A Housing Market That Works for Us

Nov 16, 2010Joe Costello

mortgage-crisis-150Robo-signers. Moratoriums. Botched documents. In the midst of a complicated and crooked mess, New Deal 2.0 asked leading thinkers and activists to help navigate the maze of the foreclosure crisis.

mortgage-crisis-150Robo-signers. Moratoriums. Botched documents. In the midst of a complicated and crooked mess, New Deal 2.0 asked leading thinkers and activists to help navigate the maze of the foreclosure crisis. Our "Foreclosure 411" series focuses on the values inherent in explaining why we should care and what the crisis means to all of us. In the first part, Joe Costello argues that we have to measure the economy not by the size of bonuses but the well-being of Americans.

My new house
You should see my house
My new house
You should see my new house
According to the postman
It's like the bleeding Bank of England
My new house
Could easily crack a mortal in it
-- The Fall

The National Association of Realtors recently released a housing report (h/t Calculated Risk) that states:

The Pending Home Sales Index,* a forward-looking indicator, slipped 1.8 percent to 80.9 based on contracts signed in September from an upwardly revised 82.4 in August. However, the index remains 24.9 percent below a surge to 107.8 in September 2009 when first-time buyers were jumping into the market to take advantage of the initial deadline for the tax credit last November.

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Whatever other numbers you want to use to measure the economy, housing remains key. Housing was the center of the bubble and it continues to deflate. And judging from every historical precedent, it's going to continue to deflate, no matter how many times Mr. Bernanke presses ctrl-alt-shift-$. Currently 25% of people are underwater in their mortgages, with estimates that it will reach 40% within two years. Which means that all the losses the banks are hiding are only going to grow larger. Now remember, the whole housing bubble was created to literally paper over the great imbalances in the American economy that had developed over several decades, and most significantly, the stagnation of wages. Which is also why all the cries for dumping ever greater amounts of fiscal stimulus into the economy without a serious look at correcting these imbalances is just as much a crack-pipe policy as they're smoking at the Fed.

We should stop the foreclosures, write down the mortgages so people can stay in their houses, and make the banks and bondholders take their losses, breaking up and recapitalizing where necessary. We need a reevaluation of how our economy works. Instead of judging the health of the economy by Wall Street bonuses and bank profits, we need to ask what sort of life it is providing for the vast majority of Americans. Are people living better? Not just in the amount of stuff they own, but are they more secure, healthier, and living fuller lives? GNP and profit/loss numbers aren't great metrics for measuring these things. We need a societal value shift.

Joe Costello was communications director for Jerry Brown’s 1992 presidential campaign and was a senior adviser for Howard Dean’s effort in 2004.

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Our Financial Infrastructure in Tatters: Announcing New Series on the Foreclosure Crisis

Nov 15, 2010Mike Konczal

mike-konczal-2-100Robo-signers. Moratoriums. Botched documents. In the midst of a complicated and crooked mess, New Deal 2.0 is asking leading thinkers and activists to help navigate the maze of the foreclosure crisis.

mike-konczal-2-100Robo-signers. Moratoriums. Botched documents. In the midst of a complicated and crooked mess, New Deal 2.0 is asking leading thinkers and activists to help navigate the maze of the foreclosure crisis. Our new "Foreclosure 411" series will focus on the values inherent in explaining why we should care and what the crisis means to all of us. Mike Konczal introduces the series.

Why, with so many problems in the world, should you care about the current foreclosure crisis? Isn't this just a problem on the fringe, a case of deadbeats not paying their bills?

I wish it was that simple. However, this crisis is a complete breakdown in the infrastructure that handles the most important financial asset for a majority of Americans, and one of the primary means by which intergenerational mobility occurs.

The foreclosure crisis sits at the heart of each of the crises that are destroying our economy. There's a massive amount of bad debt and over-leverage as we emerge from a burst credit bubble. There's the broken financial system that was created in the past two decades, rife with incentives to rip off both investors and borrowers in order for middle-men to profit. There's the macroeconomic crises of deflation and mass unemployment, which are devastating households trying to survive. And finally, there's the tepid response from the Obama administration, embracing the idea that the problem would go away by now with a growing economy. This plan hasn't worked and there isn't any plan B in place.

These aren't new problems. We've known about them for a while now, and we are living out the consequences. In light of the likelihood of continuing unemployment and a lost decade for America, New Deal 2.0 has reached out to a variety of writers to look at the foreclosure crisis and its causes, problems and solutions.

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The financial system's ultimate goal should be to mediate the transferring of funds from borrowers to savers. Starting in the early 1980s, the private mortgage securitization system was supposed to bring the best in deregulation to this market. Private servicers could manage assets better with tax-free protection, the ratings agencies could dynamically assess credit risk, and the wonders of a deregulated financial market and a financialized economy would get credit exactly where it needed to go.

This has not happened. But beyond puffing up a credit bubble in housing, it has destroyed our ability to move on afterward, to dig out of the collapse. Bad investments happen all the time. People buy at the wrong time, get in over their heads, etc. The question is: what railings are around the system? In the private system, those railings are the servicers. For the public, it is our bankruptcy courts and property record systems. Both are being corrupted by this foreclosure crisis.

This alone is reason enough to be worried. All it takes is a random problem in our servicer system to get the average homeowner into trouble. This isn't about deadbeats or responsibility. All this system does is make it profitable to be a big bank (profitable as long as it doesn't have to record its losses). However, we don't want a financial system with only this objective -- we want a financial system that finds investment opportunities, provides contracts that are valid and well-informed, that makes sure property rights that involve debt and uncertainty are maintained properly, and that the borrowing and lending markets are as complete as they can be without being exploitative. This series will show you how that has failed.

