Jun222015
Taxpayer backing for the GSEs ensures the misallocation of credit
Subsidized credit is the process of taking credit from worthy borrowers and providing it to unworthy borrowers.
I always find it interesting when writings from many years ago resonate through the ages as if they were written yesterday, like the writings of Frédéric Bastiat, a 19th century French economist. Plato’s Republic has a similar resonance. Plato’s critique of the shortcomings of democracy are still just as valid today as they were 2,500 years ago when he wrote it. Usually, I feature recent news articles less than a few weeks old. Today, I am featuring an essay written more than 160 years ago. The fact that it resonates so well today shows just how farsighted his vision was.
Our obscure French economist understood the workings of credit and it’s impact on society in general. He would readily recognize the misallocations of credit caused by government loan guarantees in the housing market and distortions of reality used to justify it. He would probably be amused by the parallels between what’s happening in the United States today and what happened in France 160 years ago. Or perhaps not. He might be horrified that mankind has made such little progress in understanding the folly of government intervention in the credit markets.
Selected Essays on Political Economy
Bastiat, Frédéric — (1801-1850)
At all times, but especially in the last few years, people have dreamt of universalizing wealth by universalizing credit.
I am sure I do not exaggerate in saying that since the February Revolution the Paris presses have spewed forth more than ten thousand brochures extolling this solution of the social problem.
This solution, alas, has as its foundation merely an optical illusion, in so far as an illusion can serve as a foundation for anything.
These people begin by confusing hard money with products; then they confuse paper money with hard money; and it is from these two confusions that they profess to derive a fact.
In this question it is absolutely necessary to forget money, coins, bank notes, and the other media by which products pass from hand to hand, in order to see only the products themselves, which constitute the real substance of a loan.
For when a farmer borrows fifty francs to buy a plow, it is not actually the fifty francs that is lent to him; it is the plow.
And when a merchant borrows twenty thousand francs to buy a house, it is not the twenty thousand francs he owes; it is the house.
This is the essence of asset-backed debt. When lenders broke the connection between the amount of the loan and the cashflow value of the house, they inflated a massive housing bubble which caused an enormous misallocation of resources as money poured into housing that we didn’t need.
Money makes its appearance only to facilitate the arrangement among several parties.
Peter may not be disposed to lend his plow, but James may be willing to lend his money. What does William do then? He borrows the money from James, and with this money he buys the plow from Peter.
But actually nobody borrows money for the sake of the money itself. We borrow money to get products.
Now, in no country is it possible to transfer from one hand to another more products than there are.
Bankers believe they can. They also confuse money with produce; they believe that if they print more money or come up with some “innovative” new loan program, they can actually create value. They don’t. Paper is paper: it has no value other than what we confer on it, and despite any short-term obfuscations and distortions, the total amount of money must equal the total value of goods and services a society produces. The excess — and there is always excess with a printing press — merely dissipates as inflation.
The federal reserve can print money out of thin air, and they did to the tune of $85 million per month until the total reached over $4 trillion. This creation of money doesn’t match up with anything tangible, merely the bad loans — the illusory assets — polluting banks balance sheets. Without this printed money, deflation would have been even worse.
Whatever the sum of hard money and bills that circulates, the borrowers taken together cannot get more plows, houses, tools, provisions, or raw materials than the total number of lenders can furnish.
For let us keep well in mind that every borrower presupposes a lender, that every borrowing implies a loan.
This much being granted, what good can credit institutions do? They can make it easier for borrowers and lenders to find one another and reach an understanding. But what they cannot do is to increase instantaneously the total number of objects borrowed and lent.
However, the credit organizations would have to do just this in order for the end of the social reformers to be attained, since these gentlemen aspire to nothing less than to give plows, houses, tools, provisions, and raw materials to everyone who wants them.
And how do they imagine they will do this?
By giving to loans the guarantee of the state.
Does this sound familiar? Politicians have worked to expand home ownership by guaranteeing loans through the FHA and the GSEs. The FHA has been around since the 1930s, and despite their best efforts, home ownership rates are no better in the United States than in countries with no government subsidies at all. As it turns out, you can’t give homes to everyone who wants one.
Let us go more deeply into the matter, for there is something here that is seen and something that is not seen. Let us try to see both.
Suppose that there is only one plow in the world and that two farmers want it.
