Decline of the Empire

Seven Billion Humans And Counting*

* Or, why I have no use for Paul Ehrlich

Yesterday the world population reached 7,000,000,000 (billion). And no, the human world did not unravel, the cataclysm is not upon us, it is not obvious to most that the human adventure on this 4.6 billion year old planet is in serious trouble. This ominous milestone passed uneventfully for almost everybody.

And that's the problem. If you think there are limits to growth and feel compelled to say something about it—there is a considerable body of evidence indicating that we are now hitting those limits—why should anybody listen to you? Why should anybody pay attention to your increasingly justified ranting and raving about peak oil, climate change, ruined ecosystems, dying species, fished-out oceans and all the rest?

The optimist's argument is basically always the same, although there are many variations on it. In short, all our experience after 1750 (to pick a date) proves Thomas Malthus was wrong. The logic goes like this: if an assumption—limits to growth—has been wrong for over 200 years, it is very likely wrong now in 2011. Many have cryed wolf before. Current cryers should be ignored. The fact that there are now seven billion of us as opposed to billions fewer in the past has no bearing on the outcome.

That's why I have no use for Paul Ehrlich. The Earth's human population was approximately half of what it is now in 1968 when he wrote The Population Bomb. Had Ehrlich been right, the population would have crashed a long time ago. In 1968 the astonishing power of the exponential function had not yet worked its magic (graph below). We were still in the early stages of what looked like exponential growth, but the issue was not yet settled.  Once you are firmly on the exponential growth path, as we are now, you are entitled to say that such growth—in population, oil consumption, global GDP per-capita, wild-caught fish, and the rest must end—but you are not entitled to say when.

Source

Consequently there was no good reason to believe we were all in big trouble when the Beatles released the White Album in 1968. Here comes the sun, as George Harrison put it. It was way too early to conclude anything. And Ehrlich's premature prediction, his crying wolf, has given every delusional optimist another "good" reason to ignore the arguments of limits-to-growthers ever since 1968. The Wall Street Journal's William McGurn is a case in point.

At Columbia University's Earth Institute, Prof. Jeffrey Sachs tells CNN "the consequences for humanity could be grim." Earlier this year, a New York Times columnist declared "the earth is full," suggesting that a growing population means "we are eating into our future." And in West Virginia, the Charleston Gazette editorializes about a "human swarm" that is "overbreeding" in a way that "prosperous, well-educated families" from the developed world do not.

The smarter ones acknowledge that Malthus's ominous warnings about a growing population outstripping the food supply were not borne out in his day. The track record for these scares in our own day is not much better. Perhaps the most famous was Paul Ehrlich's 1968 "The Population Bomb," which opened with these sunny sentences:

The battle to feed all humanity is over. In the 1970s, the world will undergo famines—hundreds of millions of people are going to starve to death in spite of any crash programs embarked upon now.

The book was wildly popular, and the assertions large. India was so hopeless he advocated a policy of "triage" that would just let them die. In fact, the mass starvation he predicted never materialized, and the Indians whom he thought could never feed themselves are now eating better than ever despite a population more than twice the size it was when "The Population Bomb" appeared.

The record, alas, doesn't seem to matter. Like so many other articles on population, one in the New Yorker this month concedes that the predictions Malthus made "proved to be wrong." Like so many other articles too, it goes on to conclude that "the premise of [his] work—that there must be some limit to population growth—is hard to argue with."

As I have explained, I think the record does matter, though not in the same way McGurn does. The record matters because it is so dismal, but it needn't have been that way. Like I said, you are not entitled to say when.

There's much more I could say about this subject, but I think today's simple point will suffice. This is why I am unusually cautious in my statements on this blog. I will write posts like The Breakdown Of Growth In the 21st Century, but note carefully that the 21st century has a long way to run. Now, I happen to think humankind will be completely screwed by 2030, if not before, and almost certainly by 2040. Also note that "screwed" is undefined. It has of course become increasingly obvious that we are truly screwed in many ways now, some of which were not predictable decades ago.

That's my personal view, but its not my "official" view. I refuse to make specific statements about the timing of future events. I will continue to (not) do so. I hedge my bets with wishy-washy probability phrases like "in all likelihood" or "not likely." I do not claim to know the future with any precision, as Ehrlich did in 1968. I do know how to extrapolate a ruinous trend, and I also know what those extrapolations are likely telling me. Finally, I do not share the unqualified enthusiasm for the human species that optimists always espouse.

When the 36-year-old Ehrlich made his bogus prediction about what would happen in the 1970s, perhaps we can chalk it up to a youthful mistake. (You probably didn't know that I consider 36 to be "youthful.") But the damage Ehrlich's famous mistake has done just goes on and on and on. Let me conclude with the painful but obvious point: the real, unfortunate lessons of Ehrlich's mistake apply to all of us today.

Bonus Video — The eternal optimist William McGurn makes my argument for me.

 

America's Economic "Growth" — A Sad State Of Affairs

The BEA released the preliminary estimate for Gross Domestic Product (GDP) for the 3rd quarter last week. The news was deemed good by the New York Times.

Economic growth in the United States picked up in the last quarter in the latest encouraging sign that the recovery, while painfully slow, had not stalled.

Consumers spent more, especially on health care and utilities, and businesses invested more, in software and vehicles among other items, spurring the fastest growth in a year. The nation’s total output of goods and services grew at an annual rate of 2.5 percent from July to September, almost double the 1.3 percent rate in the previous quarter, the Commerce Department estimated on Thursday.

That pace is not brisk enough, however, to recover the ground lost in the economic bust, relieve unemployment or even entirely dispel fears of a second recession.

Most of the increase in consumer spending was instead driven by nondiscretionary expenses like health care, according to an analysis by David A. Rosenberg, chief economist for Gluskin Sheff, a wealth management firm. “We can understand why consumer confidence has sunk,” he wrote, “when spending on essentials such as utilities and medical bills have to be funded by drawing down the personal savings rate.”

