patrick.net

It's like trying to understand why my 3-year old does something, there's often little logic involved and a lot of "I wanna".

Your 3-year-old sounds like half the managers I've worked for.

18

Dan8267 2011 Dec 22, 2:04am

Most of the damage to the economy in terms of housing is almost done.

True.

1. The immediate loss of jobs from decreased construction and the impact on industries closely related to real estate.

2. The plethora of jobs lost as a result of the credit crunch and the financial collapse. These are jobs not even remotely related to housing.

3. The decrease in pay as a result of massive firing and the competition of workers for the few remaining jobs.

4. The utter debasement of our currency due to inflationary policies and bailouts. This includes the wiping out of the purchasing power of savings and rising costs for basic necessities like food.

5. The destruction of retirement accounts due to malinvestment and fraudulent appraising by rating agencies.

6. The destruction of real wealth in the form of houses that have been looted, vandalized, defecated on (yeah, remember that), and just plain neglected.

And these are just a few of the things that the housing bubble caused. However, the worst is behind us. That's the good news. The bad news is that the refusal to simply stop the accounting fraud and recognize losses will cause this depression to be a long one. I wouldn't be surprised if we don't see an economic boom until 2020.

19

uomo_senza_nome 2011 Dec 22, 2:08am

The bad news is that the refusal to simply stop the accounting fraud and recognize losses will cause this depression to be a long one. I wouldn't be surprised if we don't see an economic boom until 2020.

Whether the Fed is intentionally doing it or not, they're basically going for a policy of controlled deflation.

Therefore, the Federal Reserveâ€™s most likely course of action is to keep the mortgage market, in which most of the losses are concentrated, in a sort of stasis, where losses are acknowledged slowly over time. Such a policy, which might well be called â€œcontrolled deflation,â€ would lead to a prolonged period of high unemployment and slow growth, as capital was only slowly reallocated to satisfy consumer preferences. Further, the insufficient or barely sufficient creation of new credit to make up for debt paid down, or defaulted on, would cause a low growth in aggregate prices, which might occasionally become negative. Not until the losses of the housing boom are fully clearedâ€”which might takes years under a policy of controlled deflationâ€”should we expect an inflationary credit expansion and a significant rise in prices

Full paper: http://libertarianpapers.org/articles/2010/lp-2-43.pdf

20

Dan8267 2011 Dec 22, 2:39am

HousingWatcher says

One thing that any Ron Paul supporters have yet to explain is how it would be good for the country to allow the housing market to completely collapse, takig the entire economy with it.

So tell me, why should we allow home prices to collapse and destroy the entire economy? And yes, that is precisely what will happen if prices plummet: The economy wil collapse.

I'm sure that you, like many others, actually do believe that the economy would collapse if housing prices keep declining. However, that belief is as well founded as the idea that unicorns will take over the Earth if Sanjaya wins American Idol. It is simply, and utterly, not true. In fact, there are a lot of false assumptions and reasoning implied in your question.

First, the housing market cannot collapse. Short of the extinction of our species, it's impossible. Although a particular house could have a market price of $0 or less if it's a financial liability (say it's full of nuclear waste), the typical house in the U.S. simply isn't going to be prices at $0 at all, ever, or even close. That's a false vision of the future.

Second, it is completely dishonest to call any price decrease "a collapse of the housing market". Housing prices, in real terms, will fall to the level of the 1990s, perhaps even the year 1990 prices. This means that the number of gallons of milk it would take to buy a house in the 1990s will be reached again by the time the correction is over. Like it or not, that will happen and there is nothing you can do about it. However, this is not a collapse of the housing market. It is a return to reasonable pricing in line with the entire history of housing in the U.S.

Third, it is a great thing that housing returns to that price level. Unless you're either selling a house and planning to downsize or your one of the parasites who make money off of the transactions of houses, it is in your best interest for house prices to be low. Low prices are good for first-time buyers, obviously. They are also good for people who want to buy more house and climb the property ladder. Lower prices are even good for people who want to sell their current house and move into another house of equal value, a lateral move. Low prices keep real estate taxes lower.

Fourth, even the old farts who are selling their houses to move into a smaller house, condo, or assistant living facility are screwed over by the housing bubble. Sure, they may make out like bandits when it comes to selling their house, but all that money is lost because the purchasing power of their pensions and social security are decreased as the price of medicine and food they need to keep living is raised. When you are on a fixed income, it's not in your best interest to devalue the currency to keep nominal housing prices high.

Fifth, a return to 1990s prices, hell, a return to 1950s prices, would not hurt the economy at large. In fact, it would be beneficial. As Elizabeth Warren showed, the amount of disposable income, in real terms, that the typical American family had in the 1970s was far greater than the disposable income of a typical family today. And the reason for this is that today American families are putting all their income into housing and medical insurance, necessities, and therefore have nothing less for discretionary spending.

