Bankster Bailouts Did NOT Save Us from the Second Great Depression

It is a widely held belief that the bailout of the banking system prevented the second Great Depression. This belief is wrong.

Today's featured high-end property is scheduled for auction on April 28th. Will the short sale be approved in time?

Irvine Home Address … 7 BUELLTON Irvine, CA 92602

Resale Home Price …… $1,224,800

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Monday finds you like a bomb

That's been left ticking there too long

You're bleeding

Some days there's nothing left to learn

From the point of no return

You're leaving

Hey hey, I saved the world today

And everybody's happy now

The bad thing's gone away

And everybody's happy now

The good thing's here to stay

Please let it stay

Eurythmics — I Saved The World Today

Did our brilliant politicians and the cool heads at the Federal Reserve save the world? Popular public opinion says yes. Me and many other astute observors say no. The only thing our collective actions has accomplished is to stop a group of greedy and ignorant fools from experiencing the consequences of their actions. Instead, the consequences have been passed on to us in the form of huge government bailouts and locally inflated house prices.

Blame It on the Bubble

Dean Baker

Politicians and the media continue to refer to the economic downturn as being the result of a financial crisis. This is wrong. We have 15 million people out of work because the housing bubble that drove the economy since the last recession finally burst. The financial crisis may have been good entertainment for those who like to see huge banks collapse, but it was a sidebar. The real story was the rise and demise of the housing bubble.

Those who claim that the real problem was the financial system and its faulty regulation can be disproved with a single word: Spain. Spain is noteworthy because it now has an unemployment rate of more than 19%, the highest rate in any of the wealthy countries. Spain did not have a financial crisis. In fact, its well-regulated financial system is often held up as model for the United States.

Spain did have a horrific housing bubble. As a result, the share of construction in the economy rose from less than 8% of GDP at the end of the 90s to 12.3% in 2007. By comparison, it is typically less than 6% of GDP in non-bubble years in the United States. This rapid rate of construction led to enormous overbuilding, which meant that a collapse was inevitable with construction falling to far below normal levels.

The run-up in house prices also had the predictable effect on consumption. Because people believe that the run-up in house prices is based on fundamentals, homeowners assume that their newly created housing wealth is real and they spend accordingly. Spain's saving rate fell from just under 6% in 2000 to 3% in 2007. When the housing wealth created by the bubble disappeared people naturally cut back their consumption.

This is Spain's crisis. According to the IMF, housing starts in Spain fell by 80% from the peak of the boom. While total construction has not fallen as much (repairs and non-residential construction did not decline nearly as much), if construction in Spain fell by 50%, this would imply a loss in annual demand of more than 6% of GDP. That would translate into a drop in demand of more than $800bn in the United States.

Similarly the loss of housing wealth reverses the housing wealth effect. If consumption fell enough to return the savings rate to its pre-bubble level, then this would imply a loss in annual consumption demand of more than three percentage points of disposable income. In the US this would amount to more than $300bn in lost annual consumption.

There is no easy mechanism to replace more than $1tn in lost demand. This is why Spain's economy is in a severe slump right now. Note that just about all analysts agree, Spain's financial system was well regulated and it had none of the loony loans and outright corruption that pervades Wall Street and the US financial system. Yet, it is suffering from this economic downturn even more than the United States.

The moral of this story is that the problem is not first and foremost a financial crisis. It might be fun to watch the Wall Street and government boys sweat as they stay up late trying to keep the big banks from drowning in the cesspools they created. But this is all a sideshow. No one saved us from a "second Great Depression," they just saved the jobs and wealth of the Wall Street crew.

The economy's real problem is simply the loss of demand created by collapse of the bubble. Throwing even more money at the banks is a way to ensure that they don't suffer from the consequence of their own greed and stupidity. It is not a way to restore the economy to health.

Restoring the economy to health is about finding a replacement for the demand lost as a result of the collapse of the bubble. In the short-term, this means increased government spending and tax cuts. Deficits put money in the economy, and using the old-fashioned view that people work for money, we can determine how much money we need to spend for the government to get the economy back towards full employment levels of output.

In the longer term, we need to move towards more balanced trade, with higher exports and fewer imports making up for the demand lost due to collapse of the housing bubble. This will require a lower-valued dollar – everything else in the trade picture is just for show.

We do need financial reform. We have an incredibly wasteful and reckless financial industry. But bad financial regulation by itself did not give us 10% unemployment, nor would good regulation have been sufficient to prevent it. Just ask the workers in Spain.

