Monday, August 22, 2011

Quote of the day

Felix Salmon:
If the US is serious about getting its fiscal house in order, a consumption tax of some description is likely to be necessary.


The Ancient said...


Anonymous said...

You want your fiscal house in order - you jus’ gotta lean on the right people.

Mr. CitiBank knows what to do - AAAA

George Pal

Anonymous said...

The first line was a better quote :

"The US government, when it taxes individuals, taxes only what they earn, and not what they spend; this is one big reason why we have a gaping budget deficit."

A bigger reason for the gaping deficit would be the spending this administration and the Democrats (since 2006) in Congress have done. Then there's the unemployment - and all the unemployment benefits that have had to be paid out despite the failed stimulus - this fact sucks for the Dems - TARP has paid for itself - the unemployment benefits which former -thank God literally - Speaker Nancy Pelosi said gave the U.S.economy it's best bang for the buck. That was thecondensed version of her actual quote. But hey, let's not look at the facts, but let's be even more like Europe and go with a consumption tax. I love it.

Obviously Mr. Salmon didn't spend much time among the boat building communities in Maine in the Bush I years and shortly thereafter.

Mrs. P

Anonymous said...

A far better ideal tax idea given the destruction of the housing market is to use a crisis to move to a flat tax. A real flat tax with no mortgage deduction. This would affect the rich more than it would affect the poor have largely exited the housing market so Obama should like it.

Mrs. P

The Ancient said...

Mrs P --

What would happen to the housing market if Congress abolished the mortgage deduction? What would happen to the construction industry? What would happen to local revenue sources (property taxes mostly, which pay for public schools)?

Anonymous said...

What would happen to the housing market if Congress abolished the mortgage deduction?

Let's unpack this shall we since the question contains Congress. Now the snarkster in me says if Congress was big enough to give a home mortgage deduction, then Congress is big enough to take it away. Which is actually pretty much right what Congress has done - Mort Zuckerman-Sept 2010(WSJ):

"A decent house has long been a symbol of middle-class American family life. Practically, it has been a secure shelter for the children and provided access to a good public education. And financially, it has been regarded as a safe store of value, a shield against the vagaries of the economy and a long-term retirement asset.

"All that seems a distant memory for the millions of American families who must confront the decline in the value of their homes. The pressure to meet mortgage payments on properties that have lost value has been especially shocking for those who have lost their jobs in the Great Recession. Their houses have become a ball and chain, restricting their ability to seek employment elsewhere. They cannot afford to abandon the remaining equity they have in their houses—and they can't sell in this miserable market.

"New home sales, pending home sales, and mortgage applications are down to a 13-year low, despite long-term mortgage rates that plummeted recently to an average 4.3% before rising slightly. New home prices have fallen by an average of 30%. According to David Rosenberg, chief economist at Gluskin Sheff, this has reduced home occupancy cost to 15% of family incomes, down from the conventional 25%.

"The fall in house prices has eaten away at the equity Americans have in their homes. About 11 million residential properties have mortgage balances that exceed the home's value, notes Mr. Rosenberg. And given the total inventory of homes and the shadow inventory of 3.7 million empty (foreclosed) homes, he notes that prices might fall another 5% to 10%. That would leave an estimated 40% of American homeowners with mortgages in excess of the value of their homes.

"Disappearing equity invites strategic defaults. Homeowners with negative equity are tempted simply to mail in their keys to their friendly lender even if they can afford the mortgage payment. Yet banks don't want to take the deflated properties onto their books because they will then have to declare a financial loss and still have to worry about maintaining the properties. Little wonder, according to Mr. Rosenberg, that foreclosure has not been enforced on a quarter of the people who haven't made a single mortgage payment in the last two years.


Anonymous said...

"A staggering eight million home loans are in some state of delinquency, default or foreclosure, Alan Abelson reported in Barron's in July. He noted that another eight million homeowners are estimated to have mortgages representing 95% or more of the value of their homes, leaving them with 5% or less equity in their homes and thus vulnerable to further price declines.

"The pace of foreclosures slowed briefly thanks to loan modifications by the Home Affordable Modification Program and other government efforts. But the programs have not been working as hoped—it's been reported that half of the borrowers have been redefaulting within 12 months, even after monthly payments were cut by as much as 50%.

"While the foreclosure pipeline remains clogged, as it unclogs a new wave of homes will wash into the market and precipitate additional downward pressure on prices. The number of foreclosed homes put on the market by banks will be a more powerful influence on the further decline of home prices than either consumer demand or interest rates.

