Negative Equity Is Not Really a Numbers Game


At 51 years old, I’d have to say that remembering back to college days is generally a pleasurable experience…not always though.  And this morning I remembered why that’s the case.  Not everything about my days spent on a college campus was fun, and in fact some of my time spent in pursuit of an education was downright annoying.


Why?  It’s simple.  I was an economics major and although I chose that dismal path because I truly loved the art and science of the subject matter, it also meant that from time to time I was forced to listen to economists explain how the world worked, always in retrospect and almost always in numeric terms.


As all econ majors will recall, there was that ubiquitous phrase, “other things being equal,” that was thrown around to loosely mean that whatever you were about to conclude was of course wrong, but that there was some theoretical learning going on nonetheless.  My professor would set up a problem having to do with supply and demand, saying something like…


As the price of lettuce rises, the demand for lettuce will fall relative to the price of cabbage… other things being equal.


And I’d rub my much younger and firmer temples and think to myself, “Well, there’s just so much wrong with that sentence, I don’t even know where to begin.”


Who eats cabbage, was always a stumbling block for me, which probably explains why I didn’t go on to earn a doctorate in economics, but beyond that, what my professor was trying to tell us was that the price of something was always the proximate cause for its demand either rising or falling… relative to the price of its substitutes… other things being equal, which of course they never were or would be.


I’d answer the question correctly when called on in class and always ace the exams, but only because I soon came to understand what they were looking for as far as an “answer” to such questions was concerned.  Well, as long as there weren’t too many demand curve charts involved, but that’s another story altogether.



And all this econochatter has reminded me… would you like to know why I got married in the first place and why I intend to stay married to my wife of 22 years?  It’s another easy thing to explain… you just have to understand the numbers… and externalities, as my economics professor would say with a straight face.  Like, if you fireproof your home, your neighbor gets a benefit even though he didn’t do anything and continues to smoke in bed after a few cocktails… that’s an externality.


So, when I was about 28 years old, I started doing some fairly sophisticated economic cyphering and basically my wife came out on the right side of the demand curve.  Oh sure, I recognized that there would be some distortion, after all a marriage would not be a state of perfect competition, and there would undoubtedly be externalities with which to contend.


I then simply measured probable distortion by factoring in the deviation between the market price of my wife as a good or service and her marginal social cost.  My economics education made it quite simple for me to understand that this distortion would come to be the difference between her marginal rate of substitution in consumption and her marginal rate of transformation in production.  And I wasn’t naive… I also looked at issues like inflation, and the potential for incomplete information to muck up my data set, but all of that had to be balanced against my desire to get her in bed.


Today, after 22 years of marriage, I’ve noticed a certain amount of dematerialization talking place and although I’m not entirely sure how to factor it into my models and five or ten-year forecasts it does seem clear that to some degree a demand vacuum has altered my desire to even consider the idea of pursuing substitutes.


Irving Fisher’s 1930 treatise, “The Theory of Interest,” explained how everyone has their own version of a printing press for money, and come to find out… sure enough my wife absolutely does has one of those all her own.  And even though I wasn’t nearly as aware of how the creation or destruction of endogenous money would play a role in our relationship as time passed, it’s become clearer each year.


So, all told it should be easy to understand my decision making to-date as far as my marriage is concerned.  Mainstream economics uses instantaneous values in much of its analysis for reasons of mathematical tractability.  And I have simply and I think rationally decided to favor discrete change over any forecasted marginal propensity to consume.


And there you have it… well, it’s either that… or it could have been the sex.  I really can’t be sure as so often back then… I was drunk… and since I’ve never seen an economist that I can reasonably assume has ever had sex… or been drunk… I don’t know who I could ask and expect a reliable response.


Now, I’ll open it up for questions…

Actually, I have a few questions for today’s debating economists on the… a list of superstars of the economics profession including Mike Konczal, Dean Baker, G. Marcus Cole, Tamara Draut, Louis Hyman, Jacob S. Hacker and Nathaniel Loewentheil, Mark A. Calabria, Robert C. Hockett, and Barbara H. Fried.