Peter is the owner of the only plow available in France. John and James wish to borrow it. John, with his honesty, his property, and his good name, offers guarantees. One believes in him; he has credit. James does not inspire confidence or at any rate seems less reliable. Naturally, Peter lends his plow to John.
That is how the private lending market would work. An dispassionate evaluation of creditworthiness would determine who got loans and who did not.
But now, under socialist inspiration, the state intervenes and says to Peter: “Lend your plow to James. We will guarantee you reimbursement, and this guarantee is worth more than John’s, for he is the only one responsible for himself, and we, though it is true we have nothing, dispose of the wealth of all the taxpayers; if necessary, we will pay back the principal and the interest with their money.”
The FHA and the GSEs facilitate loans by guaranteeing investors repayment of principal and interest on a loan regardless of whether or not the borrower repays it. The positive impact of what’s seen is the new loan given to a low-income borrower. The negative impact of what’s hidden is the crowding out of more creditworthy borrowers and the pernicious effect on borrower’s attitudes and burgeoning entitlements.
So Peter lends his plow to James; this is what is seen.
And the socialists congratulate themselves, saying, “See how our plan has succeeded. Thanks to the intervention of the state, poor James has a plow. He no longer has to spade by hand; he is on the way to making his fortune. It is a benefit for him and a profit for the nation as a whole.”
Just as supporters of the FHA and GSEs pat themselves on the back for providing home ownership to those who wouldn’t be extended loans by private lenders.
Oh no, gentlemen, it is not a profit for the nation, for here is what is not seen.
It is not seen that the plow goes to James because it did not go to John.
It is not seen that subprime borrowers and others of dubious credit quality bid up prices so prudent borrowers have to pay more, or worse yet, prudent borrowers end up getting priced out of properties commensurate with their incomes and are forced to substitute down to lower quality properties. The borrowers who should not have been given loans are provided with nicer properties while the prudent are forced to accept lesser accommodations.
It is not seen that if James pushes a plow instead of spading, John will be reduced to spading instead of plowing.
Consequently, what one would like to think of as an additional loan is only the reallocation of a loan.
Furthermore, it is not seen that this reallocation involves two profound injustices: injustice to John, who, after having merited and won credit by his honesty and his energy, sees himself deprived; injustice to the taxpayers, obligated to pay a debt that does not concern them.
This is the central injustice of the housing bubble. By 2004, prudent borrowers were forced to chose between accepting a much lower quality property or wait for years for the imbalance to correct itself. Then, when the housing bubble collapsed, rather than gaining advantage of their prudence, those that didn’t participate in the housing bubble were forced to pay for bailouts designed specifically to keep them priced out of nicer properties and benefit the Ponzis and the stupid lenders that enabled them.
Will it be said that the government offers to John the same opportunities it does to James? But since there is only one plow available, two cannot be lent. The argument always comes back to the statement that, thanks to the intervention of the state, more will be borrowed than can be lent, for the plow represents here the total of available capital.
This economic fallacy is the entire justification for loan programs specifically designed to help lower income borrowers “afford” homes. In reality, it merely inflates the prices of entry level homes and deprives a marginal buyer an opportunity to own in favor of a less qualified buyer who meets the criteria of the program.
True, I have reduced the operation to its simplest terms; but test by the same touchstone the most complicated governmental credit institutions, and you will be convinced that they can have but one result: to reallocate credit, not to increase it. In a given country and at a given time, there is only a certain sum of available capital, and it is all placed somewhere. By guaranteeing insolvent debtors, the state can certainly increase the number of borrowers, raise the rate of interest (all at the expense of the taxpayer), but it cannot increase the number of lenders and the total value of the loans.
Do not impute to me, however, a conclusion from which I beg Heaven to preserve me. I say that the law should not artificially encourage borrowing; but I do not say that it should hinder it artificially.
If in our hypothetical system or elsewhere there should be obstacles to the diffusion and application of credit, let the law remove them; nothing could be better or more just. But that, along with liberty, is all that social reformers worthy of the name should ask of the law.
Right now the law artificially encourages borrowing. We subsidize interest payments with the home mortgage interest deduction, and we guarantee the repayment of debt with FHA and GSE lending programs. In fact, when you consider the FHA and GSEs now insure more than 80% of the loans in the marketplace, we have completely nationalized home ownership. This will ensure the misallocation of resources and further injustices to borrowers through the capricious allocation of credit based on government policy rather than merit and character of the borrower. The negative impacts of these problems will reverberate for another generation. Perhaps our grandchildren will enjoy a free market, but I rather doubt it.
