ALBERT HERTER

Archive for August, 2010|Monthly archive page

‘POLICY OPTIONS DWINDLE AS ECONOMIC FEARS GROW, ‘ by Peter Goodman in the N. Y. Times.

In Uncategorized on August 30, 2010 at 17:12

Policy Options Dwindle as Economic Fears Grow

By PETER S. GOODMAN

Published: August 28, 2010

THE American economy is once again tilting toward danger. Despite an aggressive regimen of treatments from the conventional to the exotic — more than $800 billion in federal spending, and trillions of dollars worth of credit from the Federal Reserve — fears of a second recession are growing, along with worries that the country may face several more years of lean prospects.

On Friday, Ben Bernanke, chairman of the Fed, speaking in the measured tones of a man whose word choices can cause billions of dollars to move, acknowledged that the economy was weaker than hoped, while promising to consider new policies to invigorate it, should conditions worsen.

Yet even as vital signs weaken — plunging home sales, a bleak job market and, on Friday, confirmation that the quarterly rate of economic growth had slowed, to 1.6 percent — a sense has taken hold that government policy makers cannot deliver meaningful intervention. That is because nearly any proposed curative could risk adding to the national debt — a political nonstarter. The situation has left American fortunes pinned to an uncertain remedy: hoping that things somehow get better.

It increasingly seems as if the policy makers attending like physicians to the American economy are peering into their medical kits and coming up empty, their arsenal of pharmaceuticals largely exhausted and the few that remain deemed too experimental or laden with risky side effects. The patient — who started in critical care — was showing signs of improvement in the convalescent ward earlier this year, but has since deteriorated. The doctors cannot agree on a diagnosis, let alone administer an antidote with confidence.

This is where the Great Recession has taken the world’s largest economy, to a Great Ambiguity over what lies ahead, and what can be done now. Economists debate the benefits of previous policy prescriptions, but in the political realm a rare consensus has emerged: The future is now so colored in red ink that running up the debt seems politically risky in the months before the Congressional elections, even in the name of creating jobs and generating economic growth. The result is that Democrats and Republicans have foresworn virtually any course that involves spending serious money.

The growing impression of a weakening economy combined with a dearth of policy options has reinvigorated concerns that the United States risks sinking into the sort of economic stagnation that captured Japan during its so-called Lost Decade in the 1990s. Then, as now, trouble began when a speculative real estate frenzy ended, leaving banks awash in debts they preferred not to recognize and hoping that bad loans would turn good (or at least be forgotten). The crisis was deepened by indecisive policy, as the ruling party fruitlessly explored ways around a painful reckoning — boosting exports, tinkering with accounting standards.

“There are many ways in which you can see us almost surely being in a Japan-style malaise,” said the Nobel-laureate economist Joseph Stiglitz, who has accused the Obama administration of underestimating the dangers weighing on the economy. “It’s just really hard to see what will bring us out.”

Japan’s years of pain were made worse by deflation — falling prices — an affliction that assailed the United States during the Great Depression and may be gathering force again. While falling prices can be good news for people in need of cars, housing and other wares, a sustained, broad drop discourages businesses from investing and hiring. Less work and lower wages translates into less spending power, which reinforces a predilection against hiring and investing — a downward spiral.

Deflation is both symptom and cause of an economy whose basic functioning has stalled. It reflects too many goods and services in the marketplace with not enough people able to buy them.

For more than a decade, the global economy was fueled by monumental spending power underwritten by a pair of investment booms in America — the Internet explosion in the 1990s, then the exuberance over real estate. As housing prices soared, homeowners borrowed against rising values, distributing their dollars to furniture dealers in suburban malls, and furniture factories in coastal China.

But the collapse of American housing prices severed that artery of finance. Homeowners could not borrow, and they cut spending, shrinking sales for businesses and prompting layoffs.

Early this year, some economists declared that the cycle was finally righting itself. Businesses were restocking inventories, yielding modest job growth in factories. Hopes flowered that these new wages would be spent in ways that led to the hiring of more workers — a virtuous cycle

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‘WIDESPREAD FEAR FREEZES HOUSING MARKET, ‘ by Joe Nocera in the N. Y. Times.

In Uncategorized on August 30, 2010 at 12:15

TALKING BUSINESS

Widespread Fear Freezes Housing Market

By JOE NOCERA

Published: August 27, 2010

You have to wonder sometimes what they’re smoking over there at the National Association of Realtors.

Lawrence Yun, chief economist of the National Association of Realtors, told analysts on Tuesday that “the pace of a sales recovery could pick up quickly.”

On Tuesday, the self-proclaimed “voice for real estate” released its “existing home sales” figures for July. They were gruesome. Sales were down 27 percent from the previous month, and down 26 percent from a year ago. Annualized, the July sales figures would translate into fewer than 3.9 million homes sold this year — a staggeringly low figure. (The record high occurred in 2005, when more than seven million houses were sold.)

