Bacon's Rebellion

Beware the Boomerang

Through all the talk of the financial crisis, the housing crisis and various other crises I’ve developed a real misconception. Ok, some of you would say a whole host of misconceptions. However, for the sake of brevity, let’s focus on one of my misconceptions. I thought that once a homeowner had their home foreclosed that was that. I figured the unlucky homeowner would have to move out, they would be traumatised by the whole episode, their credit would suffer but … the bad decision to take out the mortgage would be behind them. Not so fast. Like a lot of things, it seems to depend on the state where you live. And “the best state for business” isn’t always the best state for consumers.

Vanessa Corey seems like a good egg. Ms. Corey built an attractive house with her husband in Fredricksburg back in 2004. Then a couple of bad things happened. The housing bust put a crimp in Ms. Corey’s finances and she and the hubby split. She took her lumps, negotiated a short sale of the house and assumed the $65,000 deficiency was negotiated away. Ooops. Last November, Ms. Corey got a letter from a lawyer demanding that she repay the $65,000. She couldn’t make that payment and had to file bankruptcy.

Here story can be found here.

I’ve done a bit of informal research and it seems that some states are non-recourse states. In California, for example, a combination of state laws allows a mortgage holder to walk away from their house (and loan) and leave the bank holding the bag.

However, about 30 states (apparently including Virginia) allow a lender to legally pursue a deficiency after a foreclosure. In some states the bank can wait up to 5 years to even sue you for the deficiency. During that 5 year interregnum you may have put your financial house back in order … only to see it torn down again.

My question is this – in an era where banks are being “loaned” taxpayer money to “de-leverage” their balance sheets, at a time when the Obama Administration is considering some form of mortgage assistance – do Virginia’s laws make sense? Why shouldn’t Virginia join California in letting borrowers walk away from loans they can’t repay without the dark cloud of potential future financial ruin over their head?

Is it because Virginia is the “best state for business”? Or is it because of the massive campaign contributions handed out to our politicians by the construction, real estate, banking, etc lobbies?

Note: I spent quite a bit of time looking into this matter but it is a very arcane and confused area. I am happy to hear about any factual errors in my post. They will be researched and, if true, corrected.

I just read an opinion piece which was slathered with invective against a sitting politician’s economic policies. The piece was titled, “The Flimflam Man” and described the politician as a charlatan and a member of the “audacity of dopes”. The politician’s financial plans were described as “leftovers drenched in flimflam sauce” and “a sham”.

At first I thought I must have been reading one of my own drafts on Obamanomics. But no. It was Paul Krugman’s Op – Ed piece from last Friday’s New York Times. You can read Krugman’s diatribe here, although you might need a free account.

Needless to say, Krugman was not pillorying his BFF (best friend forever) Barack Obama. No, he was busy personally insulting Rep. Paul Ryan (R-WI) as well as ranting about Mr. Ryan’s proposed “Roadmap” budget blueprint. During his hissy-fit Krugman manages to construct one or two cogent thoughts. The first is that the Congressional Budget Office didn’t address the tax loses from Ryan’s proposed tax cuts. The second is that Krugman is disappointed that the reliably liberal Washington Post actually thinks Rep. Ryan’s plan may have some merit. Both are cardinal sins in the conscience of a liberal.

But just as the spittle is drying on his chin after what must have been a violent keyboard concerto, Mr. Krugman realizes that he really hasn’t bothered to read Mr. Ryan’s plan. So, he issues a preemptive attack in defense of his own sloppiness. You can read it here. Even the Washington Post can’t stand much more of Krugman’s infantile insults so Ezra Klein responds with this. Infuriated at being abandoned by his liberal buddies at the Post, Krugman fires off his third salvo in two days here.

Once again, Krugman fumes about the lack of a CBO assessment of the tax proposals. He asserts that lack of an assessment makes Rep. Ryan a flim-flammer. Only one teeny weenie problem – the CBO doesn’t score the tax impacts of proposed legislation. The Joint Committee on Taxation does that. Meanwhile, Ryan has asked for just such a scoring. Mr. Krugman would do well to read Megan McArdle’s article in The Atlantic here.

Fundamentally, Krugman doesn’t know what he’s talking about with this. However, as the First Lady parties in Spain and the President lines up his next putt the Fed is getting ready to downgrade its assessment of US economic prospects. Meanwhile, one of Obama’s snarling lap dogs has managed to bite himself three times in two days.

