Creative capitalism, comma, housing crisis

Creative capitalism, the spawn (or, rather, the latest, known, publicised articulation of which is the spawn) of Bill Gates.

As I see it, there are two great forces of human nature: self-interest, and caring for others. Capitalism harnesses self-interest in helpful and sustainable ways, but only on behalf of those who can pay. Philanthropy and government aid channel our caring for those who can’t pay, but the resources run out before they meet the need. But to provide rapid improvement for the poor we need a system that draws in innovators and businesses in a far better way than we do today.

Such a system would have a twin mission: making profits and also improving lives for those who don’t fully benefit from market forces. To make the system sustainable, we need to use profit incentives whenever we can.

At the same time, profits are not always possible when business tries to serve the very poor. In such cases, there needs to be another market-based incentive—and that incentive is recognition. Recognition enhances a company’s reputation and appeals to customers; above all, it attracts good people to the organization. As such, recognition triggers a market-based reward for good behavior. In markets where profits are not possible, recognition is a proxy; where profits are possible, recognition is an added incentive.

The challenge is to design a system where market incentives, including profits and recognition, drive the change.

I like to call this new system creative capitalism—an approach where governments, businesses, and nonprofits work together to stretch the reach of market forces so that more people can make a profit, or gain recognition, doing work that eases the world’s inequities.

Aquila non capit muscas, indeed. And so, creative capitalism. The market will not deliver kindnesses to us, yet government intervention to force kindness into a market is inefficient. Government, however, is corrupt: it plays favourites, it exercises prejudice. Why not beautify this congenital disorder politic by bending it to the purpose of favouring kindnesses?

Some say Gates is dead on; some say he’s dead wrong (we all can agree that he is, however, alive).

This isn’t new – the speech was delivered, and widely reported upon, quite a while ago. It bounced back into the selective attention switches of my frontal lobe with this story in today’s Sydney Morning Herald:

Homeless by default, through no fault of their own

On Monday Mr Osman, his wife Hannan Mohieldin, and their six children, aged five to 18, will be on the streets. The Sheriff of NSW is due to enforce the court order that requires the family to leave the house they have rented in Wentworthville for the past year.

Mr Osman’s landlord has defaulted on a mortgage to Perpetual Trustees Victoria Ltd, and now the company wants the property, free of tenants, in order to sell it.

It has given Mr Osman’s family two extensions since a first notice to leave at the end of November. But now, according to the Notice to Vacate from the sheriff’s office, the family’s luck will run out on February 11 at 11.45am.

“To find a big house for my family has been very hard,” said Mr Osman, a Sudanese refugee who arrived in Australia two years ago. “We have applied for many properties at many real estate agents but we have not succeeded. I am an innocent party in the mortgage problems.”

Mr. Osman is, not surprisingly, one of many, and one of many that are growing to many more. I would not be surprised (and, in fact, would be very interested) to see a modern-day Bonus Army marching on city council chambers. But back to the story. What set this off was this comment:

The principal legal officer at the Tenants Union of NSW, Grant Arbuthnot, said the root of the problem was a lack of affordable private housing and a scarcity of public housing.

“I am aware that Perpetual Trustees responded well to requests for more time but now they are going to enforce the court order they have obtained,” he said. “I would like Perpetual Trustees to help them further.”

He would like Perpetual Trustees to help them further. For Cliff’s sake, I would like Perpetual Trustees to help them further; you like Perpetual Trustees to help them further. That’s hardly going to help. Perpetual Trustees has no reason to help them further, but every reason to reclaim their foreclosed property. They aren’t landlords: they don’t rent out houses.

Why creative capitalism, here? Why can’t the State government just expand public housing? Because that is exactly the limit of Grant Arbuthnot’s sympathy – imposition by the state on Perpetual Trustees would mean buying that house and making it public. Why not?

First, it is inefficient – that’s why we have private housing markets. For the government to explicitly, and more or less permanently, expand public housing, would be to constrict private housing. It would just make things that much worse for the rest of us (sorry, them) – and more and more families would become “in need” of public housing. The cycle would be off and running, and the government would never get back to their starting-point (alive).