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Will Federal Reserve Raise Rates in 2015
It’s hard to read the tea leaves on what the Federal Reserve will be doing with interest rates. Goldman Sachs has this to say.
“We are pushing back our forecast for the first Fed rate hike from September to December 2015. In large part this reflects the fact that seven FOMC participants are now projecting zero or one rate hike this year, a group that we believe includes Fed Chair Janet Yellen. We had viewed a clear signal for a September hike at the June meeting as close to a necessary condition for the FOMC to actually hike in September, but the committee did not lay that groundwork.”
But Wells Fargo analysts think otherwise.
“The FOMC’s fed funds expectations indicate that the Fed is set for two rate hikes in 2015 probably at the September and December meetings, which have press conferences. The Fed seems similarly inclined to hike rates four times in 2016.
“The market’s Fed funds expectations in the near and intermediate term seem to be significantly at odds with the FOMC. In the long run, the difference is within reasonable proximity, we think.”
Bank of America/Merrill Lynch lead analyst Chris Flanagan has this to say on rates, and the outlook for mortgage-backed securities.
“…(T)he financial stability system that has been constructed in the post-crisis era, including Dodd-Frank, Volker, Basel III, etc, will make it very difficult for the Fed to actually move away from ZIRP and QE. That theme was on full display the past few weeks as credit spreads moved sharply wider in anticipation (fear) of a hawkish outcome from the FOMC meeting. Investors rightly understand that the new regulatory regime means liquidity is not what it used to be; if monetary accommodation is going to be reduced significantly (big if), it makes sense to try be the first one out the door and wait for the dust to settle on spread widening…The economic weakness could change in 2H 2015, but the Fed’s lowering of the 2015 GDP forecast and the Fed Funds ‘dot plot’ for 2016 and 2017 acknowledged that less tightening, not more, is probably needed; the direction of their shift, lower, was key, as it shows them moving back to a more dovish position.
“All of this ends up as another bad news is good news story for securitized products, at least for the near term. The cloud of unjustified (by the economic data) monetary policy tightening has been lifted, and risk assets are now far better positioned to perform. The fact that much of the securitized products market, particularly credit, which tracked or exceeded spread trends in the corporate bond market, widened into the Fed meeting created good short term opportunity for investors,” Flanagan says in a client note.
Time will tell.
It’s hard to tell from the dot plot, since not all the members are voting. Even though the median didn’t move from March, average reduction was 0.21. The most hawkish members were also the ones that cut their estimate the most. The highest estimate in March was 1.625 and is now 0.875. The consensus shifted from a strong 2-rate-hikes to a weak 2-rate hikes. (.772 Mar avg. to .566 Jun avg.). To me this makes the Sept. rate hike unlikely, and lays the groundwork for removing the Dec rate hike as well unless wages, inflation and GDP strengthen considerably.
Given the economic drag from the strongly appreciating dollar, I rather doubt the economy hits the benchmarks warranting a rate hike. As I’ve said before, they may do it as a symbolic measure to test the waters, but I don’t see a sustained series of rate hikes beginning this year. I would further speculate that the federal funds rate will be at 1% or less at the end of 2016, mostly to keep housing afloat.
I could see the FED hiking 0.25% in: Dec’15, Jun’16, and Dec’16; which would put the fed funds rate at .75-1.0%, keeping the 30yrFRM under 5%. I don’t see much more than that before it affects housing.
Finance Pros Whine about the CFPB Constantly
The CFPB has come under fire in recent months for instituting a program to acquire and monitor the purchase of more than 500 million credit cards of American consumers. A new U.S. Consumer Coalition–Zogby Analytics poll finds a majority of Americans oppose the Consumer Financial Protection Bureau’s monitoring of Americans’ spending and also showed that an overwhelming majority of Americans want to see the CFPB subject to congressional oversight through the appropriations process.
Other findings include:
* A majority (55%) of respondents believe the CFPB’s data collection program is similar or worse than the controversial NSA monitoring program.
* Only 20% of those polled believed that the CFPB should be able to collect and review Americans’ credit card statements without their knowledge.
