Saturday, February 21, 2009

Getting through this

I thought I'd direct folks to this fantastic post at The Automatic Earth regarding the costs of homes in relation to personal income and the role of banks in removing wealth from our communities. Some interesting points there about the end of a functioning capitalist system as well as a sensible, community-based approach to dealing with foreclosures. The only thing I'll add is that we have been far too focused on wishful thinking in this country and that has to end. The longer we try to hold back reality, the more energy we spend trying to go around this mess rather than through it, the more intense and longer lasting it will be.

Why is 3 times income a reasonable price for a home? Shouldn't the prices perhaps be
exclusively set by the cost of building a home? If 3 times income were
"normal", consider that prices have become easily 3 times the cost of building
the home. So most homes cost 1 time annual income to build. And that’s just
the start. A mortgage of the elevated value will cost 3-4 times its notional value
to be paid off in full. Thus instead of living in a home paid off at 1 time annual
income, buyers will need 10-12 times annual income to own a home free and
clear. All this is money that disappears from communities, and into the vaults of
big faceless banks. It's little wonder that communities and individuals have an
ever harder time establishing a decent level of services and decent living
standards, health care, education, water treatment etc.

Why do we accept so easily that speculation is a good thing when it comes to
our basic needs? It will come back to haunt us in a very aggressive way. Now
that the speculators, banks and developers can no longer rely on housing for
their gambling incomes, they will turn to other basic necessities, none of which
are shielded from the so-called free market. Thus, as incomes drop and
deflation expands its rule over the earth, prices for food, water and energy will
be set by "free" markets.


If we would stop handing money to the banks, which are insolvent anyway,
take the troubled mortgages they hold or have sold to Fannie and Freddie, who
would also receive not one additional penny, and give them to the communities,
who can negotiate with the occupants about a reasonable rent that would allow
them to remain on the premises (perhaps the Obama 31%-38% of income?!),
providing the communities with income, we do away with the need for all these
bail-outs. In one fell swoop.


A situation such as the one I’m painting here will eventually and inevitably
come to fruition. But our political and societal structures will not let it, not
voluntarily. And that will unnecessarily raise the suffering to levels we do not
even dare to fear. Free market capitalism is dead, and I don't say that because
I have communist sympathies. I just look around me and see that no society
can exist that allows too many of its citizens to fall into utter misery. What
killed our capitalist system is the inclusion of basic human needs in an economic
system based on speculative games. If you set up an economy that propagates
gambling with basic human necessities, you will of necessity end up gambling
away the lives of the people who depend for their survival on those necessities.
Our societies have played these games beyond our borders, in Africa and Asia,
for hundreds of years. And now, because the system dies of it cannot grow, it's
our turn.

I cannot resist to also share this excellent quote about Obama's $275 billion plans to halt foreclosures, also from a recent post at The Automatic Earth :

The fact of the matter, of course, is that the $275 billion will not, and are not
meant to, benefit the homeowners. They are provided for the benefit of the
lenders, the banks. They are meant to guarantee an ongoing flow of funds
towards the vaults replete with toxic debts based on the very homes the
government now showers with cash. They are meant to artificially continue to
prop up US real estate values, which, if they were allowed to simply follow the
course of the markets, would bankrupt not only the owners, for which
Washington cares preciously little, but also the banks, for which Washington will
bend over backwards any time of day. The main problem is that it's way too
late. The banks will drown, and everybody knows it. So the only real purpose
served by these measures is to transfer ever more of the public's funds to the
banking sector. It'll go on until the nation itself is completely broke and broken.

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1 comment:

  1. Loans at interest should be available only for productive assets, like factories, which provide the economic activity to pay back the interest. Paying interest for a home is a ripoff. Without mortgages distorting prices, homes could be afforded with a few years savings, and a little of your own hard work.

    This is a great article on how our system tries to "monetize" every human activity. It is useful to wonder why a few percentage point slowdown in economic activity is such a disaster. You might think, hey, the economy only was 97% of what it was last year, that's pretty good, still an A+. So, what's the big deal, why is our system to fragile? This article provides some of the answer. During the time after WWII when the US was able to attract a disproportionate amount of the world's savings and natural resources, this system worked. With the onset of peak oil and the current financial fiasco, there will not be the natural resources or money to continue this.