For the past few years (and, in reality, for decades before that), the government has tried to improve the nation’s housing market by artificially inflating house prices.The mortgage-mod programs, the back-door bank bailouts, the Fed-subsidized mortgage rates, the $150 billion flushed down the Fannie and Freddie rat-hole–all these tactics and more have been designed to reduce monthly payments for mortgage holders and keep house prices high.

And while these policies are obviously appealing to anyone who owns a house, they also shaft everyone who doesn’t.

Importantly, these policies also shaft anyone who wants to buy a house.

* And anyone who has responsibly accumulated savings that are currently earning nothing thanks to the government’s zero-interest-rate policies.

* And anyone who might like to invest savings in something that might earn something–like fairly priced housing.

* And even anyone who bought more house than they can afford but are hanging on to it in the hope that the government will sucessfully bail them out–instead of cutting their losses and moving on with their lives.

But three years into the bailouts, people are finally throwing up their hands. As the administration tries to figure out what to do to save the Democrats in November, calls for a new form of housing action are emerging: STOP trying to keep house prices artificially high and just let prices fall. (See this article by David Streitfeld in the New York Times.)

In other words, stop screwing the majority of the country that didn’t borrow huge amounts of money from 2005-2007 to buy houses it couldn’t afford, and just let the market heal itself.

How would the government do this?

Any number of ways.

By letting mortgage prices and loan requirements rise to normal levels. By trimming the Fannie/Freddie subsidies. By figuring out a simple mechanism whereby banks can reduce principal on mortgages in exchange for equity interests in the houses. By squelching all talk of future housing tax credits. Etc.

And what would this do?

Well, in the short-term, if house prices fell to fair value (5% to 10% below today’s level–see chart below), it would certainly lead to more folks walking away from their mortgages. It would also, thereby, lead to more bank writeoffs.  But that’s only fair. And the banks now have enough capital (and enough access to capital), so they’ll be able to survive.

Importantly, it would also allow a new generation of home buyers to step into the market and buy with the confidence that they won’t get screwed if the government ever does decide to stop pumping up prices. (This is a big and justifiable fear.)  Instead, new buyers will be able to look at long-term price-to-income and price-to-rent ratios and observe that they are buying houses at fair value or below–instead of at levels that are still artificially inflated relative to almost all non-bubble history.

It would allow renters who have heretofore been priced out of the market to buy for the first time.

It would force banks to clean up their balance sheets faster.

It would encourage consumers to clean up their own balance sheets faster.

It would restore sales velocity to the housing market, which would help the vast communities of real-estate related industries get back on their feet–thus helping reduce unemployment.

It would restore the government’s firepower, allowing for modest, temporary intervention if it ever became desirable down the road (instead of prolonging the flooring-it-just-to-stay-steady current situation).

In short, in exchange for a modest amount of short-term pain for some banks and a minority of Americans (those underwater on their mortgages), it would help the country’s housing market heal itself faster. And, in so doing, it would help the majority of the country, by helping our economy more quickly get back on its feet again.

Here’s a larger version of Robert Shiller’s long-term house price chart. Note that prices (blue line) are still modestly above the long-term average:

Read more: http://www.businessinsider.com/finally-people-are-talking-about-a-real-housing-market-fix-letting-prices-fall-2010-9#ixzz0ynLzqz49

Welcome to the worst Labor Day in the memory of most Americans. Organized labor is down to about 7 percent of the private work force. Members of non-organized labor — most of the rest of us — are unemployed, underemployed or underwater.

The Labor Department reported on Friday that just 67,000 new private-sector jobs were created in August, which, when added to the loss of public-sector (mostly temporary Census worker jobs) resulted in a net loss of over 50,000 jobs for the month. But at least 125,000 net new jobs are needed to keep up with the growth of the potential work force.

Face it: The national economy isn’t escaping the gravitational pull of the Great Recession. None of the standard booster rockets are working. Near-zero short-term interest rates from the Fed, almost record-low borrowing costs in the bond market, a giant stimulus package, along with tax credits for small businesses that hire the long-term unemployed have all failed to do enough.

