Tag: economy

Low-Rate Mortgages: A Good Idea?

~ Clarissa ~ 24 Comments

I’m trying to get educated on the basics of the US economy but it’s hard. I read financial news online but I keep feeling completely baffled. Take this article in the NYTimes, for example:

The Obama administration is considering further actions to strengthen the housing market, but the bar is high: plans must help a broad swath of homeowners, stimulate the economy and cost next to nothing. One proposal would allow millions of homeowners with government-backedmortgages to refinance them at today’s lower interest rates, about 4 percent, according to two people briefed on the administration’s discussions who asked not to be identified because they were not allowed to talk about the information.

Low mortgage interest rates are also referred to as “the Federal Reserve’s most important economic policy response.”

I’m just not getting this, people. It is obvious to everybody, I believe, that the housing prices in the US are ridiculously over-inflated. When I discovered how much an ugly, old little bungalow in a high-crime area of Connecticut cost, I almost choked. The only reason why these cardboard buildings are selling for these high prices (even after the crisis) is because people manufacture completely unsustainable, fictitious ways to pretend they can afford them.

If I haven’t misunderstood this article, it seems to be saying that the Federal Reserve is artificially keeping mortgage rates low. (If I’m mistaken on this, please correct me.) As a result, more people will take on debt they can’t realistically shoulder. Then, eventually, when the government discovers that it can’t sustain this financial burden any longer, it will release the mortgage rates. They will go up, and we’ll have yet another round of this crisis.

Now take the following part of the article:

Some officials fear that promoting mass refinancings today could spook investors and make borrowing more expensive, for both homeowners and the federal government, in the future.

The government has already encouraged some refinancing through the Federal Housing Administration and through Fannie and Freddie, but participation is limited. For example, the Home Affordable Refinance Program excludes homeowners who owe more than 125 percent of the value of their house. To spur more refinancing, the government may decide to encourage Fannie and Freddie to lift such restrictions.

Why is the government “spurring refinancing”? How is it a good thing to have people get further and further into debt? Isn’t it more reasonable to realize that home ownership has become a luxury in today’s economy? That it’s the same kind of a luxury as, say, buying a yacht? And that people who can’t afford to buy a house simply shouldn’t? (As one of such people, I really don’t see a problem with that. I’m also a person who will never take out a mortgage because I find the concept extremely daunting.)

I understand that owning a home has been part of the American dream for a while. But this part of the dream has become unsustainable. What’s the point in paying collectively through what is nothing but a pipe dream of many?

As I said, I’m only beginning to educate myself on this, so I’m very willing to accept other explanations. Unless, of course, they are of the “everybody deserves to own their home” variety.

Why Didn’t We Do This? On Iceland

~ Clarissa ~ 13 Comments

Via Mike’s blog, I discovered this fascinating article about Iceland.

I’m sure everybody remembers how at the beginning of the current economic crisis Iceland was on the news a lot. This was a country that had participated most actively in the financial bubble and now crashed a lot harder and a lot faster than many other countries. At that time, the crisis that now is experienced by Greece, Spain and Italy was still a thing of the future. Iceland was the first small country (please correct me if I’m wrong here) to be hit hard by the crisis. It was also the first one to come out winning.

Iceland hasn’t appeared on the news for a while, so I’m sure many of my readers will be surprised to learn (just as I was) that this is how the country decided to deal with the crisis:

The belief that citizens had to pay for the mistakes of a financial monopoly, that an entire nation must be taxed to pay off private debts was shattered, transforming the relationship between citizens and their political institutions and eventually driving Iceland’s leaders to the side of their constituents. The Head of State, Olafur Ragnar Grimsson, refused to ratify the law that would have made Iceland’s citizens responsible for its bankers’ debts, and accepted calls for a referendum.

While here in the US we keep agreeing to endless cuts to education, healthcare, science, research, social programs, etc. in order to repay the debt caused, to a great degree, by bailing out billionaires, people of Iceland decided to jail the crooks instead of rewarding them:

In the March 2010 referendum, 93% voted against repayment of the debt.  The IMF immediately froze its loan.  But the revolution (though not televised in the United States), would not be intimidated. With the support of a furious citizenry, the government launched civil and penal investigations into those responsible for the financial crisis.  Interpol put out an international arrest warrant for the ex-president of Kaupthing, Sigurdur Einarsson, as the other bankers implicated in the crash fled the country.

Moreover – and this really sounds like science fiction – the people of Iceland are now writing a new constitution. Mind you, not the politicians are writing it. The people are:

To write the new constitution, the people of Iceland elected twenty-five citizens from among 522 adults not belonging to any political party but recommended by at least thirty citizens. This document was not the work of a handful of politicians, but was written on the internet. The constituent’s meetings are streamed on-line, and citizens can send their comments and suggestions, witnessing the document as it takes shape. The constitution that eventually emerges from this participatory democratic process will be submitted to parliament for approval after the next elections.

I don’t think the US needs a new constitution. However, it would be nice to have a system where, instead of watching corrupt politicians of both parties fight their useless battles in Congress, citizens could have more of a say in what’s going on.

