Category: public policy–nec

Saudi housing bubbling

Suppose you are a king. And suppose you have a restless, mostly young population, high unemployment, with most people having to rent because housing and land are too expensive. Few people can get mortgages, because they involve large down payments and high interest rates. Also suppose that you have a big country, lots of land relative to population, and a huge government surplus. What to do?

You could examine why housing is so expensive, and whether there’s a way to make more land available. Maybe that’s happened in Saudi Arabia, but recent news reports give no indication.  Instead, the Saudi solution is to encourage the mortgage industry and expand credit.  Will that make housing cheaper?  Will that make it easier for an underemployed population to get decent housing? Or will it drive up the price of land and feed what seems to be an already-building bubble?  It may be that the Saudi objective is to get more of their people into debt-slavery so they’ll faithfully serve the state.  I don’t know.

What really puzzles me is how mortgage interest fits into an Islamic-dominated state.  Possibly this is like the “Islamic Finance” offered by some U S banks, where no interest as such is charged, but either the price is inflated to compensate for the fact that it will be paid gradually, or the “homeowner” is technically a renter until enough rent has been paid to cover the cost plus what, to others, would be interest.

Bloomberg says the King pledged more than $82 billion for housing, but does not say whether this comprises direct government grants, or is simply some amount of debt which homebuyers will contract.  It also says that

Saudi Arabia’s mortgage law will change the way home finance is regulated, from registering mortgages to prosecuting police officers who refuse to carry out eviction orders.

This will be interesting to watch, preferably from a distance.

More about Saudi housing and morgages:

 

How to prevent economic Ebola?

Economic Ebola is “the virus that infects scientists and engineers and causes them to go to Wall Street rather than create something of societal value,” says Paul Kedrosky.  Graduates with quantitative skills are offered salaries up to five times what they could make in productive work, so of course many of them spend their time finding ways to scrape a few million from high-velocity financial markets, rather than designing products or processes that would actually increase society’s satisfaction.

“Let’s save the world by keeping our engineers out of finance,” says Vivek Wadhwa. [Well, they’re not really our engineers, they belong to themselves, but we’ll skip that for now.]  A fine idea, but how to do it?  One answer might be a financial transaction tax, a tiny levy on each financial trade which could remove the profit from “financial engineering.” It would have no real effect on “long-term” investors who hold a position for more than a day. Seems like a good idea, but of course there will need to be a definition of what is a “financial transaction” for tax purposes, and clever people will find a way to design a transaction which doesn’t meet the criteria.

Maybe a better approach is to eliminate or scale back some of the things that make financial engineering lucrative.  For instance, if a land value tax prevented private collection of land rent, the mortage/financial crisis we’re still in would have been much smaller, or perhaps not possible at all.  We might want to go back to the classical concept of usury, forbidding all transactions where interest is charged for the use of money.  (People can still get compensation for lending money, but it would be as some agreed share of the profits which the investment generates, keeping the lender conceptually closer to the borrower.)

Of course we could start with something simple, like having the government take over insolvent banks, prosecuting and imprisoning criminal executives, letting stockholders, bondholders, and others who have unwisely trusted the bank to absorb the financial loss.  That alone would make financial engineering a lot less appealing.

Vivek Wadhwa

Real Congressional Reform– The Art Auble Plan

The draft report from the Fiscal Responsibility Commission, subject of my previous post, has some proposals for reform of how Congress makes (or doesn’t make) expenditure decisions.  Frankly, I do not understand them.  Perhaps this is because the draft report is simply a series of slides, not really a report.  Or maybe these things are too complex for a simpleton like me to understand.

Separately, there is apparently a proposal to cut Congresspersons’ pay, and even one to reduce their pay every year that the government runs a deficit.

But these won’t work, for a very simple reason: Continue reading Real Congressional Reform– The Art Auble Plan

Fiscal responsibility and reform

The “President’s National Committee on Fiscal Responsibility and Reform” has issued its “draft report,” actually just a series of powerpoint-like slides in pdf format, with a few complete sentences here and there.   Yves Smith [correction: These comments were guest-posted on Naked Capitalism but originate at The Daily Bail] has already posted comments, of which I fully endorse the last sentence, but I would like to expand a bit here on my own site.

Now, it would be too much to expect the President’s Commission to suggest anything that would seriously change the way the powers-that-be conduct their business.  Continue reading Fiscal responsibility and reform

Avoiding foreclosure vs. getting ripped off

A significant post at Naked Capitalism asks “Why Are NACA’s Innovative Mortgage Modification Marathons Below the Radar?”    Suppose a property bought for $300,000, with a $290,000 mortgage, has declined in value to only $200,000.   If the borrower can’t keep up the payments, the lender could foreclose, but would net less than $200,000 after expenses, while the borrower would lose the property.

