An odd feature at NYT reports that homeless shelters are seeing a rise in former home owners who were foreclosed on.

Only three years ago, foreclosure was rarely a factor in how people became homeless. But among the homeless people that social service agencies have helped over the last year, an average of 10 percent lost homes to foreclosure, according to “Foreclosure to Homelessness 2009,” a survey produced by the National Coalition for the Homeless and six other advocacy groups.

In the Midwest, foreclosure played a role for 15 percent of newly homeless people, according to the survey, reflecting soaring rates of unemployment — Ohio’s reached 10.8 percent in August — and aggressive lending to people with damaged credit. At a shelter for women and children run by the West Side Catholic Center in Cleveland, where Ms. West now lives, foreclosure accounted for zero arrivals in 2007, the center’s executive director, Gerald Skoch, said. Last year, two cases emerged. This year, the number has already reached four. Similar increases have been reported at shelters in California, Michigan and Florida, where a combination of joblessness and the real estate bust have generated unusually severe rates of foreclosure.

Most people who become homeless because of foreclosure had been low-income renters whose landlords stopped making their mortgage payments, leaving them scrambling for new housing with little notice and scant savings, according to the survey and interviews with shelters. But in recent months, there has been a visible increase in the number of former homeowners showing up in shelters. Like Ms. West, most have landed there after months trying to stave off that fate.

Now, obviously, it’s sad when people lose their homes.  It’s even sadder when people find themselves without shelter and are reduced to living in their cars or on the streets.

But what’s really news here?  We know that, toward the end of the housing bubble, lenders were making no down payment loans to people who had no business buying houses.  People with no jobs, no credit, and no means of paying back said loan.  It wouldn’t be shocking if some number of these people wound up homeless.

Yet, I can’t imagine that this is a statistically important number.  Much more likely:  We have a group whose job is to increase sympathy for the homeless in order to get support for more public funding for the cause.  What better way to achieve that than to paint the homeless as being former home owners who are down on their luck as opposed to, say, drug addicts, alcoholics, and the mentally ill?

Notice the wording of this press-release-disguised-as-news report: “foreclosure played a role.”  What does that mean, exactly?  We’re set up with a long anecdote about a single woman who’s stopped paying her mortgage and found herself on the street.   Then, we’re told that this represents a “growing” trend.  But we’re also told that the principal means of creation of new homeless has long been “low-income renters whose landlords stopped making their mortgage payments.”  Presumably, the end result of this is foreclosure.  Is this report lumping these things together to make it seem like the latter is really the former?  My strong suspicion is that it is.

Oddly, the report was released four months ago.

Were you wondering if yesterday’s big rally was related to the Geithner plan? Well, it probably was.

The Treasury helpfully provides an example, which I reproduce here:

Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.

Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.

Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.

Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.

Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.

Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.

Let’s flesh this out by repeating it 100 times.  So say a bank has 100 of these $100 loan pools.  And just by way of example, suppose half of them are actually worth $100 and half of them are actually worth zero, and nobody knows which are which.  (These numbers are made up but the principle is sound.  Nobody knows what the assets are really worth because it depends on future events, like who actually defaults on their mortgages.)

Thus, on average the pools are worth $50 each and the true value of all 100 pools is $5000.

The FDIC provides 6:1 leverage to purchase each pool, and some investor (e.g., a private equity firm) takes them up on it, bidding $84 apiece.  Between the FDIC leverage and the Treasury matching funds, the private equity firm thus offers $8400 for all 100 pools but only puts in $600 of its own money.

Half of the pools wind up worthless, so the investor loses $300 total on those.  But the other half wind up worth $100 each for a $16 profit.  $16 times 50 pools equals $800 total profit which is split 1:1 with the Treasury.  So the investor gains $400 on these winning pools.  A $400 gain plus a $300 loss equals a $100 net gain, so the investor risked $600 to make $100, a tidy 16.7% return.