Second, it would be a political headache that no government would invite. So far the market is rationing housing according to price (more or less). The government rations housing by other criteria. Now: suppose the State government buys up this house. So it has a house, with a family in it. However, there are probably families already worse off – so Mr. Osman’s family is removed anyway.

Second, part 2: society-wide, there is always greater demand for than supply of public housing. Mr. Osman is a Sudanese refugee. I don’t need to email my parents and grandparents for their perspective on this one: Australian families first. That is a very ugly side of social welfare functions, but it is no less true in Australia than anywhere else on earth (England, for example).

The equity/efficiency trade-off is a lose-lose scenario, here: the government will not, cannot manage this efficiently, and it cannot hope to do it equitably because a politically stable (expedient, convenient, etc.) standard for “equity” will not be found in this case.

So, yeah, I think Gates’ “creative capitalism” has a lot going for it. Maybe. Without heavying the market, the government can, possibly, find some leverage within its own favourites-playing to offer Perpetual Trustees a quid pro quo. Do we want them to? I don’t know. It’d depend upon the deal offered, I guess. How “creative” our capitalism gets – that’s the dangerous part.

And here’s the part where Economics is the dismal science: all of this still leaves Mr. Osman and his family without a home. In the famous words of the Dillinger Four,

Thousands of us dead today, thousands went unfed today
And all we talk about’s the fucking weather

Foreclosure pulse

I found, via the Guardian, Foreclosurepulse.com. Amongst other things, they provided this splendid graphic of foreclosure intensity in the US:

As well as a good form of what is – or ought to be – the standard analytical response to the idea of stimulus, vis homeowners.

The Fed’s interest rate cut is largely symbolic. It makes more funds available to depository institutions — old-fashioned banks — but old-fashioned banks aren’t where the crisis is centered. The Fed’s move will do little for what ails the U.S. economy: Falling home prices, tighter lending standards, rising foreclosures and the ever-growing number of unsold houses on the market.

Nor will President George W. Bush’s $150 billion economic stimulus plan prevent Americans from losing their dream of homeownership to foreclosure. The Fed’s move will spark an avalanche of refinancing for homeowners with good credit. But that won’t necessarily translate into lower mortgage costs for some 2 million Americans with risky subprime home loans with rates that are scheduled to adjust sharply higher over the next year.

Many subprime borrowers have mortgages larger than what the properties are worth, ruling out the possibility of refinancing from an adjustable rate loan into a fixed mortgage rate.

If I stay in the US, this is certainly looking like a/the year to consider buying that house (or, hell, two).

New lexicon: “intentional foreclosure”

Originally spotted at the Big Picture (where else?).

This is how it works. Bob paid $420,000 for his home. Then he notices the house across the street, with more upgrades, and is selling for $315,000.

So Bob, who has pretty good credit, decides to buy the cheaper house. He can’t afford both, so then he walks away from his original home, letting it fall into foreclosure. That will hurt his credit, but he’s willing to take the hit for a more affordable home.

“Works” is, of course, a matter of perspective: (a) the bank will be stuck with a house in the worst market possible (until next month), dragging down (on aggregate) the economy – poetically just, if Bob ends up losing his job and the other house as a result; (b) it could be market-based. Just because his mortgage is 420K doesn’t mean his house it. He could move across the street and see his house going for 300k – will be repeat the procedure?

The LA Times has a varied take on the issue:

A homeowner who can’t sell his house tells the L.A.Times, “Foreclose me. … I’ll live in the house for free for 12 months, and I’ll save my money and I’ll move on.”

Banks and lenders fear this kind of thinking – that walking away from a house could be the smart economic move – appears to be on the rise. Wachovia, in a conference call yesterday, warned investors that increasing numbers of homeowners are walking away from their homes by choice: “… people that have otherwise had the capacity to pay, but have basically just decided not to because they feel like they’ve lost equity, value in their properties…”

Calculated Risk notes this is “one of the greatest fears for lenders … that it will become socially acceptable for upside down middle class Americans to walk away from their homes.”

