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The Rise and Fall of the American Residential Equity Empire

The Rise and Fall of the American Residential Equity Empire

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By ADAM NAGOURNEY
Published: January 6, 2010

WASHINGTON — Senator Christopher J. Dodd, the embattled Connecticut Democrat who was facing an increasingly tough bid for a sixth term in the United States Senate, has decided not to seek re-election this year, Democrats familiar with his plans said Wednesday.
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Mr. Dodd, 65, a pivotal figure in the major debates now confronting Congress, is to announce his decision at a news conference Wednesday afternoon in Connecticut.

The decision came hours after another Democratic senator, Byron L. Dorgan of North Dakota, also announced that he would not seek re-election this November. The developments underscored the fragility of the Democrats’ 60-vote Senate majority, which is just enough to block Republican filibusters. Democratic incumbents also face serious challenges in Arkansas, Colorado, Nevada and Pennsylvania among other states.

In this case, Mr. Dodd was already considered one of the most vulnerable Democrats facing re-election this November, and party officials had been privately hoping he would step aside. His move opens the way for the state’s highly popular attorney general, Richard Blumenthal, a Democrat, to run. Democrats and Republicans said he would be a much stronger candidate in what is a Democratic state.

Mr. Dodd’s decision was reported by The Washington Post on its Web site late Tuesday night, and later confirmed by his associates. As of early Wednesday morning, Harry Reid, the Senate majority leader, had not heard from Mr. Dodd about his decision, according to aides to Mr. Reid.

Mr. Dodd has been a fixture in the Senate since his election in 1980 and had been at the center of the contentious recent debates on overhauling the health care system and financial regulation. In November he proposed an overhaul that included consolidating bank regulators, creating a consumer financial protection agency and imposing new restraints on exotic financial instruments and credit rating agencies.

But his standing in Connecticut had been on the decline starting when he made an unsuccessful run for the presidency in 2008 — moving his family to Iowa — and when questions arose about a disputed loan he took from Countrywide Financial, the fallen subprime company.

On the Republican side, Mr. Dodd faced the prospect of running against Linda McMahon, a political novice who was prepared to use her vast personal fortune to beat the incumbent senator. Also challenging the senator was former Representative Rob Simmons, a Republican.

Mr. Dodd’s troubles escalated in 2008 when he was one of two Democratic senators — the other was Kent Conrad of North Dakota — who had been accused of receiving improper discounts from Countrywide Financial. In August, the Senate Select Committee on Ethics ruled that it had found “no credible evidence” that the senators had violated gift rules in accepting the loans.

But the committee criticized Mr. Dodd and Mr. Conrad for not avoiding the appearance of impropriety.

Both Mr. Dodd and Mr. Conrad had been members of the “Friends of Angelo” V.I.P. program at the bank, named after Angelo R. Mozilo, the chief executive of Countrywide.

Polling in Connecticut suggested that Mr. Dodd had been hurt both by his association with Countrywide and by criticism for his role in legislation that appeared to clear the way for bonuses to be paid to executives of American International Group, the insurance firm that received a government bailou
By ADAM NAGOURNEY
Published: January 6, 2010

WASHINGTON — Senator Christopher J. Dodd, the embattled Connecticut Democrat who was facing an increasingly tough bid for a sixth term in the United States Senate, has decided not to seek re-election this year, Democrats familiar with his plans said Wednesday.
Skip to next paragraph
Multimedia
Timeline: Chrisopher J. DoddInteractive
Timeline: Chrisopher J. Dodd
Related
Senator Dorgan of North Dakota Will Retire (January 6, 2010)
Decision Sets Stage for Pitched Battle (January 6, 2010)
Times Topics: Christopher J. Dodd
Blog
The Caucus
The Caucus

The latest on President Obama, his administration and other news from Washington and around the nation. Join the discussion.

* More Politics News

Readers' Comments

Share your thoughts.

* Post a Comment »
* Read All Comments (114) »

Mr. Dodd, 65, a pivotal figure in the major debates now confronting Congress, is to announce his decision at a news conference Wednesday afternoon in Connecticut.

The decision came hours after another Democratic senator, Byron L. Dorgan of North Dakota, also announced that he would not seek re-election this November. The developments underscored the fragility of the Democrats’ 60-vote Senate majority, which is just enough to block Republican filibusters. Democratic incumbents also face serious challenges in Arkansas, Colorado, Nevada and Pennsylvania among other states.

In this case, Mr. Dodd was already considered one of the most vulnerable Democrats facing re-election this November, and party officials had been privately hoping he would step aside. His move opens the way for the state’s highly popular attorney general, Richard Blumenthal, a Democrat, to run. Democrats and Republicans said he would be a much stronger candidate in what is a Democratic state.

Mr. Dodd’s decision was reported by The Washington Post on its Web site late Tuesday night, and later confirmed by his associates. As of early Wednesday morning, Harry Reid, the Senate majority leader, had not heard from Mr. Dodd about his decision, according to aides to Mr. Reid.

