It appears a number of economists and financial experts see it as a failure. Not only a failure but an impediment to recovery.
The Obama administration’s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good.
The harm it has done is precisely the same harm that many of the larger programs have done, and something we warned about here at QandO at the time. Instead of letting the market take the hit it deserved for the bad risk it undertook and giving it an opportunity to digest that and then begin recovering, both the Bush and Obama administration’s chose to try and manage the crash and avoid the pain. Consider this particular program a microcosm of what many experts believe we’ll see happen in the larger economy. And, as usual, while it was something done with best of intentions it has run afoul of the Law of Unintended consequences and as critics are saying, has seemingly done more harm than good.
Since President Obama announced the program in February, it has lowered mortgage payments on a trial basis for hundreds of thousands of people but has largely failed to provide permanent relief. Critics increasingly argue that the program, Making Homes Affordable, has raised false hopes among people who simply cannot afford their homes.
As a result, desperate homeowners have sent payments to banks in often-futile efforts to keep their homes, which some see as wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some borrowers have seen their credit tarnished while falsely assuming that loan modifications involved no negative reports to credit agencies.
On the other side of the program are the lending institutions who some experts claim are using the program to delay an honest accounting of the toxic loans they have outstanding.
Only after banks are forced to acknowledge losses and the real estate market absorbs a now pent-up surge of foreclosed properties will housing prices drop to levels at which enough Americans can afford to buy, he argues.
Instead, we’ve chosen to string this all out:
Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.
In other words, government intrusion – with the best of intentions – has impeded the market’s ability to properly reconcile the losses and begin recovering and learn from the experience. Instead, both homeowners and financial institutions have been given false hope that they can avoid this pain and somehow benefit from the program without having to do what is really necessary. And this false hope, upon which reality will eventually intrude, is simply delaying the financial reckoning and further delaying a real recovery. Once that is done:
“Then the carpenters can go back to work,” Mr. Katari said. “The roofers can go back to work, and we start building housing again. If this drips out over the next few years, that whole sector of the economy isn’t going to recover.”
The article goes on to discuss proposed fixes, tweaks and alternatives. But the bottom line is the existing program doesn’t help, but instead hurt the chances for recovery within the housing market. And that’s the lesson here. There is pain in life, but pain’s usefulness is its warning not to do what one did to incur it and to modify behavior in the future to avoid it. The problem with removing the pain quotient is the lessons necessary to modify future behavior and avoid repeating the painful activity are lost. Additionally, by attempting to avoid the pain, the present problem isn’t quickly fixed, but instead drags out as false hope does its damage before reality finally takes its course.
No one wants to see people lose their homes, but the fact remains many took on homes they couldn’t afford and many lending institutions backed their acquisition. This program isn’t going to make their homes more affordable to them nor is it going to make their loans good ones. Time for the players, not the taxpayers, to pay the piper. Government needs to back away. Until they do and the financial reckoning necessary takes place, the recovery in the housing market will continue to be delayed.
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Despite all the happy talk from the Fed about its ability to manage the money supply and wring the excess out of the economy at the proper time, avoiding inflation, when and if the economy ever takes off, is going to be a lot tougher than advertised. And we’re beginning to see rumblings that inflation is trying to find it’s footing:
Inflation at the wholesale level surged in November, reflecting price jumps in energy and other products.
The bigger-than-expected increase is certain to get the attention of Federal Reserve policymakers beginning a two-day meeting on interest rates.
The Fed has been able to keep interest rates at record-lows to bolster the shaky recovery, but if inflation pressures begin to mount, the central bank could be forced to start raising rates sooner than expected to cool the economy and keep prices in check.
That’s the trade-off: raise interest rates to hold off inflation. The tricky part is knowing how much to raise them to do that without killing the recovery. And, with the massive amounts of cash pumped into the system, I’m not sure that’s possible. Which means it is probable, at some point, that the Fed is simply going to have to make a choice – inflation or high recovery killing interest rates. My guess is they’ll choose the latter (while the politicians holler foul and try to spend more money). That’s why many don’t see economic recovery in the cards any time soon despite the “green shoots” so many politicians continue to spot among the economic ruin of the present economy.
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Whatever your feelings on abortion, this isn’t representative of what is being considered:
The city of Berkeley made an official statement on abortion Wednesday by sending coat hangers — a symbol of illegal abortions — to 20 Democrats in the U.S. House of Representatives who voted to restrict federal funding for abortions in the health care bill.
