About Me 0077: Stock Making Money

What does Obama's choice of Gene Sperling as his new top economic adviser mean? Roosevelt Institute fellows and New Deal 2.0 friends weigh in. This post originally appeared at New Deal 2.0.

Thomas Ferguson, Senior Fellow at the Roosevelt Institute and Professor of Political Science at U Mass, Boston:

Before he joined Treasury as Geithner's "Counselor," Sperling "earned" almost $900,000 advising Goldman Sachs on its philanthropic ventures, plus almost half a million dollars more from the Philadelphia Stock Exchange. Never mind the fees and honoraria he picked up from all the other financial luminaries. The key point is that payments on this scale to such political figures do not represent normal market rates for real services. He took in more from Goldman alone than many full time lobbyists earn in a year. What the White House really just announced are the names of the financial monsters with gold-plated access to the highest levels of economic policy making. That is, the winners of a rigged, money-driven lottery, and the people paying are going to be the rest of the citizenry. It's enough to drive one to drink a giant pot of tea.

Bo Cutter, Senior Fellow at the Roosevelt Institute and served as leader of Obama's OMB transition team:

Gene Sperling is a very able man, whether or not he is a good choice as Chair of The National Economic Council is a different question. My own view is that both the President and the nation require a fundamentally different economic policy. Gene is certainly capable of delivering that policy but is he temperamentally ready to lead in developing it, and has President Obama asked for it?

Marshall Auerback, Senior Fellow at the Roosevelt Institute:

President Obama has spoken of Reagan as a transformational president, and he was quite dismissive of the Clinton Administration during the 2008 primaries. Yet with the appointment of yet another Clintonista, Gene Sperling, one would be hard-pressed to find any differentiating factor between the Clinton and Obama presidencies. Arguably, the current administration is even worse, since Clinton at least had a few progressive voices such as Robert Reich in his Cabinet. True, Clinton faced relatively minor problems while Obama is neck-deep in recession and must deal with stagnant income growth. The difference in conditions allowed the former president to reshape his administration by positioning and spin doctoring, which provided the illusion of success. But Obama can only succeed by altering outcomes. Americans want jobs, lower unemployment, economic growth, a reduced deficit and an end to the recession. They will not be assuaged or appeased by nice speeches or perceived moves to the center via "triangulation".

Edward Harrison, Founder of Credit Writedowns and New Deal 2.0 Contributor:

The Gene Sperling pick is very much in line with what I expected now that the Obama Administration has moved into re-election mode. Beside making the technical recovery stick, above all, the administration wants to present a more pro-incumbent business face. The Sperling announcement allows them to do so without being perceived on the left as completely submitting to Wall Street. There is nothing objectionable about Gene Sperling's positions on issues of substance for the Democratic base. However, in my view, the Sperling appointment is another indication of the revolving door between Wall Street and politics. Sperling is yet another Clinton appointee who left for big money on Wall Street only to re-appear in the Obama Administration. How do the French put it? Plus ça change, plus c'est la même chose.

Lynn Parramore, Editor of New Deal 2.0 and Media Fellow at the Roosevelt Institute:

Welcome to another episode of 'As the Revolving Door Turns', a depressing soap opera that has become a signature of the Obama administration. Sperling is yet another example of an adviser with close ties to Wall Street formed by chains of big money. He is also a known deficit hawk -- just the sort of discredited economic thinking we should be leaving behind as the nation continues to suffer. This sounds like good news for Wall Street; bad news for the American people.

This, of course, will upset some people. Let me give my disclosure: I’ve never been foreclosed on.

But many years ago I lost a house due to lack of money (after my first business, but before my second, third, fourth).

Close family members also have lost homes when I was younger and it had a profound impact on me. I also know many people in the process of foreclosure and I get the pain that it causes

Nevertheless, there is a positive side to foreclosure.

1) People have more money. This is common sense. If you aren’t paying $2500 a month on your mortgage then you have an extra $2500 a month to spend. Many of the foreclosures are occurring not because people lost their jobs (although that’s certainly part of it) but because mortgage rates got adjusted higher after scam mortgage issuers enticed borrowers with artificially low starter rates. The rates got higher, the borrower couldn’t pay, so he stopped. Hence, more money each month to spend for the borrower.

So what do people do with the money? They pay down credit card debt. Its no surprise that since mid-2009, when foreclosures began going through the roof, that the stock of PRAA (the largest credit card debt collector) has gone up almost 300%. And their competitor, ASFI has gone up almost 500%! People don’t enjoy being in debt and giving up on the mortgage allows them to pay down and consolidate their smaller debts. Again, you can argue with this, but the proof is in the strong ability of the companies that buy debt from the banks to collect on those debts. Additionally, personal consumer expenditures are at an all-time high. You can argue if this is good or bad. People stop paying their mortgage, they start buying things at the local mall, personal spending goes to all-time highs. Fact. Is this good? Well, more spending ultimately leads to more jobs. So you decide.

2) Foreclosed houses are cheap for investors. This is common sense as well. If the bank owns a home all they want to do is get rid of the property and get it off the books. The banks are overloaded right now with foreclosed properties. You can buy many properties for 10% of what they were initially sold for or less. The downside is that you are buying them “as is”, i.e. the bank did not make any repairs and the prior owners probably left the home in a state of extreme disrepair. But if you are handy, have the money, and want to work hard at navigating the loopholes and disadvantages of buying a foreclosed home then the advantages are extreme (you make a lot of money). At some point the opportunity for investors is so great that a floor will be put in place on housing prices.

3) You can stll live in your home after you stop paying. I’m not recommending people stop making mortgage payments. The disadvantage is that your credit becomes so bad you might not even be able to rent again after you finally get evicted. But actually getting kicked out of your home after you stop paying the mortgage is often a six to eighteen month process depending on the lender and the state. So you have a place to live while you plan the next big move in your life, all the while you save the amount you would’ve spent on mortgages (and probably the money you would’ve spent on basic repairs).

4) Unemployment rate will eventually go down faster. This seems weird – why would unemployment go down faster. Here’s the basic idea: unemployment, like any market, is a function of supply and demand. Supply of jobs matched by the supply of demand for those jobs. The more people who own homes (i.e. are prevented from making a quick move) the more problematic it is for employers who want to hire people because their supply is purely local, i.e. the people who live in the surrounding area. The more supply there will be around the country. This doesn’t matter as much now with a 9%+ unemployment rate (there is plenty of supply) but as the economy continues to improve, this will make an enormous difference.

5) Banking regulations will improve. The banks are a mess and every day it seems there is a new scandal about who was foreclosed on inappropriately. This is a national shame and embarrassment. Already banks have slowed down their foreclosure rates (so the benefits of numbers 1-4 will keep increasing) as they look through their regulations and improve things so this doesn’t happen again and to as great an extent.

Ultimately the pain, embarrassment, and financial distress of being foreclosed on is not worth the benefits. But short-term, the foreclosure process is one part of the process of how a capitalist economy heals itself. Consumers end up with more money, employers have more possibilities to fill jobs (once things improve), other debts get paid off, spending goes up (temporarily), and banks improve their regulations.

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Monday, January 10, 2011

Stock Making Money

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