Bob's and Eric's Ideas for the Economy

My friends Eric Weaver and Bob Palmer wrote some good opinion pieces on the current economic troubles in the US. Eric argues that stimulus dollars flowing to banks should include money for commmunity development banks, not just because their work is important, but because they've been fulfilling their mission while the rest of the financial services sector has been buttering its belly. Bob lays out a plan for mortgage relief. Nice job, guys.

http://progressillinois.com/2009/1/16/palmer-six-steps-foreclosure-crisis

http://www.sfbayguardian.com/entry.php?entry_id=7926&catid=4&volume_id=398&issue_id=416&volume_num=43&issue_num=18

I'm not normally an iconoclast or crank, but I can't understand why the land purchase program I have described in this blog is not being taken up. Here's an op-ed I submitted to the NY Times:

I keep reading that a rebound in the housing industry will be a balm for bank and household balance sheets and a potential key to ending the US economic crisis. This formulation glosses over the fact that housing is two competing industries, both sick. Curing both, however, may not be what's best for the economy. The housing industry includes the sales of new and of existing homes. In fact, the credit crisis and the foreclosure crisis both stem from the decline in the price of existing homes. The decline in the new home construction industry hurts homebuilders and their employees, but that pain does not radiate out to the financial system or American homeowners generally. In fact, there are a lot of benefits from a decline in new home construction.

The contraction in credit markets has led to sharp reductions in investment and consumption and a broad fiscal stimulus is now necessary to sustain businesses and households through the worst of the slow-down. But a targeted plan identifying existing homes as the root of the problem, and protecting or restoring their value might have saved us from this monumental effort. At this point, a targeted initiative increasing the value of existing homes might be one of the most efficient investments of stimulus dollars, and would accomplish a variety of other worthy aims. To achieve this aim, the government should provide dollars to states for the purpose of buying undeveloped land to be set aside for conservation. Removing potential home lots from the marketplace would immediately add to the value of the existing lots, adding to homeowners' wealth and increasing the value of the home mortgages on bank balance sheets.

Homebuilding is an important industry in the United States. Americans prefer newer homes and economic vitality depends on the existence of affordable, appealing places to live located close to desirable jobs. New homes, though, can come from already developed property as well as from forest or farmland. Industrial and commercial property can be converted into lofts and apartments. Old houses can be torn down and rebuilt, remodeled, added to, or just renovated. The fact is, though, the large homebuilding corporations sell new homes on a very large scale. Their business model depends almost entirely on new home construction. The proposal here is to push back on that business model, increase the ratio of reconstruction to new construction, and give existing homeowners some much-needed market power.

New home construction has been too easy for a long time. In addition to the familiar story of the financial encouragement, the regulatory environment has also been helpful in that home-building permits are awarded at the local level. The metropolitan areas we live and work in are ungoverned. Changing land use and traffic patterns have a regional impact, but permitting is handled locally, and the narrow aim of increasing the local property tax base is usually a significant factor. The resulting sprawl strains city and inner-ring suburban economies and tax bases, and leads to longer commutes, more traffic, and more air pollution, while legacy mass transit systems are made less and less relevant.

Buying undeveloped land is a simple solution to a complex problem. Many states and localities have "land banks" in place. Their traditional role is to take temporary possession of blighted properties and eventually resell them to owners who put them to good use. With sufficient funding they, or other land conservation groups, could fight blight before it happens, rather than after a decade or two of disuse and decline. If a homebuilder sells, say, 2,000 acres of land outside a metropolitan area for $30,000,000 and undeveloped land is made more expensive by the program, the builder would dial down new home construction on undeveloped land in favor of investing in existing homes or other properties and transforming them into more desirable properties. The program could make reinvestment along these lines a condition of the sale. This would be a great benefit for the owners of existing homes, who have seen years of price declines and with inventories at very high levels, face difficulties selling their homes at all.

For 10 months in 2008, the inventory level of existing homes for sale in the United States, was more than 4 million, representing more than eleven months of sales, according to the National Association of Realtors. The annual rate of housing starts (new homes) in December 2008, twelve months into the recession and three months into the credit crisis was 550,000, according to the Census Bureau. That's 45% below the rate of housing starts one year ago, but it's still adding to the available inventory. In December of 2008, the inventory of existing homes for sale finally dropped below 4 million, dropping in fact by 490,000 even though only 360,000 homes were sold. The difference must be a result of would-be sellers giving up. That's not surprising as sales prices in December were 19% below the 2007 level.

