Sunday, February 15, 2009

Weekend Update....

Well, the stimulus was passed. Up next bank bailout 2, home bailouts and another bailout for the autos!!!

Regarding the pending home plan the details are sketchy right now but here's what we heard today - "the plan would reduce Americans' payments on troubled mortgages, people familiar with the discussions said late last week, possibly through a cut in the interest rate, the costs of which would be shared by the government and mortgage servicers. Government officials would make the reduction available to people who are at risk of defaulting.

A loan-modification program at government-backed Fannie Mae and Freddie Mac currently calls for holding monthly housing-related payments to 38% of pretax income. The new formula is likely to be as low as about 31%, according to some people."

I hate to appear like grumpy five year old that says no to everything, but in a nutshell here are my issues with this plan:

* It aims to put a FLOOR underneath home prices. This flies in the face of the US economic model. Did anyone suggest that we put a CAP on home prices when they were jumping 20% a year?

* Let's do a little math. Assume you're leveraged to your eyeballs in an overpriced ranch in Arizona. You're husband loses his job as mortgage broker and your household income is down 50% in the last couple of years. Your take pre-tax pay is $5,000/month and you have a $2,000/month mortgage (40% of pre-tax pay). The government feels your pain so instead of suggesting that you try to work out a short sale and move into a 1 bedroom apartment that you can actually afford, we're going to help you get your mortgage down to $1,500 a month (30% of pre-tax pay). Unfortunately, since we're dealing with pre-tax money, your new super-duper mortgage still represent almost 50% of your AFTER-TAX salary.

Just a quick note on housing since it's going to be a hot news topic this week. Talk radio is full of people reciting the talking points on how the Community Reinvestment Act caused the housing collapse. This is pure drivel. Look where all the foreclosures are centered - Arizona, CA, Florida, Nevada, etc. I don't do politics here (too many good people have that covered), but if you're interested there's a good rundown on the CRA myths at The Big Picture.

Japan's economy shrank 12.7% in the 4th qtr! Wow. That's a simply stunning number. The great consumer contraction seems to be having a particularly harsh impact on Japanese exports of everything from cars to televisions. I actually think there are two things at play here

1) The aspiration purchasers are moving downstream - For the same reason that some people are moving from Starbucks to McDonalds, those people that are still spending are moving downmarket from Sony's to Vizios.

2) The global consumer retrenchment. This is hitting all consumer export nations equally.

I was very disappointed in one component of the stimulus legislation that remained intact. Any bailout bank or financial services firm is going to be prohibited from hiring people on H1-B visas. H1-B visas have been an hot-button political issue for years and now the protectionists in Congress seemed to have gotten their way.

This is terrible idea because a) it keeps some of the best and brightest in their fields out of the US, b) it reduces our competitiveness by forcing the US to hire not the best person for the job, but the best US citizen, and C) it is ridiculously easy to work around this plan.

Let's say Citibank had planned to hire 200 employees living and working in the US under the H1-B visa program. Now, since Citibank has taken bailout funds, they can no longer hire these people. These people will likely stay in India, Vietnam, China, etc and become independent contractors for Citibank. They still work for Citibank, but now their purchasing power is feeding the Chinese or Indian economies rather than our own. It's called cutting off our nose to spite our face.....



Anonymous said...

Comment on the problems farmers are facing when you have the time. Their problems will affect many other business they help support in the north country.

The Artful Blogger said...

That's a really good question. I'll think about that and try to put something up this week.

Long-term I think our disconnect from the farm does not bode well for the US.