Is Saving Detroit Worth The Effort? (Yes)

Thus far, I have outlined Detroit school principles and Detroit work responsibility principles, two sets of principles amongst others that will be important to outline as the basis for a holistic solution. Yet already the solution set to accomplish just these two sets of principles might seem extremely difficult to some. To accomplish the two sets of principles that I have outlined thus far, for example, would take a great deal of cooperation between local, state, and potentially federal governments on both sides of the aisle and would force a paradigm shift that would be difficult to accomplish even with both major political parties working in concert. For this reason, many would simply scoff at my principles as unrealistic.

Yet, no other set of principles set forth thus far have been implemented in the past 60 years of Detroit’s decline that have resulted in the city’s turn around. And no principles being presented contemporaneous solve Detroit’s immediate growth problems either. Without a bold set of principles that sets the bar as high as the stars, Detroit cannot expect to even hit the moon. And right now, Detroit’s revival depends on hitting the moon.

I am suggesting that Detroit reach for a difficult task (that is reachable) to avoid a terrible alternative of bankruptcy and further decline. The alternatives thus far presented to Detroit by others show a strong and good future yet without a viable path forward. The thriving path forward requires that the city grow robustly, but the initiatives thus far presented project a slow growth.

Could Detroit achieve slow growth from Downtown and key city centers without a bold jobs initiative? Perhaps, yes, perhaps no….the answer depends on how deeply city services must be cut to balance the city’s budget and how much more crime and blight will be exacerbated by such cuts. The answer also depends on how many city assets will be sold off to forestall bankruptcy or whether bankruptcy will cause the city to lose its ability to borrow for the future.

A seemingly more complex but actually more viable solution is one that aggressively pursues a much higher rate of city growth. If a viable solution can project a realistically higher growth trajectory, it will also project a balanced budget at higher city revenue levels that can put Detroit in a position to borrow, not to pay for further operating deficits, but to create assets for the City’s future prosperity.

Since Coleman Young’s terms in office until now, Detroit has attempted to lure businesses to the city to provide jobs to keep Detroiters from leaving. The city has had some successes but not nearly enough to save Detroit from having to endure the emergency manager’s executions.

A net 1.1 million people have left Detroit since 1950, to find work and to escape Detroit’s growing crime. Now that the rate of exodus has slowed in Detroit, city leaders might be able to bring residents back if they can first bring businesses back. Yet to do so, they must convince business owners to relocate their businesses in Detroit instead of other alternatives. Detroit’s blight and crime rate make the effort formidable.

Even more formidable, the city’s leaders find themselves in two catch 22 dilemmas. First, without reversing its crime rate, Detroit will not bring in new businesses quickly enough to overcome mounting deficits. If the city cannot grow quickly enough, it will resort to selling off assets to pay debts and the sale of those assets could cripple the city. Yet, without bringing in enough businesses to provide good paying jobs, Detroit cannot reverse its crime rate. This is the circular argument that has haunted the city’s mayors for the past four decades, the catch 22.

The second circular argument is even more insidious than the first in that to lower crime, jobs must provide living wages. Yet, the type of jobs that most unemployed Detroiters qualify for pay the lowest wages. Half of working Detroiters aged 25 and under have jobs that pay minimum wage. Minimum wage is already too low to keep a worker out of poverty. Bringing in more jobs that pay minimum wage to hire unemployed Detroiters does not take them out of poverty. Without reducing Detroit’s poverty, crime will not significantly decrease. And if crime is not lowered, even those minimum wage jobs will not come to the city, hence catch 22 squared.

Since jobs could not be lured into the city to decrease crime, city leaders resorted to entertainment businesses like casinos and sports arenas, and gentrification, creating mini-walled off cities within the city, to increase the tax base, yet the pace of growth from these pursuits did not compensate for the losses due to depopulation, and now Detroit faces the impending possibility of bankruptcy.

The principles I have outlined for schools and business development will lower crime but both depend on breaking the circular arguments. If they can be broken, jobs can be brought in that provide current residents with livable wages, and Detroit can significantly lower its crime rate.

With lowered crime, the vision that Detroit is now presenting to the business community of a better Detroit will be viable. Detroit’s vision of the future city, combined with significant incentives for businesses to invest in the city, can then help the city bring in more jobs. More jobs will increase property values, which will in turn create higher city revenues that will lead to reinvestment in the city’s livability and a path toward a thriving Detroit.

To break the circular argument, however, two things must simultaneously occur. First, businesses must be convinced to hire 100,000 employees from the ranks of Detroit’s largely illiterate unemployed. Second, businesses must be convinced to pay new hirees a living wage that is above minimum wage, when half of Detroit workers under the age of 25 are being paid minimum wage. This is the herculean task that has perplexed a good many people without a solution. Therefore, Detroit faces bankruptcy.

Yet, the fact that no viable solution has been proposed in 40 years does not mean there isn’t one. The solution requires a paradigm shift. It requires the collaboration of both sides of the political aisle, and of local, state, and possible federal government leaders. Is saving Detroit worth all that effort?

The Job Auction Plan For America Ends Detente

For the last thirty years, ideologues on the left and right have kept an easy peace over subsidizing what each thought was excessive war or excessive social engineering by allowing the other to have their pet spending and by borrowing from the Chinese (and others) to pay for it. That way their constituency did not have to fund the other’s extremist views and their would be no wealth or income redistribution in the mix of continuing both policies without compromise.

Unfortunately, this short-sided thinking got America to the brink of collapse it is in today. There is no way we could have expected to run up our debt without effect. That debt funded our international competitors and took 15 million jobs and 40,000 factories offshore. More importantly, the elites outfoxed the masses in that massive wealth transfer did occur from consumers to investors at the expense of the middle class.

The poor remained poor at the level of the safety nets in place. Millions more joined them. Millions more joined the ranks of the working poor and the wealth of the middle class was taken in the housing collapse as middle class wages stagnated. This wealth was then redistributed to investors and overseas ventures. The detente between left and right must end with the wall coming down. We just haven’t figured out who is on what side of the wall.

The Job Auction Plan ends detente. It ends wealth transfer overseas. It ends jobs transfers overseas and begins to reverse the trend. Now the wealth transfer issue only get resolved if we balance the budget. For if we do not then the government will fund my plan just as it is funding the current plan of social safety nets and big war and nothing else will change except that at some time, the dollar will simply become worthless.

