The scale of the bubble created since 2003 was so massive, that RE will fall from current levels by 50% in real terms. Inflation can reduce the drop in nominal terms, and so partly mask the inevitable and on-going decline. For example RE may stay flat in nominal terms for five years of 15% inflation, which doubles the price of everything else.
I doubt that 15% US inflation can be engineered without domestic social chaos and global financial havoc, so we are more likely to see inflation in the 6-8% range. This means that in five years RE will have dropped by another 30%, and cost of living will have climbed by 40%, both in nominal terms, and RE will have returned to trend relative to other prices.
Meanwhile, public finances in the US will have become a total wreck as Fannie, Freddy, and more bailouts of every sort are piled upon the public balance sheet in an attempt to prevent the logical and the inevitable.
Why I'm Negative on Equities Despite Good Earnings Season [View article]
David, You make many valid points in clearly written terms. You did not mention one factor, perhaps because you don't see it as a negative This is excessive govt control of the economy.
In the US, the govt has basically taken over the housing and financial sectors, and may yet take over the health care sector. It has also largely taken over the domestic automotive sector. If these were truly socialist takeovers, they would be bad enough, but in reality, these takeover are much worse than purely socialist as the losses, costs, and subsidies are being socialised, whilst the profits, lavish pay, and bonuses, remain privatised; especially for finance. This makes these quasi-socialised sectors far more costly than they would have been, had they been truly nationalised. To subsidise them, govt needs to egregiously tax the dwindling number of truly productive members of the economy, in addition to monetise debt, create inflation, and fleece savers.
In the long-term, the risk of misguided policy that decimates productivity and prudence, to subsidise bloated, inefficient and unproductive sectors is the greatest negative of all.
Less Obvious Consequences of the Massachusetts Election [View article]
The bailout strategy is "working", but only if you disregard its future costs and implications.
The patronising tone of many liberal pundits during last nights election results is similar to yours: "... ah, the poor slobs don't understand ... they're just upset about losing their jobs ... they've lost their minds because their neghbor was laid off .. etc"
The public in Massachusetts are smarter than you think, because even without economic degrees, they can see and sense the poison they're being fed about bailouts and can see the wholesale looting of future generations. This does not make them simplistic!
Real Cause of This Financial Crisis? Global Hunger for Savings Instruments [View article]
Your opening sentence is great, ".. Every sort of idiotic expanation is offered by academic economists for the financial crisis ...", but I would also extend it to the vast majority of MSM commentators.
It is obvious to anyone with any intelligence that artificially low interest rates promote bubbles and mis-allocate capital and resources, and this is indeed the single root cause of this crisis. Every other explanation has this simple, obvious fact as its underlying root.
It is unbelieveable that "educated" policymakers and professors should be oblivious of such a basic fact, so perhaps they are aware of it, but choose to pretend otherwise since the politicians, the vocal elements of the MSM, and the underproducing but overconsuming sections of the populace all loves bubbles.
Fannie and Freddie Shares Soar Though Value in Question [View article]
Is it possible that the buyers have insider information? Perhaps uncle Ben will soon render them worthwhile by buying even more of their worthless paper at a nice price?
Wall Street Breakfast: Must-Know News [View article]
Almost a footnote at the end of the page: "Georgia-based Southern Community Bank's closure will cost the FDIC $114M. North Carolina-based Cooperative Bank's closure will cost the FDIC $217M. Kansas-based First National Bank of Anthony's closure will cost the FDIC $32.2M."
These add up to roughly $365m, which is roughly the cost to the taxpayers of the entire real estate crash of the late 1980's.
In other words, the total cost to the taxpayers of the previous, disastrous real estate crash of twenty years ago is now treated as a minor footnote, repeated on a weekly basis, and almost unnoticed. Last time, fraudulent bankers were led in chains by the FBI, and this time they are getting bonuses. Is this the "change we can believe in" ?
Now Playing: Zombie Condos in Manhattan [View article]
I would not be surprised if NYC property takes a very long time to recover to its bubble-era stratospheric values, perhaps longer than it makes sense for a middle-aged (or older) investor to buy into it today.
Here is an interesting prognostication from Martin Hutchinson, who has been right for a long time in predicting the recent events:
> Another urban legend in the making. New York City is the home of > The White Elephant. Go ahead, try the above mentioned trick of swooping > in on these White Elephants, and I'll see you in Central Park, feeding > the pigeons, while you try to figure out what happened to your money. > HINT: Look for your money in Paris, France, and in Geneva, Switzerland, > and in, yes, that's right, Dallas, Texas, USA. Watch out, that pigeon > is circling over your head.