* 78% of respondents believe the CFPB should have to seek Congressional approval for its budget like other agencies.
* Nearly 70% of those polled believe that the government should not be able to tell consumers how to spend their money or make financial decisions for their families.
* 71% agreed that it is the consumer’s responsibility to determine whether or not to take out loans and mortgages with unfavorable terms as long as they are presented clearly.
MBA Stevens: We are in the middle of a housing crisis
We are currently in the middle of a housing crisis.
These bold words were penned by Mortgage Bankers Association President and CEO David Stevens in a recent blog post on LinkedIn.
Before assuming the definition of “housing crisis,” Stevens said that while industry experts, economists and even consumer groups have predicted one would emerge, this is not what they expected and it is certainly sooner than anticipated.
Stevens begins by painting a picture of what housing looks like now.
Yes, the word crisis is harsh and alarmist, but it accurately reflects the complete void of focus on housing as an opportunity by Washington policy makers, including the actions of the regulators and enforcement officials that are narrowing the credit box. Fact – there is a shortage of affordable housing (both rental and owned) and the homeownership rate today is at its lowest point in over two decades. Today’s environment is not encouraging credit expansion. It’s forcing lenders to be overly conservative – ultimately failing entry-level homeowners on every front.
Included is Stevens’ call to acton, with none other than President Barack Obama at the top of the list of people who can start fixing the problem.
It’s time to acknowledge the flaws in policy, corrections needed to the rules, and the impacts of going too far. And it starts at the top.
Homebuilders Advocate Preying on Customer Fears
It’s what dreams are made of, and often, it’s what the American Dream is made of, too: Fear.
In the field, sales associates and market analysts keep looking for that certain-something–urgency–that real estate folks may have difficulty defining, but they know it if and when they see it. It’s the force inside a household that triggers the feeling of a need for change.
* I am afraid my rent’s going to go up again, and make it difficult to save money.
* I am afraid interest rates are headed up, and they’re likely to stay there for a while so Uncle Sam can reduce its balance sheet.
* I’m afraid home prices are going to spike.
* I’m afraid to miss this cycle of probably the best time in a generation to buy a home. So, I’m afraid I’ll look like an idiot if I didn’t buy while I could.
* I’m afraid we’re not going to have incomes much better than now, and that if one of us gets a better job offer somewhere else, that only means my significant other also needs to find work in the new market as well.
* I’m afraid that if I miss this cycle, I won’t be able to avail of the next downturn, where the opportunity to trade up will allow some to step up, while I’ll be stuck at the lower rungs of the ladder.
* Mostly, I’m afraid of being stuck in this dilemma-cycle, year-after-year, wondering whether now is the time or not.
When it comes to the biggest ticket consumer durable most of us ever acquire, fear is probably the most common source of urgency. And, since interest rates, home prices, loan access, and family life-stage changes are all in convergence for a final fleeting moment, fear of missing the moment may be a reason for an increased number of reports on the “return of the first-time buyer.”
Will homebuilding ever return to the highs of 2006?
Probably not
“But there are good reasons why we are unlikely to see starts regain their pre-recession highs of more than 2 million in the foreseeable future,” they write.
Few argue against the fact that the surge in homebuilding in the run-up to the recession was unsustainable, resulting in housing completions consistently outstripping household formation and a sharp increase in the vacancy rate.
But there is evidence of a downward trend in this measure over the past 50 years, or more precisely a shift to a new, lower, long-term average in starts per capita since 1990.
“This reflects a major demographic shift in the form of a reduction in the average number of people per household. This trend meant that, throughout the 60s and 70s, an increasing share of the population required a home of their own,” they say. “The high levels of homebuilding during this period, both in absolute and per capita terms, were therefore justified by strong rates of household formation.”
This means that the high levels of homebuilding throughout the 1960s and 70s were, at least partially, justified by stronger demand for housing, they say. As the size of the average household declined, a higher share of the population needed a home of their own. More housing units per capita were therefore built to meet this higher demand.
“The balance of evidence suggests that housing starts per capita have settled at an average level which is materially lower than what was typical in previous decades,” they write. “Accordingly, the 2006 highs of more than 2 million starts, or more than 6 starts per 1000 people, were excessive relative to new long-run norms. And unless there is another significant demographic or cultural shift on the horizon, there is no longer scope for a sustainable rise in starts back to these levels in the foreseeable future.”
