Monday, November 30, 2009

Why US Housing Collapsed

This is an interview I did with Jason Stipp of based on my book "The Cul-de-Sac Syndrome:"

Sunday, November 22, 2009

An "Eye-Opening Book"

This guest blog is from "In Another Country:"

The Audacity of Help

Benito Beck is quite right--President Obama does want to transform the United States with his policies. Thomas Friedman of the New York Times laments that a political system such as ours with so much special interest money blocking up the works may actually thwart our ability to solve large global issues. Unlike Beck who seems to believe in a libertarian utopia devoted to Jesus Christ, Friedman is extolling the current Chinese system with its authoritarian capitalism. We' ve been here before, folks, when people get all weak in the knees about democracy. That's why I support Eric Holder's decision to try the 9/11 perpetrators in New York City. He matter-of-factly defended the strength of our constitutional system and our ability to deal with terrorists using our own laws.

John Wasik has written an eye-opening book about Obama's Economic Plan and the Remaking of America called The Audacity of Help. ( 2009, Bloomberg Press) Anyone watching the health care debate might sympathize with Tom Friedman's remarks since the financial forces aligned against making any reforms have been awesome. In his book Wasik outlines the basic assumptions of Obama's economic plan and analyzes what has been promised and what Congress has or has not delivered. His previous work The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream gives you some idea where he comes from. He has a keen eye of what Obama was and is trying to do with the Stimulus Plan and notes the pitfalls in stimulating a bottom-up financial recovery but sees there are not alot of alternatives.The most rewarding sections of his book concern the making of a Green, Digital Economy and the initial seed money the Administration has allotted for the development of alternative fuels and technology.

For my money, the most important speech given by President Obama was his MIT address where he outlined the transformation he envisions for the American economy. I would rank it up there with JFK's Moon speech. But that may be the problem--Obama takes a long view of our problems which he should but the short term hurt of the recession may slow if not stall the long term objectives entirely. Like Bruce Bartlett in another entry of mine, Wasik also is keen on a single-payer solution to health care, something that is off the table now. But as Wasik notes, Obama has taken on some of the most divisive issues in our political economy and contrary to his critics of the Left have stepped on alot of toes of entrenched interests. To make it to the Green Deal, Obama has to show that his stimulus package does heal the economy and help the unemployed and has made an impact on starting the transition to a more Green economy.

In a way, the whole healthcare issue is not only essential to resolve but also to build momentum for the other initiatives outlined in the book. As Wasik points out President Obama has vowed to cut the national deficit in half by the end of his term in office. While plans have been started from the first days in office to tackle this issue, President Obama will have to use his ability to explain complex problems to address frontally and fully the nature of our national debt. This will lead him into the territory of the third-rail of American politics--entitlement reform.

Social Security, Medicaid and Medicare all need funding overhauls and no recent administration has even come close to addressing this urgent issue. In addition, there is no consensus solution. Not only will the tax code have to be reformed but also the Administration must develop new revenue sources to maintain these programs at the present level just as the Baby Boomers are about to swamp them. This is the Administration's Herculean task if the American dream is going to be revived at all.

The Audacity of Help is an excellent primer on the Obama Economic Plan as well as its emphasis on the needs of people in an economic system. The format of the book lends itself well to following the different aspects of the plan and what needs to be done. The Economic Plan is ambitious and unfortunately it appears to be necessary in all its aspects. For those who want the President to fail, it is a challenge to them to present an alternative view of how to maintain and sustain the American dream.

Thursday, November 12, 2009

Merchants of Debt

This guest blog is from the Manhattan Institute's City Journal ( My Merchant of Power is referenced. It was a cautionary tale about Sam Insull, the Chicago utility baron who got swamped by overleveraged securities in 1929. More on that book at

The Bear Truth
Criminal prosecutions won’t fix finance.
11 November 2009

Yesterday, U.S. prosecutors in Brooklyn lost their criminal case against two former managers of Bear Stearns’s internal hedge funds. But the acquittals aren’t a setback for financial markets’ health; they’re a step forward. They show that the public understands that Washington can’t fix our fragile financial markets through criminal cases. It must do so through regulatory change instead.