The Death of Mortgage Banking and the Shadow Banking System [View article]
This sounds like a reasonable set of rules to reduce liklihood of another bubble and more egregious losses being passed on to the overburdened public treasury. Too bad there isn't a minimum downpayment requirement, just like there used to be until the 1990's. My understanding is that in Canada, buyers still must put 20% down, but if this appears onerous, perhaps we should start with 10% then increase it to 20% after a few years, after the market has stabilized.
As head of the house banking committe, Rep. Frank bears much responsibility for the current mess. Had he exercised sound judgment and proposed such legislation a few years ago we would never have gotten to this sorry state of affairs.
Greenspan Yet Again Blames Others for Housing Bubble [View article]
"We must admit that we have got the benefit of hindsight...." implies that no one could have predicted this crisis or foreseen it. The crisis was both predictable, and in fact, predicted by many, including those like Peter Schiff, whom the msm like to dismiss as fringe, as well as by mainstream journals like The Economist magazine (March, 2003) www.economist.com/surv...
" ... and we all enjoyed the bubble before it burst..", I am not sure about the "all". Some, who knew how bubbles always end, did not.
I think you really mean to say that most members of the public and the mainstream media did not foresee the outcome of excessive money supply and artificially low interest rates, and actually enjoyed them. I agree, and this is consistent with human history which is replete with periodic bubbles. However, the office of fed president is too critical to be in the hands of those who are unaware of the history and dynamics of bubbles, and who cannot predict the likely outcome of populist easy money policies.
On Mar 12 07:56 AM Tradememe wrote:
> Good post. Unfortunately, doing post mortem does not contribute in > fixing the present situation. We must admit that we have got the > benefit of hindsight and we all enjoyed the bubble before it burst.
Obama's Homeowner Stability Plan: How Helpful Will It Be? [View article]
This plan is a slap in the face for responsible individuals who were saving to buy a home, but were priced out of the market by the irresponsible who bid prices up to absurd and unsustainable levels.
These responsible savers are being subjected to a quadruple penalty:
(a) They were outbid by the irresponsible, preventing them from buying during the bubble. (b) Their savings were decimated by low interest rates, that, ironically, were used to enable the irresponsible to bid up prices. (c) Now we are proppping up prices to continue locking them out of home ownership on responsible terms. (d) They will be made to pay higher taxes over their lifetime to pay for the subsidies now being heaped upon the irresponsible.
My personal situation is that my home is already long paid for, but am at a loss regarding what sort of advice I am supposed to give my children and grand children. Am I supposed to continue advising them to work hard, consume responsibly, and save and invest, or am I supposed to advise them to learn to "game the system"?
Government is creating a moral dilemma for society.
Preview from Europe: Slumdog Stock Market [View article]
"The government needs to just step up and solve this problem once and for all by seizing 100% control of Citi, writing down its assets, restructuring it, and selling it off. The reality is that the current policy of merely injecting capital into financially unviable companies will merely prolong the recession"
Perhaps the current policy just allows more time for powerful, well-connected bank executives to devise new methods that maximise their personal gains before the inevitable. Why any of the people who brought about this crisis is still running a bank remains a mystery.
It seems that some of the commentators who are upset by the notion of "cram-downs" think that voluntary loan modifications are better.
Voluntary loan modifications, like cram-downs, will cause losses to banks. Since the fed and treasury have undertaken to prop up the banks' losses by various mechanisms, some transparent and others opaque, then these losses are ultimately going to be borne by taxpayers, savers and the general public, either through higher taxes, higher interest rates, or higher inflation.
At the end of the day, there is no difference between cram-downs and voluntary loan modifications in terms of the beneficiary and the loser. In all cases the beneficiaries are those who consume more than they produce, and the losers are those that produce more than they consume.
Interesting to see how the fed's actions are frequently described in heroic terms. You put it as "..This is a daring gamble on the part of the Fed,..", which sounds brave, adventurous, and dashing.
Whenever the fed cuts rates, the mainstream media call the move "bold". In many instances, however, the rate cuts are priced-in by the market before the fed meets, and the market has thus put them on notice that failure to cut would "disappoint" and tank the market. So the fed dutifully cut, and the media rewards them by extolling their boldness, even though "bold" in these situations is certainly not the right adjective!
The crisis de jour is housing, but the more important and broader issue is whether we want an economy based on productive labor or one based on asset bubbles.