One could argue that the time to guard against oversupply of housing has come and gone. New construction has slowed down tremendously, and the four million people who want to sell their homes have little to fear from the half a million new homes currently being made. But the question is, how do we turn the problem around? The key may this: home prices reflect expected appreciation in addition to current supply and demand. The home-making machine is humming quietly today, but the volume will certainly get louder if home prices start to stabilize. Home-builders have substantial amounts of land inventoried, have debt service payments to make, and have an incentive to make and sell houses as soon as and as long as the sales price is greater than the cost of construction. Given this possibility, why buy now? A nationally funded land purchase program would give us a tool to steer, to some extent, new home-buying dollars toward much needed home price appreciation and redevelopment of languishing existing property, rather than toward unneeded additional home construction.

Patton and Fast Times

I watched Patton a couple weeks ago. The DVD began with Francis Ford Coppolla on a couch. I had to fast-forward through it, pushing the button, since under the DVD's menu system, the interview was part of the movie itself, not a separate feature. As a result your dense correspondent was made aware, by force, that Francis Ford Coppolla wrote the screenplay. Patton is the triumphal story of a brilliant commander and seems to fit snugly in the camp of movies about great heroes in good wars. But it's also a Coppolla movie and foretells the darker depiction of war in Apocalypse Now. What connects them is insanity. The movie Patton is an absolute nut. He reads Rommel's book on tank battle tactics before going to bed. Looking over a great valley, he hears the explosions from the Carthaginians' brave stand against the Roman legions. Omar Bradley tells him, "I do this because I was trained to do it. You do it because you love it." The movie is full of great lines. During a tank battle, Patton shouts, "Rommel you magnificent bastard. I read your book!" The 1970s were the golden age of great movies about not-great people, and Patton, from 1970, marks the transition, bridging the tough, heroic World War 2 movies like Bridge on the River Kwai with the dark 1970s take seen in Apocalapyse Now or The Deerhunter.

I left Fast Times at Ridgemont High off of my five favorites list earlier this year. I don't know how this happened. I think memory loss and confusion may be side effects of Lunesta. Fast Times was on cable TV a couple weeks ago and it never gets old. The brilliance of Cameron Crowe is his subtle, documentarian's interest in getting the quiet stuff just right. In reference to an old teacher, one teenager says to another, "You had Deegan?" Mike Damone's lines, such as "this is great iced tea!" and "I come here for the strudel," are not funny lines, but they are absolutely right for the character, who is very sharply drawn, as are many others. I've come across others over the years who know every line in the movie. It's a concatenation of episodes and it's remembered for the funny ones and the sexual ones, but what really sets it apart is the artistic freedom given to the writers and actors to create vivid, subtle, realistic characters. An added bonus: Jeff Spicoli has two mostly mute pals. Look closely and they are Eric Stoltz and Anthony Edwards!



Fast Times at Ridgemont High (Widescreen Special Edition)

buy land?

This really seems like a golden opportunity to do something about sprawl. Land is cheap. Sprawl causes increased driving and pollution, undermines the fiscal health of towns and cities, and undermines the property value of existing homes. Buying exurban land would address all these very important issues, and address falling home prices at the same time.

The only possible argument in opposition is that increasing land prices would hurt the new home construction industry. But homebuilders are not buying land in this environment. They would much prefer to sell it. If any homebuilders holding land are recapitalized with money instead, and undeveloped land was being bought at above market rates by land banks backed by the federal government, the homebuilders would turn their attention to existing homes, to buy and improve. A fine, non-polluting activity, and one that would help out the owners of those existing homes, a large group of people who have been getting socked with declining equity for about 4 years. I don't think the banks would mind seeing a rise in home prices either.

Proceed with Bailout and have Toll Brothers rebuild North Philadelphia

I'm very disappointed that the bailout failed. What I think many Americans don't understand is that we have nothing approaching a free market in the United States. We have a regulated, mixed economy in which government agencies provide many services, enfranchise businesses to provide many services, regulate businesses in an enormous variety of ways, and step in and save businesses when deemed necessary. Obviously, the size of this bail-out shows that huge mismanagement has occurred. Placing blame for it will be a fun parlor game for many years. But the credit crisis can be solved with this bold dramatic step. If the government also takes steps to improve the real estate market, they would not have to deploy the full face amount of the bailout and the investments they do make might well be pretty good ones. But the success of the legislation will itself have significant ameliorative effects on the credit market.

To improve the real estate market they should read my entry of January 26, 2008. I'd like to see the government buy some land and shrink new home development in overbuilt places like Las Vegas and Phoenix. That would be hugely helpful to existing homeowners and their creditors. Even if they bought the land someone like Toll Brothers has on inventory. I'd like to see them put Toll Brothers to work re-building North Philadelphia.

Glass Steagall is not the Issue. Economic Fundamentals are the real story.

