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HELIBEN WILL SHOW NO MERCY FOR HOUSING

In a speech to the Economic Club of New York this week, he said he would not let a faltering housing market deter him from the necessary action to wring inflation out of the system.

In other words, no mercy now, and no bail-out later, regardless of warnings.

frank,

It's somewhat unlikely that you're going to win a market fundamentalism argument with me, but I enjoy the challenge. I am about as close to a market fundamentalist as exists without being a mindless ideologue.

I’m beginning to get the impression that you believe monetary power is a good thing :-) . Perhaps for the few who have that power and their close friends. You’re not related to Greenspan, are you?

Monetary power exists whether it is utilized as a lever or not. If you have an alternative to neoclassical the IS-LM model, please proffer it forward (and collect your Nobel on the way out). The question is not whether monetary power exists, but whether we use it as a lever we pull or we relegate that power to other countries to pull to their end. This is the problem with these models once you introduce aggregate demand, aggregate supply, and capital flows. There's no free lunch.

A fixed exchange system merely transfers inflation around, it doesn't prevent it at all. Worse, it give resource extractors inflation driving power and puts resource consumers in an inflation-taker position. We switched off of the gold standard not because of some conspiratorial debt crises, but because of the rise of energy commodities and the outrageous inflation that OPEC nations were hoisting upon the west.

As to the market resolving capital allocation, I suggest you look more deeply into the well studied phenomena of market local maxima. Free markets are incredible at quickly optimizing to a local efficiency. They are less good at finding greater efficiencies outside of that. They get stuck in suboptimal points and nothing aside from catastrophic market failure or government intervention will ever move them off of local maxima. This is why we have no examples of sustainable, purely free markets historically. There is a prerequisite to a functional, practical free market: a lawful society free of coercion and able to enforce market behavior and recognize painful externalities.

It’s somewhat unlikely that you’re going to win a market fundamentalism argument with me, but I enjoy the challenge. I am about as close to a market fundamentalist as exists without being a mindless ideologue.

I am a Stiglitz-loving market fundamentalist. :)

Yhought this was funny from Ben's blog...
Two all beefy patios, special cost, borrowed lettuce, cheesy people in a pickle, with bunions on a seasame seed bun. :roll:

Frank,

Please correct me if I’m wrong but the bad social situations of the Great Depression was not due to excess government interventions. The 1920s was known to be an era of laisse faire government. Ditto for the numerous economic crises of the late 19th century. In those instances, it was the lack of government oversight structure that led to credit bubbles and speculative behavior. The government didn’t come up with regulatory bodies because it liked to put handcuffs on progress, it was because a large movement of people demanded the oversight.

Can you elaborate on how the government wants to separate me from my wealth, beyond the legal obligations my elected representatives have agreed to place on me? I might not like everything these people do, but I still have nominal control over them.

While currency debasement can be corrected, is the end result superior to fiat currency? If the American government arbitrarily debased the dollar, people will start bartering and flee into substantive currencies. I think you’re assuming that the American government is a completely uncontrollable beast. I don’t think it has crossed that bridge yet, and that numerous checks exist to dissuade serious fiat currency shark jumping (via hyper-inflation).

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Greetings to one and all! My name is Anastasia Pickens, from Seattle, Washington. Your Blog was super easy to navigate, informative, and it contained most of the info I needed for my college research report. Have a fantastic day, thanks so much!

Randy I enjoy the discussion too, and for the sake of us all, I do hope that I am partially wrong about current economic practice and what I call "The Alan Greenspan Experiment" that has brought about the greatest increase in liquidity the world has ever seen. However I am not convienced that current practice is correct, and therefore continue to prepare for the worst.

Meanwhile... you say that "monetary power" always exists. If you mean that money in a free market influences prices through it's own inherent supply and demand, you are correct. I assumed what you meant by the term was power yielded by the *government* over money. While this also exists with non-fiat currencies, its magnitude would be greatly marginalized.

Ofcourse the government could always just simply dictate the price levels directly like it did after the 1929 crash; but that at least would be out in the open and considered an extreme measure (ie. they wouldn't get away with it too often or for too long).

