patrick.net

Tanking Housing Prices says

ot true. Not at current inflated asking prices of resale housi

Some houses are priced very well now. In other cases, not so much. Patrick has a service to map these houses based on the price to earnings (current rental).
Just like stocks, when people expect growth, the price to earnings goes up. When expectations of growth are low, the price to earnings decreases.

Speaking in platitudes like 'the longer you hold a depreciating asset, the greater your losses,' is generally not helpful.

tatupu70 says

Leopold B Scotch says

I would argue that it will always be an economic reality, and in and of itself is not a measure of overall economic health.

History will again disagree with you. Wealth disparity rises and falls along with the economic environment at the time. Look at the 50/60s in the US. Compare that to the 20s and present day.

This cuts back to the seed-corn analogy. If the national wealth is vast and deep, policy can redistribute wealth from its existing growth trajectory to improve the standard of living of those who are not yet direct beneficiaries of the organic process of growing wealth. Your history beings with the 20s. What explains the massive gains in wealth in the United States during the 1800s prior to most all intervention in the economy? Why were so many fleeing other areas of the world and coming to the U.S. long before? Because wealth was growing, and increasingly the average person had more accessibility to it as each harvest grew the wealth exponentially. Again, raiding the seed corn and feeding some certainly is politically popular, but it slows the other growth.

Leopold B Scotch says

But wealth disparity unto itself, IMO, is not primary problem or cause.

Well--I disagree strongly. It is THE most important problem.

It didn't seem to dissuade millions from immigrating the the United States to become part of the American Dream long before the constitution was sufficiently ignored for politicians to do their economic redistribution thing.

If I can summarize the remainder of your post, you think inflation causes people to make poor decisions by valuing short term gains over long term gains. Is that correct?

It's much broader than that, but that is on very large problem.

Do you have any examples? Supporting evidence?

The housing bubble is a pretty clear example of massive economic stimulus pushed through via lax monetary policy that enabled the shift massive amounts of wealth into the hands of condo-flippers, overpriced real estate markets, and over-levered hedge funds.

The paragraph about special interests I think is completely off base. I don't see how inflation causes any of the things you attribute.

Think in terms of who gets to play with newly created / unbacked money and credit; whose projects get financed with that $$; who gets to charge interest on loans of unbacked credit; who gets to charge a fee on every $ bond the U.S.T. issues as they shuffle $$ back and forth between the Fed, the Primary Dealer accounts, and the U.S. Govt's accounts.

What about all the Wall Street Bailouts? What about the rescue of union contracts at GM and Chrysler? What about the stimulus recipients at Solyndra? etc. etc. etc.

Leopold B Scotch says

At a more granular level: policies from government designed to get everyone into a home regardless of home affordability or borrower solvency, demanded by legislation and financed by vast credit expansion. ETC.

OK--that is complete BS and has been proven to be so by many people.

Leopold B Scotch says

Interventionism, activist or otherwise, in the economy from the state or its agents at the central bank

Again--intervention can be either good or bad. You need to list what was done that you think was bad.

Leopold B Scotch says

In all seriousness: Why ? How can you know?

I think I listed why. Look at growth rates, unemployment, interest rates.

Leopold B Scotch says

Again, Why? How? Especially when the interest rate environment is nowhere close to a natural market rate with the massive amounts of manipulation that policy makers engage in and/or the system encourages directly through a backdrop of uber-credit accommodation?

I see this argument a lot, but I don't buy it. I see no evidence that interest rates would be much higher without the Fed. Why do you think the "natural" market rate should be higher?

duckhead says

Actually I think we should move to a 40 year mortgage minimum. That way banks can suck the blood of home debtors for even longer and in many cases until they die, then take the house anyway after gorging on interest payments. Of course they already do that now a lot of the time.

Why 40 years? Why not outlaw the owning of property by the serf and have property ownership the divine right of nobility?

Of course this might put reatlors(tm) out of a job since land and title are passed from father to first son, increasing unemployment, so the legislation might get stuck in the Senate committee on rearview-mirror driving.

Re--seed corn. I haven't commented on this because I didn't want to derail the conversation. Not surprisingly I don't find the analogy to be particularly pointed or informative.

Right now we have a huge silo filled to the top with seed. Only half the population can afford to buy corn so the farmer only needs to plant half of the seed. The remainder sits and rots in the silo.

Tanking Housing Prices says

It's not a platitude my friend.... it's a fact.

There are plenty of ways to make money while holding a depreciating asset. So, your platitude is not a fact. It is simply incorrect.

If fact most business plans, factories, etc. involve investing in a depreciating asset and making money off of it faster than it depreciates. The longer you hold the depreciating asset the better as long as it is still performing.