The bank unloaded assets worth $5000 for $8400.  So the private investor gained $100, the Treasury gained $100, and the bank gained $3400.  Somebody must therefore have lost $3600…

…and that would be the FDIC, who was so foolish as to offer 6:1 leverage to purchase assets with a 50% chance of being worthless.   But no worries.  As long as the FDIC has more expertise in evaluating the risk of toxic assets than the entire private equity and banking worlds combined, there is no way they could be taken to the cleaners like this.  What could possibly go wrong?

A couple of points. First, this is just an example to help understand how the plan would work. Hence the numbers and any percentages derived from them are likely to be completely bogus. What is important to take away from this is the qualitative aspect of the post. That is, there is still significant potential for a downside for the FDIC and ultimately for the taxpayer (yes, the FDIC is funded by the banking industry, but if they get into big trouble I have little doubt that the taxpayer will be put on the hook).

This is probably as good a reason (or one of the reasons) for the rally yesterday. As the guys on Wall Street ran this by their number crunchers it became apparent that this plan could offer a very nice deal for distressed financial institutions.

The author of that post, Nemo, has more here as well.

In Part 1, I gave an example of how a private investor could buy some loans for $8400, ultimately realize $5000 on them, and still earn a 16.7% profit. Milo Minderbinder would be proud. The loser would be the FDIC, which is interesting because the FDIC is financed not by the taxpayer but by the banking industry — or at least, it has been so far. So even if the FDIC needs to tap their new $500 billion credit line to make good on tons of bad loans, in theory they will eventually repay the Treasury by exacting higher insurance premia from the banking industry.

Thus Part 1 could be read as a transfer of wealth from good banks to bad banks and private equity. Assuming Treasury actually demands repayment on the credit line and does not just write it off…

Well, great. A transfer of equity from good banks to bad banks. Gee, if you were a good bank what would you be thinking at this point? Time to get the f*ck out of Dodge? How to quickly become a bad bank?

Apparently, we are left with private equity firms and bankers being able to fleece the FDIC and the Fed via abusing the non-recourse loans, with the Treasury/taxpayer participating in the upside of the fleecing. Which is fine, I guess, if you believe the FDIC and Fed are themselves good for the losses; i.e., that the losses will not ultimately be placed on the taxpayer. Color me skeptical, especially with regard to the Fed.

Me too.

Steven Taylor makes a point I made on Wednesday’s edition of OTB Radio (”AIG Bonus Brouhaha“) about why seemingly minor matters resonate with the public while major issues often don’t.

[W]hile broad and complicated policy may not fully register in the minds of the public, a smaller, specific and easier to understand action can capture public attention and lead to substantial reactions, that in turn can galvanize the media and the congress.

[...]

Or, more to the point, if a company needed $170 billion ($170,000,000,000) just to survive how could anyone in the company deserve a bonus? This question is made several levels of order more intense when the company in question was at the heart of the current financial crisis that has so damaged the global economy.

The above is far more easy to comprehend than issues of mortgage based derivatives and esoteric financial instruments that have been sliced and diced to the point that no one knows what they are worth and how such items led to the economic situation we currently find ourselves in.

He reiterates this point in response to Steve Verdon’s post on quantitative easing in which he notes that while “everyone [is] getting all worked up over a trivial issue, the AIG bonuses, what has gone mostly un-noticed by the chattering class, is that the Fed is going to implement quantitative easing.”  One is easy to understand — and thus get outraged over — and the other makes most of our eyes glaze over.

Photo by Flickr user johnnyalive under Creative Commons license.

Eric Posner has a Slate piece offering a novel plan for “renegotiat[ing] all those bad loans at no cost to the taxpayer.”

The solution to this problem is for the government to force renegotiations to occur. A simple plan could do this. The plan would give all homeowners who live in a ZIP code where house prices have dropped more than 20 percent the option to have their mortgage reduced to the current market value of the house. In exchange, these homeowners would yield to their lenders 50 percent of the future appreciation of the house. To avoid any gaming and future moral hazard, both the current and the future value of the house will be determined by multiplying the purchase price and the variation in the housing price index. So if you bought your house for $300,000, and the average house in your ZIP code has lost 20 percent of its value, then your new house is assumed to have a value of $240,000. If your mortgage was $280,000, now it is $240,000 (the new value of the house). You are no longer underwater.

