ARRA’s Economic Forecasts Disparaged

[This was an email I sent to Mark Cavanaugh, director of Colorado’s Economic Recovery Team, and to Greg Griffin, the Denver Post reporter who wrote the story, on Monday, August 3, 2009. I was incensed over the closing comment in the story, for reasons I address below.]

Dear Mr Cavanaugh,

I was disappointed to read that the Denver Post’s Sunday edition front page story ended with this quote attributed to you:

I have no idea where that number came from…I think it was pin the tail on the donkey.

— Mike Cavanaugh, Director of Colorado Economic Recovery program, page 6A, Denver Post, Sunday, August 2, 2009,
in referring to how the Obama administration developed its estimates of the number of jobs created by ARRA, the American
Reinvestment and Recovery Act

This was disappointing to read because (1) in the previous paragraph it was explained how the federal economists made the estimate, (2) it put you in the position of belittling and undermining the very mission of the Colorado Economic Recovery program which you are directing, and, finally, (3) disparaging the economics profession in general.

Don’t get me wrong: I don’t have much respect for economic forecasts either. However, I have worked as a professional economic consultant and have taught undergraduate economics for some years, and know well the obstacles that economists are up against when they are expected to deliver a forecast — but not given any reliable first-hand data sources on which to base them. So they do the best they can with what they’ve got — which often is not very much. The problem lies not so much with the economics profession itself, or its forecasting methodologies; rather, it is much like the old computer addage: GIGO, or Garbage In, Garbage Out. In other words, if the politicians and governmental administrators are unwilling to invest in better economic reporting systems, they will be forced to rely on such “donkey tail” forecasts; it is hardly the fault of the economists forced to work with the poor data.

It would not be surprising to hear that your remarks may have been taken out of context, and misrepresented by the reporter who wrote this piece; but, at any rate, it was an unprofessional and negative remark about a very serious topic. I’ve been unemployed myself since the end of last year, and sincerely hope that ARRA will have its intended effect.

Very sincerely,
Rick Casey

Wells Fargo Is Stealing Me Blind! (or just blindly stealing?)

This little diatribe is about an economic fact of life that’s been bugging me for some time now as a result of the mortgage crisis. Let me describe this a bit and see if it might bug you too…right where it hurts, in your wallet…