The months-to-sale number was depressingly high; the Realtors group reported that it now takes more than a year to sell a typical house, compared with six months in a normal market. The amount of inventory is high.

Lest we forget, these awful numbers are coming out at a time when the financial incentive to buy could hardly be stronger: the fixed rate on a 30-year mortgage is at an incredibly low 4.36 percent, according to an authoritative survey conducted by Freddie Mac.

Yet here was Lawrence Yun, the association’s chief economist, trying to turn lemons into lemonade: “Given the rock-bottom mortgage interest rates and historically high housing affordability conditions, the pace of a sales recovery could pick up quickly, provided the economy consistently adds jobs,” he said in a news release.

Mr. Yun went on to attribute the weak July numbers to the expiration of the Obama administration’s tax credit for home buyers. They had caused consumers to “rationally” jump into the market during the first half of the year — at the expense of summer sales, he said. The post-tax-credit slump, he predicted, would be over by the fall, and by the end of the year, five million existing homes would be sold. (“To place in perspective, annual sales averaged 4.9 million in the past 20 years,” he said.)

Mr. Yun also predicted that home values would not fall much further, since they were “back in line relative to income.” In other words, the July numbers were a mere blip.

Clearly, Mr. Yun needs to get out a little more often. Specifically, he ought to talk to people on the ground — like mortgage lenders or prospective borrowers. Talking to these people would probably give him a more sober take on the larger meaning of the latest sales numbers for existing homes. Sometimes, you see, lemons really can’t be turned into lemonade.

“In the financial markets, a lack of liquidity immediately leads to falling prices,” said Lou Barnes, the founder of Boulder West Financial Services. (Boulder West was acquired last year by Premier Mortgage Group.) “In the real estate market, something different happens,” he added. “Illiquid real estate markets freeze.” That is what is happening now. For months, the Obama tax credit had been the only grease in the housing market. Now that it is gone, the buying and selling of houses is essentially grinding to a halt.

Why is this happening? Just as the subprime bubble of 2006 and 2007 required one kind of perfect storm — namely, incentives to throw underwriting standards out the window — we are now living through the opposite kind of perfect storm. Essentially, every participant in the housing market has a reason to be afraid. And that fear is paralyzing.

The prospective buyer, for instance, has two good rationales to fear buying a new home. One is the unemployment rate. “A major psychological thing happens with high unemployment,” says Dave Zitting, a veteran mortgage banker and founder of Primary Residential Mortgages. “Those with a job worry about whether they are going to keep that job” — which, in turn, prevents them from taking the plunge on a new home.

The second reason is that, Mr. Yun notwithstanding, most people simply do not believe that housing prices are even close to hitting bottom. “In the Bay Area, a house that was worth $300,000 a decade ago became a million-dollar home,” said Greg Fielding, a real estate broker and blogger. “Now it is listed at $800,000.” That price, he suggested, was still unrealistically high. The seller, meanwhile, doesn’t want to face the fact that his or her home is too richly priced, and won’t sell at a more realistic price — which may well be below his or her mortgage debt.

BALANCE OF ARTICLE AT NYTIMES.COM

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‘DEMOCRACY IN AMERICA, ‘ by James Kwak at baselinescenario .com.

In Uncategorized on August 28, 2010 at 12:13

Democracy in America

Posted: 26 Aug 2010 07:34 PM PDT

It appears that Simon beat me to commenting on Third World America, Arianna Huffington’s bleak portrait of many of the things that are wrong with America (crumbling infrastructure, failing schools, extreme inequality, low social mobility, political system captured by special interests, etc.), so I’ll confine myself to a couple of thoughts I had while reading it.*

First, there are these great quotations from Alexis de Tocqueville’s Democracy in America (p. 45 of Huffington’s book):

“Amongst the novel objects that attracted my attention during my stay in the United States, nothing struck me more forcibly than the general equality of condition among the people. . . .

“Democratic laws generally tend to promote the welfare of the greatest possible number; for they emanate from the majority of the citizens, who are subject to error, but who cannot have an interest opposed to their own advantage.”

Now, Tocqueville was no naïve idealist. I read a big chunk of Democracy in America in college (the “cube,” we called it, because it was so thick) and read The Old Regime and the Revolution in graduate school, and Tocqueville is one of the two conservatives I most respect, along with Edmund Burke. He knew the importance of institutions and the dangers of trying to overthrow them all at once, and hence his distaste for the ideological zealots of the French Revolution. America, he thought, was different, because of its strong institutions and public sphere.