Since the early-90's, the Greenspan fed started to favor assets over labor by using artificially low interest rates to inflate asset bubbles. First to be inflated were stocks in traditional economic sectors. When those reached untenable P/E's, the creative folks on Wall Street came up with the notion of a "new economy" to justify absurd valuations for internet stocks to continue the bubble. When that became untenable, creative financing schemes were invented to create the real estate and derivatives bubbles.
Each of those bubble resulted in enormous wealth for those who created them or participated and exited at the right time. Since all members of the economy compete for goods and services, this has devalued the output of all productive labor, relative to the gains of these bubbles.
What we need is a national discussion on what sort of economy is healthy, sustainable, and fair. My own view is that an economy based on productive labor is healthy and sustainable, whereas one based on assets is not. As we increase the expenditures to the extremes that have now become necessary to try to maintain the asset bubbles, we risk irreversible damage to the economy.
The Nefarious and Destructive World of TARP [View article]
You are right. The financial industry bailout was a mistake, and it keeps getting bigger. Government should have protected the banks' innocent customers, whether depositors or borrowers, but should never have gotten involved in guaranteeing the games banks were playing with each other via credit default swaps and other derivatives.
The financial industry should have been given notice that they need to get together and wind down the giant pyramid of CDS's they all had with each other in an orderly way, perhaps with the help of a government arbitration board, but no government money. It is, at the end of the day, a giant near-zero-sum game that financial companies were playing with each other.
Is Real Estate Rolling Over? [View article]
I doubt that 15% US inflation can be engineered without domestic social chaos and global financial havoc, so we are more likely to see inflation in the 6-8% range. This means that in five years RE will have dropped by another 30%, and cost of living will have climbed by 40%, both in nominal terms, and RE will have returned to trend relative to other prices.
Meanwhile, public finances in the US will have become a total wreck as Fannie, Freddy, and more bailouts of every sort are piled upon the public balance sheet in an attempt to prevent the logical and the inevitable.
Why I'm Negative on Equities Despite Good Earnings Season [View article]
In the US, the govt has basically taken over the housing and financial sectors, and may yet take over the health care sector. It has also largely taken over the domestic automotive sector. If these were truly socialist takeovers, they would be bad enough, but in reality, these takeover are much worse than purely socialist as the losses, costs, and subsidies are being socialised, whilst the profits, lavish pay, and bonuses, remain privatised; especially for finance. This makes these quasi-socialised sectors far more costly than they would have been, had they been truly nationalised. To subsidise them, govt needs to egregiously tax the dwindling number of truly productive members of the economy, in addition to monetise debt, create inflation, and fleece savers.
In the long-term, the risk of misguided policy that decimates productivity and prudence, to subsidise bloated, inefficient and unproductive sectors is the greatest negative of all.
Less Obvious Consequences of the Massachusetts Election [View article]
The patronising tone of many liberal pundits during last nights election results is similar to yours: "... ah, the poor slobs don't understand ... they're just upset about losing their jobs ... they've lost their minds because their neghbor was laid off .. etc"
The public in Massachusetts are smarter than you think, because even without economic degrees, they can see and sense the poison they're being fed about bailouts and can see the wholesale looting of future generations. This does not make them simplistic!
Real Cause of This Financial Crisis? Global Hunger for Savings Instruments [View article]
It is obvious to anyone with any intelligence that artificially low interest rates promote bubbles and mis-allocate capital and resources, and this is indeed the single root cause of this crisis. Every other explanation has this simple, obvious fact as its underlying root.
It is unbelieveable that "educated" policymakers and professors should be oblivious of such a basic fact, so perhaps they are aware of it, but choose to pretend otherwise since the politicians, the vocal elements of the MSM, and the underproducing but overconsuming sections of the populace all loves bubbles.
Fannie and Freddie Shares Soar Though Value in Question [View article]
Wall Street Breakfast: Must-Know News [View article]
These add up to roughly $365m, which is roughly the cost to the taxpayers of the entire real estate crash of the late 1980's.
In other words, the total cost to the taxpayers of the previous, disastrous real estate crash of twenty years ago is now treated as a minor footnote, repeated on a weekly basis, and almost unnoticed. Last time, fraudulent bankers were led in chains by the FBI, and this time they are getting bonuses. Is this the "change we can believe in" ?
Now Playing: Zombie Condos in Manhattan [View article]
Here is an interesting prognostication from Martin Hutchinson, who has been right for a long time in predicting the recent events:
www.prudentbear.com/in...
On Apr 17 02:46 PM WAKEUP wrote:
> Another urban legend in the making. New York City is the home of
> The White Elephant. Go ahead, try the above mentioned trick of swooping
> in on these White Elephants, and I'll see you in Central Park, feeding
> the pigeons, while you try to figure out what happened to your money.
