Archive for the ‘Housing Crisis’ Category

There are those who claim we have to choose between paying down our deficits on the one hand, and investing in job creation and economic growth on the other. This is a false choice.

So says Obama, this week, with the suggestion of throwing around remaining TARP funds on such ill conceived projects as “cash for caulkers” and other give-aways. In a way he’s right, but not the way he thinks. Obama is still committed to the Keynesian idea that the government must make up for slack demand and that we must “spend our way out of the recession.” Missing is any appreciation for the need of deleveraging the massive debt that has accumulated first in housing and now to the federal reserve as a result of the TARP transfer of mortgage-backed-securities to the Fed’s balance sheet.

One of the market’s biggest concerns is the absence of available credit, the weak dollar, and the growing fiscal sickness of the American government. All would be improved if Obama were to use this unspent money immediately to reduce the deficit or to shore up the FDIC or to engage in some other prudent, unsexy, and long-term matter. But he’s constitutionally incapable of doing so because, in spite of his alleged reluctance to have the government overly involved in the economy, he has not yet resisted a temptation to tinker, whether in autos, housing, or healthcare. He clearly loves doing this, views it as a way to reward the right kinds of people and his friends, and the fact that a coterie of economists say it’s the best policy is welcome cover. Of course, the numbers don’t help his case or that of these economists. The huge stimulus of earlier this year came and went, and unemployment is still 10% or more. The Japanese tried various boondoggle projects in the 90s without effect. None of these approaches is working, because government cannot create wealth or jobs; every dollar it spends is siphoned off the private sector through either taxes or deficit spending. But Obama is only interested in the economy as a secondary matter; chiefly, he’s interested in power and rearranging the order of society, and the government’s new role as “employer in chief” will give it unprecedented power to do so.

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I thought this piece over at Seeking Alpha succinctly described why the latest equities bubble may just be another false alarm, like the equities run up and run down from January to May of this year:

Although there were a number of published models out there well before the economic crisis of 2008 showing why it was inevitable, I have not seen a single model showing how this vaunted economic recovery is supposed to take place considering the present state of consumer and government debt. The crisis was caused by a credit (not real estate) bubble, which has not in any way been realistically addressed. The stimulus package and tax breaks have merely extended consumer credit further by shifting more of the new debt to the U.S. government. There seems to be no realistic plan in place for even stabilizing the accrual of this debt let alone paying it down.

To begin to pay down consumer and government debt the U.S. would have to enter another cycle of sustained economic expansion (including a huge increase in exports to overcome the trade deficit) so consumers and corporations could shoulder substantial tax increases.

Such an expansion of the U.S. economy is no longer possible given world market competition. America cannot be competitive on the world market because there are not enough Americans employed making things. Most Chinese workers, for instance, are directly engaged in production whereas only a small percentage of U.S. workers are. The vast majority of U.S. workers are employed in “services,” which mostly involves moving stuff or money around; some even, like most of the so-called financial advisers, are still simply professionally engaged in the Willy Loman vocation of hustling themselves. Arthur Miller’s character in “Death of a Salesman,” may well metaphorically represent the state of the country today.

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Great piece on how the entire bailout is one collossal waste of money and example of “throwing good money after bad.”  For example, the pledged total bailout funds pf $8T exceed the entire market cap of the S&P 500.  Wow.

Useful collection of bearish charts.  While a certain optimism has its place, the naive hope that we can unwind the lunacy of the last ten years and the inherent instability of our post-1970s experiment with fiat currency is not exactly conservative.  It’s stupid.  And I’m sick of stupid people talking half-intelligently about a bottom in 2009 or 2010.   No one knows where it is, but it’s probably a ways off.

Incidentally, of all the stupid things that have come down the pike in recent years, one of the dumbest is the idea that conservatism is all about optimism.  It’s not. It’s a certain attitude about change that includes a love of traditional American institutions and folkways rooted in a respect for our heritage, our ancestors, our past, including that past’s recognition of the necessary limits of government and human nature.  Our Founders’ achievements acquire even more respect in light of the human material with which they were working and the sorry history of most other times and peoples.  By contrast, the left’s pessemism, which was in full effect in  the 1970s after Vietnam, was rooted in contempt for Western Civilization, a cult of the exotic, and hatred of our known way of life.  That affectation does not mean we must, in order to oppose them, embrace a naive, exceptionalist optimism which is much more the province of America’s Englightenment-rooted liberals and their gospel of “progress.” 