Most commentators focused on the fact that spending increases are outpacing changes in income, causing the savings rate to decline. Although the wealthiest Americans do a disproportionate amount of the spending, that trend is clearly not sustainable. Still, most observers managed to ignore the elephant in the room. You can see the obvious problem in the Times story—the consumption component of GDP rose mostly because of rises in spending on health care and utilities. Rosenberg called this a sad state of affairs.

It is sad, this self-deceptive game Americans play. Michael Panzner, who runs the blog Financial Armageddon, caught on to the game in a post called Not Sustainable. First, Panzner cites this graph from Jake's blog EconomicPic.

A greater share of what Americans take in is coming from the government.

The Medicare/Medicaid component of spending is soaring, as is Social Security spending. These health care payouts are counted as Personal Consumption Expenditures in the GDP calculation. The overall transfer payments trend is not only not sustainable; it's downright scary.

Next, Panzner cites Rosenberg, as did the Times above. Finally, Panzner includes this graph on energy costs from Gregor MacDonald's The Great American False Dilemma: Austerity vs. Stimulus.

After a large drop in 2009, household energy expenditures as a percentage of disposable income are rising once again. Over the last 12 months, higher gasoline costs were the biggest factor.

Upon being told the economy is growing, most Americans get a vague but happy impression that our general prosperity is increasing, even if it is not increasing fast enough to create enough jobs to lower the unemployment rate. That's the standard story in 2011. They certainly do not get the impression that this very same "growth" will eventually be their undoing.

Malignant tumors grow too, but nobody welcomes that growth. It is indeed a sad state of affairs. The 21st century is still in its infancy. A new century calls for a new way of thinking about beneficial growth versus destructive growth, which is what we have now.

There is a third way—no growth leading eventually (or suddenly) to irreversible decline. In fact, if we were to do an honest accounting, that's where we already are. I am not hopeful Americans can change their thinking and behavior, but that's what they're being called upon to do. Too many powerful people profit from the current system. The old thinking is too entrenched. We can not resurrect, as if from the dead, the 20th century. Those days are gone, and they are never coming back.

Bonus Video — Economists Gone Wild!

 

We Are The 98%

I feel little more than contempt for those who have ridiculed the "We Are The 99%" slogan of the occupy protesters. Some of these apologists for the status quo are more despicable than others. Those who have a reservation in Dante's inner circles of Hell tell us that only 13% of the 1% work on Wall Street (in finance). They thus feel entitled to conclude that the protests are misplaced and misinformed.

Others who may live out eternity in Dante's upper circles say that the wealthiest Americans lost a lot of income after the meltdown, so the income equality problem is not as bad it was in 2007. Megan McArdle, whose blog Assymetrical Information is hosted on The Atlantic's website, is one of those.

I'll quote from Ms. McArdle's The 1% Ain't What It Used To Be.

Unsurprisingly, Occupy Wall Street have pushed income inequality to the center of the national conversation.  Also unsurprising, I think, is the unspoken assumption that income inequality has continued to get worse since the crisis.  After all, where are the bankers panhandling for change or standing in line at the food pantry?

But it would actually be quite surprising, if true.  The massive, decades-long data set assembled  by Piketty and Saez seems to show that income inequality falls during recessions, and particularly during prolonged crises. Crises destroy capital, and top incomes tend to be more tightly linked to capital than those of average workers.  If you work for a wire factory that goes bankrupt, you may well have a rough year or two before you find another job, and your income may never fully recover. But if you own that factory, it will be years before you have an income even close to what you enjoyed before--and it's very possible that you'll never get there at all.

Note that this is not an argument about who suffers more during a recession; it is self-evident that a worker who loses a third of their $20,000 annual paycheck is much worse off than an owner who loses two thirds of their $500,000 annual draw. But the measured gap between their incomes will still shrink dramatically.

I have no argument with any of this. It's true that the income of the wealthiest falls during recessions and prolonged financial crises, and this last one was no exception. Ms McArdle has a data set which bears out that observation.

But as it happens, I was back at the University of Chicago this weekend for my tenth business school reunion. And while I was there, I ran into Professor Steven Kaplan, who has done a bit of research into what sorts of occupations contributed to rising income inequality. (Shockingly, finance played a large role.)  And he told me that my initial assumption seems to be correct: the incomes at the very top started falling in 2008.  The Piketty-Saez data, which currently run to 2008, show a little bit of it.  But Kaplan has calculated the incomes of the top 1% and the top 0.1% for 2009, and his results show that they continued to fall pretty steeply. (There's nothing more recent than that because tax data take a while to be finalized).

Here's the chart he sent me:

You can see that income inequality rose from 1981 to 2007, interrupted briefly by the crash of the stock market after the Tech Bubble deflated. You can also see that the latest crash has had a similar effect. Not since 1913, the first data point above and the year the Federal Reserve was born, has there been anything like the decades long trend we've experienced over the last 30 years.

And here is where Ms. McArdle goes completely off the rails.

There's an obvious caveat: 2009 was a very bad year for finance, corporations, and lawyers, who drive a lot of the top income.  Probably 2010 and 2011 weren't so bad, so these results may well rebound considerably when the data are in.  (They also may not; I just don't know.)

On the very day Ms. McArdle—may I call you Megan?—wrote her post, David Cay Johnston reported in Reuters on the 2010 income data. Unsurprisingly, income inequality is rising again, just like it did a few years after the last bubble burst in early 2000. You didn't have to be a rocket scientist to expect this outcome because nothing has changed in America. If you want the lurid details, see my post Working Americans Are Still Taking It Up The Wazoo. But Megan struggles on.

The larger question is "how much does it matter"? I doubt Occupy Wall Street will be assuaged by learning that the top 0.1% now only receive 8% of the income earned in the US, even if that number is the lowest it's been since 2003.

But I think it does matter. If we think there's a real problem, we need the best possible data so that we can understand its contours. Income inequality has been rising for so long that people have started to assume that it has just kept rising, even when the data show otherwise. We don't want to spend years focused on income inequality, only to learn that the financial crisis fixed it for us.

