There’s been much talk lately on these pages about how the state of real estate, and the meltdown of the mortgage market are massive market failures. Jerome here or on ET and bonddad earlier are sounding off on the crappy US economy and how the US real estate meltdown is an evolving crisis.
Ever the contrarian, I'm not seeing this as the disaster that either make it out to be. Nor do I think the real scandal has anything to do with the actions of the big swinging dicks at Merrill Lynch, Countrywide or Citigroup. And I do mean dicks.
Don’t get me wrong, these guys are scumbags, and the economy sure does suck. But these guys have always been scumbags, that’s why they run investment banks and not Second Harvest. And there’s no more a crisis in financial markets today than observed in the recent past, with the US currency crisis of the 1970's, Black Wednesday, the S&L crisis in the US or the Japanese real-estate bubble of the '90's. Bad, but not the end of the world.
Now, some of the aforementioned events caused serious economic pain to the middle classes in the countries concerned (Japan, to some extent the S&L crisis), some didn't, at least not right away, not directly, or at least not in a way which could be indisputably ascribed to the event itself. So, while it's likely true that large swathes of the US middle class are currently waking up to the fact that they aren't worth as much as they thought they were, and likely won't become millionaires by sitting on their ever-appreciating-by-12%-a-year home, the real scandal has nothing to do with dubious and over-spun real estate markets, corrupt ratings agencies or investment banks overcome with the temptations of moral hazard.
No, the real scandal is that we don't start worrying about this stuff until it starts worrying the upper reaches of the middle class and their perceptions of their own deserved wealth.
I'll admit, two million foreclosures appears, on the face of things, worrisome. This is especially true for our dear media, when the face of those foreclosures is an upwardly mobile family in a fast-growing professional hub like the Bay Area of California, middle-class retirement communities in Florida or refugees from "high-tax" Southern California in once-booming Las Vegas. Our dear media's target demographic, in sum.
But let's be honest. The folks in question are hardly going to be out on the street; many end up simply going from zero-equity "home-ownership in name only" situation straight back to a more affordable rental situation when their mortgage re-sets to a level their income cannot support. Each person who learns he or she isn't as wealthy as they once thought is one less tool in the false-consciousness tool-kit of modern capitalist society.
On the other hand, there's been a real homelessness crisis in America for the better part of two decades, with every year two to three million real American people without regular, dependable real shelter, about a third of them single women and their children, and this was true well before any McMansion got repossessed. Don't forget, five hundred to seven hundred thousand foreclosures is the normal annual rate in the US. People lose their homes due to an illness, a job loss or natural disasters all the time . Out on the street, at a soup kitchen, in a homeless shelter, in some better temporary housing arrangement if they're lucky. It isn't until the comfortable middle class, the ones who've done "everything right" and don't "deserve it" start getting hit with auction notices that we start thinking there's a problem.
As for the facts of Capital's present predicament as regards us working stiffs, in reality there isn't much more of a crisis than there is as a matter of American course. Instability and insecurity are part and parcel of capitalism, in particular the anglo-american variant. Many of us have been a couple of paychecks from the street off and on for the past couple of decades. Sure things are bad now, but the fact of the matter is that all we are seeing today is a bit more turbulence than usual. With the important difference that the turbulence starting to hit the more well-to-do. Is this the source of today's real concern?
In fact, in some ways the MBS model absorbs some of the detrimental effects better than the models used in the past. For instance, the bad assets are distributed throughout the financial system, via holding MBS themselves or via holding combinations of these with other debt instruments (so-called Collateralized Debt Obligations), held by not just pension funds, but also insurance companies (esp the longer duration stuff), and the recognition of the loss is spread across the economy much better than in '90's Japan or the S&L crisis, both of which required serious government intervention (and in the latter case, huge dollops of multi-generational moral hazard, the seeds of which we are current reaping the harvest, apparently). And don't forget that the top one percent of Americans possess 60% of financial assets, to give yourself an idea of the actual repartition of exposure to this particular set of shit-hole assets. I'd like to care that rich assholes just saw their position in Citibank shares get hammered, but I've been watching my sister try to get funding for enough beds at the battered woman's shelter she runs here in the US, or my brother working the state he lives in to get more public funding for food banks, to give a shit about that kind of thing.
Second, the rhetorical "where's the $100bn write-down," when speaking of 2M houses facing foreclosure, is a bit hyperbolic. I'm assuming the writer expects a $50K per foreclosed house loss on all of the two million households foreclosed, a figure cited by the Chicago Fed in studying foreclosures last year, initially developed by a big hitter in mortgage markets based here in the Twin Cities, GMAC RFC. But this assumes that those 2M houses haven't already been written off, which isn't the case. First, since approximately 500K-700K houses in the US go into foreclosure in a normal year (the real scandal, in truth), and yields on mortgage-backed securities are priced to reflect projected default rates (based, to be sure, on prior trends), presumably 25% to 35% of the problem was initially priced into the initial debt instrument issue already. Additionally, subsequent downgrades were presumably reflected in prior period statements when these parts of the portfolio were marked to market. (Of course, where things in fact get dicey is when there is no longer a liquid market for an issue, which is often the case for thinly traded instruments like CDOs even when there isn't an increased awareness of risk, but the fact that there isn't a market does not mean that there isn't a value. If might be 20 cents on the dollar, but there's likely a value, except in the longest durations of the junkiest shit, the riskier long-duration stuff that pension-fund managers, or alternatively, insurance companies often seek out).
But even if the number is $100 billions, the follow-on question is, cetera paribus, so what? The collective value of mortages held on US real estate is approximately $10 trillions. $100 billions is a lot of money, but it represents 1% of the mortgage market. Further, there are 76 million mortgages in the US, and approximately 1% of these goes bad every year without the system going belly-up. If 1% won't break the system, what's to say 2-3% will? On the other hand, our handwringing on this issue risks masking the real crime, which isn't that we're up to 2-3% of mortgagees losing their home this year, but rather, that the economic system that produces this result always produces this result, even when things are going along supposedly swimmingly. And the ancillary crime is that nobody gives a shit when it's poor minorities and working class folks in Detroit losing their homes. Nope, people only really start paying attention when relatively affluent, aging US baby-boomers start feeling the pain of the oppressive economic system all Americans live under. And you can be relatively confident that if and when one of the two parties in the US do something about the issue, it will be a policy prescription geared in quite a limited fashion to only help as many aging middle-class boomers as is humanly possible. After all, that's not just a key media target demographic, that's also a key political party target demographic, so something has to be done. But actually get adequate and decent public housing for families in need? You gotta be fuckin' kiddin' me, man, that's just gonna feed the moral hazard gravy train. The only people allowed on the moral hazard gravy train are campaign contributors and target voting demographics. Oh, and someone will find a way to fund a casino and a new football stadium as well. You can't do something about housing without building a casino or a sports stadium, this is the real third rail of American politics, forget about social security.
And you can bet that no one will ever foreclose on a football stadium.
So if you think the sky is falling, think again. For many Americans, the sky fell long ago. We just didn't notice.