Because they are the people whose debate today inspired me to write this NONSENSE about the economics rationale behind my decision to marry my wife of 22 years.


Confused?  I apologize.  Allow me to explain.


The group of scholars above is apparently debating issues related to our nation’s economy… as in, just how incredibly crummy it remains almost six years and countless trillions into the economic and financial meltdown that began during the summer of 2006, significantly taking on steam a year later.


It appears Konczal started things up by raising the point that it’s the underwater mortgages that are weighing things down so as to render any recovery flaccid, regardless of the amount of stimulus.  His “lead article” was titled, Sweet Forgiveness.”


Baker equivocated back claiming the middle ground saying that, while underwater homeowners deserved help, providing that help wouldn’t be enough to change the economy in any significant positive way.  And he then threw all sorts of numbers at his argument, saying…


“Mike Konczal raises many important points, but, in assessing the length and duration of the downturn, he places undue weight on underwater homeowners.

Following on the work of Atif Mian and Amir Sufi, Konczal argues that the $1.1 trillion debt of 15 million underwater homeowners is the main factor holding back the recovery. If these homeowners could somehow be brought back above water, they would increase their spending and normal economic growth would resume.

But some simple calculations suggest that this explanation is implausible.”


Okay, first of all I want to go on record saying… I have all the respect in the world for Mike Konczal and Dean Baker.  In fact, I think they totally rock.  Okay?  Cool.  But, as has proven to be the case with so many of their peers… the foreclosure crisis may very well be cursed with some sort of stupidity spell that turns otherwise brilliant intellect into Play Doh, and to which I am somehow inexplicably immune.


Don’t look at me like that, at this point it’s the only explanation I’ve got.


Here’s Baker at the cal-cal-calculator…


First, it is important to remember that one person’s debt is another’s asset. If we eliminate $1.1 trillion in underwater debt then we also eliminate $1.1 trillion in mortgage-related assets held by individuals, public and private pension funds, and other institutional investors. While underwater homeowners, restored to solvency, likely have a higher propensity to consume than their creditors do, it is hard to see the difference being large enough to affect the economy significantly.


Now, I could jump in here and talk about the multiplier effect of consumer spending or the velocity of money when spent by consumers compared with when locked up inside a bond of some kind, but even that would be indulging this incalculable calculation.  Dean… please continue…


Suppose that underwater homeowners would spend fifteen cents out of every dollar of housing wealth, while their creditors spend just three cents. If we could snap our fingers and eliminate all underwater debt, the additional consumption would add a bit more than $130 billion, 0.8 percent, to annual GDP—a substantial boost, but nowhere near the five percentage point shortfall the Congressional Budget Office sees between actual and potential output.


It’s tempting… but I’m not going to do it.  Mr. Baker it’s your equation-fest… continue.


Actually, the fifteen-cent assumption is almost certainly too generous. Estimates of the average amount of underwater debt vary, with the high end at roughly $75,000. Let’s assume that’s right. If we expect these homeowners to spend, annually, 15 percent of each dollar of debt we have eliminated, that amounts to $11,250 per year. According to the Census Bureau, the median income for homeowners is $62,500. It’s unlikely that even solvent families have $11,250 a year for discretionary spending.


This is honestly starting to give me a stomach ache, but probably not for the reasons you’re thinking… I’m turning positively green with envy.  On which planet do these people live… it must be nice there… or if there is here on Earth… where do they reside?  I want to go there… NOW… and stay there forever.


The standard effect of housing wealth provides a simple alternative explanation for the length and severity of the downturn. The pre-crash economy was driven by the housing bubble. When the bubble burst, the construction boom ended, costing us $600 billion in annual construction spending. We also lost $8 trillion in housing wealth and gave up roughly $500 billion in annual consumption. The latter figure is in keeping with what we know about the effect of housing wealth on consumption: for every dollar your house is worth, you will spend an additional five to seven cents.


