said he agreed with the local authority’s assertion to diversify the economy - by developing services industries including tourism. ‘Macau is too special. Firstly, its population is too small, but then they’re very smart,’ he said, ‘they successfully found their knack, which is gambling, and now they developed it into the biggest gaming market; the local GDP per capita is USD$50,000, while in mainland China it’s only USD$4,000.’”

“‘But the cost of this is a ‘distorted’ economy (that relies heavily on the gaming industry), and the solution is diversification - that is to develop service industry, including tourism’, he added. ‘It’s easy to say but difficult to implement, but I believe that since the Macau people are smart enough for this daunting job (of developing the world’s number one gaming market and the GDP per capita), then they must have the intelligence to find a way to diversify the local economy,’ said Tongsan.”

“‘I can only say that from an economic theory point of view, it’s correct to push for economic diversification, but I can’t tell you the details (on how to do it).’ He raised another example of Macau people’s ‘intelligence’: ‘(Last year) we heard in Beijing that Hong Kong is giving money (cash HKD6000) to its citizens - we though this an innovative idea. But after coming here, we learnt that this is actually Macau’s innovation, HK is just copying Macau’s example.’”

Bits Bucket for April 22, 2012

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