Tuesday, February 24, 2009

State of the "Obamanation"

NEW YORK, New York -- Obama's speech was pretty good, but it could've and should've been better.

A more basic, fundamental, FDR-style explanation of why banks are important -- and why, if necessary, nationalization should not be held up for ideological reasons -- would've been nice.

And all this crap about how people need to get new mortgages and banks need to be forced to lend ... uh, terrible idea. This mess came about because banks were giving too many people too much money. Real disposable income was stagnant for the last 9 years while credit and mortgage lending exploded.

The answer is not to keep giving any schmuck a mortgage to prop up house prices that are still artificially high (remember: during the prime boom years, house prices were rising at nearly 20% nationally while median incomes actually decreased; dangerously easy credit and huge inflows of Chinese Central Bank investment made this possible, not any increase in income). House prices, unfortunately, need to keep falling until demand catches up with supply. The other alternative is to bulldoze the massive housing surplus.

Here're the ingredients in the witch's brew:
-A vacant homes for sale inventory at 2.6 million homes -- versus a historical average of 1.3 million
-A net change in households at approximately 700,000 in 2008
-Historical home ownership rates of 65% (it's closer to 68% now, down from 70% a few years ago, and it will probably fall to the sustainable historical average)

If we assume housing starts stop tomorrow (and they won't, unfortunately -- they're still actually outpacing housing sales!), then we have excess supply of 1.3 million homes, and a net change in home-owning households of about 500,000 per year. That means it'll take 2.6 years -- with no new houses built -- to work out the excess supply.

Obama and Congress need to stop incentivizing builders to construct new homes, and they need to stop giving huge tax breaks on mortgages (encouraging people to buy homes rather than rent, even if they don't have the money for a down payment or have a long-term stable job justifying mooring oneself to a home). The huge pustule of housing inventory needs to be burst either by destroying excess homes, or by slowly letting the people who can actually afford them buy them. Insofar as the second option leads to wrenching, gradual declines in house prices, the first is far preferable.

Instead, Obama seems to want to re-grease the credit wheels. That may mean buyers will burn off the supply a bit quicker, but it'll also encourage irresponsible developers to keep building (bad), and it will result in lots more people who can't afford homes buying them (really bad).

Similarly, Obama's comments that "I intend to hold these banks fully accountable for the assistance they receive, and this time they will have to clearly demonstrate how taxpayer dollars result in more lending for the American taxpayer" are a horrible, horrible move. I hope it's populist, political posturing. Banks have lent way, way too much. Debt-service ratios are at record highs versus real personal disposable income.

What's needed is to increase income and get bank leverage (the amount of debt a bank has versus its capital) to normal levels. The first can be done only by creating good, high-paying jobs. And Obama's smart enough to realize that investment in education, healthcare and energy is what'll do that. I'd add immigration reform and infrastructure investment to that list, along with a number of smaller policies, but his Big Three sure kick the crap out of their Detroit counterparts.

And nationalization of banks in order to clean out their debts via asset sales, including to a money-printing Treasury, is needed to get them out of the bad situation they're in -- which was caused by a government that encouraged increased mortgages and lending to people (see a pattern?). Obama needs to bite that bullet and, while I know Taro Aso was in the White House today and Japan's a pretty cool place, stop mimicking Japan on playing coy with bank losses. Clean them up by nationalization sooner rather than later.

The "pretty good" grade I'd give Obama comes from the fact most of his speech excellently pointed out the need for long-overdue in energy, healthcare and education -- the fundamental elements of an equally long-overdue US competitiveness strategy. But the banks, oh, the banks. Stop playing dumb, Barack, and put the silver bullet of nationalization in the heart of the insolvent zombie banks.

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