So, imagine trying to make a market for 3D plasma tvs, mobile phone apps, and all the other non-essential products that 90% of businesses in our country try to make and sell today. Money that goes into housing does not go into the other 99% of the economy that isn't housing. The housing industry has had a chock-hold on our economy for the past decade. That chock-hold has prevented so many other industries from thriving and hiring. It is a terrible, terrible thing for an economy to have to spend vast resources on a single industry, whether that industry is health care or housing or anything else. A healthy economy is diverse and lets many different demands be satisfied.

So, you see, plummeting house prices would not collapse the economy, but rather get us out of this depression.

Sixth, the economic collapse you fear, has already happened. We are in a depression. We are in one that is as great as "The Great Depression", which is why I call this the Second Great Depression. Don't be fooled by the fact that we don't have soup kitchens today as believing the economy isn't that bad. We have different mechanisms for dealing with day-to-day life today than during the 1930s. Furthermore, we have mega-industrialized farming which means that food is cheap (even after the recent price increases) relative to what our great-grandparents paid in 1920s. Granted, the food isn't as healthy, but that's another story.

So, no, we won't suffer the same way that Americans did in the 1930s. We also won't wear bowler hats and walk jittery in black-and-white like an old movie. But make no mistake, if you look at the real unemployment and underemployment figures and the real wages, our current economy is about as bad as the First Great Depression. It's not going to get any worse, but it will take about a decade to recover.

Seventh, in one respect, we are worse off than during the First Great Depression. The rich-poor gap is more extreme, and it keeps getting worse.

So, there you have it: seven reasons why you shouldn't fear plummeting housing prices. However, if you still think that propping up prices is a good thing, then why don't you support propping up gasoline prices? They were over $4/gal under Bush, and they haven't been as high since. We should strive for $40/gal gas, you know, so that our entire economy doesn't collapse. After all, price deflation is always a bad thing. Sarcasm offâ€¦

21

Dan8267 2011 Dec 22, 2:44am

Therefore, the Federal Reserveâ€™s most likely course of action is to keep the mortgage market, in which most of the losses are concentrated, in a sort of stasis, where losses are acknowledged slowly over time. Such a policy, which might well be called â€œcontrolled deflation,â€ would lead to a prolonged period of high unemployment and slow growth, as capital was only slowly reallocated to satisfy consumer preferences.

Isn't that exactly what we argued in this thread?

But Keynesian Economics is a religion. You can't question it without upsetting all of its followers.

I would further argue that the attempt to "slowly acknowledge the losses over time" really means "shift the losses from the those responsible to innocents including the public at large". This, of course, protects the parasites who caused the problem at the expense of everyone else. And, that really is the true intent as well.

22

MisdemeanorRebel 2011 Dec 22, 2:45am

See the problem is all those loans were securitized and sold into PENSIONS and RETIREMENT FUNDS. So the moment you start toppling those dominoes you lead into a financial cascade effect.

Absolutely true. My concern is that by spending all this money and resources on propping up mortgages, we're ignoring other opportunities that might actually fund growth going forward. And with this strategy, the best we can hope for is to break even, that the home prices return to bubble valuations before our ability to borrow cheaply ends.

I'm not opposed to Keynesian spending, I'm opposed to how the borrowing is being spent. Propping up zombie banks creates few jobs; in fact most of the zombies have laid off people over the past few years.

I would rather we spend a trillion or so on massive alternative energy projects that will create jobs (hopefully with an in-sourcing mandate like defense projects get).

Because even if home prices surge past bubble levels, then we will have worse problems of unaffordability than we do now or did in the mid noughties. We'd have fixed the asset price problem but not the flat income problem for the vast majority of the populace.

What we need is wages to increase and more jobs at all skill levels, particularly the lower end. The only way to do that is to shift manufacturing back home, by a mixture of policy and investment of public funds. Because if we don't create productive industries beyond IP trolling and creative financing, then we can never set Pensions and Retirement funds straight, nor have the means to fund a system for those who have lost it all in their senior years.
Vicente says

I'm not sympathetic to keeping banks solvent either, nor keeping fantasy valuations on housing. However I can certainly see why the retirees will vote WHATEVER IT TAKES to keep those fantasies intact. They counted all their lives on not having to root through a dumpster for food in retirement, and will never vote for anything that might damage their nest egg.

They certainly will do so.

The boomers are looking at their predecessors, the Silents, as a road map to their retirements. Unfortunately, the boomers outnumbered the silents and the silents were thus able to sell their houses into a large demand, with lots of new home construction to boot. Younger generation's families are smaller, they already spend much more of their income than previous generations on housing and have little room to budget more for it, they prefer Urban living for convenience and avoiding sky high transportation costs, etc. etc.

And where suburban -> city or intrasuburban public transportation exists, it's ossified. The LIRR was venerable when I was a kid, now it's still ancient. I wonder if the line past Huntington is still using 1940's diesel engines.

I believe that the suburbs was the greatest waste of resources in US history, probably rivaling military spending and free trade. By spending our still vast resources on mostly propping it up via the banks and yet more suburban car culture infrastructure, we only postpone the solution and make the endgame even worse for ourselves.

23

Vicente 2011 Dec 22, 5:10am

But Keynesian Economics is a religion. You can't question it without upsetting all of its followers.

