Posts filed under “Wages & Income”

Latest Bank Headache: Home Equity Loans


"This product was meant to help people do construction on their house,
[and] do debt consolidation — not to take out every last dollar of
equity in their home to finance a different kind of lifestyle."

-Charles Scharf, head of J.P. Morgan’s retail business.


That is, in a short phrase, the reason that the US consumer is all spent out. They used debt and home equity — as opposed to Income gains — to finance an improving lifestyle. After the vacations are passed, the big screen TV and new cars become old, what are you left with?

Appreciation in the value of your home has long been considered a form of forced savings. (As in don’t eat your seed corn). The economic boost is over, the savings impact is significant, and you are left with a financial hangover. Talk about a negative wealth effect.

For the banks, it raises all different manners of headaches.  Unlike Mortgages, Home Equity loans are secondary against the collateral — the house itself:

"While banks can foreclose on a first-lien mortgage,
lenders often have little recourse when trying to collect a delinquent
home-equity loan, especially if another bank holds the primary
mortgage. Banks holding home-equity loans generally can only seize the
collateral — a house — after the mortgage is paid off.

When another bank holds the mortgage and the mortgage
payments are current, the home-equity lender is effectively powerless
to collect the debt.

Unfortunately for home-equity lenders, many borrowers
understand that pecking order, concluding there are few repercussions
if they stop making payments on their home-equity loan . . . Other types of consumer loans also are souring,
including credit cards and auto loans. But delinquent home-equity loans
are rising faster, representing 12.5% of all delinquent loans in the
fourth quarter at Bank of America Corp., the largest U.S. bank
in stock-market value. That was up from 9.4% in last year’s first
quarter, according to research firm SNL Financial.

Pretty amazing stuff.

The bankers are finally asking themselves "How the hell did we get into this mess?" The answer surprises no one:

Leaning on outside mortgage brokers for home-equity business was "one
of the biggest mistakes we’ve made."  Those loans have
performed worse than home-equity loans generated by J.P. Morgan.
-Charles Scharf, head of J.P. Morgan’s retail business.

Indeed . . .


Latest Trouble Spot for Banks: Souring Home-Equity Loans
Losses May Hit Lenders That Skirted Subprime; Surprise Delinquents
WSJ, March 12, 2008

Category: Credit, Economy, Finance, Psychology, Wages & Income

NonFarm Payroll Day: Not-So-Great Expectations

Category: Economy, Employment, Wages & Income

Hackonomics, Part II

Category: Economy, Taxes and Policy, Wages & Income



“The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.”

-Joan Robinson, Cambridge University


One of the things that really perturbs me are disingenuous, intellectually indefensible commentary consisting of willfully misleading tripe. Up until recently, that territory has been owned by the WSJ OPED pages. This past weekend, the NYT was seen elbowing its way into the same space.

I call this approach to economic analysis Hackonomics.

An OpEd in the Sunday Times is classic Hackonomics. Unfortunately, it takes little craft to slip junk past the editors at the Times OpEd section. Impressive-looking academic or government credentials seems to be all that is required. (Its a shame they don’t have, say, a professor from the Princeton Economics department on staff).

Perhaps there is a fear of looking silly or economically ignorant, rather than asking anyone else about any of these “analyses.” What we get instead are pieces like You Are What You Spend. The authors are Michael Cox, and Richard Alm, chief economist and senior economics writer at the Federal Reserve Bank of Dallas. As my British colleagues would delightfully articulate, “their work is shite.”

To wit: These two gentlemen press forward the idea that the proper manner to review economic inequality should involve looking not at income differentials. Rather, this Fed duo favors a more direct measure of economic status: household consumption. They claim “the gap between rich and poor is far less than most assume, and that the abstract,
income-based way in which we measure the so-called poverty rate no longer applies to our society.”

Their analysis is so problematic and their theory so full of holes, that, if time permitted, we could identify errors in nearly every paragraph. That sort of critique is best reserved for serious intellectual analysis of major importance. For Hackonomics, we will simply identify 3 major flaws, and then get on to more pressing and important work.

Let’s take a closer look at their arguments:

1. Income Disparity: Abstract? There is nothing “abstract” about income-based measures of poverty or wealth inequality. Merely calling income comparisons “abstract” does not make it so, nor does it make their position any less absurd. Instead, it reads as a
transparent attempt by the authors to avoid any income discussion.

Why not discuss income? Perhaps the data is the reason: The share of national income of the wealthiest 1% rose from 14.6% five years ago (2003) to 17.4% in 2005 (Emmanuel Saez, University of California-Berkeley). And since 2005, the wealth disparity has grown even further.

Indeed, as several commentators have already pointed out, these same authors previously tried to make an income based argument that “the gap between rich and poor is far less than most assume” – and crashed and burned.

Next attempt, please.

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Category: Consumer Spending, Data Analysis, Economy, Wages & Income

Overstated Job Growth & the Annual Establishment Survey Benchmarking

Category: Data Analysis, Employment, Wages & Income

Brilliant Economists Can’t Figure It Out

Tom Toles perfectly sums up both the present economic environment, and the problem with economists:

Category: Earnings, Economy, Employment, Psychology, Wages & Income

Real Income Fails to Rise for most of the 2000s

Category: Data Analysis, Economy, Employment, Psychology, Wages & Income

How Good Was NFP Really?

Category: Data Analysis, Economy, Employment, Wages & Income

The Capital Commerce Debate

Category: Economy, Employment, Real Estate, Wages & Income

How Blogging Can Help You Get a New Job

Category: Employment, Wages & Income, Weblogs