Posts Tagged ‘foreclosures’

Loose Cannon

Special mention

185875_600 185819_600

American-Roulette3-1024x832

William D. Cohan’s broadside [ht: ja] against Bernie Sanders hinges on a simple, but fundamentally wrong, argument: we all benefit from the risks taken by Wall Street.

Simply put, Wall Street’s purpose is to re-allocate capital from people who have it (savers) to those who want it (borrowers) and then use it to grow businesses that employ billions of people around the globe and help give them a modicum of wealth that they did not have before. One man’s speculation, in other words, is another man’s risk-taking. Without people willing to take those risks, and having the chance to reap their reward, there wouldn’t be an Apple, a Google, a Facebook, or countless other large corporations. The billions of people around the world who are employed by thriving companies would lose their jobs.

Clearly, Cohan doesn’t understand Wall Street (or, for that matter, the rest of the financial sector). It doesn’t collect capital from one group of savers and allocate it to another group of borrowers, which then creates jobs. Rather, it recycles the surplus created by people who work in order to allow those who appropriate the surplus to collect even more. In other words, Wall Street manages the surplus on behalf of a small group of wealthy individuals and large corporations. And it grows its own profits not as a reward for taking risks but by taking a cut of each and every financial transaction.

As we know, Wall Street does in fact take risks, as it did in the lead-up to the crash of 2007-08. But the risks were borne not by Wall Street, but by the rest of us—in the form of massive layoffs and foreclosures.

What about the other part of the argument, that Wall Street helps businesses grow?

US-financial-corp-profit-share

As it turns out, Matthew C. Klein addressed this issue just about a year ago. His argument, in short, is that productivity growth in rich countries started slowing down around the same time that the financial sector’s share of economic activity started rising rapidly.

First, the high salaries commanded in the financial sector — much of which can be attributed to too-big-to-fail subsidies and other forms of rent extraction — make it harder for genuinely innovative firms to hire researchers and invest in new technologies.

Second, the growth of the financial sector has been concentrated in mortgage lending, which means that more lending usually just leads to more building. That’s a problem for aggregate productivity, since the construction industry is one of the few that has consistently gotten less productive over time.

US-tfp-vs-fin-share

In other words, as illustrated in the chart above, the growth rate in productivity was systematically faster when the finance sector was relatively smaller (from 1948 to 1975), and then when the finance sector got bigger, productivity growth got smaller (from 1976 to 2014).

The ultimate irony is that Cohan actually makes Sanders’s case for breaking up Too Big to Fail banks and reigning in Wall Street:

Sanders is right that Wall Street still needs reform. The Dodd-Frank regulations fail to measure up; Wall Street lobbyists and $1000-an-hour attorneys work away each day to gut the meager reforms signed into law by President Barack Obama in July 2010. It is also unconscionable that Wall Street’s compensation system continues to reward bankers, traders, and executives to take big risks with other people’s money in hopes of getting big year-end bonuses. Thanks to this system, which has been prevalent since the 1970s, when Wall Street transformed itself from a bunch of undercapitalized private partnerships (where those partners had serious capital at risk every day) to a group of behemoth public companies (where the risk is borne by creditors and shareholders while the rewards go to the employees), Wall Street has become ground zero for one financial crisis after another.

Neither Sanders nor I could have said it better.

 

Watch this magnificent performance by Rebirth, a poetry ensemble of high-school-age Chicago teens, featuring Simone Allen, Semira Allen, Maya Dru, Adam Ross, Onam Lansana, and Nile Lansana. They are affiliated with the community arts program at the Logan Center.

“Money Has No Heart” was performed on 8 March 2014, during the 2014 Louder Than A Bomb teen poetry festival, organized by Young Chicago Authors. The Olympics-style poetry competition started with 120 teams from the city of Chicago and the suburbs.

135319_600

Special mention

135490_600 Bors-31-7

123291_600

Special mention

123318_600 123313_600

source

Yep, they’re still battling over the terms of the bank bailout—and rightly so.

The current battle is between Team Tim (Geithner) and Team Neil (Barofsky), the actual bailout of the banks versus the never-enacted bailout of homeowners, with Matt Yglesias stepping in to try to referee the dispute.

Team Tim would say that they’re trying to create a well-capitalized banking system in order to bolster the broader economy. Team Neil counters that the broader economy would be better served by a policy that imposed steep losses on banks and instead repaired household balance sheets. Beneath all the anger and accusations and counter-accusations is a fairly wonky policy disagreement about the relative importance of household balance sheets versus the credit channel to laying the preconditions for growth.