Councilmember Kriss Worthington, who co-sponsored the item before the City Council on Tuesday night with Susan Wengraf and Linda Maio, put the coat hangers and an official city letter in the mail Wednesday.
“The coat hanger represents the time when women had to have abortions in back alleys and tried to self-abort,” Wengraf said. “My initial take was this is too extreme. But women’s reproductive health is very important to me.
“I don’t want my granddaughter to go through what my grandmothers had to. I don’t want it compromised. I don’t think the health care bill is reform if it excludes access to women’s reproductive health care.”
It does not “exclude” access to “women’s reproductive health care”, today’s euphemism for abortion. Abortion remains legal and accessible. It simply denies payment at a federal level for the procedure, much like coverage for cosmetic coverage is denied. Does the denial of the latter somehow “exclude” access to cosmetic surgeons and make that procedure a “back alley” procedure? No, you simply buy a private bit of insurance or, *gasp*, pay for the procedure out of pocket. But both remain completely legal and completely available. Neither, however, should be subsidized by taxpayers (along with many other things).
“I think the coat hanger is an inappropriate symbol, and it could backfire on us,” Wozniak said.
Indeed, it’s not only inappropriate, but it demonstrates a fundamental misunderstanding of the proposal which makes the coat-hanger group look foolish. But then consider what group is doing this (the city that banned the military) and it isn’t at all surprising they look foolish.
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Richard Epstein, writing in Forbes, has some very unkind but deserved words for President Obama’s panel of economic advisers and specifically, Christina Romer.
The recent “upbeat” news is that the level of unemployment has leveled off at about 10% after its earlier climb this year. And just what has been the role of his professional advisors in the sorry performance of the last 10 months? To tell, it appears, the president exactly what he and his political advisors want to hear.
He points to Romer’s recent WSJ editorial:
Exhibit A is Christina Romer’s recent Wall Street Journal column, “Putting Americans Back to Work.” Romer heads the president’s Council of Economic Advisers. Her column rates as a bit of transparent propaganda that belongs in a fan magazine, not a serious newspaper. If she wrote it of her own volition, she should be fired for economic incompetence. If, as seems more likely, the White House wrote it for her, or told her just what to say, she should resign in protest.
If, over the past 10 months, you’ve had the growing feeling (or realization) that we’re now into politics 2.0 and the entire administrative organization is committed to propagandizing and politicizing everything, I’d say you’re right. Oh certainly past administrations have been guilty of some measure of that, but not to the level we’re seeing it now – to the point that it is so obvious that it must be commented upon by usually dispassionate economic analysts.
For instance, Epstein says:
Her column contains nine awestruck references to presidential omniscience and benevolence. Its opening sally places all the blame on the Bush administration, by claiming that Obama took office at “the height of the worst downturn since the great depression.” Funny that she failed to mention the tumultuous events of September and October 2008 had cooled off before then. Nor, of course, did Obama “stop the economic free fall” in those tempestuous autumn days, unless Moses also parted the Red Sea.
Worse still, she blindly celebrates Obama’s worst economic blunders as his greatest triumphs. The $787 billion stimulus package in the American Recovery and Reinvestment Act was a bust. Its protectionist “Buy American” provisions remain a perpetual irritant to international trade. The warped Cash for Clunkers program created a short bubble via a massive public giveaway, while doing nothing to help the environment.
Why, one might ask, with all these supposedly farsighted maneuvers on the books, does the president still face a “weak” employment market? Romer offers no explanation for how Obama’s wise decisions made matters worse. Instead she hyped Obama’s inconclusive meeting with various community leaders that took place the next day.
Or, as he says, propaganda and cheerleading. Is this what we expect from so-called economic experts advising the president? Is there any wonder that unemployment stands at 10% after these same advisers told the president that the “stimulus” would hold it at 8%?
Why aren’t they, instead, advising the president to do those things that government can do that actually would spur employment? Is it because they are as political as the rest of the administration? If not, why would competent economists address unemployment like this:
High on its agenda was an investigation of public-private partnerships that could, at best, only usher in yet another round of economic gimmicks. No credible economist could think that “direct incentives of homeowners to retrofit their homes to improve energy efficiency” could place a dent in the ranks of the 15.4 million unemployed. Far more likely is a replay of the older story: subsidies for these programs sop up wealth and thus kill sensible job opportunities elsewhere.
Or, playing to the political agenda even when it is ineffective in doing what really needs to be done – square peg/round hole.