It is always nice to simplify things when possible. But simple and wrong is worse than complicated and correct.

OP - So why can't their be 10 yr, 15 yr, 20 yr, 25 yr, 30 yr, and 40 yr mortgages and folks can decide what's right for them? Not everyone fits into the model you lay out.

E.g., interest only loans are thought to be some evil, sure to lead to default. But the rich also use them to put a $1 million mortgage on their $8 million house, so that the loan doesn't get paid down, and the maximum mortgage interest deduction they are after continues without paying down the principal they could pay down in cash tomorrow, if they wanted to, but they don't want to.

duckhead says

Actually I think we should move to a 40 year mortgage minimum. That way banks can suck the blood of home debtors for even longer and in many cases until they die, then take the house anyway after gorging on interest payments. Of course they already do that now a lot of the time.

Then why do stupid borrowers fall for it?

And why aren't you concerned about the upsell at restaurants, Best Buy, car dealers, etc.?

My parents bought a home on a 30 year mortgage 45 years ago. The worked hard, lived in it and paid it off. Their home has equity but that equity would not make them rich.

So in their case, a 30 year mortgage worked and made sense.

I dont know why any bank under these economic conditions and interest rates would loan money to anyone

tatupu70 says

Leopold B Scotch says

At a more granular level: policies from government designed to get everyone into a home regardless of home affordability or borrower solvency, demanded by legislation and financed by vast credit expansion. ETC.

OK--that is complete BS and has been proven to be so by many people.

The entire Freddie / Fannie system was created to provide such lending liquidity to lower quality borrowers that couldn't otherwise qualify. While there wasn't a formal guarantee behind the bonds, the guarantee was always implied that if SHTF, the authorities would backstop it. Sure enough, the Fed printed $2.7 trillion to step into the mortgage markets and provide solvency to otherwise plummeting mortgage assets, while other intervention bailout backstops were rolled out to prevent Freddie / Fannie bond holders from paying the price.

Now, that's not taking the mortgage industry off the hook. They pushed all sorts of crap on people who couldn't afford it, and sold it off to the dimwits at those institutions and others.

But your assertion that it's complete BS when I say that legislation pushed lending to borrowers who were not otherwise qualified is itself BS. Go look up the hearings on Freddie and Fannie stupidity from the early-mid 2000's (before the bubble really frothed) and you'll see a highly politicized discussion about the increasing insolvency of those institutions based on the approach to lending. On one side you have those demanding the institutions be fixed up before they end up on the taxpayer's tab (a handful of fiscally conservative republicans), and on the other you have the usual lefties accusing the fiscal disciplinarians of being racists and haters of the poor. Among them, the black caucus members, CA lefties, etc.

I have also seen first hand the rules on redlining being implemented, where large institutions are required to push lending into very low-income communities.

Now, I'm not saying that was the primary cause. Absolutely not. The primary cause was the vast amount of liquidity created under Greenspan and Bernanke which depressed the overall interest rate environment, thus allowing the average monthly payment to acquire a lot more house price, combined with the delusional credit system that ignored any and nearly all reality with it's lending standards in general. [A massive economic problem that continues].

tatupu70 says

Leopold B Scotch says

Interventionism, activist or otherwise, in the economy from the state or its agents at the central bank

Again--intervention can be either good or bad. You need to list what was done that you think was bad.

Look at the monetary base in the late 1990s through the mid 2000s.

Look at the long history of bailouts always increasing the moral hazard problem. A major entity gets itself into problems, the resulting bankruptcy would hammer major players on Wall Street, and so the taxpayer or dollar holder steps in to assure that bond holders don't get the haircut they deserve, and the Wall Street institutions don't have capital ratio problems that drive them under. Mexico default Bailout. LTCM bailout. 2000 Crash bailout. You can go back to the Chrysler bailout. And then there is the alphabet soup of bailouts since 2008 and lehman. And I already listed the GM bailouts, etc.

Now I would assume you'd think these are "good" bailouts. I would argue that they yank $$ from the functioning / wealth creating / productive economy and redirect it to those who've proven they can F up.

That said, those are specific policy interventions. There is also the endless systematic intervention that is implied in the Fed's dual mandate for controlling inflation (at a steady growth rate) and employment. What they argue is supposed to control the business cycle has only exacerbated / enabled it it to extraordinary extremes.

tatupu70 says

Re--seed corn. I haven't commented on this because I didn't want to derail the conversation. Not surprisingly I don't find the analogy to be particularly pointed or informative.

Obviously. Your economic model / mindset doesn't allow / account for it to make sense.

Right now we have a huge silo filled to the top with seed. Only half the population can afford to buy corn so the farmer only needs to plant half of the seed. The remainder sits and rots in the silo.

