Lawrence Summers on ‘House of Debtâ€

From Summers’ review/critique of the new book House of Debt by Atif Mian and Amir Sufi:

Mian and Sufi, professors at Princeton and the University of Chicago respectively, have examined a profoundly important question: what causes protracted downturns in economic activity? […]

Most in the financial community, the policy community and the commentariat see a breakdown in financial intermediation as the root cause of the financial crisis and Great Recession. […]

None of this sits easily with what Mian and Sufi call the banking view of the Great Recession. They argue that, rather than failing banks, the key culprits in the financial crisis were overly indebted households. […]

[…] they train their fire on policy makers†failure to take proper account of the levered losses view by providing far more sweeping mortgage relief. They argue that if policy makers had better appreciated their arguments about household balance sheets and been less cognitively captured by banking system concerns, the outcome could have been much better.

The book sounds like a great read, and Summers’ review of it is a fascinating read too.

Summers takes real issue, as he should — to a point, with apparent suggestions in the book that policies like mortgage cram-downs should have been enacted. It both seemed at the time and seems today pretty obvious that that particular policy and other assistance to mortgage holders would have helped the recovery immensely, but the political reality is that such policies did not have sufficient support in Congress or among the American people generally.

At the same time, Summers is — not surprisingly — too vigorous in his own defense. He was a major player in crafting the recovery, after all, and he has a history of downplaying the degree to which he underestimated the scale of the crisis in real time and the degree to which he assumed that further stimulative policies could be enacted later.

I detailed this predisposition in a really wonky post, which was read by even fewer people than will read this one, back in 2011: Larry Summers on the insufficient stimulus.

In any case, I’m looking forward to checking out Mian and Sufi’s book. Having seen so many friends and acquaintances lose vast sums of money because they over-invested in housing and/or took every cent that irresponsible lenders made available to them during the boom years, I’m especially curious to get a sense of the bigger picture of consumer borrowing and debt.

So I don’t have a dog in this hunt. At the end of the day, I don’t have any emotional stake in where the Braves play baseball.

As a columnist and as a journalism teacher, however, I’m fascinated by the story of the Braves’ planned 2017 move to a new stadium in Cobb County.

I love baseball on some levels. When I was a kid growing up in Kentucky, my dad and I routinely traveled up to Cincinnati for Reds games. For a few years there, I could recite Big Red Machine stats off the top of my head — and there are still a few in my brain to this day. Like George Foster’s 52 home runs in 1977 — in the pre-steroid days, that was a shit ton of homers. I actually saw Game 5 of the 1975 World Series against the Boston Red Sox — that’s the game when Tony Perez hit two homers.

Riverfront Stadium was a pretty soulless place compared to stadiums built both before and after it, but those trips to Cincinnati branded baseball games as  urban experiences for me.

For most Americans, professional baseball is something of an urban experience. (I have really fond memories of seeing games at Fenway Park and Camden Yards too.)

Yes, baseball fans might largely be suburbanites these days — communities with enough room for Little League ball fields — but that doesn’t mean that those attending professional games want to watch them in the suburbs. There’s a grittiness, a toughness, a smudged quality to baseball that tells many of us that it belongs in the city.

But the Braves’ move makes business sense, right? They’re moving into the heart of their biggest fan base, aren’t they? There are many factors that contribute to fan support, and there’s a paradoxical but fairly obvious counter-argument that I haven’t heard yet from any Braves’ detractors. If the team already has strong support from Atlanta’s northern suburbs, how much larger of a fan base can be cultivated in those neighborhoods? And if the supporters in Fulton County, Atlanta, and points south are less committed, how much of that marginal support will be lost when the team moves?

And how many more comments will we hear that echo this one from Cobb GOP Chairman Joe Dendy?:

It is absolutely necessary the solution is all about moving cars in and around Cobb and surrounding counties from our north and east where most Braves fans travel from, and not moving people into Cobb by rail from Atlanta. 

The emphasis is Dendy’s, by the way.

Um, wow. Is this a bias against transit? Against urban centers? Or is it just a bias against the bulk of the residents of Atlanta — the people who actually live there? Ironically, the Braves cite “lack of consistent mass transit options” as a key reason for abandoning Turner Field.

A few more public statements like that, and it’s possible that Atlanta residents, especially those who have generally taken MARTA to games, will give up on the Braves en masse.

And there’s also the bizarre (to me, at least) fact that Braves management and Cobb County officials have been largely mum about how the county will come up with the $400-450 million in public financing apparently needed for the $672 million new stadium, which will be surrounded with a huge new mixed-use development.

Ongoing road projects are already costing Georgia taxpayers over a billion dollars in Cobb and nearby counties and now officials are floating even more plans, like  a new bridge for pedestrians and a fan shuttle that will cross over I-285.

At the same time that they’re preparing for some big spending, Cobb County officials might be banking on revenue projections that are far, far, far too optimistic. For example, Commissioner Bob Ott predicts “about 400,000 new hotel stays per year.”