For the homeowner, this is a very attractive proposition. Suppose he has a $300,000 mortgage on a house he bought for $350,000 but today is worth only $200,000. With the plan, he will receive a $100,000 reduction in his mortgage in exchange for giving up a portion of the future appreciation of the house should that happen. Using the tools of finance theory, we can calculate the value of the “option” that the homeowner gives to the bank. Assuming an 8 percent annual volatility in house prices and an 11-year tenure in the house, the option is worth $36,000. The homeowner loses $36,000 from the lost future appreciation but gains $100,000 in the reduction in mortgage debt: a good deal. The homeowner also has a good incentive to maintain his property. If the homeowner adds a bathroom, he reaps the full benefits of this addition when he sells the house. Although he must pay the bank 50 percent of the increase in the price of the average house in the ZIP code, he keeps any additional return if his own house appreciates more quickly than the average house because of the new bathroom.

This does strike me as a better solution than the Obama Plan.  It is hardly, however, without moral hazard.

What of those of us who put down a substantial down payment and so are not “under water”?  Our houses have still depreciated in value but, because we were responsible, our outstanding loans are still secured.  Meanwhile, our neighbors, who bought a house they couldn’t afford, are rewarded with a free $100,000 or $200,000 or whatever.  In essence, our down payment would have been stolen from us by the government.

Michael Kinsley has a rather rambling column about the “upside-down economics” of the stimulus plan that’s subtitled (or, whatever one calls the SEO-driven title tag that appears at the top of the browser and in search results) “Recession Economics – How Do We Repay the Stimulus Spree?”

But even if the stimulus is a magnificent success, the money still has to be paid back. The plan of record apparently is that we keep borrowing, spending and stimulating, faster and faster, until suddenly, on some signal from heaven or Timothy Geithner, we all stop spending and start saving in recordbreaking amounts. Oh sure, that will work.

There is another way. If it’s not the actual, secret plan, it will be an overwhelming temptation: Don’t pay the money back. So far, even as one piggy bank after another astounds us with its emptiness, there have been only the faintest whispers about the possibility of an actual default by the U.S. government. Somewhat louder whispers can be heard, though, about the gradual default known as inflation. Just three or four years of currency erosion at, say, 10 percent a year would slice the real value of our debt — public and private, U.S. bonds and jumbo mortgages — in half.

Anyone who regards the prospect of double-digit inflation with insouciance is either too young to have lived through it the last time (the late 1970s) or too old to remember. Among other problems, inflation works only as a surprise or betrayal. It can never be part of any public, official plan. Plan for 10 percent inflation, and you’ll get 20. Plan for 20 and you’ll need a wheelbarrow to pay for your morning Starbucks. But if that’s not the plan, what is?

I don’t know whether this is a plan, secret or otherwise, but it’s a strong possibility.  We’re basically printing money at an extraordinary rate and spending it out of any relation to income.  Inflation is a natural consequence.

Story via Memeorandum. Image via Solicitor Bulgaria.

Ezra Klein is a bit bemused:

In a further signal that economic indices have a taste for irony, an index released by the National Association of Realtors shows that housing affordability was at an all-time high in December. A family earning the median income has 158.8 percent of the income needed to qualify for the mortgage on a median-priced house. And prices are likely to fall even further in the coming months. It’s going to be a good time to buy, even if it’s not going to be a good time to, you know, keep your job. And hey, it’s (probably) a safer investment than the stock market.

Now, I’m dubious of statistics provided by interest groups, so take NAR’s claims with a grain of salt.  But Ezra isn’t challenging the stats but rather the suggestion that it’s good news.

But, barring this thing getting far worse than any reasonable projections I’ve seen, virtually everyone will in fact keep their job.   Is anyone suggesting unemployment rates even as high as 10 percent?  So, this means that the market has responded correctly to a bursting bubble: Prices for housing have dropped to levels affordable to the people who need to buy them.   That’s a good thing.

