Hot Topics
Borrower Bailouts
The worst kind of demagogue is the politician who pretends to be helping the working person, while really, in the long run, doing them inestimable damage. Barney Franks, Massachusetts Congressional Democrat, is the perfect example of such a demagogue. Franks has suggested that borrowers who defaulted on their subprime loans should be able to sue the investment banks that bought the loans in the secondary market.
To summarize: many buyers purchased homes using “subprime loans” for those with less than perfect credit. Many subprime loans also had low short-term rates, that reset in a couple years with a higher rate. Frank argues that the lenders are responsible for selling “bad” loans, despite the fact that, overall, these types of loans enabled millions of working class people to purchase homes that they would otherwise not be able to afford. As interest rates on the loans have reset, and as house values have declined, some of those borrowers have stopped payments on the loans, and are at risk of foreclosure. However, the foreclosure statistics are greatly overstated, and the number of people who have actually lost their owner occupied home is, relative to the total number of recent borrowers, very small. And many of the borrowers were not owner occupants, but speculators, who thought they could make large profits quickly flipping the houses as home prices rose.
However, the specter, even though exaggerated, of large numbers of people losing their homes is a politically charged one, and people like Frank are quick to step into this void and try to make political capital. His suggestion, which is that borrowers in default have the right to sue investment banks, is simply a way of providing huge, deep pocketed targets to the already very rich plaintiff’s attorneys who will feast off the litigation; such attorneys typically represent many clients in a single case, often a class action, and take as much as half of any damages awarded. To the extent that borrowers profit from such litigation, it is simply rewarding the those who took excessive or poorly thought out risk.
Of course, the mortgage market will not continue to provide the kind of easy credit that has fueled America’s incredibly high home ownership rates if they are subject to this kind of litigation, which means that, in the long run, the net effect of such litigation is to make it more expensive for prudent working people to borrow enough money to buy homes. Here at the American Labor Party we are disgusted at such condescension towards the lower and middle class, the vast majority of who are perfectly capable of deciding for themselves about issues such as mortgages.
To summarize, who wins, and who loses, from such litigation:
Winners:
Losers:
This is what Ben Bernanke. the chairman of the Federal Reserve had to say about the subprime situation:
We must be careful not to inadvertently suppress responsible lending or eliminate refinancing opportunities for subprime borrowers. Together with other regulators and the Congress, our success in balancing these objectives will have significant implications for the financial well being, access to credit, and opportunities for homeownership of many of our fellow citizens.
According to Bernanke, the kinds of innovations in credit markets represented by subprime loan products have had a positive effect, opening up home-buying opportunities for millions of Americans.
Homeowners Insurance
This boring but crucial topic provides yet another perfect example of how demagogic politicians, supposedly protecting the less well off from the rapacacious effects of the market, are in fact subsidizing the rich. All Florida taxpayers, rich and poor, are being taxed to subsidize homeowner’s insurance, which is supposedly too expensive when provided by the free market. The only problem is that, if left to market forces, the houses that would pay the most for protection from hurricanes are those on, or very near, the beach; in other words, multimillion-dollar condos and beachfront houses. Do you know of any waiters, or carpenters, or schoolteachers that own beachfront property? Neither do we. But there are plenty of investment bankers, corporate lawyers, and other very wealthy people who do, and their insurance rates are being heavily subsidized by other, generally much less wealthy, Florida taxpayers.
Here’s the story from Business Week
Under Governor Charlie Crist, Florida has gone the furthest in challenging market forces. In January, the state legislature massively increased government involvement in the insurance business in hopes of rolling back homeowners' rates. It blocked rate hikes by the state-controlled Citizens Property Insurance Corp., which insures people who can't get coverage in the private market. That allowed Citizens to undercut private insurers. To keep private companies from bailing out of Florida, it intends to make available an additional $16 billion in highly subsidized reinsurance from a state fund. Trouble is, if a series of big hurricanes empties out the Citizens reserve fund and the reinsurance fund, the state will have to raise the money to pay claims via a special assessment of thousands of dollars apiece on all policyholders in the state. "It'll function just fine until the next storm. Then we'll see," says Joshua D. Shanker, an equity analyst at Citigroup Investment Research. The political fix temporarily alleviates the financial pain, but it worsens the underlying problem. Developers continue to erect condos in vulnerable parts of Florida in part because of the availability of state-subsidized insurance. Florida already has $2 trillion in coastal exposure and remains one of the fastest-growing states. That will raise the cost of the next Big One. "People have the expectation that insurance is a commodity and should be flatly priced," says Robert Muir-Wood, chief research officer of Risk Management Solutions Inc. But in an actuarially ideal world, he says, the rate for the South Florida beachfront should be perhaps 50 times higher than the rate for an elevated property in northern Florida. "The wealthiest people tend to benefit the most from this aberration," Muir-Wood says.
