Tuesday, July 31, 2007


The Mortgage Corner

The National Association of Home Builders’ chief economist lowered his forecasts for new construction as the market has weakened further on subprime-mortgage problems and tighter lending standards, even though June housing starts rose 2.3 percent to 1.5 million annualized units.

"It's fair to say the performance of the housing market during the first half [of 2007] and the outlook for the second half and next year are a lot weaker than six months ago," said David Seiders, referring to his last semi-year forecast.

One reason for Seiders’ downgrade is that sales of new homes in the U.S. declined more than expected in June, falling 6.6 percent to a seasonally adjusted annual rate of 834,000, the Commerce Department estimated Thursday. Sales are down 22.3 percent compared with June 2006. The sales pace in June was the lowest since March's 830,000 and is the second lowest since 1999.

His outlook for 2007 single-family housing starts is now 9 percent lower than it was at the beginning of the year, while his 2008 forecast has been slashed by 15 percent, Seiders said on a conference call. His forecast is for housing starts of 1.42 million this year and 1.45 million in 2008.

The key reason is the "unanticipated and sudden turmoil in the subprime-mortgage sector" which has resulted in more stringent lending requirements for home buyers, and also spread into other higher-quality loans. This is because the Federal Reserve had raised short-term rates 17 consecutive times June 2004 to June 2006, even though it has kept rates unchanged since then. This resulted in ARM interest rates (and payments) surging to above 8 percent, beyond the capacity of many borrowers’ incomes.

Another reason for the slowdown in housing starts is surging inventories in both new and existing-homes, up to 7.8 and 8.8 months’ inventories, respectively. Combined new and existing home sales fell 4.2 percent to 6.58 million annualized, the lowest since September 2002.

Consequently, delinquencies and foreclosures are rising and the market is "still dealing with problems and that creates massive uncertainty over where we're going," Seiders said. "Financial markets are clearly correcting dramatically as it becomes clear what loans were made earlier and their performance."

He said the repricing of mortgage-backed securities and collateralized debt obligations represent "strong signals from the securities markets." Meanwhile, financial regulators "are now in the game" and establishing stricter lending standards. Also, major ratings agencies, which he said were "behind the curve," are "finally in the game in earnest" and "downgrading securities all over the place."

The economist said the housing downturn was the result of the unsustainable boom when home prices and sales rocketed higher. The euphoria was also driven by "overly aggressive monetary policy" and new types of loans. At the same time, there was an unprecedented level of buying by investors and speculators who flipped homes for profit, while the correction was unique in that it wasn't caused by higher interest rates or a weakening economy.

His prediction is that single-family housing starts will fall 23 percent this year, but recover next year and rise 2 percent. He thinks a "reasonable" rate is 1.5 million housing starts, which the market is now well below. Seiders said it will be "a slow climb out of this hole" with no expected surge in job growth or lower interest rates, so it make take several years to reach the 1.5 million level.

Further home-price declines are needed to "get markets back in balance" and make houses more affordable for buyers. However, one risk of price erosion is that buyers might wait on the sidelines to see if prices drop further, according to Seiders, which tends to make it a self-fulfilling prophecy.

Copyright © 2007

Friday, July 27, 2007



With worries about credit quality and availability mounting, futures markets are once again pricing in a rate cut by the Federal Reserve by the end of the year, several news sources report. The federal funds futures market at the Chicago Board of Trade now sees a 96% chance of a rate cut by Dec. 31, up from about 47%. That’s almost 100 percent, which means it is a virtual certainty, according to the futures markets.

The odds of a rate cut at the Oct. 31 meeting rose from 18% to about 40%. The Fed has kept its overnight lending rate target at 5.25% for more than a year. Officially, the Fed is still "biased" toward raising rates, with officials judging that the risks of higher inflation outweigh the risks of a slower economy.

Fed Chairman Bernanke started the rate downturn last week at his semi-annual Humphry-Hawkins congressional testimony on the state of our economy, when he downgraded predicted GDP growth rate to 2.25 – 2.75 percent from 2.5 – 3 percent. Why? Bernanke stated that the real estate downturn could be deeper and last longer than earlier thought. This raised fears that subprime worries could spread into other credit markets, making credit for prime borrowers harder to obtain as well.