I have profiled hundreds of cases of HELOC abuse (or use depending on your point of view). This was an enormous economic stimulus that is now gone, and it isn't coming back. Our current economic woes are largely caused by the loss of HELOC demand and the unemployment caused by laying off most of the building industry and much of the finance industry. We still don't know how to replace that demand. We probably won't.

Why did we bail out the banks? We could have wiped out all the equity and bond holders, recapitalized with taxpayer funds, then sold the public interest later. Sweden did this in the mid 90s, and it worked well. The only reason we did not do this is because the equity and bond holders like Goldman Sachs control our government and knew they could pass the losses off to us.

Carte Blanche for the Banksters

Mike Whitney: fergiewhitney@msn.com

Housing is still on the rocks and prices are headed lower. Master illusionist Ben Bernanke has managed to engineer a modest 7-month uptick in sales, but the fairydust is set to wear off later this month when the Fed stops purchasing mortgage-backed securities (MBS). When the program ends, long-term interest rates will creep higher and sales will begin to flag. The objective of Bernanke's $1.25 trillion quantitative easing program was to transfer the banks’ toxic assets onto the Fed's balance sheet. Having achieved that goal, Bernanke will now have to find a way to unload those same assets onto the public. Freddie and Fannie, which have already been used as a government-backed off-balance-sheet dumping ground, appear to be the most likely candidates.

Bernanke's liquidity injections have helped to buoy stock prices and stabilize housing, but the economy is still weak. There's just too much inventory and too few buyers. Now that the Fed is withdrawing its support, matters will only get worse.

Of course, that hasn't stopped the folks at Bloomberg News from cheerleading the "nascent" housing rebound. Here's a clip from Monday's column:

"The U.S. housing market is poised to withstand the removal of government and Federal Reserve stimulus programs and rebound later in the year, contributing to annual economic growth for the first time since 2006. Increases in jobs, credit and affordable homes will help offset the end of the Fed’s purchases of mortgage-backed securities this month and the expiration of a federal homebuyer tax credit in April. ‘The underlying trend is turning positive,’ said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York."

Just for the record; there have been no "increases in jobs". Unemployment is stuck at 9.7 percent with underemployment checking in at 16.8 percent. There's no chance of housing rebound until payrolls start to rise. Jobless people cannot afford to buy homes.

I discussed the lag between the peak in unemployment and the bottom of house prices in UCLA Anderson Forecast 2010 with a chart from Calculated Risk:

The lag is caused by the foreclosure excess from the bubble that preceeded the recession. House prices really could turn up in 2010 if we were not facing a five-year overhang of foreclosures and distressed property owners who will sell at breakeven when given the chance.

Also, while it is true that the federal homebuyer tax credit did cause a spike in home purchases its effect has been short-lived and sales are gradually returning to normal. It's generally believed that "cash for clunker-type" programs (like the homebuyer tax credit) merely move demand forward and have no meaningful long-term impact.

So, it's likely that housing prices — particularly on the higher end — will continue to fall until they return to their historic trend. (probably 10 to 15 per cent lower) That means more trouble for the banks which are already using all kinds of accounting flim-flam ("mark-to-fiction") to conceal the wretched condition of their balance sheets. Despite the surge in stock prices, the banks are drowning in the losses from their non-performing loans and toxic assets. At the same time, they're about to get hit by the next wave of Option ARMs and Alt-As resets which will require another $1 trillion in financing.

I enjoy writers with a clear grasp of the situation.

So, let's summarize:

1–Bank bailout #1–$700 billion TARP which allowed the banks to continue operations after the repo and secondary markets froze-over from the putrid loans the banks were peddling to credulous investors.

2–Bank bailout #2–$1.25 trillion Quantitative Easing program which transferred banks toxic assets onto Fed's balance sheet (soon to be dumped on Fannie and Freddie) while rewarding the perpetrators of the biggest financial crackup in history.

3–Bank bailout #3–$1 trillion (or more) to cover all mortgage cramdowns, second liens, as well as any future liabilities including gym fees, energy drinks, double-tall nonfat mocha's, parking meters etc. ad infinitum. Basically, carte blanche for the banksters.

And as far as the banks taking "haircuts"? Forget about it! Banks don't take "haircuts". It looks bad on their quarterly reports and cuts into their bonuses. Taxpayers take haircuts, not banksters. Besides, that's what Geithner gets paid for–to make sure bigshot tycoons don't have to pay for their mistakes or bother with the niggling details of fleecing the little people.