If we think there's a real problem? Only to learn the financial crisis fixed it for us? In one clueless paragraph, Megan has managed to ignore several 30-year trends, including—

• the income (and wealth) inequality itself, which is tied to the continuing financialization of American society. Also see my recent post Trends In The Distribution of Income.
• the loss of good paying manufacturing jobs, the continuing offshoring of those jobs
• the downward pressure on American wages resulting from the global labor supply glut caused by various globalization policies

And so on. And then there is this, from the Daily Ticker's story Believe It or Not Wall Street Doesn’t Dominate the Top 1%.

Meanwhile, no one is immune to the weak economy. The threshold to make it into the 1% club was over $424,00 in 2007. Today, it's $343,927. That's in large part due to the stock market crash. The number of bankers in the elite echelon might also shrink thanks to lousy earnings on Wall Street this year. Lots of bankers, traders and hedge fund managers will still take home big six figure paychecks, but for many it will likely be less than they earned the prior year. Bonuses on Wall Street may fall as much as 40% from a year ago, reports the Wall Street Journal.

Don't expect any tears to be shed on their behalf. "Everyone is above average," Michelle Leader of footnoted.com tells Daniel Gross in the accompanying interview, referring to the huge sums of money still made on Wall Street. The average salary financial services employee in 2009 was $311,000, according to New York's Comptroller's office. Meanwhile, Leder says, even if the rank and file may earn less this year she's not expecting the top earners of CEO's of the major banks to take a big hit.

Maybe the occupy protesters should change their slogan to "We Are The 98%" or perhaps "We Are The 97%" to satisfy people like Megan. Only an idiot extremely unintelligent member of our species would take a political slogan literally, unless of course they have another agenda altogether. Megan's thinly veiled agenda is to defend the status quo.

She "accomplishes" her goal by suggesting that the financial crisis of 2008 might have "fixed" the income inequality problem, so we'll just have to wait and see what happens, meaning Do Nothing. After all, we wouldn't want to waste our time on income inequality—if it is indeed a problem—only to find out the problem, as if by magic, has gone away on its own.

Sometimes I wish there were a Heaven and a Hell. And although I would no doubt spend eternity feeling the fire, I would have plenty of company. Maybe even a seat right next to Megan!

Remedy du Jour -- October 29, 2011

Just jazz today. Enjoy.

• On Green Dolphin Street — Hank Jones Trio
• Chill — Joshua Redman and band (live in Montreal, 1996, from the great album Moodswing)
• Mama Tell Me — Impure Thoughts (led by pianist Michael Wolff)
• Birdland — Weather Report (pianist Joe Zawinul, Wayne Shorter on sax, and Jaco Pastorius on bass)

 

China's Real Estate Bubble — Is The Collapse Here?

I continue to be dumbfounded by China's miraculous economic growth. I don't of course believe the official GDP statistics emanating from state officials, for they are as phony as a 3-dollar bill. But I do know that China makes up 40-50% of the world's commodities demand, and if their economy goes into a tailspin, prices for things like cement, steel, aluminum, and crude oil could drop precipitously. China also helps to drive global food prices as the diets of their newly middle class "consumers" grow richer in protein. So I keep an eye on China, although it is not the main subject of this blog.

Mike Shedlock is proclaiming that China's real estate bubble has burst.

The property bubble in China has finally burst. Denial has turned to anger as Shanghai Homeowners Smash Showroom in Protest Over Falling Prices—

A group of around 400 homeowners in Shanghai demonstrated publicly and damaged a showroom operated by their property developer after the company said it cut prices. Home buyers had wanted to speak with the developer to refund or cancel their contracts but were unsuccessful, according to local media. One report said the price cuts exceeded 25% per square meter.

The local media reports said an unspecified number of people were injured.

Chinese media separately reported that another group of Shanghai homeowners gathered on Saturday to speak with Longfor Properties Co., after it dropped asking prices to 14,000 yuan per square meter from 18,000 yuan per square meter at a residential development in the city’s Jiading district.

The Shanghai property-owner demonstration found little support on China’s Internet, where most still expressed worries that housing prices are too high.

22% Drop Overnight

The drop from 18,000 to 14,000 yuan is a 22% overnight drop and that is just a down payment on the carnage that is coming...

The Financial Times ($ubscription) story China developer warns on price falls fills out the details—

China’s largest real estate developer believes the country’s property market, a key driver for the economy, has turned and expects conditions to worsen in the coming months as sales prices volumes decline further.

China Vanke, the country’s biggest developer by market share, said government efforts over the past year to rein in soaring prices were having a severe impact on the market and developers were being squeezed after sales volumes in 14 of the country’s largest cities halved in September from a year earlier.

“We can see a trend of declining sales, especially in the major cities,” Shirley Xiao, executive vice-president at China Vanke, said on a conference call with investors on Tuesday. “Prices have begun to decline little by little so we think even buyers who are able to buy will choose to wait for now because they’re targeting even lower price cuts.”

That last part, where buyers wait for prices to fall further, is a hallmark of a bursting bubble.

Investors and analysts are watching the Chinese real estate sector closely for signs of collapse because of its importance to the overall economy and the effect a crash could have on everything from global steel and copper prices to social stability in the world’s second-biggest economy.

A 30 per cent drop in property prices would precipitate a collapse in fixed investment in China and the country’s investment-driven economy would experience a so-called hard landing after years of annual growth above 9 per cent, according to UBS economist Wang Tao.

Property investment accounts for more than 20 per cent of total fixed investment in China and UBS estimates almost 30 per cent of final products in the economy are absorbed by the property sector.

“A property-led hard landing scenario is quite likely in the next few years, even though we do not think the property market is about to collapse now,” Ms Wang said.

Why not now? China appears to be over the hump. Property prices are starting to decline in 14 China's largest cities, but it may take some time for those price declines to accelerate. Regardless of timing, the inevitable "collapse" has now begun. Massive deflation in Shanghai and the accompanying riots sure do look like signs of a collapse to me.