That’s because the real problem has to do with the structure of the economy, not the business cycle. No booster rocket can work unless consumers are able, at some point, to keep the economy moving on their own. But consumers no longer have the purchasing power to buy the goods and services they produce as workers; for some time now, their means haven’t kept up with what the growing economy could and should have been able to provide them.

1. The Origin of the Crisis

This crisis began decades ago when a new wave of technology — things like satellite communications, container ships, computers and eventually the Internet — made it cheaper for American employers to use low-wage labor abroad or labor-replacing software here at home than to continue paying the typical worker a middle-class wage. Even though the American economy kept growing, hourly wages flattened. The median male worker earns less today, adjusted for inflation, than he did 30 years ago.

But for years American families kept spending as if their incomes were keeping pace with overall economic growth. And their spending fueled continued growth. How did families manage this trick? First, women streamed into the paid work force. By the late 1990s, more than 60 percent of mothers with young children worked outside the home (in 1966, only 24 percent did).

Second, everyone put in more hours. What families didn’t receive in wage increases they made up for in work increases. By the mid-2000s, the typical male worker was putting in roughly 100 hours more each year than two decades before, and the typical female worker about 200 hours more.

When American families couldn’t squeeze any more income out of these two coping mechanisms, they embarked on a third: going ever deeper into debt. This seemed painless — as long as home prices were soaring. From 2002 to 2007, American households extracted $2.3 trillion from their homes.

Eventually, of course, the debt bubble burst — and with it, the last coping mechanism. Now we’re left to deal with the underlying problem that we’ve avoided for decades. Even if nearly everyone was employed, the vast middle class still wouldn’t have enough money to buy what the economy is capable of producing.

Where have all the economic gains gone? Mostly to the top. The economists Emmanuel Saez and Thomas Piketty examined tax returns from 1913 to 2008. They discovered an interesting pattern. In the late 1970s, the richest 1 percent of American families took in about 9 percent of the nation’s total income; by 2007, the top 1 percent took in 23.5 percent of total income.

It’s no coincidence that the last time income was this concentrated was in 1928. I do not mean to suggest that such astonishing consolidations of income at the top directly cause sharp economic declines. The connection is more subtle.

The rich spend a much smaller proportion of their incomes than the rest of us. So when they get a disproportionate share of total income, the economy is robbed of the demand it needs to keep growing and creating jobs.

What’s more, the rich don’t necessarily invest their earnings and savings in the American economy; they send them anywhere around the globe where they’ll summon the highest returns — sometimes that’s here, but often it’s the Cayman Islands, China or elsewhere. The rich also put their money into assets most likely to attract other big investors (commodities, stocks, dot-coms or real estate), which can become wildly inflated as a result.

Meanwhile, as the economy grows, the vast majority in the middle naturally want to live better. Their consequent spending fuels continued growth and creates enough jobs for almost everyone, at least for a time. But because this situation can’t be sustained, at some point — 1929 and 2008 offer ready examples — the bill comes due.

2. What We Learned and Didn’t Learn From the Great Depression of the 1930s

This time around, policymakers had knowledge their counterparts didn’t have in 1929; they knew they could avoid immediate financial calamity by flooding the economy with money. But, paradoxically, averting another Great Depression-like calamity removed political pressure for more fundamental reform. We’re left instead with a long and seemingly endless Great Jobs Recession.

THE Great Depression and its aftermath demonstrate that there is only one way back to full recovery: through more widely shared prosperity. In the 1930s, the American economy was completely restructured. New Deal measures — Social Security, a 40-hour work week with time-and-a-half overtime, unemployment insurance, the right to form unions and bargain collectively, the minimum wage — leveled the playing field.

In the decades after World War II, legislation like the G.I. Bill, a vast expansion of public higher education and civil rights and voting rights laws further reduced economic inequality. Much of this was paid for with a 70 percent to 90 percent marginal income tax on the highest incomes. And as America’s middle class shared more of the economy’s gains, it was able to buy more of the goods and services the economy could provide. The result: rapid growth and more jobs.

By contrast, little has been done since 2008 to widen the circle of prosperity. Health-care reform is an important step forward but it’s not nearly enough.