Finally, Gary Becker and Dick Posner both dissect Obama’s housing help for losers.  Just to be clear:  I don’t like the bank bailouts, but I don’t like them for the same reason I don’t like most expensive welfare state projects and see no reason to have two huge welfare programs in the name of symmetry:  they’re both inefficient, they reward bad behavior, they don’t come with the strings and incentives of private charity, they distort markets, and they siphon money from the most productive people and companies and give it to unproductive people.  Like most welfare, the collectively harmful but personally beneficial skill of wrangling funds from the public coffers is the only thing being rewarded. 

I’ve been opposed to all of this nonsense:  the stimulus, the TARP, and now the housing help for improvident homeowners.  After all, we’re not talking about sending people to Siberia but foreclosure; they can still rent, and they can buy again some day. They and new homeowners would both benefit from allowing prices to find their natural floor. Liquidate everything.   Obama’s problem is that all his sour talk about our hopeless economy is parried with incredible (literally) optimism about the power of government to sort everything out without any tradeoffs.  His limousine liberal supporters, indebted young professionals,  private business owners, fixed income recipients, anyone with any position in the stock market, and those who do pay their mortgages are all about to find out they’re the “rich” that are going to get soaked becuase there simply are not enough hedge fund empressarios to foot the bill, and they too have lost huge sums of wealth due to their stupid gambles.

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Obama has basically proposed on housing that the biggest losers, the people who are behind on their upside down mortgages, put the least money down, have low income, and are likely to default or already in foreclosure, get to have their mortgages renegotiated and the taxpayers foot half the bill (the whole bill, of course, when you count the TARP).  He’s just delaying the inevitable.  It’s cowardice of the most extreme kind, which presumes to “stabilize” housing and avoid the massive wealth crisis of our lopsided economy.  Obama and all of America needs to learn that broke people don’t belong in homes that cost 10X their annual income, which they lied about years ago when they got in the McMansions they were chiefly interested in flipping.  With the TARP, the Stimulus, and the proposed housing law, it’s all the same theme:  money sucked out of the productive economy and given to losers, whether on Wall Street, Main Street, or foreign-occupied East LA.

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Right up there with the idea that you can’t go wrong with real estate is the investing folk wisdom that equities are the place to be, especially long-term.  Is this true?  Most of that folk wisdom comes from the happy experiences of the baby boomers who started investing in the late 70s and early 80s and have had a huge rally ever since.  The last 30 years have been, by any measure, a time of extraordinary growth fueled by a combination of emerging economies, cheap energy, a relatively stable U.S. financial and legal system, and U.S. comparative advantages in education and innovation.  These advantages seem to be dissipating for reasons both too obvious and too complicated to mention.

If you look at other periods, particularly periods of macroeconomic turmoil, equities did not perform so well, often for a decade or more.  Look at the chart below:

It took until the 1950s for the market to reach its 1929 high.  The 1970s saw almost no DJIA growth.  And this chart does not even correct from the mirage growth caused by artificial inflation, a phenomenon which has only gotten worse since the introduction of a fiat U.S. currency in 1971.

In principle, some variant on diversification is the best way to invest long-term.  But diversification does not just mean diversification in equities. By way of analogy, bundled mortgage instruments were diversified only superficially:  they depended on the housing market as a whole. Bundled equities, such as index funds, are also somewhat sector-dependent: they ultimately depend upon the growth of both the US economy and the world economy.  But how do you invest in a shrinking economy where a great number of malinvestments must be liquidated?  After all, it seems reasonable to conclude, we’re heading into a period of stagnation and decline that will last quite some time. 

It is simply fool-hardy to tie up a great portion of one’s cash in equities based on models of long-run equity performance that conveniently cut themselves off at 1980 or thereabouts.  As in all statistics, look at the scale and size of the X and Y axes.  Most models promoting the long-run benefits of equities discard data showing 10 and 20 year cycles of equity stagnation during earlier periods of decline. 

Real diversification should include real estate, bonds, cash, commodities and should be adjusted, especially during troubled times, to include the wealth-preserving insurance of tangible gold bullion.

