The MGH Report

Michael G. Haran, Proprietor


Posted by on Feb 26, 2009

Most of the time legislative “pork,” the process of lawmaker funneling taxpayer dollars to pet projects back home, is looked upon as not a good thing. But with the country teetering on the biggest meltdown since 1929 it is critical that Congress use all of its political skills to implement the stimulus package. Some times bad is good.

Now that the legislators are through beating their chest as to who’s the biggest stimulus pork cutter in Congress and the bill has passed, you just watch those same politicians fight to get their hands on that money.

In 2007, congress overhauled the ethics rules requiring lawmakers to disclose, for the first time, their earmarks – taxpayer dollars that are doled out as favors. But being the good politicians that they are, and since the scandals had died-down, they managed to exploit loopholes in the rules or just ignored them altogether.

The 2008 defense bill contained $8.5 billion in earmarks of which $3.5 billion were hidden. The amounts, which were cut by about 25%, still accounted for 2,043 earmarks. Give a politician a bill and they’ll earmark it. The 2009 $410 billion omnibus spending bill has approximately 9,000 earmarks totaling about $5 billion.

Independent Senator Joe Lieberman and Democratic Senators Christopher Dodd and Jack Reed all took credit for a new submarine that will be built by General Dynamics in Groton, Connecticut. The military never asked for the $588 million project which was the largest earmark in the defense bill.

This congressional cat and mouse game of “button, button who’s got the button” is as old as politics. It’s kind of crazy since everybody knows what’s going on but it’s really what they were elected for – to bring home the bacon. But at this time the whole nation is now every congressman’s “home” district. Regardless of where they are located the stimulus money has to go first to where home forecloses are the worst and the unemployment rates the highest. Places like Fort Meyer, Fla., Sacramento, Ca. and Elkhorn, Ind.

Now a teapot museum in Sparta, North Carolina isn’t exactly a big job creator but, as an example, the Ketchikan, Alaska “Bridge to Nowhere” could be. The “Bridge” project would create immediate jobs and it would stimulate the private sector. But it would have to be disqualified because there are other areas in the nation where foreclosures and unemployment are more critical and because the project would fail to create long term growth.

This money should go into projects that will create not only primary jobs but also private sector ancillary and tertiary jobs. The more jobs created the more taxes are generated which will go toward repaying this massive debt. Because of the size of our economy (say $13 trillion) at full employment we should be able to grow out of this mess.

Infrastructure is the quickest way to get people to work and revive retail trade. Labor is that sector of our society which will spend their paychecks because they can’t afford to save. There are over 3,000 infrastructure projects permit ready and they only need the money to get started. Congress should focus on those projects that can create three to five secondary jobs for every direct job created by a stimulus project.

The WWII stimulation of the private sector is what finally ended the Great Depression. This time around “Green Technology” should be our WW. The jobs that create not only immediate stimulus but also lead to long term economic growth should take priority. We should get a “and that’s not all” for our buck.

In Ithaca, N.Y., Connect Ithaca is trying to make this college town the first podcar community in the U.S. These driverless, electric, lightweight vehicles ride on their own networks separate from other traffic. A rider enters a destination on a computer pad and a car would take the person nonstop to the location. They reduce the use of fossil fuels, reduce traffic congestion and free up space now used by parking.

How about putting those metal strips in all new roads. These “smart” strips can communicate with the future generation of cars for such things as traffic, weather and alert information. If someone falls asleep on their way home wouldn’t it be wonderful if that person woke up in their garage rather than wrapped around a tree?

And isn’t it about time we built a water pipeline delivery system that will crisis-cross the country? The Great Lakes hold the world’s largest body of fresh water. It looks like climate changes are going to cause wider swings in drought/rain whether cycles so why not build a water infrastructure that could take the flood waters from the Midwest to the water starved areas in the West and Southeast. We could utilize the oil and gas pipeline right-a-ways that are already in place. It could be today’s federal highway system of the 1950’s.

And what ever happened to putting a solar panel on every flat roof commercial building in America?

A $588 million submarine project is not a bad deal as long as it creates a slew of ancillary jobs. Building some thing that the military actually needs would be nice but now we don’t need nice – we need jobs. No nice; no back scratching; nothing hidden just get he job done!

Is it the stimulus package big enough? Who knows – if not, we can always add to it later. Will it work? Who knows – the Great Depression bailout didn’t work until FDR started guaranteeing consumer credit at department stores which, by the way, started the old lay-away plans that caused a boom in the sale of home appliances. But don’t bet against the American businessperson. Give them an opportunity to make money and make it they will.

Our continuing credit stagnation is because we are still in a deflationary cycle. The stimulus is meant to artificially bottom out this cycle by jolting the private sector to life. So the money should be shoved down the economy’s throat as quickly as possible. And who best to do this? Why the only segment of our government experienced in this sort of thing – the U.S. Congress, of course. Oink!

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Posted by on Feb 26, 2009

We have two new adages to add to the housing crisis lexicon. “Cram Down” and “Skin Game,” that can now be added to “Subprime,” “Toxic,” “Underwater” and “Upside Down.” Because Cram Down refers to a bankruptcy judge reducing the principal balance of a home mortgage it was probably coined by some residential lender. Skin Game is Secretary of Housing and Urban Development Shaun Donovan reference to mortgage lenders participating in loan modifications.

It’s now becoming clearer how the feds are looking to tackle the most important part of the recovery plan. Until housing is stabilized nothing else matters – nothing. Without housing stabilization all the stimulus money will be spent and we would still be at an economic stand still.