I fear the world has been so preoccupied by the endless debt soap operas in Europe—Days of Our Lives, As The World Turns— that they have not noticed what's happening in China, which may be much more important to the fate of the global economy over the long run. Although Morgan Stanley Asian analyst and economist Stephen Roach says there will be no hard landing for China, other Americans without PhDs in economics have become quite adept at identifying stages in the lifecycle of bubbles

Bonus Video — excellent, from ChinaForbiddenNews (with subtitles)

 

Trends In The Distribution Of Income

It is gratifying to see that many Americans, including the morons on National Propaganda Radio, learned something this week. Given the Occupy protests, and the focus on the top 1% versus everybody else, somebody asked the Congressional Budget Office (CBO) to produce a report on trends in the distribution of income in the United States (summary, and full report). These data, which show growing income inequality during the Empire's Decline (early 1980s to the present), are not new to readers of DOTE. The CBO results simply repeat what we've pointed out here a hundred times before.

So the real news is that some fucking idiots have now learned—for the moment, anyway—what we already knew, although as I write this, NPR is interviewing Bloomberg columnist Amity Shlaes, who is denying that the distribution of the income (and wealth) has any effect on economic growth and our general prosperity. In fact, the opposite is true!  Thus she wants to eliminate the capital gains tax so the rich can get even richer. She says this will create jobs. Some expert!

Fairness, of course, is not an issue for Amity. Some things never change. People like her are utterly hopeless, as are media people like NPR's John Hockenberry, who saw fit to interview her. See my post Income Inequality — America Is Like Mexico And The Philippines. This text and the graphs are from the CBO's summary.

From 1979 to 2007, real (inflation-adjusted) average household income, measured after government transfers and federal taxes, grew by 62 percent. That growth was not equal across the income distribution: Income after government transfers and federal taxes (denoted as after-tax income) for households at the higher end of the income scale rose much more rapidly than income for households in the middle and at the lower end of the income scale.

• The share of after-tax household income going to the highest income quintile grew from 43 percent in 1979 to 53 percent in 2007. (Each quintile contains one-fifth of the population, ranked by adjusted household income.)
• The share of after-tax household income for the 1 percent of the population with the highest income more than doubled, climbing from nearly 8 percent in 1979 to 17 percent in 2007.
• The population in the lowest income quintile received about 7 percent of after-tax household income in 1979; by 2007, their share of after-tax income fell to about 5 percent. The middle three income quintiles all saw their shares of after-tax income decline by 2 to 3 percentage points between 1979 and 2007.

The CBO is using after-tax income, which includes government transfer payments and reflects tax policy. The alternative is to use pre-tax income, or what the CBO calls market income.

The major reason for the growing unevenness in the distribution of after-tax income was an increase in the concentration of market income—income measured before government transfers and taxes—in favor of higher-income households. Specifically, over the 1979 to 2007 period, the highest income quintile’s share of market income increased from 50 percent to 60 percent (see figure below), while the share of market income for every other quintile declined. In fact, the distribution of market income became more unequal almost continuously between 1979 and 2007 except during the recessions in 1990–1991 and 2001.

Note that the income share of all quintiles was either lower or the same in the period 1979-2007. That means that only the share of the top 1% grew. Outside the top earners, the income pie grew, but everybody's piece of that pie was slimmer in 2007 than it was in 1979.

We might be interested in real (inflation-adjusted) pre-tax income "growth" over the decades, analogous to the first graph above. The CBO doesn't include it, but here's a version I used in my posts America's Invisible Poor and Let's Destroy The Village In Order To Save It.

Market Income Grew Rapidly for the Highest-Income Households

The rapid growth in average real household market income for the 1 percent of the population with the highest income was a major factor contributing to the growing dispersion of income. Average real household market income for the highest income group tripled over the period, whereas such income increased by about 19 percent for a household at the midpoint of the income distribution.

As a result, the share of total market income received by the top 1 percent of the population more than doubled between 1979 and 2007, growing from about 10 percent to more than 20 percent.

The precise reasons for the rapid growth in income at the top are not well understood...

From Lane Kenworthy's The Best Inequality Graph. "Between the late 1940s and the mid-1970s incomes increased at roughly the same pace throughout the distribution; they doubled for each group. Since the 1970s the story has been quite different. At the 95th percentile, incomes have continued to rise. At the upper-middle levels (the 80th and 60th percentiles), they’ve increased at a moderate pace. In the bottom half of the distribution (the 40th and 20th percentiles), they’ve been fairly stagnant."

Update: Here's a better graph based on a 2010 CBO report everybody has now forgotten about.

Average pre-tax income 1979-2007. Do see all those nearly flat lines? Enough said.

The precise reasons for the rapid growth in income at the top are not well understood...

... though researchers have offered several potential rationales, including technical innovations that have changed the labor market for superstars (such as actors, athletes, and musicians), changes in the governance and structure of executive compensation, increases in firms’ size and complexity, and the increasing scale of financial-sector activities.

If you read the summary, you will further learn that government transfers and federal taxes became less redistributive.

Although an increasing concentration of market income was the primary force behind growing inequality in the distribution of after-tax household income, shifts in government transfers (cash payments to individuals and estimates of the value of in-kind benefits) and federal taxes also contributed to that increase in inequality. CBO estimates that the dispersion of market income grew by about one-quarter between 1979 and 2007, while the dispersion of income after government transfer and federal taxes grew by about one-third.

Because government transfers and federal taxes are both progressive, the distribution of after-transfer, after-federal-tax household income is more equal than is the distribution of market income. Nevertheless, the equalizing effect of transfers and federal taxes on household income was smaller in 2007 than it had been in 1979.

Specifically, in 1979, households in the bottom quintile received more than 50 percent of transfer payments. In 2007, similar households received about 35 percent of transfers. That shift reflects the growth in spending for programs focused on the elderly population (such as Social Security and Unemployment Insurance), in which benefits are not limited to low-income households.

Likewise, the equalizing effect of federal taxes was smaller. Over the 1979–2007 period, the overall average federal tax rate fell by a small amount, the composition of federal revenues shifted away from progressive income taxes to less-progressive payroll taxes, and income taxes became slightly more concentrated at the higher end of the income scale. The effect of the first two factors outweighed the effect of the third, reducing the extent to which taxes lessened the dispersion of household income.

So what did the idiots learn this week?  After-tax income for the top 1% grew 275% in the last 30 years (first graph above). Everyone else got hosed. The idiots learned that there really is a gross disparity between the top 1% and the bottom 99%. Two things will happen now. The elites or, more likely, their lapdogs in the media—see Amity Shlaes—will argue that this CBO data is unimportant. Or these people will simply forget about this data, just like they forget about everything else as the 24-hour news cycle cycles on.