It is hard to argue with the author's conclusions about the behavior of our government and the banksters. We have bailed them out and in the process provided them with the money to lobby and fight any real financial reform that might cut into their profits.

We have created moral hazard. Lenders know they can take unlimited risks an we will absorb the losses.

We are pwned. Our leaders have failed us.

“Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves.” — Andrew Jackson

Featured Property

  • This property was purchased on 4/17/2006 for $1,580,000. The owner used a $1,000,000 first mortgage, a $580,000 down payment, and simultaneously opened a $422,000 HELOC which probably wasn't used as purchase money (there is no way to be sure).
  • On 1/16/2007 the owners refinanced the first mortgage for $1,268,000 and opened a stand-alone second for $158,000.
  • Total property debt is $1,426,000

Foreclosure Record

Recording Date: 10/27/2009

Document Type: Notice of Sale (aka Notice of Trustee's Sale)

Click here to get Foreclosure Report.

Foreclosure Record

Recording Date: 07/22/2009

Document Type: Notice of Default

The owners must feel good about the refinance that pulled their cash out of the property. They are stil going to lose $150,000 to $200,000, but they are passing much of the loss on to the lender.

Gazumping Short Sales

Have you heard the term gazumping? According to Wikipedia,

"Gazumping" is to refuse to formalise a property sale agreement at the last minute usually in order to accept a higher offer.

This phenomenon is not common here in the United States as it is in England because our purchase and sale agreements are binding; however, gazumping is alive and well in today's market with short sales and trustee sales.

Most short sales go to auction. When they do, all short sale offers are void because the previous owner is no longer in control of the property. Now that we can help people transact in the trustee market, we can gazump short sale offers. If you are in a back-up position — or even primary for that matter — if you want to ensure you get the property, you should be sending us to the aution just to make sure.

Irvine Home Address … 7 BUELLTON Irvine, CA 92602

Resale Home Price … $1,224,800

Home Purchase Price … $1,580,000

Home Purchase Date …. 4/17/2006

Net Gain (Loss) ………. $(428,688)

Percent Change ………. -22.5%

Annual Appreciation … -6.3%

Cost of Ownership

————————————————-

$1,224,800 ………. Asking Price

$244,960 ………. 20% Down Conventional

5.11% …………… Mortgage Interest Rate

$979,840 ………. 30-Year Mortgage

$256,792 ………. Income Requirement

$5,326 ………. Monthly Mortgage Payment

$1061 ………. Property Tax

$333 ………. Special Taxes and Levies (Mello Roos)

$102 ………. Homeowners Insurance

$145 ………. Homeowners Association Fees

============================================

$6,968 ………. Monthly Cash Outlays

-$1466 ………. Tax Savings (% of Interest and Property Tax)

-$1154 ………. Equity Hidden in Payment

$491 ………. Lost Income to Down Payment (net of taxes)

$153 ………. Maintenance and Replacement Reserves

============================================

$4,993 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$12,248 ………. Furnishing and Move In @1%

$12,248 ………. Closing Costs @1%

$9,798 ………… Interest Points @1% of Loan

$244,960 ………. Down Payment

============================================

$279,254 ………. Total Cash Costs

$76,500 ………… Emergency Cash Reserves

============================================

$355,754 ………. Total Savings Needed

Property Details for 7 BUELLTON Irvine, CA 92602

——————————————————————————

Beds: 5

Baths: 3 full 1 part baths

Home size: 3,627 sq ft

($338 / sq ft)

Lot Size: 7,617 sq ft

Year Built: 2002

Days on Market: 271

MLS Number: S580023

Property Type: Single Family, Residential

Community: Northpark

Tract: Hunt

——————————————————————————

According to the listing agent, this listing may be a pre-foreclosure or short sale.

Excellent interior deep cul-de-sac location, huge pool size lot, impressive curb appeal with flagstone/brick walkway, main floor bedroom/bath plus den/office, elegant entry w/cathedral ceiling/travertine floor, formal living/dining rooms w/wrought iron, gourmet kitchen w/sit-up center island, granite countertops, upgraded cabinets w/glass display, stainless appliance package, five burner cooktop, butler's pantry w/dual wine compartments, work desk, fireplace w/custom mantel, built-in media center, surround sound, decorator paint, crown moulding, shutters, ceiling fans, high baseboards, inside laundry w/sink, master suite extends to lavish bath w/travertine floor, separate shower, deep oval soaking tub w/marble surround, twin china sinks, individual vanity, professionally designed front/backyards w/patio cover, built-in counter space, fountain, garage w/epoxy floor, resort life-style amenities: pools, parks, spas,meandering greenbelts, clubhouse, tennis/sports courts

/w is annoying. Reading through slashes is very difficult.

