Miscellaneous

The Wall Street Journal February 4, 2010, A19 CCLV Number 28 "A Short History of American Populism"

Andrew Jackson -- libertarianism as populism. Government programs gave money to the rich. He is of course known for killing the Central Bank. In 1835, was the last time that the United States was debt free. And he opposed road/canal projects. After the Civil war, the Republicans sponsored aid to railroads. As I wrote earlier, the 1850's to 1890's where United States government sponsored the corporate form. The 1890's populism, William Jenning Bryan gave his Cross of Gold speech, because of the rampant deflation which was giving farmers who owed money a problem. But William Jenning Bryan ran several times for president, never winning and getting smaller and smaller percentages of the vote.

Andy Kessler, "Bernanke's Exit Strategy, Tighter Reserve Requirements" same issue

I wrote a lot about the system where banks can loan more money than their deposits. Currently, banks can loan ten dollars for every dollar they have on deposit. And in some cases more Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns all loaned out twenty times their capital. No wonder they have so much money for bonuses. Should the depositors all run on the bank, the FDIC is there to back the bank.

My Intermediate macroeconomics professor explained how this works, including how having multiple banks has the same effect as having one big bank. I asked him a simple question. Do the banks make profit on the difference between the interest on the deposits and the interest they change to the lender or the interest on all their loans. He said the latter. So if a bank charges an average of ten percent and pays five per cent to its depositors (a rate structure similar to the eighty's), it is earning 75% interest on every dollar deposited. No wonder, they are so willing to give away a free toaster to those who deposit in their accounts or bear the costs of processing checks for the free checking account with $1,000 minimum balance.

Mr. Kessler said this system caused all sixteen panics since 1812. The gold standard is neither necessary nor sufficient--Elizabeth gold smiths would write more gold receipts than gold they received. And in the first half of the 1800's, American State banks would do the same thing. I recall from Galbraith's Money that the Medici's did the same thing.

Stephen Greenhouse, "More Workers Face Pay Cuts, Not Furloughs" The New York Times New York Wednesday August Fourth 2010 Page A1 and A3

L. Weitzman's share economy is based upon the idea of avoiding layoffs by having one's salary be the gross revenue divided by the number of workers. A corrolary of that is a firm cutting pay during a recession or having a policy of no lay-offs. State and local governments are cutting salaries, in some case with agreement from Union. One report says that 22 percent of municipalities cut "some pay and benefits." On the business side, we have: Westin Hotel cutting wages twenty per cent, Sub-Zero, a Refrigerator Manufacturer, is asking for the same thing, threatening to move to another state, ABF Freight Systems asking Teamsters to agree to a fifteen percent cut and St. Louis Post-dispatch, Seattle Symphony and Newsday making about five percent cuts. Reed Smith, a large law firm, lowered first-year associate salaries to $130,000 from $160,000.

From NPR, on the Mortgage Crisis

I blogged several times about using the share economy idea to make mortgages payments a share of one's income. As I assume most know Freddie and Fannie have a major role in the mortgage market. They own or guarantee half of Federal mortgages 5.5 trilliion worth of mortgages. Our Federal Government guarantees them, at first implicitly , now explicitly but does not put this on the budget. Raj Date said that Fannie and Freddie accelerated the sub-prime meltdown by guaranteeing mortgages for lower-priced houses thus causing their value to inflate to bubble-proportions. These government sponsored entities represent a subsidy to "middle and upper middle income home owners." And, perhaps, we should go away from home ownership. Individuals move around much more than in the 1950's, so one has the problem of selling the house when one has to relocate for job reasons. Or in telling words, Americans should not buy an "illiquid, very large, concentrated, leveraged asset."

One of the problems is that a renter has no guarantee of being able to stay in the property long term. Personally, I was fortunate enough to negotiate a permanent lease in 1994, until either I changed jobs, had my parents come join me and we bought a house together, or on their side they remoddelled the place into something not compatible with residential living. It ended up in court when the landlord sold at a fire-sale basis. I tried to negotiate a similar deal with businesses and landlords in the area but was unsuccessful. More on that in a different blog.

Also, of course, there is also status in owning a home.

Happiness

NPR has had two series on happiness. Jiangyin in China is actively trying to make itself conducive to happiness. Xu Dongqing, the Communist party Committee's head of propaganda, said "they are trying to further use people's wisdom and suggestions to help the government do better," not provide "Western multiparty democracy." Research in the United States found that daily mood improves as one's income goes up to $75,000 per year. It does not go up as people increase their income. The famous Marmot Whitehall study found that people at the top of a hierarchy have a better health than those at the bottom, and it is a strict does-response. And those at the top of the hierarchy generally make more.

Rich Strategic mortgage defaulters

Seeking Alpha documented that the wealthy are most likely to Welch on their mortgage when they could in fact pay their mortgage. Twenty Three Percent of luxury home mortgages are over three months overdue! This is much more than conventional homes.

And eight percent of current mortgages are no-documentation or "liar" loans.

More on Strategic Defaults on mortgages

Seventeen percent of mortgage defaults are strategic defaults. and is going up to a third Mortgage defaults and mortgage squeezes is exactly what the share economy is good for.

Thanks to Rick Ungar and his policy page for linking to the new article from the Los Angeles Times.

General Growth Inc. and why we need a share economy

General Growth, a mall owner and operator, declared bankruptcy--because its bonds and mortgages were for five years and they simply came due. This is why we should not have bonds with fixed maturity dates, only a share continuous stream. This avoids manufactured crises that have nothing to do with fundamentals.

General Growth declared bankruptcy. A bunch of speculators bought their bonds at three cents on the dollar. Those same bonds are selling above par and the speculators made a dramatic profit.