3. What Else Should Be Done

What else could be done to raise wages and thereby spur the economy? I don’t pretend to have all the answers but some initiatives seem worthwhile.

[Pause for a commercial announcement. These points, and others, are developed at length in my upcoming book, “AFTERSHOCK: The Next Economy and America’s Future,” out in two weeks from Alfred Knopf.]

We might consider, for example, extending the earned income tax credit all the way up through the middle class, and paying for it with a tax on carbon. The carbon tax would raise the prices of goods and services especially dependent on carbon-based fuels, which is appropriate given that the social costs of carbon-based fuels should be included in their prices. Consider how much our society now spends on such things as foreign wars designed to secure our sources of oil, as well as oil cleanups. But the wage subsidies would more than make up for these price rises, at least for most Americans in the middle and below.

Another step would be to exempt the first $20,000 of income from payroll taxes and paying for it with a payroll tax on incomes over $250,000. This, too, seems reasonable, given that under current law only the first $106,000 of income is subject to the Social Security portion of the payroll tax – a particularly regressive system. Most higher-income people, who get good medical care, live longer and collect far more in Social Security benefits, than do lower-income people.

In the longer term, Americans must be better prepared to succeed in the global, high-tech economy. Early childhood education should be more widely available, paid for by a small 0.5 percent fee on all financial transactions. Public universities should be free; in return, graduates would then be required to pay back 10 percent of their first 10 years of full-time income.

Another step: workers who lose their jobs and have to settle for positions that pay less could qualify for “earnings insurance” that would pay half the salary difference for two years; such a program would probably prove less expensive than extended unemployment benefits.

These measures would not enlarge the budget deficit because they would be paid for. In fact, such moves would help reduce the long-term deficits by getting more Americans back to work and the economy growing again.

Here’s the point. Policies that generate more widely shared prosperity lead to stronger and more sustainable economic growth — and that’s good for everyone.

The rich are better off with a smaller percentage of a fast-growing economy than a larger share of an economy that’s barely moving. That’s the Labor Day lesson we learned decades ago; until we remember it again, we’ll be stuck in the Great Recession.

Read more: http://www.businessinsider.com/welcome-to-the-worst-labor-day-in-history-2010-9#ixzz0ykfDVdRm

This week, financial advisors have been informed of some new disclosure and reporting rules.  As expected, the impact of the Dodd/Frank Bill is already foreshadowing a ridiculous amount of additional paperwork – mostly silly work as one of my colleagues would call it.  Financial regulation is a double-edged sword and changes were necessary, no arguments there. However, it is questionable to what extent investors will be better off, safer, and whether the financial system will any more stable after implementing the new financial overhaul bill.

I had a chance to glance at some aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act but as soon as I opened this document, I had to close it again; I simply couldn’t find the courage to actually read through some 800 pages of legalese.  So here is my offer:  I will buy anyone dinner who can muster up the courage to read this and give me a concise 20 minute plain English summary…

Going back to regulatory reform, my views are sadly quite cynical which is evident in the many references you can find in previous articles:

• Market Insights 14-Feb-2009

• Mark-to-Market or Mark-to-Myth?

• It’s all about Tim Geithner

• Market Insights – 25 July 2009

• Market Insights – 24 April 2010

• Overhauling The Financial Services Industry – Really?

So what’s it going to be after the dust settles and this monstrosity of an overhaul will eventually be implemented?  My take is that investors and the general public will have to foot the bill in one form or another.  Clients will lose out in having to pay higher fees. Smaller firms, such as our tiny practice, will find it increasingly difficult to swallow the cost of dealing with regulators and may be forced to team up with a larger firm, losing some of their coveted independence. Already overregulated jurisdictions such as the US and the UK must carefully evaluate what’s at stake.  In the UK, several banks have been warning that they might relocate to business-friendlier jurisdictions.  HSBC just announced its clearest warning over relocation, warning that it might relocate its headquarters to Hong Kong.

The choice for many of these institutions is clear as well; they will be following the money and economic growth which has been in emerging markets.  London hosts the investment banking headquarters of many international financial institutions including some high profile US and German banks.  If those divisions can operate from London, why can’t they move their investment banking headquarters to Hong Kong, Singapore or other jurisdictions that would give incentives to operate at substantial cost savings?