If the Government does not balance the budget, then my plan will result in everyone that is able to have a job will have jobs, businesses producing products that are exportable and as inexpensive to the American consumer because they were produced at international wage rates, Therefore America will shift purchases to American manufacturers and exports will go up to absorb the increased production.

The wage differential will be paid by the government. The wealth transfer in this case goes to the small business owners and the millions of new workers as opposed to the elite, who essentially have been taking a share of the debt as their payment for detente for the last wo years. Yet the cost to the taxpayer remains the same, zero, because just like the current plan is being paid for with debt, this one will be too.

If the Government chooses to balance the budget, then whomever is responsible for paying for the budget balancing will pay for the plan. Yet the cost of this plan will be no different than what we are paying now, if anything, I expect it to be less. We will simply transfer costs of unemployment and social safety nets now being paid for by taxpayers and transfer them to the auction process. The only difference is that instead of paying people to sit in their homes without jobs, we will now be assisting all to get real productive jobs and to contribute to our country.

Therefore the issue of who pays becomes moot, and the issue of balancing the budget goes back to solving detente. That may mean either that elites pay more, or everyone along the tax chain, flattening out wages in income redistribution. It may be consumers of social services that are cut to balance the budget pay for the program. Nonetheless, solving detente makes us all finally decide how big a military is big enough and how much subsidizing of the capitalist system flaw that keeps so many people idly out of work we will accept.

Consider The Job Auction Plan an adjustment to capitalism that actually improves the current system flaw while reducing the cost, inefficiency, and lack of empathy of our current patchwork of social safety net programs.

Business exists for the Sustenance of Mankind

For those that continue to harp that businesses do not exist for the purpose of creating jobs, let me set the record straight. Business has the responsibility of 100% effective and sustainable employment. In this “modern” era, mankind has fallen susceptible to the idea that business is an organism coexisting in time with men, finding arms lengths symbiosis whereby each feeds off the other but neither have a responsibility further than from what can be gained.

This odd paradigm that business does not have the purpose of creating jobs is an erroneous fiction of our time. While it may be quite true when viewed from the perspective of an individual business including the sole purpose of its owners and managers to make profit, the idea that the purpose of business does not include providing employment is one that has mutated in the evolution of the era of individualism.

Before our time, in the era of Kings, men held other misconceptions such as the purpose of land. It was widely held that land should not provide each serf his own castle but instead should connect all in servitude to the king (similarly to connecting all mankind as a series of batteries connected by wires to provide the electrical power for the nation of computers as seen in the movie “The Matrix”). Kings would grant temporary sharing of power to corporations to reward those who would risk life to advance the kingdom.

Yet in their quest for more, Kings allowed this power sharing to gain a foothold and their power spread too thin amongst the businesses. In this devolvement of power, the era of kings diminished and the era of fiat money derived from gold renting rose. With it, a new paradigm of business came to being. Businessmen gathered the trappings of power; money, ideas, inventions, innovations, labor, these were those that provided aggressive men the means to acquire kingdoms unto themselves. Yet in the beginning, these new mini-kingdoms existed within the realms of the nation-state, still subject to the whims of the king.

Ultimately, as businessmen acquired a majority of power, they demanded and received their due. A new paradigm arrived whereby these captains of industry exchanged seats with the rulers and the rulers bowed to them, becoming puppets to their whims instead. Now the new kings of business shared their power with the people to hold them in abeyance. But as the masses rose in opposition to workplace excesses, power once again shifted and all prospered in a moment of whimsical balance created only by the transfer of time and power toward its ultimate destiny.

We now have a period of imbalance that will only worsen over time. Businesses will continue to garner power from the transition toward the corporate state. And with the power shift, the middle class will suffer even more from this unnatural imbalance. Mankind is meant to be communal. Not that all should be equal or share equally but that all should contribute to the common good. Systems that provide that opportunity include businesses. Business owners are cogs in the wheel of life and have the responsibility to employ all in the community for the common good.

Yet individual businesses should not have to employ any more than that which is needed by increased innovation and productivity. Therefore, if excess unemployment exists, an artificial constraint, unnatural, ungodly, and unsustainable exists; one that is only imposed on man by those that would seek to enrich their own mini-kingdoms. And now that the era of kings is dead, those mini-kingdoms hide out in the marshes of government bureaucracy. Therefore, the bindings of government that have created it must be loosened, and a new paradigm of mutuality between government and business must be created with the outcome of full employment.

Republicans Lost 2012 Election Because of a Confidence Crisis

By the numbers, this year was not a great victory for the Democrat Party. Yet, it was a great failure of the Republican Party to win the confidence of Independents.

For those that want to call this a democratic mandate, some historical reference is in order. Looking back at previous second term elections, we see that 2012 provides the least significant “mandate” for a returning President in recent history.

1972 Nixon won by 18 million votes, a spread of 21.2 percent of the popular vote. His approval/disapproval rates were 62/28 just prior to the election.

1984 Reagan won by 16.8 million votes, a spread of 18.2% of the popular vote.
His approval/disapproval rates were 58/33 just prior to the election.

1996 Clinton won by 8.2 million votes, a spread of 8.5% of the popular vote.
His approval/disapproval rates were 54/36 just prior to the election.

2004 Bush won by 3 million votes, a spread of 2.4% of the popular vote.
His approval/disapproval rates were 53/44 just prior to the election.

2012 Obama won by 2.6 million votes, a spread of 2.2% of the popular vote. His approval/disapproval rates were 52/45 just prior to the election.

More voters were disenfranchised in 2012 versus 2008 for 119 million voted this year compared to 131 million in 2008.

In 2012, Democrats continued to enjoy greater number of registered voters than Republicans. In fact, Democrats have 18% more registered voters than Republicans, and 6 million more Democrats than Republicans voted in 2012. Republicans win national elections when more independents affiliate with their views than with those of the Democrats. Yet in 2012, Republicans failed to make up this 6 million-vote party vote gap when only 3.5 million more Independents voted with the Republicans than with the Democrats.

What was the greatest factor in the independent voting gap in 2012? JOBS! 23 million Americans were either unemployed or underemployed. Add in their spouses and 40 million people were concerned in 2012 about where they would find money to make mortgage payments or even to buy groceries. 5.5 million Americans are the so-called 99ers have long since stopped collecting unemployment checks and whose need for immediate employment is dire. Add to this list the 15.7 million Americans whose homes are underwater, and what we have is a confidence crisis in America.