Mr. Donovan announced that the government’s current plan, which has yet to be finalized, would help homeowners on two levels. The first would be to help the “underwater” group who have been making their payment but now find their homes worth a couple of hundred thousand less than what they paid for them. The second group would be any homeowner who, in good faith, refinanced into a “subprime” loan which they now can’t afford.

The first group would get their mortgages reduced to the current value of their home. Say someone bought their home for $500,000 and now it’s worth only $300,000. There are a lot of these homeowners that have been watching their values erode while speculators come in and buy up their neighbor’s foreclosures. This program will allow families to stay in their homes and have some chance of future appreciation. For doing this the government could go partners with the homeowner in any future appreciation. Good deal for both parties.

The second group would have their mortgages modified to principal and interest payments of no more that 38% of their incomes. This percentage could be lowered to 30% if the lender or loan servicer agrees to forgo an additional eight percent. The secretary referred to this as “giving some skin” by the lender. He continued that if they weren’t willing to play “the skin game” then the lender wouldn’t be helped if the home goes into foreclosure.

I think we are getting close. But the feds have to do more. They have to keep the foreclosed homes out of the hands of lenders. These lenders will sell the foreclosed homes for whatever they can get for them. This not only decimates whole communities buy by locking in values that are as much as 70% below what neighborhood homes originally sold for, it perpetuate a continuing deflationary cycle which, if not stopped, will dilute any stimulus effect on the economy.

What will stop this deflation dead in its tracks would be if the feds bought all the foreclosures that are under water. They should then hold them until the market improved to the point where the home could be sold for the amount of the foreclosed mortgage or maybe even at a profit. I wouldn’t mind being a one three hundred millionth owner in some five million homes. And being partners with an entity that can legally print money is better than investing with say, Uncle Louie. Now wouldn’t that be a nice gift to our children as it pays down the deficit.

The conservative right might say that this is a form of nationalization or that the government doesn’t have the expertise to manage residential real estate but let me remind everyone that the feds are not only the largest owners of real estate in the country, they have a long history of managing foreclosures through the FHA, VA Fannie Mea and Freddie Mac.

My only beef so far is that the package is limited to just conforming loans ($417,000 or less). This completely cuts out the trade up market which comprises a large part of the middle class in this country. These are the people are the small business owners and service providers which are the main source of job growth in this country. These families have to be stabilized too if we are going to stop this deflationary cycle.

This limit is the same mind set in Congress that cut the $15,000 credit for buying a home out of the stimulus bill. At this point in the recession anything that promotes housing stability should be a top priority. The program should take more expensive area of the country into consideration. I’m not talking about the upper end. In this market, the rich are just going to have to fend for themselves. I’m talking about people that work hard to support their families just like every middle class community in the country. It’s just that these people happen to live in more expensive areas of the country.

The feds are getting close to stopping the one thing that keeps the recession from bottoming out – housing deflation. With a little more tweaking I think they’ll have it.

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Posted by on Feb 13, 2009

A lot of people are sitting on the sidelines waiting for residential real estate prices to dip even lower than they currently are. Is this a smart move or are they missing a golden opportunity? Everyone knows that wealth is created in times like this but is this the time?

The current economic situation has created a buying opportunity that hasn’t been seen in the past 20 years. Entry level home buying activity is dominated by first time buyers and investors but trade up and upper level housing sales have ground to a halt. So what’s the problem why aren’t housing sales going through the roof?

The reason is we are in a deflationary mind set. People still think housing prices are still falling. This is why people are not buying and banks are not lending. Why buy a house if it could be worth less tomorrow and why would a bank lend on a depreciating asset? And why do they think this? Because it’s true. Housing prices are still falling. But should that be a reason not to buy? I don’t thinks so.

The cause of the entry level price depression is over supply. This, in itself is not unusual. Normally, residential housing runs in a five year cycle. Prices go along; the population continues to grow; not enough houses; prices increase with demand; builders over build to that demand. Sales slow; prices stabilize to reflect that demand; prices go along; and the cycle repeats itself.

What happened to the last cycle was that cheap money caused an over supply of houses to be built. Based on the California Department of Finance population growth projections, the current over supply of housing stock should be absorbed by the end of 2010. However, because the current supply of housing is artificially large it has affected the core U.S. economy.  And because 75% of the U.S. economy is based on retail sales, the collapse of the housing market has affected the value of the U.S. stock market.

As J.P. Morgan said during the collapse of the stock market in 1929, “buy when there’s blood in the streets.” Now no one knows when this real estate market will bottom out but bottom out it will. The current over supply of the hosing stock will be absorbed and the financial systems will be re-regulated. People will make money in this market. The only question is will you be one of them?

Even in high priced markets like the Bay Area opportunities abound. The value in buying an entry level home for $300k less than it was priced a year ago is obvious and dominates the headlines. But what about the trade up and upper end markets? The lack of a trade up buyers has affected the upper end market. There is a common attitude that the upper end homes are recession proof. To a certain degree that is true. If an owner of an upper end home doesn’t have to sell, they will simply keep their home off the market until the market comes back into balance. But there are always people that have to sell even in the upper end.

The deals are there and all a serious buyer has to do is educate him/her self and start looking. In addition, the pay-back provision of the $8,000 first time home buyer tax credit has been repealed in the final stimulus bill. No one knows when this market will bottom out but close is good enough. Wealth is created in times like this.

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