"A well-balanced housing market has a supply of about five to six months. These days the inventory backlog has surged to about a 12½ months' supply. This explains why average sale prices have been declining for so many months. The high end of the market, in particular, is under great pressure.

"The mortgage market is also deeply troubled. Conventional lenders now insist on a substantial down payment and impose other more stringent financial requirements. Household formation (marriages) is also shrinking now, down to an annual rate of about 600,000, compared to net household formation in excess of a million annually during the bubble years.

"The most critical factor subduing the demand for housing is that home ownership is no longer seen as the great, long-term buildup in equity value. So it is not too difficult to understand why demand for housing has declined and will not revive anytime soon.

"This is a disturbing development for those who believe that housing is going to lead America to an economic recovery, as it did during the Great Depression and every recession since. In the past, residential construction preceded the recovery in the larger economy. This time a lead weight on recovery has been the disappearance of some $6 trillion of home equity value, a loss that has had a devastating effect on consumer confidence, retirement savings and current spending.

"Every further 1% decline in home prices today lowers household wealth by approximately $170 billion, according to Goldman Sachs. For each dollar lost in housing wealth, Goldman Sachs estimates that consumption is lowered by 5 cents. Add to this the fact that we are building a million-plus fewer homes on an annual basis from the peak years of the housing boom. With five people or more working on each home, we have permanently lost over five million jobs in residential construction.

"That is why housing was such an important generator of normal economic recoveries. To give this context, residential construction was 6.3% of GDP at its recent peak in 2005 and 2006 but has fallen to 2.4% this year, according to economist A. Gary Shilling. This is significant if you recognize that a 3% top-to-bottom decline in real GDP constitutes a serious recession.

"There is no painless, quick fix for this catastrophe. The more the government tries to paper over the housing crisis and prevent housing from seeking its own equilibrium value in real terms, the longer it will take to find out what is true market pricing and then be able to grow from there."

Anonymous said...

TheNYT -this am:

"The Obama administration is considering further actions to strengthen the housing market, but the bar is high: plans must help a broad swath of homeowners, stimulate the economy and cost next to nothing.

"President Obama's administration is weighing proposals to strengthen the housing market.

"One proposal would allow millions of homeowners with government-backed mortgages to refinance them at today’s lower interest rates, about 4 percent, according to two people briefed on the administration’s discussions who asked not to be identified because they were not allowed to talk about the information."

Prediction - more epic failure.

Purely anecdotal now - we used to live in Grosse Pointe Farms - we bought an 80 year old home 17 years ago using the traditional mortgage lending rules in the town in Michigan that boasted the best quality of life in Michigan - including schools, police safety, beauty and a park system that rivaled many private clubs in America. Because so much hope was pinned on Detroit's comeback - read Fortune, Forbes and whatnot in the mid-90s right after we bought property values that had been slumbering at best since the '68 riots and the 5 Grosse Pointes had army tanks patrolling its streets to keep the citizenry safe, began to take off. Our street which was once full of housewives with babies at home with excutive husbands at work quickly became a street with 2 executive spouses with kids in daycare. Our home more than doubled in value in a short period - and we were assured it would more than double again. We borrowed against it and put in new windows, roof, heater, pipes, kitchen, driveway, landscaping - we didn't borrow against the home to take trips or go out to dinner. When we sold our home 15 years later because my husband's entire department -100 people were summoned into a conference room and fired en mass with 8 weeks of severance at a time when unemployment was hovering around the 20% mark in Metro Detroit and this was before bankruptcy of Big Three, we sold our home for 10 grand more than we had paid for it 15 years earlier. Our home had lost more than 50% of its value. We had to burn through what investments we had left after the stock market crash 10 months earlier to cover the shortfall with our mortgage. We are private sector. No pension for us. We had invested and saved for our retirements and future family since the day we both got out of school. It's all gone and soon so will our health care. But we are better off than our neighbor 3 doors over from old house - he was our age - he died of brain cancer. His brother sold his home -post-bailout mind you and Grosse Pointe still enjoys a great quality of life and schools- for $113,000 less than we were able to sell ours. Our other neighbors - a lawyer, his working wife and baby who bought after us paying nearly twice what we did - they just foreclosed. They couldn't even find a buyer for the price we sold at so they walked away, relocating to a state he could actually be employed in.

When we bought in GPF we went to "the" bank for our mortgage. When we left GPF - that bank no longer had a mortgage department. Not jesting.

Anonymous said...

