They've Learned Nothing

A little trip down memory lane, here. How did the financial crisis get started?

If you answered "By banks making high-risk loans to people who couldn't afford the homes they bought," you're (substantially) right.

With that in mind, here's a bit of "news analysis" from the Fish Wrapper which justifies why I call it that -- the headline and leaderline alone are revealing:

$15,000 tax credit won't help low-income home buyers, experts say
The Senate measure offers the credit to anyone buying a primary residence. But buyers must earn enough to have $7,500 in income taxes -- $81,900 per year for a family of four -- to get the full benefit.

It goes on from there to the effect that this particular tax cut is only for rich people and therefore we should all hate and reject it.

Point one. Call me a heartless bastard, becasue I'm about to tell you that, at least in Southern California, a family of four that makes less than $80,000 a year is probably a bad credit risk.

Traditionally, a bank wants no more than one-third of a family's take-home pay to go to the mortgage. That's one of the reasons there is a credit check and financial profile involved in writing home loans. Banks want to make sure that there is enough money so that the family can actually pay the mortgage. In California, a family of four that makes $81,900 a year can expect after-tax income of something like $5,000 a month. Now, after you add things like mortgage points, mortgage insurance, homeowner's and fire insurance, and property taxes, that not-quite-$82,000 a year income is going to translate into about $250,000 worth of loan. More than that, and you're entering risk-escalation territory, all other things being equal.

Now, let's say you were going to go house-shopping with a pre-qual letter for $250,000 in your pocket in Los Angeles County -- if you aren't looking in the Antelope Valley or in Compton, you are S.O.L. because even now, after the market has dropped through the basement, you're still not in a position to buy a single-family home at that price.

So that's point one. For the target audience of the Fish Wrapper, bemoaning a tax cut for the rich is silly because no one who reads the Fish Wrapper and who personally is in a position to benefit from the tax cut is anything but one of the "rich" people who will benefit from it. If you don't make at least that much money, you aren't supposed to be buying a house in Southern California anyway. Writing a home loan to such a person is what got the banks in trouble in the first place.

Point two. The headline is deceptive. It may be that a family that earns less than $81,900 a year will not reap the entire benefit of the tax cut. But that's the impression that the headline leaves. Let's say you have a family of four in Knoxville, Tennessee that is fortunate enough to have a gross income of $70,000 a year and they go out and buy a starter home for $100,000. Now, that's a good credit risk; the mortgage payment even after points, taxes, and insurance will still be less than $1,000 a month, which will be something like 25% of the take-home pay.

Now, this family, you might argue, does not particularly need the tax cut to buy a house in a place like Knoxville. This family will have already bought the house at that income level and in that market. Maybe, but the point is, who gets to take advantage of the tax cut? This family does. Maybe not all $7,500 spaced out over two years' worth. But they do get something on the order of $6,000 spread out over two years. That makes them much better off than they were before the tax cut.

Point three. Is the goal here to lower the financial bar for people to buy their own homes? This is a laudable goal, to be sure, but we're being asked to get behind this bill because we are told it will stimulate the economy out of recession. Consider that family in Knoxville who won't get to take advantage of the "whole" tax cut. Alas! They "only" get a $6,000 cut spread out over two years, while their wealthier counterparts in cities like Nashville and Atlanta get the whole $7,500.

For our hypothetical Knoxvillians, that still works out to $250 in extra take-home income each month, which can make a real difference in the way the family lives its life. At that level, it makes a difference in the sorts of things the family consumes, like how often it goes out to dinner or buys toys for the kids or books and jewelry from the mall -- things that stimulate the economy. Even if they use it to pay down their credit cards, that increases the principal recapture rate of financial institutions and that, too, is beneficial to the economy because the money stays there.

Certainly, they could in theory get more of a tax cut than this. But at this point, the cut is at a level appropriate to serve its stated legislative purpose of a short-term economic stimulus. This, then, is a stimulus-appropriate sort of tax cut, plausibly aimed at the sorts of people who can reasonably be foreseen to do the sorts of things that we are informed will stimulate generalized economic activity. And worst of all, they get to decide for themselves what to do with the money because the government doesn't take it and give it back to them with strings attached.

But left-wing populism about how awful tax cuts are because they help rich people along with poor people will not help get us out of the economic doldrums. So, "boo hiss" to the Fish Wrapper.