FedUpUSA

Archive for August 1st, 2010

Freidrich Hayek

Rasmussen has an interesting poll that caught my eye last week regarding the free market economy. Please consider 75% Say Free Markets Better Than Government Management of Economy, Political Class Disagrees.

A new Rasmussen Reports national telephone survey finds that 75% of Likely Voters prefer free markets over a government managed economy. Just 14% think a government managed economy is better while 11% are not sure. These figures have changed little since December.

Polling released earlier this week showed that Americans overwhelmingly believe that more competition and less regulation is better for the economy than more regulation and less competition.

Not surprisingly, America’s Political Class is far less enamored with the virtues of a free market. In fact, Political Class voters narrowly prefer a government managed economy over free markets by a 44% to 37% margin. However, among Mainstream voters, 90% prefer the free market.

Outside of the Political Class, free markets are preferred across all demographic and partisan lines. This gap may be one reason that 68% of voters believe the Political Class doesn’t care what most Americans think. Fifty-nine percent (59%) are embarrassed by the behavior of the Political Class.

If we have all these free-market believers, how the heck do we keep electing politicians who believe in anything but free markets?

For example, president Obama is the worst combination possible of socialist, corporatist, and war-monger possible. Clearly he does not believe in a free market. However, he had a very catchy message “Change You Can Believe In”.

Where was the change?

Then again, please remember he never promised change, just change you could believe in. People believed. However, the few changes were all for the worse.

That still does not explain how Congressional anti-free market clowns keep getting elected if the public wants something else.

Throw the Bums Out – But Not My Bum

Caroline Baum offers one possible answer in Throw the Bums Out as Long as My Bum Stays Put

Everywhere you turn, anti-incumbent sentiment is on the rise.

You can see it in opinion polls, where six in 10 Americans, the highest ever, say most members of Congress don’t deserve to be re-elected, according to a June 11-13 Gallup survey.

You can see it in primary ballots, where long-serving lawmakers are being booted in favor of Tea Party candidates and other outsiders.

And you can see it at town meetings, at social gatherings and on talk radio, where ordinary Americans are eager to voice their discontent with the culture in Washington.

In fact, the only place you probably won’t see it is at the bi-annual congressional elections. Incumbency, it turns out, is the best credential for winning an election.

In the House of Representatives, the incumbency rate has averaged 93.3 percent since 1964, according to the Center for Responsive Politics, a non-partisan independent research group tracking money in politics. It dipped below 90 percent only five times in the last 23 elections. The low was 85 percent in 1970.

Devil I Know

Even revolutions don’t produce a dramatic shake-up in the composition of the House of Representatives. The Reagan Revolution of 1980 returned 91 percent of House incumbents to their seats. The Republican Revolution of 1994 saw the GOP pick up 54 seats and take control of both houses of Congress for the first time in 40 years. Even then 90 percent of House incumbents were re-elected.

What happens to all that angst when Americans walk into the voting booth on alternate Novembers and pull the lever for 16- term Congressman Peter Porkbarrel instead of Ida Unknown? In some cases, people never make it to the polls. Voter turnout in the U.S. since 1960 has averaged 55 percent at presidential elections and 40 percent in off-year elections, well below the 75 percent to 80 percent typical of most democracies.

Those who make it to their polling place often have limited options. Many incumbents run unopposed. And if there is somebody challenging the incumbent, “that somebody is invisible, lacks credentials and isn’t an appealing alternative,” says Stuart Rothenberg, editor and publisher of the Rothenberg Political Report. “It’s not really a choice.”

In an April Gallup poll, 28 percent of registered voters, the lowest on record, said members of Congress deserved to be re-elected. Forty-nine percent said their own member was worthy. (Translation: Throw the bums out, but spare my bum, at least until he brings home the funds for that civic center.)

Campaign Contribution Bribes

Baum’s “bum-analysis” is correct. However, there are other reasons too, notably campaign contributions.