What they ought to be saying the president is either being left unsaid or being ignored. The reason will be obvious:
You can only improve labor markets by freeing them up. Scrap the talk about goofy ad hoc subsidies, and tell the president, for the first time in his life, to think hard about deregulation. Roll back the three recent minimum-wage increases that have blunted job creation for low-skilled workers in a stagnant labor market. Announce he will veto any effort by Congress to pass the Employer Free Choice Act, whose uncertain threat of compulsory unionization has prompted many businesses to shelve any plans for expansion. Abandon the monstrous health care bills winding through Congress, whose panoply of taxes, subsidies and regulations are job killers of the first magnitude. Put a halt on legislation for carbon caps and taxes until the science gets sorted out. Don’t let the EPA make a hasty endangerment finding on carbon dioxide.
Deregulation costs nothing to administer, increases jobs and adds to the tax base. It is only an added benefit that sound economics reduces presidential power.
Those are all things government can do now, and, they’re all things which would spur economic activity and employment. And they are all things that, politically, go completely against the agenda of the Democrats and the President. And, apparently, they go unspoken by his so-called Council of Economic Advisers.
The people are poorly served when politics seeps into every layer of an administration. Political survival becomes the foremost priority. Those whose job it is to credibly and ethically serve a president and thereby the people, fail in their duty when they become mere propaganda tools of an agenda. When the “advise”, for instance, of an economic panel is driven by politics and a desire to support an agenda rather than by a real desire to serve the best interests of the country, they fail in the inherent duty their position demands and even worse, they fail public’s trust. Being a credible adviser doesn’t mean always saying yes to the agenda, something this present bunch could apparently afford to learn and learn quickly.
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How did I know that would be the inevitable outcome?
President Obama will propose using $200 billion from the Troubled Asset Relief Program (TARP) to support creating jobs, White House officials confirmed Monday.
The president, in an economic speech before the Brookings Institution on Tuesday, will argue that the money would be well spent by funding projects to build bridges and roads, weatherize homes, and provide other assistance for small businesses as well as the unemployed.
Fund projects to build bridges and roads? I thought that was the purpose of the 787 billion “stimulus”. Shovel ready projects correct? The great and wonderful stimulus, if passed, was guaranteed to keep unemployment at 8% or below, remember? How’s that worked out for us?
And, the funds will come from TARP which was borrowed to begin with. Instead of not spending (and paying back the lenders), we’re now going to create jobs weatherizing homes, oh, and giving “other assistance for small business as well as the unemployed”? It may come as a surprise to the people in Washington DC, but extending unemployment and giving the unemployed other benefits does not create jobs. Nor does some complicated bureaucratic adventure in “weatherizing”.
Initiatives which make the decision to hire and expand easy will do that, and there are none on the horizon. Instead we’ll see another 200 billion added to the 787 billion (yes, friends, a few billion shy of a trillion) on this spending boondoggle that’s worked so well in dampening unemployment.
In case you’ve forgotten (via Patterico), here’s the adjusted projected 10 year Obama budget:
The dark red CBO shows the actual cost, not the sanitized cost from the White House. This is our future in terms of spending. We’ve certainly seen all the excuses for spending at that level due to the financial crisis (reasons I am still not convinced are necessarily valid), but what are the excuses for the years beyond 2010? And where is that money going to come from?
It is hard to deny this isn’t planned deficit spending on a level we’ve never even contemplated before. You have to wonder how any politician of any stripe could see those budget numbers as doing anything other than worsening a bad situation. The question some are beginning to ask is whether or not this future is based on the naive assumption that government can spend its way out of financial crisis or another thing altogether.
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As regular readers know, we’ve been talking about why businesses are sitting on the sidelines and not hiring at the moment. Businesses don’t like unsettled questions about the arena in which they must operate. Health care legislation will effect the cost of doing business. Until that is settled, there’s little incentive to take a chance and hire or expand their business. If it costs more to do so after the legislation is passed – and it seems it will, they’ll wait to see the eventual outcome (and cost) and adjust accordingly. Same with cap-and-trade.
However, in that regard, the EPA seems ready to proceed on it’s own schedule and businesses are not liking what they’re hearing:
Officials gather in Copenhagen this week for an international climate summit, but business leaders are focusing even more on Washington, where the Obama administration is expected as early as Monday to formally declare carbon dioxide a dangerous pollutant.