In troubled times, it makes sense to be prudent.   But, while irrational exuberance is hazardous, so is irrational gloominess. Acting as if you’re destitute because slightly more people are experiencing bad times than were doing so a few months ago is not only bad for your own quality of life but contributes to a vicious cycle that slows down the recovery.

If you were otherwise going to go out to a restaurant, buy a new car, or move from an apartment into a house and have no specific reason to think your job’s going away, why wouldn’t you go ahead an do those things?

Photo by Flickr user HolyHolySnappers under Creative Commons License.

Roughly three in five people who got bailed after failing to pay back home loans are back in trouble in short order according to a shocking government report.  (Well, shocking to government officials.  Otherwise, entirely predictable.)

Recent data suggests that many borrowers who received help with mortgage modifications earlier this year tended to re-default on their payments, a top U.S. banking regulator said on Monday. “The results, I confess, were somewhat surprising, and not in a good way,” said John Dugan, head of the U.S. Office of the Comptroller of the Currency, in prepared remarks for a U.S. housing forum.   “Put simply, it shows that over half of mortgage modifications seemed not to be working after six months,” he said.

[...]

Dugan said recent data showed that after three months, nearly 36 percent of borrowers who received restructured mortgages in the first quarter re-defaulted. The rate of re-default jumped to about 53 percent after six months and 58 percent after eight months, Dugan said, without providing an explanation for the trend.

Explanation?  Bad credit risks don’t stop being bad credit risks?  That’s lawhawk’s guess, too.

Can it be that these people should never have been homeowners in the first place? Maybe the problem really is home owners who should not be owning a home in the first place? What happened to income verification?

Bruce McQuain, too: “Sometimes a stiff is just a stiff.”

Tyler Cowen thinks it interesting but provides no conclusions.  His commenters, though, provide some useful inputs.

Links via Memeorandum and Google Reader.   Photo via taberandrew under Creative Commons license.

Matt Yglesias snarks,

Unlike the guy who runs Lehman Brothers, the guys who clean the bathrooms in the Lehman Brothers office have, as best one can tell, been doing an excellent job. And yet if the company going under results in everyone involved losing their jobs, the guy who runs Lehman will wind up being better off than the guys who clean the bathrooms. This is because in the United States of America, hard work is the way to get ahead.

Now that’s a great line.  But is it really true?

A March AP story reported that “Lehman Brothers Inc. Chairman and Chief Executive Richard Fuld received compensation valued at $22.1 million in 2007, a year in which the company weathered the subprime mortgage collapse better than its rivals.”  That last clause has suddenly been overtaken by events, obviously, but one presumes Fuld will see his compensation drop rather starkly.

The story does not have comparables for the custodial staff.  Salary.com puts the median salary for “anitor” in the United Sates at $23,839.  Given that Lehman was headquartered in Manhattan, let’s say they paid their’s $30,000.

I’m guessing that it’s going to be far easier for Lehman’s janitorial staff than their executives to find comparable replacement positions.

Now that Freddie Mac and Fannie Mae have joined the “too big to fail” club, isn’t it high time we started thinking about how to avoid allowing companies and other quasi-private agencies to get into these problems in the first place? It seems that over the past few decades, the Federal government has pretty much given carte blanche for any large corporation to ignore sane business principles as long as their revenues are high enough. I’m not an economist, but I can’t hope avoid the thought that this history of bailouts does, in some perverse way, incentivize risky behavior by ensuring that there are no real consequences for your risks–as long as your failures are big enough.

Having read various responses to the recent financial and mortgage industry bailouts, it seems like the most common policy suggestions regarding bailouts are these:

1) Stop bailing companies out.
2) More regulations for the industry in which the bailouts occur.
3) Punish executives after a bailout–remove them from their positions, etc.
4) Nationalize or partially nationalize (ie own a large of stock) of the company being bailed out.

Personally, I’m inclined towards #1, as I don’t see why the government should step in and stop a business from failing. However, the odds of bailouts actually stopping are pretty much zero, as one consequence of democracy is that government has to be seen “doing something” in response to a crisis, even if the best response is for the government to ignore it.