Anyone care to wager whether Krugman admits his mistake?

As for the Washington Post … first, a positive article on Ken Cuccinelli and then an intelligent discussion of Rep. Ryan’s plan? I may have to renew my subscription!

From my latest Washington Times column:

After a three-month delay, the trustees of the Social Security and Medicare trust funds have finally published their annual report. Now we have an explanation for the wait. Thanks to program changes made by the Affordable Care Act (aka Obamacare), the report summary says, “The outlook for Medicare has improved substantially.”

The Hospital Insurance Trust Fund, expected only last year to run out of money in 2017, is now expected to remain solvent until 2029, says the report. What is responsible for this 12-year lease on life? Another document, released by the Center for Medicare and Medicaid Services earlier this week, fills in the details: Reforms to the health care delivery system will shave government spending by $575 billion over the next 10 years, and trillions of dollars more in the following decades. To use the jargon of the health care wonks, Obamacare will “bend the cost curve down” – from 6.8 percent annual increases in Medicare spending, as projected previously, to a more fiscally sustainable 5.3 percent.

In Obamaworld, those gains will not come from health care rationing, as Republicans fear, but by transforming the health care system from a fee-for-service model that encourages wasteful spending into a system that rewards hospitals and doctors for economic efficiency and improved quality.

Alas, the Obama administration is living in never-never land. The positive components of Obamacare – and there are several – may have a beneficial effect, but they will be swamped by the bureaucratic nature of the legislation. The Medicare budget deficit will turn out far worse than the Obama team imagines. Read more.

Update: In retrospect, I realize that I don’t make the argument in the Times column as strongly as I could have. I spent too much space articulating the Obama administration’s thinking behind Obamacare (bending over backwards to be fair and balanced), and not enough space to explaining how the legislation actually undermines the intent. As I explained in my Boomergeddon blog post, “Where Are the Health Entrepreneurs?” (warning, none of this will make much sense until you finish reading the Times column):

There is one critical element that Cutler, a key architect of Obamacare, left out: The number one reason there is so little innovation in new health care delivery systems is that the key established players in the system — hospitals, insurers and doctors — have utilized their political power to entrench their positions in the medical marketplace and ward off competition. For all practical purposes, independent entrepreneurs are prevented from devising new models for delivering health care.

That’s why Obamacare is not the answer. Although the Affordable Care Act does set up mechanisms to fill the information void on medical outcomes, and it aims to change the incentives to reward efficiency, rather than punish it as the current fee-for-service system does, it also protects the big insurers and hospitals against competition from entrepreneurs, and it does nothing — indeed, in practice, it discourages — patient/consumers from taking more ownership of their health care purchases.

There’s fascinating news in TV Land — only 1.38 percent of the viewers of Fox News are African-American.

It’s only 2-3 weeks before the “Boomergeddon” publication date. If you pre-order your copy now, Amazon.com will give you a discounted price — $10.08, or half the list price. (For those who have pre-ordered already, Amazon.com will honor the lower price.)

The U.S. Senate approved another bail-out Wednesday, this one for state governments. In a 61-38, mostly party-line vote, Virginia Senators Jim Webb and Mark Warner agreed to provide $26 billion in aid to the states, nominally to save the jobs of some 145,000 teachers and prop up state Medicaid programs. Approval by the House of Representatives and signature by President Obama seems to be a foregone conclusion.

It’s been quite a week so far Ken Cuccinelli, Virginia’s right-wing attorney general.

MORE ON THE WEALTH GAP and SWEEPING UP THE DUNG LEFT AFTER THE RICH-PERSON, POOR-PERSON POST OF 25 JULY.

EMR was hoping that the RICH-PERSON, POOR-PERSON post of last Sunday (25 July) would generate substantive ideas on how to narrow the Wealth Gap.

No such luck.

There HAVE to be better answers than

Dictator / demagogue – driven socialism on the one hand, and

Demise of civilization driven by “I have mine” greed, xenophobia and 18th century concepts of rights without commitments to 21st century responsibilities

on the other.

Before going on, let us clear the air on the issue of “over regulation” of shelter being responsible for kicking off the Great Recession:

EMR received a note from a housing professional in Austin (that is in Texas) and here are some quotes:

“When you clean up the RICH-PERSON, POOR-PERSON post please toss out all that trash about how land use controls are what have saved Texas from high foreclosure rates.

