July 7, 2013

Back To Square One

Readers suggested a topic on central banking. “We have reached the end of a century of recurring panic-ridden financial management at the hands of the central banking oligopoly. I am curious whether any of the big minds in academia have considered whether some kind of perestroika of the current command-and-control central banking cartel could serve to restore competition to the banking sector? I realize oligarchs might not make as much money in the near term, but if we continue along our current trajectory, we run the risk of driving golden-egg laying geese who provide for the wealth of nations to the point of extinction.”

A reply, “Is the economy too chaotic to be centrally planned? Is picking winners and losers by a central planner, in direct opposition to market forces, a recipe for a durable recovery? With financial companies the world over, trying to play a game of poker and trying to obfuscate their operations, can a central planner ever reliably take the right steps to engineer a sustainable recovery?”

From KRNV Reno Nevada. “Last week, Federal Reserve Chairman Ben Bernahnke announced the Fed would not take action to hold interest rates down, and rates are now at their highest point since august of 2011, but the CEO of City National Bank told News 4 today he thinks that’s a positive sign that will help the housing market, and the economy, in the long run. ‘That’s actually a good thing because rates are getting up to more normal levels and that will kind of lace that boil,’ City National Bank CEO Russell Goldsmith says. ‘It’s not a bubble; it’s a boil. We shouldn’t be growing home prices 20 percent a year, even though it’s fun when you own a house.’”

From Forbes. “Krista Pape, a real estate agent in Boise, Idaho, says her method for flipping houses comes down to a formula spelled out on a spreadsheet. On the current home she hopes to sell, she plans to spend no more than $30,000 on repairs and expects a return on investment of about 40% based on her selling price. She just did a flip on a home she bought for $100,000 with $30,000 down and $10,000 in improvements. She sold it for $137,000. After paying back the mortgage for the house, she made $17,000 on the sale, which is a 43% return on her $40,000 investment.”

“She says the real estate market in Boise is going so well that houses are appreciating by 18% a year. What’s changed from the last housing boom is that most flippers are now unable to buy homes with 0% down. Banks will not finance a deal without 25% down, Pape says. She puts down 30% or more for her purchases. Pape plans to stick to her formula, using the earnings from one deal to fund the next. ‘If you’re going to flip in three months, you’re going to get such a good buy on it, you can make a nice profit in a short period of time,’ she says.”

From Mortgage Rates. “NZIER economist Shamubeel Eaqub said more than half the debt accumulation over the past 12 months in New Zealand had occurred in Auckland, and a lot of it had been mortgages taken out with low deposits. He said there were huge amounts of risk building up in Auckland as house prices increase from already elevated levels, on the back of a massive build-up of debt. He said it was not a supply of housing issue, because rents have only increased 2% in Auckland over the past year, compared to prices up 16%. ‘It’s not a physical shortage of housing but a bubble and we’re doing it with lots and lots of debt. It’s a big risk for New Zealand.’”

“Eaqub said there was no room to absorb a shock and the amount of money being borrowed was a mistake. ‘If there’s a recession in Australia tomorrow, we’re screwed.’”

“Macroprudential tools to cool the housing market would likely not work, Eaqub said, and the Reserve Bank would deploy an OCR hike that would hurt the whole economy.”

The Philippine Daily Inquirer. “The boom in the country’s real estate sector continues to be supported by real demand from consumers, the Bangko Sentral ng Pilipinas (BSP) said, playing down concerns of a possible price ‘bubble’ that could harm the economy if left unchecked. The BSP said it saw no need to restrict lending to fund the purchase or construction of new homes, noting that demand for property across all income levels remained robust.”

“BSP Governor Amando M. Tetangco Jr. noted the new trend being reported by home builders of more people wanting to buy homes in the middle of the country’s central business districts to avoid having to go back to their homes in the outskirts of the metropolis. This is further supported by rising income levels among workers in the business process outsourcing (BPO) companies. He said many BPO workers were buying condos on their own and taking four or five other colleagues as roommates to help shoulder amortization costs.”

“‘They buy condos and use them for the week, then they go back to their houses during weekends,’ Tetangco said. ‘Developers have actually calculated how much money people in this segment are willing to spend and use that as a basis for their prices.’”

From What Investment. “The new Bank of England governor encouraged reckless lending in Canada and is now poised to inflict the same damage on the UK, according to a financial adviser. Jonathan Davis, managing director of Jonathan Davis Wealth Management, has argued that Mark Carney kept Canada’s economy only superficially strong by bolstering it with debt. ‘Canadian banks lent just as recklessly into the property bubble as ours did,’ Davis said. The worrying practices he highlighted included the use of credit cards to finance mortgage deposits, and the ability of buyers to self-certify themselves for mortgages worth more than the value of their houses.”

“‘It now looks as if all Carney really did was keep the debt-fuelled boom running longer than anywhere else,’ commented Davis. ‘There are worrying signs that the Canadian economy is coming off the rails and it looks as if he is getting out before it crashes.’”

“For Davis, this is particularly alarming because Carney ‘inherited an economy that was in perfectly decent shape and he engineered a property bubble.’ Now, Davis cautioned, Carney has been appointed to the Bank of England as ‘one more desperate attempt to reflate the debt bubble.’”

From Firstpost. “What would Ludwig von Mises tell us about the recovery forecasts of Bernanke? Essentially the US Fed inflated one of the biggest housing bubbles ever witnessed through a combination of artificially low interest rates, lax lending standards and government guaranteed mortgages. When this bubble burst in 2008, as all bubbles eventually do, instead of allowing the liquidation of the malinvestment made during the bubble period, the US Fed stepped in to prop up the failing institutions as well as the overvalued assets through a combination of near zero interest rates as well as the unprecedented QE programme that created a market for these illiquid assets (they are illiquid because prices are inflated).”

“So what the Fed has managed is to blow some air back into the bubble to prevent a complete collapse of the housing market. And whatever the little ‘official’ improvements in employment, housing stats or consumption numbers, it is entirely on account of this reflated bubble. Or, in other words, QE is the basis of the current US economy and any withdrawal of the QE would take the US right back to 2008.”

“A valid question at this stage would be, if 2008 was the consequence of the original housing bubble, what is going to be the consequence of this current reflation? In the process of reflating, the US Fed has more than quadrupled it’s balance-sheet since 2008 and we have now in place a treasury bubble that is many times the size of the original housing bubble. So when Bernanke says he wants to taper off QE, it is with the intention of not allowing this treasury bubble to grow bigger.”

“The low interest rates and the accompanying QE are the reasons for the moderate levitation of housing prices and, if this is withdrawn, we are back to square one – and that too with US government finances in a rather precarious position this time around. Interest rates would skyrocket and prick the treasury bubble that will take down not only the housing market, but also the US economy along with it.”

“How does all this end? My guess is that the US Fed will keep up the QE till we have a bursting of the treasury bubble, which will almost immediately manifest in a full blown currency crisis. I think Bernanke well recognises the course he has put the US dollar on and does not want to be seen as the chairman who destroyed the US dollar. He wants to at least talk of an exit strategy. But Economics 101 tells us that once the route of easy money has been chosen, there really is no exit without a liquidation of the malinvestment – i.e. unless Bernanke comes clean and says he will withdraw the QE quite independent of the consequences for the US economy, there really cannot be an exit.”

Bits Bucket for July 7, 2013

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