President Obama explained his plans for preventing foreclosures in housing this afternoon, speaking from Phoenix, where there are lots and lots of them. He spoke, as one commentator noted, in “vague and complicated” terms, warning that he could not prevent all foreclosures.
He drew loud cheers when he said that “speculators”, people who took on mortgages they knew they could not repay, and people who fuzzed the small print while pushing the mortgage on buyers would not be protected.
This is Goldwater country and no undeserving need apply. Well, I could not help thinking, that just about eliminates everyone who bought or sold a house during the past three years or so. Businessweek cites a couple in California—he was a federal cop; she worked for a university; these are not rich folk—who are about to lose their newly purchased home.
It seems their mortgage will soon leap from $3000 a month to $4000. They recently bought a nice subdivision house for almost $600,000. Excuse me? Only a few years ago that was the kind of money a highly paid medical specialist acquaintance of mine paid for his enviable mansion! Or that you paid for a house right on the beach at Lake Michigan.
Obama did not deal with the fact that a whole lot of American “middleclass” housing is way, way overpriced to begin with. He did not deal with what is going to happen to the American economy if and when housing drops to a sane level of cost and mortgage payments.
Talk about trillions and trillions of value going bye-bye! Or there’s an equally hideous alternative—so much inflation that a $4000 mortgage becomes as easily handled on a normal middle class income as the $105 a month my dad paid in 1954 or the $450 a month I contracted for in 1980 (for less house than my dad bought. Housing inflation isn’t new).
But when there is that kind of inflation, a lot of people get left behind. Pensions usually don’t keep up; bond interest may not; salaries and wages almost never do. But that’s what you’re going to have to have if all the banks are going to come out of this solvent, let alone the government that’s guaranteeing all this rescue.
Banks are caught in a truly nasty kind of loop. It doesn’t help anybody to say, “They made it.” Even if it’s true. They were chief among speculators, gambling that the $600,000 houses would keep right on appreciating, so they could be repossessed and resold if needed. Gambling that law enforcement officers and university non-teaching staff incomes would keep climbing. Gambling that credit for refinancing would always be available. (That should eliminate nearly all banks from Obama’s plan.) To stay out of receivership—to survive—banks must have more money in assets than they have in debts. So should we all, but the government does not take us over the instant our worth drops below our obligations. It does with banks.
A truly terrifying reality today is that one whale of a lot of the assets that banks count on to keep them solvent and running consist of mortgage paper. Beginning in July 2007 the Bush administration began jawboning banks to get them to lower rates and even cut principal to ward off a coming housing collapse. “Banks,” said one official, “were in denial.”
No they weren’t. They understood full well that the moment they cut principal and interest on 101 Love Nest Lane, auditors would start devaluing the paper on 102, 103, 104—in effect, all of Love Nest Lane. This would do savage and potentially fatal things to the bank’s books.
They chose to trust that somehow, someway housing prices would retain their $600,000 valuations and even climb beyond that. It was like a wife’s trust in a philandering husband, but it was all they had to go on. The alternative was too frightening. Call it denial if you will, but if she has no other way of making a living, that is what many wives do. That is what the banks did.
Hang tough and hope, this became the mantra of American bankers. People did not get interest rates cut; there was no way principal was going to be cut! Under that Bush plan, in nearly two years, exactly 25 mortgages have been modified. In the whole United States. Obama obviously hopes for more—but how is he going to prevent receivership for banks that cooperate?
Guess how? Print lots and lots of money—787 billion here, a trillion there, 75 more billion over there—and inflation will take care of all the overpriced assets out there.
China will rescue us by buying our debt? Chinese export trade is suddenly in deep, deep trouble. They are muscling out foreign competitors in their domestic market by moving their own products (that they can no longer export) into domestic outlets. General Motors which had up until recently been making much of its money in China is a significant casualty here.
Do not wait for the cavalry, kiddies. It has been downsized. Natural forces like massive inflation are about all we have left.