Globalization
Here’s what Bill Gross, manager of the world’s largest bond fund says:
Add a billion or so potential workers to the global labor force, blend in a technology S curve acceleration, combine these with deregulation, lower taxes, and free trade, and you have a recipe for accelerating returns to capital and diminishing returns to labor… Does this virtuous circle favoring capital at the expense of labor continue? We see nothing to stop it absent a global financial bubble popping of sorts, an accelerated decline of U.S. housing in the short run, or a U.S.-led trade policy reversal that could precipitate counter-attacks from Asian exporters.
Globalization has been a double-edged sword for American workers. As more than a billion workers from China, India, and other developing nations have entered the global labor pool, mainly in manufacturing, but also outsourcing of services like programming and data entry, obviously this has depressed wages for American workers on the lower end of the skills spectrum.
On the other hand, it is less recognized, but absolutely true, that globalization has resulted in much lower costs for most goods, from which all Americans have benefited. While working class wages have not increased at all in real terms since 2001, the standard of living of most working class consumers probably has increased, as most products of the same quality cost less – consumer electronics being one good example.
Borrower Bailouts
The worst kind of demagogue is the politician who pretends to be helping the working person, while really, in the long run, doing them inestimable damage. Barney Franks, Massachusetts Congressional Democrat, is the perfect example of such a demagogue. Franks has suggested that borrowers who defaulted on their subprime loans should be able to sue the investment banks that bought the loans in the secondary market.
To summarize: many buyers purchased homes using “subprime loans” for those with less than perfect credit. Many subprime loans also had low short-term rates, that reset in a couple years with a higher rate. Frank argues that the lenders are responsible for selling “bad” loans, despite the fact that, overall, these types of loans enabled millions of working class people to purchase homes that they would otherwise not be able to afford. As interest rates on the loans have reset, and as house values have declined, some of those borrowers have stopped payments on the loans, and are at risk of foreclosure. However, the foreclosure statistics are greatly overstated, and the number of people who have actually lost their owner occupied home is, relative to the total number of recent borrowers, very small. And many of the borrowers were not owner occupants, but speculators, who thought they could make large profits quickly flipping the houses as home prices rose.
However, the specter, even though exaggerated, of large numbers of people losing their homes is a politically charged one, and people like Frank are quick to step into this void and try to make political capital. His suggestion, which is that borrowers in default have the right to sue investment banks, is simply a way of providing huge, deep pocketed targets to the already very rich plaintiff’s attorneys who will feast off the litigation; such attorneys typically represent many clients in a single case, often a class action, and take as much as half of any damages awarded. To the extent that borrowers profit from such litigation, it is simply rewarding the those who took excessive or poorly thought out risk.
Of course, the mortgage market will not continue to provide the kind of easy credit that has fueled America’s incredibly high home ownership rates if they are subject to this kind of litigation, which means that, in the long run, the net effect of such litigation is to make it more expensive for prudent working people to borrow enough money to buy homes. Here at the American Labor Party we are disgusted at such condescension towards the lower and middle class, the vast majority of who are perfectly capable of deciding for themselves about issues such as mortgages.
To summarize, who wins, and who loses, from such litigation:
Winners:
- Demagogue politicians like Barney Frank, who pretend to be allied with the working class
- Trial Lawyers who make multimillions from winning class action cases
- Imprudent Borrowers who, instead of being punished for their imprudence, can actually profit from it through damage awards
Losers:
- The investment banks who bought the loans in the secondary market; note that they did not even make the loans, and had no contact with the borrowers.
