Thought for the Day

“Government is a necessary evil.  And the greater the distance of the government from the effects of their decisions… the more evil government necessarily becomes.”

Comments?
PS
There are no bonus points for Googling the quote.

Filed under: POLITICAL & ECONOMIC FOLLY , government

Learning to Appreciate the Arts

Not everyone appreciates the entertainment value of watching the body politic.  But I do.  I stand hands on hips, amazed by the intricate movements each player contributes to their tap dance around the truth.  I listen to their spin, enthralled by the rhythm and stunned by their ability to stand upon the dais and look us in the eyes.  For all its pleasures though, most dedicated fans recognize the elements of tragedy that underlie every production.  There may be action and there will most certainly be humor; but the end is always the same: hubris and self-importance combine to bring about tragedy.  In the audience we may see it coming, but our recognition is too late to avert the inevitable.

Residents of California have been blessed with a double header as of late; two shows for the price of one.  True aficionados of this delicate art form will not only revel in the production value both shows offer, but the clever juxtaposition between them – the contrasting views of power they represent.

On the main stage we find the Federal Players and their prime-time rendition of The King and I.  The legislative branch of democracy writes a blank check and hands it to King Henry (Paulson) and his trusty side-kick President Bush.  They spend it on assorted items, many never contemplated when the check was written.  The legislature must be commended, however, for its heartfelt portrayal of the country bumpkins who did not see any of this coming.  In the final act, a chagrined upper house – the Senate – reasserts itself.  They choose not to spend money they don’t have on an industry that does not deserve it.  (This decision aligns with the wishes of the audience, but we assume the relationship to be coincidental more than causal.)  At the last moment: a twist!  We see the King spending the money anyway!  He usurps the Legislature’s constitutional and historical role as the means of appropriation.  It is a dramatic twist, shocking in its brazen contempt for law.  As the curtain comes down the audience is too dazzled by it all to recognize the depth of the tragedy they have just witnessed.

On the secondary stages we find the State Players.  If you travel to the “Will Never Be Ready for Prime Time” tent you find the players particular to California, a state which all art patrons know to be the source of every decent slapstick comedy in the past thirty years.  Tonight’s presentation finds a Legislature stymied by the people’s will.  A proposition that allows tax hikes only upon a two-thirds vote of the house and senate prevents them from a continuous bacchanal of taxing and spending.  Like Nero, they fiddle while California burns.  There is a comic element in the beginning as the populace, forced to tighten their belts and deal with tremendous cuts to their budget, watches a government – unwilling to employ a budget - throw temper tantrums over their denied access to the public’s ever thinning wallets. But the comedy turns dark when the legislature realizes they can redefine taxes as fees.  For instance: define all gasoline tax as a fee and remove the fee.  Now they can raise income tax, sales tax plus a multitude of other taxes and offset it all by the elimination of the gasoline tax.  Thus they have a revenue-neutral tax bill which, in their humble opinion, does not fall under the two-thirds law enacted to prevent them from doing that which they have done.  The tragedy: the gasoline fee was immediately reinstated… and raised.  All of this was done with a straight and earnest face.  Afterall, for the play to succeed the audience must believe.

Great entertainment indeed.  A federal King usurping the power of the legislature and a state legislature usurping the power of the people – that’s quite a bit of power being transferred.  As an ardent fan of the tragic form I am enthralled by the drama of it all, but as a member of the audience I wonder how much power is left to us and suddenly saddened by the tragedy of it all.

Filed under: POLITICAL & ECONOMIC FOLLY , California, Fed, government

Point / Counter-Point

Michael Cook wrote a thought provoking post earlier entitled What Happens to the Early Worm.  So thought provoking that I found my comments drifting to post length.  So how about a little point/counter-point?

Michael, a very detailed and thoughtful post. I would not disagree with you that cautiousness is a safe strategy (although not always a profitable one) and I certainly do not disagree with your assessment of the people here on BHB.  But I do have some other questions:

The income / price equation did not get out of whack overnight, so buyers and sellers should not expect it to correct itself overnight either.

