Tag: Economics

Greece Folds

Well, that didn’t take long.

It turns out that math is not subject to a referendum.

Greece and its European creditors announced an agreement here on Monday that aims to resolve the country’s debt crisis and keep it in the eurozone, but that will require further budgetary belt-tightening that Prime Minister Alexis Tsipras could have trouble selling back in Athens.

The agreement does not guarantee that Greece will receive its third bailout in five years. But it does allow the start of detailed negotiations on a new assistance package for Greece.

The total commitment of money has not been disclosed. But a document by the eurozone leaders noted that experts had estimated that Greece might need from 82 billion to 86 billion euros more — $91 billion to $96 billion — to shore up its economy, rebuild its banks and meet its debt obligations over the next three years. The document said Greece and its creditors should seek to “reduce that financing envelope,” if possible.

As part of Greece’s commitments, Ms. Merkel said, a fund will be created to use the proceeds from selling off assets owned by the Greek government to help pay down the country’s debt. That fund would be “to the tune of” €50 billion, she said.

Greece will also be required to seek assistance from the International Monetary Fund and to agree to let the organization continue to monitor the country’s adherence to its bailout commitments. The Greek government had resisted a continued role for the I.M.F., seeing the fund’s involvement as unwanted meddling.

The agreement will call for Greece to raise taxes in some cases, pare pension benefits and take various other measures meant to reduce what critics see as too much bureaucracy and too many market protections that keep the Greek economy from operating efficiently.

In other words, Greece has to do what they’ve always had to do: fix their broken tax system, fix their broken pension system, stop spending money they don’t have, sell off bloated Greek government assets and clean up the corruption.

It’s not clear that this will happen: the Greek parliament still needs to approve it. But it is clear that Greece’s left-wing government has accomplished very little other than making the pain worse for their citizens, all to the cheers and plaudits of comfy Western liberals who see this as some kind of experiment in economics and an opportunity to show those damned austerians what’s what.

The alternative for Greece in exiting the Euro. Virtually the entire American Left, who are apparently fine with the idea of a government weaseling out of its debt, thinks this is a better option. The BBC has a great summary of what a Grexit would mean:

The previous Greek Prime Minister, Antonis Samaras, warned that living standards could fall by 80% within a few weeks of exit.

Unable to borrow from anyone (not even other European governments), the Greek government would simply run out of euros.

It would have to pay social benefits and civil servants’ wages in IOUs (if it pays them at all) until a new non-euro currency can be introduced.

The government would not be able to repay its debts, which now amount to a total of about €320bn (£237bn), most of it owed to European governments and agencies and the International Monetary Fund.

The government would have to impose a freeze on withdrawals and on people taking money out of the country. This could lead to queues of ordinary Greeks trying to empty their bank accounts before they get converted into a new currency worth substantially less than the previous one.

In the longer run, Greece’s economy should benefit from having a much more competitive exchange rate.

But the devaluation would not solve underlying problems in the economy, including poor tax collection and a struggle to control government spending.

There is also a real possibility of a surge in inflation.
Tax receipts would probably fall as the economy contracted, so the government might finance spending by printing money.

The likely currency depreciation would also be inflationary. It would make imported goods – which in Greece includes a lot of its food and medicine – more expensive.

That’s just the effect on Greece. It might also encourage other countries like Spain to leave. And worldwide, the effects would be very unpredictable.

That’s what the people glibly talking about a Grexit are contemplating. Seems a steep price to pay so that you can side with the deadbeats against the Germans.

The Minimum Wage Kills Jobs, Part 5529

Of all the sounded-clever-but-was-actually-idiotic things Obama said in the State of the Union address, this was the most cleverly-sounding-but-really-stupid:

And to everyone in this Congress who still refuses to raise the minimum wage, I say this: If you truly believe you could work full-time and support a family on less than $15,000 a year, go try it. If not, vote to give millions of the hardest-working people in America a raise.