The case was the first important criminal trial to emerge from the global financial crisis. The feds accused the two defendants, Ralph Cioffi and Matthew Tannin, of committing criminal fraud and conspiracy in 2007. According to the charges, Cioffi and Tannin talked up their mortgage-related funds to investors while freaking out about them in private. For example, in spring 2007, according to the Wall Street Journal, Cioffi fretted to his colleague that he saw “simply no way for us to make money—ever,” even as he assuaged investors’ fears. But the government’s argument didn’t fly. After the verdict, one juror even offered explicit support for the defendants, telling the New York Post that the two men had tried to save their clients’ money, not lose it. “If this was really a fraud case, they wouldn’t have worked that hard” at trying to rescue the investments, said Aram Hong, adding that she would even invest her own money with them.

Why the sympathy for rich men in suits? Just a few years ago, jurors were happy to send former Enron CEO Jeff Skilling to the clink, possibly for the rest of his life (though the Supreme Court is hearing his appeal). The charges against Skilling weren’t so different from the charges here: he had committed crimes, the government argued, partly by putting on a brave face to the public while trying futilely to deal with sudden, massive losses on impossibly complex investments. Prosecutors must have thought that jurors would be even more willing to convict now, during the worst financial and economic crisis since the Great Depression.

Instead, the jurors rebelled—and if prosecutors had looked back to history, they wouldn’t have been surprised. Nearly eight decades ago, Samuel Insull, a Chicago utility titan, became a public face for the excesses of the twenties. As John F. Wasik has chronicled, Insull used cheap, easy money to create an impossible tower of debt securities on top of stock securities and stock securities on top of debt securities, all based on the premise of ever-mounting profits. When profits stopped rising, the tower fell and investors lost everything.

Prosecutors tried Insull three separate times and lost each case. Why? The juries decided that Insull’s failure constituted not a crime but evidence of the systemic failure of financial capitalism to regulate itself. Putting Insull behind bars wouldn’t solve anything; he had acted rationally in an irrational world. He could borrow to the extent that he did before the Depression, for example, because regulations to rein in speculative borrowing were nearly nonexistent. He could do so largely without investors knowing about the risks that he was taking because requirements to disclose such things consistently and publicly were also nonexistent.

The prosecutors’ defeat back then didn’t prove damaging to markets or to the economy. Even as prosecutors tried Insull, policymakers in Washington understood the real task: to protect the economy from the unrestrained excesses of financial markets, largely through civil, not criminal, solutions. Regulators put in place simple, uniform rules to limit speculative borrowing, so that, for example, nobody could borrow more than half of the purchase price of a stock. Regulators also required fair public disclosure of corporate risk, as well as consistent public reporting of financial markets’ activities.

This system worked well until the eighties, when financial firms and markets began to find ways around these reasonable regulations. Financial instruments like mortgage-backed securities escaped limits on borrowing, while credit-default swaps escaped limits on borrowing and disclosure. The financial world could once again get away with what Insull and others had done in the twenties: building intricate towers of limitless debt, destined to fall. The broader economy, too, became dependent on this ever-increasing debt.

But over the past two decades, Washington persistently failed to see that a financial system that escaped its limits on debt and on disclosure was growing untenable. Instead, the government saw scandals from Michael Milken to Enron not as evidence of civil regulatory breakdown but as unique criminal cases. The public went along, distracted from the real problem by high-profile villains. Consider what the Times said after Skilling’s 2006 conviction: “We hope the jury’s verdict deters other corporate kingpins from breaking the rules.”

Today, though, the public seems to understand that regulation through prosecution won’t work. In the Bear Stearns case, the jury recognized what the Insull jury saw long ago. Cioffi and Tannin weren’t criminals, but imperfect people doing their best in a world with no reasonable constraint. When the entire financial system fails, that failure isn’t any one person’s fault. It means that there’s something wrong with the system, something that can’t be locked away in a cell.

Nicole Gelinas, contributing editor to the Manhattan Institute’s City Journal, is author of the forthcoming After the Fall: Saving Capitalism From Wall Street—and Washington.

Monday, November 9, 2009

Cash for Craters

This is a blog from Bill Dahl in which he references my "Audacity of Help" and "Cul-de-Sac Syndrome."

Cash For Craters

By Bill Dahl

All Rights Reserved 2009

The Crater – or – “Hey! —We’re Down Here!”

What are the odds of your home being struck by a meteor? Has the current extraterrestrial economic crisis in the U.S. pummeled the value of your home, your neighbor, a friend, colleague or family member? When you look at what you currently owe on your home mortgage versus the current appraised value, are you in-the-hole? As you sit in your living room, do you feel as if you are treading water in the bottom of a crater, staring up at the walls of seemingly insurmountable mortgage debt that now surrounds you?