Prior to decorating this house, the owners must have taken a trip to Italy and toured the great Italian Villas and the Sistine Chapel.

Can you picture Michelangelo lying on his back on a scaffold painting this ceiling?

Do you like the view of the grounds of your Italian Villa?

I like this property. I think that means I have no taste….

58 thoughts on “Bankster Bailouts Did NOT Save Us from the Second Great Depression

  1. Freetrader

    It’s OK IR. I also like this property “ironically.” I wonder if somebody actually painted Roman garden on the wall, or if it is some kind of print? If it’s hand painted, it would be so tacky that it’s kind of cool.

    “You went full retard! Everybody knows — never go full retard!” – Kirk Lazarus

    1. IrvineRenter

      I believe it is hand painted. Look at the leaves and vines that extend onto the nearby arches and columns. And I agree, it is so tacky that it’s kind of cool.

      1. SoOCOwner

        It’s very easy to go overboard with the ‘faux’ stuff. This house is teetering on the brink of overboard. Nicely done ‘faux’, though.

        1. SoOCOwner

          If you look at today’s ‘lovelylisting.com’ entry, you will see an example of BAD faux painting. Very bad.

          1. Art Student in Atlanta

            ZOMG…

            The listing before that is possibly even worse. As for this house. It is one thing to paint this on your own or have this type of work done with your own money on a house you own outright, but to do this on a property you really do not own(mortgaged) that are supposedly worth over a million dollars is beyond tacky. I want to use the term criminal neglegence. The property was technically owned by someone else and this work has rendered them almost unusable to someone else. It might have been better if they ripped all the copper and pergenteel countertops(I am sure they only went for the very best in tacky fake marble) out of the house. That can be replaced. To even try to remove this off of the house would require house of work just to remove the paint.

            I love artistic expression, this just seems more like vandalism to me. I don’t think art should cause damage to another person, place, or thing. I believe this does that. I would file this under kitsch.

          2. AZDavidPhx

            It’s definitely bizarre. The housedebtors had some kind of a hard_on for some kind of foreign palace.

            Sort of like an American wearing an Asian Calligraphy tattoo. Sounds cool when you are drunk but a few years later you wonder WTF you were thinking and what the quickest painless way is to get rid of it.

          3. Art Student in Atlanta

            WTF…

            What the hell is someone going to do with a *$#@ing castle?! They also want 7.9 million for this thing! Who wants to take bets that some genius at a bank decided to finance this thing for 100% of its original value? This castle is located in the mountains, it it pretty far from everything.

            I will look up its finance situation it might be comical. Thanks!

    2. Long Beach

      I actually like the painting. After so many blandly tasteful properties, it’s fun to see something with personality and originality.

  2. Sue in Irvine

    Way overboard on the walls, ceilings, and floors.

    Don’t forget you’re over it. Remember?

    1. AZDavidPhx

      Wouldn’t it make you feel like you are living some kind of a lie? If I had to live in that, it would be a slap across the face each time I looked at that wall. “You are not in Italy – this is all fake imagery – You are a fraud” would be thoughts going through my mind.

  3. adeline

    “Bailouts Did NOT Save Us from the Second Great Depression”

    Totally agree, Every dollar we print now, we actually lose 50 cent.

    In the ancient time, if people cannot hunt for the food, they will hungry to die, then human find a way to trade money for food. Today people can loan money from credit card.

    During the 1st GD, there is no globalization and no unified monetary policies, each country is by his own in terms of financial co-relationship.
    Today US dollar is an international monetary tool and US is the only country has privilege to print money freely (but with obligation to pay back).
    Fed and Bernanke try to scare people that if we don’t keep printing huge amount money, we will have GD II. Pritning money is one way to save economics, but not a profitable way: Every dollar we print now, we actually lose 50 cent.

    We and our children need to pay back in the future. I predict this will happen much faster than you can image.

    1. Geotpf

      Maybe bailouts didn’t, but government spending sure did. Lots and lots of government spending. WPA infrastructure projects to start and bombs and planes and tanks to finish.

      1. adeline

        Save Wall St. 1st and then people.

        Obama is so smart, and know how to KO his political enemies. I can only compare him with Mao Zedong.

        Republicans please give up you fight completely, for your own and also for you country. The more your fight the more embarrasses you will be, after the 1st bail out St. and re-nominate Bernanke, there should be no more fight.