Businesses and public unions give hundreds of millions of dollars to politicians who will vote how they are paid to vote. Indeed, incumbents have a huge head start in fund raising bribe collection activities. This is why campaign finance reform and lobby reform is desperately needed, and exactly why it won’t happen.

Topping that off, the incumbent gets free staff, free news mailings, etc. “Free” means at taxpayer expense of course.

Dumb and Dumber Choices

As to why election choices frequently appear to be between dumb and dumber, please bear in mind that corporations frequently bribe the incumbent’s opponents as well, just in case.

The result is that is often hard to tell much difference between the candidates on major things like the economy. Frequently the only major differentiation between candidates is on lightening-rod issues like abortion. The banks and major corporations could not care less about such issues, so without hot and heavy money telling the candidates how to vote, energetic mudslinging surfaces.

Gerrymandering

Finally, many Congressional districts are so Gerrymandered on the basis of race, nationality, etc. that it is nearly impossible to defeat the incumbent. In such cases, there may be genuine political differences but no chance in hell of doing anything other than returning the incumbent to office, no matter how bad the incumbent candidate might be.

In Illinois, voters continually reelect known crooks up to the point of conviction and jail sentencing. Is Illinois unique? Probably not.

Will It Be Different This Time?

Unfortunately, it’s highly unlikely this election will be any different than the last.

However, there is sufficient voter anger to throw out enough incumbents, many who were elected on Obama coattails, that I believe Republicans will win the House and pick up enough seats in the Senate to sink any legislation Obama wants.

That would be a good thing, even if 90% of the bums deserving to be thrown out on their bums get reelected.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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In a very alarming sign for the U.S. economy, foreclosures have continued to dramatically increase in 2010.  But there has been a shift.  Back in 2007 and 2008, experts tell us that most foreclosures were due to toxic mortgages.  People were being suckered into mortgages that they couldn’t afford with “teaser rates” or with payments that would dramatically escalate after a few years, and when those mortgages reset, the people who had agreed to them no longer could make the payments.  But now RealtyTrac says that unemployment has become the major reason for foreclosures.  Millions of Americans have become chronically unemployed during the economic downturn and many of them are losing their homes as a result.  But whatever the cause, one thing is certain – foreclosures have continued to skyrocket at a staggering rate.

According to a new report from RealtyTrac, foreclosure filings climbed in 75% of the nation’s metro areas during the first half of 2010.  At a time when the Obama administration believes that we are “turning the corner”, things just seem to get even worse. 

Some areas of the country continue to be complete and total disaster areas when it comes to real estate.  For example, you have got to feel really sorry for anyone trying to sell a house down in Florida right now.  According to RealtyTrac, Florida led the way with nine of the top 20 metro foreclosure rates in the country during the first half of 2010.

Ouch.

But the worst city for foreclosures continues to be Las Vegas.

According to RealtyTrac spokesman Rick Sharga, unemployment has replaced bad loans as the number one cause of foreclosures there….

“Las Vegas has seamlessly shifted from having a high level of foreclosures due to bad loans to defaults caused by a high level of unemployment.”

But other cities with high unemployment rates are having huge problems as well.

For those who believe that the economy is supposed to be “improving”, it must seem really odd that foreclosure rates in major cities such as Chicago continue to soar.

RealtyTrac says that foreclosure filings in Chicago have increased 23 percent year-over-year to one out of every 48 households.

But it isn’t just cities like Las Vegas and Chicago that are nightmares right now.

The truth is that this is a national crisis.

The Mortgage Bankers Association recently announced that more than 10% of all U.S. homeowners with a mortgage had missed at least one mortgage payment during the January to March time period.  That was a new all-time record and represented an increase from 9.1 percent a year ago.

Unfortunately, new all-time records are being set all over the place….

*The number of home foreclosures set a record for the second consecutive month in May.

*Banks repossessed 269,962 U.S. homes during the second quarter of 2010, which was a new all-time record.

*As of March, U.S. banks had an inventory of approximately 1.1 million foreclosed homes, which was a new record and which was up 20 percent from a year ago.

So is there any hope that things are going to get better soon?