There's a lot of talk now about how John McCain is particularly ill-equipped to lead the country out of the current financial melt-down because he and Phil Gramm were proponents of deregulation and deregulation, including Gramm's dismantling of the Glass Steagall act that separated commercial from investment banking, is what got us into this mess. There are two main problems with this argument. First, Wall Street has been highly regulated in the last decade. Eliot Spitzer's prosecutions, Sarbanes Oxley, regulation FD, have left the business neck-deep in red tape. For example, communications between different functions of the firms are tightly constricted, and employees need permission to make personal investments or accept positions on corporate boards. Second, Glass Steagall might have made things worse. Bear could not have jumped into the arms of JPM had Glass Steagall been in place, nor could Merrill have merged with Bank of America. Past mergers may have been responsible for averting other potential crises as well. Could Citi's or UBS's investment banking arms have weathered the storm without their banking parents?

So regulation and oversight sound good (and appear to have worked in the case of commercial banks), but their application doesn't necessarily protect us, as illustrated by the recent crisis.

The problem this time around was really pretty similar to what happened in the dot-com bubble. Investors had a great appetite for a particular category of investment, in this case structured finance including mortgage-backed securities, and so Wall Street provided a great amount of it. The bizarre twist in this case was that a lot of what turned out to be rubbish was not equities, bets on promising technology, but AAA-rated debt. That made this bubble more toxic than the last one. Another realization that didn't really come up in the dot-com era: broker-dealers hold a lot of inventory and can suffer significant losses as a result.

The problems occurred in the unregulated "structured finance" realm rather than in the regulated world of corporate finance. One response would be to demand the kind of transparency and disclosure of structured entities that is demanded of public corporations. After all, if billions of dollars are being invested in them, the cost of disclosure might be worth the benefit. This might help, and we should probably do what we can, but it's safe to say it won't solve the problem. When investor appetites are in play, securities will flow and when the good stuff is gone, the junky stuff will be conjured up. The problems were flawed science, hopeful investing, and old-fashioned spin-meistering. These things can't be stopped.

So what ought to be done? First, a litle more diagnosis.

The root of the problem is the distribution of income. Wealth was quickly accumulating in the newly global investor class and it wound up spilling into these instruments that looked conservative, but in fact relied on a healthy American middle class. This group didn't exist anymore.

The US response to anemic economic growth was to keep interest rates really low. Growth was anemic because the American consumer saw no growth in earnings. Low interest rates permitted borrowing and grew asset prices in real estate, as well as sustaining politically presentable levels of consumption growth. Beggars can't be choosers, and this debt-based economic growth was all the US could muster.

Can anything be done about the skewed distribution of income which is essentially a technological phenomenon? Well, the appropriate public policy response is to recognize that economic growth as well as the basic health of a society depends on broad-based prosperity. If the dollars are flowing to corporations and the wealthy, tax them and make the middle class better off with free popular services that benefit everyone such as education, health care, infrastructure.

Historically, societies marked prosperous times by building great, lasting things, like universities, city boulevards, museums, skyscrapers. The prosperity of the 1990s and the more narrow prosperity of the mid-2000s didn't yield much public manifestation. I think that's the root of the problem here. The wealth wasn't shared. And as Obama says, the poverty trickled up.

Polk

I've read the new biography of James Polk, by Walter Borneman. It's a great read, and it's a long-overdue effort to explain how it was that Polk was able to accomplish so much in such a short period of time. What it comes down to is that Polk knew exactly what he wanted to accomplish but also that to get it done, you need to be shrewd and indirect. That's the dark horse strategy.

Just to take one example, for many years before Polk, the US and the British disputed sovereignty over a large area called Oregon, including, I think, what is now Oregon, Washington, and British Columbia. He campaigned on a Jacksonian expansionist platform, and implied that he supported the aggressive Westeners' slogan, "54-40 or fight," a reference to a latitude at the very northern end of the disputed territory. Once in office, however, he said that it was his duty to stand by a US offer to the British at around the 49th parallel, or a little south of it in some instances. So he gave the British an opportunity to accept this compromise, based on his need to honor an American promise. When the British negotiator said no, Polk said, fine, that offer is now off the table.

Many Americans were worried about war with the British and were eager to make counter-proposals. Secretary of State Buchanan was especially anxious to engage in new negotiations. (Another element of the dark-horse philosophy: keep your enemy, Buchanan, in the administration and keep your hands on his neck at all times. Buchanan was undermining Polk right and left, but Polk never fired him. Just kept slapping him down.) No communication with the British took place, and the British negotiator ended up getting in trouble for failing to get a deal done, and risking war. Ultimately they came back with a proposal like the one they had rejected, but a little more favorable to the US: the famous 49th parallel. Polk asked the Senate for advice and consent. They said fine. Oregon and Washington were then part of the US.