While US investors must wait until the Dodd/Frank Bill is implemented to find out whether salvation is nigh, capital won’t.  As the markets and institutions assess the impacts of new reform, we are going to be faced with a very different financial landscape in the near future. Investors might then also need to assess whether it makes more sense to “follow the money”.

Read more: http://www.businessinsider.com/how-long-until-financial-reform-kills-small-firms-and-drives-big-firms-to-hong-kong-2010-9#ixzz0ykbmEfNO

Read more: http://www.businessinsider.com/want-to-make-a-lot-of-money-as-a-ceo-fire-people-2010-9#ixzz0ykYrGBc7

Read more: http://www.businessinsider.com/android-share-of-mobile-web-use-soaring-iphone-falling-2010-9#ixzz0ykVjiNTX

Some cities in California are so bloated in debt and other problems they are considering dissolution. Mercury News asks is this The End of Half Moon Bay?

Between budget losses and lawsuit payments, Half Moon Bay’s financials have become so dire that if a local sales tax measure doesn’t pass this November, officials say they may have to disincorporate.

City leaders have been using the “D” word for a few weeks now as they try to persuade voters to pass Measure K, a one-cent sales tax increase that would help the city balance its budget with an extra infusion of $1.4 million per year for the next seven years.

Dissolving Half Moon Bay — handing the city’s budget, operations and services to San Mateo County — would be an absolute last resort, but the city may not have many other options left, City Councilman John Muller said.

At first glance, disincorporation could save taxpayers some money: no more city administration to support. Police services would be contracted out, and the county would cover planning, building and public works projects from its offices in Redwood City.

City Manager Michael Dolder admits disincorporation is one of the options on the table now. The City Council already cut $900,000 from the current budget — including half its employees — and imposed furloughs on those who remain. Some of the cuts were needed to pay for the Beachwood lawsuit settlement, a $15 million burden the city will shoulder in bond payments for the next 20 years.

Disincorporation is so rare in California that it’s almost without precedent. The last city to do it, Cabazon in Riverside County, had fewer than 2,000 residents and no functional government to speak of when it voted to give up cityhood.

The process is so complicated that county officials said they don’t know what kinds of services the Board of Supervisors would choose to provide or how much they would cost.

One thing is certain: disincorporation is not a bailout. The county would lay claim to revenues, including Half Moon Bay’s property taxes, sales taxes and hotel taxes, but not its liabilities. Today’s Half Moon Bay residents would be required to assume the debt burden of Beachwood bond payments, which would likely be added as a lien on their properties, according to Assistant County Controller Bob Adler.

D Is for Disincorporate

The PropZero blog writes California Cities: D Is for Disincorporate

City officials in Half Moon Bay say the municipal budget is such a mess that it may make sense to disincorporate and turn the place over to San Mateo County

Consider Los Angeles County which has 88 cities, many of which it clearly does not need. Several of the smaller cities seem to exist as personal playgrounds for families or particular businesses. Those municipalities — the now famous Bell just one of them — have extensive histories of municipal corruption. If such cities were to go away, would they be missed?

A side note: unions have revived legislation in Sacramento that seeks to prevent cash-strapped cities from declaring bankruptcy (Municipalities would have to get permission from a labor-dominated commission first). The consequence of that legislation, were it to pass, might well be to promote more disincorporations — that is, the shutting down of cities — since bankruptcy would be all but off the table.

Simple Solution

Unions have revived measures to prevent municipal bankruptcies, but hopefully the governor would veto such asinine legislation were it to actually pass. I doubt there would be enough votes to override the veto.

The problem with disincorporation straight up is that it leaves the debts intact.

Instead, I propose Half Moon Bay file bankruptcy, wiping out its debts, or at least sending them to bankruptcy court. Then Half Moon Bay can disincorporate, saving itself the problems of dealing with a local police force and its pensions.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Read more: http://www.businessinsider.com/the-latest-scheme-in-california-dissolving-cities-2010-9#ixzz0ykTIGonY

Read more: http://www.businessinsider.com/the-latest-scheme-in-california-dissolving-cities-2010-9#ixzz0ykTA5Xin