Okay, my turn at the white board?  Let’s see if this equation makes an impression on anyone…


2 x 4x/3 – 112 + 1y + 22x = SCARED SHITLESS


Go ahead… check my numbers, make sure my math is correct.  Can everyone see that in the back of the room?  You’ve heard of The Mandelbrot Set?”  Well, this is, “The Mandelman Shit,” for what should be obvious reasons.


I’m being too snarky again, aren’t I?  I’m sorry, I really am… but HOLY-EDUCATION-RUN-A-MUCKA, Batman.  What kind of insanity has taken hold here?  Is this some sort of body-snatchers scenario in the works?  Am I on Candid Camera?  Am I typing in English but it’s coming out in Mandarin and I can’t tell?


I think I have to go lay down… but I can’t be sure.  Hang on, let me see what kind of calculation I can come up with to check out what I should do next…


Nope, looks like I’ll be staying up a little longer…. ‘cause that’s they way I roll.


Okay, so I want to be very clear about something here… I’m just making fun of Baker’s impulse to turn this analysis into some numeric calculation based on some data from the past.  There’s just not a chance in the world that sort of thinking is going to get us anywhere, even if it were correct… which it isn’t.  And not because his math is wrong, but because there’s no need for math to be involved.  Just like there weren’t actually economics principles underpinning my decision to get married 22 years ago.


Homeowners, who by now have become so large a group that we are starting to refer to them as “consumers,” aren’t spending… they aren’t borrowing… and they aren’t paying attention to any of this sort of nonsense for many reasons, but numbers aren’t a part of how those reasons would be described regardless.


How about these reasons, just to introduce a few off the top of my head…


  • The eradication of all trust in our government.
  • A society we might watch circle the toilet bowl before being flushed, or maybe we’d just shut the lid.
  • The abandonment of our citizenry as they rushed the gates of our embassy only steps ahead of murderous hordes and father-rapers.
  • Fellow citizens we’d literally like to murder slowly with our bare hands simply because it’s been so long since we’ve had a good laugh.
  • A resulting sense of profound fear and permanent solicitude.


I don’t know how to sum it up in numeric terms, but are you feeling me here?  This country essentially turned its collective back on millions of our fellow citizens, stereotyped them for being irresponsible and only stopped short of literally spitting in the faces of their children on television.


We pulled the rug out on senior citizens and ignored our country’s veterans while they were fighting wars overseas.  What has been allowed to go on over the last few years is unconscionable at a level previously unimaginable except perhaps by those who endured the horrors of segregation.


And you want to know why people aren’t spending and borrowing?  Because they don’t know… and can’t even imagine… what will happen tomorrow, that’s why.  The only thing they do know is that with their home completely underwater and their credit score too low to finance a $179 patio furniture set at Lowe’s… they’re only a couple of paychecks away from trying to sell their DVD collection on E-Bay.


It’s worth saying that Konczal’s article is correct, of course.  Here’s how Konczal describes our situation as follows…


But help has not arrived, and the reasons lie in three decades of legal developments, organizational shifts in the financial sector, and changing ideas and attitudes.  The rights of creditors have gained legal and political prominence.  And debt relief is rarely perceived as a fair way to deal with especially heavy burdens, or as an effective policy for rekindling growth. It is commonly condemned as rewarding irresponsible past behavior and encouraging more of the same in the future. 


(NOTE: Assuming we’re talking about homeowners, of course, were we talking about financial institutions or even American Express Travel Related Services, none of these feelings or constraints would apply.)


Because of these changes, mortgage relief—or any other kind of debt relief—is very hard to achieve. How has this happened, and what can we do about it?


Maybe it’s just me, but to some degree it even felt like Konczal got mired in some combination of old hat and meaningless technical discussions based on research plagued by confirmation bias and black swans in hindsight around every turn.  It doesn’t matter… none of it does… because soon it will be too late… a generation of 88 million is literally dying both literally and figuratively.


He talks about the need for bankruptcy reform, the sort of plan discussed a few years back that would have allowed bankruptcy court judges to write down first liens… it never got close, although a lovely sentiment and a darn good idea.