Mike Konczal is a Fellow at the Roosevelt Institute.

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What Does it Mean to Live Beyond Our Means?

Oct 26, 2010Marshall Auerback

marshall-auerback-100Why deficit spending is a good thing until it becomes inflationary.

marshall-auerback-100Why deficit spending is a good thing until it becomes inflationary.

Nine times out of 10, Joe Stiglitz is on the right side of the issue. But his response in a recent exchange with our own Lynn Parramore highlights a problem that progressives need to consider in the debate on fiscal stimulus:

Lynn Parramore: People have said that before the crash, the U.S. provided the world's consumer of last resort. How much has the world changed in that respect?

Joseph Stiglitz: Well, before the crisis, the United States was living beyond its means, and much of what it was spending beyond its means was consumption. It is still the case that the United States is living beyond its means, but the good news is that the households are now beginning to save. But on the other hand, the government deficits have actually increased. So the fact is, the U.S. is continuing to spend beyond its means. Now in the long run, this can't continue, and that is what is sometimes referred to as the problem of global imbalances. It changed a little bit since the crisis, but the fundamental problems that have given rise to it have not been corrected.

Statements like this are potentially misread. In my view, the size of the public sector deficits per se are of no economic consequence until they become inflationary. At this stage, they are a very useful tool to help reduce private sector indebtedness, and should therefore be seen as a good thing, not a necessary evil. The alternative is 1930s-style debt deflation.

There is no doubt in my mind that the case for fiscal austerity is based on the ideological hatred of government intervention rather than any sound economic theory that the cutbacks will improve the aggregates we are usually concerned with -- output and income growth, reduced unemployment, low inflation, etc. It is clear to me that the fiscal austerity approach -- epitomized by the announcement in the UK earlier this week -- will further damage employment growth and undermine economic growth.

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Bill Mitchell provides a good, simple example. He poses the question: what happens in a simplified economy if the government spends $120 and taxes remain at $100? The result is that private saving is 20 dollars, and this can be accumulated as financial assets -- initially in the form of numbers in the spreadsheet under private currency holdings. The government might call these holdings "private bank deposits" if it liked.

Where did the 20 dollars in savings come from? Answer: the initial net deficit spending by the government. The person who now has the $20 in additional financial assets can spend the money, thereby creating a multiplier effect in the real economy. Alternatively, (but not before), the government person might then say to the non-government person that they are prepared to encourage further saving and will issue an interest-bearing bond. So a column in the spreadsheet is created to record any "bond sales", which just amount to reducing a number in the "private bank deposits" column and putting that number into the bond sales column. Please note that the bonds do not "fund" anything. They are effectively being offered as an interest-bearing alternative to cash. The person can either spend part of the $20 or save it in the form of a bond. This enhances his net wealth.

Has the government done anything to suggest that it is "living beyond its means"? Of course not. As Mitchell notes, the government is not obliged to issue this bond. The net spending will still appear as before in the spreadsheet. The deficit does not need to be "financed" by borrowing. There is no operational imperative for the government to issue this debt as things stand. It is clear that the government is "borrowing" back what it has already spent.

The government deficit of $20 is exactly the private savings of $20, which may be stored in bonds or deposits. We could add any number of financial assets without contradicting the basic finding -- over time, the accumulated private savings would equal the cumulative budget deficits.

Now, what would happen if the government person decided to run a surplus (say spend $80 and tax $100)? Answer: in the next period the private sector person would owe the government a net tax payment of 20 dollars. Where would they get that shortfall from? They would need to sell something back to the government to get the needed funds or run down their bank deposits. The result is the government generally buys back some bonds it had previously sold.

Either way, accumulated private saving is reduced dollar-for-dollar when there is a government surplus. Which is why government surpluses (rather than deficits per se) are inherently unsustainable. They drain aggregate demand in one of two ways, as Mitchell argues:

  • The stock of financial assets (money or bonds) held by the private sector, which represents its wealth, falls; and
  • Private disposable income also falls in line with the net taxation impost. Some may retort that government bond purchases provide the private wealth-holder with cash. That is true, but the liquidation of wealth is driven by the shortage of cash in the private sector, arising from tax demands exceeding income. The cash from the bond sales pays the government's net tax bill. The result is exactly the same when we expand this example by allowing for private income generation and a banking sector.

So when Stiglitz describes people in the US "living beyond their means", he has to place this in the context of governments running insufficiently large deficits (or, in the case of the Clinton era, budget surpluses), thereby constraining aggregate demand and forcing people to resort to private debt accumulation, which is clearly an unhealthy development.

The President and his economics team operate from the a flawed economic perspective, which is why he and his party is suffering so much in the polls. You can't make a reasonable case for fiscal stimulus if the argument is predicated on notions that deficit spending is a "necessary, albeit temporary, evil" or creates a situation where we "live beyond our means".

Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.

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Consumers: Our Only Economic Hope?

Oct 20, 2010Mike Konczal

mike-konczal-2-100Don't hold your breath for consumer spending to lead the recovery.

mike-konczal-2-100Don't hold your breath for consumer spending to lead the recovery.

Noam Scheiber has a fantastic piece this morning, Handoff, or Fumble?, which is about the handoff "between temporary boosts to growth, like government stimulus, and more lasting drivers, like spending by consumers and businesses." This is a handoff that needs to occur in order for even feeble growth to take off.