But today, Tocqueville’s observations no longer ring true. America is no longer a land of equality, and it’s largely because our democratic system no longer promotes “the welfare of the greatest possible number.” And that’s because many citizens are only too eager to support policies that are “opposed to their own advantage,” like the then-popular (and apparently still-popular) Bush tax cuts, which shifted the relative tax burden from the rich onto the middle class.** What Tocqueville underestimated was the power of money in modern politics and the marketing genius of modern politicians, which have freed democratic politics from the constraints of the actual interests of the majority.

Second . . . I think I’ll hold off on second until another post.

* I got a free copy from the publisher.

** Yes, income taxes on the middle class went down a bit. But if we assume that government spending must eventually be paid for, it’s the relative distribution of the tax burden that matters. If we assume instead that government spending will be reduced, those reductions will affect the middle class (Social Security, Medicare, etc.) much more than the rich.

‘THIS IS NOT A RECOVERY,’ by Paul Krugman in the N. Y. Times.

In Uncategorized on August 27, 2010 at 18:03

This Is Not a Recovery

By PAUL KRUGMAN

Published: August 26, 2010

What will Ben Bernanke, the Fed chairman, say in his big speech Friday in Jackson Hole, Wyo.? Will he hint at new steps to boost the economy? Stay tuned.

But we can safely predict what he and other officials will say about where we are right now: that the economy is continuing to recover, albeit more slowly than they would like. Unfortunately, that’s not true: this isn’t a recovery, in any sense that matters. And policy makers should be doing everything they can to change that fact.

The small sliver of truth in claims of continuing recovery is the fact that G.D.P. is still rising: we’re not in a classic recession, in which everything goes down. But so what?

The important question is whether growth is fast enough to bring down sky-high unemployment. We need about 2.5 percent growth just to keep unemployment from rising, and much faster growth to bring it significantly down. Yet growth is currently running somewhere between 1 and 2 percent, with a good chance that it will slow even further in the months ahead. Will the economy actually enter a double dip, with G.D.P. shrinking? Who cares? If unemployment rises for the rest of this year, which seems likely, it won’t matter whether the G.D.P. numbers are slightly positive or slightly negative.

All of this is obvious. Yet policy makers are in denial.

After its last monetary policy meeting, the Fed released a statement declaring that it “anticipates a gradual return to higher levels of resource utilization” — Fedspeak for falling unemployment. Nothing in the data supports that kind of optimism. Meanwhile, Tim Geithner, the Treasury secretary, says that “we’re on the road to recovery.” No, we aren’t.

Why are people who know better sugar-coating economic reality? The answer, I’m sorry to say, is that it’s all about evading responsibility.

In the case of the Fed, admitting that the economy isn’t recovering would put the institution under pressure to do more. And so far, at least, the Fed seems more afraid of the possible loss of face if it tries to help the economy and fails than it is of the costs to the American people if it does nothing, and settles for a recovery that isn’t.

In the case of the Obama administration, officials seem loath to admit that the original stimulus was too small. True, it was enough to limit the depth of the slump — a recent analysis by the Congressional Budget Office says unemployment would probably be well into double digits now without the stimulus — but it wasn’t big enough to bring unemployment down significantly.

Now, it’s arguable that even in early 2009, when President Obama was at the peak of his popularity, he couldn’t have gotten a bigger plan through the Senate. And he certainly couldn’t pass a supplemental stimulus now. So officials could, with considerable justification, place the onus for the non-recovery on Republican obstructionism. But they’ve chosen, instead, to draw smiley faces on a grim picture, convincing nobody. And the likely result in November — big gains for the obstructionists — will paralyze policy for years to come.

So what should officials be doing, aside from telling the truth about the economy?

The Fed has a number of options. It can buy more long-term and private debt; it can push down long-term interest rates by announcing its intention to keep short-term rates low; it can raise its medium-term target for inflation, making it less attractive for businesses to simply sit on their cash. Nobody can be sure how well these measures would work, but it’s better to try something that might not work than to make excuses while workers suffer.

The administration has less freedom of action, since it can’t get legislation past the Republican blockade. But it still has options. It can revamp its deeply unsuccessful attempt to aid troubled homeowners. It can use Fannie Mae and Freddie Mac, the government-sponsored lenders, to engineer mortgage refinancing that puts money in the hands of American families — yes, Republicans will howl, but they’re doing that anyway. It can finally get serious about confronting China over its currency manipulation: how many times do the Chinese have to promise to change their policies, then renege, before the administration decides that it’s time to act?

Which of these options should policy makers pursue? If I had my way, all of them.

I know what some players both at the Fed and in the administration will say: they’ll warn about the risks of doing anything unconventional. But we’ve already seen the consequences of playing it safe, and waiting for recovery to happen all by itself: it’s landed us in what looks increasingly like a permanent state of stagnation and high unemployment. It’s time to admit that what we have now isn’t a recovery, and do whatever we can to change that situation.

‘LEARNING CURVES ON THE CAREER PATH, ‘ by Steven Greenhouse in the N. Y. Times.