"Nobel prize"

F.A. Hayek already collected the Nobel Prize for that... I'm too late :-(.

"A fixed exchange system merely transfers inflation around..."

If you don't acknowledge that monetary inflation is different than price inflation, then we'll just go round in circles. I contend that monetary inflation is bad and price inflation is it's consequence. Price inflation however has other causes (e.g. supply & demand of products) and in those manifestations is perfectly fine.

"There is a prerequisite to a functional, practical free market: a lawful society free of coercion and able to enforce market behavior and recognize painful externalities."

That goes without saying... when we say free market we don't mean "unlawful" market. The government's job should be to provide the lawful environment in which a free market can operate. It's job should *not* be to manipulate the market by adjusting interest rates, enacting trade tariffs or buying securities.

Stuck on local maximas? Hardly. Human action in a free market can often find surprising pathways to places thought unreachable. I suggest you read "The genetical basis of social behavior" by William Hamilton for a very influential view on human behavior in that regard.

No national economy exists that is the ideal of a free market. The term "free market economy" usually refers to an economy that approximates the ideal by virtue of having a government that engages in little or no interventionist economic regulation. That's the best we can hope for.

frank,

I haven't read Hamilton, but will be sure to take him in before our next encounter. My studies in the phenomena of local maxima comes from Hubbard and Beim (Columbia Business School). Admittedly, most of their research is of a global macro nature.

My definition of inflation comes from Mankiw, the well known neoclassical economist. The popular definition of inflation is "price increases", as he acknowledges. But the economic definition is categorically not micro economic in nature and has nothing to do with specific supply and demand, only with macroeconomic aggregate supply and aggregate demand in conjunction with the quantity theory of money.

As Mankiw puts it: "Thus, any system of commodity money eventually evolves into a system of fiat money once the economy reaches a sufficient scale. Notice that in the end, the use of money -- any type of money -- in exchange is a social convention: everyone values money, fiat, commodity backed or direct commodity, because they expect everyone else to also value it."

Notice that in the end, the use of money — any type of money — in exchange is a social convention: everyone values money, fiat, commodity backed or direct commodity, because they expect everyone else to also value it.

Very true. Purchasing power is nothing but a belief system, which is inherently fiat.

"Hell NO am I going to reward those fat bastards for screwing things up if it comes down all ugly."

I totally agree. America cannot afford to bail these guys and set up a gargantuan moral hazard for decades to come.

Rat_Patrol,

SJMN doesn't have my choice.

No, not worried and can't wait to see the Bay Area housing price drop by half at least.

athena peter p, astrid,

unfortunately bailing out these fat bastards is a must, either by the state or by the fed. We cannot afford to have the house of cards brought down, do you want to see massive bank failure? How can FDIC foot its promise of paying up to $100K per account when there is a massive bank failure? Do you want to see desperate gun owners ending up on the street? We good savers will have to chip in more or less, either through inflation brought by liquidity injection, or through lower purchasing power of USD going forward.

Although I hate the idea of paying for these bastards and minimize my exposure to asset classes that are likely to get taxed in bastard-saving effort, I am still for saving their asses from a social stability point of view.

This from todays Santa Barbara newspress

"over 70% of the loans made are neg-am adjustables"

I truly hope they drop the soap.

An ideal end to the housing bubble....

To hear the weeping of the spouses and children as the agents and brokers are executed in public, their organs harvested to supply the middle class of India with hearts, lungs and kidneys.

Another ideal end to the housing bubble...

The Geico Gekko is sitting in a cozy chair saying, "you see mate, told you it wasn't a good idea to be spendin' 1/2 of your hard earned bread on housing. Shoulda rented and spent it on car insurance with Geico. Money well spent. Chin up then. How's yer mum?"

Home buyers won't be bailed out, mortgage lenders, banks, or whatever American entities holding the subprime bags will be bailed out.

If a FB just borrowed to the hilt for a McMansion and at the end of the day cannot pay his bill, he will either need to file for bankruptcy or better still, carry on that debt obligation till inflation makes his debt burden lighter.