So who’s right? I think this is actually a much more difficult question than partisans on either side are willing to acknowledge. Team Tim has bolstered their argument with the overblown notion that homeowner bailouts “launched the Tea Party” via Rick Santelli and are therefore politically impossible and thus one doesn’t even really need to address the merits of the case. On the other hand, Team Neil has never really presented a coherent alternative course of action that takes real account of the consequences of imposing very large losses on the banks. From the original winter 2008-09 argument over bank nationalization along Swedish lines, I’ve rarely heard it acknowledged that these courses of actions would likely have required hundreds of billions of dollars in additional “bailout” money. I think that still would have been the optimal policy, but it’s not a no-brainer and I think the administration’s left-wing critics would have been very disappointed if the White House made universal health care take a back seat to a second round of bank equity injections.

What Matt fails to recognize is that the bailout of the homeowners could have been made a precondition for the bailout of the banks.

I actually agree that, in the fall of 2008, the banks needed to be bailed out. Otherwise, the entire world economy could have come tumbling down.* I do think we came that close. At the same time, Washington was in the position to require that the banks write down the mortgages they’d profited from during the preceding decade. And, if the banks wouldn’t agree to that condition, they could have been nationalized.

That’s the simple policy option neither administration followed. Not Bush (with Paulson, Bernanke, and Geithner), and not Obama (with Geithner, Bernanke, and Dudley).

And now we’re paying the consequences, in the midst of the Second Great Depression.

*Let them lie in the beds they made? Well, the problem was, the rest of us were under the beds and would have been crushed if they had collapsed.

Special mention

Jefferson Park, Chicago

As another sign we’re in the midst of the Second Great Depression, home foreclosures in Illinois and around the country are on the rise again.

Illinois home foreclosure activity rose 29 percent in May compared to the previous month and is 54 percent higher than May of 2011.

A report released Thursday by Irvine, Calif.-based RealtyTrac shows Illinois with 16,318 foreclosure filings last month. Filings include default notices, auction-sale notices and bank repossessions.

The filings represent one in every 325 housing units in the state, fifth highest nationally.

RealtyTrac says the jump signals a “bumpy ride” but that new foreclosure starts are likely to end up as short sales or auction sales rather than bank repossessions. . .

Foreclosure rates in Chicago worsened to one in every 252 housing units, fourth-highest among the nation’s 20 largest metro areas.

Nationally, lenders initiated foreclosure proceedings against more U.S. homeowners in May, setting the stage for increases in home repossessions and short sales — scenarios that could further weigh down home values in coming months.

Hundreds of Occupy Wall Street demonstrators from across the country descended on San Francisco to protest the policies of banking giant Wells Fargo.

Wells Fargo’s response to the charge of foreclosing on homes?

[Ruben] Pulido, the Wells Fargo spokesman, defended the bank’s foreclosure policies, saying less than 2 percent of the loans Wells Fargo issued on owner-occupied properties had been foreclosed on.

“We work to keep people in their homes where there is affordability,” Pulido said. “Unfortunately some people have seen their incomes drastically reduced due to unemployment or underemployment.”

Children are the invisible victims of the housing crisis in the United States.

According to a new study by First Focus, more than 8 million children are directly affected by the ongoing foreclosure debacle.

In other words, more than one in ten American children (11 percent) are affected by the foreclosure crisis, under relatively conservative assumptions, and more than one third of these children live in rental housing. . .

Foreclosures may affect children negatively in at least four different ways.

First, and most obviously, families receiving foreclosure notices are much more likely to move than other families, and, as discussed further below, children who move frequently do less well in school. Second, homeowners receiving a foreclosure notice are under a lot of financial and psychological stress, as they struggle to stay in their house, and if that fails, to find a new home quickly. A body of research dating back to the Great Depression finds that job loss and other forms of economic hardship can affect the way parents interact with each other and their children. In particular, parents under a lot of financial distress sometimes engage in harsher and less supportive parenting, which in turn can lead to negative behaviors on the part of children, making it harder for them to interact well with peers and in school. Third, foreclosures and housing instability have a negative impact on physical as well as mental health, with studies finding higher rates of non-elective visits to emergency rooms and hospitals in ZIP codes with the highest foreclosure rates, as well as a strong association between housing instability and postponement of needed health care visits and necessary medications. Finally, because foreclosures are often highly concentrated in certain neighborhoods, children living in or near foreclosed homes may suffer the consequences of living in neighborhoods with more vacant houses, higher crime rates, lower social cohesion, and a lower tax base.

Children living in rental housing undergoing foreclosure may face many of the same negative effects as children of homeowners, as their parents may be forced to move with little advance notice, and their neighborhoods may also enter into decline.

The country that continues to impose foreclosures as a solution to the bursting of the housing bubble is creating millions of innocent—and frequently invisible—victims.