Say what?

So there are going to be 5,000 hotel stays in Cobb for every Braves home game? Consider this contradictory data from a recent economic impact study, as cited by the Saporta Report:

Visiting Braves fans stay 110,000 nights each year in local hotels and motels (averaging about 2.5 nights per out-of-town fan).

That means that some of those fans see one game while they are in town for longer stays. Will a large number of fans really stay in Cobb County hotels for an average of 2.5 nights while just seeing one game? Really? Or will they just, you know, get a hotel in downtown Atlanta for a couple nights and drive out to Cobb to catch a game?

And how many hotel stays in Cobb will be lost when would-be visitors realize their plans conflict with Braves’ home games and all that additional traffic?

I could go on and on. Maybe all of this will work out fine for the Braves and for Cobb too.

But I think it has trouble written all over it, and I’m shocked that the famously tax-averse citizens of the Cobb County aren’t up in arms about the move.

The FDIC has only closed 16 banks nationwide in 2013 and none since early June.

And the number of banks under special FDIC scrutiny, which reached around 1,000 at one point, has been falling steadily.

Here’s much of the press release from Abshire Public Relations this morning noting that the FDIC has lifted the consent order for The Coastal Bank based here in Savannah:

The Coastal Bank announced today that the FDIC and the Georgia Department of Banking and Finance have removed the Consent Order which was entered into in May 2011. The Coastal Bank is the first bank in the Savannah area and one of very few in the southeast Georgia market to emerge from a formal order with the regulatory authorities.

“Long before the formal order was issued, we committed the necessary resources to improve the bankâ€s condition as quickly as possible,” said Jim A. LaHaise, president and CEO of The Coastal Bank. Throughout the two year tenure of the order, we maintained capital levels which were well in excess of the agreed upon minimums. This capital position allows us to continue to lend money to support customer needs in the communities we serve. We appreciate the support of our board of directors, management team and staff in reaching this significant accomplishment.”

Improvement of The Coastal Bankâ€s financial condition over the past two years has been driven primarily by the reduction of problem loans. The bank has made significant improvements in earnings performance, returning to profitability in 2012. This trend continues into 2013 with the bank reporting net income of $1.09 million through six months ended June 30, 2013 compared to $922,000 for the year ended December 31, 2012.

From Business in Savannah’s Former Savannah bank president, six others indicted for fraud | BusinessInSavannah.com:

The former president and six other officers of First National Bank of Savannah were indicted by a federal grand jury, accused of defrauding First National Bank and other banks out of millions of dollars.

The long-running scheme allegedly contributed to the failure of First National Bank in 2010, which will cost the FDIC deposit-insurance fund more than $90 million, according to a press release from the Department of Justice’s Southern District of Georgia.

Click on through to the link if you’re interested in reading the names of those indicted today.

The pace of bank failures fell dramatically in 2012, but it’s entirely possible — quite likely, in fact — that more Georgia banks will fail in 2013.

And I’d say it’s very likely that we’ll see more indictments like these against bank officers around the state.

Georgia has led the nation in bank failures since the housing bust.

Check out my post from last week: Whereâ€s the Savannah economy headed in 2013?, which has a link to my recent City Talk column with predictions for the new year.

And be sure to check out this long piece today in the Savannah Morning News from Mary Carr Mayle and Adam Van Brimmer: The local economy in 2013: A look ahead | savannahnow.com.

The key paragraph:

The economy is expected to continue its moderate — but still subpar — pace of growth, as consumers, businesses and governments adjust to the new normal of fiscal constraint.

I generally agree with the various broader trends and specific details discussed in the piece, which covers tourism, banking, real estate, jobs, manufacturing, the ports, economic development, and small business.

Just a couple of details with which I would quibble. There’s a suggestion that the start of the long-discussed dredging of the Savannah River might “stress” the industrial sector in real estate. We had a lot of excess capacity right now, so I doubt we’ll see such demand in 2013.

And will New Hampstead High School spur development in the “fallow New Hampstead developments”? That’s a tricky call. New construction is certainly going to continue picking up in 2013 in West Chatham, but there’s still a whole lot of excess capacity in neighborhoods that have already been partially built.

And there are no population or employment centers — or even retail shops — within several miles of the new high school. Parents or employees interested in living close to the high school will be making a devil’s bargain. Their children will have shorter commutes to school, but every other trip will take longer and eat up a lot of gas.

It’s going to be interesting to see what happens out there in those big vacant swaths that are curiously within the Savannah city limits. The city spent over $10 million on infrastructure out there before the downturn.

But those are small quibbles. The entire piece is well worth a read.

Somewhere along the line, the ELP fan went on an extended riff about how I should never pay off my house — I should just keep refinancing for long terms so that I could keep taking advantage of the mortgage interest deduction.