Administration economists believe such a handoff, weak as it may be, will work because consumer spending will eventually increase. They base this analysis on well-modeled historical data. But the other side in this argument is the idea of a "balance-sheet recession", which is primarily associated with Richard Koo. In this side's mind, historical data won't be of much use to us because the nature of this recession is different. This article by Noam is a great introduction to Koo's thinking:

The question -- really more like a nagging terror -- is whether something has happened since the recent financial crisis to fundamentally change the way consumers behave, rendering the administration’s model moot. As it happens, there’s a school of wonks that worries this is the case.

The godfather of this group is a Japanese economist named Richard Koo, whose framework for thinking about this appears in a book he modestly titled The Holy Grail of Macroeconomics. (Paul Krugman, among others, has identified himself with some of Koo’s ideas.)

Koo’s view is that consumers and businesses who take on enormous debt during a bubble abruptly shift gears once the bubble bursts, spending very little while they pay off loans. Moreover, this stinginess continues until the process of debt-repayment (economists call it “deleveraging”) is complete, creating a huge drain on the economy. In the case of Japan, whose real estate and stock markets collapsed in the early ’90s, this took over a decade. During that time, Koo argues, the only force propping up the economy was massive amounts of government stimulus. He tells a similar story about the Great Depression.

Whereas Carroll assumes people base their saving decisions on the same factors both before and after the crisis, Koo says the way they make decisions beforehand tells you little about their behavior afterward. The crash doesn’t just pummel the value of their assets (like housing). It creates a kind of psychological trauma that preoccupies them with paying down debt before they can think about borrowing again. If you accept Koo’s premise, the data of the last 40 years is of little help in guiding us through the current situation. The episodes we’re talking about -- Koo calls them “balance-sheet recessions” -- simply didn’t happen at any point in that time-frame.

Noam then goes on to explain how we'll know who was right in about a year.

A few extra points on Koo's thinking: Here's Richard Koo presenting his argument at the kick-off INET conference:

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When we think of household balance sheets being underwater, it's important to remember that the middle-class is the most underwater. As we discussed here, the middle-class, normally the engine that drives consumer spending out of a recession, is so underwater that they need some life preservers thrown their way:

It's tough to see them leading a consumer spending-driven recovery.

We talked about how Koo compares and contrasts the early 1980s here. Here's a graph from his book:

As we mentioned back then, Japanese interest rates are at 0%, yet the corporate bond market is shrinking. Repeat that again: interest rates are at 0%, so debt is essentially free, yet corporations are choosing to net pay off debt.

If you go to every business school's textbooks and case studies, you won’t find good answers for this. This means that corporations can’t find a good use for their money. If a firm has no profitable opportunities, it should close and return its money to businesses. It has no reason to exist, given that its reason for existing is that it knows what to do with shareholder’s money better than the shareholders, which in this case it does not.

How does that look for the United States' market? From the Fed Flow of Funds:

This was updated in September, and we see yet another quarter of households paying off debt and deleveraging, and it doesn't seem to be trending upwards anytime soon. Meanwhile, businesses are hovering, uncertain whether there will be demand for their products. This points to Koo's argument. We'll be watching the data as it comes in to see which side's argument is winning and what kind of policy mechanisms can be put into place one way or the other.

Mike Konczal is a Fellow at the Roosevelt Institute.  You can follow him on twitter.

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The Breakdown of the U.S. Mortgage Market

Oct 19, 2010Mike Konczal

mike-konczal-2-100Newsflash: the system has been failing homeowners, and the rest of the market, for some time.

mike-konczal-2-100Newsflash: the system has been failing homeowners, and the rest of the market, for some time.

This is a placeholder for some ideas I want to develop further.  Obsidian Wings catches something I've noticed in this debate too: "In any event, I noticed commenters at every blog giving a ritual statement that 'of course I don't have any pity for people who are defaulting on their mortgages' before they get down to the business of apportioning blame."  If there's anything our elite can agree on, it is beating on the so-called 'losers' who are getting kicked out of their homes.

I think this is a backwards way of looking at what is going on with the foreclosure crisis. The way we deal with mortgages in this country is a brand new phenomenon, one that only dates back 15 years or so, and it is a failed system. It's like a car in an accident that wasn't tested, but instead of the airbag not deploying the car has exploded.  That a record numbers of homeowners are delinquent and defaulting is the sign of a sick system, and efforts to 'purge' delinquencies out doesn't get at what has gone wrong.

The real debate for me is: why are we having so many foreclosures?  Think of the iconic example of a local housing bubble, Texas in the 1980s. Here's how bad the foreclosure rate got:

That was after a pretty vicious oil and housing bubble popped around 1986, and we don't see anywhere near as many foreclosures as we do now (the number has gone up throughout 2009 and 2010).

Because the first rule of mortgage lending is you don't foreclose.  And the second rule of mortgage lending is you don't foreclose.  For all the talk about how principal modifications will harm other economic parties, it's the other way around. Imagine a house is worth $200,000, but the mortgage is worth $300,000. The homeowner can't make the payments at $300,000 but can at $250,000. If the homeowner's principal isn't written down, the bank seizes the house and sells it at... $200,000.  And that assumes they don't lose 30+%, as is common for a foreclosure sale.  This loss will raise the cost of capital for everyone else. Why is it breaking down this way?

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One reason is that there isn't anyone standing in the center acting as the fiduciary. We only have to look at the structure of the servicers to see this. Designed to do automated, scalable and streamlined work, they are being asked to do work that is time and energy intensive. Then comes the incentive structure wherein it's less profitable for loans to be current and functioning. Built into this business model is the fact that delinquent loans will balance out the lack of profit from fewer mortgages being started (what they called a counter-cyclical diversification strategy).  This is what people like Amar Bhide are pointing out about local knowledge; issuing loans can harness economies of scale.  Servicing loans can harness economies of scale.  Managing loans that are delinquent and in need of modification is time and knowledge intensive.

