by Steven Waechter | Jul 22, 2013
Former Michigan Congressman and Reagan Budget Director David Stockmanâ€™s new book â€œThe Great Deformationâ€ provoked a flurry of insult and ridicule when it first came out back in April. Iâ€™m late to the party because as a law school graduate I spend all of my spare cash on liquor; in fact, I have not yet read the book. Fortunately for me, book tour promotional speeches are readily available on Youtube, and Stockman has no instinct for holding back.
Here is the gist; the Bretton Woods Conference made the dollar the reserve currency of the world, it was gold-based until 1971 when Nixon decided to let it float free, allowing the US to run endless trade deficits with mercantilist, export-led industrializing countries in East Asia. Along the way, the US ran up an enormous government debt – selling bonds to the East Asian economies that were gradually undermining American industry – to expand the welfare state, fight a half-dozen wars, fund some peanut farmerâ€™s idea of Synfuels, wind power, weapons systems that werenâ€™t even used in the half-dozen wars, and what Stockman refers to as the HES – Healthcare, Education, and Social Services employment sectors – government jobs funding the consumers of Chinese goods.
Calling the Federal Reserve a â€œBubble Machine,â€ Stockman digs into their low-interest rate policies and attempts to fine-tune capital allocation through the Tech Bubble, the Housing Bubble, and the Government Bubble that is, according to Stockman, about to pop.
I see no reason to doubt Stockmanâ€™s basic assertions; the stock market is playing with new highs even as the labor participation rate slips – only about 47 percent of adult Americans have full time jobs – and a full 100 million Americans receive some kind of food aid from the federal government.
What remains of American prosperity is Crony Capitalism in Stockmanâ€™s terms, where politically-connected operators get all the benefits of cheap money from the Fed, tax breaks only they can claim, and bailouts when things go bad; and the bulk of the people get nothing, not even jobs.
There is no escape, either. Stockman doesnâ€™t hold back regarding Social Security, Medicare, the massive debt already on the books, and the massive tax hikes that will be required to keep the grist mill turning, assuming the next generation of tax oxen can even earn income – and Stockman doesnâ€™t seem to think that they will.
The stunning loss of what he calls â€œBreadwinner Jobs,â€ which are jobs that actually pay the bills, has gone hand-in-hand with the loss of sound money and the growth of the welfare state.
The middle classes have been the main patrons of sectors ranging from real estate, insurance, retail, and even my field, the law. The nobility of Europe could commission artists for grand portraits and sculptures, but it took a growing bourgeois class with the money to buy houses worth decorating to spur the great easel painters of the Dutch Golden Age or the salons of 19th Century Paris. From art to coffee, the principle is inescapable; the indulgences might exist in some form regardless, but their proliferation takes middle class aspiration.
I think that our middle class is in trouble; Stockman believes this, too. With bills that we cannot pay, debts we cannot service, interest rates that cannot stay low forever, a large population of labor rendered unemployable by circumstances, and no indications of growth beyond the rather disturbing rise in the number of coffee shops around the Des Moines Metro area – patronized by students and a handful of investors who â€œfeel wealthierâ€ because the Dow is up – then the next meltdown will be far worse.
Do you deny that the middle class is shrinking? I have an exercise for you – right now, get in your car and take a drive through the nearest urban area. Count the number of times you see the following scene:
A super-discount retailer (Family Dollar, Dollar Tree, etcâ€¦) sharing a parking lot with a payday loan outlet, and a bucket-shop tax preparation shop (they specialize in helping low-income people claim the Earned Income Tax Credit) and some sort of no-frills dining. Depending on where you are, you might even see a blood plasma collection company and in the near vicinity there will be a â€œbuy here pay hereâ€ auto lot, where used cars are sold on credit to people who cannot get formal bank loans.
Hardly the commercial trappings of a wealthy economy.
by Steven Waechter | Jun 12, 2013
A sizeable chunk of my legal career has been spent neck-deep in the morass of the foreclosure wave that has wreaked havoc across the land several years ago. If you wonder what has made me cynical about both the economy and the competency of government, it was my year doing foreclosures.