An “endangerment” finding by the Environmental Protection Agency could pave the way for the government to require businesses that emit carbon dioxide and five other greenhouse gases to make costly changes in machinery to reduce emissions — even if Congress doesn’t pass pending climate-change legislation. EPA action to regulate emissions could affect the U.S. economy more directly, and more quickly, than any global deal inked in the Danish capital, where no binding agreement is expected.
Bottom line – if the administration can’t get it done legislatively, they’ll just assume the authority and implement what they wish to do to restrict emissions and require “changes in machinery” unilaterally.
An EPA endangerment finding “could result in a top-down command-and-control regime that will choke off growth by adding new mandates to virtually every major construction and renovation project,” U.S. Chamber of Commerce President Thomas Donohue said in a statement. “The devil will be in the details, and we look forward to working with the government to ensure we don’t stifle our economic recovery,” he said, noting that the group supports federal legislation.
Can you imagine a more pervasive “emission” or arbitrarily applied set of mandates? Start asking yourself who the favored and unfavored industries are out there? Do you suppose coal fired power plants might be target one? And I’d guess that refiners would be in the same boat – unless they make ethanol.
The point of course is this is a perfect way to target and increase the cost of operating businesses that the EPA decides are the worst CO2 polluters. They’ll just write regulations that require costly renovations and changes. The net outcome, of course, is increased cost to consumers – most likely in their electricity bills, the cost of goods (transportation) and just about every other aspect of life you can imagine.
An endangerment finding would allow the EPA to use the federal Clean Air Act to regulate carbon-dioxide emissions, which are produced whenever fossil fuel is burned. Under that law, the EPA could require emitters of as little as 250 tons of carbon dioxide per year to install new technology to curb their emissions starting as soon as 2012.
The EPA has said it will only require permits from big emitters — facilities that put out 25,000 tons of carbon dioxide a year. But that effort to tailor the regulations to avoid slamming small businesses with new costs is expected to be challenged in court.
Legislators are aware that polls show the public appetite for action that would raise energy prices to protect the environment has fallen precipitously amid the recession.
Understanding that the public appetite for such action is very low, legislators are perfectly happy to let cap-and-trade languish. So the bureaucracy is being empowered to go where no elected politician dares at the moment. And if you’re a business, that means you’re still not clear what that means to you at the moment.
And so, you don’t hire. You don’t expand. You’re barely competitive in the global market as it is and now they’re talking about adding more cost? Yeah, that settles everything, doesn’t it? They’ll start hiring tomorrow.
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I see that Megan McCardle thinks the unemployment numbers released today are enough to make her make her “cautiously optimistic” about the jobs picture. I’ll meet her halfway. I see room for caution, but not yet for optimism.
Ms. McArdle writes:
It’s very solidly good news: the labor force participation rate was basically unchanged, which means we’re seeing an actual decline in the unemployment rate, not a spike in the number of people leaving the labor force because they can’t find a job.
My reading of the numbers is precisely the opposite. It appears to me that teenagers, high school dropouts, and those with only a high school diploma, all of whom have high unemployment rates, did, in fact, drop out of the labor force, which led to the decrease in the employment rate.
I also think the numbers are skewed by the seasonal adjustments. The BLS adjusts the figures for seasonal changes, with extra weighting given to more recent years. Last November, the Lehman collapse led to the loss of 610,000 jobs–the largest ever recorded by the BLS–so I suspect the weighting for seasonal factors is skewed to the point where the jobs situation may look better than it actually is.
We do see an increase in hours worked of 0.6 hours, but that doesn’t really create new jobs, it just provides more hours for current part-timers.
However, temporary employment rose significantly for the 4th straight month, and it appears that the mass layoffs have petered out.
So, as far as I can tell, there may have been a bottom, but there are still some anomalies that need to be explained before I jump into the optimist camp.
And, of course, none of this even touches on the 800-pound gorilla in the room, which is monetary policy. The Fed’s policy of quantitative easing, i.e. massive increases in the money supply, still present us with hundreds of billions of dollars in low-velocity money floating around, all of which will have to be absorbed through higher interest rates, or through significant inflation. The possibility still remains that necessary credit tightening will strangle any nascent recovery over the next 12-18 months, and send the economy on a another downward leg.
I spoke with Tom Campbell for over 45 minutes on a range of topics, and I’ve split my posts on that discussion into two posts, one here and one over at The Next Right. Here at QandO, I’m going to cover the more policy-oriented topics, and over at The Next Right the topics have to do with new media, elections, and the politics of fiscal conservative governance.
