Archive for February, 2012

CONSUMER DEBT AND ITS SOCIAL CONSEQUENCES

Saturday, February 11th, 2012

[Second in a Series on Income Inequality]
Summary
The United States, more than any other country, raises consumer spending to a virtue and sometimes denigrates saving. Some believe that it is patriotic to spend rather than save. This is the finding of Princeton history Professor Sheldon Garon, in his book “Beyond Our Means: Why America Spends While the World Saves” (Princeton University Press, 2012).  After 9/11, President Bush encouraged Americans to go to the mall, or to Disney World. Public officials have told the nation that we can have growth in our Gross Domestic Product (GDP) through debt. This essay asks the question whether or not consumer debt is always a good thing. By examining the recent nature of debt in our country, it shows that,  along with consumer spending  and  increased personal debt, has come a rapid rise, through debtor interest and fees, in the wealth of some of the lending banks, corporations, and their officers. Critics have described them as parasitic on the middle and lower income ranks. We point to the consequences of the rise in borrowing  and the income gap, for distrust of government  and reduction in social mobility. We argue for your consideration of community banks as a family banking destination. (more…)

THE HOUSING CRISIS, ITS EFFECT ON THE ECONOMY and a POTENTIAL SOLUTION

Monday, February 6th, 2012

Part 1: Summary
• Housing debt is at the center of the slow American economic recovery
• Home values are in a downward spiral endangering the entire economy
• The private residential mortgage market has inadequate infrastructure to reverse this trend
• Proposed solution-lower mortgage principle nationwide through a cooperative effort of the mortgage industry and the Federal Government.
• Consider modifications of existing mortgage agreements
If implemented, this plan would result in a win-win situation for both borrowers and creditors and benefit the entire country

Part 2: Background

 “There is widespread agreement among economists that housing debt is at the heart of the slow [economic] recovery, and that finding a way to bring it down faster would accelerate the recovery.”[1]The home values in the market are in a downward spiral which, if left unresolved, endangers the entire economy. In a recent article Joe Nocera, interviewed Laurie Goodman [senior managing director Amherst Securities], who states that there are 55 million home mortgages in the United States, and greater than 10 Million of them are reasonably likely to default, due to so many homes being “underwater” [meaning that the owners owe more on their mortgages than their home is currently worth]. This is due to the severe drop in home prices since the housing bubble burst in 2008. In addition the supply of available housing will continue to outstrip demand. It’s estimated that there could develop a glut in excess of 6.2 million houses. [2] There are fewer home buyers because multiple factors are at work.  These include the grim economic outlook, high unemployment, lack of personal savings for down payments, young adults returning home to live with their parents, and tightening mortgage lending standards.

 Goodman says that the combination of all these factors has led to a “death spiral” in the housing market initiated by supply/demand imbalance, leading to decreased home values, more home owners underwater, an increased number of defaults, more foreclosures, an increase in the supply/demand ratio, and so on and on spiraling downward!

  What can be done? (more…)