Polls did not ask these folks affected by this confidence crisis who they believed in 2012 would most likely support them with a social safety net, but if they had, the numbers would have been overwhelmingly in favor of the Democrats. For the Republicans to have won in 2012, they would have had to overcome this confidence crisis by ensuring that those affected by joblessness could quickly become employed by the Republican job plan. Otherwise, those voting for Romney would be in an even direr financial crisis than now. Obviously, Romney did not overcome their fears.

What was required for Romney to win in 2012 was a jobs plan that could ensure immediate employment of those that voted for him, such as my plan that can be found at thrivingpath.com. The electorate measured up his jobs plan and found it wanting.

Will America Hand the Election Back to Barack?

With about 60 hours to go before the votes are in for the President of the United States, a dread is coming over the Democrats as if some underlying deviousness will come from somewhere to steal the election away from where the polls are pointing. If Barack has such a lead in Ohio going into the election, will he not win? I have watched our nation flip-flop every two years lately like a stock market bubbling in a narrow range just waiting to break out one direction or another. Without a clear direction from either candidate, I see no reason why this simmering won’t continue.

Barack had his chance with the entire Congress to focus on JOBS and he wasted his bullets as far as the unemployed were concerned. Never mind that he actually got the ball rolling on the critical factor that is bankrupting our country, healthcare. Whether or not it was the right answer, it was an answer, and no Congress after Obamacare can return America to the stench that was our healthcare system before it. Hooray for the President for moving that mountain.

The Tea Party seemed a vibrant choice to focus on JOBS if Barack would not, even if their election mantra was on lowering the deficit. Given the chance to break out, they instead held the nation hostage over the debt ceiling and, more importantly, applied nefarious tactics to break the unions, including the teacher’s union.

America’s middle knows unions somehow are missing how their membership has not steered itself toward helping America right itself. We understood why attacks occurred on Unions in Wisconsin and Ohio. We just didn’t think the rationale and tactics smelled right. But kudos to the Tea Party for at least focusing the nation on such out of whack salaries and pensions. And no one can claim that America can ever return to a time when we simply accept such ridiculous Congressional spending without question after the last debt ceiling episode. So our hats are off in gratitude to the Tea Party. BUT where was their focus on JOBS?

So is it any wonder that Ohio apparently leans toward turning back toward the President, and that we may once again flip-flop back in this election. If this occurs with such an awful economy staring us in the face, with such abysmal ongoing Keynesian economics attempts by the Fed, and with the current administration’s lack of any real jobs ideas of substance, this is a “Big F…. deal” as my friend Joe Biden would say.

Mr. President, if Ohio hands you one more chance, BREAK OUT. Don’t allow America to simmer in disbelief that no Party cares for our economic blight. BE BOLD. Focus, for a little while at least, on the unemployed, who desperately need our country to recover. Fixing America for the unemployed will fix it for the employed and employers alike. Fixing America for the middle class, will fix America’s future for all classes.

Do not believe this current Western paradigm that structural unemployment is a necessity of Western economies. Focus on busting the international arbitrage that is spiraling us into structural unemployment. America can become competitive if our brand of capitalism realigns business with the American people. Look at my jobs program. You can find it on thrivingpath.com.

A hegemonic empire is a terrible thing to waste. If you get a second chance, don’t…

Party Cockroaches Must Crawl out from the Pre-election Rocks

2010 is not a foreshadowing of 2012 just like 2008 was not of 2010 and 2006 was not of 2008. If the past three elections foreshadowed anything, they warned both political parties that Americans have fallen into a caldron of frantic emotions spurred on by a devastated economy and that roaming, apolitical gangs are wandering the dusty highways of a post-apocalyptic economic era clinging to last hopes of finding someone who will bravely stand atop the barren political landscape holding up a banner of a believable brighter future.

Like cockroaches after the nuclear explosions, gangs of Democrats and Republicans have huddled en masse in 2012 hoping to survive the fallout by shouting worn out platitudes of pre-cataclysmic issues. Yet, millions of jobless Americans, no longer believing in the protection offered by the parties, are drifting the bombed out pre-election roads looking for any sign of a future economic life that can be offered to them as a token to join these burned out, Party semblances of prior ideals.

Finding no hope of a viable plan for recovery, these poor unaffiliated souls will continue to drift right up until the election, their ears deafened to the ringing sounds of any other political issue drum that attempts to drown out the hollow sounds of joblessness. A blurry vision of a destitute future having replaced the hope for America’s shining city on a hill that previous generations bore as they entered precinct voting booths, 2012 out of work voters’ hearts will be filled with angst and fear for their loved ones.

When one dreads the potential fallout of their decision, the last thing they vote for is change. Living with the gloom of repeating the past four years of vastly lowered expectations is sadly better than the potential their vote for Republicans might shove the economy and any hopes of even a mildly better life off a cliff of despair.

The problem with Governor Romney’s campaign that no one who can turn it around is admitting, is that he has not been able to inspire even an inkling of confidence that the Republicans will spur jobs in 2013. Out of work voters find little encouragement in messages of tax reductions and smaller government at a time when 1 in 6 Americans cannot provide their families enough food on their dinner tables. When the economy is broken, even would be diehard conservatives secretly grasp onto even small life rings of government assistance that float amidst the economic wreckage. The Republican mantra must shift left momentarily to briefly aid a drowning public.

If Governor Romney’s message does not take a major course correction, not only he, but the entire Republican Party is in for an historic routing. The 40 million out of work independent voters that hold the 2012 election in their hands want viable, direct jobs plans and yet neither party has yet to grasp the gravity of this certainty. I am sure that Republican Party strategists could construct a DIRECT job plan that best fits their market ideology while assisting America out of this depression.

Continuing to manage this election like all others, attempting to energize their faithful into the voting booths rather than address head on the central issue of 2012 might work for the Democrats but it will fail miserably for the Republicans. Party faithful will turn out in droves this year for the potential outcome of 2012 elections is more critical to voters than we have experienced in 40 years. But the out of work independents will be there as a massive bloc and they will cast the deciding votes.