“The pace of home sales seems likely to remain sluggish for a time, partly as a result of some tightening in lending standards and the recent increase in mortgage interest rates,” said Bernanke in his testimony. “However, even if demand stabilizes as we expect, the pace of construction will probably fall somewhat further as builders work down stocks of unsold new homes. Thus, declines in residential construction will likely continue to weigh on economic growth over coming quarters, although the magnitude of the drag on growth should diminish over time.”

But there is good news in the bad news. Mortgage rates are declining in tandem with long-term Treasury bond rates, and this could cause real estate to turnaround sooner. The10-year benchmark T Bond yield that pegs most fixed rate mortgages has fallen to 4.78 percent, after remaining above 5 percent for several weeks.

Recent data showed the 30-year fixed-rate mortgage averaging 6.69% for July 20-26, down from the previous week's 6.73% average. The mortgage averaged 6.72% a year ago. The 15-year averaged 6.37%, down slightly from last week's 6.38% but above 6.34% a year ago.

The softening rates came after further evidence of sluggish housing demand, Freddie Mac vice president and chief economist, Frank Nothaft, said Thursday.

"For example, building permits fell last month to the slowest pace in a decade, and more recent data on June sales of existing home showed a fourth consecutive monthly decline," he said in a news release.

EXISTING-HOME SALES—June sales dropped 3.8 percent to the lowest pace in 5 years. Inventories also declined, as some sellers are taking their homes off the market, according to the NAR. The median price rose slightly, but Moody’s economist Mark Zandi attributed it to the subprime “debacle”, as fewer qualified lower-income buyers are skewing the median price higher.

NEW-HOME SALES—New-home sales dropped 6.6 percent. The June median price was down 2.2 percent and new-home inventories rose to a 7.8-month supply. More noteworthy was that it now takes 6 months to sell a unit upon completion, whereas average time was 4.3 months last year.

In other news, Wells Fargo Home Mortgage, the second-largest holder of subprime loans said this week it will close its nonprime wholesale lending business, which processes and funds subprime loans for third-party mortgage brokers. In 2006, the business represented 1.6% of Wells Fargo's total residential mortgage loan volume of $397.6 billion.

The Federal Reserve should contemplate dropping short-term rates this year. Their actions since June 2004 have pushed the real, underlying interest on ARMs above 8 percent to payment amounts that many middle-income, as well as lower-income, homeowners can no longer bear in many regions with today’s elevated loan amounts.

Copyright © 2007

Promoting the Popular Understanding of Economic Issues

July 27, 2007

The Economists Voice

Letter to Editor

Samuel Bowles and Arjun Jayadev, authors of The Economists Voice essay, “Garrison America”, rightly sound the alarm over the United States’ expanding guard labor population, but do not mention at least two possible causes of the social and economic inequalities they cite as its basis. Endemic to U.S. society—and that should be fertile areas of research—are the cultural disparities and resultant conflicts that result from the fact that the U.S. has always been an ethnic melting pot.

Secondly, the authors do show a high correlation between U.S. guard labor and political conflict (in Figure 3 of the essay). But why? It could be because the U.S. as the world’s first modern democracy has a fairly primitive winner-take-all political system (based on our more than 200-year old Constitution) that discourages and even excludes minority ethnic and cultural groups. More recent Western democracies have a parliamentary system that allows a greater number of political parties (and viewpoints) than our two-party system. The result is special interests rule U.S. politics that research has shown lead to very low voter participation rates. (Which is why conservatives resist modernization of our constitution, which would create a more participatory democracy.)

New York City contains the largest Russian, Chinese, and maybe Latino populations outside of their native countries (and/or hemispheres). Los Angeles may contain an even larger population of Latinos, when illegal immigrants are included. Harvard’s Joint Center for Housing Studies’ 2006 “State of the Nations Housing” report estimates that 10 percent of the U.S. population are now first generation immigrants.

Our largest influx of immigrants occurred during the late 1800s, due to chronic shortages of domestic labor in our dynamic and fast expanding economy. Hence the establishment of National Guard Armories during those times (and the 20 armories situated in New York State alone with its Ellis Island, the immigrants main gateway to America). The Harvard study estimates that one million new immigrants continue to enter the U.S. per year.

The remedy might be more methods of cultural assimilation, especially for those most affected with ‘culture shock’, which can mean extreme disorientation for those not able to readily assimilate. (This is another fertile area of research, by the way.)