First of all, I am not the big expert, and this is in no way legal advice; I worked long enough to learn how the process works and how it ties in to real estate market and the economy as a whole. I think I have put the picture together reasonably well, and I have learned a few things about our national obsession with real estate.
Banks Do Not Hold Mortgages
The fact that mortgages are syndicated and securitized – a high-end way of saying that they are sold off and bundled into bonds, because I have the diplomas and still harbor an urge to use them – has reached public knowledge for the most part.
The bank might sell the note and mortgage to a mortgage servicing company or hold them in their own servicing division, but either way the â€œbeneficial ownershipâ€ is sold off, often to Fannie Mae, Freddie Mac, or into an Asset-Backed Pass Through assembled by an investment bank – the mortgage-backed securities which made headlines in 2008 and are now being bought up by the Federal Reserve at $45 billion per month. The banks stay involved only as servicing agents.
This is why a foreclosure caseâ€™s name is so long; things like â€œXYZ Bank NA, as Trustee under agreement dated May 1, 2004 for Asset Backed Certificates Series C-2004 v. Joe and Jill Serfdomfaller,â€ are common.
Because the banks have no real stake in the mortgages any more, it is financially beneficial to them to cut costs in their servicing departments. This has driven massive outsourcing in the sector, and there is no real incentive to actually deal with anybody. Like chess pieces protecting the king, the bankâ€™s employees are there to prevent you from getting to someone who can actually help you.
There is No Free Market in Home Mortgages
The government has busied itself with housing programs since the 1930â€™s, and if you attended public school you are probably inclined to believe that these efforts were all for the benefit of the populace themselves. I briefly believed that back in college, but working as a foreclosure attorney snapped me back to reality.
Congress chartered the Federal National Mortgage Association (FNMA), commonly called Fannie Mae, to purchase mortgages from banks. The idea being that by buying the mortgages, the banks would be re-capitalized immediately and could write more mortgages.
Originally, Fannie Mae was a government-owned enterprise, but was privatized to pay for the Vietnam War. Of course, a privatized, government-sponsored mortgage buying company would look a bit monopolistic, so Congress chartered Freddie Mac as a companion company, to buy conforming loans as well as mortgage-backed securities.
Alongside the two Congressionally-chartered government-sponsored enterprises (GSEâ€™s), were other programs like the Federal Housing Administration, or the FHA, and it provides insurance to both home builders and home buyers.
Most importantly, FHA provides mortgage insurance at a cheaper rate and with easier terms than private mortgage insurance, requiring less than 4 percent down payments, and thus skewing towards higher-risk borrowers.
If a mortgage goes into default during the mortgage insurance period, then the bank will foreclose, and then deed the house to HUD (FHAâ€™s parent department) in exchange for the entire balance of the bad loan. That is how HUD gets so much real estate.
The Federal Reserve Pushes Debt
Not only do we have two government-sponsored companies buying mortgages, along with a government agency designed to encourage higher risk lending, we also have the Federal Reserve pumping the system full of cash, both with a very low Funds rate, but also now by directly purchasing both US Treasuries and mortgage-backed securities at a combined level of $85 billion per month.
The structure of the mortgage industry – mostly assembled by government action – was thus inflated by the Fed in the last decade with low interest rates and is now being re-inflated with lower interest rates and asset purchases. Altogether, bank depositors arenâ€™t that important in the housing market any more. So long George Bailey.
Modifications Were a Joke
Think about it this way; if a mortgage for $200,000 goes bad, and the house is only worth $100,000 at the time, then the bank, FNMA, the investors, or the FHA is likely to lose $100,000 almost instantly in the foreclosure – they lose the â€œassetâ€ of the $200,000 mortgage on their books, and replace it with a $100,000 house.
Because of this, any cash they can squeeze out of a borrower before the inevitable foreclosure on these bad loans (mostly written off already by this point) would go straight to the bottom line, saving money for the banks, the investors, FNMA, or the FHA as the case may be.
HARP, or the Home Affordable Refinance Program, had more success. It was designed to help underwater borrowers refinance without having to default. This would help them take advantage of the lower interest rates, and avoid the loss of asset equity that was hitting the financial system so hard.