You can make this same argument about Austrian or any other "school of thought". If you disagree with it, all it's adherents must be blind religious dogmatics who just can't see your shining torch.

The fact is no political or economic thinking has to be PERFECT it has to be GOOD ENOUGH to deliver useful results in something approximating a human lifespan.

24

uomo_senza_nome 2011 Dec 22, 6:24am

You can make this same argument about Austrian or any other "school of thought".

I agree there's dogmatism within the Austrian circles also, but I am inclined to think that Austrian theory is more close to explaining economic reality as opposed to Keynesian.

The fact is no political or economic thinking has to be PERFECT it has to be GOOD ENOUGH to deliver useful results in something approximating a human lifespan.

Agree on this point also. But whatever is going on is NOT GOOD ENOUGH. Do you think it is? If no, what do you suggest?

25

Vicente 2011 Dec 22, 6:38am

Agree on this point also. But whatever is going on is NOT GOOD ENOUGH. Do you think it is? If no, what do you suggest?

A puppy?

No seriously I want the parties involved to actually agree on terms and what the problems really are.

Do the Austrian schoolers agree that wage inequality is a valid problem? Not that I've seen. Many self-described adherents claim it's impossible for it to occur in their ideal system. And of course an Austrian-built system would be perfect.

Of course we can run around in circles here. Many adherents only pick and choose what they want out of a theory and ignore the rest. For one example I like to flaunt in front of "Libertarians" is how many of them describe themselves as "Randists". Ron Paul what did he name his child? Yet, let's not talk about Ayn Rand's opinions on religion or a lot of other topics, they are only "Randists" where it feels right and not in others.

So most self-described Keynesians during boom time behave like a squirrel in the summer. Maybe they remember something about "saving nuts for the winter" and maybe not. Keynes was explicit about it. It's not been put into much practice, so is it fair to say "Keynesianism" is fatally flawed? I don't think so. Austrians have the same sorts of flaws.

One thing I think we can all agree on though:

Peter Schiff has a some sort of skin problem lately

26 futuresmc 2011 Dec 22, 7:50am

But Keynesian Economics is a religion. You can't question it without upsetting all of its followers.
I would further argue that the attempt to "slowly acknowledge the losses over time" really means "shift the losses from the those responsible to innocents including the public at large". This, of course, protects the parasites who caused the problem at the expense of everyone else. And, that really is the true intent as well.

Oh drop the snide comments on Keynsianism. It has its flaws, but so does the Austrian perspective. Personally, as a behavioralist, I believe both camps have too much faith in the rationality of the human race, but I don't go around shoving that belief in everyone's face. This bickering is becoming as toxic as republican/democrat, when both parties are bought and paid for.

However, your assessment of the true intention of 'controlled deflation' is spot on. But then that is what all the central banks are doing globally, not just in the US housing market. It reminds me of the scene in Titanic where the crew were gating the third class passengers in the bowels of the ship, to ensure those in first class got comfortably into the lifeboats.

27

Dan8267 2011 Dec 22, 12:17pm

futuresmc says

Oh drop the snide comments on Keynsianism. It has its flaws, but so does the Austrian perspective.

Oh, I have no problem saying there are flaws in all economic models, including Austrian. But everyone in the government and Wall Street blindly follow KE or some idealized version of it. And that makes it way more dangerous than Austrian economics. If anything, we need a strong injection of AE to balance things out a bit.

28 nope 2011 Dec 23, 6:16pm

http://news.bbc.co.uk/2/hi/programmes/from_our_own_correspondent/9550667.stm

But everyone in the government and Wall Street blindly follow KE or some idealized version of it

"everyone in the government and Wall Street" except for all those people (such as the majority of the house of representatives) calling for reduced government spending and a less progressive tax rate, right?

29

TMAC54 2011 Dec 24, 2:30am

WITH or Without propping banks, Real Property Values will eventually establish themselves. Gubmint's costly attempts at tricking us into believing values are higher than they actually are, is worse than COMMUNISM itself.
Communist business's are immune from risk. Capitalist business's need to be prudential or fail.

IS SOMEONE SENDING THE WRONG MESSAGE ?

30

tatupu70 2011 Dec 25, 1:35am

TMAC54 says

WITH or Without propping banks, Real Property Values will eventually establish themselves. Gubmint's costly attempts at tricking us into believing values are higher than they actually are, is worse than COMMUNISM itself.
Communist business's are immune from risk. Capitalist business's need to be prudential or fail.

The government is concerned with keeping the economy out of a depression, as it should.

31

uomo_senza_nome 2011 Dec 25, 3:31am

tatupu70 says

The government is concerned with keeping the economy out of a depression, as it should.

Put it another way, the government is propping up the insolvent banks who can't mark their assets to market. What it should do is break them up and declare the assets that are completely not repayable, as defaulted assets.

32 bob2356 2011 Dec 25, 3:47am

tatupu70 says

The government is concerned with keeping the economy out of a depression, as it should.

Government is concerned with keeping themselves in office no matter who they have to sell down the river. That's the fact Jack.

33

tatupu70 2011 Dec 25, 3:48am