“At least set the record straight:

“There are three major reasons that the foreclosure rate is lower in the Texas’ Regions that had growing economies than in other southern states:

“1. Very stringent usury laws that have the impact of controlling the use of second mortgages, the size of down payments, the cash one can take out of a refi, multiple dwelling investments, etc.

“2. Very high property tax rates that make running up the price of housing an unattractive idea for everyone but flippers who are caught by the usury laws anyway.

“3. Texas has squandered vast sums of oil revenue on roads and expressways rather than spending it on quality of life investments. Houston, for example, has three beltways, multiple radials, including toll roads and still is near the top of the Texas A&M congestion measures year after year.

(EMR addressed the gross overbuild and dysfunctional design of Texas’ limited access roadways in Column # 50 Interstate Crime, 14 March 2005.” (All columns are now accessible from the RESOURCES page at www.emrisse.com)

The Texas roadway building extravagance opened up vast areas in ‘the next county out’ and so there has always been an over build of Wrong Size House, Wrong Location.)

“’The reason for fewer foreclosures is less regulation’ myth is just the latest zone of deception that has been a hobby horse for ideologies and idiots on the topic of ‘onerous regulations’ for years.

(That is especially true for those who write for and quote “The New Geography” – Kotkin, Cox, et. al. As EMR has pointed out, the lack of regulation has generated not one whit of difference in settlement patterns at the Dooryard or Cluster scale in Texas vis a vis other states – just more scatteration due to excessive road building.)

“There have not been the high foreclose rates in Texas like there have been in California, Nevada, Arizona, Geogia and Florida.

“However, Texas has quality of housing for those at the bottom of the food chain on a par with Arkansas, Mississippi and Alabama.

“The idea that less regulation is a solution for Affordable and Accessible Housing is worse than wrong, it is fraud and borderline criminal because so many at the bottom of the food chain are deceived by these misrepresentations.

“Those at the bottom of the food chain cannot afford big, scattered, detached dwellings in Texas any more than they can anywhere else.

“While housing is less expensive in Texas, lower income families spend more to own and drive cars than they do on food or housing – and in some cases both.”

That pretty much wraps up the “over-regulation” issue.

By the way on the topic of Affordable and Accessible Housing, she recommends a new report from Todd Littman

www.vtpi.org/aff_acc_hou.pdf

On the topic of settlement pattern dysfunction and its most vocal apologist (Joel Kotkin), it is worth reading about the recent debate between Kotkin and Chris Leinberger at

http://www.fastcompany.com/1668425/america-in-2050-urban-or-suburban-both-neither

In a recent Blog post, Leinberger says that after this debate, he realized that he and Kotkin actually AGREE on many aspects of the shape of the future, they just use different Vocabulary.

Robust Vocabulary and comprehensive Conceptual Framework – understand the need for them or flounder in Geographic Illiteracy and Spacial Ignorance.

OK, enough about cleaning up after the last post, lets see if there are not SOME ideas for narrowing the Wealth Gap. Please do not bother with more blabber about ‘freedom’ and ‘rights’ without responsibilities. Also avoid tossing rocks at empty pigeon holes.

How about some REAL insights into how to narrow the Wealth Gap and provide a safety net without abandoning a market economy and democracy.

EMR

Well, how about that. It appears that privately insured Americans are using fewer medical services these days. Patient visits, drug prescriptions and procedures were down in the second quarter of 2010 compared to year-ago levels, reports the Wall Street Journal.

Weak demand could put downward pressure on spiraling health care costs and insurance premiums, the WSJ suggests. And what could be behind this remarkable change? Health economist Paul Ginsburg attributes some of the new behavior to the weak economy. But, he adds, “This could go beyond the recession. Being a less aggressive consumer of health care is here to stay.”

Perhaps this has something to do with it: More Americans are buying high-deductible health plans that make them bear a bigger share of the cost of their medical services. Eighteen million people have such plans compared to 13 million last year, according to the Journal. Believe it or not, people exercise more discretion and care as consumers when they have to pay for medical services themselves! Imagine that. They don’t go to the doctor as often — presumably cutting back on more frivolous trips — and they look for better deals when buying pharmaceuticals.

Most extraordinary! Who could have predicted it? Is there some body of thought that could explain why people consume more of a product or service when someone else is paying for it, and consume less when they pay for it thmselves? Could the field of economics shed some light on this perplexing question?