What interests me about this story is that an administration remembered for its aggressive postures in fact accomplished its aims through a careful communications strategy, encompassing a calculated obfuscation about Polk's position prior to the election and then a careful couching of the US position once he took power. It was this kind of poker-playing that got him elected in the first place and then permitted him to accomplish what he did in his four-year term.

Five Favorites

On facebook, there's an application called Flixter that asks you to name your ten favorite movies. I did it and nobody noticed. I, however, was pleased with the list so I will reproduce it here, but with commentary, and a shorter tougher to make list. It occurred to me that these favorites are also products, so I've linked to amazon.com for your convenience!

Saturday Night Fever

How can you not like this one? The whole movie rides effortlessly along the seam between guilty-pleasure cheesy entertainment and cinematic glory. The music is cheesy pop but brilliant cheesy pop. The star is a television star in the tradition of David Cassidy but revealed in this movie to be a really good dramatic actor. The plot is a hackneyed dance contest and a hackneyed struggle to overcome class. But the sturdy story does the job: the local dancing talent isn't bad at all. The two-bit pals perfectly set off the star power of the king of the dicso, and the group's desperation is beautifully illustrated in a harrowing action sequence on the Verrizano Bridge . It's a great film from talented, unpretentious director John Badham.

Friday Night Lights

As a football fan, the topic - football is life itself for small-town boys in West Texas - interested me a lot, and I bought the book. But I didn't even get half way through. The kids just didn't come off the page and become three-dimensional people for me. But boy do they in the movie. The boys and the coach really mean it on the field and their home lives are tough too, with embarrassing atypical families, and not a cliche in sight. The action is extremely well-filmed; the football is riveting. The no-stars casting and naturalistic dialog make it feel real, and it's very affecting. And then Tim McGraw, like fellow country musician Dwight Yoakam did in Sling Blade, delivers a tough dose of redneck authenticity.

Dog Day Afternoon

Listen to how people talk in this movie. Look at the rubber in the legs of that pizza man, excited to get onto the evening news, for delivering a pie to bank robbers at work. Look at how a gathering of earnest New Yorkers, some of whom have strayed off the courses prescribed for them, but all of whom are trying to do the humane thing, push each other into impossibly difficult circumstances on a hot day in a tense time on the busy dirty streets of striving, thriving, jiving Brooklyn. Sidney Lumet keeps things ultra-tense, but you get some levity too. I like a little levity.

Broadway Danny Rose

Woody Allen transitioned from great stand-up to funny comedy movies in the late 1960s and 1970s. Annie Hall, Manhattan, and others mixed in poignant commentary, took on some big questions, and wowed the critics, but for me, they weren't great movies. They didn't have plots, drama, characters you cared much about, and they showed a cloying insular world. I became a big fan of Woody's with Broadway Danny Rose. The Danny character is an inspired exaggeration of the characters Woody played in previous movies. He's a joker, a mannered little man, trapped by who he is, nervous, elaborately polite, forever trotting out the trusty conversation starters, and in an original twist, he's an ultra-loyal talent agent, delivering well-intentioned, half-way capable representaion to a group who brings new meaning to the word motley. With an elaborate plot, a nutty mass of blue-collar/gray-market Italian-American characters including a tough tawkin' Mia Farrow, it's the story of a man who can't help being a sentimental fool and his so-called friends, who can't not be who they are either. The movie is framed in a conversation among a group of comics reminiscing about Danny Rose, the legend. The device adds a timeless nostalgic quality to the story, as does the use of black and white film, although the cars and the clothes are pointedly tacky and contemporary.

Poseidon Adventure

Please don't lump this one with The Towering Inferno. Inferno isn't terrible but it feels like a sequel; you can smell a formula afoot right from the start. Poseidon is a big mainstream Hollywood movie too, with its alotment of big stars, has-beens, and up and coming cuties. The difference between the first and second disaster movie is huge though, like the difference between Rocky and Rocky II or Star Wars and Revenge of the Jedi. The actors show it when something big is being taken on for the first time; you can see the rage in their faces and the audience can feel it in their spines. I don't think Gene Hackman is going through the motions when he preaches to newly arrived passengers on a cold and overcast day at the beginning of the film or when he's leading his little party through the pits of hell at the end. Shelley Winters is one of the great actresses of the 20th century and she left it on the field in this one.

On board ship is the world, including a priest, a cop, and a hooker (no joke), plus old people and children. The ship is a marvel, just as you'd guess. But nature has other plans for our little microcosm! The test is harrowing, and the response to it invokes great themes: perseverance, faith, intelligence, sacrifice. It feels historic. It feels biblical. It's a big, juicy drama with a great cast.