We are seeing more attempts in our educational system to include cultural assimilation, such as a growing number of universities’ ethnic studies departments that study ethnic and intercultural differences. But it is not a priority in our society. What if we could create more programs that assist assimilation? Would that reduce the guard labor population?

Harlan Green

Thursday, July 26, 2007


July 24, 2007

Dear New York Times

Re: Brooks op ed, “A Reality-Based Economy”

David Brooks makes a valiant, but unsuccessful, attempt to justify the Bush Administration’s economic policies in his July 24 op-ed piece, “A Reality-Based Economy.” The “complicating facts” that he cites to refute the Democrats’ campaign to discredit Republican economic policies are themselves simplistic in the extreme, as follows:

First factor—Brooks correctly notes that wages have finally risen in 2006, but average real household wages from 2000-2005 fell 5.4 percent per the Economic Policy Institute. This has been the poorest post-war recovery on record, both in terms of wage earnings and job creation.

Second—It is true that the bottom 20th income percentile may have increased earnings by 80 percent through 2005, but that poorest 20th percentile still has an average income of just $15,400, approximately $4,000 below the current official poverty line, per the latest U.S. Census figures! Is this something to be proud of?

Third—Income volatility may be down slightly, but so is upward mobility. The latest studies show that Europeans now have greater upward mobility than U.S. citizens, hence a greater opportunity to better themselves.

Fourth—Recent rises in inequality certainly have much to do with a growing educational inequality. That is proven by the sky-high tuitions and admission caps for the best schools that can only be overcome by the huge student loans that those in the lower and middle classes fortunate enough to be admitted have to take out. Brooks’ insinuation that hard work is somehow lacking in those left behind is belied by the fact that U.S. workers work more hours, have less vacation time, (and less health insurance coverage) than European and Japanese workers.

Fifth—“Performance pay” is certainly a reason for growing income inequality. It is also a method of making workers work harder with longer hours. Increasing income inequality increases job insecurity, which makes workers more docile, which is just what employers who wish to exploit their workers want.

Sixth—Working longer hours is not a cure for inequality, as Brooks suggests. It is not good for anyone’s health, either, and U.S. workers are paying for it with poorer health outcomes than other developed countries. Our live span is shrinking, we have higher disease rates, and have even a shorter average height now than in European countries.

Seventh—It is true that “greedheads” are not just “self-dealing” corporate types “bilking shareholders”, but is that a defense? Brooks doesn’t mention that much of the hedge fund managers’ whopping earnings were made through a tax loophole that they have profited from—their incomes being taxed as capital gains rather than ordinary income.

Eighth—Certainly CEO compensation should be performance based. So how does that excuse those corporate greedheads who got the big bucks (such as Pfizer’s CEO Hank Kinser) without good economic results? Pfizer lost both earnings and stock price under his watch, yet he was awarded what--$200 million?—for his non-performance?

Ninth—True, our economy is doing well with a 4.5 percent unemployment rate, tax revenues are up and the budget deficit is down to 1.5 percent of GDP. But the Republican tax and spending policies of the past 6 years have left an $8 billion federal debt burden, much of it owed to foreign investors.

More economists are sounding the alarm that the policies Brooks attempts to defend are dangerous to our long-term, economic health. Goldman Sachs Vice Chairman Robert Hormats is but the latest. Hormats appeared before the U.S. House Budget Committee to "discuss an issue of great economic, financial and national security importance to our country -- the growing dependence of the United States on foreign capital." Currently we import $1 trillion new debt annually, with no repayment plans. That's a historic break from over two centuries of American policy.

"One central, constant theme emerges,” he continued, “sound national finances have proved to be indispensable to the country's military strength" and long-term national security.

So, who is drifting “further away from reality”? The only solution to our long-term economic (and national) security is a bi-partisan consensus on reducing our national debt. Right and left-wing ideologies have never answered the needs of real people.


Harlan Green, Editor



It is time to look at the prospects for third quarter growth, a crucial time that could determine what happens for the rest of 2007. Two factors make this quarter of interest: Fed Chairman Ben Berrnanke suddenly lowered his expectations for inflation and economic growth in his latest congressional testimony, and the subprime market continues to have problems. This seems to take any possibility of further Fed rate hikes off the table this year.