Consumer Debt Declines
Some optimistic news about consumers: they’ve continued to deleverage from high amounts of both mortgage loans and consumer loans. That’s according to the Federal Reserve on Friday, which reported that currently on average, consumer debt service payments—mortgage and otherwise—is now less than 10 percent of disposable income. As of the first quarter of 2015, in fact, the average stood at 9.92 percent, almost the same as in the last quarter of 2014, when it was 9.91 percent. Mortgage payments in 1Q 2015 ate up an average of 4.62 percent of disposable income, while consumer debt service took 5.3 percent. The bubble of the 2000s drove those totals way up—to over 13 percent as recently as Q1 2008. That doesn’t sound like much of a decline, but it represents many billions of dollars that consumers can now devote to other things.
http://collegedebt.com/
Current Student Loan Debt in the United States
Student Loans : $1,331,152,865,708.59
Credit Cards: $882,600,000,000.00
Auto Loans: $750,000,000,000.00
Those numbers are so large, the government will soon have to report them using scientific notation.
I’ll admit that the principal numbers are quite shocking, but how does that really impact consumer finances? What really matters is the debt service. As rates fall, more debt can be carried without impacting personal finances or consumer spending. DTI is a measurement of debt SERVICE to income not PRINCIPAL. As inflation rises, principal will erode more quickly as debt is destroyed by wage growth.
The only way rates can rise is if wages rise first. The debt service burden can only be overcome by (1) reduced principal, (2) reduced interest rates, or (3) increased wages. Since principal reduction won’t happen, and since rates are already at historic lows, the only viable solution is rising wages. If rates go up before wages do, then borrowers will get wiped out in large numbers.
Wages don’t have to rise for interest rates to rise; rates will only be allowed to rise once wages rise. By keeping high amounts of capital available, the FED is keeping a lid on rates.
Normally, coming out of a depression, little capital would be available and would demand high rates. By flooding markets will boundless amounts of capital, the FED has removed an impediment to expansion.
The FED won’t pull back on this capital until wage growth kicks in, thereby allowing rates to rise. If rising rates cause the expansion to fail, then here comes QE4.
There are other ways to lessen the debt burden: I read an article recently where a son’s parents took out a sub 4%30yr home equity loan to pay off their son’s student loan. By extending the term and reducing the rate the debt burden was diminished. The son now pays the home equity loan which is $800/mo instead of $1700/mo.
With the rebound in home prices, equity, and low interest rates, this is now possible. If the government is serious about getting millenials back in the housing market, allowing a term change and lower rates for those without generous parents would be an easy solution.
Rates are NOT going to rise BECAUSE wages are NOT going to rise in America. We are in a global and highly automated economy now. Americans are either going to have to learn how to make more money on their own, (entrepreneurial) OR move to more affordable places to live. Talent is now a commodity and it’s cost is dropping significantly.
Housing prices will continue to rise in America because immigrants will never stop coming in. The middle class is gone. In fact it never existed. Either you make alot of money or you struggle.
One of the hardest challenges my company faces is retaining engineers in India. They change jobs frequently receiving 25% pay raises. Their wages are still 10% of US wages, but they are also inexperienced so productivity makes wages a wash. Still need to have them onsite, though, so you deal with the issues.
Once wages stabilize over there at a productive parity with the US, then off-shoring advantage will disappear. We are rapidly approaching that point.
The fact that we are in a global economy means there will be more customers for products, and automation increases wages as it increases productivity and specialization.
Gold extends losses after upbeat U.S. existing home sales data
Gold prices fell to the lowest levels of the session on Monday, adding to losses after data showed that U.S. existing home sales in May rose to the highest level since November 2009.
Gold futures for August delivery on the Comex division of the New York Mercantile Exchange lost $19.30, or 1.61%, to trade at $1,182.60 a troy ounce during U.S. morning hours. Futures were likely to find support at $1,171.90, the low from June 15, and resistance at $1,208.90, the high from May 26.
The National Association of Realtors said that existing home sales increased 5.1% to 5.35 million units last month from 5.09 million in April. Analysts had expected existing home sales to rise 4.4% to 5.26 million units in May.
The upbeat data boosted optimism over the health of the economy and supported the case for a U.S. interest rate hike later this year.