If we get rid of the mortgage interest deduction, the people immediately hurt the most will be those with more than one home. Beyond that,and not being an economist I can't tell you what exactly will happen if Congress gets rid of the mortgage deduction. Truthfully I don't think many economists can - Paul Krugman will probably say Aliens will begin looking more to Earth for their vacation homes. I can tell you - you do not want anything like what happened to us to happen to you.

A flat tax worked very nicely for Hong Kong. Here, nearly 50% don't pay income taxes yet receive the bulk of the federal gov. benefits. They need to pay something especially if taxing is as Dems claim- about "fairness".

Walter Russell Mead wrote this a few days ago and hit hits the spending sweet spot especially sweet:

"Como Se Dice ‘Tea Party’ En Espanol?

"Don’t anyone tell Nancy Pelosi, but Spain’s socialist government and opposition are embracing constitutional limits on public sector borrowing and enforced balanced budgets. It’s a man bites blue dog story: European socialists and social market conservatives are embracing radical fiscal ideas that the Tea Party loves and American liberals hate.

"Spain isn’t acting alone. Nicolas Sarkozy and Angela Merkel recently encouraged all Eurozone governments to introduce new balanced budget amendments. Germany already has one. France is getting read to put one in place. Even Italian Premier Silvio Berlusconi initiated a similar move in early August. The UK government, which includes the Liberal Democratic Party in its coalition, has voted for some of the most stringent spending cuts in western history.

"If her on again off again presidential campaign doesn’t take off, Sarah Palin should maybe think about emigrating to Europe; an anti-tax, balanced budget, anti-foreign aid and anti-immigrant program is becoming mainstream politics over there. If things keep going this way, Texas might decide to join the EU when it secedes from the US."

Mrs. P

The Ancient said...

What would happen to the housing market if Congress abolished the mortgage deduction? What would happen to the construction industry? What would happen to local revenue sources (property taxes mostly, which pay for public schools

Mrs P --

With all respect, you are not responsive to my questions.

I certainly agree that in an ideal world, there would be no mortgage deduction. But we are not in that world.

In theory, one could compensate people "punished" by the elimination of the mortgage interest deduction with some adjustment in the capital gains treatment of real estate.

But this does not begin to get at the larger problem, which is what it would do to housing prices. I think it would push prices of houses downwards -- way downwards. (Though not the houses of the rich, mind you.)

I think the elimination of the mortgage interest deduction would tend to punish the middle, middle class. (I'm not going to look up numbers, but I'd guess this means people with 350 K to 450K houses and 200K to 300 K second homes.)

Beyond that, I think the elimination of the mortgage interest deduction, by pushing down housing values, would have a catastrophic impact on local property tax revenues in much of the country.

And beyond that, it would further depress the construction industry. (We could discuss just why, if it's not obvious.)

Anonymous said...

I answered your question - here

"If we get rid of the mortgage interest deduction, the people immediately hurt the most will be those with more than one home. Beyond that,and not being an economist I can't tell you what exactly will happen if Congress gets rid of the mortgage deduction."

True I discussed at length probably more than you card about how Congress. But the fact is they have. And that meddling still hasn't played out - but it plays right into what you say here -

"But this does not begin to get at the larger problem, which is what it would do to housing prices. I think it would push prices of houses downwards -- way downwards."

Prices are already way down thanks to what Congress has done. I've heard that the national average is homes are worth 1/3 less than they were 5 years ago. There's nothing on the horizon to bring those prices back up. Many think we haven't hit bottom yet. The construction business has been hobbled well as well. As for the local revenue based on property taxes- we're already there. We don't need to get rid of the home mortgage interest deduction to cause that one. If you poke around you'll learn that (buckets of) stimulus money went to cover far more budget shortfalls than any Democrat would like to suggest.

Let's look at Illinois - it had a huge budget gap - this time last year all the public schools and town halls had signs on their fronts as to how much the state owed them. Enormous amounts. Then there was the huge public union pension fund gap. We watched Union jerks going to the Capitol screaming "raise our taxes" - the Union jerks got what they wanted almost - last January the Democrat Guv did the single largest tax hike in history - corporate tax as well as personal income tax (to 67% I think) on highest income earners. He didn't raise them on the Union jerks. By any chance did you hear that in July Illinois lost more jobs than the rest of the country? Yup. In fact it has lost the most jobs in the country this year - over 80,000 of them.

Now that is the way to patch up a budget shortfall - drive out jobs, cause more forecloures and increase the misery. Oh, a lot of those jobs were Union jobs - not public Union.

I'm not an economist. I've been fond of the flat tax since Steve Forbes - long before he tried to get the Republican nomination- was talking about it to anyone who would listen. I also am quite keen Arthur Laffer and his ideas.

Mrs. P

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