Archive for February, 2009

Auto Bailout: Politics v. Economics

Friday, February 27th, 2009

Just as General Motors announced that it lost a staggering $9.6 billion in the fourth quarter of 2008, the company’s top brass was at the White House yesterday asking President Obama’s newly formed auto task force for as much as $16.6 billion more in federal aid. In a case of bad timing for GM, a Gallup poll also out yesterday showed that 72 percent of Americans oppose giving more taxpayer dollars to Detroit automakers.

Whether Washington will give in to public sentiment or offer further assistance to GM remains to be seen, but, if history is any indicator, the politics of job loss and reelection concerns will likely weigh more heavily in the decision than hard economic data. In his 2005 paper “Saving Chrysler: The Use and Nonuse of Accounting Information by the U.S. Congress,” Smeal’s Mark Dirsmith examined the 1979 Chrysler bailout and found that accounting evidence in that decision was mostly used politically as rationale for a decision or as ammunition for an argument.

In the end, despite the huge economic risk, Congress agreed to the bailout and saved Chrysler from bankruptcy. Dirsmith and his coauthor Timothy Fogarty speculate that had more of the accounting analysis been considered, however, Congress may have been dissuaded from making such a leap-of-faith decision.

They write:

The worst possible scenario that was not faced was a bailout that did not work. If Chrysler was given loan guarantees yet failed despite them, a large transfer of public money to private parties would have had to occur. In addition, all the adversity the government sought to prevent, would have been visited upon the economy. Despite a substantial possibility that this downside could materialize, very little attention to it was commanded in the debate. Much depended upon that which could not be known at the time. Perhaps the accounting information that was used, or that could have been used, would have not sustained such a leap of faith. That might be why we have politics. 

Tags: Auto Industry, Dirsmith, Economic Crisis, Economy
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Housing Recovery Likely Distant

Thursday, February 26th, 2009

Two real estate indices released this week piled on the evidence that the country’s housing market troubles continue. On Tuesday, Standard & Poor’s released its Case-Shiller report, which found that home prices declined by 18.5 percent in its 20 U.S. cities from December 2007 to December 2008, the sharpest drop on record. A day later, the National Association of Realtors announced that sales of existing homes fell 5.3 percent in January to the lowest levels since July 1997.

According to Smeal’s Austin Jaffe, these indices have been in free-fall mode for the past 25 months. The most discouraging thing, Jaffe says, is that the rate of decline continues to accelerate. “Once there is a bottoming out of declining home prices, market psychology is likely to change quickly,” he says. ”This day will come sometime—perhaps in late 2009 or during 2010—but it is not expected to come much sooner.”

Meantime, President Obama’s $75 billion Homeowner Affordability and Stability Plan aims to help struggling borrowers who have negative equity of no more than 5 percent by allowing them to refinance at lower rates with Fannie Mae and Freddie Mac. The program, Jaffe says, is expected to help as many as 5 million homeowners, but there are as many as 12 million U.S. homeowners facing negative equity. He says the president’s plan will provide some short-term relief, but in the long-run, the market fundamentals must change. 

More from Jaffe:

There continue to be too many houses on the market due to declining prices and foreclosure sales.  New construction is at record lows and there are serious questions about the future of homebuilding as an industry for the next several years.  It’s a toss-up as to whether these mortgage relief programs will stabilize prices. 

My best guess is that they will help many borrowers, but they will not solve the problem.  Those who are not close to making payments will not be helped. And the overbuilding of the past at significantly higher prices will require drastic adjustments by the market.  These adjustments will likely take some time and appear to be in the distant future.

Tags: Economic Crisis, Economy, Jaffe, Real Estate
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