All real estate is local and that is never more true than now. In some areas we have seen real estate go through the support level of fundamental value (that value which would allow an investor to purchase a property and cash flow). This is no different than the Dow last week. It was oversold and many companies could be purchased below their fundamental value. So are you suggesting that rents are going to decrease in these areas?  Otherwise, the correction has already occurred in some areas.

You are looking at some of the best real estate agents in the business here. So when they write that their business has not dropped off, it might lead the casual reader to believe that the real estate market is not in a tailspin or even that real estate is close to a bottom. Do not be lulled into a false sense of optimism. This group is adaptable, smart and most of all well above average.

Michael, to whom are are you writing this post?  If it is agents then I suggest the new market has caused an industry-wide house cleaning.  Those that do not belong have seen business disappear and those that do have been rewarded; but this does not necessarily reflect a worsening real estate market.  If, on the other hand, you are writing to consumers then I suggest they read you closely when you say that the top agents have found “their business has not dropped off.”  It has not dropped off for a reason and would behoove those buyers and sellers to search out the agents that remain busy; again, because the market does not seem to be as bad for them.

Consumer spending is down – Much of it fear-based
Manufacturing is down and declining – As the credit crunch alleviates, this should soften
Jobless claims are up and rising – DEFINITELY A STAT TO WATCH
Housing remains weak – This begs the question
Housing inventory remains well above average – But dropping in many areas.  Plus, programs like Hope for Homeowners may put a significant dent in the rate of increase of REOs
Dow Jones has dropped nearly 40% over the past six months – This is significant, as you said. But may be good for real estate. The markets can go to zero but a house is still a place to live

…decline in the stock market. This represents a decline in confidence in the global economy. This level says that investors believe business could be in for sustained economic distress

There are a couple of great articles addressing this over on Coyote Blog.  Don’t Panic discusses what stock pricing represents and how it does not always address company value (especially in the comments). There is also a great graph in Good News, Really along with this summary: “(i)n fact, the current level of the stock market is screaming normalcy.”

housing still has room to decline because the historical ratio of median housing prices to median income is still too high

Past is not always prologue.  I find problems with the affordability index and have discussed them here.

In the end I agree that people should not try to “catch the knife” (I was wondering if you would make use of that colorful term from the equities market).  But neither should people try to time the market.  I have asked this before but I will ask it here:

What do you fear more: buying now at $350,000 and seeing in six months that you could have paid $325,000 OR waiting six months for the price to reach $325,000 and finding interest rates have moved up two points and you can’t afford any home?

Interest rates negatively affect affordability much more than pricing.  If you are making a long term investment (which is what real estate should generally be) then buying now makes great sense in the areas that are fundamentally sound.  Just make sure to work with someone as “adaptable, smart and … above average” as the agents found here.

(This post was first pubished here.)

Filed under: BUYERS, POLITICAL & ECONOMIC FOLLY, REALTORS, SELLERS , Economy, government, Rates, unemployment

You Don’t Always Get What You Want, But If You Try Sometime, You Might Find, You Get What You Need

If you are a mortgage holder who is either struggling with crushing payments, bitter for having overpaid for your home during the bubble, or who has extravagantly refinanced when prices were rising, the government’s landmark $700 billion bailout package has an important message for you: stop making your mortgage payments.

So says Peter Schiff, president of Euro Pacific Captital and author of “The Little Book of Bull Moves in Bear Markets” in his op/ed piece entitled, Just Stop Paying Your Mortgage.  You may or may not read it with tongue in cheek, but read it you should.

When a financial institution holds a mortgage, homeowners must live with the fear of foreclosure. Private institutions only have obligations to shareholders. In the case of a defaulting borrower, they will look to recover as much of their principal as possible. If foreclosure is their best option, they will take it in a heartbeat.

The government has no such obligations. Its only goal is to keep voters happy. After supposedly bailing out the fat cats on Wall Street, no politician wants to be accused of evicting struggling families. Once you understand this, all of your anxiety should melt away.

The law of unintended consequences is never so manifest, or insidious, as when politicians correct the free market with legislation.  (Except, perhaps, when they do so because they are …from the government and … here to help.)

(This post was first published here.)