Clearly, then, there’s some consensus that there needs to be some harsher consequences for future bailouts. Of these, the most likely to occur are probably #2 and #3, as thankfully there’s not a lot of political will for the government to control businesses in this country.

The problem is that both of those responses to the problem don’t seem to be likely to keep bailouts from happening in the future. For one, bailouts cross industries, so more regulation in one industry isn’t going to really affect a bailout in another. Also, as we can see from the past few decades in business, it’s clear that monumental failure as a high-profile corporate executive doesn’t actually seem to hinder one’s job prospects, unless that failure includes prison time. Additionally, the prospect of just losing executives might not be enough to change a corporate culture as a whole. After all, if the company survives, what does the Board care if they have to find a new CEO and CFO?

So having thought about this for a bit, the idea I think ought to be thrown around out there is this: if we have to bail a company out because it’s “too big to fail”, then the consequence a company should face for that bailout is to ensure that it doesn’t become “too big” again. In other words, if the federal government bails out a company, it ought to require that the company break itself up, preferably into at least three companies. That way, the company suffers consequences, but at least portions of that company will come under new leadership, and a secondary failure of one of the new companies is less likely to cripple the industry and economy as a whole.

Not being an economist, I’m sure somebody’s already thought of this, and there’s no doubt that there’s going to be some refinements here, but a mandatory breakup of a bailed out company seems to be the best way to disincentivize too-risky behavior without the risk of over-regulation.

The widespread rumors of a government bailout of Fannie Mae and Freddie Mac have already had dramatic consequences, perhaps creating a self-fulfilling prophecy. Iain Dey and Dominic Rushe, writing for The Times of London, note that, “The two companies lost almost half their market value last week as rumours of a government bail-out swept the stock markets, hammering share prices around the world.”

Julie Creswell of the NYT notes that many have seen this coming for years.

Among them is Jim Leach, a Republican former representative from Iowa, who began arguing two decades ago in Congress that the government-chartered mortgage companies, Fannie Mae and Freddie Mac, were unfairly insulated from the real world. They were not subject to the same financial standards and tax burdens as their competitors, he warned, and if they ran into trouble, an implicit government guarantee to back them up meant taxpayers would be left with the losses.

The size of the problem is enormous.

Today they own or guarantee about half of the country’s $12 trillion in mortgage debt, so the free fall of their share prices last week amid concerns that they were undercapitalized has created chaos for Wall Street and Washington.

The dominant role Fannie and Freddie play today is no accident. The companies, Wall Street firms, mortgage bankers, real estate agents and Washington lawmakers have built up an unusual and mutually beneficial co-dependency, helped along by robust lobbying efforts and campaign contributions. In Washington, Fannie and Freddie’s sprawling lobbying machine hired family and friends of politicians in their efforts to quickly sideline any regulations that might slow their growth or invite greater oversight of their business practices. Indeed, their rapid expansion was, at least in part, the result of such artful lobbying over the years. And as Fannie and Freddie grew, so did the fortunes of Wall Street, which reaped rich fees from issuing debt for the two companies, as well as the mortgage and housing industries, which banked billions of dollars as the housing market boomed.

UCLA business law professor Steve Bainbridge has been warning about this for years, too. He points to some analysis from LAT Market Beat columnist Tom Petruno:

[I]t is triggering worries that would have been unthinkable even a year ago — including that the U.S. Treasury’s debt might lose its AAA credit grade because of heavy blows to the nation’s fiscal health from the housing mess.

[...]

Because of their size and importance to the mortgage market, it’s inconceivable that Fannie and Freddie would be allowed to fail. But an outright takeover of the companies by the government, as some experts have suggested, could frighten foreign investors — who are big lenders to the Treasury — by, in effect, adding the companies’ $5-trillion debt load to the Treasury’s massive debt of $9.5 trillion. Nationalizing the companies “would put the full faith and credit of the Treasury at risk,” [Allen] Sinai [of Decision Economics] said. “It would make foreign investors think hard about buying U.S. Treasury debt.”