        Wait until 2016. But time will give us a fair judge.

    2. Print and Lose value

      Those of us who have savings lose a percent of our net worth every time a dollar gets printed beyond what is justified by economic expansion. We may not see the loss immediately but the loss will materialize sooner or later. We actually lose a % of our salaries as well.

      With easy monetary policy, we also lose about 3% to 5% a year due to the Federal Reserve crowding out savers when banks borrow from the Feds at 0% instead of paying savers the higher rate.

      1. AZDavidPhx

        This is true, but who is going to cry for change when the culture is hell bent on save nothing and live beyond your means?

        1. Print and Lose

          The morale of what I said is that we, currently, are paying something for the bail-outs, and we’re NOT passing it all down to the children. Sure, some way, somehow, the kids will pay some of it as well.

  4. Geotpf

    Yesterday, I posted a house with the same square footage in Hemet as the one shown in Irvine. (The price difference was $115k vs. $715k). Let’s do that again today, shall we?

    http://www.redfin.com/CA/Hemet/1869-Overland-Ct-92545/home/8170226

    For Sale (MLS-listed)
    $180,000

    1869 OVERLAND Ct
    Hemet, CA 92545
    Beds: 5
    Baths: 4.5
    Sq. Ft.: 3,698
    $/Sq. Ft.: $49
    Lot Size: 0.32 Acres
    Property Type: Residential, Single Family
    Style: Two Level, Other
    Year Built: 2005
    Community: Hemet/San Jacinto
    County: Riverside
    MLS#: P683300
    Source: SoCalMLS
    Status: Active This listing is for sale and the sellers are accepting offers.
    On Redfin: 352 days

    Approved Short Sale. No long time waiting. Back to Market as of 3/8, Buyer did not perform, looking for serious buyer that can close quick. GREAT OPPORTUNITY. 5 Bedroom, 4.5 bath in beautiful Willowalk Community. Large open rooms, big open kitchen with built in appliances, formal dining room, laundry room, master bedroom with walk in closet, Fireplace in Living room, Huge lot 13,939 sq ft. This beautiful home is looking for a new Owner.

    Just a reminder that you aren’t buy a house when you buy a house in Irvine, you are buying a tiny lot in a particular corner of the world that happens to have a house on it.

    1. Perspective

      I understand your purpose, but you might as well throw in a house from Detroit to make the comps.

      Hemet is a nasty place.

      1. TACOSHARK

        I say use Corona as a comparison. Its close enough to jobs in Irvine because of the 241 and has many new comparable houses. Hemet/Riverside is to far for someone considering Irvine real estate.

      2. Geotpf

        Well, your average house in Detroit would be seventy years old and missing all it’s plumbing, windows, and roof. This house is five years old, and while it appears to be “builder’s grade” (tile counters instead of granite, etc.), it also appears to be in good shape with a modern floor plan, very similiar to the Irvine house (sans radical paint scheme).

        A similiar house in Corona would cost twice as much this Hemet house. Still less than a third of the Irvine house.

        My only point here is that, these days, 85% or so of the cost of an Irvine house is for the land. Transport this house to Hemet or Iowa or elsewhere in the vast majority of the country, and the house itself is worth $150k or so (probably less than construction cost).

      1. AZDavidPhx

        They call THAT a ghetto?

        Because someone tried to steal a van?

        Call back when the drug pushers hit the street corners and stray bullets are whizzing past the breakfast nook.

        1. newbie2008

          Hemet is having a rash of crime. Attempted bombings on the police and setting city cars on fire.
          Will it be another Gary, IN?

  5. newbie2008

    RR: A recession is when my neighbor is out of work. A depression is when I’m out of work.

    With 10% unemployment, 17% underemployment, 20% with “discouraged worker,” those that gave up. We are essentially in a depression if your income is dependent upon working. If you’re a bankster or on federal payroll, happy days are here again.

    AzDavePhz, Here’s a quote for govt encouraging education and thinking, but a little is lost in the translation and memory.

    Thoughts are more dangerous than guns. We don’t allow our enemies to have guns. Why sould we allow people to have thoughts (thinking)?

    IrvineRenter,
    The purchaser was bright. He didn’t fully game the system, because he bought at the near high. IMH-NLO: the one action rule applies with some residual liability on the second. The first bank is using its one action on a trustee sale. The “owner” is likely loss $230,000 of his own money ($154k down plus discounted second), but his downside is mitigated with free rent and no property taxes. If he connected, maybe 2 to 3 years of free rent-taxes at $60,000 per year?