The rational solution is for the parties to agree to a reduction in principal, write the mortgage down to, say $200,000, with payments reduced commensurately.  The lender is better off, the borrower is better off, and there’s no vacant foreclosed home for the neighbors to worry about.

But homeowners under financial stress tend to have a lot of difficulty dealing with their lenders.  Lenders want to pretend that the mortgage is still worth $290,000 (otherwise they might have to liquidate or raise more capital), and/or hope to be bailed out by yet another federal program, and/or lack competent staff.

The NC post implies that NACA can be helpful in this situation.  But, as one of the commenters there notes, thousands of other enterprises make similar promises, and many of these are predatory.  How is the stressed homeowner to find someone who will help, rather than rip her off?

NACA provides some reason to be suspicious:

NACA – America’s Best Mortgage Program
The incredible NACA mortgage allows NACA Members to purchase or refinance homes with:

  • no down payment,
  • no closing costs,
  • no fees,
  • no requirement for perfect credit,
  • and at a below-market interest rate.

Everyone gets the same incredible terms, including the below-market interest rate, regardless of their credit score or other factors.

I can only answer by treating it like any other purchase of consumer services. You ask your friends, google around to see what other folks say about it, evaluate the explicit promises made on the provider’s web site…. and maybe you guess correctly, getting real help. [Hopefully you are not working three jobs trying to make ends meet, lacking time to do any real investigation.] There is no sure solution, only ways to improve the odds.

A better remedy, of course, would be a system that allows people to obtain decent housing in a decent neighborhood, without having to mortgage their futures for an “investment.” That would be one benefit of a land value tax.  No, we wouldn’t expect our homes to appreciate in value, at least not beyond the general rate of inflation.  But we would need much less debt to purchase them, and more easily build a reserve of real savings.

A warning about the NACA web site, btw: They seem beholden to Microsoft and will display an error message on many pages if you are not using genuine Internet Explorer.  I think some other browsers allow you to pretend to be using IE, and possibly this will solve the problem.

Who are putting their lives on the line for us?

A new report(pdf) from the U S Bureau of Labor Statistics provides 2009 data, pretty much consistent with earlier years, about fatality rates (per 100,000 equivalent full-time workers) in various occupations:

  • Fishers and related fishing workers 200.0
  • Aircraft pilots and flight engineers  57.1
  • Farmers and ranchers 38.5
  • Roofers 34.7
  • Refuse and recyclable material collectors  25.2
  • Driver/sales workers and truck drivers  18.3
  • Miscellaneous agricultural workers 16.7
  • First-line supervisors/managers of landscaping, lawn service, and groundskeeping workers 16.2
  • First-line supervisors/managers of construction trades and extraction workers 15.2
  • Grounds maintenance workers 15.0
  • Taxi drivers and chauffeurs  14.9
  • Police & sheriff’s patrol officers 13.1
  • All self-employed workers (included in the various occupational categories) 12.0
  • Firefighters 4.4

When I think about what occupations are really important to the maintenance of civilized life in my community, I definitely think of the farmers and the refuse collectors. And in an emergency, sometimes I have had to call on a taxi driver.  Some of the other categories maybe are less essential. I like fish, but not enough to risk death.

Of course police and firefighters face dangerous situations, but they are trained, equipped, and staffed to deal with them.  Maybe we need to give equal attention to some other essential occupations.

Economic Recovery Prevention Commission

I must not have been paying attention, but apparently on June 24 Governor Quinn’s Economic Recovery Commission issued its report. If we’re lucky, this will be one of those that just sits on the shelf.

The whole report is at the link above, or get the pdf from the direct link here, provided by the Executive Service Corps. It seems that a summary would be: “Raise taxes and make them more complicated, then give more subsidies to favored interests.” Among the tax increases are higher individual and corporate income taxes, and a broadening of the sales tax to include more services.

Those of us with a sound understanding of economics will be shocked discouraged to find that there is no mention of increasing the taxes on land value as a way of encouraging development and easing taxes on productive activity.

I’m not likely to review the whole report in detail, and doubtless it contains a few sound recommendations. I’ll just mention two other things that struck me.

First, we all know about TIF’s which divert real estate taxes to private pockets, and there are quite a few TIF’s that divert sales taxes, but this is the first I’ve heard of a TIF that diverts state income tax:

The CenterPoint Intermodal Center in Joliet, a 3,900-acre state-of-the-art, integrated intermodal center,  represents a $2 billion private investment. The center also will receive State investment under theIntermodal Facilities Promotion Act, signed last year. Designed to encourage business development along the freight rail systems of Illinois, the Act authorizes income taxes from jobs created at the facility to be placed in an Intermodal Facilities Promotion Fund. DCEO will administer the fund to reimburse CenterPoint for infrastructure improvements. DCEO will award an annual grant of up to $3 million in fiscal years 2010 to 2016.

