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Archive for October, 2013


Was the USA founded as a Christian nation?

Read Wikipedia regarding the Treaty of Tripoli signed and unanimously ratified by the Senate in 1797. Very interesting! Article 11 of the English translation includes the following statement: “Art. 11. As the Government of the United States of America is not, in any sense, founded on the Christian religion,—as it has in itself no character of enmity against the laws, religion, or tranquility, of Mussulmen [Muslims],—and as the said States never entered into any war or act of hostility against any Mahometan [Muslim] nation, it is declared by the parties that no pretext arising from religious opinions shall ever produce an interruption of the harmony existing between the two countries.”


The anatomy of the next housing crisis

The next housing crisis will be driven by property taxes, but let’s review the last crisis before moving forward with a description of the next one. Recall that during the Bush presidency there were two Fed chairmen, Greenspan and Bernanke. The change occurred at the start of 2006. Between 2000 and 2006, the Bush/Greenspan era, the money supply (M1) grew rather steadily but a problem was looming: the money multiplier . . . the link between the monetary base and the money supply . . . was declining. Then came the Bush/Bernanke era. The money supply (M1 again) ceased to grow at all during this era. The monetary base grew at a diminished rate, but because of the decline in the money multiplier, the money supply grew not at all. Well, this set off a mini recession, not enough to be labeled a recession, but a little one nevertheless.  So by the start of 2007, housing prices began to level off or decline a bit. Meanwhile, the financial sector had been made exceptionally delicate by the use of high loan-to-value mortgages. As an aside, a 95% loan to value ratio is under water if housing prices are constant, if brokerage commissions and selling costs are 6% or more. So if prices decline ever so slightly, then lots of houses are under water with negative equity. No one will default if their home has positive equity, but lots of people will default if their home has negative equity. The rate of mortgage defaults increased dramatically in early 2007. You could say that there was a cascade of defaults. By the late summer of 2008, these default and foreclosure problems had become obvious in the mortgage derivatives market. The rest is well known.

The next housing crisis will be driven by extreme property tax rates. A great many cities are overextended with bloated government and underfunded retirement systems. Some of these cities have assessment systems with long lags in adjustments . . . sometimes because of legalities and sometimes for other reasons. Nevertheless, assessments have not adjusted downward rapidly enough to reflect the decrease in housing values since 2007. At the same time, many cities are pushing the envelope on property tax rates to cover their financial difficulties. As a result, it is not hard to find properties with huge effective property tax rates. That is the ratio of property tax to the market value of property is unsustainably large. What should this ratio be to be sustainable? The answer is on the order of 1% to 2%. What have I been seeing lately in Chicago suburbs? I have seen up to slightly over 7%. Magnitudes over 3% will cause a vicious circle of property value declines, defaults, and chronic public sector budget difficulties. Of course, the more extreme the effective rate, the greater the downward pressure on values.

What should be done about all this? First, we must stop the practice of high loan-to-value ratio mortgage lending. Second, cities should get their effective property tax rates under control. There is temporary pain associated with both of these steps but not taking them will lead to greater pain in the next housing crisis.