Well, according to RealtyTrac’s CEO James Saccacio, that depends on the U.S. economy….

“The fragile stability achieved in many local housing markets hinges on improvements in the underlying economy, specifically job growth. If unemployment remains persistently high and foreclosure prevention efforts only delay the inevitable, then we could continue to see increased foreclosure activity and a corresponding weakness in home prices in many metro areas.”

Without good jobs, the American people are not going to be able to pay their mortgages.

So are the millions upon millions of jobs that have been lost coming back soon?

No, unfortunately they are not.

As we discussed at length in a previous article, the big global corporations that dominate our economy are figuring out that they don’t really need the rest of us anymore.  The American worker is becoming obsolete.  After all, why pay an American ten times as much to do the same job?  Big corporations can hire two people in China or India to do the same job and still pocket 80% of the difference.

In addition, big corporations don’t really need the headache of making employer contributions to Social Security, setting up benefit packages and pension plans or of trying to comply with the thousands upon thousands of ridiculous regulations that the U.S. government continues to spew out.

At this point, the American worker has become extremely unattractive for large corporations, and so jobs will continue to migrate to other areas of the world.

We allowed our politicians to merge us into a “global economy”, so now we are all going to have to deal with being part of a “global workforce”.

As jobs continue to be offshored and outsourced, more Americans are going to become unemployed and the foreclosure crisis is going to continue to be a nightmare.

It would be nice to put a positive spin on all of this, but there isn’t one.

The Economic Collapse

The last 40 years have seen the U.S. housing market transform into a market largely driven by incredible amounts of debt.  The credit card companies understood the basic notion that the monthly payment drove most financial decisions.  Even though people purchase a home with a 30 year mortgage, the implicit understanding was that in a few years the home would be sold again and yet another new mortgage would be taken out.  Housing became like the national debt in that most realized we would never get around to paying it off.  We would simply roll over the debt over and over apparently in an endless process.  Yet this can only go on as long as average Americans have an increase in their standard of living and wages.  The opposite has occurred.  For that reason, housing is expensive in today’s market.  The median sales price of an existing home is $184,000:

As the media reports that prices are going up, the underlying message is that somehow things are getting better.  Yet the reasons for prices going up are largely due to government intervention into the market.  The two main driving forces that have pushed prices up in the last few months are:

(-1)  The new home buyer tax credit

(-2)  Federal Reserve purchasing mortgage backed securities to force interest rates lower

The outcome of this has pushed the existing sales price of homes up but Americans are not seeing improvements in their income.  You can see that 30 year mortgage rates are at historical lows:

Let us go back to the first chart.  Back in 1970 the median home price in the U.S. was $23,000.  This means very little without context.  Back in 1969 the median household income was $9,302.  So it took 2.4 times the annual household income to purchase a home:

Median household income

1969:     $9,302

2008:     $57,000

Median home price

1970:     $23,000

2010:     $184,000

The ratio today is up to 3.2 so it is still more expensive to buy a home today than it was back in 1970 relative to income and home values.  You also need to remember we have many more two income households today so we have more people working unable to purchase the same standard of living from four decades ago.  This is an important distinction.  We can even measure home values in terms of gold:

1970 gold price:                                 $35

1970 median home price:             $23,000

Ounces of gold needed to buy a home:                 657 ounces

2010 gold price:                                 $1,181

2010 median home price:             $184,000

Ounces of gold needed to buy a home:                 155 ounces

Regardless of your view on gold, it has gotten much more valuable in terms of home values over this time.  You would need 4 times the amount of gold back in 1970 to purchase the median priced home.  Today, 155 ounces is enough to purchase the typical home.  What has occurred over this time is the slow decline of the U.S. dollar.  Average Americans haven’t paid much attention to this because access to debt has hidden the real erosion of purchasing power.  It is also the case that cheaper imported goods have hidden the weakness of the currency.  But those things are now coming to fruition and we are starting to realize how much the U.S. dollar has fallen.