Here’s the simple logic, step by step: (a) the mortgage boom (which happened for whatever reasons, however nefarious) caused housing prices to rise to unforeseen heights during the Nineties and into the first years of the 21st century, causing (b) an asset bubble. This meant that many (most?) homes purchased in this period were at (historically) inflated prices. (It made no difference why the home was bought, for speculation or occupation, of course.) However, (c) the boom ultimately crashes due to the financial crisis, initiating the biggest recession since the Great Depression (which has a long time to yet play out), with consequent unemployment, causing (d) a wide and prolonged rise in foreclosures across the country, more intensely in some areas than others, resulting in, of course, (e) the asset bubble to finally burst, resulting in the current dramatic devaluation of housing market prices, again more intensely in some areas than others.
Now why should this bug me, you’re thinking? Because I’m one of those people who bought a home in this period, who is now unemployed (due to cutbacks in federal funding for scientific research by NIH, thank you very much George W. et al), and struggling to hang on to my home.
What is bugging me is how much I paid for my home, how much it is worth now, and just how little I expect Wells Fargo, my mortgage bank, to care; but I’m trying! I have an application in to them for a “mortgage loan modification” as we speak. And here’s the reason: I paid $143,000 for my two bedroom condo is a nice, but definitely middle class, neighbor in Lafayette, a suburb between Boulder and Denver in 2003 — probably at the height of housing boom. With hindsight, yes, it was not a smart time to buy; but at the time, I had been renting all my adult life, I’d just graduated from CU-Boulder with a graduate degree, the economy was still in the final overheated phase of the financial boom, and I needed a place to live — it was the time in my life to buy. Boy, was I in the wrong place at the wrong time…
Last week I received my 2008 assessed value for my home: as of June 30, 2008 it was $133,100. Which means a decrease in value of $9,900 in the last five years, or a drop of 6.9%. Acutally, I doubt I could get $120,000 for it now, a drop of 16%. This on top of being unemployed since the end of last year. I’m barely making my mortgage payments with my unemployment benefits.
But does any of this make a difference to Wells Fargo? Not a bit; all they’re worried about is foreclosure, which would stick them with this now-lower-value property — and a lot less bucks to them over the life of the loan. So of course they send me a weekly barrage of mail warning me about being late with mortgage payments (gee, sorry I’m late, my cash flow is totally dependent on my unemployment benefits now), where to seek “credit counseling” and even warnings about how “short sales” of foreclosed homes dumped on the market work. Hey, do I need this? I’m a little late with my mortgage payment each month, and WF starts acting like a paranoid grandmother — give me a break. (I called them to ask if they would change the date my monthly payment was due; no way, they said, because it’s “fixed by my mortgage.” Aww, give me a friggin’ break…)
No, what is really bugging me about this is what happens when you take my situation, which is all too common in the country right now, and scale it up to the macroeconomic level. Observed from that perspective, the situation begins to look like a massive wealth transfer from the low to middle class to the financial institutions who own the mortgages (and, of course, to the higher level management that runs them. ) Because few, if any, of the mortgage banks are reducing the principle on the loans of these homes that were purchased during that time, meaning that the homeowners who are stuck with the bill will be paying back much more than the home is worth now, or probably ever will be worth again. Which is why I feel like my mortgage bank is blindly stealing from me. Of course, they will claim they can’t be blamed for how housing prices rise and fall (or can they?), and it’s not their fault that the balance I still owe on my place ($127,554.63) is probably more than the price at which it would currently sell.
No, I suppose not. This is all just as legal as it gets. But it’s still unfair, and it’s still a massive wealth transfer, and it’s also beginning to be noticed by others. In the July 5, 2009 issue of the Sunday New York Times, reporter Gretchen Mortgenson aptly pointed out that “Foreclosures remain one of the great financial ills for the economy.” And as one of her sources describes just the point that’s bugging me: how few mortgages are being “modified” and how few loans have had anyreduction in principal…and how irrational this action is on the part of the big mortgage banks; let me quote at length:

Given losses like these, Mr. White said he was perplexed that lenders and their representatives were resisting reducing principal when they modify loans. His data shows how rare it is for lenders to reduce principal. In June, for example, 3,135 loans — just 17.2 percent of the total modified — involved write-downs of principal, interest or fees. The total loss from these write-downs was just $45 million in June.

And yet, the losses incurred in foreclosure sales involving loans in the securitization trusts were a staggering $4.59 billion in June. “There is 100 times as much money lost in foreclosure sales as there was in writing down balances in modifications,” Mr. White said. “That is not rational economic behavior.”1

And there you have it: the mortage banks stealing from the middle class, claiming that this is just blind economic forces at work…or are they? I think it’s only fair that the mortgage banks be forced to share in the economic pain of readjustment, and be given fair, transparent, national standard guidelines — and be required by force of law to obey them — by how to reduce principal balances on any mortgages purchased during this bubble in housing prices, until housing payments are brought back in line with income levels in this country. I think this in only fair particularly since the mortgage banks were so complicit in creating this situation; but that’s another story…1Gretchen Morgenson, So Many Foreclosures, So Little Logic, New York Times, June 5, 2009, page BU 1.

Why I Believe in the Sustainability Movement

Why I Believe in the Sustainability Movement
[This essay was submitted, and accepted, to NPR’s “This I Believe” radio project on January 20, 2009. I wanted to summarize my personal vision of how the sustainability movement is transforming society, based on my experiences in the economics field and growing up in America in the Sixties. I started this essay in November 2005 but it took the Obama campaign and election to inspire me to finish it. I believe we are observing a global paradigm shift that will force out the long-broken economic model of neoclassical economic development which could, potentially, result in new methods of sustainable development that unites the world in a culture that is more at harmony with nature and fosters true community and human development. I want to help make that shift happen.]