Our government doesn't give a damn about the individual home buyers or home debtors, it cares about businesses, especially big businesses. So anyone who borrowed more than they could afford in the last 2-3 years will end up royally screwed. Sadly enough, these little bagholders are usually the insecure trolls on the blog, not the big player on the MBS food chain or the big banks or builders.

I like athena more every time I read her.

We shall see how true those making repeated "free market" claims are to their ideals when the shit hits the fan. Sarcasm aside, this is the crux of my repeated droning that one must beware of "free-market-fundamentalists" in free-marketer clothing. They are quick to cry "hands off the market" until they end up on the wrong side.

I fear that Athena's wish will go unrealized unless we see such a severe collapse that it finally breaks the political lock the NAR lobby holds over Congress. Perhaps then we'll see an appropriate level of regulation and standards applied to this enormous, strategically critical industry.

What I wish is not really that Realtors(tm) become anathema. Rather I wish to see them disparaged for a while, then reformed. I envision a new licensing regime which drives about 98.9% of existing real-estate-sales-drones out of the business, mainly because it's just too hard to pass. I picture them studying up on their linear algebra and industry standards so that when they make forward-looking statements which will critically determine the future wealth of almost every one of their clients, they are credible enough to have earned that great responsibility.

I wish to see them and their industry do what's in their clients' best interest not only because that's what they have to do regulatorily, but because when they don't they lose business for having earned the reputation of being sleazy. There will always be "Payday Loans", which operate at the edge of the law, and desperate, uneducated people who patronize them. But I'd like to see the same stratification happen in real-estate with agents, brokers and creditors.

As it stands now, there is absolutely no difference between realtors(tm) akin to the difference between Vanguard, Bank of America, and Check-to-Cash; all the realtors(tm), brokers and mortgage types are just Gary Coleman in a leased Lexus.

Owneroccupier,

I know we have to bail out the banks and lenders to some degree (in exchange for more supervision and tighter lending practices) to avoid system failure. But do we really need to bail out irresponsible realtors and home-debtors? I don't want them to think that Uncle Sam is gonna bail them out every time they make a bad decision.

There has to be a punititive way to go about this so that they're taught a lesson, the kind of lesson the Great Depression taught people about abusing credit and living above their means. I want to see suicides, I want to see people publicly disgraced, I want to see the ringleaders locked up behind bars, I want to see the MLS monopoly broken up. I want there to be severe consequences so that no one even dreams about government bailout as a plausible exit strategy for many years to come.

I know that sounds harsh, but I really think a quick and severe economic lesson is the only way America will learn and then get on with retooling the system.

SQT, LOL!

I've seen a lot of that kind of stuff lately. On a brighter note, I just saw the first hedge-fund advertising for an analyst to do a fund play on the coming downturn (in commercial, not residential, though).

As for the big players. I want them in government receivership. I want their executives locked up and humiliated, I want their shareholders to get nothing. I know I will pay to keep the overall financial system afloat, but I want the individuals responsible to be hurt badly and made an example to the rest of the population.

SQT,

I approved my own moderated comment. Hope you don't mind.

hate to rent,

I'm not sure I'd go so far as to wish a depression. A depression will probably wipe out whatever is left of America's middle class, many of whom are now teetering on the edge. Also, America's past record for climbing out of depressions isn't too good. I guess I just most a maximum of sound and fiery to scare Americans into economic and political sanity, while not overly damaging the functional part of the underlying structure.

FDR's New Deal era programs may have laid the foundation for post war prosperity, but it was WWII that really took America out of the Great Depression. I know the stats show that America was showing signs of recovery by 1939 or 1940, but by that time, the Axis powers were already positioning themselves for war.

Well, I'm hoping for a scenario where the perception of awfulness is sufficient to bring changes to people's behaviors and to improve the overall system. I don't know if that's likely, but that's my hope. I'm resting my hopes in the power of shame, on a massive scale, to force people to behave better.

I wish we had a resident behavioral scientist.