In Defense of Strategic Foreclosure
In almost all circumstances, borrowers would have been better off defaulting rather than modifying. Instead of paying their $200,000 mortgage on their $100,000 house at 8 percent, they could pay a modified 3 percent, but still would have to throw money into the black hole without acquiring any equity from it.
I had a case like that; it was a couple in their mid-fifties, with no savings left, and their modified mortgage payment was still about $1,300 a month. This, in southern Iowa where a 2-bedroom apartment can be had for $600 a month. That was $8,400 a year they could have saved in cold, hard cash, to use to begin rebuilding their lives and avoid living so tenuously – especially at their age.
When you are under that much financial strain, guilt and sentimentality will do no good for anybody. If you are broke, admit it. If – or more likely when – they default again, with no cash reserves they are very likely to fall permanently into the dependent classes, in terms of housing, food, income support, and medical care.
Debt, on Top of Debt
That sums up the American economy in the words of David Stockman, and I see no reason to doubt him at this point. The idea that we donâ€™t have to manufacture, mine, drill, or grow more in order to produce more wealth, but can simply purchase more assets with borrowed money, is a dangerous mindset that cannot last forever, a lesson we should have learned in 2008 but apparently havenâ€™t.
If you think this is a glorious recovery, then answer me this: Where is all the wealth being produced by our allegedly recovering economy? The prices of inflation-sensitive assets are going up, but so are trade deficits, food stamp rolls, and the number of people outside of the workforce entirely. I think I am currently a â€œfreelancer,â€ but that is just a white-collar unemployed guy.
This former foreclosure lawyer is more likely to live in a shack and raise goats than buy a mortgaged suburban house, because debt and freedom cannot harmoniously coexist. Maybe we should pay members of Congress in goats instead of moneyâ€¦
by Steven Waechter | Jun 3, 2013
Well, another class of high school graduates are killing time until they begin their college experience. In four, five, or six years, many of them will graduate from college, and move to Dallas County so they can work as temps at Wells Fargo.
Meanwhile, town squares across Iowa are emptying out. Iâ€™ve spent some time exploring small towns in rural Iowa, and there are common threads that threaten to further damage the prospects of the young, and may even threaten the existence of many towns across the state.
And so it goes; young people leave to try and buy jobs that donâ€™t matter (and often donâ€™t exist in large numbers), buildings stand unused, and eventually the towns just collapse into stagnant malaise.
What Muscatine Has To Say
Muscatine is a unique town; the downtown fell into disuse as businesses moved to the ring road, but Muscatine kept some relatively large manufacturing and agribusiness installations, as well as banking and insurance industries. This meant that there was cheap, unused store space downtown, and a population with enough disposable income to support a restaurant culture which is unique in my experience.
Italian, Mexican, and Korean (called the Yakky Shack, it was a personal favorite of mine) can be on the menu for any given meal. Avenue Subs, just around the block from my former law office, is truly unique. Their sandwiches cost more than the chain sandwich restaurants, but the place was always busy at lunch time.
If you can re-create their menu reasonably well, you could open up in any mid-sized Iowa town and Iâ€™d bet you would do very well – if you can keep start-up costs down.
What Can Communities Do?
I am often accused of â€œhaving no answers,â€ and â€œbeing negative and critical,â€ and â€œbeing mean.â€ Well, I am an intensely unpleasant person in many ways, pessimism is the lubricant of victory, and I donâ€™t believe in the governmentâ€™s ability to solve social or economic problems – which translates into â€œhaving no answersâ€ when you live in a society enamored by Statism.
In towns and counties across the state there are established businesses, and many of them have working relationships with chambers of commerce or local economic development corporations.
Some of these business interests and organizations have either direct control of vacant retail space or contacts with property owners with retail, warehouse or light-industrial space to offer but with no available takers.
So, how about a community-level angel investor network? Why donâ€™t we put young entrepreneurs together with established business owners or property owners to help them raise start-up capital – cash, space, or equipment – for their own small businesses.
What businesses? Thatâ€™s the beauty of it – I donâ€™t know. I think the sandwich shop idea would work well in any town of about 5,000 + people, especially if you can get space within walking distance of the largest employer in town, the school, or the college.