The economic meteor that has crushed the valuations of the U.S. housing market has created an incomprehensible financial crater for millions of American households. One observer writes that this phenomenon is the result of a defiance of the natural laws of the universe.[i] The mortgage holders I am referring to have the following characteristics in common:

  • They have conventional mortgages, backed by VA, FHA, Freddie Mac and Fannie Mae. These are conforming borrowers.
  • They do not have jumbo mortgages.
  • They do not have “sub-prime” mortgages or those with increasing rates attached to the fine print in their adjustable ARRM’s.
  • These homeowners are not the ones who succumbed to the no down or interest only enticements that infected the mortgage market and the U.S. economic infrastructure.
  • These homeowners do not have liar loan or no income documentation mortgages.
  • The mortgages held by these folks are for their primary personal residence. They don’t have “second homes.”
  • These are homeowners who used their hard earned savings as down payments.
  • They relied on the legitimacy of a bonafide appraisal. They relied upon the protections afforded them under a myriad of consumer, mortgage and regulatory statutes.

These are the millions of responsible U.S. homeowners who have become the innocent victims of the horrific impact the economic meteor shower has inflicted on individuals, families, neighborhoods, communities and regions throughout this country. They are the innocent bystanders who have experienced tangible, enduring, economic collateral damage by virtue of the irresponsible actions of other individuals, institutions, and government regulatory agencies. One study reveals that: “Home price declines will have their biggest impact on prime “conforming” loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac.”[ii] These loans comprise two-thirds of mortgages, and have historically been considered mortgages granted to the most creditworthy borrowers. Translation: These are the U.S. citizens for whom the system has failed.

What is the perspective of those who are living in the bottom of these craters? Consider the following:

  • “Today, I can’t sell my home for what I paid for it. I’m stuck. I can’t get out.”
  • “I didn’t do this. I’m a victim of the irresponsible actions of others.”
  • “By staying here, paying my mortgage and property taxes, I am subsidizing the poor judgment of others, who have walked away from their mortgage obligations.”
  • “Somebody keeps digging my crater deeper…I don’t even own a shovel!”
  • “My American dream has been shattered — by somebody else. I feel violated, angry and helpless.”
  • “I didn’t step into the path of this meteor. What hit the guy next door slammed me!”
  • “During the rest of my lifetime, there is absolutely no way I can earn enough to get out of this hole.”

Voice from one crater dweller to another, looking up at the craters edge above her: Hey! Is that Ben Bernanke up there?

Crater Dwellers – The Numbers Are Climbing

For the third quarter of 2009, foreclosure filings in the U.S. hit an all time high up 23% over the same quarter in 2008. According to the S&P/Case-Shiller Home Price Index, average home prices in the U.S. are currently at 2003 levels, based upon data from August 2009 — down approximately 30%. Studies by The Kellogg School of Management have found that when the mortgage balance due is 10% or more than the value of the home, people begin to abandon their homes. As this crater deepens, the percentages of those who walk away from their economic cavern increases. One author notes: “Not only do abandoned homes lead to higher crime rates and lower tax revenues, they are like a cancer that spreads to neighboring homes.”[iii] Deutche Bank has forecast that the number of crater dwellers in the U.S. (those with negative equity in their primary personal residence) will rise from approximately 14 million mortgage obligors as of the first quarter of 2009 to 25 million by the first quarter of 2011. Translation: 48% of all U.S. mortgages will house crater dwellers – 41% of these folks have conforming loans. Others have suggested that at the beginning of 2009, “more than half of American homeowners owed more on their homes than they owned.”[iv]

On November 6th 2009, the U.S. unemployment rate hit 10.2% in October 2009 — the highest figure since 1983. The consumer confidence index for October 2009 revealed that the U.S. consumer outlook has become more pessimistic about business conditions, the labor market, and prospects for future earnings. Some economists believe the growth in third quarter GDP is due primarily to stimulus incentives and will likely fade throughout 2010. The U.S. Congress appears inextricably paralyzed in their collective responsibility to muster the political will to craft a meaningful solution. Translation: U.S. households dwelling within mortgage craters don’t spend money. Strategic efforts to extricate the U.S. economy from the negative inertia/drag this reality continues to exert on the prospects for a sustainable recovery of the U.S. economy must begin in earnest. Who will take the lead in this endeavor?