In Uncategorized on August 26, 2010 at 11:40

Learning Curves on the Career Path

By STEVEN GREENHOUSE

Published: August 25, 2010

“Every day we know less and less about more and more,” said Ray Caprio, vice president for continuing education at Rutgers University.

That, he said, goes far to explain why so many people, including engineers, teachers, bankers, museum workers and public relations aides, are concluding that they need to return to school, often years after receiving their bachelor’s degrees.

With the world growing ever more complex and new technologies being developed every day, it’s hardly surprising that millions of Americans have returned to campus. Some return to their alma maters or other colleges, some pursue continuing education at graduate schools and some turn to their local community college. Many experts say continuing education is more important than ever because most college graduates will go through five to seven job changes over their careers.

“To sustain themselves as competitive employees during their career, they’re probably going to need the equivalent of several more years of studying, although not necessarily in degree programs,” Mr. Caprio said.

To improve their workers’ skills, some employers provide in-house courses or underwrite elaborate executive education programs. But most workers are on their own when they want to take courses to increase their skills in the hope of climbing the career ladder.

David Gillbank lost his job at an advertising firm last summer. Unemployed, he debated what would give him a leg up in finding work. The path for him, he concluded, was in green marketing.

So he enrolled in a new program in global sustainability at the University of California, Los Angeles. It involved nine classes, including courses on renewable energy, principles of sustainability and green marketing. As part of the program, he worked with an elementary school in Hollywood to help it develop a program to conserve energy and follow other principles of sustainability.

“I really learned some skills to add to my résumé,” Mr. Gillbank said.

But that was not the only benefit. “It’s a good way to fill the gap in my résumé,” he added. “Everyone’s asking me, what have I done in my past year? Everyone appreciates that I’ve done something substantial with my time.”

Mr. Gillbank’s certificate in sustainability has helped him land interviews, he said, but he has not yet nailed down a job.

Some people have worked at a prosperous company for five years and are eager to move up, or are unemployed and eager to reinvent themselves. Still others are in an industry where successive waves of downsizing have made job security seem shaky. And more of them are concluding that if there is an answer to their problems, it’s more education.

At Rutgers, many ambitious 30- and 40-somethings are studying for mini-M.B.A.’s, taking condensed, intense business programs to quickly fortify themselves with new expertise and increase their chances of getting a promotion — and soon. At U.C.L.A., many who aspire to a career in Hollywood are taking courses in producing, screenwriting, television writing and music production. At Macomb Community College in Michigan, many former white-collar workers from Detroit’s automakers are plunging into health care courses and careers.

Anyone who has been out of college for five, 10 or 15 years and is thinking of returning to school has important questions to explore before jumping back in. Many colleges have counselors to advise would-be students, often helping on matters like whether to pursue a degree program like an M.B.A. or go for a certificate program, which sometimes requires four, six or eight courses and attests to attaining a specific expertise, like project management.

“I would go first to an institution that has these kinds of learner representatives to ask these questions, to do the drilling down that helps individuals sort out what is best for them,” said Mary Nichols, dean of the University of Minnesota’s college of continuing education.

Any good continuing education program, Dean Nichols said, takes an individualized approach to its students. “We’re not in the business of steering people toward things,” she said. “We’re in the business of helping people capitalize on their strengths and put together ways to build on their interests and passions.”

Cathy A. Sandeen, dean of continuing education at U.C.L.A., suggested, “Look at trends in your field. Look at your current skills and what do you need to augment your skills to make you more relevant and more attractive in your field.”

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‘STEAL THIS MOVIE , TOO, ‘ by Thomas L. Friedman in the N. Y. Times.

In Uncategorized on August 25, 2010 at 16:33

Steal This Movie, Too

By THOMAS L. FRIEDMAN

While Washington is consumed with whether our president is secretly a Muslim, or born abroad, possibly in outer space, I’d like to talk about some good news. But to see it, you have to stand on your head.

You have to look at America from the bottom up, not from the top (Washington) down. And what you’ll see from down there is that there is a movement stirring in this country around education. From the explosion of new charter schools to the new teachers’ union contract in D.C., which will richly reward public school teachers who get their students to improve faster and weed out those who don’t, Americans are finally taking their education crisis seriously. If you don’t want to stand on your head, then just go to a theater near you after Sept. 24 and watch the new documentary “Waiting for Superman.” You’ll see just what I’m talking about.

Directed by Davis Guggenheim, who also directed Al Gore’s “An Inconvenient Truth,” “Waiting for Superman” takes its name from an opening interview with the remarkable Geoffrey Canada, founder of the Harlem Children’s Zone. HCZ has used a comprehensive strategy, including a prenatal Baby College, social service programs and longer days at its charter schools to forge a new highway to the future for one of New York’s bleakest neighborhoods.