Mr. Dodd has been a fixture in the Senate since his election in 1980 and had been at the center of the contentious recent debates on overhauling the health care system and financial regulation. In November he proposed an overhaul that included consolidating bank regulators, creating a consumer financial protection agency and imposing new restraints on exotic financial instruments and credit rating agencies.

But his standing in Connecticut had been on the decline starting when he made an unsuccessful run for the presidency in 2008 — moving his family to Iowa — and when questions arose about a disputed loan he took from Countrywide Financial, the fallen subprime company.

On the Republican side, Mr. Dodd faced the prospect of running against Linda McMahon, a political novice who was prepared to use her vast personal fortune to beat the incumbent senator. Also challenging the senator was former Representative Rob Simmons, a Republican.

Mr. Dodd’s troubles escalated in 2008 when he was one of two Democratic senators — the other was Kent Conrad of North Dakota — who had been accused of receiving improper discounts from Countrywide Financial. In August, the Senate Select Committee on Ethics ruled that it had found “no credible evidence” that the senators had violated gift rules in accepting the loans.

But the committee criticized Mr. Dodd and Mr. Conrad for not avoiding the appearance of impropriety.

Both Mr. Dodd and Mr. Conrad had been members of the “Friends of Angelo” V.I.P. program at the bank, named after Angelo R. Mozilo, the chief executive of Countrywide.

Polling in Connecticut suggested that Mr. Dodd had been hurt both by his association with Countrywide and by criticism for his role in legislation that appeared to clear the way for bonuses to be paid to executives of American International Group, the insurance firm that received a government bailou

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Published by: Center for Economic and Policy Research on Jan 06, 2010
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The Rise and Fall of the AmericanResidential Equity Empire
 
David Rosnick
 July 2009
Center for Economic and Policy Research
1611 Connecticut Avenue, NW, Suite 400Washington, D.C. 20009202-293-5380www.cepr.net
 
CEPR The Rise and Fall of the American Residential Equity Empire
i
 
Contents
Introduction........................................................................................................................................................1
 
 The Bubble in Home Prices.............................................................................................................................1
 
 The Bubble was Obvious.................................................................................................................................2
 
 As Prices Rose, Equity Rose Far Less Quickly.............................................................................................4
 
 What Might Have Been.....................................................................................................................................6
 
 About the Author
David Rosnick is an Economist at the Center for Economic and Policy Research.
 Acknowledgments
 The author thanks Dean Baker and Kris Warner for helpful comments.
 
CEPR The Rise and Fall of the American Residential Equity Empire
1
 
Introduction
Social Security and defined benefit pensions form two of the three important components toretirement wealth. While Social Security is in fine shape for decades to come, the number of  workers with private defined benefit pensions has dramatically declined in the past couple of decades. The third plank of retirement security – private savings – had been nearly nonexistent forseveral years. For most households, private wealth building had been principally focused onhomeownership. As families build up equity in their homes, they may sell their houses at retirement,converting the equity into financial assets, or continue to live in the house in lieu rent and mortgage-free.In the long run, a homeowner who is overly optimistic as to the value of their residence and so lacksthe necessary equity will find neither option is available at retirement. A homeowner whooverestimates the sale price of the family house will consume more than one who perceives the pricemore accurately. If house prices are rising quickly in the midst of a bubble, such behavior ismagnified. When prices return to historical levels, the household finds itself with much less wealthfor retirement and must recapitalize by cutting back on consumption. The macroeconomic consequences are very real. When households do start consuming less andresume saving, businesses find themselves with excess capacity. They stop investing and beginlaying off workers. Those who lose their jobs make further cuts in spending and the vicious cyclecontinues with even greater overcapacity and additional job loss. Shrinking consumption andinvestment may be partially offset by reduced imports, but when the crisis is global, exports fall as well. Thus government deficit spending becomes the last remaining source of economic growth. Absent the housing bubble, households would not have consumed as much in the past, but they  would have been left with more wealth and consumed more in the future. This reflects not merely ashift in spending from the past to future, but a real increase in income as well. Had we avoided thedeep recession of the bursting bubble, greater employment today would have left households withboth greater savings and greater spending.
The Bubble in Home Prices
From 1890 to 1995, real home prices rose only 10.3 percent – less than 0.1 percent per year formore than a century. Yet from 1995 to 2006, real home prices spiked nearly 84 percent. It was clearback in 2002, when home prices were up only 29 percent, that much of the metropolitan UnitedStates was experiencing a bubble market in real estate. The bubble peaked in 2006, and by late 2008prices had already fallen more than 28 percent from that peak – back to where they were in 2002.
1
  Yet there was a general failure to recognize that the run-up in house prices was unsustainable. Though few economists understood this early in the bubble, most denied that anything butfundamental conditions drove the unprecedented growth in home prices. Consequently,homeowners and prospective homeowners were misled into questionable decisions with their
1 Data from Robert Shiller http://www.econ.yale.edu/~shiller/data.htm

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