Well, we can all blame my boyfriend if the world goes to hell in a hand basket.

I told him to get cracking on cold fusion four years ago. But no, he'd rather spend his spare time on rotisserie baseball. :)

wow, i'm agreeing and disagreeing with folks all over the place

Frank,
Please correct me if I’m wrong but the bad social situations of the Great Depression was not due to excess government interventions. The 1920s was known to be an era of laisse faire government.

yes, it was due pretty much to wild'n'crazy speculation and capitalist boom/bust cycles. pretty similar to dot com bust and housing now.

but i agree with frank about critiquing the 'local maxima' theory, and the wild'n'crazy places irrational markets will go. i wouldn't necessarily trust the 'theorising' of any business school in particular, a la postmodernism: 'incredulity toward metanarratives' etc.

in fact, a friend (colleague?) of mine here, frank stilwell, set up the 'political economy' school at sydney university rather than a school of economics, selecting the name to differentiate from neoclassical 'dry' economics schools...

just a question of perspective - but randy's contributions and analysis background are second to none on this site...

astrid:
I wish we had a resident behavioral scientist.

ahem.

does my degree in psychology, sociology and anthropology help? but don't expect quantitative number crunching on every topic...

Wow, lot's of good discussion to catch up on from the weekend!

Here's a question: for those of you who believe in a bubble-burst scenario any more severe than a "soft landing," do any of you think this scenario will be enough to wake the American masses out of the credit card debt-carrying, Walmart-shopping, GWBush-tolerating stupor that most of this country is living? If not, what will? We surely need it either way.

Jeffolie,

Thanks for the info on OC tax payments. This is the kind of hard data we need.

On the topic, I have no idea when or where we will de-orbit. I surely don't pretend to know what's the best for us. I'll leave that to the geniuses who aspire to control a command economy somewhere. Totalitarian economies are great as long as the five year plan is heading in the right direction. But even the smartest dictators are often wrong. None of us is as smart as all of us.

I understand that a pure free market is just as mythical as pure communism. They are only theoretical constructs, like points or lines in geometry, they occupy no space. Just imaginary ideas.

In reality, a free market exists only when and as far as the sovereign says. On the imaginary island where people trade their goods freely, someone has to decide the inevitable and constant disputes.

Someone has to step in and decide, for example, whether the monopolist has gamed the market, broken the rules, or even just stolen the goods. Monopolies are not always inherently evil, but jealous purchasers often think so. If mad enough, they'll take action. Then, the sovereign steps in to resolve the dispute, by force of arms if needed.

In America the sovereign is a constitional republic, governed not only by written rules but also by customs of constitutional interpretation like England. We are obviously not a pure free market because there's no such thing. But we do value the concept of the free market. In reality, it is a useful tool because it allows the masses to help steer the economy. None of us is as smart as all of us.

America succeeds in practice because we cherish the role of the individual. Yankee individualism. The democratic ideal.

Goober,
The middle class already are. It scares me actually. My folks, who live in Knoxville tell me stories every time I call. Knoxville for the entire time I lived in the state was a sleepy, sort of 1930's time capsule where nobody went downtown, or really cared about the city. In the year since I have been, several companies have been building large luxory condos, revitalizing the downtown area, and building more buildings. The occupancy rate is now higher than it was in 1937. With it are coming higher prices. It is getting more common to see homes and places around knoxville go for 300+k, which might sound like peanuts to Californians, but pricey for the locals. I know I'm blatently going against my own anti- NIMBYism, but I don't want any more of these people- the kind of people who jack prices- moving to the south. If they dirtied their own water, then they can just sit in it and not dirty ours.