Canada’s point is that the only way to fix our schools is not with a Superman or a super-theory. No, it’s with supermen and superwomen pushing super-hard to assemble what we know works: better-trained teachers working with the best methods under the best principals supported by more involved parents.

“One of the saddest days of my life was when my mother told me Superman did not exist,” Canada says in the film. “I read comic books and I just loved ’em …’cause even in the depths of the ghetto you just thought, ‘He’s coming, I just don’t know when, because he always shows up and he saves all the good people.’ ”

Then when he was in fourth or fifth grade, he asked, “Ma, do you think Superman is actually [real]?” She told him the truth: “ ‘Superman is not real.’ I was like: ‘He’s not? What do you mean he’s not?’ ‘No, he’s not real.’ And she thought I was crying because it’s like Santa Claus is not real. And I was crying because there was no one … coming with enough power to save us.”

“Waiting for Superman” follows five kids and their parents who aspire to obtain a decent public education but have to enter a bingo-like lottery to get into a good charter school, because their home schools are miserable failures.

Guggenheim kicks off the film explaining that he was all for sending kids to their local public schools until “it was time to choose a school for my own children, and then reality set in. My feelings about public education didn’t matter as much as my fear of sending them to a failing school. And so every morning, betraying the ideals I thought I lived by, I drive past three public schools as I take my kids to a private school. But I’m lucky. I have a choice. Other families pin their hopes to a bouncing ball, a hand pulling a card from a box or a computer that generates numbers in random sequence. Because when there’s a great public school there aren’t enough spaces, and so we do what’s fair. We place our children and their future in the hands of luck.”

It is intolerable that in America today a bouncing bingo ball should determine a kid’s educational future, especially when there are plenty of schools that work and even more that are getting better. This movie is about the people trying to change that. The film’s core thesis is that for too long our public school system was built to serve adults, not kids. For too long we underpaid and undervalued our teachers and compensated them instead by giving them union perks. Over decades, though, those perks accumulated to prevent reform in too many districts. The best ones are now reforming, and the worst are facing challenges from charters.

Although the movie makes the claim that the key to student achievement is putting a great teacher in every classroom, and it is critical of the teachers’ unions and supportive of charters, it challenges all the adults who run our schools — teachers, union leaders, principals, parents, school boards, charter-founders, politicians — with one question: Are you putting kids and their education first?

Because we know what works, and it’s not a miracle cure. It is the whatever-it-takes-tenacity of the Geoffrey Canadas; it is the no-excuses-seriousness of the KIPP school (Knowledge is Power Program) founders; it is the lead-follow-or-get-out-of-the-way ferocity of the Washington and New York City school chancellors, Michelle Rhee and Joel Klein.

And it is the quiet heroism of millions of public and charter school teachers and parents who do put kids first by implementing the best ideas, and in so doing make their schools just a little bit better and more accountable every day — so no Americans ever again have to play life bingo with their kids, or pray to be rescued by Superman.

‘HOUSING IN TEN WORDS , ‘ by James Kwak at baselinescenario .com. “..Home ownership will never again yield rewards like those enjoyed in the second half of the 20th century.” NEVER AGAIN!!!! BTW: I BOUGHT MY APT. IN PARIS SEPT. 1998. AND SOLD MY APT. IN SAN FRANCISCO IN MAY 2007. THE REAL ESTATE MARKET TOPPED OUT IN JUNE 2007. TIMING IS EVERYTHING.

In Uncategorized on August 24, 2010 at 10:32

Housing in Ten Words

Posted: 23 Aug 2010 07:04 AM PDT

By James Kwak

“Housing Fades as a Means to Build Wealth, Analysts Say.” That’s the title of a New York Times article by David Streitfeld. Here’s most of the lead:

“Many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.

“The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming.

“More than likely, that era is gone for good.”

I’ve been telling my friends for a decade that housing is a bad investment. These are real housing prices over the past century, based on data collected by Robert Shiller:

Housing is generally a worse investment than either stocks or simple U.S. Treasury bonds. Then why do so many people think it’s such a great investment?

Leverage. Let’s say inflation is 2% and housing returns 3% (1% real return). If you put 10% down, now your house is returning 30%, or a 28% real return; subtract a 6% fixed-rate mortgage, and you’re making about 22%–or twenty-two times the real return of the underlying asset. Of course, we all know the dangers of leverage.

Price illusion. People remember the nominal price they paid for their houses. When they sell them thirty years later, they look at the difference between the nominal purchase and sale prices and think they made a ton of money. This is especially true of the generation that bought houses in the 1960s and early 1970s before inflation hit; they saw their home prices go up by a factor of ten and thought it was due to high real returns.