You can rip apart any analogy if your goal is literalism. There is a similarity to an economy's real capital and seed corn. It is not a perfect analogy -- what is?

In the most basic sense, let's shift this to a simple Carusoian model. Caruso and Friday land on an Island with some apple trees. For the sake of discussion, let's say that each day Caruso and Friday wake up empty bellied, and must climb into the trees to pick apples, and that it takes 40 apples a day for a well-fed belly, but also all day to pick those apples.

After weeks of doing this and feeling very hand-to-mouth about life, with clothes wearing thin, no shelter, etc. Friday contemplates a tool that will allow him to be more efficient in his apple picking. He calculates that it will take him about two weeks to fashion this tool out of available resources. But, he needs to be able to eat during that period, too. Hence, Friday decides to start sacrificing a bit to set aside 10 apples a day, eating 30, saving 10. While he's hungry at the end of each day, he's willing to forgo immediate gratification with the hopes that his tool will reap dividends. To have two weeks of apples set aside, he needs 30 apples x 14 days = 420 apples. Saving 10 apples each day, it takes Friday about 42 days to save enough apples.

On day 43, Friday redirects his efforts from apple trees and starts working on his tool. Two weeks (and 420 eaten saved apples later), Friday goes back to his trees and is now able to harvest, let's say, nearly twice as many apples in a day (from 40 to 70).

After a few days of this, Friday has a full belly and a store of extra apples. Friday then says to Caruso, "why don't you climb out of that tree and build me some shelter. I will pay you 40 apples each day to do this. Caruso sees this and decides he will save a few of his apples as his own savings, and set himself up to build a home for himself. Meanwhile, Friday's tool frees him up to do other things to improve his lot in life.

Eventually another boat sinks and more stragglers come ashore. You have hand to mouth apple pickers living day to day. Friday exchanges apples for one to make clothes, another to go fishing. But the rest are in the trees living hand to mouth. What's needed are more apples, and there is only one tool.

The solution IMO is to allow for savings to accumulate so that the island economy continues to grow and diversify.

What policy makers instead propose is that savings is bad. They would argue that it is their job to remove apples from Caruso's savings and hand them out willy-nilly to whoever lines up. The Krugman's of the world even believe that Caruso and Friday, and especially the new Islanders showing up with nothing, would benefit by being forced to dedicate their apple savings to put the newly shipwrecked to the task of building of a war machine to protect them from an alien invasion that (hopefully) never materializes.

Now, of course people don't save in apples, per say. They would save in something more lasting and universally tangible when possible, hence the evolution of currencies always towards universally accepted stores of value that are scarce. (surely that relationship breaks down with fiat currencies that always depreciate as they are destroyed by the political classes). But if you think about it, when a farmer exchanges his apples for, say, dollars, his dollars reflect his sacrifice and work. So, in a barter environment, he could exchange apples for bread from a baker. Or, the baker might sell some bread to the tailor, and use some of the proceeds to buy apples. But in this example, these are dollars backed by hard work, productivity. If our farmer (baker or Tailor) lends them out, they are backed by his original hard work that benefited society as a whole through his efforts and exchange.

This is much different than our current system, which allows for the invention of credit and currency out of nothing via the C. Banks and fiat fractional reserve currency backed by nothing but debt paid off in more of the same currency backed by nothing but debt. When a bank fractionally creates money, it allows its users to exchange "NOTHING" for the farmers hard work and sacrifice -- his "something". Being able to use nothing to exchange for something is a bad deal for the economy as a whole as it begins to dislocate the accumulated wealth, savings and hard work and redirect it into less effective and efficient areas of the economy. If you keep doing it over and over again, you begin to stun the natural growth progression of an economy that benefits those who create and exchange value, and you shift it to less effective / efficient activities that otherwise would not be possible. Solandra. GM. Chrysler. Housing bubbles. Dot com bubbles. etc.

Yeah, the seed-corn analogy isn't perfect. But it has a point: eating it may give you the feeling of a full belly, (distributing it to the masses may ward off short-term famine) but a policy that places an emphasis on full bellies instead of increased harvests that makes feeding bellies easier and less costly over time, in the end, undermines and impoverishes the very hand that feeds it. If you raid the seed corn too much, you virtually guarantee famine. IMO, that's where the economy is heading due to too much destruction of the organic capital / wealth formation process, disrupted as noted above.

Again, I am not defending corporatism in any shape or form. Rather, I am criticizing it. The system is skewed enable the powers that be to get most of that something for nothing. With newly minted credit and dollars, they get to buy in before the prices adjust as their "out of nothing" demand creates economic scarcity. This is far different than if their own production and creation balanced out the transaction by increasing the availability of something in demand.

I now feel like I'm going in circles, so I'll shut up.