I grew up in the turbulent Sixties. When I started college in 1972, the world was a chaotic mix of the civil rights movement, political assassinations, Vietnam, the nuclear weapons race, hippies, Watergate and Woodstock. In college, I dedicated my university education to understanding social and environmental problems at a deeper level, searching for something to believe in; but it wasn’t until graduate school that I discovered my intellectual calling: economics. It showed how the “real world” really worked, and held the promise of not only explaining the world, but, I believed, how to improve it.
After graduation, I tried teaching economics at a community college. I enjoyed connecting with my students, helping them to better understand this complex world. But after a few years, as I read and thought more deeply on my own, it became increasingly difficult to believe conventional economic theory fully explained how the “real world” works. Gradually, I became convinced that my textbooks were missing a rather important fact: that the global economy was more accurately described as a global corporate state, where governments the world over were mostly acting in the interests of corporations at the expense of the people they were elected to serve. The proposition that the well being of people and corporations were identical, with the benefits trickling down to all, became increasingly difficult to support in the face of evidence to the contrary. Actually, the economy was being managed for the profits of corporations at increasingly greater expense to the environment and society’s collective well being, though my textbooks put little emphasis on this. Discouraged, I turned to computer programming to earn a living, resigned to a world ruled by unstoppable global capitalism.
Since then, global warming has become a scientific fact. Far from fearing global climate change, I welcome it, because I believe this dark cloud has a silver lining: it will drive us towards the green economy which conventional “market forces” could never have achieved. The dramatic and frightening economic events of 2008 have only further convinced me that the conventional economic belief that the market forces of global capitalism work themselves out to our benefit is dangerously naive.

In the last few years I’ve learned much about the sustainability movement, and it gives me new hope. I believe it can fundamentally change how we think about the economy, though there is still much work to be done to accomplish that. The sustainability movement is actually the convergence of many movements with deep historical roots — it’s about human rights, world peace, injecting a higher awareness into economic activity, and rooting out corruption in business and politics by making them transparent to the public they serve. It’s about having a real and personal connection to Nature. It’s about waking up in the morning and feeling good about yourself because you work at a job that has a purpose for you and your community. I believe this is what all people truly want, all over the world.

How Much More Evidence Do We Need?

As the Madoff scandal unfolds, what is becoming evident is that the largest fraud ever perpetrated in the US financial markets was never detected by the government regulatory agency charged with preventing this kind of thing: the Securities and Exchange Commission. Why? Because it has been so weakened by the presidential appointment of top officials who do not believe in the need to regulate and by Congressional laws that have greatly weakened the regulatory framework.

The SEC had abundant warnings: “Madoff Securities is the world’s largest Ponzi Scheme,” Mr. Markopolos, wrote in a letter to the U.S. Securities and Exchange Commission in 1999.” (from WSJ, Dec 13, 2008. Mr. Markopolos worked at a Wall Street firm that competed with Madoff.)

Transparency in the financial sector has always been resisted by disreputable firms and pro-business administrations, who prefer to keep their dealings secret. To achieve transparency requires effective and intelligent regulation. But the global economy has been on a deregulatory trend for the past 30 years, ever since the election of Ronald Reagan. The Gramm-Leach-Bliley Act (GLBA) passed by Congress in 1999, allowed commercial and investment banks to consolidate. In the vernacular, this basically allows banks to get into the stock market. Its passage effectively repealed the 1933 Glass-Stegall Act, which was enacted to prevent precisely that activity, because that was a primary cause of the 1929 stock market crash and consequent Great Depression. How little we have learned!