Bainbridge sees a “worst case scenario” in which “Foreigners abandon the dollar for the euro, dumping treasuries. The collapse of foreign investment in Treasuries makes our massive current account deficit unsustainable. At which point, things really go to pot. “  Uh-oh, indeed.

What’s not clear to me, even in the case of a government absorption of Fannie and Freddie, is why we’d add an additional $5 trillion in “debt” by so doing.  Sure, we’d be adding some unknown amount of risk.  But, presumably, the overwhelming majority of people will be paying back their home loans.  So, isn’t most of that $5 trillion, then, an asset?

The Manufactured Outrage of the Day comes to us from Joe Stephens and his page A3 piece for today’s Washington Post, “Obama Got Discount on Home Loan.”

Shortly after joining the U.S. Senate and while enjoying a surge in income, Barack Obama bought a $1.65 million restored Georgian mansion in an upscale Chicago neighborhood. To finance the purchase, he secured a $1.32 million loan from Northern Trust in Illinois.

The freshman Democratic senator received a discount. He locked in an interest rate of 5.625 percent on the 30-year fixed-rate mortgage, below the average for such loans at the time in Chicago. The loan was unusually large, known in banker lingo as a “super super jumbo.” Obama paid no origination fee or discount points, as some consumers do to reduce their interest rates.

Compared with the average terms offered at the time in Chicago, Obama’s rate could have saved him more than $300 per month.

Why, that’s not right! A millionaire Senator getting a more favorable home loan than some average schmoe? How could that be?!

Actually, that’s rather a question that answers itself, no?   Nate Silver issues an “Irresponsible Journalism Alert” and points out that:

[T]he amount of the loan and the nature of the property are not the only factors that determine a mortgage rate. Another major consideration is the creditworthiness of the borrower. According to current rate quotes from myFICO.com, a borrower with very good credit can expect a mortgage rate about 30 basis points better than someone with pretty good credit, and a borrower with excellent credit can expect about a 50 basis point discount.

How credit worthy was Obama?  Well, aside from being a United States Senator, a steady gig if ever there was one, and having just received a $2.27 book deal, he and his wife combined to make around half a mil a year.  Not Rush Limbaugh money, to be sure, but he was probably a decent credit risk.

Ed Morrissey wants to know, “Can the lender identify (anonymously) any other borrower during the relevant time period that got the same favorable rate and, if so, what was the basis for setting the rate that low for the other borrower(s)?”  Not an unfair question especially, as Ed notes, when “Obama has spent plenty of time castigating credit lenders in this campaign for their capricious practices and bad management.  He has rung the populist bell, saying that ordinary Americans can’t get a break from lenders while the powerful play by different rules.”  But, yes, I’d be willing to bet that other well-heeled folks got these kind of rates.

Obama’s spokesman claims, “Obama received the same rate as would have been available to anyone with his financial profile and with an offer from another institution.”  I’m inclined to believe him.

To the extent this has legs it will, like the Cindy McCain back taxes scandal, be because it draws attention to the fact that the Obamas and McCains make a whole lot more money than regular folks and get treated better because of it.  But who didn’t already know that?

Major caveat:  Larry Johnson promises that “shortly, we will reveal additional details.” Given how famous he is for doing that, I’ll be refreshing that page every few minutes.*

Other responders at memeorandum: The Crypt’s Blogs, TownHall Blog, Redstate, MSNBC, Flopping Aces, michellemalkin.com, puma pac, Right Wing News, The Caucus, The Campaign Spot, Fox News, Confederate Yankee, Salon, Ben Smith’s Blogs, TBogg, Brilliant at Breakfast, Political Machine, Comments from Left Field, TPM Election Central, The Swamp, JammieWearingFool, Macsmind, Bark Bark Woof Woof, The Political Carnival, Whiskey Fire, Washington Monthly, The Campaign Spot, and Jack & Jill Politics

____________

*Yes, this I’m being ironic here.   Like a pony.

Ezra Klein jumps on a growing meme the home ownership isn’t all it’s cracked up to be and that the government should stop subsidizing it.