As I said, sounds clever. A bunch of liberals in my Twitter feed said the equivalent of, “Oh, snap!” But the reality is that you’re not supposed to be raising a family on minimum wage. Minimum wage is an entry level wage, a wage to get your foot in the door for future better-paying jobs. I made minimum wage once. Actually, I made less than minimum wage because I was paid in cash under the table. But I was a teenager, so it was fine.

The biggest reason to oppose the minimum wage, of course, is the Law of Supply and Demand. If you artificially set the price of something high (low-skill labor), you will find that people learn to live without it (i.e., they stop hiring people). We’ve been told this is a myth, despite clear evidence that it’s not. Well, here’s another example of this thing that supposedly never happens:

In November, San Francisco voters overwhelmingly passed a measure that will increase the minimum wage within the city to $15 per hour by 2018. Although all of us at Borderlands support the concept of a living wage in principal and we believe that it’s possible that the new law will be good for San Francisco — Borderlands Books as it exists is not a financially viable business if subject to that minimum wage. Consequently we will be closing our doors no later than March 31st. The cafe will continue to operate until at least the end of this year.

Many businesses can make adjustments to allow for increased wages. The cafe side of Borderlands, for example, should have no difficulty at all. Viability is simply a matter of increasing prices. And, since all the other cafes in the city will be under the same pressure, all the prices will float upwards. But books are a special case because the price is set by the publisher and printed on the book. Furthermore, for years part of the challenge for brick-and-mortar bookstores is that companies like Amazon.com have made it difficult to get people to pay retail prices. So it is inconceivable to adjust our prices upwards to cover increased wages.

The change in minimum wage will mean our payroll will increase roughly 39%. That increase will in turn bring up our total operating expenses by 18%. To make up for that expense, we would need to increase our sales by a minimum of 20%. We do not believe that is a realistic possibility for a bookstore in San Francisco at this time.

I will point out something else that they gloss over. It’s true that businesses like the cafe side of Borderlands can cover the minimum wage hike by increasing prices. But you know who pays those increasing prices? Primarily poor and middle class people who go to the kind of places — fast food restaurants, cheap bookstores, etc. — that pay their employees minimum wage. So you’re giving them money with one hand while taking it with the other.

This is a liberal bookstore ownership. That’s clear from the way they talk about this. But they point out that the minimum wage hike will increase their operating costs by 18%. Other business will see similar hikes. Do you know how many business are operating at an 18% profit margin? Very very few. And certainly none that are patronized by the poor and middle class.

Minimum wage hikes sound good and make liberals feel good. But they are a nightmare for the job market. If you don’t believe me, believe the guys at Borderlands. They have no reason to spew “right wing propaganda”.

A Recovery About Nothing

As you know, there are signs — tentative ones — that our economy is beginning to recover from Great Depression II. It’s about on schedule — I thought we would need about five years to crawl out of the hole we were in. But we had 5% growth in Q3 and unemployment continues to edge down (although the U6 remains high). Projections for 2015 are cautiously optimistic, barring a major war or something (which, with Obama, is always on the cards).

I have noted, however, that this recovery runs against the dogma we’ve been hearing from the Keynesians and pseudo-Keynesians on the Left Wing. According to them, the “austerity” of the last few years (i.e., flat spending) should have caused us to have a double-dip recession. David Harsanyi expands on this:

But if activist policies really have as big an impact on our economic fortunes as Washington operatives claim, I only have one question: What policy did Barack Obama enact to initiate this astonishing turnaround? We should definitely replicate it.

Because those who’ve been paying attention these past few years may have noticed that the predominant agenda of Washington has been to do nothing. It was only when the tinkering and superfluous stimulus spending wound down that fortunes began to turn around. So it’s perplexing how the same pundits who cautioned us about gridlock’s traumatizing effects now ignore its existence.

