It's dark comedy indeed that "US shares turned sharply lower following the announcement" of a "stimulus package worth perhaps $140bn dollars [that] will have little real impact on a total US economy worth a gargantuan $14,000bn a year," according to the BBC correspondent. A more poignant evaluation of the tax cut is to question how much good it will do to stave off a recession that has little to do with tax levels in the first place.
It only takes one look at the BBC's "latest news" sidebar next to the article, which, at the time I read it, displayed these headlines:
GLOBAL CREDIT CRUNCHAnd these headlines, further down under the "US SUB-PRIME PROBLEMS" header:
Sub-prime woes spread worldwide
Merrill Lynch posts $7.8bn loss JP Morgan's $1.3bn sub-prime hit Citigroup's $9.8bn sub-prime loss Fed boss says 2008 outlook worse Sub-prime woes continue for UBS Bear Stearns boss Cayne resigns Morgan Stanley takes $9.4bn hit Fed tightens sub-prime rules ECB lends $500bn to lower rates
Nor will Bush's "housing rescue plan," which allows some distressed sub-prime borrowers to refinance their mortgage loans at a lower rate or freeze interest payments, guarantee a significant leg up for the economy.
Bush details housing rescue plan Political deadlock on aid Carnage on Wall Street Foreclosure wave sweeps US US housing market crash Credit woes 'need private action'
"Something other than lower interest rates is needed to fix the sub-prime crisis and a freeze on mortgage interest payments is a big step in the right direction, if it works," said Cary Leahey, managing director of Decision Economics. [BBC]It won't work for many people, according to Forbes.
The Bush Administration's plan to rescue the housing market and keep the economy from slipping into recession took flak yesterday for freezing interest rate hikes for a mere fraction of subprime, adjustable-rate borrowers. But there's a bigger risk: It could deepen and lengthen the credit crisis.From the perspective of a financial layman like me, the federal government's branch-hacking strategies fail to get at the root of the U.S. economic crisis. It is a crisis of value.
According to analysis by Barclays Capital, the "freezer-teaser" plan applies to just 240,000 subprime loans. The Mortgage Bankers Association reports the number of subprime adjustable rate mortgages at 2.9 million.
It also won't help the 16% of subprime borrowers who are already delinquent or in default, and it won't help millions of other homeowners who either will be deemed able to pay the higher rates when they adjust, starting in January, or who have the unhappy circumstance of having a house worth less than their mortgage or a loan that has already reset to the higher rates.
Home "buyers" took out sub-prime mortgage loans that seemed irresistible due to their initial low interest rates. When the interest rates reset to much higher levels (sometimes double), many borrowers could not pay them back. Many had poor credit histories and-or income levels that were not prepared for the higher rates.
These homes, of course, were primarily in the suburbs. According to an excellent BBC guide on the crisis, "it was difficult [for lower-income or first-time buyers] to become an owner-occupier without moving to the very edge of the metropolitan area." The guide contains a telling graphic of the locations of the Cleveland metropolitan area's foreclosures: primarily in the suburban areas. The City of Cleveland has since filed a lawsuit against 21 banks who engaged in sub-prime lending in the area.
The hard evidence points to the deception of the banks in offering sub-prime loans without clearly explaining the adjustable rate structure. But the crisis is about the more abstract but fundamental deception of the American dream. In an important sense, cookie-cutter suburban homes are overvalued. They incur higher transportation costs on their inhabitants, who have to drive to do any errand. Many potential buyers probably also overestimated the size of the house they could afford. The initial "teaser" rates could have made these homes seem affordable. If so, they also could be facing higher heating or cooling costs.