Filed under: BUYERS, INVESTORS, LENDERS, POLITICAL & ECONOMIC FOLLY, REALTORS, SELLERS , bailout, government, law of unintended consequences

And Now, No Reason to Root At All

Last week, while watching the House contort itself in a self-serving round of navel-gazing over the bailout package, I pondered two connotations of their disconnect with the populace.  Taken together they are a question really, that looks at the motivation behind politicians’ decisions; the metaphysical understanding of a Representative if you will.  This question in particular asks why our elected officials vote for legislation they know their constituents are against.  At the time, many of our representatives had chosen not to support the bailout package; not because they were against it – quite the contrary, they wanted to vote for it – no, their problem was their constituents didn’t want it and the election was to close for a nice spin cycle.  So I wondered if they ignored the people who elected them because:

• …constituents are too stupid to understand

or

• …constituents are not the ones who pay their bills

Over the weekend I am sad to report the answer became clear.  The majority of America (at least the majority of America who contact their representatives) were against the bailout the first time around.  I had hoped it was due to the fact that middle America was smarter than the politicians and pundits surmised.  But then Wall Street had its little temper tantrum and middle America couldn’t wait for the bailout package to pass.  They told their representatives so with an onslaught of voice mails, emails and snail mails.

Walls Street’s melt down affected every-one’s retirement funds and investment funds and saving funds… if they elected to sell them that day.  Otherwise it made not a wit of difference to the average person on the street who does not expect to need those funds for years yet.  But people panicked anyway.

I learned from this episode a lesson most politicians must learn early in their career.  I learned that middle America did not read up on or have at least a passing understanding of what the bailout meant, nor did they look into and try to understand how Wall Street’s shoe stomping episode actually affected them.  Instead, middle America did what they always do: they swam over to the shallow end of the pool, dipped their face in the water for a second or two and then asked someone else what to think and how much to panic. The bailout package passed.  The market is down 500 points.  Happy Monday everyone.  There must be a lot of head scratching going on now.

By the way: Why do our elected officials vote what they think is best despite what their constituents may think or tell them?  Because we are simply too stupid to understand.

(This post was first published here.)

Filed under: LENDERS, POLITICAL & ECONOMIC FOLLY, REALTORS , bailout, government, Wall Street

No One to Root For…

I wrote yesterday that we were Front Seat to History, but main stream press continues to miss it and I fear I was a little too cavalier in my writing.  The real story here is not the initial failure of the bailout, but the in-your-face blatancy of our politicians.  There is no longer even the veil of accountability or representation.  I know this is a political philosophy question regarding representative government, but there has always been at least lip service paid to the idea of politicians keeping their finger on the pulse of their constituents.  Senator McCain said “Americans are frightened…” and the Democratic leadership is returning to the bargaining table in hopes of enticing more politicians from both sides of the aisle to vote against the wishes of the very people who voted them into office.  Today we had President Bush demand “Congress must act.”  In most scenarios, if  the White House disagrees with congress, the President takes it to the people and admonishes all of us to call, write or email our representatives and let them know how we feel.  But in this case there is no call to action.  Why is that?  Obviously the majority of America does not agree with the bailout as it is presently understood, but there is more to it.  Congress and our executive leaders are all of one mind: get this done despite what middle America thinks.  This has two connotations:

• Don’t bother representing your constituents – they are too stupid to understand.
• Don’t bother representing your constituents – they are not the ones who pay your bills.

Either way I want to SCREAM OUT to everyone watching this.  I want to say: Pay Attention!  It is rare that an event of this magnitude happens close enough to an election that we witness the true motivation of those who run for office.  If you feel a disconnect with your elected officials… is it any wonder?

(This post was first published here.)

Filed under: POLITICAL & ECONOMIC FOLLY , bailout, government

Front Seat to History

Whether or not you approved of the bailout, you have to count yourself lucky to be witnessing an historic event.  Take a good, hard look at what is unfolding before us.  One elected official after another said they could not vote for this legislation because their constituents back home were not in favor of it and would vote them out of office.  As a matter of fact, this was part of an openly discussed game plan yesterday before the vote:

Both parties were also scouring the political map to identify lawmakers who face little or no opposition for re-election in November, knowing they would be more willing to vote yes. New York Times News Service

Think about that again.   They wanted to vote for it, but the people they represented were overwhelmingly against it and would have thrown them out for approving the bill.  How often does anything of REAL importance happen this close to an election?  This is so close to election time that the legislators are accountable for their votes.  Imagine that!  And they are scared.  They can not do their politics as usual because they don’t have time so spin it.  This is a magical time to witness: politicians acting out of accountability rather than self-interest.  Were that it was always true…

(This post was first published here.)