For instance, Paul Krugman wrote a column titled “The Obama Recovery.” The problem is that the author failed to justify his headline. It begins like this:

“Suppose that for some reason you decided to start hitting yourself in the head, repeatedly, with a baseball bat. You’d feel pretty bad. Correspondingly, you’d probably feel a lot better if and when you finally stopped. What would that improvement in your condition tell you?”

Suppose you tell us what the bat represents, because spending in current dollars has remained steady since 2010, and spending as a percentage of GDP has gone down. In 2009, 125 bills were enacted into law. In 2010, 258. After that, Congress, year by year, became one of the least productive in history. And the more unproductive Washington became the more the economy began to improve.

Krugman argues that the recession lingered because government hadn’t hired enough people to do taxpayer-funded busywork. The baseball bat. But then he undercuts this notion by pointing out that there was an explosion of public-sector hiring under George W. Bush—the man he claims caused the entire mess in the first place. Krugman also ignores the stimulus, because it screws up his imaginary “austerity” timeline. He then spends most of the column debunking austerity’s success in Britain.

Britain’s “austerity”, incidentally, was called austerity when the UK economy was stagnant. When it began to recover, the exact same budgets were described as having abandoned austerity. With the Keynesians, it’s always heads they win, tails we lose.

This recession was not about a lack of demand or a lack of spending. It was about the huge amount of debt that the American people had dug themselves into. That debt has declined — mortgage debt is down and consumer debt is down. Student and public debts have risen but not as sharply. In short, we’re finally getting out from under the 16,000 pound boulder that was the Housing Bubble. And, who knows? Maybe things would be better if we didn’t have the 10,000 pound boulder of federal debt and the 2,000 pound barbell of student loans.

OK, I’m letting that metaphor get away from me.

Anyway, our gridlocked do-nothing Congress has failed to pass a “jobs” bill, has failed to enact “temporary” stimulus and has cut programs to “build the economy”. And the result is the healthiest economic numbers in a decade.

Funny how well we can do when our government stops “helping” us. Now imagine if we could get them to stop giving us “free” healthcare and regulating our every move.

The Definition of Insanity

Is government housing policy:

Recent steps by federal regulators make it clear: low down-payment loans, a feature of the housing market’s boom, are coming back.

On Monday, Federal Housing Finance Agency Director Mel Watt announced that mortgage-finance companies Fannie Mae and Freddie Mac would start backing loans with down payments as low as 3%.

And on Tuesday, three federal agencies approved a loosened set of mortgage-lending rules, removing a requirement for a 20% down payment for a class of high-quality loan known as a “qualified residential mortgage.”

Loans with little to no down payment were a common feature of the lax lending practices that were prevalent during the housing market’s bubble years.

Yes, my friends. Not content with easy mortgages wrecking the economy and destroying what little wealth the poor and middle class had accumulated, our government is back for more.

Why on Earth would they want to do this? McArdle:

Because, I think, most of us still haven’t managed to shed the idea that buying a house is a good way to get some unearned bonus wealth. Too many people managed to do just that for too many years. We think of 2008 as an aberration, rather than reversion to the mean. And that’s a costly mental error.

The long, steep increase in American home prices from 1946 to 2008 was driven by a whole lot of trends that are hard to repeat: the invention of the 30-year, fixed-rate, self-amortizing mortgage, which allowed people to pay more for a house by lowering the monthly payments. The securitization revolution, which lowered mortgage risk by bundling the loans into large, diversified portfolios, thereby lowering rates. Rising inflation, which pushed up the price of houses. Falling inflation, which lowered interest rates and monthly payments still further and allowed people to pay even more for those houses. The credit-scoring revolution, which allowed banks to offer loans to more people, increasing demand for the existing housing stock. And in dense coastal areas, you also had the rise of NIMBY zoning laws, which made housing scarcer and therefore more expensive.

The problem is, these things have already happened. Most of them cannot happen again — interest rates can’t really go much lower.