The second is the structure of multiple liens. It was no accident that this structure makes it incredibly difficult to modify and deal with a mortgage crisis. If you go back and read the arguments put out by a conservative think tank like the American Enterprise Institute, arguments like Charles W. Calomiris and Joseph R. Mason's High Loan-to-Value Mortgage Lending: Problem or Cure? (which we discussed here), the idea that leveraging up and using your home as a credit card with multiple different entities having multiple different claims, junior claims that senior claims might not even know about, would lock you into having to be a more responsible party and also save you some pennies on that housing credit card. Calomiris:

Misplaced concerns about the riskiness of HLTV lending and the destabilizing effects of reloading and churning have led some in Congress to advocate altering personal bankruptcy law to allow cram-down -- or bifurcation -- of mortgage debt exceeding 100 percent of home value. Under such a scenario a borrower filing under Chapter 13 would avoid foreclosure. Mortgage lenders would retain senior claims on the borrower up to the amount of the fair market value of the underlying property at the time of bankruptcy. The HLTV loan would thus be second in line as a claim on borrower wealth up to a maximum of the value of the mortgaged property. The amount of the HLTV loan greater than the value of the underlying property at the time of bankruptcy would be treated as unsecured debt and placed on an equal footing in the bankruptcy process with other unsecured debt... Cram-down would essentially eliminate that special bargaining power of the HLTV lender.

So AEI thought it should be incredibly difficult to modify a failing mortgage so that homeowners could save a tenth of a percent on their house credit card.  It's worth noting that the "special bargaining power" is designed to eliminate modifications, or the simple Pareto-improving agreements between a senior debt-holding bank and a lender. As we noted before, it would be insane to allow this kind of structure to go on in the corporate bond market.

Another way to think of this more general idea is that if we seal someone inside a car and take out the airbags and seatbelts, they'll be the best driver ever. I had an economics professor back in business school who was proud of the fact that he never wore a bicycling helmet, even after he broke his collarbone in an accident, because he found some half-assed research saying that cars drive closer to people with bike helmets on.

This bizarre idea, known as risk homeostasis in the economic ideology, is useful as a thought exercise, but a dangerous way to run a mortgage system. And this is the system that we are dealing with.  Because it ignores the fact that sometimes a gigantic truck of global imbalances and a systemically large housing bubble and financial crash will be racing the opposite way, right in your direction.

Last bit of real talk: there's no point in making a partial payment on a mortgage from the standpoint of keeping the mortgage current. If your mortgage payment is $1,000, and you pay $900, you aren't any more current for it. Is there an instrument we can use to see if people are trying to stay current and make some sort of payment? Here's one from Mr. David Lowman, Chief Executive Officer, JPMorgan Chase Home Lending, at a House committee on "Second Liens and Other Barriers to Principal Reduction as an Effective Foreclosure Mitigation Program":

It is important not to confuse payment priority with lien priority. In almost all scenarios, second lien holders have rights equal to a first lien holder with respect to a borrower’s cash flow. The same is true with respect to other secured or unsecured debt, such as credit cards or car loans. Generally, consumers can decide how they want to manage their monthly payments. In fact, almost 64% of borrowers who are 30-59 days delinquent on a first lien serviced by Chase are current on their second lien. It is only at liquidation or property disposition that first lien investors have priority.

So what you see is a lot of people, over half, who have stopped paying the first lien are trying to make some sort of payment. (In a way that strikes me as a weird conflict of interest if it's consistent across all servicers. Talk about bad financial literacy.)  If there's ever been evidence that rather than trying to leech out a vacation, there are a large number of people trying to get current on their loans, trying to pay something to stay in their homes, it's this number proving that people are paying the smaller junior lien first. Why can't the system meet them halfway?

Mike Konczal is a Fellow at the Roosevelt Institute.

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A Defense of Thrifty Consumers

Oct 14, 2010Bryce Covert

Spending on credit isn't the only way to get the economy humming. Jobs and a living wage can do the trick.

Yahoo! Finance Economics Editor Daniel Gross had an op-ed in the NYTimes recently proving that while thrift is the new black, consumer use of credit cards is still in vogue. The decline in credit card balances may not be due so much to consumers putting their cards in the shredder, but perhaps to accounting:

Spending on credit isn't the only way to get the economy humming. Jobs and a living wage can do the trick.

Yahoo! Finance Economics Editor Daniel Gross had an op-ed in the NYTimes recently proving that while thrift is the new black, consumer use of credit cards is still in vogue. The decline in credit card balances may not be due so much to consumers putting their cards in the shredder, but perhaps to accounting:

CardHub.com, a credit-card industry site, crunched data from rating agencies and the Federal Reserve and found that in the 18-month period from January 2009 through June 2010, American lenders simply wrote off $124.1 billion in credit card balances as uncollectable. That accounts for nearly the entire $134 billion decline in revolving credit balances outstanding in the same period. And in the second quarter of this year, company write-offs were actually nearly $10 billion greater than the amount consumers paid down.

Is it a bad that consumers are still paying with plastic? Gross feels that it's not bad at all. In fact, he says it's the very pick-me-up that this slumbering economy needs: "In an economy in which consumers account for 70 percent of activity, credit is both a vital lubricant and the indispensable fuel."