In economic theory, the financial sector is supposed to act as a fiduciary channel that allows society’s collective savings to be used for investment in the real economy. When the financial sector starts to act like an out of control casino with outright fraud run in plain sight for years, and has become so swollen in size that the collective outstanding capital dwarfs the real economy (such as the deriviatives markets now do on a global scale), it is a case of the tail wagging the dog; it has corrupted its economic function and its effect on the global body is like a cancer that must be controlled or eliminated — or death can be the result. The results from this rampage of deregulation are tragic, devastating and have yet to fully play out; clearly, it will take years upon years to recover from the damage that has been done. We need no more evidence: the financial sector deserves to be restructured and re-regulated immediately, before it is allowed to wreak more havoc on communities all around the globe. The culture that dominates this industry is based on ruthless greed that is killing the planet, undermining our communities, perpetuating economic theft that extracts wealth from the lower to higher income classes on an international scale, perpetuates a violence towards the environment and marginal cultures, and strangles the ability of democracy to function with its connections and lobbying. Enough is enough! Make your voice heard and contact your congressional representatives today; or better yet, go to change.gov and make your input heard directly.

Open Source Government

The open source movement has revolutionized the software industry. [insert overwhelming citations here…]

Governments the world over are in dire need of assistance and input from the public to help support politicians with the courage and leadership to stand up to the influence of corporate lobbyists. [insert even more overwhelming citations here…first and foremost: change.gov]

In turn, the public needs current, up-to-date information about the economy and status of political issues from the government — which only the government can collect, organize and authorize — in order to stay informed on these complex and interwoven topics.

Enter the open software movement. The programmers who make it run will be inspired to help — if the way is made clear to allow them to contribute. Keep code open and secure!

Online citations:
Steady-State Economics by Herman Daly

[more to follow….]

Do We Need a Court of Economic Justice?

I’ve been reading about a lot of tales of economic woe in the news lately due to the wrenching effects of the subprime mortgage debacle. One of the more bizarre cases is Jefferson County, Alabama, which is currently several billion dollars in debt because, apparently, some of its public officials, with questionable backgrounds and dubious motives, thought they could save on interest payments for the taxpayers by making some risky bond-swapping agreements. In addition, there was some plain old-fashioned graft going on in a county-wide overhaul of the sewer system being awarded to inexperienced companies with ties to the same questionable officials. Though they haven’t hit bottom yet, poor Jefferson County appears headed to break the record for municipal bankruptcy. Who’s to blame? More importantly, who should pay? The citizens of the county are on the hook to the tune of around $7,000 a person. Who in their right mind can call that fair?

Municipal bankruptcy laws were created during the Great Depression to deal with the woefully inadequate laws then on the books. Prior to then, the only choice for a county or state in debt was to raise taxes on its citizens to pay off their debts – as required by law. (The justification for that type of legal action was termed by mandamus, Latin for “we command”; who’s “we” in this case, I wonder?) It seems we are still learning the lessons of the Great Depression, for many municipalities will be very thankful for these bankruptcy laws now in place. Jefferson County is not alone: there are many news stories on municipal bankruptcy can be easily found on the Net.

Municipalities are just one type of victim of the current global financial crisis; but it is an impersonal aspect of it. The more personal aspect is more compelling: who knows how many millions of households are now facing foreclosure, and the massive scale of hardship they are enduring? What is now clear is that this has been caused by financial chicanery on an international scale.

A fundamental point here is that all this debt — which is causing real hardship, misery, even homelessness, murders and suicides — has been inflicted on unknowing innocents by an unjust economy. The economy is not some blind, impartial force of Nature, and cannot fall into that famous clause in legal contracts as “acts of God.” Far from it! The economy is an entirely man-made artifact, subject to our possible collective control; so why does it seem so out of control? It is because the current laws and regulations allow it — laws and regulations heavily influenced by corporate lobbyists, but ultimately under democratic control. I believe that we should start to recognize that economic stalkings and killings are just as serious as those criminal acts committed in person — and they are far more widespread. Innocent victims should not be made to pay for the economic injustice knowingly committed by economic thieves and murderers. We need a new Court of Economic Justice where such people and communities can plead their case, name their attackers and have the economic evidence reviewed and considered, just as we do now for the criminal acts that consider the motives, the weapons, the evidence, and all the facts, before reaching a verdict.