Bubbles and optimism bias. Every now and then we have a huge bubble like the one at the right-hand end of the chart above. For a while, people think that’s the new normal. For a while after that, they continue to think it’s the new normal, because they are biased toward optimistic expectations about the world. (Note that during the first half of the decade that I was advising friends that housing was a bad investment, housing was actually a great investment, assuming you could get out in time.)

OK, so now we all now the real story. Or do we? “In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade.” There’s that optimism bias.

But I don’t think it’s correct to say that an era is over–an era when housing appreciation was the key to the economy. The chart above shows simply that that era never existed; housing was flat for a long time, and then there was a bubble. Instead, we had the illusion of an era of housing appreciation, produced mainly by leverage and price illusion. For every homeowner who made a killing because she got a fixed-rate mortgage in 1970, there was a new family that couldn’t afford a house in 1980 because interest rates were too high, or a savings and loan that failed because it was weighed down by those fixed-rate mortgages. That whole phenomenon was just a transfer of wealth within society.

One last caveat, however. When “analysts say” one thing, they are usually wrong. Remember back in 1999-2000, when most analysts were saying that stocks were the best investment for everyone, all the time? Generally the best time to buy an asset class is when conventional wisdom has shifted against it. So while I still think housing is overpriced–and we should slowly remove the props on that price, like the mortgage interest tax deduction–maybe in the long term it’s not such a bad idea after all.

‘HOW TO BE FRUGAL AND STILL BE ASKED ON DATES, by Ron Lieber in the N. Y. Times.

In Uncategorized on August 23, 2010 at 19:13

YOUR MONEY

How to Be Frugal and Still Be Asked on Dates

By RON LIEBER

Published: August 20, 2010

Saving may be making a comeback, but it still hasn’t gotten its sexy back, particularly if you’re a man.

BJ Gallagher, an author, says that “for a lot of women, love looks like ‘Take care of me.’ ”

Earlier this month, the Commerce Department reported that the personal savings rate in June was a much-improved 6.4 percent and that the number had risen as high as 8.2 percent in the depths of the stock market doldrums in the spring of 2009.

Those who are single may not have been rewarded for their parsimony, though. Now comes some survey data from ING Direct, the people who would like you to save more money in their online savings accounts. In June, the company asked 1,000 people which words would come to mind if someone was fixing them up on a blind date with someone described as frugal.

Just 3.7 percent answered “sexy,” while 15 percent picked “boring” and 27 percent chose “stingy.”

Anyone who urges better money habits on the masses for a living ought to be gravely offended by this, though Ramit Sethi, author of “I Will Teach You to Be Rich,” tried to take it in stride. “The term frugality has been so perverted that it now means ‘No, no, no’ to everyone, whether it’s shoes or lattes or travel,” he said. “I don’t think it’s the right word.”

Yet it is a term that the online dating company eHarmony screens for in its patented compatibility test, asking people to rank themselves on a seven-point scale for frugality (along with things you would expect, like compassion and generosity).

“It makes sense, right?” asks Gian Gonzaga, 40, who has a doctorate in psychology and is eHarmony’s senior research director. “You look at the attractiveness angle, but farther down the road, money and finances are one of the biggest conflict areas couples traditionally face. And a lot of that comes down to having enough or not having enough.”

Well, maybe it makes sense and maybe it doesn’t. If your frugality has the potential to turn off nearly half of the mating pool, it raises a question: How best to broadcast your financial values and seek significant others who share your approach without coming off as a tightwad or a gold digger?

This challenge is a fairly recent one. Several generations back, personal ads could not have been more explicit about finances, since everyone knew that women generally had no income and a marriage involving a man of means was the only way to live comfortably.

This posting, from The New York Herald in 1860, was about par for the course, according to Pam Epstein, an adjunct professor at the Newark campus of Rutgers University, who wrote her history Ph.D. thesis on older ads. “A young lady, rather good looking, and of good address, desires the acquaintance of a gentleman of wealth (none other need apply), with a view to matrimony,” the ad read.

Ads from men from that period seemed custom-built to fit that bill. “The advertiser, a successful young business man of good education, polite manners and agreeable address, having recently amassed a fortune and safely invested the same, wishes to meet with a young lady or widow,” one said.

“There was this idea that men were very frugal,” said Ms. Epstein, 33, who posts copies of some of the ads she’s dug up at advertisingforlove.com. “You were going to work hard and save your money, and then by doing so, you would be able to support a wife in comfort. I do see a lot of ads saying ‘I’ve been wrapped up in business all this time and now I can support a wife comfortably.’ ”

Flash forward to today, however, and things get more complicated. Some people do put down an income range in their online dating profiles, though it’s not as if anyone is auditing the figures for honesty. Many men, meanwhile, pose peacocklike in front of their cars or boats or homes. The message here is less clear, though. Are these meant to be trophies, a sign of a fortune already amassed? Or is it the mark of a spendthrift? Or an indication that he’ll spend all of his time on the water, and you’d better be ready with the Dramamine if the relationship is going to work?