- Everyone who wishes to borrow money for mortgages in the future. The cost of litigation will raise the cost of doing business, and result in higher costs, and less availability of credit, for prudent borrowers in the future. We should note that America’s relatively easy credit system is absolutely critical to the process of helping lower and middle class citizens borrow money to raise their standard of living.
This is what Ben Bernanke. the chairman of the Federal Reserve had to say about the subprime situation:
We must be careful not to inadvertently suppress responsible lending or eliminate refinancing opportunities for subprime borrowers. Together with other regulators and the Congress, our success in balancing these objectives will have significant implications for the financial well being, access to credit, and opportunities for homeownership of many of our fellow citizens.
According to Bernanke, the kinds of innovations in credit markets represented by subprime loan products have had a positive effect, opening up home-buying opportunities for millions of Americans.
Homeowners Insurance
This boring but crucial topic provides yet another perfect example of how demagogic politicians, supposedly protecting the less well off from the rapacacious effects of the market, are in fact subsidizing the rich. All Florida taxpayers, rich and poor, are being taxed to subsidize homeowner’s insurance, which is supposedly too expensive when provided by the free market. The only problem is that, if left to market forces, the houses that would pay the most for protection from hurricanes are those on, or very near, the beach; in other words, multimillion-dollar condos and beachfront houses. Do you know of any waiters, or carpenters, or schoolteachers that own beachfront property? Neither do we. But there are plenty of investment bankers, corporate lawyers, and other very wealthy people who do, and their insurance rates are being heavily subsidized by other, generally much less wealthy, Florida taxpayers.
Here’s the story from Business Week
Under Governor Charlie Crist, Florida has gone the furthest in challenging market forces. In January, the state legislature massively increased government involvement in the insurance business in hopes of rolling back homeowners' rates. It blocked rate hikes by the state-controlled Citizens Property Insurance Corp., which insures people who can't get coverage in the private market. That allowed Citizens to undercut private insurers. To keep private companies from bailing out of Florida, it intends to make available an additional $16 billion in highly subsidized reinsurance from a state fund. Trouble is, if a series of big hurricanes empties out the Citizens reserve fund and the reinsurance fund, the state will have to raise the money to pay claims via a special assessment of thousands of dollars apiece on all policyholders in the state. "It'll function just fine until the next storm. Then we'll see," says Joshua D. Shanker, an equity analyst at Citigroup Investment Research. The political fix temporarily alleviates the financial pain, but it worsens the underlying problem. Developers continue to erect condos in vulnerable parts of Florida in part because of the availability of state-subsidized insurance. Florida already has $2 trillion in coastal exposure and remains one of the fastest-growing states. That will raise the cost of the next Big One. "People have the expectation that insurance is a commodity and should be flatly priced," says Robert Muir-Wood, chief research officer of Risk Management Solutions Inc. But in an actuarially ideal world, he says, the rate for the South Florida beachfront should be perhaps 50 times higher than the rate for an elevated property in northern Florida. "The wealthiest people tend to benefit the most from this aberration," Muir-Wood says.
Globalization
Here’s what Bill Gross, manager of the world’s largest bond fund says:
Add a billion or so potential workers to the global labor force, blend in a technology S curve acceleration, combine these with deregulation, lower taxes, and free trade, and you have a recipe for accelerating returns to capital and diminishing returns to labor… Does this virtuous circle favoring capital at the expense of labor continue? We see nothing to stop it absent a global financial bubble popping of sorts, an accelerated decline of U.S. housing in the short run, or a U.S.-led trade policy reversal that could precipitate counter-attacks from Asian exporters.
Globalization has been a double-edged sword for American workers. As more than a billion workers from China, India, and other developing nations have entered the global labor pool, mainly in manufacturing, but also outsourcing of services like programming and data entry, obviously this has depressed wages for American workers on the lower end of the skills spectrum.
On the other hand, it is less recognized, but absolutely true, that globalization has resulted in much lower costs for most goods, from which all Americans have benefited. While working class wages have not increased at all in real terms since 2001, the standard of living of most working class consumers probably has increased, as most products of the same quality cost less – consumer electronics being one good example.