The cause of his change of heart may be that credit rating agencies such as Standard & Poor’s and Moody’s downgraded to junk bond status at least $10 billion in so-called mortgage backed securities (MBS) and other credit instruments that back subprime mortgages. The reason? Massive defaults are exposing the sloppy underwriting and accounting practices of not only subprime lenders, but the Wall Street firms that underwrote their business.

“The downgrades come because S&P said losses on such mortgage-backed securities will "significantly" exceed anything that's happened before and its own expectations,” reported CBS Marketwatch.

Both of these occurrences can be good for real estate, since bond markets rallied on the lessening inflation threat. The 10-year benchmark Treasury bond yield dropped below 5 percent for the first time in months.

The earliest actual indicator for Q3 growth is the Conference Board Index of Leading Economic Indicators (LEI) that came out this week. It fell 0.3 percent in June, and has declined 1.3% annualized over the past six months, suggesting that "economic growth is likely to continue, but it is likely to be at a slow pace in the near term," said the Conference Board release.

It is a pretty good predictor for second-half growth, since it incorporates many of the factors that control growth, such as the money supply, consumer expectations, and manufacturing output.

June’s inflation indexes were also benign, just as Bernanke has predicted. Wholesale PPI prices actually fell 0.2 percent, surprising analysts, and retail (CPI) prices rose 0.2 percent, because energy costs softened. Only auto and food prices rose; autos because Detroit is introducing its new season models and food prices because of the wholesale diversion of corn for the making of ethanol.

Housing starts for June rose slightly, but building permits continued to decline. This could be a sign that housing demand is solidifying, even though the National Association of Builders’ sentiment index for future business sank to its lowest level since 1991.

Bernanke’s congressional testimony was really an admission that the Fed is becoming worried over the damage the subprime debacle could do to real estate and banks. This can only continue to bring down interest rates and so hearten home buyers who now have a large inventory of homes for sale to choose from.

Copyright © 2007

Tuesday, July 17, 2007

What Do We Mean by Fair Taxes?

July 16, 2007

Harvard Professor N. Gregory Mankiw believes the rich pay their “fair share” of taxes in his July 15 op ed piece, “Fair Taxes? Depends What You Mean by Fair’.” But using President Bush’s pronouncement that, “On principle, no one in America should have to pay more than a third of their income to the federal government,” is not a very believable standard. This is a president, after all, who has run up the largest federal budget deficit in history and a federal debt load that exceeds $8 trillion, much of it owed to foreign investors.

We can think of a better definition of ‘fair share’. For example, the fact that the poorest fifth of our population (20 percent equals 60 million people!) have an average annual income of $15,400, is below what the U.S. Census Bureau has deemed the poverty line. Why should they be taxed at all? And we are supposed to be the richest country in the world?

Why not make the measure of what is ‘fair’ how our taxes are spent? For taxation policy is really a mechanism for the redistribution of wealth. Maybe there would be little debate on taxation policy, or the need to raise or lower taxes, if we had a balanced federal budget, for example. Half of our ‘unbalanced budget’ is now spent on the military. And so it is the military-industrial complex and its supporters—the likes of VP Cheney’s Halliburton, the Carlyle Group, and oil companies—who benefit most from our tax monies. Much less is now spent on the much more important human capital that determines our standing and competitiveness in the world—like education and health care.

We are falling behind the rest of the developed world in many categories of human capital: a decent health care system (including for our veterans) would not allow more than 40 million uninsured. An adequate educational system would not allow our elementary and high school children to rank lower in math and reading skills than those in Japan and other developed countries.

These results are confirmed by scientific studies. U.S. citizens now have much longer working hours than in other developed countries, fewer benefits including paid vacations and sick leave, a greater incidence of major diseases, shorter life spans, and higher infant mortality than in some developing countries (including Cuba).

So why not concentrate on a ‘fair’ distribution of our wealth? Other developed countries spend their tax monies more wisely—i.e., on their citizens rather than war-making ability. And that increases their ability to compete globally. Libertarian philosophers and economists such as Milton Friedman like to cite the ‘freedom to choose’. But we know from evolutionary psychologists and behavioral economists, among others, that the wealthy are freer to make intelligent choices than the 60 million of our poorest members.