Out government is consumed with the idea that home ownership is the path to wealth for the poor and lower middle class. But nothing could be further from the truth, as the last decade proved. The housing bubble hurt the wealthy … a bit. But it completely burned what little wealth existed in the lower quintiles of our society.

The reason is that houses aren’t a great investment. They’re a good investment … if you have a stable income and employment situation and can manage money well. They’re a stable investment … if you have some equity. But people are besotted with idea of real estate as the gate to wealth.

Low down-payment loans are especially dangerous for people trying to climb the economic ladder. They can allow people to make a quicker entry into housing. The danger, however, is that a house with low equity is a highly leveraged investment. If you make a down payment of 3% and housing prices fall 3%, 100% of your equity goes up in smoke. The reason so many people ended up in underwater mortgages with negative wealth was because they had such a thin margin of equity.

But … they never learn. This will happen again and they still won’t learn. The people running our government and their cheerleaders in places like the Center for American Regress will continue to believe that there is a alchemical formula for creating middle-class wealth out of thin air. I guess you have to believe in something when you think that businesses don’t create jobs.

Monday Roundup

For reasons that I hope I’ll explain one day, this week is going to be a bit crazy. So here are a few stories I’ve been sitting on, awaiting longer commentary:

A few weeks ago, Marvel comics unveiled an alternative Spiderwoman cover which was immediately decried as sexist because of her pose. I suspected that this criticism was largely coming from people who weren’t terribly familiar with the medium. And indeed, Maddox easily found a spiderman cover that was almost identical. As a general rule, if you ask a rhetorical question like, “Would they draw Spiderman like that?” you should probably do a little bit of research to make sure the answer isn’t “yep”. I don’t agree with everything Maddox says, but his point is well taken.

Another video you want to take in is Matt Ridley talking about global greening — the apparent rise in plants that has resulted from global warming. I disagree with parts of what he says, but toward the end he hits a very important point: Europeans are now planning to burn zillions of tons of trees under the belief that this is “green energy”. There’s a reason we stopped burning trees for fuel.

A few months ago, the town of Peoria launched a SWAT raid into the home of Jon Daniel. This incredibly dangerous man had … uh … created a parody Twitter account of Mayor Jim Ardis. During the raid, the cops found some pot on one of Daniel’s roommates. A judge has decided that the raid was lawful and they can proceed with the felony possession charges. I have no idea how the raid could be lawful when the prosecutor is not bringing charges because mocking someone on Twitter is not illegal. We have now gotten to the point where cops can raid your house based on something that isn’t a crime.

Obama has unveiled a plan to deal with drug-resistant bacteria, mainly by curtailing the massive overuse of antibiotics in farming and creating incentives for companies to develop new antibiotics. All things considered, this could be the biggest accomplishment of his administration. I mean, he’s not actively making things worse, so it’s got to be one of the top five things he’s done, at least on par with the Great Deckchair Rearranging of 2011.

Just a reminder if you need one: slavery did not make America rich.

Government Doesn’t Fix Inequality Because it Can’t

Vox has one of their usual questions today, asking why our government doesn’t “fix” inequality.

Now before I get into this, I should say that I’m not entirely convinced that inequality is a problem needing fixing. Piketty’s book has been found to have some dubious data and his conclusion — that capital always grows faster than the economy — seems incredibly shaky and simplistic. The contention that inequality is increasing is subject to three assumptions that are all dubious. First, that the cost-of-living is being accounted for correctly. If it has been over-estimated — and there are reasons to believe it has been — then the wages of the middle class have actually grown. Second, most of these calculations are based on pre-tax wages. But wages are only a part of the compensation people get for working nowadays (in my grants, about 20% of the cost of hiring someone is in benefits, not wages and many countries have socialized medicine and other socialized benefits). Moreover, our tax system has been specifically canted to reduce income inequality by paying negative taxes to the poor and charging heavy rates on the wealthy. And most other tax systems are steeply progressive. Finally, a lot of this is based on “per household” data but households have been shrinking (quite drastically in Western Europe).

