Monday, September 22, 2008

Money for nothing

Anyone remember that song, Money for Nothing? Seems like for the last few years, a lot of people wanted that. Anyone reading the news is aware that the financial markets are tanking primarily as a result of really bad real estate investing. Investors got really greedy with their adjustable rate mortgages (ARM). Homeowners got in with the false hope that their house would increase in value enough to allow them to refinance their loan with a safe and sane 30-year fixed loan before the interest rates started to adjust with the market. But that hope was really a fantasy.

Between 2003-2006, we saw housing prices double in Southern California. Much of the rest of country saw something similar, or a serious spike in prices. During this time, people were buying houses to flip them for a tidy profit. Real estate agents were telling people that if they didn't buy now, they'd be frozen out of the market. Many people with bad credit wanted in, fearing they wouldn't be able to later. So they turned to the ARM.

Now they're wishing they hadn't. Or at least wishing their homes had increased in value. But they just couldn't go up forever, at that rate, anyway.

The Adjustable Rate Mortgage was probably the single biggest factor driving up home prices. Initially they were intended to give those who didn't have a home, a way to buy into a home.

Many economists knew this day was coming. But we really didn't see that much in the press about it. Sure Greenspan said something about it, and I'm sure people were listening intently, nodding when everyone else nodded. Unfortunately, it takes months of hard work by highly skilled technicians to parse his language into common English.

I remember reading about it in 2006 in the OC Weekly, in an article called "Welcome to Stanton!", by Rebecca Schoenkopf, aka, the Commie Girl (sorry, dead link - but I wrote to the paper to ask them to put it back). She had pointed out that even in the bad parts of Garden Grove and Santa Ana, where the doors have iron gates, and police helicopters fly nightly, houses were selling for more then $400,000. Why? ARMs. And she boldy predicted the mess we're in today.

Anyone reviewing housing prices on will see that housing took a wild ride during 2003-6. They have a pretty cool feature that lets you see the value history of the house over time. During that time, municipalities were basking in the glow of higher property taxes. Remember, municipalities have accountants who work for them. Surely they must've smelled the problem miles away. But strangely, they were silent. Everyone was happy as long as the housing prices continued to rise. Except for the people who wanted to buy a house.

I grew up in Manhattan Beach, California. When my parents bought a house there, they paid $50,000 for it, mumble-mumble years ago. That same house at the height of the boom in 2006 was worth nearly $2 million. In fact, most of the houses on my street where I grew up were worth close to $2 million. I talked to my sister, and she says "I wouldn't want to live there. Go down one of those streets at night, around 6-7pm. There's nobody home because they're working! Go to Sand Dune park and look at the people there: Nanny's and their kids!" It takes a lot of work to pay off a $2 million mortgage.

Now that we've watched the biggest investment banks fall, Bear Stearns and Lehman Brothers, and AIG get a nice helping hand of $85 Billion, and Fannie Mae and Freddie Mac get nationalized, where are we? We have a Republican administration pushing a bill that would give omnipotent authority to the Treasury Secretary to buy bad mortgages. Oh, and don't forget, we don't want the courts to get involved. We can't have pesky judges get in the way while we help our friends and allies in Wall Street.

So are we willing to spend $800 Billion to help the investment industry save their posteriors? I see that the Democrats are speaking up about the golden parachutes of the people who ran these firms into the ground. So how about it, CEO of Fannie Mae? Now that you've decimated your company's stock, are you going to give back? Oh, wait. You still need to be able to send your kids to a private school, live in a gated community, take the family on vacation in Europe twice a year and make payments on 3 cars? No can do, my friend. You have to come down here, with the rest of us if you want to get back up again. Oh no! He flew to Barbados! Sigh. Easy come, easy go.

A recession is what happens when the middle class cannot afford, or is unwilling to work for what the upper class is willing to pay. That is what we have here. The lower classes couldn't afford to get a home on what the upper classes were willing to pay. Notice that upper class is still not willing to pay. They're really worried that they won't have enough money for when Jesus returns.

Howcome I don't hear anyone talking about "infrastructure"? Well, I heard Obama talking about it, but only briefly. The point is this: we could spend $800 Billion to save the people who got us here, or we could do a Roosevelt and start building roads. Remember the bridge collapse in Minnesota? Michael Heller says that we could eliminate delays at airports if we built 25 new runways at our busiest airports. But that would be too expensive (there are easement issues, too, but that's another article).

How about communications? Check out this website by the Communications Workers of America. Seems they have noticed that Japan has internet access we could only dream of. They get 61 Mbs on average. That kind of money could light up all the dark fiber laying around in this country, too.

Infrastructure is what made this coutnry great. Without all the freeways, airports, plumbing, wiring and communications, we couldn't live the way we live now. But all of that takes maintenance. Maintenance that the billionaires in Dana Point and Beverly Hills weren't willing to pay for with taxes. Perhaps they'd rather go to war.

I moved from California to Utah. Life is pretty nice here. But one thing I've noticed is that they're really busy with the infrastructure. It's hard to drive down a major road without seeing some sort of construction going on. They may be paving the road, laying pipe, or just fixing it up. But the're always working on something. They get it that infrastructure is important.

That might explain their low unemployment rate of 3.8%, relative to the rest of the country, which now stands around 6.1%. I'm sure there are other factors at work here, no pun intended. But the bottom line shows up in the infrastructure.

Building infrastructure would add more value to homes, a lasting value I might add, than bailing out executives who wanted to fleece people who wanted a home to live in. Talk to your friends and politicians about it. Get the message out.

I rest my fingers.

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