President Clinton’s convention speech quelled enough of independents’ anger over the slow recovery to maintain an incumbency lead going into November. If the Republican Party, and more precisely Mitt Romney, is unable to replace the out-of work independents’ fear of the unknown with a clear vision inclusive of real jobs, 2012 levers will most certainly be pulled for the disheartening status quo.

Congress Must Act Now To Save America’s Homes or Seal Our Fate!

INTRODUCTION:

As of December 2011, housing prices have fallen 38% nationally, 7% more than during the Great Depression. While pricing has already dipped below the trend line that housing might have followed had the housing bubble not occurred, the outlook is for prices to continue freefalling another 4% during 2012. Some experts predict prices could drop nationally below 50 % of peak levels or more. Yet others suggest that economic fundamentals should be supporting a leveling of prices, and they wonder if normal economics of supply and demand have abandoned the housing market altogether.

Even though they may not appear so, the rules of economics actually still do apply to the housing market, and unfortunately they point ominously to even more alarming conditions in the years ahead. While many believe that Congress makes things worse every time they fiddle with the economy, Congress really has no choice but to intervene in this housing market if we are to save a cornerstone of America’s economic future. This post describes why housing prices rose and fell, and why they will continue to fall in the absence of intervention. It suggests why half the home mortgages in America could end up underwater and disrupt our economy for decades to come if Congress fails to act.

HOUSING’S RISE:

1995: Total housing units (in millions) 112.6 Renter Occupied 35.2 Vacant 12.7

In the five decades leading up to the 2000s building frenzy, housing prices rose predictably according to the principles of supply and demand. Housing pricing surged and slumped in response to peaks and troughs of business cycles, increases and decreases in interest rates, and growing or obsolescing local market commerce. Yet, nationally, averages followed historical patterns of a gradually rising nominal price market. Adjusted for home square footage that increased with each decade, new home prices tracked inflation nationally. Housing starts followed population growth, and as a major 14 % component of America’s GDP, housing generally has led the nation out of recessions.

Beginning in the mid 1990s however, housing economics began a dramatic divergence from historical trends. For the next decade, a sustained building spree added 6.6 million more housing units than was needed to support the rise in U.S. population, as many as one million units per year. In a rationally functioning market, this excessive addition of new homes would have quickly precipitated a business cycle slump and prices would have dropped to encourage a slowdown of new housing starts. But America got caught up in a housing frenzy and added enough demand to absorb this excessive supply while bidding prices up 225% above their historical trend line, a speculation that Fed Chairman Alan Greenspan as early as 1997 called an “irrational exuberance”.

COMPONENTS OF INCREASED DEMAND:

2006: Total housing units (in millions) 126.6 Renter Occupied 34.1 Vacant 16.7

LOW INCOME BUYERS: Some blame the excessive demand that pushed pricing well above its historical trend line on low income buyers who benefited from government regulations that forced lenders to ease requirements for lending. By passing the Community Reinvestment Act (CRA) and substantially revising regulations in 1995, Congress pulled these non-traditional buyers and their higher risk into the housing market. In doing so, Congress did nudge the beginning of the feeding frenzy, but the immediate effect of adding these buyers was not a large component of demand but merely a catalyst of future demand.

More importantly to the housing bubble than the numbers of low income CRA buyers was their impact on creative financing. Being forced into accepting additional risk, banks responded by creating risk spreading financial tools to mitigate high-risk, subprime loans. These tools would later be used to set the housing industry ablaze. Without them, the Housing Ponzi could not have developed.

BABY BOOMERS: Others blame the added demand of the bubble on Baby Boomers whose retirement accounts had been consumed by the bursting of the Dot Com bubble. In need of a quick fix for their fast approaching retirements, some Baby Boomers took advantage of “exotic” loans to buy too much home at too high prices hoping for substantial returns. As more Boomers entered the market, they pushed up home prices and acquired excessive debt in the process. At the beginning of the bubble, the median home price was $120,000 and the median income was $73,000, a ratio of 1.65. At the peak, the median home price had soared to $215,000 but incomes remained the same increasing the loan to income ratio to 2.94, an unsustainable level.

To cover the shortfall of income needed to make their new debt payments, consumers relied on home equity loans and credit card debt. Between 2000 and 2006, home equity debt increased $1.2 trillion and credit card debt rose $900 billion, again to unsustainable levels. By the peak of the Ponzi, home ownership had surged from a historical 65.1 percent to a 69.9 percent of the population and home ownership debt load had increased from 65% of GDP to an unsustainable 110%.

CONGRESS: More blame the actions of Congress for the housing bubble than the addition of non-traditional buyers and overreaching Baby Boomers. Certainly the Community Reinvestment Act and its subsequent regulatory revisions in 1995, including HUD’s direction that Fannie Mae and Freddy Mac set aside 50% of guaranty funds for low income earners, increased subprime loans tenfold and increased demand. But the repeal of Glass-Steagall, through the Financial Services Modernization Act of 1999 that allowed commercial-banking, Wall Street banks, and the insurance industry to merge, created banking products that swelled demand much more. And the Commodities Futures Modernization Act of 2000, that excluded certain financial commodities from oversight by the Commodity Futures Trading Commission, the Securities and Exchange Commission, the Federal Reserve, and state insurance regulators, allowed bankers to flood the world with lucrative credit-default swaps and to push exotic retail products into a growing speculative housing market to feed the swap market. Without the collusion of Congress, the irrational exuberance of consumers needed to fuel housing’s excessive demand could not have been enticed by the resulting banking products.

INVESTMENT BANKING: Most place the blame for the Housing Ponzi squarely on the shoulders of investment bankers. To allow non-traditional buyers into the market in the mid 1990s, banks initiated low doc and low down payment introductory loans to the primary market and combined these loans with others to form securities called Collateralized Debt Obligations (CDOs) which were then sold into the secondary market to transfer bank risk off their books. While 52% of low income loans were securitized by Fannie Mae and Freddie Mac in the early years, securitization quickly became a lucrative international commodity product of investment bankers and the market topped $2 trillion at its peak in 2006.