He also talks about what he says is “the conventional explanation for this slow-motion recovery.”   It comes from Reinhart and Rogoff’s 2009 book, “This Time Is Different” (2009), and as it happens, I’ve read it too.


The authors purport that financial crises are commonly followed by very slow recoveries, so it should come as no surprise that we feel like we’re basically running in place.  Konczal says that…


“This analysis suggests that the country should not focus on the immediate problem of mass unemployment, about which little can be done. Instead we should turn attention to long-term issues, such as tax reform and education.”


He also brings up Paul Krugman’s “balance sheet recession,” concept… which stands in contrast to an “income statement” recession, I suppose… and he correctly states that our debt must be dealt with if we are to see any sort of recovery anytime soon.  It’s terrifying, and to me he seems to be at least a little scared as he’s writing his article that there is no hope and that our jars are too damn low on change.


Konczal does an excellent job explaining the various theories floating around.  For example, he describes how consumers deleveraging is a positive thing, but that if everyone saves… no one spends… and that makes any recovery that much more illusive.  Here’s how Konczal explains how the Fed is trying to combat that effect…


“The Federal Reserve has tried to break the current cycle by lowering interest rates. People do not want to park their money in accounts that deliver very low returns, so, theoretically, reduced interest rates encourage people to spend more. Increased spending by people who are not worried about their balance sheets should help to correct for the decline in consumption by people who are deleveraging.”


Argggghhhhh… makes me want to chew on glass.  Here’s the deal.  None of that is going on.  That’s not how we think or function.  Here’s how we operate… think about it as our 4-POINT LIFE PLAN.


1. We know in our heart of hearts that we aren’t going to be responsible savers.


2. But we know that we will pay our rent each month.


3. So, we seek to turn our “rent” into a forced savings account we call a mortgage payment.


4. And we go to sleep each night knowing that after paying our “rent” each month for decades… we’ll have something worth a bunch.


Pretty sophisticated financial planning going on there, right?  We’re a bunch of Warren Buffets, yes we are.  Bernanke can lower interest rates until the cows come home and it’s not going to get us to start spending again.  We don’t care about “parking money in accounts delivering low returns,” that’s something rich people may worry about but not the rest of us.


Want to know how we calculate our individual net worths?  First we add up any available purchasing power on our credit cards.  Then we add to that amount the approximate total in our change jars.  After that we estimate the value of what we could pawn, and finally we throw a few grand in that we’re sure we could borrow from someone in a pinch.  Presto… Net Worth.


Konczal admits that monetary policy is dead in this country… that’s the sort of policy that’s employed when Bernanke plays around with interest rates.  Ben has painted himself directly into a corner, rates can’t get any lower and it wouldn’t matter anyway.


We’re not going to spend because we’re scared to death of what might happen tomorrow and after seeing how our government handled the events of the last few years, we know we’re basically at the mercy of three C-students named, Barry, Ho, and Squirley. 


So, we’ll just hang back, thanks very much.  Let’s see who blinks first… us… or Wall Street.  I’m betting soon there will be bankers going door to door begging us to buy something… anything at all.  In Florida and Las Vegas they’ll be giving away condos when you open a checking account.


We’ve lost four million homes to foreclosure and as of today… we’re certain to lose another four million over the next few years.  How much more of this will it take before our personalities become permanently loss averse and even if every homeowner in the nation received a check for $50k few would spend it, and those that would spend it would send it heading directly for bank coffers to repay student loan late fees?


And the longer we allow ourselves to be led by people so insulated that they can’t even imagine what our world is like anymore… we will be deluded by their “jobless recoveries,” whose only discernible movement is sinking further into a familiar morass.


We’re not even looking at plans with potential on the drawing board.  We’ve only just begun to suffer as a society, and as individuals.  We’ve had a long way to fall and to-date we’re acting as if the wind feels good in our hair as we rush towards Earth.


We’re about as close to offering individuals debt relief as we are to seeing JPMorgan Chase and Goldman Sachs start lobbying for derivatives to be traded on an open exchange headed by Elizabeth Warren.


Mandelman out.


Page Rank