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Friday, February 20, 2009

Economic Outlook

The Atlantic has a long article by Richard Florida titled How the Crash Will Reshape America. I found these paragraphs about New York's future encouraging:

"Amsterdam stood at the center of the world’s financial system in the 17th century; its place was taken by London in the early 19th century, then New York in the 20th. Across more than three centuries, no other city has topped the list of global financial centers. Financial capitals have “remarkable longevity,” Cassis writes, “in spite of the phases of boom and bust in the course of their existence.”

The transition from one financial center to another typically lags behind broader shifts in the economic balance of power, Cassis suggests. Although the U.S. displaced England as the world’s largest economy well before 1900, it was not until after World War II that New York eclipsed London as the world’s preeminent financial center (and even then, the eclipse was not complete; in recent years, London has, by some measures, edged out New York). As Asia has risen, Tokyo, Hong Kong, and Singapore have become major financial centers—yet in size and scope, they still trail New York and London by large margins."

This one about homeownership was surprising.

And while homeownership has some social benefits—a higher level of civic engagement is one—it is costly to the economy. The economist Andrew Oswald has demonstrated that in both the United States and Europe, those places with higher homeownership rates also suffer from higher unemployment. Homeownership, Oswald found, is a more important predictor of unemployment than rates of unionization or the generosity of welfare benefits. Too often, it ties people to declining or blighted locations, and forces them into work—if they can find it—that is a poor match for their interests and abilities."

Something to think about. He also mentions something about requiring banks to rent foreclosed houses. I don't think we need to do anything about foreclosed houses. If there are too many houses on the market, their value is going to fall. If a bank forecloses on a house, what are they going to do with it? Sit on it for months waiting for it to not sell? It's going to cost them two or three grand a month to do that. They could bulldoze it, but then they lose the whole value of the house (they would still have the land, which is maybe a sixth of the value). They could sell it on the open market for maybe half of the original price. I'm pretty sure they could find buyers then. But then they have to take an immediate hit on their books. Or they could change the terms of the mortgage so the current homeowner could keep the house. You know, something like cut the interest rate to, say 1%. Since the payments on new mortgages are almost all entirely interest, that would make a big difference.

That would allow them to keep the property on the books at it's full value. Of course they are probably paying more than one percent to the Fed, which is where they got the money in the first place. But you know, if people aren't paying the loans you made to them, it doesn't really matter what the interest rate is, because when the aren't making any payments your effective interest rate is like minus one thousand percent. That is going to still make a big dent in their books, but it is likely to cost less than any other option.

So if the bank is threatening to foreclose, make them an offer. Start with telling them you will only charge them a thousand a month to stay in the house and protect it from vandals and looters. You will probably need to go up from there, but give it a shot. With the large number of problem mortgages, they are going to be willing to listen to anyone who has any kind of solution.

Via Tam.

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