Yet as big a profit maker as CDOs were, an even greater profit was made in the issuance of Credit Default Swaps (CDSs), a form of unregulated insurance that allowed banks to take the risk of loans off their books, to increase their loan-to-collateral values four fold, and to profit from insuring events that they thought could never occur. At the peak of the Ponzi, the CDS outstanding market topped $60 trillion and had made $4 trillion in profits for participants in just three short years, much more than the $2.7 billion paid for lobbying Congress or the $1 billion paid in campaign contributions by the financial industry (peanuts in comparison) to persuade Congress’s votes allowing this free-for-all in the decade prior to the financial crisis.

To feed this frenetic pace of profiteering, international banking required the pace of loan origination to increase even though housing prices were accelerating upward beyond traditional affordability, and thus they began what became their final phase to lure additional demand. To bring the last customers into the Ponzi before its collapse, banks introduced a myriad of “exotic” loan products. After low doc and low down payment loans came no down payment and no doc loans. Later, interest only and negative amortization loans were offered. Banks then created piggy back loans with first and second mortgages that eliminated PMI and even offered to finance closing costs. From 2003 until the peak of the Ponzi, fully 25% of mortgage loans included teaser introductory rates. And in the final two years of the housing spree, banks allowed consumers to acquire pay-option mortgages that gave them the choice each month of paying fully amortized, interest only, or even very small monthly minimum payments. All of these risky products fed the secondary CDO and CDS market with mortgage securities by targeting the U.S. market for excess demand and exuberant prices.

RISING HOME PRICES: By 2003, all semblances of historical housing pricing metrics were gone. Brokers, agents, and bankers all explained that the new measurement of housing value was not bound by either the historical rental rate of housing or the constraint of trailing American incomes, but was instead measured by a new metric, combining these traditional valuations with the rate of return of increasing home prices themselves, thus spurring a real estate bubble with the fallacies of hope and greed. Half of all home buyers responded to this new flawed ideal by purchasing beyond their means, and in the process, pushing up the price of housing.

FEDERAL RESERVE: The Federal Reserve, flush with investment from China and concerned about recession because of the bursting of the Dot Com bubble and the economic shock of 9/11, consciously chose to support the housing surge through lowering of interest rates from 2001 through 2005. As a result, average mortgage rates reduced through the period from 7.9 percent to 5.6 percent, increasing demand and supporting higher home prices.

SECURITIES AND EXCHANGE COMMISION: The SEC inexplicably allowed five of the nation’s largest brokers to waive their capital-to-debt requirements that had historically been held to a 12 to 1 ratio. The brokers responded by leveraging their capital as high as 40 to 1, adding liquidity to debt financing, fueling housing demand, and pushing up pricing. Three of the five qualifying brokers later went bankrupt or were absorbed by other firms.

In the aftermath of the financial crisis, when many are demanding prosecutions of what seems to have been criminal actions by some in the financing industry, the SEC has been loath to act. Data suggests that the SEC had significant knowledge of financial firms’ negligence in following regulations for several years prior to the financial crisis and yet the SEC chose not to act on its knowledge. If the SEC were to take action now, the resulting trials would focus as much on the SEC’s foreknowledge and complicity as they would on the potential criminality of bankers and would shine an ugly light on the revolving door between government and industry, two reasons why the SEC might conspicuously choose to continue its inaction.

THE HOUSING BUBBLE POP:

2008: Total housing units (in millions) 130.3 Renter Occupied 35.8 Vacant 18.6

Inwardly, the banking industry knew that it had stretched the bounds of credibility and sustainability as it introduced riskier and riskier loan products to create additional demand. Bankers feared that resulting aggregate loan to income ratios exceeded all historical limits and might eventually collapse. In fact, some industry insiders even began to bet against CDO portfolios of other companies through CDSs, expecting to profit on rising defaults that began as early as 2004.

So when these defaulting subprime loan cracks appeared in the dyke of this elaborate housing Ponzi, a nervous fog settled in over the entire industry and many began to speculate whether highly leveraged firms such as Bear Sterns could cover their liquidity gaps. After some banks refused to cover Bear Stearns with short term loans, confidence waned, Bear’s stock plummeted, and Bear was purchased by J.P. Morgan Chase. By allowing Bear’s leverage to grow to 35 to 1, the SEC allowed just a 1% loss of asset value to increase Bear’s leverage to over 70 to 1. In this maximum consumer debt environment, that extraordinary leverage caused market confidence to collapse. Lehman Brothers followed suit six months later with a delayed total collapse of their 40 to 1 leveraged firm.

In the after shock of Bear Sterns and Lehman Brothers, the U.S. Government stepped in to rescue Freddy Mac and Fannie Mae, made loans to AIG, put in place a $700 billion bailout of teetering banks, forced the sale of Washington Mutual to J.P. Morgan Chase, and implemented a stimulus plan to strengthen Wall Street. The two remaining firms that had taken advantage of the SECs allowance of extreme leveraging, Goldman Sachs and Morgan Stanley, abandoned their status as investment banks. One effect of such sweeping industry changes was to substantially reduce the demand for higher risk mortgage CDOs in the secondary market, thereby dampening exotic retail products which then diminished housing demand and depressed pricing.

THE UNWINDING OF HOUSING SUPPLY AND DEMAND:

2011: Total housing units (in millions) 131.2 Renter Occupied 38.3 Vacant 18.7

SUPPLY:

EXISTING INVENTORY: At the peak of the housing bubble, housing inventory for sale equaled about 4 months of sales. From that point, listed inventory rose steadily to level off at about 9 months of inventory. Additional shadow inventory being withheld from the market, such as bank REOs, has kept listed supply at about 9 months for the past two years. However, as housing prices continue to decline, more houses will be returned to banks either through walk-aways or foreclosures, adding to bank’s already significant shadow inventory. In addition, job uncertainty and job immobility due to housing illiquidity continues to add to shadow supply. If demand increases, shadow inventory will flow into the market and continue to depress pricing.

NEW INVENTORY: Demand for new construction is now running at about half of the 1.2 million new homes per year required to fill the needs of a growing population. The excess supply of existing housing and the increasing cost of new construction commodity materials have combined to keep existing housing prices well below the cost of new construction. This price differential not only pressures construction labor rates downward and reduces profitability of the new construction industry, but it causes demand to be filled by existing homes rather than new ones. Therefore the vacant inventory of existing homes is being absorbed at a rate of 600,000 units a year. At this rate, the excess 6.6 million homes that were built during the Ponzi will not be fully absorbed until 2020, extending pricing slide and/or excessive gap for years to come.