    Do you think the second bank will settle with less than 30 cents on the dollar and be made whole by the federal govt?

    I agree with you, the house looks very nice.

    1. AZDavidPhx

      Carlin said it best that people would rather stroke themselves. People calling this a recession are just stroking themselves. When the history books are printed 100 years from now this period will be the known as the second depression.

      Thoughts are not dangerous if you can influence the majority of them. Get people thinking about Ricky Martin’s social life instead of how badly they are being ripped off. Oh and make them feel very afraid of terrorists around every corner. Did you see how the bombing in Russia yesterday caused NYPD to dispatch their militia of soldiers carrying M16s and wearing full body armor into the Subways? Quite a demonstration to the masses I say.

      1. newbie2008

        I consider people thinking about the headline news of Tiger, Ricky, etc. being amused, i.e. a diversion of thought or thinking. In other words: not thinking.

        The govt, media, bankster complex is trying to keep the people amused and not able or willing to think about issues and about indirectly mortgaging our children into indentured servitude. “People would rather die than think. And most do.”

        The BS of the USA entering as a service economy was big dogma in the 1970’s. Too bad being a protein food rotation engineer at Burger King as not provided growth opportunity to the masses. Most of the well paid service sections has been in repackaging money or companies. Drain the cash and technology out of the company and sell it again. A very sickly company is left at the end, but what’s it to them, they had great ROI’s for a generation.

        Most private sector Ph.D. levels jobs in America has lost ground in the last 10 years. The die was cast about years ago.
        MD’s will likely loss ground next because the die is being cast today. MD’s have professional schools and licensing to slow down the their decline.

        1. Thank the AMA

          Doctors can thank the AMA for pressuring medical schools to limit the number of medical students who get admitted; thus, limiting the supply of doctors, and keeping their salaries and income high.

    2. avobserver

      We are in DP II. But of course the official announcement will not come out until maybe 2020. What separates recession from depression in modern days is long duration of stagnation and lack of sustainable recovery. Gov’t spending and central bank QE programs do not cure the disease but can mask the symptoms and reduce ongoing pain for long stretch at a time. Even during GD I and Japan’s lost 2 decades sporadic (sometimes rapid) GDP growth and market rallies interspersed with equally severe declines in short intervals. Temporary expansions spurred by fiscal and monetary stimuli have no lasting effect and economy reverses its course once the gov’t spending/QE induced high wears off.

      Even unemployment rate does not tell the whole story. If you replace 10,000 high paying IT/manufacturing jobs with 10,000 Walmart jobs, unemployment rate remains the same. If most of the realtors in CA make less than half what they made during bubble years, unemployment rate remains the same. For years housing bubble masked the stagnation of American household income, but the housing/financial crisis inadvertently accelerated this downward drift of income.

      The current policies are focused on supporting (bailing out) both ends while squeezing the middle (or more precisely, the responsible middle), until the middle is gone and 90% of population collectively settles for a standard of living several notches below where we are today.

      1. Good analysis

        Good analysis. Good analysis. If high paying (hint: manufacturing) jobs are not increased, then it’s inevitable that we’ll see a decreased standard of living. Ok, we have a great agricultural sector which employs about 2% of the population but how can the rest of the 300 million U.S. people be supported by service jobs alone? I think agriculture and manufacturing are the main part of the economic pie that services are built around (example: insurance, health care, entertainment for the factory worker/builder/manager/farmer). But if we do not have enough actual goods to peddle, what do we build the economy around?

        1. Geotpf

          Manufacturing jobs are not high paying and never have been. A doctor is high paying. A scientist potentially can be high paying. An engineer is high paying. A computer programmer is high paying. A lawyer is high paying. Heck, even a plumber or auto mechanic can sometimes be high paying. All of these require a degree and/or specialized training. The only high paying manufacturing jobs are those with specialized skills (a jeweler perhaps), or those that are heavily unionized or protected by government action (high tariffs, perhaps). But barring that, almost all manufacturing jobs are low skilled and therefore low paying.

          The only difference now is that poorer countries are now advanced enough, and world trade is advanced and free enough, that it makes economic sense to build a factory in China or Mexico instead of the United States.

          1. nefron

            Ahhh, Geotpf, you aren’t thinking about union jobs in industries like steel and automaking. I didn’t grow up in SoCal, but I think the aerospace manufacturing jobs were like that, too. Those were manufacturing jobs that paid a good enough wage for a blue collar worker to buy a modest house in burbs and send kids to the local college. And they got a pension. That was what was happening in the 1950’s, 1960’s and 1970’s. Those jobs are just about gone, to Japan and more recently, China, I believe.