Maybe internet commerce, custom clothing, fresh foods, computer game design, who knows.
But, College is Important for Jobs Skillsâ€¦..
No, it is not. The idea that your young go-getter will be more entrepreneurial after spending half a decade with tenured academics is laughable. If you need to learn accounting, take accounting at community college part-time for a fraction of the cost.
Why canâ€™t Iowa become the youth start-up capital of the country? Why must we continue to shuffle the young and the (presumably) ambitious into expensive colleges only to graduate with the pressure of debt and depleted financial resources pushing them towards the work-a-day life that could disappear in the next round of layoffs?
Iâ€™m Just a Lawyer, butâ€¦
Now, I am perfectly willing to admit that I am not the exemplar of my own advice – think of me as the desert hermit the protagonist seeks out for guidance. That is probably why I was attracted to the law, and most ofÂ my legal career has involved debtor-creditor law, so I know how debt can screw up a life or a business venture.
This is how the Chamber of Commerce can help. They can assemble angel investors with cash, equipment, or space available. They can arrange discounts for accounting and legal services for things like taxation and payroll. They can send experienced businesspeople into the schools to speak on business creation, promote self-employment, and whatever else they can think of to encourage young Iowans to consider independent livelihoods without the need for debt financing.
If you fail, then start over with a different idea. If you succeed, then you owe me lunch.
by | Apr 8, 2013
Proving his concern about our countryâ€™s national debt wasnâ€™t mere campaign lip service, Congressman Tom Latham continued to warn against the perils of a $17 trillion debt in Urbandale on Friday.Â He joined an event hosted by the Iowa chapter of Fix The Debt and toured the facility of Jon Troenâ€™s ColorFX company.
Speaking to a group of ColorFX employees Latham seemed hopeful a long-term solution could be agreed to this year saying, â€œI think there is a real chance of getting a bi-partisan deal passed.Â It has to be done to ensure our nationâ€™s economic and fiscal security.â€Â As the owner of a company trying to navigate through an increasingly shaky economy, ColorFX owner Jon Troen fully concurred by stating, â€œThe national debt affects everyone and it has a direct impact on how small business owners like me run and manage their operations.â€
Mr. Lathamâ€™s participation in these types of forums should be heartening to all Iowans, regardless of their political persuasion, who realize continued record deficit spending is fatal to our entire population.Â I have reported here before that a close look at Rep. Lathamâ€™s voting record the last several years reveals a rock-solid fiscal conservative unwilling to mortgage the future for temporary political gains.Â With so many politicians these days willing to speak one way around election time and then consistently vote the other way when the spotlight fades, Iowa is lucky to have someone willing to both speak out and vote for their convictions.
Below are some pictures from the event:
by | Sep 3, 2012
(This is the second installment of a continuing seriesÂ posing 3 questions to Republican candidates statewide)Â
Vicki Stogdill is running for the seat representing Senate District 18 in the Iowa Legislature.Â She has been campaigning hard for months to give this traditionally Democratic territory a new voiceÂ at the State House.Â Every race in theÂ Iowa SenateÂ this year is of utmost importance, andÂ Stogdill’sÂ effort to engage the voters of District 18Â will reveal much about the Iowa electorate at large.Â Â Voters both in and out of her district should take the timeÂ to check out her positions and background on her website, and to showÂ her support in any way they can.Â She brings to the table a long career in small business andÂ a host of new ideas to strengthen Iowa’s communities and economy.
Recently, Vicki was kind enough to sit down with The Conservative Reader:Iowa to talk about her campaign and answer three questions that will have a direct impact both on her constituents and the state of Iowa.
1.) Nearly 28% of the voters in your district are not registered with either political party, what two things would you like these folks to know about you and your candidacy before they vote in November?