I've heard this argument before in response to my anti-credit card stance -- even though I'm not advocating that we get rid of credit cards, but more that we get rid of any chains that tie consumers to them. Some have protested my position by saying that our economy runs on credit card use. It's an issue worth exploring. Does our economy need credit in order to survive? Are there other ways to get the gears grinding once more? I got a chance to ask Gross these questions directly, and his answer can be summed up pretty easily: he maintains that credit is part of the answer, but it doesn't have to be the whole picture. In fact, increased spending on credit is intertwined with increased jobs and pay.

In the op-ed, Gross points out that "unless you're a multimillionaire, it's difficult to make significant purchases -- college tuition, a Viking stove, a Toyota Prius, computers, jewelry, a house -- out of savings or cash flow from wages." The problem right now is that while sales in everyday purchases like food and clothes are either leveled out or rising, really big buys just aren't moving. The good news, he told me, is that data shows over the past two years consumer spending and personal savings have risen together, while credit card debt has fallen (even if it's due to write-offs). In other words, he said, "people with jobs and income are stashing more cash under the mattress, and they're spending more at stores -- without running up as big tabs on their home equity lines and credit cards." But the big purchases still remain stagnant. Some industries, like car dealerships and home builders, rely on credit -- there are few among us who can plunk down $16,000 in cash for a new Civic. So to pick up demand in these slack areas, consumers will have to get comfortable again buying things with debt.

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But increased credit is not the only way to get back to a humming economic machine. In a short video on the fallacies behind fiscal austerity, Professor Mark Blyth discusses how so much debt -- corporate as well as personal -- got racked up before the financial crisis. He makes a key point for my argument: "The bottom forty percent of US income distribution hasn't had a real wage increase since 1979." It therefore made sense for them to take on debt to pay the bills during the boom. But while banks were leveraging up to take huge bets for themselves, the lower 40% "didn't really benefit from the boom. All they got was debt and the illusion of prosperity." And that continues. As of February, the average credit card debt was still about $3,700 per adult, or $7,400 per household. Meanwhile, 44 percent of American families have experienced a job loss of one or more members, a reduction in hours or a cut in pay. One in five American households is financially insecure. The costs of basic necessities are rising faster than incomes for a majority of consumers.

The solution to this problem isn't simply going back to paying the bills with credit cards. As our blogger Marshall Auerback said to me, "You would rather create an environment where people have good paying jobs where they don't need to rely on credit to sustain their living standards." Businesses need paying customers -- not just the car dealers, but also the grocery stores and the clothing outlets. Paying customers need jobs and decent incomes. Those things are in scarce supply right now. If the US were to actually pursue a policy of full employment and a living wage, the number of eager consumers would automatically rise.

And Gross agrees, pointing out that it's not an either/or problem -- credit is compatible with a strong job market and good wages. In fact, it's all inter-related. When unemployment is down and wages are up, "the capacity to handle, manage and pay down debt grows accordingly," he points out. Which means that credit lenders are more inclined to loan out money to cash flush consumers -- the economic wheels start spinning, in other words. Gross is not optimistic, he says, about our politicians' ability to pull off an increase in jobs and wages, given the decline of the unions' powers, a broken political machine in DC, and the state of globalization and free trade. But in this case of the chicken and the egg, we might want to start with more jobs and better pay before we return to a heavy reliance on credit. I'm up for being an idealist over a pragmatist.

So while we still have to rely on credit for large purchases like cars and washers (here's hoping that we someday find a way to make college tuition affordable), our economy should also be based on workers who have access to jobs and decent wages to pay the bills. And those things are in very short supply right now. Too many people are still living in the shadow of debt. After all, huge debt levels are what Auerback calls "the 21st century equivalent of indentured servitude for the vast majority of Americans." And he's not wrong. Listen to the terror in this woman's voice as her bank literally knocks down her door to foreclose it. Watch this woman inform Bank of America she will no longer pay her credit card bill under their inexplicable raise in rates. Debt leaves many feeling powerless against the banks.

Perhaps we can continue to pay cash instead of credit for our groceries a bit longer. Let's focus on abundant jobs and decent pay. Then we can get back to being good patriots and go shopping for new refrigerators.

Bryce Covert is Assistant Editor at New Deal 2.0.

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More on the Florida Foreclosure Nightmare

Sep 30, 2010Mike Konczal

mike-konczal-2-100Foreclosure cases are running afoul of the law, and underwater homeowners get shafted. **Tune in to NPR's Marketplace tonight to hear Mike talk with David Brancaccio.

mike-konczal-2-100Foreclosure cases are running afoul of the law, and underwater homeowners get shafted. **Tune in to NPR's Marketplace tonight to hear Mike talk with David Brancaccio.

We just discussed the nightmare situation in Florida, which is likely to spin out nationally. Before I tell you more about what I think about the Florida situation, I'll tell you I was raised by a family in law enforcement, and as such, I tend to think people who are arrested are usually guilty.   And I think that the people who are ending up inside the Florida bankruptcy courts are usually going to be people that shouldn't be in their homes.

It's because of the fact that I and others usually believe this to be true that I think due process and trust in the process of our courts is so incredibly important. It's necessary to force the parties at hand to marshal evidence that they swear is true, and to present it to an impartial judge to render judgment after full consideration. This is America, where everyone gets a chance before the court. If this system breaks, the weak and the innocent are the ones who suffer.

So it's because of this background that I feel sick to my stomach learning of a random sampling of foreclosure cases conducted by the Florida Bar News has just found "that 20 percent or more of the cases set for summary judgment had some procedural or paperwork problems."

Think about that. Twenty percent! It's outrageous, and shouldn't stand in a country that values the rule of law.