Harlan Russell Green

Monday, July 16, 2007


July 14, 2007


Other Voices Submission

J.T. Young’s “Other Voices’ (July 16) essay, “Tax Cuts Helped Economy Stay Afloat,” is but a repetition of what has become the Bush Administration’s mantra: “…cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible.” (as originally coined by economist Milton Friedman). Simply put, Young’s assertion that the 2001 (and 2003?) tax cuts “produced the best recession/recovery cycle of the past 60 years” was given the lie by the 2006 elections, in which much of the Democrats success was attributed to voters’ dissatisfaction with the economy.

There is almost no dispute among economists that the 2001 recession was one of the shallowest in history. But that was mainly due to the fact that the Fed dropped interest rates too low for too long—a policy that resulted in the printing of limitless amounts of money that powered the greatest housing boom on record (and bursting of the subsequent housing bubble), as well as a credit bubble based on fraudulent subprime loans that is bursting as we speak.

But the strength of the recovery is another matter. Most Americans did not benefit, just the top 10 percent of income earners—i.e., those who now control almost 80 percent of the wealth of this country. These numbers are corroborated by everyone from the Federal Reserve Bank to the Congressional Budget Office, to the international Organization for Economic Co-operation and Development (OECD).

Nobelist Joseph Stiglitz and fellow economist Peter Orszag said it best in a Business Week essay of that time: “The administration’s (tax cut) package largely ignores the central feature of a recession: lack of demand. The primary problem is that the nation’s firms face a reduction in demand for their products—not that they lack available workers, equipment, or anything else needed to produce goods and services. Indiscriminately injecting cash into such firms through tax breaks, without linking the tax breaks to new activity, would do little if anything to address the underlying difficulty.”

What did Drs. Stiglitz and Orszag recommend? They recommended a temporary extension of unemployment insurance and cut in income taxes for salaried workers, which directly benefits those who spend the largest portion of their income. This is classical Keynesian economics, of course.

Supply-side economists (conservatives one and all), on the other hand, swear by Say’s Law that says demand is never the problem, only an adequate supply of goods and services. Let wages fall where they may (though wage levels are the major determinate of aggregate demand). Allow workers to work for next to nothing, in other words, and eventually any economy will recover!

That certainly happened during this administration. By not giving tax cuts to those who could most use it—rather than investment tax breaks on capital gains and dividends--real average household incomes for working age households under 65 fell 5.4 percent 2000-2005, after inflation. Incomes have only begun to recover over the past three quarters, too late to prevent the lowest personal savings rate since the Great Depression. Consumers’ personal savings rate has been negative for more than 2 years.

The conservatives’ tax cuts were in fact a calculated shift of wealth from the lower and middle classes to the already wealthy and their supporters. The massive resulting Federal budget deficits have pushed us back to inequality levels last seen in the 1920s—at the expense of a decent health care system (and our veterans), and declining educational system (our elementary and high school children rank lower in math and reading skills than those in Japan and other developed countries).

These results are confirmed by scientific studies. U.S. citizens now have much longer working hours than in other developed countries, fewer benefits including paid vacations and sick leave, a greater incidence of major diseases, shorter life spans, and higher infant mortality than in some developing countries (including Cuba).

What should be some remedies that a majority of Americans already advocate, but that recent administrations and a congress beholden to lobbyists have not had the courage to adopt? Spend more tax dollars on domestic programs than the military, for starters. Our defense expenditures now make up half the federal budget. And military expenditures only benefit the military-industrial complex (and its supporters) when we are already the sole military super-power.

Then use some of those savings (military spending is notoriously wasteful) to take health care out of the hands of the HMOs, drug, and insurance companies, and replace it with a national health care system for all U.S. citizens, like every other industrialized country in the world!

The current policy of lavishing our tax monies on the military ignores the economic advantages our neglect of domestic spending has given Japan, Asia and our European allies who use their tax monies more wisely. They choose to invest their citizens’ money in improving their human capital, which after all, is the real basis of any nation’s wealth.

Otherwise, continuing such blatantly unworkable tax policies means not only will we fall back further in the competitive global race for economic supremacy, but winning hearts and minds in the global war on terror as well.

“Cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible,” is really a formula for disinvestment in people. It puts the United States of America on a dangerous course of decline in both status and the power to influence worldwide events.


Harlan Green, Editor