That wasn’t the first time that I was told not to pay down — or pay off — my mortgage. Lots of well-educated people, including several with accounting backgrounds, have told me about the benefits of the mortgage interest deduction.

For people like me who bought reasonably priced homes, such advice is utter nonsense. And no matter what the price paid for a home, the amount of interest being paid is always going to be higher than the tax benefit from the mortgage interest deduction.

I paid less than $80,000 for my house back in the mid-90s. A couple of years later, I refinanced to a 15-year mortgage and began paying extra principal every month — anywhere from $50 to several hundred, depending on my employment. Within a few years, my yearly interest payments were so low that it wasn’t even worth itemizing deductions. I paid off my house a couple of years ago. No, I don’t get the benefit of a mortgage interest deduction, but I have no house payment and own the asset free and clear.

We have a lot of elements in the tax code that promote preferred social behavior, and I think to a degree those elements are defensible.

And I think that it’s acceptable for tax policy to promote homeownership. (The homebuyer tax credit of recent years was a disaster — it just encouraged first-time buyers to buy homes before prices had bottomed out.)

Of course, the mortgage interest deduction doesn’t really promote homeownership. It promotes home purchases and the maintaining of high levels of debt on those homes. As a result, the deduction in effect subsidizes the real estate and banking industries as much or more than it helps mortgage holders.

From a great 2010 piece by the Tax Foundation:

Sound tax policy dictates that interest payments be deductible only when they are incurred to produce taxable income, such as those resulting from a small business loan. Mortgage interest on a principal residence doesn’t meet this requirement, but a special exception was carved out at the inception of the income tax in 1913, and the mortgage interest deduction has become one of the largest and most sacrosanct loopholes in the tax code.

For tax year 2008, a little over one quarter of the nation’s tax returns claimed the mortgage interest deduction, 26.8 percent of the nation’s 143 million tax returns. Rates of home ownership are much higher than this, but many home owners don’t claim the deduction. Often they live in low-cost homes for which the deduction isn’t large enough to make a tax difference, so they don’t itemize deductions on their tax returns. In addition, home owners who have paid off their mortgages make no interest payments to deduct.

The average tax return in the U.S. deducted $3,279 in mortgage interest; that includes all tax returns, even the non-homeowners and non-itemizers. Counting only the tax returns that deducted mortgage interest, the average amount was $12,221.

So in 2008, the average return that benefited from the mortgage interest deduction was from an individual or household paying on average $1,000 per month in mortgage interest. Is that a level of debt we want to reward and encourage with tax breaks?

If we want to encourage homeownership through the tax code, there are better ways to do it — ones that don’t encourage such high levels of debt.

Here’s a bit more background from the Tax Policy Center:

The MID was not originally placed in income tax law to subsidize home ownership. When the modern federal income tax was enacted in 1913 shortly after ratification of the 16th Amendment to the U.S. Constitution, all interest payments were made deductible on the grounds that interest payments
were an expense of earning business and investment income. Congress made no distinction, however, between interest incurred for the production of taxable income (such as interest on business loans) and interest incurred to generate non-taxable “imputed” returns from homes and consumer durables.

The deduction had little effect on housing investment before World War II because only the very highest-income individuals paid any income tax. The conversion of the income tax from a “class” to a “mass” tax during World War II, followed by a large postwar growth in home ownership rates fueled by the increased availability of long-term mortgage finance, converted the mortgage interest deduction from a provision used by only a few taxpayers into a major subsidy for middle- and upper-middle-income homeowners.

As of June 2012, REOs comprised 1.87 percent of all loans in Georgia. That’s second worst only to Michigan at 2.33 percent.

Minnesota (surprisingly) is third at 1.61 percent. Illinois is fourth at 1.51 percent. Nevada is fifth at 1.41 percent.

As of June 2012, Georgia had 33,537 REO loans, according to the analysis. That number ranks 5th in the country and represents 7.6 percent of all REO loans in the nation.

Housing economist Tom Lawler has posted at Calculated Risk the total number of REOs by region and state.

The high number of REOs in Georgia has certainly played a huge role in the state’s banking crisis and has had a variety of other negative effects on the state’s economy. That drag isn’t going away anytime soon.

I’ve been posting there about some issues that I used to post routinely about here, like bank failures. But relatively few people looked at posts on this blog about wonky economic issues regarding state revenue and such, and Peach Pundit provides a much bigger platform for putting issues out there.

My recent Savannah Morning News columns are in a feed in the right sidebar here, and you can click here if you’re interested in seeing all my posts at Peach Pundit.

A few of my recent posts that seem especially important, at least to me:

• Two more Georgia bank failures: First Cherokee Bank in Woodstock and Georgia Trust Bank in Buford
• Georgia revenue picture brighter than a year ago, but still well below pre-recession levels
• A look at the partisan leanings of each T-SPLOST region
• House banking committee chair joins his Senate counterpart in the FDIC spotlight
• The importance of state tax credits for filmmaking in Georgia