Second, among the recommendations is an increase in the public employee retirement age to 72. I am no expert in retirement ages, and probably it’s appropriate to push the age up from 60 (which I believe it is now, and younger in many cases), but 72? No basis is given for choosing this age (other than the obvious fiscal benefits of more workers and fewer retirees. My guess is that nobody takes this recommendation seriously; had they recommended 65 or 67, there’d be a danger that the change might actually happen, but there are probably enough stories of senile 72-year-olds to prevent anything from being done.

China collecting some rent

Bloomberg reports that China has imposed what appears to be a 5% severance fee for coal, oil, and gas in one western province, and will extend it to others.  Revenue will be used to fund development projects in the area.

In principle, this is collecting the rent for the benefit of the community.  How it will actually work out cannot be known.

A percentage of a lot is quite a bit

Here are a couple more examples of troubles we wouldn’t have under a just economic system.

Mortgage servicers incentivized to prevent mortgage modification. Many commentators have pointed out that, if the value of a property declines below the market value, and the homeowner is unable to pay, the lender is better off agreeing to reduce the principal to an amount consistent with current values.  (This is true even in the absence of any government-funded incentives.) So why does it rarely happen? It’s because lenders, apparently to conform to bizarre federal tax rules, have given up the right to modify loans.  Only the mortgage servicer, an independent company (tho sometimes a subsidiary of a big bank),  has the right to do that.  But the mortgage servicer is paid based on a percentage of the outstanding principal, thus has no incentive to help reduce it.  (Cash incentives offered under a recent federal program apparently aren’t large enough to matter.)

The geoist perspective: If land values were fully taxed,  real estate prices never would have bubbled, and mortgages would cover only the cost of the house, not the cost of the land it occupies.  Therefore mortgages would be smaller, perhaps rarer, and the whole problem of numerous underwater homeowners could never have occurred.

A little extra sleaze for municipal bonds. When a municipality (or, for that matter, any organization) issues bonds, they choose an underwriter who, for a fee, agrees to get all the bonds sold.  The issuer may choose the underwriter by open bid or by negotiation.  Academic research shows that, in the latter case, interest rates tend to be 17 to 48 basis points (hundredths of a percent) higher.  So how were 85% of the $378 billion in municipal bounds issued last year underwritten? By negotiation, which seems in theory to be costing taxpayers several billion dollars over the life of these bonds.   And that 85% includes 100% of bonds issues by the City of Chicago.  No one familiar with local government will be surprised at the reason: “[T]he city and its aldermen want to reward those who support public officials and politically connected charities.”

The geoist perspective: Most public debts are issued to benefit the underwriters and bond purchasers. At best, the funds are used for improvements that increase land values. Therefore, capital investments should be paid thru a tax on land values. If the landowner who benefits hasn’t enough cash to pay her share, she may need to borrow privately to cover it, but the general public should not be liable. If the improvement does not increase land rents enough to justify its cost, then it is not worth doing.

Much more information about both of these outrages is provided in the source articles, which you should read unless it would make your head explode.

More general ignorance of economic fundamentals

Fannie Mae’s new National Housing Survey, intended “to gauge the public’s current attitudes toward housing,” shows that Americans still believe buying a home is a good investment, and socially beneficial. Both ideas are, as Felix Salmon put it, “horribly misguided.”  Public policy subsidizes owner-occupants in numerous ways, all of which get capitalized into the price of real estate making it even less affordable.  One might be able to time the market so as to buy and sell one’s house profitably, but it’s not something to count on and many of us have had things go disasterously the other way.

Salmon’s done a good job of describing some of the social costs

[T]he top two reasons to buy a home are that “it means having a good place to raise children and provide them with a good education”; and “you have a physical structure where you and your family feel safe”. Reading between the lines here, I think that what we’re seeing is the effect of rental ghettoes, and the fact that neighborhoods with high levels of homeownership tend to be safer, and have better schools, than neighborhoods which are mostly owned by landlords. That’s a negative aspect of homeownership, in the grand scheme of things, but it’s clearly here to stay: no one’s anticipating a more sensible world where it’s commonplace to be able to rent a house in a good school district.

And most of those surveyed– renters, unmortgaged owners, mortgaged owners, underwater mortgaged owners– still think that now is a good time to buy themselves a house.  Imagine how they’d react if told that now is a good time to shift more taxes on to the land they want to buy. Will they sit still long enough to understand the mechanism that makes housing easier to afford when land is taxed?