In any case, it was naive to believe that the expected value of these homes would materialize. A U.S. Conference of Mayors report (PDF) chronicles the housing bubble growing and bursting:
The U.S. economy this decade experienced a dramatic real estate bubble – the inflation of both home values far in excess of historic norms and of reasonable estimates of the growth of fundamental determinants of home value. One salient feature of the bubble psychology was the expectation on the part of home-buyers of a continuation of this supra-normal trend in home price appreciation.The mortgage crisis is primarily a metropolitan crisis. It is the first shock reality has sent us that our suburban fantasy is unsustainable. (The second shock might come with the 2008 summer driving season.) The libertarian, hyper-individualist strand in our society has pushed us to think that there is only value in individual homes. The larger the house, the larger the lot, the better, even if we are isolated from everyone else, even if we have to spend a lot more for our daily lives. In short, we have forgotten the value of community. We have forgotten that living in urban settings can decrease our cost of living, primarily through lower transportation costs. Transportation costs are significant, sometimes higher for households than housing costs, but they are not something homeowners generally think about when deciding the affordability of a place. A 2006 report by the Center for Housing Policy (PDF) found that
...then the perfect storm occurred. Home price appreciation ground to a halt, and home sales plummeted. This happened just as the ARM rate resets were beginning in large numbers, dooming the finances of millions of buyers. Delinquencies and foreclosures began to mount. At the same time, the inventory of new and existing homes for sale escalated, putting further downward pressure on prices, and limiting the ability of those who needed to
[In 2008,] [h]omeowners will...see property values decline by $1.2 trillion in 2008. The initial adjustment of over-heated home prices to the combination of weaker market demand and large inventories of homes for sale would have reduced values by $676 billion in 2008. Now, due to the foreclosure and mortgage crisis, home values will decline further, by an additional $519 billion. Foreclosures in 2008 will increase by at least 1.4 million. These homes represent a market value of $316 billion. [emphasis added]
On average...working families in the 28 metropolitan areas spend about 57 percent of their incomes on the combined costs of housing and transportation, with roughly 28 percent of income going for housing and 29 percent going for transportation. While the share of income devoted to housing or transportation varies from area to area, the combined costs of the two expenses are surprisingly constant. In areas where families spend more on housing, they tend to spend less on transportation, and vice-versa. However, in all the metropolitan areas there are neighborhoods where working families are saddled with both high housing and high transportation cost burdens.It follows that if families spend less on transportation, they can spend more on housing. That is to say, perhaps they could better bear ratcheted-up interest rates and save their property from foreclosure, or, better yet, afford a conventional loan with prime rates.
In their search for lower cost housing, working families often locate far from their place of work, dramatically increasing their transportation costs and commute times. Indeed, for many such families, their transportation costs exceed their housing costs. Recent census data suggest this trend may be accelerating. Of the 20 fastest growing counties in the United States, 15 are located 30 miles or more from the closest central business district.
What would help our current economic woes much more than offering up minute tax breaks or suing sub-prime lenders would be to halt the suburban growth in this country. It actually would have paid off 15 years ago when we were starting to come out of the early 1990s recession and the housing market started booming, or 60 years ago when we converted the hubris of World War II victory into paving the first interstate highways and machining the first suburban tract homes on a large-scale. We could have done this through comprehensive, regional planning that directed growth towards existing built-up centers where utilities were already provided. We could have done this through urban growth boundaries or urban services boundaries. In short, we could have done this through smart growth.
Now reality has started to halt suburban growth for us. And since we were relatively unprepared due to our previous collective fantasizing, it is being halted the hard way, and we will endure losses to the tune of $166 billion less GDP, half a million fewer jobs, and the aforementioned $1.2 trillion drop in property values, according to the U.S. Conference of Mayors report.
This, I have long thought, is an example that gets at the heart of what sustainability really means to me. If nothing is constant but change, then, technically, nothing is sustainable. We can only be sustainable in direct proportion to our ability to adapt to change. Even a country totally powered by renewable energy cannot escape the law of entropy. Wind turbines and solar panels eventually deteriorate.
The central question of sustainability then becomes, "Do we want to avoid massive hardship or suffer it?" This question is intimately tied to ethical first principles based on happiness, on eudaimonia. Its necessary corollary is, "Do we want to plan for change or let it overtake us when we are unprepared?" Clearly, the housing crisis and slumping economy fall under the latter result. We should learn from this hardship and accelerate planning for quality of life after all the cheap oil is gone. This involves rediscovering the value of community.