patrick.net

Oh, I think the 30 is great. Just got one at 3.75%. I fully expect to, within the next five years, to be able to buy fixed income that well exceeds that deductible cost to me. Those rates will rise simply because bond vigilantes will no longer cooperate with our profligate spenders in the U.S. Govt. and debt dependent populace. In the meantime, I'll continue doing what I've been doing for a decade: buy precious metals, especially on dips like recently, with the cash flow I have beyond the (lower) monthly payment of my 30-year (vs a 15 or 10).

Otherwise, I agree we're too reliant on debt in this country. But that's a cultural phenom that comes from the top down as much as the bottom up. Every dollar in circulation in our fiat $$ system exists only because the bankers (from retail up to the Fed) loan it into existence -- from nothing, backed by nothing. In other words, we are all expected to be debt slaves to these institutions in order to be allowed to have currency they functionally print out of thin air.

Meanwhile, the Fed run Cartel has rates pegged at ZERO, which means savers can't accumulate capital fast enough to purchase what they'd like since they're currently subsidizing banks (in order to recapitalize them from their previously lousy loans, etc.) and the very policy that encourages more debt.

But to the point, the biggest difference between family wealth and no family wealth is the use of debt vs. savings. Those who suspend immediate gratification are those who are most successful. Those who buy on the come end up slaves to circumstances. We, as a nation, need to incentivize capital formation and investment, not consumption and non-productive debt generated from monetary expansion (e.g. redistribution of the national economic seed-corn)... yet we more closely follow the ways of Krugman-Keynes than we do Mises-Paul.

Leopold B Scotch says

yet we more closely follow the ways of Krugman-Keynes than we do Mises-Paul.

Krugman sure doesn't think so. Nor do any non-Paulistas.

I think you guys have been out in the collective renters "elements" too long. The problem isn't the length of mortgages, or mortgages at all for that matter. The problem was the value of the homes, the terms of the mortgage and the ability of the debtor to pay off the mortgage. That was only a 00's phenomena, the system has worked fine for decades up to this point.

The bigger problem is insurance companies making people insure their house for 2 to 3 times the value of the house. And insurance monopolies like Florida's Citizen single payer insurance company with is great insight to what a single payer healthcare system in this country would look like.

Florida told insurance companies they couldn't raise the rates back in 08, 10% back when the average policy was $800 a year. All of the insurance companies bailed and Florida created Citizens a subsidized ins company. A state created monopoly, which left unchecked has festered into over $3,0000 a year average policy for most homes valued $97,000 or less. That's with a 250K replacement value.

That 3,000 a year is $250 a month on top of the mortgage, that only impedes the ability to repay the loan, and only serves to make Rick Scotts buddies richer.

Leopold B Scotch says

We, as a nation, need to incentivize capital formation and investment, not consumption

I'm not sure you understand how economics works. You need consumption or else there is no need for capital.

Our problem right now is that we have too little consumption, not too much. And too much capital sitting idle, not too little.

You've got it exactly backwards.

CaptainShuddup says

A state created monopoly, which left unchecked has festered into over $3,0000 a year average policy for most homes valued $97,000 or less.

That is a great point. The additional costs of owning real estate are generally controlled or regulated by the government (insurance, property taxes, building permits, etc.) Obviously the government is greatly involved in mortgages also, but at least it is still basically a private party transaction between you and the institution.

I don't know much about the Florida situation, but I'm sure the government heralded it as a way to get the greedy insurance companies out of the state and keep expenses "reasonable." For all those who cry out to limit mortgage options, wait until the government starts to get more heavily involved and looks to run those greedy banks out of the mortgage business (like they did with student loans).

tatupu70 says

Leopold B Scotch says

We, as a nation, need to incentivize capital formation and investment, not consumption

I'm not sure you understand how economics works. You need consumption or else there is no need for capital.

Our problem right now is that we have too little consumption, not too much. And too much capital sitting idle, not too little.

You've got it exactly backwards.

No. I understand how economics works differently than those like you who echo the prevailing neo-keynesian/monetarist theories. You grossly misunderstand what wealth is, or what causes its formation.