> HINT: Look for your money in Paris, France, and in Geneva, Switzerland,
> and in, yes, that's right, Dallas, Texas, USA. Watch out, that pigeon
> is circling over your head.
The Death of Mortgage Banking and the Shadow Banking System [View article]
As head of the house banking committe, Rep. Frank bears much responsibility for the current mess. Had he exercised sound judgment and proposed such legislation a few years ago we would never have gotten to this sorry state of affairs.
Greenspan Yet Again Blames Others for Housing Bubble [View article]
" ... and we all enjoyed the bubble before it burst..", I am not sure about the "all". Some, who knew how bubbles always end, did not.
I think you really mean to say that most members of the public and the mainstream media did not foresee the outcome of excessive money supply and artificially low interest rates, and actually enjoyed them. I agree, and this is consistent with human history which is replete with periodic bubbles. However, the office of fed president is too critical to be in the hands of those who are unaware of the history and dynamics of bubbles, and who cannot predict the likely outcome of populist easy money policies.
On Mar 12 07:56 AM Tradememe wrote:
> Good post. Unfortunately, doing post mortem does not contribute in
> fixing the present situation. We must admit that we have got the
> benefit of hindsight and we all enjoyed the bubble before it burst.
Obama's Homeowner Stability Plan: How Helpful Will It Be? [View article]
These responsible savers are being subjected to a quadruple penalty:
(a) They were outbid by the irresponsible, preventing them from buying during the bubble.
(b) Their savings were decimated by low interest rates, that, ironically, were used to enable the irresponsible to bid up prices.
(c) Now we are proppping up prices to continue locking them out of home ownership on responsible terms.
(d) They will be made to pay higher taxes over their lifetime to pay for the subsidies now being heaped upon the irresponsible.
My personal situation is that my home is already long paid for, but am at a loss regarding what sort of advice I am supposed to give my children and grand children. Am I supposed to continue advising them to work hard, consume responsibly, and save and invest, or am I supposed to advise them to learn to "game the system"?
Government is creating a moral dilemma for society.
Preview from Europe: Slumdog Stock Market [View article]
Perhaps the current policy just allows more time for powerful, well-connected bank executives to devise new methods that maximise their personal gains before the inevitable. Why any of the people who brought about this crisis is still running a bank remains a mystery.
Are Home Prices Still Too High? [View article]
Voluntary loan modifications, like cram-downs, will cause losses to banks. Since the fed and treasury have undertaken to prop up the banks' losses by various mechanisms, some transparent and others opaque, then these losses are ultimately going to be borne by taxpayers, savers and the general public, either through higher taxes, higher interest rates, or higher inflation.
At the end of the day, there is no difference between cram-downs and voluntary loan modifications in terms of the beneficiary and the loser. In all cases the beneficiaries are those who consume more than they produce, and the losers are those that produce more than they consume.
The Fed's Big Gamble [View article]
Whenever the fed cuts rates, the mainstream media call the move "bold". In many instances, however, the rate cuts are priced-in by the market before the fed meets, and the market has thus put them on notice that failure to cut would "disappoint" and tank the market. So the fed dutifully cut, and the media rewards them by extolling their boldness, even though "bold" in these situations is certainly not the right adjective!
The Housing Blame Game, Redux [View article]
Since the early-90's, the Greenspan fed started to favor assets over labor by using artificially low interest rates to inflate asset bubbles. First to be inflated were stocks in traditional economic sectors. When those reached untenable P/E's, the creative folks on Wall Street came up with the notion of a "new economy" to justify absurd valuations for internet stocks to continue the bubble. When that became untenable, creative financing schemes were invented to create the real estate and derivatives bubbles.
Each of those bubble resulted in enormous wealth for those who created them or participated and exited at the right time. Since all members of the economy compete for goods and services, this has devalued the output of all productive labor, relative to the gains of these bubbles.
What we need is a national discussion on what sort of economy is healthy, sustainable, and fair. My own view is that an economy based on productive labor is healthy and sustainable, whereas one based on assets is not. As we increase the expenditures to the extremes that have now become necessary to try to maintain the asset bubbles, we risk irreversible damage to the economy.
The Nefarious and Destructive World of TARP [View article]
The financial industry should have been given notice that they need to get together and wind down the giant pyramid of CDS's they all had with each other in an orderly way, perhaps with the help of a government arbitration board, but no government money. It is, at the end of the day, a giant near-zero-sum game that financial companies were playing with each other.