Oof. If banks have bread-baskets, I reckon such a fashion as this would count as a punch right in it. That would have to be the banker equivalent of being chased by giant carrots as a child, surely. Terrifying.

Funnily enough, my wife opened a new bank account over the weekend (with Wachovia: Bank of America, you’re just too big a bunch of dicks). During it she commented on her credit rating (good) – I told her that, 6 months from now, there’d probably be so many bad credit ratings going around that people wouldn’t know what to even do with a credit rating anymore (I’m a foreigner – this will all benefit me because, while mine is good, I barely have one at all)

“Safe as houses” now, finally, only said with irony

Hard as it is to pull from the haystack of needles (that is the current crop of financial reports) a single one. Lennar corp. is coming good on previous promises to be losing more money:

The company took a $1.86bn impairment charge for land, inventory and goodwill in the quarter ending in November, which included a $740m loss on 11,000 lots the company sold to its joint venture with Morgan Stanley. Lennar said its land portfolio was worth $4.5bn at the beginning of its first quarter, down from $7.8bn the year before.

The impairment charge takes the total amount written off by the housebuilding industry to nearly $20bn since the beginning of 2006, according to calculations by Standard & Poor’s.

…

“You’re going to see a lot more land sales,” said Stephen East, an analyst at Pali Capital. “That’s going to depress land and housing prices further.”

Stuart Miller, Lennar chief executive, called his group’s results “disappointing”. He said: “It is apparent that 2007 was a very tough year. At the back end of this year I do not expect to see sales or price acceleration.”

I’m not one to say ‘I told you so’, so much as ‘oh, hi guys – where in hell have you idiots been?‘ Lennar made this promise, while losing money, back in June of 2007. While everyone else appeared blithely to follow the tripe spoon-fed by the National Association of Realtors, this was a picture of Dorian Gray’s house, becoming more and more ugly.

Now, of course, people are noticing.

The US housing market closed the books on a dismal year on Thursday, recording a 2.2 per cent drop in the pace of existing home sales in December to an annual rate of 4.89m units, which was slower than expected.

…

The downturn in the US housing market has been at the heart of the credit crisis that has shaken global markets and worsened the outlook for US economy.

Funnily enough the same article contains this nice piece:

Earlier in the day, however, the labour department issued a more upbeat set of figures on the US economy, showing that the number of new jobless claims fell 1,000 to 301,000 in the week ending January 19. The downward move marked a surprise compared to analysts’ expectations of a small rise. It was the fourth weekly decline in new jobless claims.

So, recognition that the economy piled on 1m fewer jobs than last year, and is set to give workers six of the best, pants down, is apparently still going to be a little while coming (watch for ‘the papers’ to be surprised, 4 months from now, to see the employment numbers worse than they expected. It’s like an army of Forrest Gumps: the great thing about being stupid is that you are constantly surprised).

The Wall Street Journal has a good piece pulled together for city-based housing markets (click the image to view the full chart):

Even Manhattan, where prices continued to rise briskly last year, looks more vulnerable to a slowdown. Falling home prices and soaring defaults elsewhere have created more than $100 billion of losses on mortgage-related securities at Wall Street firms, destroying many jobs in the New York area. The number of homes listed for sale in Long Island and Queens at the end of 2007 was enough to last 18 months at the current sales rate, up from a 12-month supply a year before.

…

Few expect a quick recovery. Stricter credit policies at mortgage lenders have disqualified many potential buyers, and foreclosures are adding to an already glutted supply in many areas.

Ouch. Hardly unexpected, but ouch.

Retail didn’t make it, after all

Not – former Eco 1 students will know – that it was ever going to. By the numbers:

1) Retail sales just weren’t … ooh, what’s that word? Good.

Last-minute purchases over the pre- Christmas weekend failed to salvage what may be the slowest- growing holiday spending season in five years.

2) Taking retailers – and Wall Street – with them.

U.S. stocks dropped for the first time in four days on concern slower sales at Target Corp. and the biggest drop in home prices in at least six years signal consumer spending may weaken more than expected.