A.Â I ran as an Independent/NP candidate in 2008 â€“ which demonstrates that Iâ€™m not afraid to stand up for principles before a party affiliation.Â I wonâ€™t support a bill thatâ€™s not good for Iowa, regardless of party recommendations.Â Â I want to foster greater cooperation between the two parties.Â People are tired of the â€œpartisanshipâ€ at our State Capitol, and Iâ€™d like to help minimize that.Â Instead of the two parties going to their â€œopposing cornersâ€ in a disagreement, I will attempt to sit down and discuss where there are differences and find common ground, without compromising on principle.Â I will put â€œpeople before politics.â€
B.Â I will self-impose term limits to allow more Iowans to have a chance to participate in the process.Â I want to bring my business experience, creativity and problem-solving skills to the Iowa Capitol and have a positive influence on improving the future of our State.Â Letâ€™s bring fresh ideas and perspective to the discussion.
2.) Education is both an issue you are passionate about and one that will be front and center next session.Â What major reforms need to be implemented to improve results state-wide (and in Des Moines especially), and why should voters resist the urge to not make these changes?
First of all, I donâ€™t claim to have all the answers on how to â€œfixâ€ Iowaâ€™s Education system.Â However, I believe one of the biggest keys to restoring our State to excellence in education is to restore more local control to school districts.Â I am also a strong proponent of giving parents more choices in educating their children, and to having the dollars “follow the child” in those choices.
Iowa should repeal the â€œcore curriculumâ€ mandates and instead offer recommendations which would allow local school districts to decide how and what to teach again.Â Locally elected school boards and administrators should make curriculum decisions based on the needs of their community, such as whether to enhance vocation programs for kids who do not choose a 4-year college after graduation, etc.Â The Iowa Dept. of Education should be downsized to serve as an advisory support agency instead of an umbrella.Â The State should continue to license and certify teachers.Â School districts should conduct annual assessments (such as ITBS) and scores should be published locally for taxpayers to see what kind of results they are getting for their investment.Â The State would only step in if a school district is consistently under-performing.
While technology and cutting edge learning must be a priority — we can’t lose sight of the “tried and true” teaching methods and foundational basics that have served us well in the past.Â And throwing out “old” methods just because theyâ€™re old isn’t necessarily progress.Â Teachers should have the ability to use their creativity again – to inspire kids to learn, with oversight from their local school administrators and school boards, instead of the State.Â Iowa must stop trying to mold each child into a cookie-cutter curriculum and teaching methodology that obviously isnâ€™t working. Iowa should continue to reject â€œNo Child Left Behindâ€ mandates.
In Des Moines our test scores and drop-out rates demonstrate that local voters need to recruit better local school board candidates and then â€œclean houseâ€ at the voting booth.Â The results of our local schools are unacceptable at best, and it is not the job of the State to fix it â€“ it is the responsibility of the community to demand it.Â Local taxpayers must hold their local school boards and administrators accountable.Â When searching for administrators, we should look first at the wealth of Iowa educators who are qualified to lead our schools â€“ instead of conducting expensive searches to bring in out-of-state educators.Â Â We have more than enough talented educators in Iowa who already know the landscape, challenges and history of our state.
A few other ideas that are worthy of consideration are to implement a dress code so students could focus on learning instead of fashion, which might also improve discipline and respect in our classrooms.Â We must also realize that itâ€™s not the job of schools to â€œsocially engineerâ€ our kidsâ€”that task is the duty and responsibility of parents.Â In the Iowa Senate, I will work with educators, parents and the business community to arrive at recommendations which will prepare students for a career path after graduation.Â Iowans deserve better than what weâ€™re currently delivering in Education, and I will work tirelessly to achieve positive results for Iowaâ€™s kids, parents and taxpayers.
3.)Â Should you prevail in November and enter the Iowa Senate, what are the two or three votes you would most like to cast, and why?
While there are many bills Iâ€™m passionate about seeing passed â€“ these three are among the most commonly suggested from my constituents, so they will be top priorities for me in the upcoming session:
A.Â Voter ID â€“ because NOT verifying the identity of voters is unconstitutional â€“ and my vote is disenfranchised when fraud is allowed to potentially cancel it out.
B.Â Â Property tax reform â€“ on all classes of property.Â For businesses, this will spur more expansion and investment which in turn will create more jobs when we stop penalizing the very engine of economic growth.Â For homeowners it will mean leaving more money in the pockets of those who earned it. For farmers, it will mean using a funding formula that doesnâ€™t penalize them for success.
C.Â Â Education Reform, as discussed above.