Yesterday, I wrote that corruption in the United States could not get any worse in the current system. But reader Joonsae said "Of course [it can]! The moron index has never been higher!" Sadly, that is correct. That was merely some rare wishful thinking on my part.

Have a good weekend.

Bonus Video — Mark Dow and Henry Blodget explain why we are fucked. (Ignore some boneheaded remarks.)

Can The Corruption Get Any Worse?

As the Occupy Wall Street protests continue, government of the banks, for the banks and by the banks has not perished from the Earth. In fact, it's gotten worse lately.

In a story called More Booze For The Drunk, Tim Iacono took Larry Summers to task for calling for more of what got us to this sorry point. Summers wrote an editorial for the Washington Post called How To Stabilize The Housing Market. You will recall that The Prince of Darkness (pictured below) was an important player on Obama's original economic team—he is back at Harvard—and anything he says now still represents Official Policy. I'll quote some of the same passages Iacono did.

The central irony of a financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it can be resolved only with more confidence, borrowing and lending, and spending. This is true, above all, of housing policies. Fannie Mae and Freddie Mac, government-sponsored enterprises (GSEs) whose purpose is to mitigate cyclicality in housing and that today dominate the mortgage market, have become a textbook case of disastrous and pro-cyclical policy.

More confidence, more borrowing and lending, more spending. You can see why Iacono called it "more booze for the drunk." We also see that the GSEs (Fannie and Freddie) are now officially to blame for the Unholy Mess called the Housing Market. How do we fix it?

First, and perhaps most fundamentally, credit standards for those seeking to buy homes are too high and too rigorous. The characteristics of the average successful applicant in 2004 would make that applicant among the most risky today. The pattern should be the opposite, given that the odds of a further 35 percent decline in house prices are much lower than they were at past bubble valuations...

The GSEs, however, have made refinancings very difficult by insisting on significant fees and by requiring that any new refinancier take on all the liability for errors in underwriting the original mortgage at a cost to American households of tens of billions a year...

Fifth, there were clearly substantial abuses by financial institutions and most everyone in the mortgage industry during the bubble. Just compensation to the victims is a legitimate objective. But allowing negotiation over past actions to be the dominant thrust of policy creates overhangs of uncertainty that impose huge costs on the financial system and inhibit lending.

A rapid resolution of disputes is equally in the interests of bank shareholders and the housing market. The Federal Housing Finance Agency should be striving to rapidly conclude this period of uncertainty.

In other words, Summer wants us to return to the FIRE economy (finance, insurance, real estage) of the Bubble Era (1995-2007). Prosecuting banks for mortgage fraud simply creates "uncertainty" which inhibits stability and growth. Credit standards are too high and rigorous. Such standards should be lax again so "consumers" can resume borrowing and spending like there's no tomorrow and take advantage of (not so) low mortgage interest rates.

Note that Summers says the GSEs are wrong in insisting that refinanciers (the banks) be free of liability for "errors" (fraud) in underwriting the original mortgage. I quote from the Huffington Post's New Obama Foreclosure Plan Helps Banks At Taxpayers' Expense—

On a conference call with reporters, White House National Economic Council Director Gene Sperling referred to the HARP expansion as "a win-win policy" that will result in "less defaults" and "fewer foreclosures." But one of the program's new terms will benefit private-sector Wall Street banks, potentially at the expense of taxpayers.

The newly expanded program would expunge legal liabilities associated with mortgages refinanced through the program for the original lenders of the mortgages [i.e. the banks].

Each time a bank sent a loan to Fannie and Freddie, it certified that the loan met Fannie and Freddie's safe lending criteria. But many loans sent to the mortgage giants did not, in fact, meet those criteria. Currently, when borrowers default on those ineligible loans, the mortgage giants can "put back" the resulting losses onto the banks that pushed the loans.

OK, make sure you understand what you just read. Let's continue.

Under the modified plan, "put back" liability at banks will be erased for any underwater mortgage that is refinanced through HARP, eliminating Fannie and Freddie's ability to sack lenders with losses in the event that the mortgage does not pan out.

If borrowers go through HARP, but decide after several months that the modest monthly savings do not outweigh owing tens of thousands of dollars more than their home is worth, taxpayer-owned Fannie and Freddie will have to take the full loss.

Even if the original loan was sent to Fannie and Freddie with false or fraudulent guarantees from the bank — promises that may directly be tied to the borrower's current financial problems — banks will be immune from liability.

Fannie and Freddie plan to charge banks "a modest fee" to extinguish this liability, but the administration has yet to determine what that fee will be.

A modest fee? How about $10? Well, that may be too harsh. How about $5?

Thus Obama's program for aiding homeowners is mostly a thinly disguised plan to get the banks who made the original bad loans off the hook. Who takes on the liability? Taxpayers.

The yawning gap separating the People, as represented by Occupy Wall Street and many others, and the imperial Powers That Be, who represent the banks and other special interests, is very wide. Can the corruption get any worse? Honestly, I think not, at least within the bounds of the current system.

What will change things? Nothing. It's all downhill from here. The good news? Everybody enjoys a really big train wreck ... for a while.

Ten Ways You Can Screw Up Your Life

Today we have DOTE's inaugural guest post. Bill Hicks (a pseudonym) of the excellent blog The Downward Spiral gives us some practical advice for living in a rapidly changing world. I hope this will be the first of many guest posts by Bill and others. — Dave

Sometimes it’s tough having your eyes wide open while nearly everybody around you remains fast asleep.  Like the protagonist in the classic H.G. Wells story, “The Country of the Blind,” instead of becoming the king, you find yourself to be a social outcast, especially if you try to tell the truth to those unwilling to hear it.  So you go through every day as if in a trance—while friends, colleagues and perhaps even family members make plans that you know are going to lead them to grief in the long run.  But you remain mum.  After all, however addicted to the truth you might be, you don’t want to become that pariah who claims to see while everyone else is blind.