VACANCY RATE: At 9.8%, vacancy rates are about 40% higher than the 40 year historical norm. Vacancy rates increased to such historical highs for two reasons. First, housing construction lagged the housing crisis and new units were completed even as the crisis unfolded. Vacancy rates surged as these lagging units came online. Second, as the crisis unfolded, foreclosure rates increased fivefold adding to the rental population. Increased vacancy rates have depressed pricing.

RENTAL RATE: Home ownership unwound from its Ponzi peak rate of 69.9% back toward its historical averages of 65.1% as home owners gave their homes back to the banks and entered the rental market. As a result of increased demand for rentals, the percentage of new construction rental units has increased. In addition the monthly rental rate in many U.S. markets now exceeds monthly mortgage rates. The growing gap in rental versus mortgage costs suggests either that home buyers are unable or reluctant to buy and indicates a lax demand that is depressing pricing.

DEMAND:

PURCHASE RATE: At a rate of 4.9 million purchases annually, housing purchases are occurring at approximately the rate that would be expected had the bubble not occurred and had the trend of purchases extended with population growth from the early 1990s until now. The current rate of housing purchases is slightly below historical standards, but only appears depressed when compared to the excessive standard of the housing bubble. No indicators point to any trends that will materially increase purchase rates for the foreseeable future. Therefore, an extended period of excess housing supply will continue to support a long term downward drift in pricing.

Buyers have left home ownership in droves since the beginning of the housing crisis by either selling, short selling, walking away from mortgages or being forced out through foreclosures and have shifted to either rentals, sharing quarters with others, or becoming homeless. Home ownership has unwound from its Ponzi peak rate of 69.9% back toward its historical averages of 65.1%. Nonetheless, there are no indicators to suggest in this high unemployment and uncertain business environment that home ownership will level off at its historical average of 65.1%. It will likely continue to decrease, depressing demand and pricing further as a result.

REDUCED DEMAND OF SECONDARY MARKET: While the market for credit default swaps still exists and continues to destabilize the world’s economy, demand for CDSs has dropped to half of its peak of $60 trillion at the height of the housing bubble. Demand for underlying CDOs has been hampered by the scandal of claims to title that has rocked the CDO market. During the frenzy of the housing bubble, short cuts were taken that left the chain of title to millions of individual notes in question, threatening legal entanglement for years to come. At the same time, housing value deteriorated, reducing the value of their packaged CDOs and in some cases triggering repayment from their corresponding CDSs. The resulting title debacle collapsed the secondary market for CDOs, squashed the exotic loan supply, lessened demand for housing, and dampened housing pricing.

REDUCED ACCESS TO CREDIT: Banks, that had received bailouts from the Federal Government in its attempt to preserve lending liquidity, instead chose to reserve funds to enhance balance sheets. In addition, without being able to pass risky loans to the secondary market, banks tightened credit criteria and withdrew to more standard loan products, requiring PMI insurance, higher down payments, higher credit ratings, more solid work histories, and historical income to debt ratios. Tighter credit requirements diminished demand for housing and depressed pricing.

Banks also substantially retracted from the credit card market, eliminating 25% of $5 trillion available credit. In addition, banks increased average rates on credit cards from 10.9 percent to 16.2 percent. Buyers had counted on consumer credit to support their short fall between income and housing debt during the bubble, and without it, home buyers lost the ability to carry higher priced homes. Even though the financial crisis eliminated the motive to flip houses for profit and thus removed a primary reason for excessive use of credit card credit, the loss of credit as a cash management tool for existing housing dampened demand and depressed pricing.

SAVING TREND: After the housing bubble burst, consumers prudently used excess funds to pay down loans, eliminating more than a trillion in housing debt, and more than $100 billion of the peak credit card debt. Another $4 trillion is needed to reduce housing debt overhang and close to $800 billion in credit card debt still remains. If the economy and housing prices continue to drift downward, these numbers will grow. The trend toward repayment has subsided somewhat but continues to remove funds from the purchase market and to depress pricing.

INFLATION: While median salaries essentially remained stagnant throughout the housing bubble and beyond, prices for commodities have increased. As food, energy, clothing and other essential commodity prices continue to increase against a back drop of stagnant wages, less income will be available for housing which will dampen demand and depress pricing.

The Fed has signaled that interest rates will be held at essentially zero for the next two years but the Fed may be forced to change its position as external events overtake it. Housing ARM interest rates are threatened not only by creeping inflation but by rating agency threats over continued Congressional inaction, the Fed’s stuffing of long term treasuries with the its Operation Twist, and by potential overflow reaction as the Euro Zone worsens. The mere uncertainty of interest rate increases that would cause more funds to be used to pay interest instead of higher home prices dampens demand and depresses pricing.

POPULATION DEMOGRAPHICS HAVE SHIFTED: The housing bubble was driven in large part by Baby Boomers who controlled 80 percent of America’s wealth. During the bubble, they aggressively added 12 million housing units to the existing inventory of 112 million units, influencing the size and style of new inventory. Boomers reached beyond their means to buy more square footage than they needed or could afford. From the post war 1950s, the average home gradually increased from 258 square feet per person, but during the bubble, size increases swelled to over 960 square feet per person. To fill the square footage void, boomers added immediately obsolescing features such as gargantuan walk in closets, media rooms, sitting areas, and home offices that would not be valued by the following green generations.

The housing bubble burst just as the Baby Boomers began to retire, wanting to shed themselves of large houses. Their 1.7 children were flying from the nest and Boomers now wanted to condo-size. However, the 20 years following the Boomers’ births, 1965 to 1985, produced about one million less babies per year, not enough to absorb Boomer houses. This group of home buyers is now entering their peak earning and peak square footage years at a time of economic slump and increased awareness of energy and space efficiency. Therefore, the demand for large Baby Boomer houses will be diminished as contractors build new houses to meet this group’s desires. Changing demographics will place a downward pressure on Boomer housing pricing that will permeate the entire home market.

PRICE STICKINESS: 28.6 percent of homes with mortgages, or 14.6 million homes, have underwater mortgages. If the cost of selling a home and putting a down payment on a new home is included, then fully 50% of home owners cannot afford to sell their homes now. As pricing drifts downward, this figure will only exacerbate. As a result, would be buyers who cannot take the loss of a sale of their own property are trapped from entering the market, reducing demand, and depressing pricing.