“There’s nothing admirable in frugality, because it’s invisible,” Ms. Epstein notes.

But even if you could transmit that value through an online dating profile, would you want to? It turns out that the answer to that may depend on whether you’re a man or a woman.

The ING Direct survey, which was conducted by phone and has a sampling error of plus or minus 3 percentage points, presented one more potential label for that frugal blind date: smart. And in a promising sign for the nation’s solvency, that was the term chosen most often, picked by 49 percent of respondents. EHarmony also crunched the numbers for me on 30 million matches it made in July and found that both men and women were 25 percent more likely to have a potential mate reach out to them if they identified themselves as a saver rather than a spender.

‘HOUSING FADES AS A MEANS TO BUILD WEALTH,’ by David Streitfeld in the N. Y. Times.

In Uncategorized on August 23, 2010 at 11:25

Housing Fades as a Means to Build Wealth, Analysts Say

By DAVID STREITFELD

Published: August 22, 2010

Housing will eventually recover from its great swoon. But many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.

The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming.

More than likely, that era is gone for good.

“There is no iron law that real estate must appreciate,” said Stan Humphries, chief economist for the real estate site Zillow. “All those theories advanced during the boom about why housing is special — that more people are choosing to spend more on housing, that more people are moving to the coasts, that we were running out of usable land — didn’t hold up.”

Instead, Mr. Humphries and other economists say, housing values will only keep up with inflation. A home will return the money an owner puts in each month, but will not multiply the investment.

Dean Baker, co-director of the Center for Economic and Policy Research, estimates that it will take 20 years to recoup the $6 trillion of housing wealth that has been lost since 2005. After adjusting for inflation, values will never catch up.

“People shouldn’t look at a home as a way to make money because it won’t,” Mr. Baker said.

If the long term is grim, the short term is grimmer. Housing experts are bracing themselves for Tuesday, when the sales figures for July will be released. The data is expected to show a drop of as much as 20 percent from last year.

The supply of homes sitting on the market might rise to as much as 12 months, about twice the level of a healthy market. That would push down prices as all those sellers compete to secure a buyer, adding to a slide that has already chopped off as much as 30 percent in home values.

Set against this dismal present and a bleak future, buying a home is a willful act of optimism. That explains why Adam and Allison Lyons are waiting to close on a $417,500 house in Deerfield, Ill.

“We’re trying not to think too far ahead,” said Ms. Lyons, 35, an information technology manager.

The couple’s first venture into real estate came in 2003 when they bought a condo in a 17-unit building under construction in Chicago. By the time they moved in two years later, it was already worth $50,000 more than they had paid. “We were thinking, great!” said Mr. Lyons, 34.

That quick appreciation started them on the same track as their parents, who watched the value of their houses ascend for decades. The real estate crash interrupted that pleasant dream. The couple cannot sell their condo. Unwillingly, they are becoming landlords.

“I don’t think we’re ever going to see the prosperity our parents did, but I don’t think it’s all doom and gloom either,” said Mr. Lyons, a manager at I.B.M. “At some point, you just have to say what the heck and go for it.”

Other buyers have grand and even grander expectations.

In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade.

With minor swings in sentiment, the latest results reflect what new buyers always seem to feel. At the boom’s peak in 2005, they said prices would go up. When the market was sliding in 2008, they still said prices would go up.

“People think it’s a law of nature,” said Mr. Shiller, who teaches at Yale.

For the first half of the 20th century, he said, expectations followed the opposite path. Houses were seen the way cars are now: as a consumer durable that the buyer eventually used up.

The notion of housing as an investment first began to blossom after World War II, when the nesting urges of returning soldiers created a construction boom. Demand was stoked as their bumper crop of children grew up and bought places of their own. The inflation of the 1970s, which increased the value of hard assets, and liberal tax policies both helped make housing a good bet. So did the long decline in mortgage rates from the early 1980s.

Despite all these tailwinds, prices rose modestly for much of the period. Real home prices increased 1.1 percent a year after inflation, according to Mr. Shiller’s research.

By the late 1990s, however, the rate was 4 percent a year. Happy homeowners were taking about $100 billion a year out of their houses, which paid for a lot of good times.

“The experience we had from the late 1970s to the late 1990s was an aberration,” said Barry Ritholtz of the equity research firm Fusion IQ. “People shouldn’t be holding their breath waiting for it to happen again.”

Not everyone views the notion of real appreciation in real estate as a lost cause.

Bob Walters, chief economist of the online mortgage firm Quicken, acknowledges that the recent collapse will create a “mind scar” just as the Great Depression did. But he argues that housing remains unique.

“You have to live somewhere,” he said. “In three or four years, people will resume a normal course, and home values will continue to increase.”