          2. Good Analysis

            When I mentioned manufacturing jobs, I did not exclude the scientists and engineers but I included them as they are workers as well – regardless of titles and they are needed for manufacturing. It makes sense in the short term to export jobs to China or India but after they have had enough of our dollars, what are we going to give them in exchange for their goods? Also, a regular factory worker is not highly paid but definitely makes much more money than a cashier at Target. And doctors? Doctors will have to accept less money in real terms than now if everybody’s standard of living declines. The same goes for lawyers salesmen…etc.

          3. scientist

            The hour pay for a scientist is very low to start with and get to be middle class wages later. They are expected to work 50-60 hours without overtime pay. Graduate school is 5+ years working 6 day/week 11 hour days, 2+ years post-doct training with similar hours and all for $60,000 to $70,000 for the first real job that’s “exempt” from overtime. Their real wage has been going down for the last 15 years or more.

    3. zubs

      Speaking of education, I am seeing more and more ads & commercials for private colleges like Phoenix and Everest lately. Is it because the government is now going to begin funding student loans instead of private banks?

      I find it funny that people would go into debt at $20,000 ~ $200,000 just to go to college, and come out to find no job or a job that doesn’t need an advanced degree.

      The private colleges just seem to be a scam for government student loan money. I’m looking at DeVry, Phoenix, Everest, etc….

      1. Perspective

        Don’t stop there. Those schools are “bottom of the barrel” institutions, but “real” private colleges are turning-out grads with near-six-figure debt to fight over scarce jobs paying a fraction of their debt. And then there are the law schools today graduating attorneys with $200k+/- debt and no real prospects.

      2. Laura Louzader

        Zubs, what do you mean,” begin funding student loans”?

        The government has been funding student loans for 30 years now, and it has been the EZ money for non-dischargable student debt that has not only caused the nightmare inflation in college tuition, but has totally degraded our colleges and universities, and spawned hundreds of garbage private and online colleges that charge as much as $40K a year for inferior “education”.

        Worse, the Sallie Mae and Stafford loan troughs have enabled the formation of dozens of new law schools that are inundating the law profession with 45,000 new JDs every year, way beyond the usual demand for newly minted lawyers. I have a young relative who has rung up $200K in post-graduate college debt to attend law-school, and I hope she can get employed at a salary that will enable her to service this monster debt and still live. Whether she will ever be able to realize the kind of income that justifies it in such an overcrowded field is questionable.

  6. es

    The Dean Baker article misses a critical point that obviates his premise: the fact that Gramm/ Leach/ Bliley allowed I banks and regular banks to merge, thereby allowing I banks to use depositor funds to gather more leverage to make progressively larger derivative trades. Furthermore, simple regulation such as barring derivatives from being given a AAA rating probably would have had profound consequences in derivative trading. Would the demand for mortgage backed derivatives have skyrocketed had they had more appropriate credit ratings? Would mortgage providers such as Countrywide had the impetus to loan to people with no verifiable income or worse yet, knowing they couldn’t afford their loan? I highly doubt it.

    Does Spain have such regulation of derivative trading? Or did their bubble lead to a recession in a different way?

    This article is conclusory at best. Belongs at Foxnews.com along with the birthers and the death panel screamers.

    1. IrvineRenter

      That does bring up the question as to what financed the Spanish housing bubble. I don’t know the answer. Perhaps it was from overseas money that came from derivatives.

      You point is well taken. The bubble would not have inflated to the degree it did without stupid money coming through securitization.

  7. oc bear

    The unintended consequence of bailouts and accounting gimmicks was that they did not control the mortgage revenue stream into the banks. Banksters just assumed it would remain constant. Debtors are weighing their options — Eternal debt or 12 to 18 months free rent. I have an idea which choice is going to be more popular in the near future.

  8. Gemina13

    I went to meet a friend for lunch today. I passed yet another two lots where the houses were being torn down to the pads. As I pulled into the parking lot, I heard a commercial. “Learn how you can make a fortune in real estate! Real estate millionaires are being made every day!”

    I laughed myself into a coughing fit. Remember, this is Phoenix, and we’ve already experienced up to 50% price drops in housing. When Fulton Homes runs the same “we’ve sold 200 homes in the last 60 days” from October ’09 to March ’10, you know nobody’s making any money in real estate.