Mortgage Crises, Share Economy

The Tarp Watchdog, Neil Barofsky, is concerned abuot that ninety percent of mortgage loans are backed by Fannie Mae, Fredie Mac and the Federal Housing Administration. This has increased the risk of another housing bubble. Millions of home owners have refinanced.

A long term solution is extending the idea of the share economy. An MIT Economist, Martin Weitzman proposed the Share Economy as a solution to stagflation. Companies would pay their workers a fixed percentage of their gross revenue rather than a fixed monthly wage. That way, when recession hits, the company would not have to lay people off.

Extending the idea, mortgage payments would be a percentage of the wages. The investments based upon them would not be fixed-rate instruments, but a simple percentage of the payments received from the mortages on which they are based. For example, twenty individual with $100,000 to invest might contribute $5,000.00 to each of twenty mortgages for a total of $100,000.00. Each borrower would agree to pay thirty percent of their take-home pay to the mortgage. Thus each investor would receive 1.5% of each worker's gross revenue. Should one borrower suffer a medical setback or a layoff, this would get propagated to the mortgagors. Of course, other borrowers might do better than expected, so with good diversification and "the law of large numbers," it would approximately balance out. Should one of these investors themselves have a mortgage, the changes in their income would be propagated to the investors funding same, so they would not be squeezed. And this idea works well with commercial mortgages such as for hotels and shopping centers. The hotelier would pay a percentage of the room rents they received, and the shopping center would pay a percentage of the rents, which often are a percentage of what the stores sell. Thus commercial real estate trusts would not go bankrupt unless they couldn't pay basic upkeep; then, they would cease paying revenue when the buildings crumble and the ultimate investors would get the appropriate share of the value of the raw land.

Yogi Berra said that "It is difficult to make predictions, especially when they concern the future." Weitzman's share economy means that when a business owner predicts higher demand or better prices for the firm's products, the workers don't suffer layoffs. We should extend this idea to mortgages and for those receiving income from real estate or securitized mortgages. This means that homeowners don't suffer foreclosures and financial institutions don't fail just because someone is more optimistic than the reality turns out to be. There is already precedent for this, one can convert some types of student loan to an agreement one pays up to twenty percent of one's income rather than a fixed payment.

This idea of extending the share economy to segments of the financial industry is certainly not new. As Hyman Minsky pointed out in 1995, using speculative assets can lead to a cash shortage and a collapse. A long term solution is extending the idea of the share economy. An MIT Economist, Martin Weitzman proposed the Share Economy as a solution to stagflation. Companies would pay their workers a fixed percentage of their gross revenue rather than a fixed monthly wage. That way, when recession hits, the company would not have to lay people off.

Extending the idea, mortgage payments would be a percentage of the wages. The investments based upon them would not be fixed-rate instruments, but a simple percentage of the payments received from the mortages on which they are based. For example, twenty individual with $100,000 to invest might contribute $5,000.00 to each of twenty mortgages for a total of $100,000.00. Each borrower would agree to pay thirty percent of their take-home pay to the mortgage. Thus each investor would receive 1.5% of each worker's gross revenue. Should one borrower suffer a medical setback or a layoff, this would get propagated to the mortgagors. Of course, other borrowers might do better than expected, so with good diversification and "the law of large numbers," it would approximately balance out. Should one of these investors themselves have a mortgage, the changes in their income would be propagated to the investors funding same, so they would not be squeezed. And this idea works well with commercial mortgages such as for hotels and shopping centers. The hotelier would pay a percentage of the room rents they received, and the shopping center would pay a percentage of the rents, which often are a percentage of what the stores sell. Thus commercial real estate trusts would not go bankrupt unless they couldn't pay basic upkeep; then, they would cease paying revenue when the buildings crumble and the ultimate investors would get the appropriate share of the value of the raw land.

Yogi Berra said that "It is difficult to make predictions, especially when they concern the future." Weitzman's share economy means that when a business owner predicts higher demand or better prices for the firm's products, the workers don't suffer layoffs. We should extend this idea to mortgages and for those receiving income from real estate or securitized mortgages. This means that homeowners don't suffer foreclosures and financial institutions don't fail just because someone is more optimistic than the reality turns out to be. There is already precedent for this, one can convert some types of student loan to an agreement one pays up to twenty percent of one's income rather than a fixed payment.

This idea of extending the share economy to segments of the financial industry is certainly not new. As Minsky pointed out in 1995, using debt to create physical assets and the the hedge finance of our modern capitalist system can (and obviously has) evolved into speculative bubbles, like we see in real estate.

Underwater Mortgages and the Share Economy

Twenty five percent are "underwater" on their mortgage or twenty-three percent according to the Core Logic report, which shows that in Arizona and Nevada, it is reaching levels of half the mortgagees. That is the home owner owes more than the house is worth, often having buying with no money down. They are walking away from their mortgage. Seventeen percent of defaults are strategic defaults. Share economy mortgage is the answer, the mortgage is a fixed per cent of their income.

What happens when they sell "under water." Let's say they purchased for $400,000. They agree to pay 25% of their income for the mortgae. They sell for $300,000.00. They pay $75,000 to the bank, keep $225,000.00, but continue paying the 25% of their income to the bank.

This evens the moral playing field between those who do what might financially best for them, and those who feel a moral obligation to continue paying their mortgage.

New York Times, Thursday, July 30th 2009, Volume CLVIII, Page A1 Mortgage servicers get fees for insurance, appraisals, etc. during foreclosure. Thus, they have an incentive against modifying a loan and working with a mortgagee to prevent foreclosure.