Why is this happening? Again, keeping with what I know about the law, the criminals courts would simply shut down if everyone had a jury trial. Hence the crucial role of plea-bargaining. (If you want to see the role plea-bargaining plays, you should read Courtroom 302, one of my favorite books, by Chicago Reader journalist Steve Bogira.) There's a plea-bargaining mechanism to be had in these foreclosure trials: remove the deficiency judgments. People want to be able to hand over their homes, but they don't want to spend the next decade hounded by JP Morgan for every last dollar that can be grabbed out of their paycheck. From the Florida Bar (my bracketed numbering):

Another hitch in clearing cases, he said, is [1] sometimes banks put off getting the final judgment so they don’t have to immediately take possession of the property, which makes the banks liable for property taxes and homeowners’ association fees on homes that may take considerable time to resell...

“If we had everyone defending their foreclosure, we’d never get through this.”

She said an unappreciated problem is [2] that many foreclosed homeowners don’t realize they are still liable for deficiency judgments, which is the difference between what they owed on the mortgage and what the bank gets in a foreclosure auction or a short sale. Those who do understand may fight or try to delay foreclosures, which doesn’t help the courts with the backlog. But it also means that once the foreclosure crisis is over, courts could be hit with a wave of deficiency actions.

Zikakis said of many of her clients, “If they could be relieved of the deficiency, they would hand in the keys immediately.”

Two things. First, in number one, notice that a lot of the backlog is the result of banks not wanting to take over properties. Some estimates place an abandoned property at $20,000 a pop, so a bank leaving three properties abandoned in any given place reasonably costs the municipality a teacher's salary.

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The second is even more important: homeowners are still on the hook for the deficiency judgments. If banks said they wouldn't chase homeowners to the ends of the earth, garnishing their wages and disrupting their earnings, many years after a bum investment decision went south -- if they were able to take at least a share in the downside -- there would be a much, much smaller crisis. But because banks are credibly signaling that they will move Heaven and Earth to get every last penny they can out of those who have already been kicked to the curb, those who are about to be kicked out want to have their say in court.

Having mortgage cramdown would have helped alleviate this, FYI. Sure, courts would have gotten more crowded short-term, but it also would have been clearer in the results. And remember, this isn't about poor people wanting to steal a home from someone;  it's about people wanting to make sure they can negotiate their way out of the housing crash that has left them deeply underwater.  The ramifications of the crisis have left people much worse off than their original bad investment would have.  People are willing to negotiate. Are the banks?

When you go back and read Yves Smith's site about a sample judge, it's clear he's moving people as fast as possible into a situation of not wanting to fight, either for their homes or for the their negotiated values. Those who are falsely being evicted or those who have a credible case to fight are being lost in the shuffle. Meanwhile, banks realized that they could cash out big by rushing as much as possible through foreclosure, but that doesn't give homeowners a fair shake, or cause a reasonable negotiation to occur. And that is simply not just.

Start watching this (Naked Capitalism is the clearinghouse of info). The ratings agencies are being put in motion and they are always late to the news. JP Morgan has just fessed up to worries, arguably slowing the foreclosures in the country to a standstill. It's going to get much worse before it gets better.

Mike Konczal is a Fellow at the Roosevelt Institute.

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Why We Should be Mad as Hell About Florida's Foreclosures

Sep 29, 2010Mike Konczal

mike-konczal-2-100We could be giving underwater homeowners a chance. Instead, we're kicking people out of their homes without due process.

mike-konczal-2-100We could be giving underwater homeowners a chance. Instead, we're kicking people out of their homes without due process.

Given that the IMF and others believe a large part of the "structural unemployment" in our country is related to the struggling housing market and underwater/barely-hanging on homeowners, what is to be done? One choice is to allow for options like lien-stripping in bankruptcy courts, resetting mortgages by zip code, etc. Another option is for courts to accelerate foreclosures by ignoring due process, proper documentation and legal process in order to kick people out of their homes and preserve the value of senior tranches of RMBS while giving mortgage servicers a nice kickback.

What option do you think our country is taking?

We should all be very concerned about the foreclosure situation in Florida. If you are a homeowner or potential homeowner, you should find it offensive that people's property rights are being violated in such a flagrant way. If you are an investor, either as "bond vigilante" or someone with a generic 401(k), you should be worried that servicers have gone rogue and the incentive structure to maximize value instead of fees associated with foreclosures has broken down.

And if you care about basic Western liberalism -- the classical kind, with a Lockean understanding of freedom to own property along with freedoms of speech and religion -- you should be pissed off. This is a clear-cut instance of the rich and powerful decimating other people's property rights, rights that are supposed to protect the weak from the strong, in order to preserve their wealth and autonomy. Unless you think property rights are mere placeholders for whatever the financial sector demands, this should be resisted. This should be viewed as a problem an order of magnitude larger than Kelo v. City of New London.

The short problem is that banks are foreclosing without showing clear ownership of the property. In addition, "foreclosure mills" are processing 100,000s of foreclosures a month without doing any of the actual due diligence or legal legwork required for the state to justify the taking of property and putting people on the street. Even worse, many are faking documentation and committing other fraud in the process. The government is allowing this to happen both by not having courts block it from going forward, but also through purchasing the services of these mills. As Barney Frank noted: "Why is Fannie Mae using lawyers that are accused of regularly engaging in fraud to kick people out of their homes?"

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And the worst part is the lack of conversation about this. Thanks to Yves Smith at naked capitalism for following this story from the get-go; her blog has become the place for anyone interested in this topic (that link is a catch-up post). The rest of the media is starting to catch up to where she was weeks ago.  Here's the Washington Post with the story of an individual caught in one of these nets and ProPublica on GMAC's "robo-signers" who sign off on foreclosures without knowing anything about them.