It pains me to see my native California in such dire straits. The state is broke, farms are collapsing, and unemployment is over 12 percent. The public colleges that might help retrain a lot of those workers are slashing classes.
The tax and regulatory burden has finally overcome the state’s many natural advantages, leading its citizens to abandon the Golden State. And these are people who can’t be having an easy time selling their homes: California, one of the first to suffer in the real estate collapse, is still near the top of the heap in foreclosures.
California, as we say, has issues. I talked with Tom Campbell about some of the most important ones: the budget deficit, jobs, health care, education, water and infrastructure.
If you’re among the 15 or so in this country that believe this White House job summit will actually end up creating policies that produce jobs, I think Evan Newmark’s WSJ piece might dissuade you from that belief:
Now, I’ve never been to a White House summit, so I can’t say exactly what will happen on Thursday. But as a past Davos World Economic Forum participant, I’m pretty familiar with these kinds of VIP schmooze and snoozefests.
And here’s how it will likely play out. A senior White House official — perhaps the president — will give a welcome pep talk to the 130 gathered “summiteers.” He’ll ply them with thanks and stirring patriotic words.
But then he’ll urge them to not waste the day in conference fuzzy talk. Instead, the summiteers should turn words into actions and actions into jobs. After all, it is a “jobs” summit.
And then the summiteers will shuffle off to one of six working groups — where of course they’ll end up wasting the day in conference fuzzy talk.
It’s inevitable. Prepared remarks, banal anecdotes and empty debates are the stuff of these mushy forums. I can count on one hand the number of memorable moments from the dozens of my Davos sessions on technology super-revolutions, entrepreneurial innovation and world peace.
That’s because the VIPs at these things aren’t there to say or do anything unexpected.
Do you think that FedEx CEO Fred Smith and United Steelworkers President Leo Girard will somehow reach agreement that the best way to create jobs is to kill the union-card check?
Do you think that Randi Weingarten, President of the American Federation of Teachers, will suddenly serve up innovative ideas for trade unions to assist small businesses?
It seems unlikely.
And so the jobs summit will fail for the same reason Obamanomics is failing: The White House mistakenly believes economic growth and new jobs are created by society’s stakeholders — business, labor and government — cooperatively working together.
Like most of these events, this is a political stage show. It is a visual representation meant to convey the idea that a) the government is interested in your problems and, most importantly, b) it is here to help.
But the key to the failure of this summit, even if they were serious about creating jobs, is found in Newmark’s last sentence. The key to economic growth and new jobs aren’t the product of summits among “society’s stakeholders”. They never have been.
In fact, it’s pretty simple as he notes:
But that’s not the way capitalism works. It doesn’t take a village to create a new job. It takes a businessman trying to make another buck.
So why aren’t the businessmen out there trying to “make another buck”? While business is all about risk, the risks they take are rational. Businessmen aren’t at all inclined to take risks that can ruin them, especially in unsettled markets. Right now economy is very unsettled and government has huge tax laden legislative bills pending which will directly effect these businesses in a very negative way. And of course, there’s new and increased financial regulation pending which may effect their ability to get funds to expand their businesses and hire new workers. Thus they’ve concluded it would be entirely irrational to expand their business or hire in such an atmosphere.
Instead, they’ll hold off on hiring or expanding until the economy and markets are much more settled and they’ve had the opportunity to gauge the cost to them of all of this new legislation and regulation.
That said, the simple answer on how ease economic uncertainty and thereby create more jobs is kill health care, kill cap-and-trade and back off the increased regulation. Additionally, a corporate tax cut might help as well. All of that would certainly settle market down and give businesses an incentive to both expand and hire. But this job summit? Newmark nails it. Fuzzy talk aimed at the wrong solution. The best thing the government can do is back off and let the market get back to work. Unfortunately, that won’t be the solution the “summit” proposes nor will it be the policy the White House will adopt.
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So, the CBO today, in surveying the success of the American Recovery and Re-investment Act (ARRA,. or as we call it, “the stimulus”, makes the following claim:
Economic output and employment in the spring and summer of 2009 were lower than CBO had projected at the beginning of the year. But in CBO’s judgment, that outcome reflects greater-than-projected weakness in the underlying economy rather than lower-than-expected effects of the ARRA.
It’s kind of hard to argue with that kind of “judgment”. Your “judgment” may vary, of course.
Not that it matters, because neither you, nor the CBO, have the math to back it up.