He points to Paul Krugman, who argues in today’s NYT that it’s time to rethink our decades-long bipartisan consensus that home ownership should be encouraged. While everyone stresses the advantages of owning your own home, like building equity and creating a stake in one’s community, not enough emphasis is placed on the disadvantages.

• If housing prices fall, you can lose money

• The cost and difficulty of selling a house makes it harder to move for a new job

• If gas prices suddenly double and you live a long way from work, it sucks

That’s really only two reasons, since the last merely restates the third: Owing ties you down.

Not mentioned in Krugman’s column, but more certain than the others:

• When you own your own home, you’re responsible for maintenance and will inevitably spend much more in “upgrades” than if you rent.

Anyway, I see from Ezra’s “link blog” that James Surowiecki wrote almost exactly the same article for the New Yorker back in March. Better yet, Andrew Oh-Willeke wrote all of this in a May 2006 blog post, before the subprime lending crisis hit, putting him way ahead of the curve.

Klein, Surowiecki, and Oh-Willeke all note that easy lending exacerbated these issues, since so many people are now mortgaged up to their eyeballs, buying ever-bigger homes, and now feeling the crunch as the economy has slowed down. Back in the days when one had to put 20 percent or more down to buy a home, people were much more insulated from these effects.

Ezra argues, “[T]oday, owning a home looks a whole lot more like renting. Fairly few homeowners actually ‘own’ anything. Rather, they have a sizable mortgage, and they pay money to a bank. That’s not all that different than paying money to a landlord.” But that’s not right. Having lived a somewhat nomadic existence, I’ve “owned” and rented numerous times. Every time I’ve done the latter, I’ve lost money. The landlord got X dollars a month and, at the end of our relationship, I left with nothing. Conversely, every time I’ve taken out a mortgage, I’ve built sizable amounts of equity which I was able to extract from the house upon selling it and then reinvest later. Indeed, there have been years when my house earned more money than I did.

Since moving into our current house nearly two years ago, my wife and I have “lost” money, in that the house would currently sell for perhaps 5 percent less than we paid for it. Then again, we’re still far ahead of where we would be had we rented all these years. And we went into the current mortgage with open eyes; the housing bubble was already bursting but we wanted to move to a nicer house and neighborhood and figured we’d rather be “stuck” in this house than the one we left.

Beyond the economics, there’s a huge psychic value to owning your own place. You don’t have to worry about your landlord selling the place out from under you or “going condo.” You can paint the walls any color you damn well please, rip out the carpets and put in hardwood floors, have all the pets you want, and just generally live your life with greater autonomy. And I’ve never once raised my rent!

But, yes, it’s more expensive and you’ve got less ability to chuck it all and move to Mexico. And, if you bought into more house than you could afford and suddenly need to move, you risk emerging in worse financial shape if prices plunge.

All told, though, I recommend home ownership highly.

That said, however, I agree with Ezra on the public policy question: “Does it make economic sense for home buyers to be subsidized by renters?” No, it doesn’t.

Now, one could argue the degree to which they are. Home owners pay more property taxes than their renting counterparts, which means we pay much more for the public schools, even if we have no kids going to the public schools. And, since high earners, who pay the lion’s share of income taxes, are also likely to be homeowners, we’re paying a disproportionate amount for public services, even those which subsidize ourselves like the added infrastructure costs of supplying roads, utilities, and whatnot to the suburbs.

Even so, the most obvious subsidy, the ability to write off home mortgage interest, has always struck me as silly. There’s not much doubt that it artificially tips the scales not only in the rent vs. buy calculation but even encourages people to buy larger homes than they could otherwise afford since a portion of one’s monthly mortgage payment is actually “paid for” by the taxpayers. There’s no good rationale for that.

Howard Fineman thinks we have learned a lot about Barack Obama from the Jim Johnson incident.

We know John McCain: as formed and familiar as a well-worn boot. But we don’t know Barack Obama very well, and getting to know him has been and remains the basic national task of 2008.