Let's make this as simple as possible: consumption without savings and capital formation = hand to mouth economy.

For Keynesian to work (Or any of its consumptionist offshoots)you have to have an originary pool of wealth to redistribute to feed consumption. Without it, you have no theory. In other words, the model you're promoting has the cart before the horse. The only reason it appears to work is because there is a history of accumulated capital that serves to feed the consumptionist approach.

However, what's taken place over many decades is the economic equivalent of having regularly raided the stores of seed-corn, giving it to others to "spur the economy along" with more consumption. On the short run, nobody notices the problem because everyone feels a full belly by eating the seed corn, while some actually plant some of their seed-corn and start growing.

However, these new growers, too, soon have some of their stores of seed corn taken from them and redistributed to the masses. Each round of "redirection to encourage consumption" actually negatively affects the economic yield of the economy as a whole as capital continually gets redirected away from stewards who can build / grow it to the overall benefit of society (granted, a gradual, long-term process) and into the hands of those who primarily eat it at the behest of the short-term economic mentality that is politically popular with the masses because it bestows a standard of living upon its beneficiaries ahead of the schedule of the natural progression.

Eventually, and inevitably, however, the efficacy of this degrades as each round produces less actual growth-oriented behavior, and more purely frivolous consumptive behavior -- until the stores of seed corn (the history of capital formation) hits a critical point that the economy At-Large begins to feel the ensuing famine.

Then, we get to experience Hemingway's observation about how one goes bankrupt: Very gradually, and then suddenly.

We've crossed the line. Right now we need to remove the barriers to capital formation, to allow those capable of increasing the economic yield through actual wealth creation / real improvements in economic standards of living to actually do so.

Prevailing policy promotes free lunch economics -- that one needs only to consume more to be wealthy, to rack up more and more debt (unproductive dead-weight debt is fine) in order to become rich. And yet we wonder why the economy does not recover? While proponents of such lunacy say "we just have not been consuming enough" or " if only people had more and more debt".

Rabbit-hole crazy talk, yet embraced by all to many people - most indoctrinated from the start with basic economics in High School, Samuelson texts in College, etc. It's killing the economy.

'

[I should be clear -- I am not defending corporatism or bankster cartelism. These forms of corporate parasitism are feeding off the seed-corn and need to be cut off. No bailouts at the expense of everyone else.]

Leopold B Scotch says

Rabbit-hole crazy talk

You wrote a long post that was completely BS. You didn't address any of my points.

Do you disagree that interest rates are at all time lows? That there is all kinds of available capital looking for investments?

How does that jibe with your distorted view of the world?

tatupu70 says

MoneySheep says

Agree. This is a correct time frame. On average people move every 7 years or so.
So what? Why do you think someone should have to have it completely paid off before they move?

Why? About half of people I met in SD said they are investors, pre-bubble and now, now because they are stuck with the houses. Their idea is to flip or do a HELOC koolaid.

The truth is you build wealth by hanging on to houses for decades, not flipping them. So why 7 years? This is an emprical average and not an academic average. In real life people do tend to be thinking of moving at around 7 years. If your house is paid off, you will have a smart thought, "Why move, I have my house free an clear." If you are smart and stay, you begin to accelerate your wealth building without knowing it.

MoneySheep says

The truth is you build wealth by hanging on to houses for decades, not flipping them

Sure--I agree with that.

If, at all possible, you should buy a place and stay there. But that has nothing to do with the pros and cons of a 30 year mortgage.

tatupu70 says

Leopold B Scotch says

Rabbit-hole crazy talk

You wrote a long post that was completely BS.

So sayeth tatupu70. Yeah verily. Yeah Verily.

You didn't address any of my points.

Hah. Right after you simply dismiss my entire post as "completely BS" without addressing any of the sub points... -- Only re-asking a new question and one of the old?

I addressed each of your points, some more directly than others. You just don't fully comprehend what I'm getting at through your neo-Keynesian, Red-Tinted Glasses.

Do you disagree that interest rates are at all time lows?