All homes are different, and some neighborhoods and regions will rebound more quickly. On the other hand, areas where there was intense overbuilding, like Arizona, will be extremely slow to show any sign of renewal.

“It’s entirely likely that markets like Arizona will not recover even in the 15- to 20-year time frame,” said Mr. Humphries of Zillow. “The demand doesn’t exist.”

Owners in those foreclosure-plagued areas consider themselves lucky if they are still solvent. But that does not prevent the occasional regret that a life-changing sum of money was so briefly within their grasp.

Robert Austin, a Phoenix lawyer, paid $200,000 for his home in 2000. Five years later, his neighbors listed a similar home for $500,000.

Freedom beckoned. “I thought, when my daughter gets out of school, I can sell the house and buy a boat and sail around the world,” said Mr. Austin, 56.

His home is now worth about what he paid for it. As for that cruise, “it may be a while,” Mr. Austin said. Showing the hopefulness that is apparently innate to homeowners, he added: “But I won’t rule it out forever.”

‘IN STRIKING SHIFT, SMALL INVESTORS FLEE STOCK MARKET,’ by Graham Bowley in the N. Y. Times.

In Uncategorized on August 22, 2010 at 19:39

In Striking Shift, Small Investors Flee Stock Market

By GRAHAM BOWLEY

Published: August 21, 2010

Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to the Investment Company Institute, the mutual fund industry trade group. Now many are choosing investments they deem safer, like bonds.

If that pace continues, more money will be pulled out of these mutual funds in 2010 than in any year since the 1980s, with the exception of 2008, when the global financial crisis peaked.

Small investors are “losing their appetite for risk,” a Credit Suisse analyst, Doug Cliggott, said in a report to investors on Friday.

One of the phenomena of the last several decades has been the rise of the individual investor. As Americans have become more responsible for their own retirement, they have poured money into stocks with such faith that half of the country’s households now own shares directly or through mutual funds, which are by far the most popular way Americans invest in stocks. So the turnabout is striking.

So is the timing. After past recessions, ordinary investors have typically regained their enthusiasm for stocks, hoping to profit as the economy recovered. This time, even as corporate earnings have improved, Americans have become more guarded with their investments.

“At this stage in the economic cycle, $10 to $20 billion would normally be flowing into domestic equity funds” rather than the billions that are flowing out, said Brian K. Reid, chief economist of the investment institute. He added, “This is very unusual.”

The notion that stocks tend to be safe and profitable investments over time seems to have been dented in much the same way that a decline in home values and in job stability the last few years has altered Americans’ sense of financial security.

It may take many years before it is clear whether this becomes a long-term shift in psychology. After technology and dot-com shares crashed in the early 2000s, for example, investors were quick to re-enter the stock market. Yet bigger economic calamities like the Great Depression affected people’s attitudes toward money for decades.

For now, though, mixed economic data is presenting a picture of an economy that is recovering feebly from recession.

“For a lot of ordinary people, the economic recovery does not feel real,” said Loren Fox, a senior analyst at Strategic Insight, a New York research and data firm. “People are not going to rush toward the stock market on a sustained basis until they feel more confident of employment growth and the sustainability of the economic recovery.”

One investor who has restructured his portfolio is Gary Olsen, 51, from Dallas. Over the past four years, he has adjusted the proportion of his investments from 65 percent equities and 35 percent bonds so that the $1.1 million he has invested is now evenly balanced.

He had worked as a portfolio liquidity manager for the local Federal Home Loan Bank and retired four years ago.

“Like everyone, I lost” during the recent market declines, he said. “I needed to have a more conservative allocation.”

To be sure, a lot of money is still flowing into the stock market from small investors, pension funds and other big institutional investors. But ordinary investors are reallocating their 401(k) retirement plans, according to Hewitt Associates, a consulting firm that tracks pension plans.

Until two years ago, 70 percent of the money in 401(k) accounts it tracks was invested in stock funds; that proportion fell to 49 percent by the start of 2009 as people rebalanced their portfolios toward bond investments following the financial crisis in the fall of 2008. It is now back at 57 percent, but almost all of that can be attributed to the rising price of stocks in recent years. People are still staying with bonds.

Another force at work is the aging of the baby-boomer generation. As they approach retirement, Americans are shifting some of their investments away from stocks to provide regular guaranteed income for the years when they are no longer working.

And the flight from stocks may also be driven by households that are no longer able to tap into home equity for cash and may simply need the money to pay for ordinary expenses.

On Friday, Fidelity Investments reported that a record number of people took so-called hardship withdrawals from their retirement accounts in the second quarter. These are early withdrawals intended to pay for needs like medical expenses.

According to the Investment Company Institute, which surveys 4,000 households annually, the appetite for stock market risk among American investors of all ages has been declining steadily since it peaked around 2001, and the change is most pronounced in the under-35 age group.