To me the whole housing boom has seemingly redefined the terms middle class, upper class, and lower class several times over. Middle class to me means you comfortable own a home, 2 cars, a decent yard, and have access to decent public institutions like good public schools, parks, and so forth. I think people in the Bay Area misinterpret upper class for what the former definition of middle class meant. Lawyers, Doctors, and engineers now live in medium sized homes which were former homes of the working poor and lower middle class. Perfect example is when I ride my bicycle to the store and pass by a number of the more recent homes that sold in the past few years. You'll see a 2 bedroom, single story, plain-jane home with a new bimmer parked out front. How ironic. As a person impossibly priced out of the market making an above middle class wage, I can't help but feel that the people who own a home- any home at all, must be loaded.
The ideal ending to this fiasco would be a return to normalcy, where ordinary people- interesting people like plumbers, shoe salesmen, artists, writers, weird people, and so forth can just as easily afford to live next door to all the lawyers and upper execs. This area is turning into a place that has the feeling of stiff starched shirt collars- All lilly white and squeaky clean with the people that made the area what it is leaving the picture with throngs of rich people who play make-believe in the little towns they are taking over.

Ps,
sorry about the lawyer statement. What I meant to say was that as a given, lawyers make bank compared to people like me, hence if the prices are too high for anyone not making lawyer level salaries, then california would turn into a place where only lawyers and execs live. I wouldn't want to live in an area that only had plumbers either. Same thing. Guess I meant to clarify the topic a bit more above by making the statement that as of now, Lawyers can now only afford former factory worker and school teacher dwellings, hence it would be nice if that equation was reversed and the folks those homes were built for could afford them once again. sorry bout' that!

nomadtoons,
Your observation is true, from what I know. Here's an example. Our friends live in a traditionally very middle-class town in the BA. Wife is a lawyer, husband is in tech, so together make around probably 1.5 HaHa's. They bought a stucco box for 5HaHa's in 2003. Their neighbors: next door is a guy who works for a utility (field worker), a contractor with like 6 different ATV's he keeps parked up and down the street, and a bunch of really old people who clearly bought their homes when the development was built in the 50's. Of course, most of the neighbors are really nice and all, but my friends are the most recent purchasers on the street, and they honestly have very little in common with their neighbors socioeconomically. Their "mistake" was buying at a price they could manage with a full 20% down payment and an old-school fixed mortgage.
Imagine that!

Skibum,

I would add that this housing bubble squeezes young middle class people from both ends. You got both the rich yuppies and the migrant workers packed 20 to a house. Those are the only types who can buy the house at current BA prices.

Where are we heading? Where should we go?

I don't know. But I do know that you don't either. Here's a great example of a crucial global issue where the best and the brightest could be heading 180 degrees in the wrong direction:

http://www.telegraph.co.uk/opinion/main.jhtml?xml=/opinion/2006/04/09/do0907.xml&sSheet=/news/2006/04/09/ixworld

DS,

I'll remember your expertise and call on it in the future.

Soooo... what's your social theory poison? :)

Garth Farkley,

I know that's from the Telegraph, but it's an op-ed piece of one man's opinion. If we're doing duels of op-eds, I can probably find ten times as many articles that say just the opposite. (and I have access to lexis-nexis, so it's hella easier to do) Point me towards something a bit more peer reviewed if you want me to follow your train of thought.

Actually, I'm gonna skip all that and say Day After Tomorrow said giant cyclones of incredibly cold temperatures are coming in from the upper atmosphere, leading to a new ice age. That's totally gonna happen! I saw pictures! of! Randy Quaid! and Jake Gyllenhaal! and Ian Holmes! and a bunch of frozen people!

I think you guys might enjoy this ad report card on the Century 21 nagging wife ad.

http://www.slate.com/id/2139572/

Astrid,

I'm not taking up the cudgel against Kyoto. I know that I don't understand our climate. Though not completely ignorant, I'm hardly well read. I just can't help but suspect that many loud activists know even less than I do. I certainly won't look to Hollywood for guidance.

Yes, Lexis-Nexis is cool. However:

You must not decide an issue by the simple process of counting the number of witnesses who have testified on the opposing sides. The final test is not in the relative number of witnesses, but in the convincing force of the evidence.

CALJIC 2.22 WEIGHING CONFLICTING TESTIMONY

I've put a copy of the outrageously offensive Century 21 ad on my blog, you can view or download it here.

This thing makes my skin crawl. It is just so wrong on so many levels. At long last, has this industry absolutely no sense of decency?