3) And onwards and outward. In fact, we can add appreciating oil prices and declining gasoline stocks (meaning future appreciation in gasoline prices, meaning less post-gas disposable income, and more cost-push inflation in prices) to the big drop in house prices (meaning that people have less household wealth to back their consumption, just as their incomes are in trouble).

Crude oil rose above $96 a barrel in New York on speculation an Energy Department report tomorrow will show that U.S. inventories fell for a sixth week.

Supplies dropped 1.75 million barrels in the week ended Dec. 21, according to the median of nine responses in a Bloomberg News survey of analysts. Prices also rose after Turkish jets bombed suspected Kurdish rebel camps in northern Iraq, the military said on its Web site.

Home prices in 20 U.S. metropolitan areas fell in October by the most in at least six years, a private survey showed today.

Property values fell 6.1 percent from October 2006, more than forecast, after dropping 4.9 percent in September, according to the S&P/Case-Shiller home-price index. The decrease was the biggest since the group started keeping year-over-year records in 2001. The index has fallen every month this year.

So much for that killer 1.1% increase in consumer spending. The blog The Big Picture has an excellent re-cap of it “all”, also – particularly with regard to the numbers being bolstered by (i) purchases of gasoline and dinners at restaurants and (ii) things marked-down heavily.

“Fed shrugged” – excellent allusion

The New York Times – via the Big Picture – had a super critique (including this splendid graphic – click for larger version) of Greenspan’s Federal Reserve, his incurious attitude towards subprime and adjustable-rate (and stated income, and piggyback, and…) mortgage lending, and his orchestra.

Nice, eh?

Today, as the mortgage crisis of 2007 worsens and threatens to tip the economy into a recession, many are asking: where was Washington?

An examination of regulatory decisions shows that the Federal Reserve and other agencies waited until it was too late before trying to tame the industry’s excesses. Both the Fed and the Bush administration placed a higher priority on promoting “financial innovation” and what President Bush has called the “ownership society.”

On top of that, many Fed officials counted on the housing boom to prop up the economy after the stock market collapsed in 2000.

The article is mostly a list of qualified observers who warned the Fed that shit was piling up and the fans were being turned on. It also criticises Greenspan for his (as we saw in a previous post, ongoing) defense of his policy, based upon the salvation of appreciating house values.

People are piling on, back over on the Big Picture. The comments are worth the few minutes’ read.

The Austrian school, sub-prime, and speaking of centrally-planned economies…

Did you know, for example, that agricultural subsidies are set in five-year plans, here in the US? Those crazy commie Chinese. I mean. Wait…

Meanwhile, Hank “what is this thing called foreign exchange, anyway?” Paulson is pushing ever forward, along with his friends in the George “what is this thing called mature, responsible government, anyway?” Bush administration, with their five-year plan to fix interest rates.

George W. Bush is expected to announce on Thursday a five-year interest rate freeze on some subprime mortgages as part of a deal brokered by Hank Paulson, Treasury secretary, to prevent a tidal wave of home foreclosures.

The five-year freeze – a compromise between regulators, who were pushing for a seven-year freeze, and some lenders, who had argued for a one- or two-year freeze – was in a draft accord circulated on Wednesday, a Treasury official confirmed.

…

Under the plan, mortgage servicers would agree to the five-year rate freeze voluntarily. An industry lobbyist said the freeze would apply to subprime adjustable rate loans taken out between January 2005 and July 2007, with rates scheduled to step up between January 2008 and July 2010.

Although not directly related, I liked this passage, most of all:

Speaking at the Nasdaq stock exchange, Mrs Clinton said the financial sector had to accept its share of responsibility. “Wall Street shifted risk away from the people who knew what was going on and on to the people who didn’t,” she said. “Wall Street helped create the foreclosure crisis, and Wall Street needs to help solve it.’’

I agree – the moreso, had she mentioned her own culpability, being First Lady, and then Senator, for the period in which Greenspan loaded all these cannons with shit, aimed them at fans and then retired to write his goddamn book, I Can Be Pontius Pilate, And So Can You!

