No Takers

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In May 2004, the price of a house in my hometown was going up by about 1% each month. At the time, my wife and I were living in a house we had bought only 30 months previously. The rate of increase puzzled us. We looked into it and decided that it was the result of mortgages being given to people on the assumption that the rate would continue for years. But, given that neither incomes nor rents were keeping pace with the rise in home prices, it seemed to us that the rate of increase was unsustainable.

Further, we decided that because so many mortgages were structured so that the payments were initially low but subsequently much higher, the increase in home prices would have to stop, and then turn into a decrease — sort of like musical chairs when the music stops. And from what we could tell, the trend was national. My wife and I are not economists, but we decided that a 50% increase in the value of a house in 30 months was a pretty good return. Since we had lived in it for more than two years, there was no capital gains tax. We sold the house and became renters.

A few months later, in summer 2004, Timothy Geithner bought a house in Larchmont, New York, for about $1.6 million. The mortgage was about $1 million. A few years later, he took out an equity line of credit on the house for an additional $400,000. In February 2009, when he was appointed secretary of the treasury, he put the house on the market for $1,635,000. After three months on the market with no takers, the asking price was lowered to $1,575,000. There were still no takers. He ended up renting the house for $7,500 per month. At 5%, the monthly payment on a $1.4 million mortgage is $7,515. That would not include insurance, property taxes, maintenance costs, or tax on the rental income. It is likely that the cash flow on the house was negative. Whether the house is now underwater — whether it is worth less than the mortgage — isn’t clear, but it has not, to date, been a good investment.

It is not my intention to pick on Secretary Geithner. Neither am I gloating. There are two points that need to be underscored here.

The first, and more obvious of the two, is that Timothy Geithner had no idea in 2004 that a decrease in home prices was coming. You might say, well, neither did most people. But the information that was available to my wife and me was available to him, and unlike most people, he is supposed to know about these things, to understand them, isn’t he? While I am sure that he is a very intelligent young man, the question needs to be asked: why in the world would you invite someone who bought a house near the peak of the housing bubble to become the Secretary of the Treasury?

The strategy selected by the federal government to deal with the bursting of that bubble was to shore up home prices. Given that they were artificially inflated by creative lending products in the first place, the task has not been easy. It included bailing out the banks that bought the creative mortgages, lowering interest rates so that homeowners in danger of foreclosure can refinance and lower their monthly payments, and buying up the bad mortgages wholesale and putting the taxpayer on the hook for the unavoidable losses. Now we hear a proposal to have the feds guarantee mortgages if the banks will lower the principal of the loans by 10%.

In spite of all these efforts and more, the pile of bad paper grows. Trillions of dollars have been created out of thin air in an effort to shore up the prices of homes. This may be part of an overall effort to eventually inflate the dollar so that the old purchase prices seem cheap — the rising tide that sinks all anchored boats. Who knows? There have been many reasons given for the selection of this strategy of shoring up home prices.

I would like to add one more. But first, an alternative economic strategy: X borrows money from Y so that X can buy a house. If X fails to pay the money back as agreed, Y becomes the owner of the house. Y then sells the house to Z at whatever price Z is willing to pay.

Here, then, is the second point. I submit to you that Timothy Geithner, whether he knows it or not, has been trying to jack up house prices so that he can get $1,635,000 for his.

By the way, my wife and I just bought a house. No, not in including me, concluded that there might be something we didn’t know, and we all left the building. The people standing outside now numbered about 100. Half of them were young Japanese on some kind of tour; the other half were midwestern Americans, all middle class or working class (this was a cheap but decent hotel).

I detected no difference in behavior between the two national groups. Each might be described as stolid. They had started off as skeptical; they remained skeptical; but eventually they’d obeyed the official command of the fire alarm. They didn’t like it, but they did it. Almost no one had anything to say. One old lady loudly claimed that she had smelled smoke three nights running, but no one paid any attention to her attempt at exposing the hostelry’s hazards to health.

The surprise of the occasion was the fact that nobody except me took any possessions out of the place beyond the most basic clothing. We had all had plenty of time to establish that if there was a fire, it wasn’t anywhere near us; we could all see at a glance from one end of the building to the other, noting clear escape paths at both ends; and we had all had time to pack something and take it out. When I finally decided to evacuate, I spent about a minute and a half putting my computer into its bag, adding money, my passport, and so on, and bearing the bag out of the building. My idea was that if even a small fire had broken out somewhere, there might be some official nonsense about not going back inside, once the fire was extinguished; and in that event I didn’t want to be deprived of my most necessary possessions. Apparently no one else felt that way. Many people, including many who left when I did, hadn’t even put on their shoes. It was cold outside, and they kept shifting miserably from one foot to another.

At about 4:30 a fire engine arrived and two firemen entered the building. Suspense built as the old lady kept exclaiming, “Why don’t they tell us something?” Why not, indeed? From the solemnly disgusted looks on many faces, I guessed that many people agreed with her, but everyone remained silent. Even if she was right, none of us wanted to get stuck in her protest movement.

After 10 or 15 minutes of this, a white guy and a black guy came forward in the crowd, pushed open the main doors of the hotel, and peered inside, gathering their courage. Soon they had created a beachhead in the lobby — but the rest of us hung back. I know why I did; I didn’t want to be caught and admonished by some boring fireman. I suppose that was the reason why the other 97 people acted like cowards, too.

Well, soon afterward, one of the firemen came out and proclaimed that there wasn’t a fire and we might as well go back to our rooms. So we drifted into the building. The other fireman lingered in the lobby, explaining to a knot of interested persons that you can’t always tell why an alarm goes off. And thus the party ended. It was a little experiment in what Americans are like (and Japanese too, apparently).

We hesitate, but we obey. That’s our default position, especially when there’s a possible threat to life, however remote the threat may be. After a while, we’ll push back, or consider doing so. But we’re remarkably bad about planning for our survival, or even our comfort. On the day of 9/11, mobs of congressmen and their flunkies fled the Capitol, running so fast that their shoes fell off, blanketing the grass on the east side of the structure. The people in my hotel didn’t panic; their shoes didn’t fall off; they just didn’t consider the advisability of wearing them — much less the advisability of grabbing their valuables.

Americans are not fools, and we’re not hysterics. We have the basic, unthinking good behavior on which civilization is built. But we’re not as bright or as bold as we might be, that’s for certain.

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