Also Dean Baker just wrote a good summary of the situation for the Guardian:

As a number of news reports have shown in recent weeks, banks have been carrying through foreclosures at a breakneck pace and freely ignoring the legal niceties required under the law, such as demonstrating clear ownership to the property being foreclosed.

The problem is that when mortgages got sliced and diced into various mortgage-backed securities, it became difficult to follow who actually held the title to the home. Often the bank that was servicing the mortgage did not actually have the title and may not even know where the title is. As a result, if a homeowner stopped paying their mortgage, the servicer may not be able to prove they actually have a claim to the property.

If the servicer followed the law on carrying through foreclosures then it would have to go through a costly and time-consuming process of getting its paperwork in order and ensuring that it actually did have possession of the title before going to a judge and getting a judgment that would allow them to take possession of the property. Instead, banks got in the habit of skirting the proper procedures and filling in forms inaccurately and improperly in order to take possession of properties.

And the situation in Florida is worse than most assume. The specially-created courts see it as their purpose to clear out the foreclosures, as Yves Smith covers here (must read). The most obvious takeaway is that homeowners aren't being given the chance to have their documents properly viewed, have the challenges and proper legal hurdles to putting someone on the street vetted by the courts, and instead are being bribed with an additional month of house time if they don't ask too many questions.

And the biggest fear is that the fraud uncovered at GMAC is the tip of the iceberg for what is going on nationwide.   Keep your eye on this situation.

Mike Konczal is a Fellow at the Roosevelt Institute.

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Political Trends and Countertrends

Sep 21, 2010Joe Costello



The television man is crazy says we're juvenile delinquent wrecks
Oh man, I need TV when I have T. Rex?
-- All the Young Dudes

This is one of the most optimistic trends in America over the last several decades:

Selling cars to young adults under 30 is proving to be a real challenge for automakers. Unlike their elders, Generation Yers own fewer cars and don't drive much. They're likely to see autos as a source of pollution, not as a sex or status symbol.

They're more apt to ride mass transit to work and use car sharing services -- pioneered by Zipcar -- for longer trips. And car sharing choices are expanding, with car rental firms moving into the market, making it convenient for young folks to rent with hourly rates and easy insurance. Connect by Hertz, for example, is rolling out its car sharing services in the New York metropolitan area, with plans to eventually expand them to around 40 college campuses nationwide.

Moreover, in survey after survey, Gen Yers say that they believe cars are damaging to the environment. Even hybrid electric vehicles don't seem to be changing young consumers' attitudes much.

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So, maybe the greatest damage done to brand Obama with the youth vote was the saving of GM? What's most interesting is the politics of cars has yet to make it onto any political platform in America. Phew! Nothing defined 20th century America more than the automobile -- political economy, culture, and the politics of technology. Talk about a revolution.

At the same time, the counter-revolution against the rule of law, led by our financial class, is in full force. Yves Smith has been out ahead on the issue of paper related to debt, such as liens. This was all lost in the buying, selling and swapping of debt -- also known as the American economy for the past couple decades. As foreclosures and other debt collections increased in the past couple of years, no one seems to have the related paper, so various industries have expanded their fraudulent activities to simply make things up to file in our various courts of law. I'd suggest following Yves on this very important issue.

Finally, Alternet has good piece on the white underclass, though it should be more accurately called the white part of the American underclass. Of course there is no class in America -- just ask the ruling elite, or the cultural left for that matter. Remember, Marshall McLuhan said old technology becomes art, so we can all soon put a car on the front lawn. Solidarity, brothers and sisters.

Joe Costello was communications director for Jerry Brown’s 1992 presidential campaign and was a senior adviser for Howard Dean’s effort in 2004.

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Elizabeth Warren in Her Own Words

Sep 17, 2010Lynn Parramore

elizabeth-warren-150This is the first installment of "The Influencers," a six-part interview series that ND20 Editor Lynn Parramore is conducting in partnership with

elizabeth-warren-150This is the first installment of "The Influencers," a six-part interview series that ND20 Editor Lynn Parramore is conducting in partnership with Salon.com. In July, she sat down with Elizabeth Warren, pegged to help launch the new Consumer Financial Protection Bureau. **If you haven't seen it, also be sure to read Warren's folksy post on the White House blog about the appointment.

Lynn Parramore: What are some of the values that were instilled in your childhood that you would like to see emphasized now?

Elizabeth Warren: I guess it is a fundamental belief that people are doing the best they can. It is easy when you are successful to think that you did it all by yourself and to forget that you didn't. You got here because a lot of things broke your way. You were lucky enough to be born into a family that could afford to take care of you well. You were lucky enough to be able to have a family that could pay for you to go to school or buy your way out of scrapes. And to people who have had a lot of luck and don't acknowledge that -- the world looks like a total meritocracy, right? I'm on top because I really won, because I am better than everyone else.

I think I grew up with a profound sense of watching people who were good people, who were smart people, who were hardworking people -- God, nobody on this Earth worked harder than my mom and dad -- and they had very little. But they made do with what they had. They had their family, they raised four kids who loved them and four kids who all had our own families that we loved. And so, I guess the only way I can say it is that the value is in knowing that the game doesn't always come out fairly. There is a lot more going on. The material success at the end of the day is only a small part of it. Truly successful lives are about family.

Has your idea of fairness changed in recent years, particularly since the financial crisis?