Finish reading this blog post on the Boomergeddon blog.

WaPo is full of good stuff today!

Lets start with the front page of Business:

Household Economics writer Michelle Singletary (The Color of Money) sketches out “What Sherrod was telling us” in a column with that subtitle. The money graf:

There is a disturbing and widening gulf between the rich and the poor in America. And it would be even wider except for the fact that so many middle-income families have borrowed their way to a comfortable lifestyle. They are just a paycheck, a divorce or a heath crisis away from financial ruin.

Read it all here: http://www.washingtonpost.com/wp-dyn/content/article/2010/07/24/AR2010072400146_pf.html
Just for you, Peter.

By the way the online version of the story is titled “Race isn’t the problem – economic inequality is.”

This was the theme of Jim Bacon’s post “Webb Shatters the Mold” on Friday.

No one had commented on Observer’s note at end of the comment section on the Webb post. EMR suspects no one saw it so here is a copy:

“Peter:

“Observer”

Perhaps it should have been:

“Give credit to Mr. Bacon for pointing out that Senator Webb is trying to find an answer.”

Item two from today’s WaPo:

On the same page as Singletary’s column there is one by Ezra Klein titled “Digging into finance’s pay dirt.” Klein argues that Broke, USA needs to be read along with The Big Short .

The later deals with what those at the top of the Ziggurat did to cause The Great Recession, Broke, USA documents what those in the middle and at the bottom did to provide the funds.

Same song, second verse: It is the little guy that is having to pay and, as someone said recently:

The Wealth Gap is not sustainable in a world with instantaneous communications, mass literacy and weapons of mass destruction.

EMR thought he had seen a second sentence for the Pulitzer quote cited by Observer. Sure enough it reads:

“The inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal sharing of misery.”

That is a perfect segue to a third item in today’s WaPo.

Check out this book review in the Outlook (Opinion) section: The review by Andrew Higgins is titled “China, a capitalist machine with a communist engine” about The Party: The Secret World of China’s Communist Rulers. (“China’s ruling party has disentangled itself from ideological chains.”)

Sounds like Pulitzer’s worst of all possible worlds.

Is it time to focus on Regional Resiliency, Import Replacement and DeGrowth?

EMR

Josh Dent is an early victim of Obamacare. The lanky, shaven-headed machine operator likes the medical insurance plan his employer, Acorn Sign Graphics, provides him. But under the newly enacted Affordable Care Act, his insurance policy will get less affordable. A provision in the law is putting his insurance company out of business, and whatever replaces Mr. Dent’s current policy will likely be much more expensive.

The way the 29-year-old sees it, Acorn will have to cut benefits or cut pay. One way or another, he figures, the switch to a new insurer will cost him.

Steve Gillispie, Acorn’s president, is distressed by this unexpected development. A year and a half ago, he was facing premiums of $150,000 from an established insurer, up from $80,000 just three years before. Then along came Richmond, Va.-based nHealth. The start-up company, launched with the mission of making consumer-driven health care a reality, rescued him with a plan that kept premiums below $90,000 yearly. The plan insured his 35 employees against hospital expenses, created a $1,500 deductible for doctors’ fees and set up health savings accounts (HSAs) for employees to pay for what the health plan did not. “For most employees,” Mr. Gillispie says, “it netted out money in the pocket.”

Lower insurance charges helped Acorn survive the recession without laying off any of its employees or cutting their compensation. Going back hat in hand to one of the dominant insurers in town, Mr. Gillispie fears, will add tens of thousands of dollars to his cost structure. Profit margins are tight in this slow-growth economy, but he hates to pass on the higher insurance costs to his employees, many of whom are paid $14 to $16 an hour. “Most of these people are living hand to mouth as it is,” he says. He still does not know what he will do.

Such is the unintended consequence of Obamacare, which overhauled the health care industry with the goal of making medical insurance more affordable and accessible to all. The provision that is causing Acorn Signs so much heartache is the so-called 80/20 rule, which requires all insurance plans to pay out at least 80 percent of premiums in benefits. The goal behind the rule is to punish insurers that let administrative expenses get out of hand. In practice, the law punishes innovative, entrepreneurial companies like nHealth that kept premiums low. Read the rest of the column here.

(This column was originally published Friday in the Washington Times, and has been republished on the Boomergeddon blog. Illustration credit: Alexander Hunter for the Washington Times.)