Consumer Gloom: Could it be Housing?


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“That has led a growing number of economists to argue that the collapse of housing prices, a defining feature of this downturn, is also a critical and underappreciated impediment to recovery. Americans have lost a vast amount of wealth, and they have lost faith in housing as an investment. They lack money, and they lack the confidence that they will have more money tomorrow.”

EDITOR’S NOTE: I wonder if it could be housing. Is it possible the consumers have lost faith in the system and their prospects, having lost all their wealth and being mired in debt in an economy dragged down by the collapse of the financial system (except for a few companies)? It’s a difficult question — but only if you have had your eyes and ears closed and blocked to hearing the cries of the people of our once great nation. Bank of America, once great for being the largest bank, is now number two and probably on its way to dying off altogether. Why so gloomy?

For four years I have been writing about the depression — economic and psychological and how they relate — caused by the the crisis caused by Banks stealing the wealth out of the belly of the nation. In a scheme to issue securities to unwary investors, they involuntarily enlisted homeowners to sign and accept financial products that were doomed from the start. This isn’t like driving a new car off the lot and losing value because now it is a used car. This is like driving off a cliff.

HERE IS WHAT HAPPENED: The banks sold investors on the idea of buying “mortgage bonds.” But there actually were few real bonds. The Banks sold them and the world on the idea of pooling mortgage assets into trusts. There were no trusts. And the pools never had anything in them. AFTER they had the money, the Banks organized aggregators who supposedly were collecting mortgages, loans, notes and obligation from originators that were created or enlisted by the aggregators offering higher compensation than anything the world has ever seen.

Then the Banks ordered the aggregators to arrange the loans” which were not owned, into pools that did not exist. The Banks arranged for the aggregators to sell the pools to the Banks and then the Banks sold them to the special purpose vehicles into which the investors had invested their money.The Banks made a “proprietary trading profit” by diverting money that should have been used to fund mortgages into their own pockets. On average the Banks skimmed between 15% and 25% of the money given to them by investors. The rest was a cover-up of forged, fabricated, robo-signed, surrogate signed, fraudulent documents.

The investors were expecting 5% return but the loans were for rates as high as 18%, which meant that the dollar income from the loans exceeded the dollar return expected by the investors (on paper, because the loans did not conform to industry standard underwriting standards). So the amount funded as loans was far less than the amount that the investors advanced. The difference between the amount advanced by investors and the amount loaned out was called a proprietary trading profit for the Bank, which has now vanished because nobody except the Banks wants this system anymore. That’s why Goldman Sachs no longer reports high “proprietary” trading profits. It isn’t regulation that is depressing Bank earnings it is the fact that the market won’t tolerate theft anymore.

There was no profit. They merely didn’t loan out the amount that investors gave them to fund mortgages. They kept the rest and called it profit. Under the Truth in Lending Act, this would be an undisclosed yield spread premium — that puts the Bank squarely in the sites of investors who didn’t get what was promised and borrowers who didn’t get the disclosure that was required. What investor and what borrower would have signed onto a deal where the intermediaries were making in fees as much as the loan itself? These Banks are doomed and so are their shareholders and management who thought they could away with calling theft of investor money by another name — “proprietary trading profits.”

The effect on investors was devastating while the effect on banks was bountiful with bonuses, supercharged earnings, and the esteem of the world as they posted ever higher values on their balance sheets and income statements. The effect on borrowers was also devastating as they had been steered into loans that were guaranteed to fail, and that MUST fail, in order for the Banks to cover up the theft from investors. The money received from insurance and bailouts and such was taken by the Banks who never had any loss in the first instance because it was investor money that was used to fund the loans.

The ultimate result is that everyone who had anything invested in real property was demolished by the scheme of the banks. The scheme was covered up as a lending program but in fact it was a scam to cover up the theft from investors and the theft of money that was received to cover the investors’ advance. So the borrowers are portrayed as owing money on obligations that have been paid several times over and they not only have no money to pay it, they also have no prospects of getting out from under this mess. The mess includes millions of vacant homes and of course millions of homeless people. The effect also includes millions of closed businesses whose customers have no money to buy anything.

HERE IS WHAT WE CAN DO ABOUT IT: Apply existing standards of generally accepted accounting principles to the Banks and have them cough up the truth, disgorge the illicit profit, apply them to the investor accounts, and thus reduce the obligations, pro rata of borrowers for the money that was paid to cover the losses. Then we will have a basis for settling all the foreclosures, and the wealth of the pensioners and homeowners alike will be restored.

Investors and borrowers will be smarter and less gloomy if they know that their government demanded the truth and acted on it. Their rage will increase exponentially if their government insists on going to the Banks for projections and status reports. Politicians beware! The people now understand what was done to them, their neighbors and their nation — and they are not just gloomy, they are angry.

Gloom Grips Consumers, and It May Be Home Prices


ORLANDO, Fla. — Ernest Markey lost his stone-cutting business in 2009. He then sold his home for half a million dollars less than its value at the peak of the housing bubble and moved with his wife, Marie, to a smaller home in a less affluent suburb. They gave up two new cars and bought one. Used.