That's your first mention of interest rates. But, of course -- That they are record low is obvious. They are there because policy makers have manipulated markets in such a way, financed by raiding the seed corn I was talking about before, and bestowing it upon / using it to intervene in the lending market.

So what? And do have you any explanation as to why nobody bothers to borrow at these rates?

That there is all kinds of available capital looking for investments?

Again, why don't they bother to invest it? Your explanation is probably going to be "because they won't until people start spending more to assure them it's worth investing." And around and around you go: if only we uproot those stores of savings and send it into the hands of those who will consume it, we'll all be better off.

How does that jibe with your distorted view of the world?

There are many reasons cash is sitting idle right now. They include (but are not limited to):

1. The last time folks had tons of cash (thanks also to artificially low interest rates, thanks to Greenspan's intervention, the entire economy restructured around those rates and how they flowed through the credit system and into housing and real estate. This was exacerbated by A) legislation requiring lenders to lend to one and all regardless of actual qualification B) such readily available money corrupting both the credit and housing markets with get-rich-quick, F-All bubble mentality.

2) Smart business people see monetary intervention and policy stimulus as one off, temporary events, and are therefore reticent to make the same mistake pending a more organic, self-sustaining (non bailout dependent) recovery to emerge.

3) The unit of account (our currency) is highly corrupted and unreliable as is reflected in the ever-increasing volatility as market participants struggle to make heads or tails of proper market pricing. But the pricing mechanism of the market is n breakdown mode, and those with capital hold tight.

That aside, you're posting current consequences of existing policy and asking me to explain them through my view. I just responded partially in-kind above.

What's your explanation for these circumstances?

Rather than distorted, my view is one that actually provides an explanation for what's going down, rather than some cart-before-the-horse theory-cum-policy resting on the foundation of "saving is horrible" and "if we only spend enough we'll all become wealthy"

Explanation?

tatupu70 says

So what? Why do you think someone should have to have it completely paid off before they move?

Not necessarilly paid off. If you are just making the minimum monthly payment on a 30 year mortgage, typically year 7 is when you have paid enough interest and principal down to recoup your downpayment and initial transaction costs. Plus or minus a couple years depending where you are.

Of course, this assumes the market hasn't declined in those 7 years. . . .

wthrfrk80 says

tatupu70 says

Wrong. They allow the middle class to avoid being at the mercy of the 1% for their whole life.

Or help enslave them to the 1% for their whole life.

This mortage = slavery rhetoric is wearing a bit thin... Historically, the last decade has been the only decade for generations that housing hasn't proven to be far better for your financial position in life than renting.

Claiming taking a mortgage on a home within 2-4x your income is tantamount to slavery is nonsense. Even taking a loan out 20x your income is far from slavery...

You can still get out from underneath that situation VERY easily...

It's called WALK AWAY.. and if need be due to multiple refinancings... declare bankruptcy. Then INSTANTLY they are in the same situation as every renter on this board again.. 0 debt.. maybe tarnished credit for a few years... and a little less net worth. But they can take advantage of all those "amazing" rental deals like anyone else.

So stop calling mortgage debt .. slavery. It makes housing bears sound delusional.

Philistine says

Of course, this assumes the market hasn't declined in those 7 years. . . .

That'd be very bullish assumption,hence renting makes sense until a home starts appreciating.

Inflated and Falling Houses says

Not true at all.

The longer you hold onto a depreciating asset, the greater your losses.

You might as well just kill yourself.. cause you are a depreciating asset... Cut your losses now why don't you.

Inflated and Falling Houses says

MoneySheep says

The truth is you build wealth by hanging on to houses for decades

Not true at all.

The longer you hold onto a depreciating asset, the greater your losses.

Well, that's the way it would be, but for the massive intervention in monetary policy that constantly injects more and more money and credit into the system, both of which are out of thin air / unbacked (e.g. expanding monetary policy).

It should therefore come as no surprise that any asset tied to credit availability should find the asset's price inflating for no other reason than the authorities are simultaneously inflating the money supply which is injected into the economy via the credit system. (Look at the prices for higher education, for example, where so many receive easy access to credit?)