If U.S. home values were increasing due to a healthy job market with steady income growth then we can say price increases were justified.  Yet the gain is currently artificial.  We need only look at the jump in homeownership rates brought on by exotic mortgage financing:

The homeownership rate is now back to levels not seen since the 1990s.  Simply providing debt to someone without the means to sustain a long term payment is irresponsible.  Yet the deeper problem stemmed from banks believing that home values would keep going up and up.  In fact, some of the bigger banks saw this coming in 2005 and 2006 and started positioning their portfolio to take advantage of the coming collapse.  There was no accident here but a deliberate funneling of debt to American consumers with housing as the main Trojan horse.  Now that we know what has kept things propped up, do we want to continue down this road?  Having a high homeownership rate shouldn’t be a mandated policy.  If we have higher homeownership rates in this country based on healthy economics then that is fine.  But simply putting people into homes for the sake of doing it is bad policy.  It is also the case that many of the bailouts were ushered in under the guise of helping “homeowners” but it was really a way to fix the bad bets of banks.

The chart above shows that there were times in our past when homeownership was actually in the minority camp.  The massive increase in the late 1940s and 1950s was for the right reasons.  It came because of big increases in household formation and a booming economy.  The push in the 1990s and 2000s was largely due to bubbles.

You wouldn’t know it from reading the mainstream press but a large part of our country actually rents:

Source:  Census

37 million households in the U.S. rent.  This works out to 1 out of 3 households.  Yet government policy through tax incentives punishes those for renting.  So it was no surprise that easy lending from banks and stated government policy created the perfect storm for the largest housing bubble the world has ever witnessed.  Those that think the correction is over are wrong.  Let us look at new home sales data:

People aren’t buying new homes in large numbers because they don’t have the money to do so.  When you have 40 million Americans on food assistance, purchasing a new home doesn’t exactly show up on the radar.  For those with work, you have 4 out of 10 Americans workers employed in the lower paying service sector.  Who will buy the more expensive newer homes?  That is why most of the recent action has come in the existing home market.  What constitutes an existing home sale?  This would be a foreclosure resale or a pre-owned home being resold.  In fact, in June only 30,000 new homes were sold in the entire country while 564,000 existing homes were sold.  The gap is always big but this is near historical levels.

40 years of housing was built on more and more debt.  Households even today are required to go massively into debt to purchase a home.  The metrics are still off.  It is still too expensive to buy given the current economic conditions of our market.  Money is only as valuable as what you can buy with it.  Would you rather have those 657 ounces of gold from 1970 or the median home from back then?  That median priced home is now worth $184,000 while the 657 ounces of gold would be worth $775,917.  The purchasing power of the dollar has gotten weaker but some fail to see it because of the large amounts of debt that mask the longer term problems.  The housing market is in for a harrowing few years.  Proceed with caution.

My Budget360

For the definitive confirmation that the Fed is and has always been very open to, at least philosophically, pushing the market higher no matter what the cost (if not in practice – they would never do that, oh no, Liberty 33 would never stoop so low), is this quote from former Fed chairman Alan Greenspan who was on Meet The Press earlier, where he said the following stunner: “if the stock market continues higher it will do more to stimulate the economy than any other measure we have discussed here.” In other words, the Fed’s dual mandate of maximizing employment and promoting a stable inflation rate have been brushed aside, and the one and only prerogative for Chairman Ben currently, and for the short and long-term future, is to keep the Dow Jones (because nobody in the administration, even the Fed, has heard about the S&P yet), above 10,000. Yet Greenspan, who now apparently is off the reservation concludes with this stunner: “There is no doubt that the federal funds rate can be fixed at what the Fed wants it to be but which the government has no control over is long-term interest rates and long-term interest rates are what make the economy move. And if this budget problem eventually merges to the point where it begins to become very toxic, it will be reflected in rising long-term interest rates, rising mortgage rates, lower housing. At the moment there is no sign of that because the financial system is broke and you can not have inflation if the financial system is not working.” In other words, we will be in deflation until the broke financial system becomes unbroke… and then we will have hyperinflation.

Well, ladies and gentlemen, Q.E.D.

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