Expectations of higher borrowing rates going forward is considered bearish for gold, as the precious metal struggles to compete with yield-bearing assets when rates are on the rise.
Gold rallied almost 2% last week after the Federal Reserve’s rate statement tempered expectations for a rate hike later this year.
In addition, the fed is backing uber-low rates, which ensures the misallocation of capital; so we have misallocation of both credit and capital (for an extended period)
Thus, when the rental bubble pops, the damage done to those who bought so-called investment property to squeeze former homedebtors forced to rent will be quite severe.
“Furthermore, it is not seen that this reallocation involves two profound injustices: injustice to John, who, after having merited and won credit by his honesty and his energy, sees himself deprived; injustice to the taxpayers, obligated to pay a debt that does not concern them.”
I would also add that the consumer suffers a third injustice by paying more per item at the market for lower quality goods. In order to get the best prices on the highest quality products, limited resources need to go to those best able to exploit them.
Misallocation of resources from of state guarantees causes consumers to back questionable loans, but they also get inferior goods and services. Resources should go to those who have demonstrated an ability to use them. Last year’s profitability is a good predictor of next year’s returns. If you are profitable, then you generally have money to pay back the loan and you generally do.
If we match the best farmer with the best land and the best plow, then we can reasonably expect to get the best yield. Until James has demonstrated superlative farming skills, he shouldn’t get access to the sole French plow.
If societal progress was truly the goal, then market-based credit would be embraced by the state. Since it is not, we can surmise that backers of universal credit believe that justice is unjust – and that credit worthiness is based solely on inability to merit it.
The better neighborhoods are typically, although not exclusively, occupied by better people. (Better at telling the truth and meeting their obligations versus better at lying and evading responsibility). I’m not making any judgments, just observing.
When credit is illogically extended to the credit unworthy, and the foreclosure-bound buy in prime areas, this affects property values and the willingness of other residents to invest in those areas and their community. There is nothing like a foreclosure next door, one across the street, and another two-doors-down to tighten your purse strings. Not only on housing but on everything else too.
People buy in nice areas not only because they can afford to, but also because they want to live in a stable environment where their neighbors believe it’s important to pay their bills on time. It also makes it easier to go to work during the day if you know your neighbor didn’t just do a dime up in Chino and is breaking into your house to pay for a mortgage he could never afford.
Extending credit universally has ramifications far beyond making houses “affordable.” It destabilizes everything that everyone in that society has worked to build. Perhaps that is the true intention?
That’s a nice extension of the argument against universal credit. I hadn’t considered the full ramification and impact of the policy.
My observation during the housing bust was the opposite. The people in better neighborhoods were substantially better liars. They were the ones fibbing on mortgage applications and taking on Ponzi debt they could never repay, and they were also the ones who more skillfully gamed the system to squat longer or lever their lenders for better modifications.
“My observation during the housing bust was the opposite. The people in better neighborhoods were substantially better liars.”
My point exactly. The expansion of credit allowed these liar-loan posers to ruin neighborhoods they never could have otherwise afforded. The more successful Ponzi’s were able to flip their way up the ladder by rolling over and expanding debt they never intended to repay. All the long-term owners were left to pick up the pieces locally in addition to servicing the federal and state government debts.
Quote: “Better at telling the truth and meeting their obligations…”
Well, during the housing bust, people with mortgages larger than $1 Million defaulted at a higher-rate than people with smaller mortgages.
As this NY Times article details, in 2010 at least 1 in 9 Million dollar plus mortgages were in default, while 1 in 12 sub-million dollar mortgages were in default.
Seems to me that failing to meet your obligations knows no socio-economic boundary.
Wealthier people tend to run their financial lives more like a business. When the housing bust occurred it was better to just take the loss of a down payment and move on instead of paying more than market prices for a property.
Yes, the wealthy were far more likely to make a true strategic default to cut their losses. Many middle-class borrowers who ostensibly strategically defaulted really couldn’t afford their payments anyway, so the only strategic about their default was the timing. The true strategic defaults — people who could have paid but chose not to — were the wealthy.
There are a lot of reasons why more expensive areas would default at higher rates than in less expensive areas during a bust. Many small business owners live in more expensive areas. When a recession hits, these businesses feel the contraction most, therefore more defaults.
It isn’t that these owners wouldn’t normally pay if they could, they just make the decision to save the business and lose the house. I’m sure their employees are grateful that they are still able to make their mortgage payments.