But let’s say that rising inequality really exists and is a bad thing. Why doesn’t government do anything about it? Please tell us, oh wise Vox:

The decline of labor unions has decreased the political importance of poor voters, because unions were an important “get-out-the-vote” machine. A recent study by Jan Leighley and Jonathan Nagler finds that the decline in union strength has reduced low-income and middle-income turnout. But labor’s influence (or lack thereof) is also important when the voting is done. Research finds that policy outcomes in the United States are heavily mediated by lobbying between interest groups, so organization matters.

Martin Gilens writes, “Given the fact that most Americans have little independent influence on policy outcomes, interest groups like unions may be the only way to forward their economic interests and preference.” His research indicates that unions regularly lobby in favor of policies broadly supported by Americans across the income spectrum, in contrast to business groups, which lobby in favor of policies only supported by the wealthy.

So … special interests. In fact, all five of Vox’s explanation for why government hasn’t dealt with inequality boil down to what I talked about recently — the need of the Left to see their opponents as mentally ill or mislead in some way. So, according to Vox, we overestimate income mobility, inequality ruins the camaraderie of society, we’re not voting enough, special interests control our government and we’re afraid of black people (seriously). If only we were as wise and informed as Vox, we’d embrace a grand redistribution scheme.

It never occurs to them that the reason people don’t support redistribution schemes is because they know that the government would inevitably fuck it up. A couple of weeks ago, George Will issued this you-really-should-read-the-whole-thing cri de coeur:

Resistance to taxation, although normal and healthy, is today also related to the belief that government is thoroughly sunk in self-dealing, indiscriminate meddling and the lunatic spending that lards police forces with devices designed for conquering Fallujah. People know that no normal person can know one-tenth of 1 percent of what the government is doing.

Contempt for government cannot be hermetically sealed; it seeps into everything . Which is why cupcake regulations have foreign policy consequences. Americans, inundated with evidence that government is becoming dumber and more presumptuous, think it cannot be trusted to decipher foreign problems and apply force intelligently.

The collapse of confidence in government is not primarily because many conspicuous leaders are conspicuously dimwitted, although when Joe Biden refers to “the nation of Africa,” or Harry Reid disparages the Supreme Court’s Hobby Lobby decision as rendered by “five white men” (who included Clarence Thomas), Americans understand that their increasingly ludicrous government lacks adult supervision. What they might not understand is that Reids and Bidens come with government so bereft of restraint and so disoriented by delusions of grandeur that it gives fighting knives to police and grief to purveyors of noncompliant cupcakes.

Bingo. Every day, we get examples of how incompetent our government is. From funding companies that can’t make solar cells to bungling wars to a disastrous website launch. In a comment to the last post, Xetrov linked a story about how the government is going to have to un-deport some people because it screwed up their deportation. They can’t even kick illegals out of the country without creating a mess.

So why on Earth would the American people trust this bumbling leviathan to redistribute wealth? And, more to the point, why should they do so when there is every reason to believe that our government has made inequality far far worse.

One of Piketty’s claims is that occasional disasters like world wars and economic crises level the playing field, reducing income inequality. Well, we recently had a disaster that should have leveled the playing field — the mortgage bubble and subsequent financial crisis. And what did the government do? By bi-partisan consensus, it bailed out the wealthy bankers and left the rest of us holding the bag.

How does the government deal with global warming? By making our appliances more expensive and shelling out billions to fund companies run by wealthy friends of the President.

How does it stimulate the economy? By borrowing money and spending it on boondoggles run by the wealthy and powerful.

What about job training? Ed Morrissey recently ran a great post showing that only does federal job training fail to place people in jobs, it often leaves them with thousands of dollars of debt from paying for expensive classes that gave them training no one needed.

What about higher education? As I’ve documented on this blog, our government doles out predatory loans that can not be discharged in bankruptcy. These loans help fund seven-figure salaries for university Presidents. (Incidentally, one of the few people who’s doing something about the cost of college? Mitch Daniels, former Republican governor, now President of Purdue).