In a sound money system (one that is not constantly devalued / debased), houses would indeed be depreciating assets requiring annual input to keep functioning. Instead, houses are magically bestowed with market value in a way that is, in its most basic sense, no different than the mechanism that magically bestows wealth upon citizens of a city where the prices of what they own constantly rise simply because one of their residents is a very effective, efficient counterfeiter.

Leopold B Scotch says

I addressed each of your points, some more directly than others. You just don't fully comprehend what I'm getting at through your neo-Keynesian, Red-Tinted Glasses.

OK--let me try again. Before I write a long post, let's get your position clear.

You claim that the problem is too much consumption and not enough investment right?

OK--I changed my mind. I will address your points.

Leopold B Scotch says

There are many reasons cash is sitting idle right now. They include (but are not limited to):

Leopold B Scotch says

1. The last time folks had tons of cash (thanks also to artificially low interest rates, thanks to Greenspan's intervention, the entire economy restructured around those rates and how they flowed through the credit system and into housing and real estate. This was exacerbated by A) legislation requiring lenders to lend to one and all regardless of actual qualification B) such readily available money corrupting both the credit and housing markets with get-rich-quick, F-All bubble mentality.

That's a long paragraph that didn't answer your own question.

Leopold B Scotch says

2) Smart business people see monetary intervention and policy stimulus as one off, temporary events, and are therefore reticent to make the same mistake pending a more organic, self-sustaining (non bailout dependent) recovery to emerge.

So, what your saying is that "smart" business people don't trust the recovery. Probably because they know that income inequality is near all time highs. And they are afraid that consumption will go away. (they agree with my thinking)

Leopold B Scotch says

3) The unit of account (our currency) is highly corrupted and unreliable as is reflected in the ever-increasing volatility as market participants struggle to make heads or tails of proper market pricing. But the pricing mechanism of the market is n breakdown mode, and those with capital hold tight.

Currency has been volatile for a long time. That doesn't stop people from investing. It might change where they invest, but it certainly wouldn't cause they to just hold dollars. That would be the worst possible investment in an inflationary environment. So, that is just plain wrong.

You had the right answer, but your dogma rejects it for some reason.

Leopold B Scotch says

if only we uproot those stores of savings and send it into the hands of those who will consume it, we'll all be better off.

Ding, ding, ding. We have a winner.

tatupu70 says

Leopold B Scotch says

if only we uproot those stores of savings and send it into the hands of those who will consume it, we'll all be better off.

Ding, ding, ding. We have a winner.

Yikes.. the same old Keynesian baloney that's been grinding the world's economies into the ditch for decades? Slowly but surely? That theory embraced only by beneficiaries of big government?

Tatupu's prescription for a healthful recovery is yet a heavier dose of the very pathogen that's caused the problems in the first place.

That's the point about economic seed-corn in my first comment to you that you've now ignored (or don't understand) multiple times.

Such redistributive policies help its beneficiaries feel good until the day the real savings (the economic seed corn) of the economy are too shallow to support the burden, and the system collapses in economic famine.

Of course, if you're like Tatupu70, and can't tell the difference between paper currency (of which there is plenty sloshing around) and actual wealth-creation, well... you'll just be tone deaf to reality. So long as more units of currency slosh around and redirect wealth, that's good. So, I suppose you support a Krugmanesque recipe of having the Fed print yet more money out of thin air and dumping it into the economy, so to allow for wealth to be leeched from savers and into the hands of spenders?

Never mind that such policy merely erodes the collective standard of living by destroying the very engines that create wealth?

It's like trying to get a steam ship to motor faster across the ocean by ripping planks of wood for the furnace from the bottom hull.

Keynesian has never been anything more than a form of economic cannibalism. It's like eating a part of your own leg so you have the energy to run faster.

tatupu70 says

Leopold B Scotch says

I addressed each of your points, some more directly than others. You just don't fully comprehend what I'm getting at through your neo-Keynesian, Red-Tinted Glasses.