Here’s an interesting point of reference:

The Chinese government on Wednesday froze prices that it controls for the rest of the year, in the latest sign of Beijing’s mounting concern over inflation.

…

“All current rules on goods and service prices controlled by the government should be strictly implemented. Any unauthorized price rise is strictly forbidden,” the statement said.

The ministries ordered local governments not to raise prices without the approval of the National Development and Reform Commission, the main planning agency.

The statement urged local governments to raise minimum wages as soon as possible to make up for inflation, which jumped to 6.5 percent in the year to August.

That was mid-September – a little bit before that Secretary Paulson fellow went on his tour of lecturing other countries on how to govern and regulate financial markets.

This would be where the Austrian school (with whom I find I am ever-increasingly sympathetic) comes in. Specifically:

In a mixed economy, government decision makers can use information generated by markets, but as government grows relative to the market sector, market prices contain less information to guide resource allocation, rendering the economic system less efficient. Thus, smaller governments naturally act more efficiently than larger ones.

In addition, government institutions often contain incentives to make decisions that work against the public interest, and because government decision makers have no invisible hand to pull them toward socially desirable policies, the self-correcting aspects of market activity play no role in the public sector. As government grows, the ability of the price system to effectively convey information leading to efficient resource allocation breaks down.

… government intervention leads to more government intervention because all interventions have unintended consequences. A major source of the unintended consequences is the response of affected individuals who try to avoid suffering the negative consequences of the intervention. Thus, taxpayers who face higher taxes look for ways to avoid taxation, and individuals alter their behavior to avoid the negative effects of government regulation. Such responses create three sources of additional intervention.

First, the government might close loopholes to try to force people to behave as originally intended.

Second, because people try to avoid the adverse effects of interventions, an initial intervention will fall short of its goals, creating demands for more intervention to produce the desired effects.

Third, an intervention will produce unintended negative consequences that people may not even realize resulted from the intervention. When these negative side effects show up, demands will arise for more government intervention to remedy them. Because one government intervention creates demands for more intervention, the mixed economy moves increasingly toward government control.

Sing out when any of this becomes familiar. This is a trope to which I return, and ever will return, often: there is (as far as I’m concerned) no such thing as big government vs. small government; there is no substitute for good government. In this instance, only bad governments fix prices; only bad governments push five-year plans onto otherwise operable markets.

UPDATE: from a colleague:

I am naturally cautious of anything with the words

1. “five year plan”
2. “the master plan of”, or
3. “the final solution to”

in the title.

Does the government and the BBC actually believe that English = white?

I’m serious. As I read this on the road today (passenger, not driver), it did rather blow my mind.

Probe into housing ‘unfairness’

An inquiry into the “widespread perception” that immigrants are jumping housing queues is to be launched by the Equalities and Human Rights Commission.

Its head, Trevor Phillips, said the belief migrants were gaining “unfair advantages” was fuelling tensions.

And the question of “whether the housing system is being abused to the detriment of anyone – including white families” had to be finally settled.

…

In a speech in Birmingham, Mr Phillips said people were “realistic” about migration and accepted they had to share services such as schools and hospitals with new arrivals.

But he added: “What, however, does drive tension and hostility is a widespread public perception, that new migrants too often get an unfair advantages to which they are not entitled.

“And one area where this idea of unfairness is most frequently alleged – is in housing allocation.

“Specifically that white families are cheated out of their right to social housing by newly arrived migrants.”

At no point in their story does the BBC indicate that they, at least, understand that “English” does not equal “white”; that migrants can also be “white”; or that residents and citizens can also not be “white”. They do offer this:

He said there was “no reliable evidence to back up this claim” and public feeling was “driven by careless media and racist parties”.

He must be referring to (a) people who give speeches equating citizenship in the UK with being “white”, and/or (b) media organisations who reproduce such speeches with no insertion of common sense. Right?

Perhaps the rest of us just get to let our hair down, while the Tories rattle the chains of Enoch Powell. All things being relative, and so forth. I look forward to a resurgence in the socially-acceptable racism of newspaper articles about Gypsies, in the coming months.