“The only case for an independent central bank in a democracy is that it can take a longer view and do what is in the interest of the people in ways that elected politicians cannot.”[v]

Ben…are you listening?

The Case for Cash For Craters

Wisdom from Federal Reserve Chairman Ben Bernanke:

“The biggest risk is that we don’t have the political will, that we don’t have the commitment to solve this problem, and that we just let it continue. In which case, we can’t count on recovery.”[vi]

The contribution of cash for clunkers is now history. It’s over. Approximately 690,000 vehicles were sold for $3 billion sparing 42,000 jobs in the auto industry. Remember – These consumers received money for trading in junk – clunkers worth virtually nada, zilch, zero, zip!

Newsflash America: You cannot live in your car! My Black Lab Reggie and I spent one night in mine…it’s a memory we’d both like to forget. Trust me.

Gluskin-Sheff’s Chief Economist and Strategist David Rosenberg writes: “Even though we’re probably past the worst in the business cycle and probably even in the bear market, we’re talking about something much bigger here. The largest balance sheet in the world is the U.S. household balance sheet, and it’s contracting at a record rate. — The ratio of debt to income increased from about 35% in the early 1950s to about 65% by the mid-1960s, where it more or less stayed until the late 1980s. That’s when debt started its epic rise, hitting 100% of income in 2001 and going all the way up to 133% in 2007.”[vii]

George Ackerlof and Robert J. Shiller adroitly point out:

“To understand how economies work and how we can manage them and prosper, we must pay attention to the thought patterns that animate people’s ideas and feelings, their animal spirits. We will never really understand important economic events unless we confront the fact that their causes are largely mental in nature.[viii] They make the case for the role of confidence, hope, fear and trust in the macroeconomic mosaic. In an earlier work, Shiller points to the unequivocal importance of the human imagination, social psychology, a sense of fairness, and the deleterious effects of resentment.[ix] The field is now referred to as behavioral economics. It is the emotional, mental and attitudinal composition of people within a culture that has now garnered the focal point for research in this arena. Why? Because the assumptions that has guided economics over the last several decades that markets and economies are rational, efficient, self-correcting, people/investors/traders/homeowners are reasonable – and that the risks are quantifiable, predictable, and that tomorrow can be inferred from yesterday — is under siege. We have learned that “uncertainty, as opposed to risk, is an indefinite condition, one that does not conform to numerical straitjackets.[x] Translation: Economics is a social science, just like sociology or psychology or political science. It involves much of human behavior and the human condition that we cannot continue to pretend to understand. There are people; moms and dads, children, teenagers, young adults, students, bread winners, seniors, entrepreneurs, business owners, families, neighborhoods, communities, regions across this nation — treading water in the depths of these mortgage craters. The precariousness of the ongoing uncertainty currently experienced by this segment of the U.S. economy need not become an indefinite condition. The strategic plan for U.S. economic recovery must address this fiasco, or run the risk of allowing millions of impaired U.S. consumers to become casualties of exhaustion and subsequent drowning — the avoidable fate of those who are left to tread water without the resolve of passersby to come to their rescue.

The Lifeline:

The current economic crisis has prompted many to scurry to seek guidance from the economic history of this nation, particularly The Great Depression. Of course, the distinct differences between the structural complexities of the economic infrastructure during the Depression era versus today provide a convenient backdrop to rationalize away the pertinent lessons that might serve to inform our thinking today. Some have suggested that we are somehow more advanced and learned today – therefore immune to the miscalculations that contributed to the human misery suffered by millions during the Depression. Others carelessly take the position that this too shall pass. Finally, there appear to be loud voices shouting in the chambers of the U.S. Congress that we have already done too much. Yet, there is one parallel from the Depression that is particularly poignant as it pertains to the U.S. economic crisis today:

“The Great Depression was not some act of God or the result of some deep-rooted contradictions of capitalism but the direct result of a series of misjudgments by economic policy makers, some made back in the 1920’s, others after the crisis set in – by any measure the most dramatic sequence of collective blunders ever made by financial officials…authority at the Fed shifted to a group of inexperienced and ill-informed timeservers, who believed the economy would return to an even keel (emphasis is mine).”[xi]

Translation: The duly empowered failed to act as aggressively and deliberately as the reality demanded.