Filed under: POLITICAL & ECONOMIC FOLLY , bailout, government

Alex, I’ll Take “Terrifying” for $1000

Even with all the financial failure that surrounds us, I still find myself loathe to accept any type of government intervention.  We throw around comments like “too big to fail” but rarely examine the end game.  Greg Swann recently reposted a very intelligent treatise on something he likes to call Rotarian Socialism and how each “fix” only begets a greater problem down the road.  As a matter of fact, Mr. Swann and I share a healthy fear of government and the implied force of violence that backstops all regulations and laws.

Earlier this week I followed a story out of Spokane, WA.  It centers around a Mr. Kevin Coe, convicted rapist and suspected serial rapist.  For the relevant details and background on this story click here.  Mr. Coe, however, is not the scary part of this story:

Coe has completed his sentence of 25 years in prison, but he is not getting out of jail yet.  Starting tomorrow, Coe faces a civil trial as the state tries to keep him locked up indefinitely as a violent sexual predator.

“We think he’s mentally ill and dangerous,” said Todd Bowers of the state Attorney General’s Office.

In 1990, Washington became the first state to create a program to keep behind bars people determined to be at risk of committing more sex crimes even after they have completed their sentences. A special facility near Tacoma holds about 300 of them, including Coe, whose sentence was completed in 2006.

A person is convicted of a crime and sentenced.  He never allocutes; he maintains his innocence throughout (despite the government’s repeated attempts at blackmail offered in the form of early parole) and he serves his FULL TERM.  At which time the government continues to keep him locked up; found guilty by a jury of legislators, of having the potential to commit another crime.

The state reserves the power to take away your property, your liberty and your very life.  They enforce this power at the tip of a gun.  All laws, all regulations (and, apparently now, all judgment on potential) is maintained by the government, ultimately, on penalty of death.  The abrogation of your liberty is a trifle by comparison.  Just ask Kevin Coe.

This is why the most terrifying thing in the world is not a murderer, not a rapist, not even the wholesale failure of our financial markets.  No, at all times the thing to be most terrified of is the government and its benign attempts to help.

Alex, I don’t think I want to play Double Jeopardy…

(This post was first published here.)

Filed under: POLITICAL & ECONOMIC FOLLY , bailout, government

Alex, I’ll Take “Irony” for $600

The government is now in the mortgage business and the insurance business.  I am sure others will expound on the AIG debacle and all of its implications in due course.  I just wanted to point out the something that should make me laugh so hard it brings a tear to me eye… instead it just brings the tear.

Just before each financial giant goes down, there is a final blow.  One last lynchpin pulled that leads to the immediate cessation of breath for a company: the ratings agencies lower the company’s credit rating.  Standard & Poor’s, Moody’s, etc. take a look at the mortgage based assets the company is carrying, look at the write downs still to come and make an assessment on the credit worthiness of that company.  Once their rating drops they cannot borrow money at a cost that allows them to remain solvent and “a-begging they will go.”

Now that is the job of the ratings agencies and I do not begrudge them their responsibility.  Here’s the funny part though.  The failing, mortgage-based assets that are crushing these financial companies (and now an insurance company) were originally purchased, to a large degree, based on the credit worthiness assigned them by… wait for it… wait for it… these self-same ratings agencies!  Imagine the hubris of being so, so wrong in their primary mission of evaluating the creditworthiness of an investment vehicle, then lowering their evaluation of the creditworthiness of those companies that purchased the very investment vehicles they failed to correctly evaluate!  Talk about having your bread buttered on both sides. I know there is a great joke in there somewhere.  I am just too terrified to find it.

Welcome to the other side of the looking glass.

(This post was first published here.)

Filed under: POLITICAL & ECONOMIC FOLLY , AIG, Economy, government, ratings agency