Despite how few of us recognize that there was a fundamental change back in 2008, and our civilization has now crossed over from the long era of economic growth to one of permanent contraction, this fact has nevertheless turned all of the accepted wisdom of how one should manage one’s personal finances on its head.  Since Internet readers seem to love tidy little lists, I decided to put together one of my own, which I call: Ten Ways You Can Screw Up Your Life.  These are things that people still do every day because they remain firmly rooted in the business as usual mindset.  Sadly, thanks to the relentless propaganda of the mainstream media, most will not recognize the folly of their actions until it is far too late.

So without further ado, here are the ten ways:

1). Take Out a Big Home Mortgage – Several professional colleagues of mine have done this one just within the past year alone.  Most people buying homes today probably think they’re getting a great deal, what with real estate prices still being very much depressed and 30-year fixed rate mortgages going for around 4% interest.  But even with all of that, prices remain WAY TOO HIGH and will no doubt fall much further in the coming years with the next big waves of job losses and government spending cutbacks.    A particular folly is buying a humungous exurban McMansion, with the half-acre yard, granite counter tops, lawyer foyer and three-car garage located 30 miles from your job.  In a few years when gasoline becomes unaffordable for most people, those ugly monstrosities will become virtually worthless, and all of your equity will vanish like a Texas fishing hole in July.

2). Buy a Large SUV, Minivan or Pick Up Truck – Is the current elevated price of gasoline putting a strain on your family budget?  Well, if so then you have no business continuing to buy the kinds of gas-guzzling behemoths the auto industry loves to push on dimwitted customers because they carry the largest profit margin.  Many parents, for example, think they need that huge vehicle with the video entertainment system in the back seat to keep their precious little snowflakes safe and entertained wherever they go.  They don’t stop to think how they are going to be able to afford to pump gas into that monstrosity when one of them loses their job or gas goes to five-dollars a gallon.

3).  Max Out Your 401K Contributions – I sympathize with people on this one.  I really do, for I myself made this stupid mistake for about 15 years, blissfully pouring the maximum amount of money into a paper asset I cannot access until I retire.  Nowadays, I just make the minimum 5% contribution it takes to get the matching payments from my employer.  Even so, I am gambling that the system will hold together for three more years until I can take early retirement and withdraw that large chunk of change—10% IRS early withdrawal penalty be damned.  Always remember that every dollar you deposit into a retirement account that you cannot access for years is at risk of being lost when the financial system does finally acknowledge reality and implodes.  The longer your money has to remain in the account before you can access it, the greater the risk you are taking.

4).  Keep Your Savings in a Big Bank – Okay, so you’ve been listening to commentators who tell you that the safest investment right now, other than precious metals, is cash.  Good on you for at least having the sense to stop playing at the rigged Wall Street casino.  So now what do you do with all that loot?  Well, if you deposit it in a savings account at one of the shaky big banks like Bank of America, Citigroup or Wells Fargo, it could also be very much at risk.  “But what about the FDIC deposit insurance?” I hear you asking.  Well, as I wrote recently on my blog, the Deposit Insurance Fund is currently carrying a positive balance of around a measly $4 billion, even though the total amount of insured deposits at those three banks alone is $1.8 trillion.  If one or all three of those banks fail, it would likely be months at a minimum before you would be able to access any money you had deposited with them, assuming you are EVER reimbursed.

5). Take Out Student Loans – On my blog, I’ve written several posts about Leslie, a 23-year-old woman with a Master’s Degree, a six-figure student loan debt, and no job prospects.  Leslie and her live-in boyfriend survive on his $10-dollar-an-hour retail job and food stamps.  She’s been participating in the Occupy Wall Street protests, but sadly, despite her opposition to America’s imperial wars, she has decided to join the military in order to pay off her debt.  By doing so she has deferred her dreams of getting married, buying a house, starting a family and planning for retirement.  Leslie’s situation is hardly unique, and it should be obvious by now that a college degree, particularly one you have to place yourself deeply in debt to obtain, is no longer a guaranteed ticket to do any of those things.

6).  Count on Your Pension to Be There When You Retire – As I have reported on my blog, the financial condition of the Pension Benefit Guarantee Corporation (PBGC), the little known federal agency that backstops private pension plans should the companies that have them go bankrupt, is even worse than the FDIC.  The PBGC is currently running about $23 billion in the red, and yet the cumulative pension deficit of America’s largest corporations is over half-a-trillion dollars.  Worse yet, it was also reported recently that the federal government pension plan for its own retirees is underfunded by a staggering $5 trillion.  Not to be outdone, the state and local government pension plans around the country are also in a huge collective hole.  Whether you are employed in either the public or private sector, if you are more than a decade from retirement you should assume you’ll likely never see one thin dime of your promised pension.

7).  Count on Receiving Social Security Benefits – Like the FDIC and the PBGC, the Social Security Administration is effectively broke.  The alleged $2.6 trillion social security “trust fund,” supposedly built up from many years of the program running a surplus, is a cruel lie.  The trust fund contains U.S. Treasury securities, which means that any deficit in payroll tax collections has to be made up by selling those securities—directly adding to the already-insane levels of federal deficit spending.  The annual surpluses in the program have already disappeared because a large number of Baby Boomers have joined the rolls in recent years, and that was even before our so-called “leaders” decided to increase the financial strain on the system by lowering payroll taxes from 6.2% to 4.2% this year in a desperate bid to stimulate the economy.

8). Run Up Your Credit Card Bills – this one seems pretty obvious, and if you are reading this essay I gather you are probably the kind of person who is already wary of taking on debt at the usurious rates charged by the credit card companies.  Unfortunately, as working and middle class incomes have stagnated in recent years, many people have turned to the plastic to try and keep up the appearance of prosperity.  These are people who are still employed, but are finding that their incomes are not keeping up with the rapid rise in basic expenses such as food and energy.  Instead of readjusting their lifestyles to reflect reality, they use the cards to keep on buying massive amounts of stuff they don’t need because hey, they “work hard” and they “deserve it.”  It is true that credit card debit is unsecured, but if you were to become unemployed, would you really want a massive debt default on your record to be considered by future potential employers at a time when there is cutthroat competition for even the crappiest jobs?