In normal times, mean credit scores are higher for high-income census tracts than for low-income census tracts.
57.9 vs. 32.5 TransRisk Score in this FRB study:
http://www.federalreserve.gov/boarddocs/rptcongress/creditscore/creditscore.pdf
“Better at telling the truth and meeting their obligations versus better at lying and evading responsibility”
Nice deflection. So now you are praising people in “better” neighborhoods for defaulting. Got it.
http://www.torontosun.com/2015/06/18/ontario-loses-fiscal-battle-against-rust-belt-states-report
TORONTO – In the battle between Ontario and the so-called “rust belt” U.S. states, this province comes out with a fiscal black eye.
The Fraser Institute is releasing a new report Thursday that shows Ontario plunged into greater debt and lost a bigger share of its manufacturing sector even though its population and economy actually grew.
The report — Ontario vs. the U.S. Rust Belt: Coping With a Changing Economic World — says competing jurisdictions south of the border were able to retain and even grow their manufacturing base while keeping a lid on debt despite more sluggish economies.
Jason Clemens, executive vice-president of the Fraser Institute, said the provincial government likes to blame its double-digit deficits and manufacturing woes since the recession on global restructuring, but a more in-depth analysis suggests the problem is made-in-Ontario.
“At its core, what the paper does is refute the assertion that the Ontario government can’t do anything because the problems in the Ontario economy are the result of a global phenomenon,” Clemens said. “The problems in not only the manufacturing sector, but I would say the Ontario economy more broadly, and the finances of the Ontario government are the result of that policy at Queen’s Park, rather than some external force like global restructuring in manufacturing.”
Reducing deficits and debts through curtailed government spending also encourages businesses to invest more in a jurisdiction because red ink is perceived as future taxes, he said.
The Ontario government has repeatedly pointed to the worldwide recession and changes in manufacturing when explaining the loss of significant companies in the province.
But the rust-belt states, including Indiana, Michigan, Ohio and Pennsylvania, have large manufacturing sectors that are vulnerable to global trends too, Clemens said.
Ian Howcroft, vice-president of Canadian Manufacturers and Exporters, said the situation in Ontario is not as dire as many believe but there is more to be done.
“I think the United States has probably done a better job in recognizing the importance of manufacturing before many in Ontario did,” Howcroft said. “You hear the President of the United States talking about a reshoring and onshoring renaissance going on in manufacturing and doing all they can to build up manufacturing.”
The rust-belt states — such as Illinois, Pennsylvania and Ohio — may still have challenges but they’ve aggressively targeted them, he said.
Ontario has taken some steps to address the cost of electricity for manufacturers but that remains a significant deterrence since those costs are lower in competing jurisdictions, Howcroft said.
The new Ontario Retirement Pension Plan being brought in by the Kathleen Wynne government will create unique new costs for provincial businesses, and the cap-and-trade initiative proposed by the government raises more issues, he said.
“I think we have seen some success, quite a bit of success in some areas, but not enough and it’s becoming more of a challenge to attract investment to Ontario,” Howcroft said. “You see that particularly in the auto sector – we haven’t attracted a new major manufacturer here for many, many years.”
Ontario versus the U.S. Rust Belt
•Share of Ontario economy held by manufacturing in 1999: 19.9%
•Share of Ontario economy held by manufacturing in 2013: 12.8% — a 7.1% drop
•Share of Indiana economy held by manufacturing in 1999: 26.1%
•Share of Indiana economy held by manufacturing in 2013: 30% – a 3.9% increase
•Growth in Ontario’s population (1999-2013): 17.8%
•Growth in Indiana’s population (1999-2013): 8.7%
•Growth in Illinois’ population (1999-2013): 4.2%
•Growth in Pennsylvania’s population (1999-2013): 4.2%
•Real per-capita GDP per person in Ontario (2013): $46,666
•Real per-capita GDP per person in Michigan (2013): $47,979
•Real per-capita GDP per person in Ohio (2013): $53,262
•Real per-capita GDP per person in Illinois (2013): $60,977
Prior to 2008 it was declared by the GSEs themselves that the loans they bought were NOT taxpayer guaranteed. (They also had a reps & warranty clause) Funny how things work out when the wealth of the 0.01% is at risk, eh?