Sunday, October 31, 2010

Why the Democrats Will Lose

With Election Day right around the corner, the attack ads are pounding the airwaves. I suspect most people do as we do, mute the TV when they come on. All the pundits agree the Democrats will lose big-time in this mid-term election, but I would like to suggest a different reason for the size of their loss from those most often proposed.

The reason the Democrats are going to get pounded this election is because they are not being honest with the voters about what they have accomplished in the last two years. Democrats came to office on the back of “making change,” and they have indeed made a large number of changes. If they had spent a good bit of their campaign energy helping the voters understand those changes, this year’s election would be about the Republican and Democratic visions of governing America. (Or maybe about the Republican, Democratic and Tea Party visions of governing America.) Instead, the Democrats have ceded the conversation with the American people to those who shout the loudest in protest.

Democrats spent much time and energy passing health care legislation and financial reform legislation. They should have trumpeted the reasons for these bills and what the actual provisions are. Voters can then decide whether they are better off or worse off with those bills. Allowing nonsense like “death panels” to misinform does everyone a disservice. These “catch-phrases” do stick in the mind, but with patient conversation about facts, most people will come to understand what the real provisions are. That does not mean they will necessarily like them, but at least they will understand them.

Almost all economists, regardless of party preference, agree the country needed the stimulus and that it helped prevent a further deterioration in the economy. Where they differ is largely on whether it was too little, not too much, and specifics on how to spend the money. Yet Democrats have allowed themselves to be negatively tagged with the stimulus and bailouts (most of which actually occurred during the Bush administration.) They should be proudly proclaiming that their actions prevented more unemployment. Admittedly, “it could have been worse,” is a weak response to criticism. What is necessary was to paint a vivid picture of what would have happened without the bailout – some reminders about the Great Depression would have been useful.

Democrats should also be telling voters how regulations have changed from the Bush to the Obama administrations. The differences are significant. Again, letting voters understand the true significance of the differences allows them to realize the two parties are not the same. We have short memories and we forget the cause of today’s troubles. The purpose of these discussions is not to convince everyone the Democratic way is better; the purpose is to inform the electorate of the differences. An educated electorate will make good decisions.

Democrats should be conversing not only with those on the “far left” but with those in the middle half of American political leanings. Instead, they have allowed the political conversation in the country to be dictated by those on the far right.

In short, Democrats are going to be creamed this election not because they are career politicians who happen to be in power. (That would have caused the normal midterm election losses.) They are going to be creamed because they have been inept politicians who have not told the people what they have accomplished and will accomplish. They have not provided a vision.

~ Jim

Tuesday, October 12, 2010

More Thoughts on the Mortgage Crisis

The politicians are all hot and lathered about the latest bone-headed moves by banks that submitted faulty documents as part of their foreclosure process. I watched the debate between the Democratic and Republican candidates for Michigan governor Sunday night. The Democrat beat his breast about how we needed a moratorium on all foreclosures because of the banks’ misdeeds. The Republican suggested that since the rules the banks and their employees should follow do work, we should punish the rule-breakers, not suspend the process.

In the election hot air, many politicians are willing to ignore any and all economists in order to play to the crowd—even when the solution they propose (in this case a holiday from all foreclosures) will only worsen our overall economic situation.

With an exception here and there to prove the rule, the right houses are being foreclosed by the right banks because homeowners are not meeting their mortgage obligations. Do I condone the sloppiness of those who try to circumvent the legal process? No – see my comments on the subject. Those banks should stop their foreclosure processes until they have their paperwork in order. However, anything that artificially slows down the adjustment process hurts everyone. If politicians impose a moratorium, people will not ultimately keep houses they otherwise would lose. They will still lose them; it only delays the day of reckoning.

Furthermore, until the massive supply of foreclosures is cleared out of the system, we cannot regain market equilibrium. With the huge volume of overhanging foreclosures, who can say for sure what the market price of a home is? Certainly those people being foreclosed are not willing sellers, and banks who have already written off their losses tend to sell properties at a lower price than the rest of us. Why would housing prices increase (or even stabilize) until this overburden of foreclosed houses becomes a de minimus part of the overall market? It’s like asking people to pay full price when the store is proclaiming in big letters: CLEARANCE SALE COMING SOON. Only when we return to willing buyers and willing sellers can a fair market value be determined.

Many of those who will be foreclosed have lost their jobs. As long as they “own” a house—particularly one that costs them little to maintain because they have stopped making mortgage payments and investing in upkeep—they are less likely to move to another area to take a new job. This too inhibits the recovery process because the job market has an added inefficiency.

Whenever governments artificially prop up a market it involves a transfer of wealth to the benefactors from everyone else. Sometimes the cost is worth the benefit. Not this time. The best thing we can do for the housing market is to have it function with minimal governmental interference. We humans are very adaptable, but resistant to change. Putting off the inevitable delays healing. As sick as I feel for those who are losing their homes, they aren’t going to start to heal until they move on; nor will the market heal until it transcends the foreclosure tsunami.

~ Jim

Wednesday, October 6, 2010

Where’s the Jail Time?

Almost as soon as the most recent recession hit, I began to read stories about the illegal activities in the real estate market. The one story I haven’t read since then is about arrests of the hundreds, or perhaps thousands, of mortgage brokers who broke the law by fabricating data on mortgage applications to allow them to sail through the approval process. They collected their fees or commissions; the rest of us are paying the price.

In bringing up children one of the more important lessons parents can instill is that actions bring consequences. Yet when it comes to illegal activity in the business world, that rarely seems to be the case. Oh yes, I know companies are fined – big deal. I’m talking here about individuals paying the consequences. There have been notable exceptions: Ivan Boesky, Michael Milken and Martha Stewart come to mind. Yet where are the little guys that made this mortgage mess possible – the ones who knowingly allowed borrowers to fabricate income for example?

Since nothing much has happened to mortgage brokers in the last two years, I suppose I will be disappointed. However, with the newest revelations about individuals knowingly signing false affidavits as part of the foreclosure process, I am once again forced to ask the question: where is the arrest warrant?

Take for example, Jeffrey Stephen of GMAC Mortgage LLC. Assuming the allegations are correct (see for example STOPA Law Blog) I think Mr. Stephen should be arrested for false statements to the court. (I’m not a lawyer, so I don’t know the correct terms – the point is lying to courts is clearly illegal—that’s why they have to sign affidavits.) To the extent Mr. Stephen’s direct supervisor knew he was signing affidavits without proper verification, he too should be subject to legal repercussions and termination at the least. If at some level within the GMAC hierarchy someone really didn’t know what was going on, that person should also be fired for incompetence – they should have known.

Will this happen? I’m not holding my breath.

~ Jim