    As for the house shown above . . . I must have no taste either, because I love it. It’s totally unlivable. It’s a piece of candy-studded kitsch. And if I had the cash, I’d buy it in a hot minute, just to have someplace this Godawfully fabulous where I could have my friends over to party to the strains of “Purple Rain.”

    1. Geotpf

      There is plenty of money to be made in flipping properties, even in a depressed market. If you can buy a property at 50% off peak and sell it for 30% off peak, you just made money.

      Let me give you a random example here in Riverside:

      http://www.redfin.com/CA/Riverside/6697-Jerome-St-92504/home/4906462

      Here’s the sold records of the house:

      Mar 25, 2010 Sold (MLS) $145,000 — Inactive MRMLS #W10001811
      Dec 03, 2009 Sold (Public Records) $94,500 -18.8%/yr Public Records
      Dec 30, 2004 Sold (Public Records) $264,000 24.0%/yr Public Records
      Feb 16, 2001 Sold (Public Records) $115,000 2.1%/yr Public Records
      Jun 01, 1989 Sold (Public Records) $90,000 — Public Records

      The property was bought at 64.2% off peak and sold at 45.1% off peak. The flipper clearly put work into it (new landscaping, a new kitchen, paint and carpet), but it still doesn’t have air conditioning (and is less than a thousand square feet). He maybe spent $20k on upgrades and $10k on commissions and other selling costs, for a guesstimate profit of $20k or so on a $125k investment for four months. Do that three times a year, and you are making a 50% yearly profit.

  9. IrvineRenter

    The post from yesterday has gone viral. Patrick.net and other news aggregators have picked it up. My statistics also show hundreds of email forwards where the recipient clicked through to the IHB.

    1. Art Student in Atlanta

      Congrats IR,

      It was a good post and it certainly made my eyes pop. 45,000 foreclosures a month by December is breaking news. To get to that point, BOA will probably cumulatively foreclose on more than 100,000 properties in a 3 to 4 month span. If other large banks follow suit this could have a significant impact.

      Your blog does the work that the 24 hr business networks should be doing.

      Thanks for the time and work you put into it.

  10. fiat

    Wow, Gemina, I totally want to come to your party! Like it’s 1999 🙂

    I have to say that I found the report yesterday regarding B of A’s actions pretty disturbing. This is beginning to feel like the ocean has receded and some of us are grabbing for the (small inventory of) exposed fish…meanwhile, here comes the tsunami. 4,500 homes per month? I smell doom.

  11. theyenguy

    Great article — timely too.

    Being naive, that is a simpleton, I missed my economic stimulus as I did not take out OptionArm loans, a 1st, a 2nd, and 3rd from Washington Mutual, or one of the other mortgage lenders: shame on me. If I would have been one of the informed and smart ones, I would not be writing these notes here, I would have pocketed taken the money out of the house, and put it in gold, and not in a brokerage account, not someplace where Goldman Sachs could get their hands on it. And I would have gone to live outside of the US, maybe Panama, in a condo tower; the drug money flowed into Panama real estate and built some nice places.

    I look at the Real House Price And Unemployment Rate Chart … Unemployment will go up, and up well past 25% … so prices will fall and fall, there will literally be no bottom.

    You write “We have created moral hazard. Lenders know they can take unlimited risks an we will absorb the losses”. I came across the term moral hazard about a year ago, I believe it to be an Austrian Economist term, and I think it lets people off too lightly. I guess blog authors use it instead of terms like crime, criminality, and those types of terms. Well, I would say it like this: … The lenders know they rule, so they can take on unlimited risks and they know we will absorb the losses.

    Thanks for you blog site … it’s a daily read

    1. newbie2008

      theyenguy,
      The lenders are taking essentially no personal risk becasue the bailout will make them more than whole. The fees are paid up front and if the loan becomes non-paying, classify the non-payments as receivables and bill the govt, i.e., bailout money. Have the shareholders (or consumer loses), banksters do some legal actions that the current shareholders must pay, and collect some more money, but the retail holders of the mortgages.CDO will not likely see more than 5 cent on the dollar for the legal action (since they do not have legal standing as a secondary purchasers). Not legal advise, but just what I have observed in reading the trade journals and papers.

  12. matt138

    Gov/t guarantees = no investor gives a shit what happens to the investment.

    So is the fed actually going to stop purchasing and start selling MBS?

  13. matt138

    Gov/t jobs will not save us from the second great depression.

    It can artificially mask the problems and destroy future viability however.

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