The gender distribution of bad home-loans

Although it has taken me long enough to get to it:

There was a time when purchasing a home was something only married couples did. However, increasingly, single, widowed, and divorced women with and without children are making the choice to purchase a home on their own. Yet, the economic and social consequences of subprime lending practices on them are subjects few are discussing.

Women have become a key component in the real estate market. Last year in Massachusetts, over one-third of first-time home buyers were single women and nearly one-quarter of all home buyers were single women.

Women borrowers are overrepresented in the subprime lending market according to studies done by both the Consumer Federation of America and the National Community Reinvestment Coalition. Across the economic spectrum, women receive less favorable terms than similarly situated men on home purchase, refinance, and home improvement loans. The studies also show that the gap between women and men receiving subprime loans actually increases as women’s income increases.

Elderly women are prime targets of refinance and home improvement subprime lenders. Women on average live longer than men and have a greater chance of living alone. Rising property taxes and medical expenses make older women on fixed incomes particularly susceptible to lenders who promise money for necessary repairs, but instead exact huge fees and charge inflated interest rates.

African-American women, who represent half of African-American home purchase borrowers, are particularly vulnerable. In fact, there is evidence that subprime lenders charge black women and Latinas higher rates and fees than same-race men and white men, again, regardless of income and across all loan types.

For women, the impact of problems in the lending industry crosses age, class, and racial lines as well as neighborhoods.

The primer from the Consumer Federation of America <a href=”National Community Reinvestment Coalition“>can be found here.

African American and Latino women had the highest incidences of subprime lending – and the gap between women of color and white men increased as incomes rose. African American women earning double the area median income were nearly five times more likely to receive subprime home purchase mortgages than white men with similar incomes and Latino women earning twice the area median income were about four times more likely to receive subprime purchase mortgages than white men with similar earnings.

African American women make up half the African American purchase mortgage borrowers and Latino women make up nearly a third of Latino home purchase mortgage borrowers.

I didn’t find the same from the National Community Reinvestment Coalition. The first one is also listed as released December 2006: I wonder if either the problem has declined, or if everyone else has basically caught up in the catching-shit-stakes.

Futures on the fed funds rate traded on the Chicago Board of Trade imply a 72 percent chance of a cut to 4.50 percent

Just quickly, before class starts:

Government bond traders, who predicted six of the last seven recessions, say the Federal Reserve will lower interest rates again before the end of the year as the economy comes to a standstill.

Since the Fed last week lopped half a percentage point off the central bank’s target for overnight lending between banks — the first orchestrated decline in so-called federal funds since 2003 — traders have pushed the yield on Treasury two-year notes to almost three quarters of a point below the designated 4.75 percent funds rate. In the three previous occasions during the past 20 years when that has happened, policy makers have cut borrowing costs.

“The U.S. economy needs to grow at 2.5 to 3 percent or else it stalls,” said Bill Gross, manager of the $104.4 billion Total Return Fund, the world’s biggest bond fund. “Historically every time we get close to stall speed the Fed lowers short rates.”

The latest government data show unexpected job losses in August, sagging core retail sales and no relief in sight for the moribund housing market. Now that U.S. gross domestic product probably is growing at an annualized rate of less than 2 percent, speculation is rampant that another Fed rate cut is assured before January.

I particularly liked this part:

Interest-rate futures have an accuracy rate of less than 30 percent since 1994 in forecasting the fed funds target, an August 2006 study by the Federal Reserve Bank of St. Louis found. As recently as July 25, futures put the odds of a target lower than 5.25 percent by November at less than 20 percent.

This time, they may prove prescient, according to Lacy Hunt, chief economist at Austin, Texas-based Hoisington Investment Management Co., which oversees about $5 billion of Treasuries.

If futures have an accuracy rate of less-than-30 percent, why tell us what odds the futures market is currently offering? Moreover every time “may prove to be prescient” – they just only do 30% of the time.

Pretty funny. No joy for the US dollar, then…