9).  Listen to a Financial Adviser – My wife’s employer recently had a financial adviser-type come in to the office and speak to the employees about planning their financial futures.  My wife was appalled to hear the man actually repeat the tired old housing bubble-era mantra that people who pay off their mortgages early are foolish because that money would be much better off invested in the stock market.  This is someone who actually gets paid to spew such claptrap.  Ten years ago, most financial advisers would no doubt have been horrified had you told them you were going to invest in precious metals rather than the stocks.  Had you done so, you would have quadrupled your money, whereas the stock market remains mired near the levels it first attained back in 2000. 

10).  Have Children While Being Unaware of What the Future Likely Holds – I am not one of those misanthropes who says that since the world is just now adding its seven billionth human that no one has any business having children.  If you are aware of the issues I’ve written about above, and you are planning to become a parent with your eyes wide open, then that is your choice and I wish you the best of luck.  Most people, however, have no idea what’s coming.  They have no clue that they are bringing their children into a world where not only are they going to be worse off than they themselves were, but they are very likely going to endure much pain and suffering at some point.  This is particularly true because most parents are raising their children to function within an economic growth model that is already dead.  It’s a zombie—the body just doesn’t know enough to stop twitching yet.  Young people who have been raised to expect that they will always possess the latest electronic gadgets, and if they dutifully attend their classes and don’t rock the boat they can go to work in some cubicle and be able to afford all of the same things that their parents had are going to be in for the rudest generational awakening ever seen in human history.

Help Underwater Homeowners? No Can Do!

The grim statistics are there for everyone to see if they care to look. 25% of those with a mortgage are underwater, meaning their mortgage debt exceeds the value of their house. Despite all the foreclosures we've had up to now, there are an estimated 5 million more in the pipeline. Have national average house prices hit bottom? No one really knows.

The world appears to be a complicated place, but at a useful level of abstraction, it is not. When Hopey-Changey was elected, among his first hires were Tim Geithner and Larry Summers. Why these guys? Why not some other guys? After all, both Geithner and Summers were former (Larry) Rubinites who had pushed for the market deregulation which led directly to the huge housing mess we have today.

The banks financed Hopey-Changey's election, and Geithner and Summers were hired to protect banking interests. The world is simple, not complicated. People make it complicated by ignoring the fact that our government is corrupt, elites get what they pay for, and so on. In short, they assume that our politics is what it appears to be instead of what it actually is.

In yesterday's Washington Post, Zachary Goldfarb published a story with the unwieldy title Obama's efforts to aid homeowners, boost housing market fall far short of goals. The story makes it abundantly clear that Geithner and Summers, but especially Geithner, did their job well, successfully blocking all efforts to restructure the debt of underwater mortgage holders. The problem is that such restructuring (refinancing) requires the banks to take and acknowledge losses on the bad loans they made, which in the twisted logic of the Empire, is not perceived to be in the best interests of ... the banks. It is forbidden, verboten, not allowed.

You see, we're talking about the interests of the banks here, not the interests of millions of underwater Americans. Simple, not complicated. If you want to read about the abominable failures of the Obama administration and the role of Geithner in all this, read Goldfarb's article.

Today we want to understand apparent but false complexity of taking American politics seriously and the confusion arising from it. Salon's Andrew Leonard is a staunchly partisan supporter of the Democrats and a big fan of Hopey-Changey—Republicans are evil, Democrats are not. In this regard, Leonard is the King of Confusion. Here he is talking about the housing mess.

Moments before a conference call in which White House officials were set to explain their new plan to resuscitate the nation’s morbid housing sector, Dan Pfeiffer, President Obama’s communications director, got on the line and debuted the latest administration jingle: “We can’t wait.”

The gist: Since congressional Republicans are blocking any action on the economy, Obama has been forced to take matters into his own hands and do what he can via executive action. Case in point: the administration’s plan, announced Monday, to make it considerably easier for homeowners to take advantage of current phenomenally low interest rates and refinance their mortgages.

“Where Congress won’t act, this president will,” said Pfeiffer. “Every week going forward, you can expect the president to be making executive actions.”

So what took him so long? ...

... Nobody comes out of Goldfarb’s story looking good, but Timothy Geithner looks especially bad. The responsibility for the failure to move aggressively to help struggling homeowners — whether those who were simply “underwater” on their mortgages (meaning that their houses are worth less than the their outstanding mortgage balance) or those who were actively facing foreclosure — gets blamed fairly definitively on the treasury secretary. Geithner was consistently more worried about the health of the financial sector than he was about the housing sector and actively discouraged Obama from diverting resources toward helping homeowners.

The administration ended up spending only a fraction of the $50 billion it had allocated for homeowner assistance, and to date, reports Goldfarb, “administration programs have permanently reduced the debt of just one tenth of 1 percent of underwater borrowers.”

Against this context, the refrain “We can’t wait” doesn’t just ring hollow — it actively begs for mockery. The housing sector is the beating heart of the American economy, and until it recovers, economic growth will be minimal to nonexistent. Since the day President Obama took office, economists have pointed to the housing sector as a critical target for economic policy. There are still as many as 5 million foreclosures coming down the pike.

But for three long years, the Obama administration has dragged its heels on crafting and executing a meaningful housing sector rescue plan.

Some of the most powerful men in the White House — Geithner, Larry Summers, Austan Goolsbee — are reported to have expressly opposed any significant steps toward homeowner debt reduction.

We can’t wait? What else have we been doing? There’s an immense and tragic irony underlying all this. Goldfarb reports that White House reluctance to divert more funds to helping homeowners was in part due to the fear that the general public would feel that it was unfair to help out some homeowners on the taxpayers’ dime...

... the Obama administration should have made measures like this a much higher priority three years ago. The optimistic, forgiving approach to take toward the new initiative is that it might indicate that the Obama administration is finally getting its act together and tackling the real problems. But it’s much easier to look at the plan and say “too little, too late,” than to nod along with the mantra “we can’t wait.”