Employers, who used to buy workers’ homes to initiate job transfers have ample local employee choices and can no longer justify the cost, further exacerbating a reduction of demand and thus putting a downward pressure on pricing.

GLOBALIZATION: After WWII, the United States military provided a modicum of economic stability in the world, lessening the risks of businesses transferring operations to overseas locations. As a result, mass transfers of capital and jobs to direct foreign investments increased significantly. With China’s doors opening in 1979, the U.S. flooded China with 40,000 new factories that each took away certainty of America’s future and that accelerated a trend toward wealth disparity and a diminishing middle class. The resulting impact on wage pressures over the past three decades has lowered the expectations of the new generation of home buyers, reducing demand and depressing pricing.

MONETARY IMPLOSION: The artificially stimulated economy of the past two bubble decades hid the underlying sickness of America’s base GDP. When the housing bubble finally popped, our consumer based economy was clogged with both housing and consumer debt that had been diverted from the real economy to feed the housing bubble. After the banks quickly pulled credit to protect themselves from what they knew would be a chaotic implosion, America’s consumer base had no means to continue consuming, the credit engine of small business was stopped even before small business could fulfill its current client requests, and business shortfalls translated to employee layoffs, precipitating a circular implosion of consumers, businesses, and employees wealth and debt capacity.

After the implosion, as the economy lingered without commerce or money creation, debts mounted, credit ratings suffered, and unemployment intensified. The ability of home owners to pay their mortgages decreased which in turn increased mortgage delinquencies and foreclosures and accelerated the deflation of the housing bubble, exposing the housing debt overhang.

The resulting economy now suffers from a trifecta of dilemmas. The greatest bubble America has ever experienced has led to a housing debt overhang that stifles America’s engine of consumption. It has also damaged credit ratings that have pulled American businesses’ and home owners’ access to essential cash management tools and vital growth credit. And it has led to a loss of productive jobs for 25 million Americans who without work cannot help to restore America’s economy. If a simultaneous solution to these dilemmas is not enacted, the economy will spiral lower and will create an environment for a continued downwardly drifting malaise of the housing market.

CONCLUSION:

Since the passage of the National Housing Act of 1949, Home ownership has been heralded as a benefit to American society, supporting stable families and prosperous communities. It has provided the number one source of economic security for the majority of Americans for the past six decades. However, rather than bring hope to millions of Americans that had previously been left out of the American dream, two decades of governmental policies and international banking have led to the gutting of that dream not only for those who could not afford homes previously but for tens of millions more Americans, eroding home ownership benefits in the process.

Rather than the rock of social stability that it could have been, the American home has become the proverbial albatross around the neck of the middle class, draining its limited wealth to keep banks from suffering the consequences of their prior decisions. If Congress is to stop the housing crisis’s deterioration of families and communities across America, and if it is to protect the cornerstone of our economic and national security, Congress must act now to stabilize what, by all indicators, will be another decade of housing pricing decay.

Components of my plan:

Equity for debt swap to remove excess housing debt
http://jobvoucherplan.com/2011/08/04/hawaiians-have-the-hale-housing-solution-to-right-america-housing-bubble/

Job voucher plan to employ all able Americans immediately
http://jobvoucherplan.com/must-reads/

Credit amnesty program to quickly repair business and consumer credit
http://jobvoucherplan.com/2011/09/08/yes-america-can-quickly-turnaround-heres-how/

Modified Republican multinational incentives that entice domestic investment without giving carte blanche tax holiday and that do not entice further foreign domestic investment
https://jobvoucherplan.wordpress.com/2011/10/26/our-economy-can-be-re-ignited-like-a-boy-scout-fire/

Is Congress Punch Drunk?

In 2010, two Democrat Congressmen walk into a bar. One quips to the other, “This unemployment situation is getting pretty bad, how we should focus on it.” The other sternly replies, “I don’t know about you, but I for one am going to make sure they have health care when they finally get a job!”

Punch line: Tea Party

In 2011, two Republican campaign strategists walk into a bar. One says to the other “Hey what kind of slogan can we have for the unemployment situation.” The other one says, “How about – Hey you lazy bum, go get a job!”

Punch line: Occupy Wall Street

Yesterday, two Republican senators walked into a bar. One said to the other, “I am concerned that our free trade legislation created extended high unemployment that has hurt our ability to make good on our pledge to reduce the deficit. What do we do?” “I know”, the other one chirps, “Let’s introduce legislation to significantly shorten the term of unemployment compensation!”

Punch Line: Are you kidding me? These aren’t jokes!

Congress’s obtuse politicians should spend a little less time in bars and a lot more time helping to get Lady Liberty back on her feet.

Political Catch Phrases Only Deter Real Economic Recovery

When starting my quest last November to determine a way to fix our country’s job problem, I hoped that I could draw on the strengths of the American public to collectively create the beginnings of a viable turnaround plan. I determined early on not to be dissuaded by all the catch phrases that both the Republican and Democratic parties used as spin to stop many of our frustrated electorate in their own quest to find the truth only to become dejected and more frustrated.

These spin phrases have worked in part because they have some “Truthiness” in them that wears down many from attempting to dig through the morass. One of the well worn phrases touts the principle that “It’s not the government’s place to create jobs for the masses. The government should limit itself to creating a confident and stable business environment and should otherwise stay clear of free enterprise.” On its surface, the thought has merit and has thus become a flagship of fiscal conservatives.

During periods of “normal” economic times, the government should in fact minimize its foot print and limit its use of the private sector’s capital to essential services. To do otherwise stymies future economic growth and can lead to job losses. Yet, during the peaks and troughs of normal economic cycles, government can help smooth out the highs and lows of the cycle by accelerating or slowing long term purchases of houses and cars and the like through interest rate manipulation and other monetary policy of the Fed. Government sometimes exacerbates the business cycle but nonetheless it can be a useful tool.

During larger recessions, government has sometimes attempted to “fix” the cycle through fiscal policy of Keynesian, government stimulus, big projects like road construction that by their nature add some jobs in certain industries as a “bonus”. In most of these government attempts through our history, the length of time required to enact and to implement such policies has invariably missed the trough of the business cycle and has actually harmed the economy through exacerbation of the already improving business cycle and through increasing our federal debt.