OK--let me try again. Before I write a long post, let's get your position clear.

You claim that the problem is too much consumption and not enough investment right?

I wish I'd seen this first. I appreciate that you are asking for clarification.

Not really. I don't look at this purely through the lens of Keynesian consumption or investment.

The problem is that policies so far, and those espoused by the likes of Krugman, are counterproductive to capital formation and the associated improvements in the standard of living of those in said economy.

A consumption-first policy is a cart-before-the-horse approach to growing wealth.

Inflated and Falling Houses says

MoneySheep says

The truth is you build wealth by hanging on to houses for decades

Not true at all.

The longer you hold onto a depreciating asset, the greater your losses.

That's only true if the asset isn't providing a service or earning income. If you hold onto and drive a depreciating car for 30 yrs, you will be better off financially then buying a new one (to drive) every yr. If you buy a house and live in it for 30 yrs, you will typically be better off than if you (1) rented for 30 yrs or (2) bought and sold a house every other year for 30 yrs.

Leopold B Scotch says

Not really. I don't look at this purely through the lens of Keynesian consumption or investment.

Good. Neither do I.

Leopold B Scotch says

The problem is that policies so far, and those espoused by the likes of Krugman, are counterproductive to capital formation and the associated improvements in the standard of living of those in said economy.

Could you be more specific? To which policies do you refer?

Leopold B Scotch says

A consumption-first policy is a cart-before-the-horse approach to growing wealth.

I'm not sure what you mean here. There is no universal prescription for healing an economy--it depends on what the disease is. Keynesians understand this. When lack of consumption is the problem, then policies to encourage consumption should be undertaken. When lack of investment is the problem, then policies that encourage investment should be undertaken.

To be clear--I think lack of consumption is the problem now. Low interest rates, high unemployment, very low growth, etc. are why I think this.

If we had high inflation, high growth, low unemployment, then I would argue we need less consumption and more investment. Which is why you see higher interest rates during those periods--to encourage investment.

Leopold B Scotch says

Tatupu's prescription for a healthful recovery is yet a heavier dose of the very pathogen that's caused the problems in the first place.

Wrong--I don't want larger income and wealth disparity. That is what has caused the problems. Out of curiosity, what is the pathogen in your mind? How has it caused the problems?

Leopold B Scotch says

It's like trying to get a steam ship to motor faster across the ocean by ripping planks of wood for the furnace from the bottom hull.

How about you forget the analogies. They serve no purpose and are very poor.

I thought that before the FHA in the 1930's that the typical mortgage terms were a 50% down payment and paid off in 5 years.

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.

tatupu70 says

Leopold B Scotch says

Tatupu's prescription for a healthful recovery is yet a heavier dose of the very pathogen that's caused the problems in the first place.

Wrong--I don't want larger income and wealth disparity. That is what has caused the problems.

Well, there is a difference of view re cause and effect. Income and wealth disparity is a matter of current fact. This disparity is also exacerbated by some factors / actions, improved by others. I would argue that it will always be an economic reality, and in and of itself is not a measure of overall economic health. (e.g., would folks mind if the least wealthy had the current living standards of a present-day the millionaire that some have $ billions? Surely, some would.) But wealth disparity unto itself, IMO, is not primary problem or cause. That it may be a negative currently is more a symptom of the primary problem.

Out of curiosity, what is the pathogen in your mind?

Nearly 100 years of constantly increasing amounts of centrally planned, activist economic interventionism.

How has it caused the problems?

There are so many subsets, where does one begin?

Primarily I would say that through a myriad of policies, we've derailed the process of wealth / capital formation / creation, because our broader policy initiatives engage in primarily the rearrangement and consumption of existing economic wealth rather than towards the creation of additional wealth. In doing so, it both negatively stuns the upward trajectory in the broader improvements of standards of living, while simultaneously exhausting the existing supply of capital upon which the economy relies to for future improvement.