[in the picture above, Obama's original team. Left-to-right, Larry Summers, Peter Orszag, Timmy Geithner and Christina Romer]

What is the immense and tragic irony Leonard has overlooked? I fear it is so blindingly obvious that it is far too easy to miss. Obama hired these men to do a job—in part, to protect the interests of the banks—and they did it well. This was not a failure of policy. It was due to corrupt intentions. It was payback for campaign donations received. It makes little difference whether Geithner (or Obama) is aware of his not-so-hidden agenda to protect the banks. People internalize a certain set of values which benefit their patrons and themselves. They can rationalize this obvious bias all day long. This is simply another exercise in backscratching—you scratch mine and I'll scratch yours.

We might call it the fallacy of projected sincerity, the attribution onto political leaders or their advisers of an intention to serve the public interest when the reality is that they have no such intention, especially if the public interests conflicts with the interests of the elites (the banks in this case). This human fallacy is of course far more general than this one case indicates. This fallacy introduces all sorts of complexity where it doesn't exist, causes no end of confusion. Why is there now a new, expanded plan to help homeowners to refinance? Because we're "deep" into the election cycle in October, 2011. After all, the presidential election is only 13 months away.

The most conspicuous immense and tragic irony in Goldfarb's story, the one Leonard acknowledges, is that underwater mortgage-holders could not be helped because of the "moral hazard" of aiding some homeowners and not others. There certainly wasn't any "moral hazard" in bailing out a banking system which offered credit to anybody standing upright and breathing.

This must be a tough time for Andrew Leonard. He wrote the new jingle "we can’t wait” doesn’t just ring hollow — it actively begs for mockery. It does beg for mockery and I'm mocking it. The Emperor has no clothes. But Leonard has a choice. He can grow up, and see thing as they are, or he can continue to write confused nonsense for Salon. Dealing with reality is a long, hard road, discouraging to those just starting out. But it's good to know that others have traveled it before.

Update: Read this Felix Salmon post on the new "plan" to help the nearly 11 million underwater homeowners. Find a bucket to throw up in before you read it.

Bonus Video — from the Daily Ticker's Yes, There Are Some Things Our Government Could Do To Help Housing, But It Won’t: Galbraith.

 

Working Americans Are Still Taking It Up The Wazoo

It's been a while since we reviewed the economic data. It's not a pretty sight. David Cay Johnston took a long look at the first income data we have for 2010 in First look at US pay data, it’s awful (Reuters).

Anyone who wants to understand the enduring nature of Occupy Wall Street and similar protests across the country need only look at the first official data on 2010 paychecks, which the U.S. government posted on the Internet on Wednesday.

The figures from payroll taxes reported to the Social Security Administration on jobs and pay are, in a word, awful.

These are important and powerful figures. Maybe the reason the government does not announce their release — and so far I am the only journalist who writes about them each year — is the data show how the United States smolders while Washington fiddles.

Doesn't announce their release? Fiddling while Rome burns? Imagine that! Quelle surprise!

There were fewer jobs and they paid less last year, except at the very top where, the number of people making more than $1 million increased by 20 percent over 2009.

The median paycheck — half made more, half less — fell again in 2010, down 1.2 percent to $26,364. That works out to $507 a week, the lowest level, after adjusting for inflation, since 1999.

The number of Americans with any work fell again last year, down by more than a half million from 2009 to less than 150.4 million.

More significantly, the number of people with any work has fallen by 5.2 million since 2007, when the worst recession since the Great Depression began, with a massive taxpayer bailout of Wall Street following in late 2008...

While median pay — the halfway point on the salary ladder declined, average pay rose because of continuing increases at the top. Average pay was $39,959 last year, up $46 — or less than a buck a week — compared with 2009. Average pay peaked in 2007 at $40,764, which is $15 a week more than average weekly wage income in 2010.

The number of workers making $1 million or more rose to almost 94,000 from 78,000 in 2009. However, that was still below some earlier years, including 2007, when more than 110,000 workers made more than $1 million each...

Even as income and the number of workers fell in 2010, CPI inflation hit a new 3-year high of 3.9% (annual rate) in September. However, you will be pleased to know that non-core inflation is up only 2% over the past year, and that's the more important number. Unlike normal people, Federal Reserve officials do not require food and never pay for gasoline, preferring to use teleportation instead. (You can disregard the rumor that they are from outer space.) The Wall Street Journal's Kathleen Madigan covered the inflation issues in Pay Raises Trail Behind Even Mild Inflation.

When even a hawk like Charles Plosser acknowledges inflation isn’t a near-term threat, you know price pressures are a nonissue for the recovery.

See? For Fed officials, even if they are "hawks" like Charles Plosser, inflation is a non-issue. You know, for "the recovery".

Last week, Plosser, the president of the Federal Reserve Bank of Philadelphia and one of the dissenters to recent monetary policy decisions, said he expects “inflation will moderate in the near term.”

Plosser remain cautious about future inflation — as any inflation hawk would be — but he’s right to recognize current price pressures are extremely low. The Labor Department said Wednesday the consumer price index [CPI] increased 0.3% in September. Core prices, which exclude food and energy, were up a milder 0.1%.

The Fed tends to watch the core rate, and policymakers are probably happy that core prices are up just 2.0% over the past year.

Households, however, have to deal with the jumps in energy and food prices. The annual top-line inflation is running at a faster 3.9%.

Over the past year, food prices have risen 4.7%, gasoline costs 33.3% more and the cost of fuels and utilities used at home are up 4.0%. While households can reduce buying some of these staples, they cannot avoid them completely, which leaves less money to spend on other items.

More troubling for the consumer outlook, wage gains aren’t keeping pace with price hikes. Real weekly earnings rose in September for the first time since May. But the 0.2% gain reflected workers putting in longer shifts, not from wages increasing. Real hourly wages fell 0.1% in September from August.

After rising briefly at the start of this recovery, real hourly pay is back to about where it was two years ago — despite the fact that worker productivity has risen more than 5% since then.

There you have it. Fewer jobs, lower pay, 3.9% annual inflation and wage gains decreases are not keeping up with price hikes. Jobs and prices—American workers are getting screwed both ways, being shafted, sucking it up, getting the short end of the stick, taking it up the wazoo. In short, little has changed since the last time we looked at the economic data. What was Johnston's word?

Awful.

Bonus Video