In the 1960’s, government gave us “urban renewal”, a process by which they bulldozed functional but poor neighborhoods and gave rich developers money to build slums. And as Ta-Nehisi Coates showed, they redlined black neighborhoods to keep federally-guaranteed loans away from working class black people.

This is the government you want to redistribute wealth?

Look at the story below on Chelsea Clinton’s ridiculous salary at NBC. One of my points was that this is not unusual. Our political elite make tons of money telling us how they are going to make society fairer. Sometimes literally. Paul Krugman is getting $250,000 to teach about income inequality at CUNY (in an industry that employs thousands upon thousands of adjunct professors who do most of the teaching and are paid a pittance for it). And the Left vigorously defended how “fair” it was!

In the end, redistribution usually ends up the same way — with a massive class of “equal” serfs and a small class of “more equal” rulers. If you don’t believe that … all you have to do is look at the current system. Vox, like most liberals, is just surprised that the American people are smart enough to realize this.

Obamanomics On the March

The economy contracted almost three percent in the first quarter, the worst quarter since the end of the Great Recession. Maybe it’s a blip, but that is a scary number. I’m sure the Obama defenders will blame it on the cold weather but I’m pretty sure we had cold weather in the past. Eventually, this will be Bush’s fault. Or “austerity”.

This is horrible news, whatever your politics. While I oppose Obama, I want the country to do well. But we may be staring down a double dip recession.

Update: Before the liberal spin master get in, keep in mind that we just remade a quarter of our economy with Obamacare. Seven million people changed insurance or bought insurance. The idea that this has nothing to do with the GDP strain credulity.

The Latest Triumph of Obamanomics

You remember the “Summer of Recovery”? That was back in 2010 when the combination of fiscal stimulus and Obama frisson was supposed to get the economy moving again. Since then, we’ve been waiting and waiting for a full recovery, bumbling along at 2% growth with job creation barely keeping up with population. But I’m sure an economic boom is just around …

Oh:

The Commerce Department said on Thursday that the nation’s overall output shrank at an annual rate of 1 percent in the first three months of the year, revising downward its initial estimate from late April, which showed a very slight gain for the period. It is the first quarter in three years in which the nation’s output of goods and services has contracted.

The figures are bad news for the White House as well as for Democrats running for Congress in November’s midterm elections. Although there’s still time for growth to rebound before then — and recent data on hiring has been more encouraging — little room remains on the runway for an economic takeoff this year.

This is being blamed on the unusually cold winter. That’s not a ridiculous explanation but it’s not enough to explain everything. Gross Domestic Income fell a whopping 2.3% which could indicate that further revisions will be even worse.

Yeah, I know. Austerity! Republicans! Libertarians! Uh … no:

It has been six years since the financial crisis. Federal government spending is still around 21 percent of GDP, up from 19 percent in 2007, and the Federal Reserve still has a very expansive monetary policy. Under those circumstances, a quarter of negative growth is pretty unsettling.

Exactly. The “austerity” we’ve enjoyed has been a huge increase in FY2009 followed by flat spending. It has included a massive quantitative easement from the Fed. You simply can not look at all that and call it austerity, no matter how much Paul Krugman stamps his foot.

The “Do Nothing” Congress Cuts Both Ways

We’ve been hearing for the last couple of years that the Republican congress won’t do anything (with “do anything” defined as “unilaterally cave in to the President’s entire agenda”). But doing nothing cuts both ways. It’s not like the Democrats are proposing a raft of great laws that would save our country. And in many cases, they are opposing them for stupid reasons:

A high-profile Senate bill that would dismantle Fannie Mae and Freddie Mac suffered a blow this week when key Democrats decided not to support the legislation, likely wiping out its chances of advancing to the floor this year.