I have been focused on the issue of fairness for 20 years now, ever since I started doing research on the economics of the middle class. I wanted to believe "work hard, play by the rules" equals success. I knew that my parents struggled, but I wanted to believe it was better now. And what I began to see in my research was that the rules were beginning steadily to work against the middle class. Healthcare, there's an example. It was not the case in the 1970s that a modest medical problem could land a family in bankruptcy. The advances in medical technology are wonderful, but the financial impact has become staggering. Sure, for one segment of society, the people with the gold-plated healthcare, the consequence of a medical problem is nothing more than medical. But for the much larger proportion of Americans, the financial consequences of a medical problem can be devastating. We studied these people in our bankruptcy research, and that's one that I regard as fundamentally unfair, not just in the sense that the Lord deals different cards to different people, and some get sick and some have babies too early. But unfair in the sense that any one of us could be hit, so why is it that we don't take care of each other? Why is it that we aren't more careful to make sure that none of us can be devastated financially by a medical problem? So, yeah, I've been studying the unfairness of how it translates into the economic insecurity of the middle class.

Is the middle class disappearing?

It is more that it is trembling; it is crumbling. Middle class used to be synonymous with secure, with steady, with boring, because middle-class people were people who were pretty much safe from the time they first started work on through retirement and until their deaths, no longer. Now, to be middle class is to worry, is to be insecure, is to face much increased odds of job loss, of a healthcare problem, of a family breakup that can land a family in economic collapse.

We need to get out of debt, yet there are so many forces that conspire against us. What is the way out of that conundrum?

It is a conundrum that has to be approached from two different directions. One direction is from the individual, the borrower, the family. My advice there is to do everything you can to protect yourself, and I have a whole list of things that I would identify. But that by itself will not be enough. There is also the part about the rules of the game, about collective action, about what banks are permitted to do, about what lenders are permitted to do, about how we finance, our healthcare, what housing policy looks like, what education policy looks like, what it costs to educate our children. For those, the appropriate place to go is to the policy forum, to talk to Congress, to talk to the president, to speak to people about how we can change the rules by which we all live. So, the way out of the problem is both on a highly individualized basis and also on a collective basis.

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Are you anti-debt?

No. Debt can be enormously valuable.

An example?

Borrowing money to buy a home - it can be a good investment. Borrowing money to buy a car so that you can get to work. Borrowing money to deal with an emergency, a serious medical problem. Those are all investments in effect in your future. But borrowing money because you can't live on your current salary, assuming you are not under some kind of emergency situation, this is your day-to-day, if you are rolling credit card debt over month to month to month, and this is your real job, this is your real life, you do have a serious problem. Because people have got to bring their expenses and their income into line with each other. And so, that is where I focus on debt particularly with individual families. This is the part you need to see. There is a red light flashing if you're carrying debt for reasons other than investment.

Why do you think you've become a lightning rod in recent years?

I don't know. I have to say I often think that the things I talk about seem fairly obvious. Maybe I am a little plain-spoken about it, but why should that bother people? Let's talk about the content of what I say. If you think I am wrong, tell me so and tell me why, and show me the data, show me the evidence, tell me the reason. Let's have a serious conversation about the content, about what has happened to the incomes of middle-class American families, about what's happened to their expenses on housing, on healthcare, on childcare, on college costs. Let's talk about how the business model of the consumer credit industry has changed. Tell me I am wrong on any of that. Let's have that conversation. But I sometimes have come to think that lightning rod is another way to say, "Let's change the conversation" -- let's make this all about something else. But let's not really talk about the serious issues.

Has our financial system become too complicated for a person with a high school or even a college degree to navigate?

I think complexity has become a strategy. Let me just start with your credit card. In 1980, Bank of America's credit card contract was just a little over 700 words long. That is a little over a page, easy to read. You could tell what the terms were. Today, credit card contracts can run 30 pages or even longer. And much of it is tiny, incomprehensible print. Now, why the changes? Well, part of it is regulation. A large part of it is that a complex document is one where it is a lot easier to hide the tricks and traps. It is a lot easier to fool people. No one realizes until after they've committed $5,000 on their credit card that the interest rate is no longer going to be 3.9 percent, but is going to jump to 28 percent.

In other words, complexity is itself a part of the business model. It is part of what keeps the customer from evaluating the cost and the risk, and it is part of what keeps the customer from comparing product to product, which would drive the prices down. So, from my point of view, complexity really is the enemy. The American people have to be in the conversation; they have every right to understand what their contracts are, they have every right to understand what policies their government is embracing, and if I can be helpful in that, I am glad to do so.

Speaking of complexity, what has surprised you most about working inside of Washington?

It really is an amazing place. I'm thinking that the thing that has surprised me most is how hard it is to have a conversation about substance. And it is too bad because it means that we are not all engaged in the same game of trying to make things better and that often to disagree is to declare mortal enemies rather than to say, "I don't see it the same way, I am seeing these data." And if you can't have that conversation, people can't change their minds.

What part of your work excites you most right now and going forward? What are you most looking forward to?

This is an historic moment. The president has just signed into law the most powerful financial reforms in three generations. And, coming out of that, it will be necessary to build the real apparatus to make markets work again, to make them work for families, to make them work, frankly, whether they like it or not. To make them work for Wall Street, to make them work for financial institutions, ultimately to make them work for the real economy. It is a moment in which there will be great change and I am simultaneously worried about what could go wrong but deeply excited and even optimistic about what could go right.

This post originally appeared on Salon.com.

Lynn Parramore is the editor of New Deal 2.0, Media Fellow at the Roosevelt Institute, and author of Reading the Sphinx, named a "notable scholarly book for 2008" by the Chronicle of Higher Education.

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