The Markeys have since patched together a semblance of their old life, opening a new stone-cutting shop. But they do not expect that they will ever recover financially from the loss of equity in their old home.

“For two years I kept thinking that things would get better,” Mr. Markey, 51, said as he stood in his empty store on a recent weekday. “Now I think the future doesn’t look so good.”

The United States has a confidence problem: a nation long defined by irrational exuberance has turned gloomy about tomorrow. Consumers are holding back, businesses are suffering and the economy is barely growing.

There are good reasons for gloom — incomes have declined, many people cannot find jobs, few trust the government to make things better — but as Federal Reserve chairman, Ben S. Bernanke, noted earlier this year, those problems are not sufficient to explain the depth of the funk.

That has led a growing number of economists to argue that the collapse of housing prices, a defining feature of this downturn, is also a critical and underappreciated impediment to recovery. Americans have lost a vast amount of wealth, and they have lost faith in housing as an investment. They lack money, and they lack the confidence that they will have more money tomorrow.

Many say they believe that the bust has permanently changed their financial trajectory.

“People don’t expect their home to regain value, and that’s really led to a change in consumer attitudes about the economy that we’ve just never seen before,” said Richard Curtin, a professor of economics at the University of Michigan who directs its Survey of Consumers. The latest data from the survey, released Friday by Thomson Reuters, shows that expectations for economic growth have fallen to the lowest level since May 1980.

In Orlando, a city that trades in upbeat fantasies, the housing crash has been particularly painful. The total value of area homes has fallen below the total mortgage debt on those homes, according to the real estate analytics firm CoreLogic. In the parlance of the real estate world, Orlando is underwater, a distinction matched by Las Vegas.

“I don’t know that it’s going to get better. We just have to get used to it,” said Sherry DeWeese, whose home in Ocoee, a northwestern suburb of Orlando, is worth less than she paid for it 13 years ago — and about a third of its value at the peak of the market. “It was nothing to buy whatever we wanted. Now we just think about what we really need.”

Economists have only recently devoted serious study to how a decline in housing prices affects consumer spending, not least because this is the first decline in the average price of an American home since the Great Depression. A 2007 review of existing research by the Congressional Budget Office reported that people reduce spending by $20 to $70 a year for every $1,000 decline in the value of their home.

This “wealth effect” is significantly larger for changes in home equity than in the value of other investments, such as stocks, apparently because people regard changes in housing prices as more likely to endure.

A recent paper by Karl E. Case, an economics professor at Wellesley College, and two co-authors estimated the decline in home prices from 2005 to 2009 caused consumer spending to be $240 billion lower in 2010 than it otherwise would have been. That figure is equal to about 1.7 percent of annual economic activity, enough to be the difference between the mediocre recent growth and healthy growth. And it does not include all the other effects of the housing crash, including the low level of new home construction, that are also weighing on the economy.

Roy Pugsley, who owns a pool supply store in Winter Garden, another suburb here, said that he made 2,500 fewer sales during the first eight months of 2011 compared with the same period in 2007. That translates to one less person walking through the doors to buy chemicals or toys or spare parts in each hour that the store is open.

Mr. Pugsley said business actually increased in the early days of the recession; customers had told him they were spending more time at home. But now people buy only what they need for maintenance. “People realized that it wasn’t going to get any better, and they stopped spending on their pools, too,” he said.

At Milcarsky’s Appliance Center in the adjacent town of Longwood, business now comes from people remodeling their own homes rather than builders, and customers are picking cheaper models, said Doug Morey, a sales manager.

“People who might have bought that” — he taps a stove with chunky burners, designed to look like it belongs in a restaurant kitchen — “are double-thinking it. Everyone has had to cut back.”

That means Milcarsky’s has cut back too. The company, which employed 26 people three years ago, now has about a dozen workers, and they are making less in salary and commissions.

“I might like to think that I’m middle class, but I’m not. I’m not anymore,” said Rae-Anne Crotty, a customer service manager at the store. She now shops for groceries at discount stores, she said, and buys gifts for her children at Christmas but not on their birthdays.

It remains the prevailing view of economic policy makers that economic activity will eventually return to the same trajectory as before the recession. Mr. Bernanke and others have said that they see no evidence of any permanent change in the economy. Previous bouts of economic pessimism, as in the early 1980s and early 1990s, went away once growth picked up.

But many people in the Orlando area do not share this confidence, at least not when it comes to their own prospects. Instead, like the Markeys, they are settling into lives of less prosperity.

The couple moved to Orlando 12 years ago from central Massachusetts in search of opportunities. The business Mr. Markey created, Stone Giant, grew to include two factories and 60 employees, and it installed granite countertops in up to 15 new kitchens every day.

His new company, Winter Park Granite, now installs two kitchens on the average day. He has eight employees but cannot afford health insurance for them or himself. The family income last year was less than a third of the $175,000 that he and his wife made in 2007, their last good year.

And he sees little room for growth. He has stopped spending money on advertising.

“We’re never going to get that big again,” he said. “I was someone employing people and taking people to the good life. Now I’m just trying to survive.”

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