The bill has enough votes to pass the Senate Banking Committee, which plans to consider the measure next week. But the bill’s sponsors — Sens. Tim Johnson (D-S.D.) and Mike Crapo ­(R-Idaho) — failed to win over the committee’s liberal Democrats and secure a larger majority.

Without more support, Majority Leader Harry M. Reid (D-Nev.) is unlikely to move the measure to the full chamber, and its chances of gaining traction next year are unclear. The setback comes despite bipartisan support for the bill on the committee and suggests that the effort to revamp the nation’s housing finance system could stretch on for years.

The bill would gradually unwind these two behemoths and shift the risk back to the private sector, where it belongs. This has run into a firestorm of opposition from groups that want the GSE’s to loan more money to low-income groups as well as people who want to re-inflate the mortgage market and the derivatives market.

The liberal intelligentsia had been desperately trying to pretend that Fannie and Freddie — who controlled the lion’s share of the imploded mortgage market — had nothing to do with the financial crisis. They are wrong about this, cherry-picking the data that support their cause. But they are wrong on a more fundamental level as well.

The fundamental error is that encouraging poor people to buy houses is a bad thing. Not just bad for the economy, not just bad for the markets, not just bad for any of the reasons usually cited. It is bad for poor people. Buying a house for anyone is a marginal investment at best, unless it comes with a lot of land. I bought my house because I value the things that come with home ownership — stability, responsibility, possession — and because it is a form of forced savings. I also have a good credit rating so my loan was cheap. But unless you’re investing in rental properties, a home is a solid investment, not a great one. And it’s a terrible investment if you have poor credit, move a lot, have a shaky job situation or aren’t very good with money — traits that are very common among the poor.

Look at what happened during the financial crisis. Thanks to efforts to get the poor to buy houses, they had almost all of their wealth tied up in housing. When the bubble popped, it destroyed what little wealth the poor had:

The chart above splits U.S. homeowners into net-worth quintiles, and plots housing as a fraction of all assets for each quintile in 2007. For the poorest homeowners, houses were by far the most important thing they owned going into the Great Recession, making up almost 80 percent of their total assets. Another way of saying this is that the poor held very few financial assets such as stocks, bonds or mutual funds. On the other hand, housing was a much smaller part of the overall asset portfolios of the richest households — less than 20 percent.

So the poor were much more vulnerable to a crash in housing prices in 2007 than the rich were. In fact, it was even worse for the poor because they used so much debt to purchase their homes. Above, we also plot mortgage balance as a fraction of home value in 2007 for each of the net-worth quintiles. For example, if a household owned a home worth $100,000 and had a mortgage of $80,000, then the household would have a mortgage balance that was 80 percent of the home’s value.

Leverage can be a very dangerous thing for borrowers when their home values plummet. Continuing the example above, if someone has a $80,000 mortgage on a $100,000 home, and the home drops in value by 20 percent to $80,000, then the homeowner loses $20,000, or 100 percent of their equity in the home. Home prices fell 20 percent, but the homeowner lost 100 percent. That’s the effect of leverage!

The so-called “ownership society” encouraged this behavior under the belief that housing was a magical money maker that would turn poor people into rich people. Rich people own homes; therefore owning homes must make your rich. But it doesn’t and it never will. Owning a house is not a path to sudden riches. It is, at best, a sound investment if you have the means, the stability and the discipline.

Not that Fannie and Freddie have learned from their experiment in sucking away what little wealth the poor have. Just today, the overseer of the GSE’s announced that he wants to expand their role in the markets, to encourage people to buy houses and to not lower the caps on their mortgages. This is being done to “stimulate the economy”. But we’ve been down this road before. The only things that got stimulated were Wall Street crooks and mortgage sharks. Everyone else ended up getting “stimulated” right up the keister.

Enough. End this madness. End the GSE’s. Let’s not go down that road again thinking that this time, it will be different. If the President and his sycophantic media want Congress to “do something” I suggest they start right here with a bi-partisan effort to finally end this failed experiment.