As Roger Lowenstein has said; Finance is poetically just; it punishes the reckless with special fervor.”[xii] Well, that’s a half-truth – particularly when the reckless wreak indisputable financial and emotional havoc on a broad segment of a strategically essential component the U.S. economic landscape. To paraphrase an oft-quoted utterance of economist John Maynard Keynes, markets can remain irrational longer than you can remain solvent. Unfortunately, this insight reflects the conundrum that millions of U.S. homeowners currently find themselves in. It’s difficult to hear the voices of those mired in the depths of a crater. Yet, we cannot continue to wander by this reality, reluctant to move toward those who remain trapped in the darkness beneath the collapse of our economic infrastructure, ignoring the necessity to move toward their cries for help. We must embrace the responsibility and become those “who are willing to open their eyes and assess the facts in the cold light of day.”[xiii]

A recent New York Times editorial has suggested, “We know that more stimulus spending and government programs are a fraught topic. But they are exactly what the country needs. It may be the only way to prevent a renewed downturn.”[xiv] The purpose of this article is to illustrate the moral imperative and economic necessity to include this impaired class of U.S. homeowners in the lifeline that has yet to be extended.

Former President Theodore Roosevelt captures the essence of the opportunity that currently awaits our embrace when he wrote:

“Until we put honor and duty first, and are willing to risk something to achieve righteousness both for ourselves and for others, we shall accomplish nothing: and we shall earn and deserve the contempt of the strong nations of mankind.”[xv]

Voice from the bottom of the crater:

Hey! — Ben! Tim! Larry! — Sheila! — Somebody throw us a rope would ya?”



[i] McDonald, Lawrence G. with Robinson , Patrick A Colossal Failure of Common Sense – The Inside Story of the Collapse of Lehman Brothers, Crown Business – an imprint of Crown Publishing Group, a division of Random House Inc. NY, NY Copyright © 2009 by Lawrence G. McDonald and Patrick Robinson, p. 77


[iii] Wasik, John F. The CUL-DE-SAC Syndrome – Turning Around The Unsustainable American Dream, Bloomberg Press, New York, New York Copyright © 2009 by John F. Wasik, p.136

[iv] Wasik, John F. The Audacity of Help – Obama’s Economic Plan and the Remaking of America, Bloomberg Press, New York, New York Copyright © 2009 by John F. Wasik, p.122

[v] Wessel, David In Fed We Trust – Ben Bernanke’s War on the Great Panic – How The Federal Reserve Became The Fourth Branch of Government, Crown Business – An Imprint of the Crown Publishing Group, a division of Random House, Inc. NY, NY Copyright © 2009 by David Wessel, p. 271

[vi] CBS News – 60 Minutes, March 15, 2009 An Interview With Ben Bernanke:


[viii] Akerlof, George A. and Shiller, Robert J. – Animal Spirits – How Human Psychology Drives the Economy, and Why It Matters For Global Capitalism, Princeton University Press Princeton, NJ USA and Oxford, UK Copyright © 2009 by Princeton University Press, p. 55.

[ix] Shiller, Robert J. Irrational Exuberance, Broadway Books, An imprint of Crown Publishing Group, a division of Random House, Inc. New York, New York, pp. 208, 213-215.

[x] Lowenstein, Roger – When Genius Failed The Rise and Fall of Long Term Capital Management Randon House Trade Paperback Edition Copyright © 2000 by Roger Lowenstein, p. 235.

[xi] Ahamed, Liaquat Lords of Finance – The Bankers Who Broke The World, The Penguin Press – The Penguin Group (USA) Inc. New York, New York Copyright © 2009 by Liaquat Ahamed, pp. 501 & 503.

[xii] Lowenstein, Roger – When Genius Failed The Rise and Fall of Long Term Capital Management Randon House Trade Paperback Edition Copyright © 2000 by Roger Lowenstein, p. 179.

[xiii] Panzner, Michael J. When Giants Fall – An Economic Roadmap For The End Of The American Era, John Wiley & Sons, Hoboken, New Jersey Copyright © 2009 by Michael J. Panzner, p. 182

[xiv] New York Times – Sunday November 8, 2009 – Sunday Opinion

[xv] Power, Samantha A Problem From Hell – America In An Age of Genocide, Perrenial – An Imprint of HarperCollinsPublishers, New York, NY Copyright © 2002 by Samantha Power, p. 11.