For now, it seems like there are two countries that have been able to weather the global crisis pretty well: Iceland and Canada. (I’ve just come back from Canada and, believe me, they are doing extremely well compared to how things are going in the US, let alone in Western Europe). If anybody knows of any other countries that are dealing with the crisis in inventive and productive ways, please let me know in the comments.

Because no matter what your political persuasion is, I think that you have to agree that whatever we are doing in the US is not working.

Would You Have Handled It That Much Better?

~ Clarissa ~ 6 Comments

I kind of don’t like it how people are falling all over themselves in criticizing Obama for the way he handled the whole debt ceiling debacle. He compromised too much, people say.

And what alternative did he have, exactly? No, seriously, if you are disappointed with Obama’s actions during the crisis, what would you have done in his place?

To Be Continued. . .

~ Clarissa ~ 13 Comments

So it seems like the debt ceiling will be raised. Not to worry, though, there are several more rounds of this drama awaiting us:

  • We get not one, but two more debt ceiling votes in the immediate future, like Republicans wanted.
  • The McConnell notion of a future debt vote in which the president can get a small partial raising of the debt limit if he agrees it’s all on his own head, upon which Congress gets to have a meaningless “no” vote to wash its hands of it.
  • But that’s not good enough, so we also include the formation of Super Congress! It’s a Republican-desired committee tasked with making up to $1.5 trillion in budget cuts, so that Congress doesn’t have to do the dirty work itself. Then Congress gets to vote on whether to adopt those cuts…
  • … and we get the Republican demand of a “trigger,” because if those committee-proposed cuts get voted down by Congress, presuming the committee can even produce recommendations in the first place (the last one couldn’t), we get cuts anyway, in the form of mandatory across-the-board cuts of as much as $1.5 trillion.
  • As the GOP insisted, there are no new revenues. No tax increases.

If the Democrats were going to roll over and play dead anyways, then what was the point of the whole drama, I wonder?

I’m getting a sinking feeling we are never going to get out of this whole mess.

And Sometimes It’s Just a Cigar

~ Clarissa ~ 35 Comments

Somebody I know has been recommending Juan Cole to me forever. So I finally found time to check him out. And this is the first article of his I stumbled upon:

I take it the American news cycle is dominated by the artificial debate over raising the debt limit. It is a silly season story. The budget was being balanced by Clinton in the late 1990s, and the Republicans were the ones who created long-term structural deficits by slashing taxes on the wealthiest Americans (even Bush argued with Cheney over the second cut), by an unfunded prescription drug give-away to get votes from the medicare crowd, and by two unfunded wars, one of them illegal in international law.

The reason that the Republicans deliberately destroyed the balanced budget and created unprecedented government debt was precisely in hopes that at some point they could use the debt as an excuse to destroy social security, medicare, and myriads of educational and health programs. They represent rich people, and the rich don’t want to be having to bear their fair share of the national burden. What better way to get out of having to pay those pesky taxes than making sure the government doesn’t do anything for anyone but the rich.

So everything unfolding in Washington was planned out in a room in 2001, and is going according to plan.

I like a good conspiracy person as much as the next person, but this one is just too outlandish. A group of people huddled in a room ten years ago and planning everything that would happen ten years from then would make for a bad Hollywood movie. Reality, however, is always a bit more nuanced, complex, and unpredictable.

Also, I don’t think that demonizing the Republicans in this way is useful to the Liberal cause. If they are capable of such brilliant, out-of-this world planning and strategizing, then we really might want these resourceful and organized people leading the country. Of course, the question arises as to why such ultra-intelligent folks allowed themselves to lose the White House in 2008. Maybe that was part of their hidden agenda whose consequences will become evident ten or a hundred years from now.

The reason why the Republicans are anti-tax is much simpler, in my opinion. The voters who handed them the congress last November are anti-tax, so the Republicans are simply following through on that popular sentiment. In my Spanish class that I was teaching right around the time of the 2010 elections, we arrived at the chapter in our textbook that introduced the vocabulary related to politics. I always ask my students to begin approaching the new vocabulary by creating sentences with the new words. From these sentences, I discovered that my students in the American Midwest overwhelmingly believe that taxes are the government’s way of ripping off hard-working folks to feed a huge bureaucracy.

One might not like this fact but the truth is that there are very very many people in this country who are anti-tax and anti-government spending. A huge number of citizens is driven by the hope of becoming extremely rich and buying their own yacht. Whether they will succeed or not, having that possibility is crucial to them. They are more prepared to identify with a millionaire on a personal jet than they are with an unemployed steel worker. Even though their personal circumstances place them much closer to the steel worker, their sympathies still lie with the more positive example of the millionaire. Psychologically, this makes a lot of sense.

I’m sure most of my readers are well-aware of all this. As in immigrant, however, I felt puzzled by this phenomenon for a long time. Only after living in the Midwest and talking to people of all ages and professions did I begin to understand why these hard-working folks seem to vote consistently against their own economic interests. The thing is, they don’t. They are neither stupid nor deluded. They simply vote for the interests of their future selves, the ones who will have managed to make it big eventually.