It derails the time preferences of economic actors, shifting wealth from those who are generating an improvement in overall standards of living to those who are increasingly more purely consumptive in their handling of wealth. It shifts wealth from longer term projects to immediate gratification type projects. It punishes long time horizons to the benefit of short time preferences. While it serves the short-term / populist goal of fast-forwarding a narrowing of the gap in income disparity, it ultimately reduces the overall, on-average standard-of-living growth trajectory for the economy as a whole.

Worse yet, tallowing for such policies enables looting of the wealth for the benefit of special interests, corporatism / parasitic capitalism by providing a strong, centralized government that can be hijacked by special the powers that be for their own benefits. Happens either directly through government contracts / graft, or less directly (and more destructively) through (normally) steady (and sometimes rapid) devaluation / expansion of the currency, directly through monetization, or less directly, through the ever-expanding credit markets. Either way, rather than spreading the wealth, as we see currently, Wall Street gets mega bonuses, mega corporations earn mega profits for their bigwigs, and Washington D.C. and all the feeders at the trough feel massive economic growth and success while the rest of the nation suffers in a full fledged depression while they prosper, netting out a GDP that is tepid growth on average.

Leopold B Scotch says

It's like trying to get a steam ship to motor faster across the ocean by ripping planks of wood for the furnace from the bottom hull.

How about you forget the analogies. They serve no purpose and are very poor.

But this is the subject of chapters in books, difficult to articulate through a concise forum post that open all sorts of doors. I'll grant you the two analogies (the ship and leg ones) were a bit much in my last post, but I stick with the economic seed-corn analogy because so many seem to be capable of seeing economic relationship to squandering the stores of seed-corn with capital formation and the benefits thereof. I've added the ship and leg ones to try to communicate in the most simple terms with you since, so far, with the seed-corn analogy, you've been the lone exception to not "get it".

Perhaps your own dogmatic blinders prevent you from getting it? (Which, BTW, claiming someone else's points are "dogma" as you tried above in order to invalidate them is a weak, straw-man argument. You have an ax to grind with your view / your own dogma, and I have my own view, dogma, whatever. Whoop-dee-doo. To turn your own words back at you, such red-herrings "serve no purpose and are very poor" approaches to discourse.)

Leopold B Scotch says

Perhaps your own dogmatic blinders prevent you from getting it? (Which, BTW, claiming someone else's points are "dogma" as you tried above in order to invalidate them is a weak, straw-man argument. You have an ax to grind with your view / your own dogma, and I have my own view, dogma, whatever. Whoop-dee-doo. To turn your own words back at you, such red-herrings "serve no purpose and are very poor" approaches to discourse.)

I agree. I did it mainly to show that while you claim dogma blinds me, if anyone is guilty it is you.

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.

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.

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?

Do you have any examples? Supporting evidence?

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

tatupu70 says

Could you be more specific? To which policies do you refer?

Too many to list. Interventionism, activist or otherwise, in the economy from the state or its agents at the central bank. Examples -- At a higher level: Greenspan's work to short-circuit and redirect the recession and correction of 2000-2002. 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.

Leopold B Scotch says

A consumption-first policy is a cart-before-the-horse approach to growing wealth.

I'm not sure what you mean here. There is no universal prescription for healing an economy--it depends on what the disease is. Keynesians understand this. When lack of consumption is the problem, then policies to encourage consumption should be undertaken. When lack of investment is the problem, then policies that encourage investment should be undertaken.

To be clear--I think lack of consumption is the problem now. Low interest rates, high unemployment, very low growth, etc. are why I think this.

In all seriousness: Why ? How can you know?

If we had high inflation, high growth, low unemployment, then I would argue we need less consumption and more investment. Which is why you see higher interest rates during those periods--to encourage investment.

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 think trying to centrally plan this all is folly. Markets have billions of participants exchanging information, working to most efficiently distribute resources in a constantly recalibrating value exchange. Interventions short-circuits this process, degrading it. On top of the seed corn problem that all of this enables, as well as the fact that our system is invariably coopted to redirect wealth from the average guy to the most politically powerful. Such is the bedfellow, even if unwelcome, of even the most well-intended socialist aspirations because the tool of socialism is always government force.

I am interested in the why's and how's above.

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.