With less than five months until Election Day, there isn’t much time left for research. And because Obama still is wet clay, not yet fixed in the public mind, every news cycle, speech, sound bite (or nibble) and video stream takes on huge evidentiary significance. Almost everything is, as they say in the law, a case of first impression.

This comports with my judgment that McCain better known than Obama in the ways that matter. Fineman’s first impression?

What we learn is that Obama by instinct is no revolutionary, but rather a soothing semi-insurgent seemingly eager to reassure the very Establishments he claims to be eager to assault. We learn that he has yet to master the art of keeping his cool when someone (an opponent or the press) has the temerity to question his decision-making. We learn that his first instinct is to brush off criticism with a flick of a finger.

That’s my sense as well although I’m far from sure that this is how the vast majority of Americans, who are following this campaign through 13 second sound bytes, are seeing Obama.

One lesson he has internalized is how to cut his losses quickly. It took him months to ditch the Rev. Jeremiah Wright and the Trinity Church of Christ. It took him weeks to distance himself from the likes of Samantha Power. It took Obama only a day to throw [Jim] Johnson [former head of his VP selection committee] under the bus.

While most of my commenters disagree with my assessment that Obama’s ruthlessness serves him well, we all agree with Fineman here.

This is both right and unfair:

If they had thought about it for more than a minute, they would have realized that Johnson is the very embodiment of the world they had been running against: a fabulously wealthy man who had gotten that way by manipulating the tangled strings of money and power in the capital, and whose chief calling card to many who admire him is not his mind but his access to other people’s bundled cash.

John McCain has had the same problem, as a man who runs on outrage against lobbyists but who keeps surrounding himself with them. They say a foolish consistency is the hobgoblin of little minds, though, for a reason. Running against “insiders” and “special interests” and “big money” is a tried-and-true campaign tactic. Trying to run a campaign, much less a country, without these people would be stupid. The revolving door ensures that the most talented and experienced people move back and forth between government and big money jobs that depend partly on currying favor with the government.

Story via memeorandum. Photo via ABC News

Frank Williams reports that Chrysler is having serious cashflow problems and has taken a novel approach to dealing with it: “Chrysler will now be taking five percent off all [purchase orders] PO’s and will take 60 days to pay instead of 45.” This applies “to all existing orders, not just future orders.”

I would love to implement such a system with respect to my mortgage company and others to whom I owe money but, alas, suspect they would not be amused.

Then again, Chrysler may not get away with it for long, either. Stephen Green, who thinks we may be down to “the Big 2″ before long. I stopped counting Chrysler among the “Big 3″ when they got bought up by Daimler and never added them back once Daimler spit them back out, so I won’t miss them terribly. The concept of an “American” car is long outdated, anyway. My wife and I both drive “Japanese” vehicles that were designed and/or assembled in the United States.

It’s not change when he offers four more years of Bush economic policies that have failed to create well-paying jobs,…
–Barack Obama, Remarks of Senator Barack Obama: Final Primary Night

I heard that and the first thought that went through my head was, “Since when did the President of the United States become in charge of placing people in well paying jobs?” My second thought was, “Yet another bit of evidence that the President of the United of the States is actually the Nanny-in-Chief, and that us Americans really can’t take care of ourselves anymore.”

Now don’t misunderstand, I’m not saying I like John McCain. Frankly, I can’t stand the man. I think he is a big government Statist who doesn’t like the idea of the Americans doing what they perceive as being in their best interest. After all, when I go to McCain’s website I find this,

John McCain Is Proposing A New “HOME Plan” To Provide Robust, Timely And Targeted Help To Those Hurt By The Housing Crisis. Under his HOME Plan, every deserving American family or homeowner will be afforded the opportunity to trade a burdensome mortgage for a manageable loan that reflects their home’s market value.

In other words, John McCain also wants to the the Nanny-in-Chief too. McCain wants to help people who made unwise decisions during the housing bubble, and also penalize those of us who did not make unwise choices.

The idea of people dealing with the mistakes they’ve made, and having to bear the burdens of unwise choices is totally anathema to these people.