The 1930s of course were an exception in that the Great Depression was not the result of a normal business cycle but was the result of a monetary implosion much like we are experiencing today. While the works programs of the thirties did help feed a hungry nation, they did not heal the economy for several reasons. First, they created government jobs working on public infrastructure like parks that have been a blessing to future generations but that did not aid the economy, or they created government jobs that actually helped the future economy but did not help their current economy significantly. These jobs created business improving infrastructure like electric dams that created inexpensive power and flood control dams that aided future crop stability. Second, because these government jobs did not actually increase GDP, the Great Depression’s extended contraction was exacerbated by an increasing debt load. Third, even though some people now had government jobs, not enough jobs could be created by government and unemployment still remained exceedingly high throughout the Depression. Forth, even though some people now had jobs, these same people could not afford to stimulate the economy because their new pay barely covered debt loads that were incurred as they fell into the Great Depression. As a result, no pay was left over to create additional consumer demand for private sector companies to create more jobs. Fifth, even though some people had new government jobs, their credit ratings had been destroyed as the nation fell into the depression. Even though some new workers could now afford new loans that could increase consumer demand, it would take years for their credit to be restored in order for banks to make new loans to them. Finally sixth, even though some people had new jobs, the banks would not lend into a shaky economy where overall demand was low and unemployment was high.

The monetary implosion that began in 2008 is somewhat different than in the 1930s because many American businesses are multinational corporations that have been buoyed by the double digit growth of the East. As a result, America’s technical definition of a “depression” has not occurred. However, the 2008 monetary implosion has had a very similar impact on America’s middle class as did the 1930s. It has created excessive housing and consumer debt, destroyed credit and collapsed the demand for jobs. America’s free enterprise will not pull American families from this monetary implosion for another 15 years without fundamental restoration of our capitalist system. That necessarily requires government intervention to repair our international banking excesses.

The recent government programs that applied Keynesian stimulus and Fed monetary policies failed to right our economy because they attempted to fix the wrong problem. America is not in a recession. It is suffering from a monetary implosion and debt explosion. The government programs of the 1930s failed to quickly restore America because Government did not attempt to repair all of the failings of capitalism. My plan recognizes that we are not in a normal or even exaggerated business cycle that could be fixed by stimulus or monetary manipulation. It also recognizes that government make work will not fix the economy either. Instead it provides a holistic healing of our capitalistic economy.

My turnaround plan requires the banks to accept shared equity in housing in return for removing excess housing debt from homeowner’s notes. It requires the credit rating agencies to speed restoration of credit ratings for those caught by the 2008 depression so that additional credit is available to restore consumer and business demand. And it provides for simultaneous hiring of 10 million people into the private sector that otherwise would be collecting long term unemployment compensation. The compensation that they would have received for sitting out our economy instead passes through the hands of small domestic businesses, reducing their risk of hiring, lowering their costs of supply, improving their international competitiveness, and making their goods and services more affordable to the American public.

Rather than government make work or stimulus jobs targeted to a very few select industries, this turnaround plan allows people to be hired throughout the domestic, private, small business economy. All citizens have the opportunity to return to the workforce immediately. All have the opportunity to restore their credit. All have the opportunity to stay in their houses and to make affordable payments on their own property. All have the wherewithal to incrementally add to the nation’s consumer demand and to create worldwide demand for America’s products. All will help America return to prosperity.
All will become part of a holistic plan, endorsed and enforced by government, that will turnaround our country.

Without a Bold Jobs Plan, the Democrats will Lose in 2012

The latest polls predict that the Republicans will maintain a lead in the House and may obtain a filibuster proof majority in the Senate in the 2012 election. With the White House, the Republicans could cause sweeping reforms through Romney’s plan or what is sure to be a new Gingrich “Contract with America”. It will amount to a complete victory of the Republican strategy that has played out since the election of the 112th Congress.

The American people know that Republicans have been stalling. We do not think they put the interests of Middle America first. However, we also intuitively know that a continuation of this political stalemate will not improve our lot and that the Democrats seem impotent to stop it. At some point, staying put by the wreckage on the mountain becomes deadlier than attempting to climb down the icy path to safety. America is ready to risk a change in 2012.

If no major policy changes are introduced by either party, the Republicans will win. As a result, America will get regulation “reforms”, budget cuts in discretionary spending and entitlements, lower taxes and tax holidays on international profits, and more “free trade”. We will likely experience an initial downturn in GDP and higher unemployment, a furthering divide between the wealthy and poor, lesser services, and increased austerity, followed by gradual job growth and recovery as longer term Republican measures begin to affect the U.S. economy.

The outlook is not bright but America will endure the pain because we fear the status quo more than change. We hope the pain endured as a result of a vote for Republicans will be followed by the possibility of gain. Republicans know this and have no interest in any compromises that will change their strategy unless cornered by opposition political spin. This provides a perplexing and difficult strategy ahead for the Democratic Party.

To win in 2012, the Democrats have only three choices. Their first is the continued dangerous path of one upsmanship to see who can make the other look like a worse cretin in the eyes of the American public to eke out a slim majority. The second is to co-opt the Occupy Wall Street movement in an early 2012 grass roots political campaign that emphasizes the 99 percent. This strategy relies on a hoped for uprising that will result in what the Democrat elites might consider as an unruly Tea-Party-like caucus for the progressive leadership to attempt to corral within the Democratic Party after the elections.

The third path is to ignite the fifty million workers that were marginalized by the 2008 crisis through a bold turn-around strategy. A viable plan initiated early in 2012 including a direct jobs program, a housing debt to equity program that keeps people in their homes, and a rapid recovery of business and personal credit through credit amnesty, will engender the voters to the Democratic Party whether or not it is enacted by the 112th Congress. A bold plan that co-opts the Republican Party philosophy by offsetting its cost with elimination of long term unemployment compensation and by creating jobs within the private, domestic sector, will not only embolden the electorate but will create vote yielding indignation if the Republican Party refuses to participate.

2012 will be an election year unlike any since the Great Depression. Either the Republicans will win through attrition of America’s will, or one bold party will present a viable, rapid, 15 million direct jobs plan to cause the independents and the other party’s faithful to shift their votes in droves. 2012 can be won and residual victories over the next two to four years should be expected for the party that moves first. The lamb and the lion will lay down together in the party that welcomes them with jobs in 2012.