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Bush said yesterday that the U.S. “will continue to act to resolve this crisis and restore stability to our markets.” John McCain–during his last “townhall” debate with Barack Obama–said, “But we all know, my friends, until we stabilize home values in America, we’re never going to start turning around and creating jobs and fixing our economy. And we’ve got to give some trust and confidence back to America.” Obama replied, ” Sen. McCain is right that we’ve got to stabilize housing prices.”

It all sounds good enough. Who wants “instability” after all? But it is the instability of falling prices that is absolutely necessary to an economic recovery. It is the necessary “creative destruction” on which all free market economic activity depends. Bad investments have been made. No one–other than politically less powerful first-time home buyers–was complaining much as housing prices were rising. People were getting rich just for living in their house. Now the former instability of artificial high prices must be followed by the instability of falling prices. Only when prices bottom out in housing, the stock market, and in general, can a recovery begin. And, while this painful process is most visible in the housing market, it’s true across the board.

Deceptive “par value” accounting of crummy assets, attempts to prop up overbuilt home prices, and various pockets of malinvestment will tie up assets, capital, and labor from more productive enterprises. Obviously, no one wants chaos. But an inordinate fear of a cleansing contraction is wasting money and dragging out this entire mess. By further weakening the dollar by increasing the national debt, it invites greater chaos in the future. Paulson’s $700B is going to be wiped out trying to bail out sinking ships, transferring money in various unforeseeable ways. What will we do in a few months when that $700B runs out and its supposed “investments” in byzantine financial instruments turn out to be worthless.

Murray Rothbard in his excellent book The Great Depression noted that various measures begun under President Hoover to induce artificial spending and “stabilize” wages prevented the necessary adjustments–in everything, including wages–needed for an economic recovery. Then, as now, politicians congratulated themselves on their commitment to stabilization. Far from being a heartless, laissez faire incompetent, President Hoover simply undertook New Deal style program, but with less panache and flair for public relations than his successor

President Hoover said–not so differently from McCain and Obama above:

I have instituted . . . systematic . . . cooperation with business . . . that wages and therefore earning power shall not be reduced and that a special effort shall be made to expand construction . . . a very large degree of individual suffering and unemployment has been prevented.

The panics of 1819, 1873, 1896, and 1907 are footnotes to American history, almost all over in a year. Yet in the “enlightened” age of government intervention and the Federal Reserve system, we witnessed the most massive depression in American history, which lasted over 10 years, as well as periodic recessions ever since. During the 1930s, as now, calls for government spending, loose money, “stability,” punitive measures against “speculators,” and various ill-advised schemes were pervasive. Then, as now, politicians, the media, and other elites pushed for consensus and for the government to “do something . . . anything.”

Would that we examined our history, where the instability and lack of government intervention in previous economic crises also allowed them to resolve themselves more quickly than those of the 20th Century.

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This is a useful analysis of the dual pressures on the economy: the massive decline in spending and housing prices, which is counterbalanced by inflationary activities such as the Federal Reserves’ expansion of lending and its increase of balance sheet assets. In other words, the only reason we won’t have hyperinflation (yet) is because of an impending economic contraction. Some prices might rise, but overall economic activity will decline dramatically dampening the immediate inflationary effects of government spending through another round of cheap credit. Commodities valued for use value will decline–oil, copper, etc. Gold will likely stay elevated above other commodities because of its “safe haven” reputation when bank guarantees are viewed suspiciously and the spectre of debt monetization is always waiting in the wings.

This WSJ article describes how the government blew its wad on Bear Stearns, could not respond in the same way to Lehman Brothers, and that this evidence of government impotence freaked the market out.

While there are obvious political reasons Bush and Paulson and Bernanke want to kick the can down the road, government cannot do much to resolve this crisis. Paulson and company’s frantic maneuvers, three or four steps behind the market, reveal this in dramatic fashion. Obviously, going forward, some changes to CDS markets, tying the dollar more closely to commodity prices, revisions to executive compensation on Wall Street (more salary and fewer bonuses, as well as clawbacks for failures), reducing incentives to “expand home ownership,” and an industrial policy that drives harder bargains with exporters to assist domestic exporters would be sensible. In the meantime, we just have to let all kinds of businesses fail, shrink, reduce sales and salaries, and otherwise adjust.

Loose money bailouts will solve nothing. You cannot patch a leaking dam with more water.

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