The Housing Bubble

09 was just a minor correction. Prices were still double to triple long term trend.

You got some sweet deals in 09, are you still holding 7 homes? Can you still do those 25 chin ups? SAT 1000?

Stein’s law still applies. Nothing goes up forever.

http://www.scmp.com/business/article/2089147/its-so-tranquil-we-must-be-nearing-death-stage-global-asset-prices

my house here in N. CA was built in 1972 with aluminum wiring.
not sure if it was a cost saving feature, supply shortage or just an experiment for the time . . . !?

‘The retail slowdown has become a key theme in the narrative of the market over the last year-and-a-half. Brokers bemoan stubborn landlords holding out for higher rents, but many landlords remain optimistic they’ll find tenants willing to pay top dollar for a presence on the city’s most popular shopping corridors.’

‘Not so, says Billy Macklowe. “I think retail is f#cked, plain and simple,” the head of the William Macklowe company said Friday, adding that the signs are obvious to anyone walking down Fifth and Madison avenues or around Soho. “If you do that, just on a visual basis, you will get to a radical vacancy rate the major brokerages aren’t putting out there,” he said.’

‘Don Peebles, a fellow panelist and head of the Peebles Corporation, said residential developers had in the past seen retail as another avenue for value creation in new buildings. “Now we’re in an unknown space,” he said. He described retail vacancies on Fifth Avenue as a “bloodbath” and said retail throughout the city has weathered “dramatic” price adjustments.’

Good thing Yellen was all over this mess.

‘there’s no way we can pay it. It’s too much of a hardship’

You’ve been disrupted.

These guys are using a WEBSITE people! Laws don’t cover WEBSITES! Don’t you know they have an office in San Francisco?!

Setup points:

1) Among other things, the economy is a competition for resources. People provide goods and services in an effort to convince people to give them resources, mostly in the form of money. Criminals try to steal resources and convert them to money. Panhandlers try to obtain resources by having people take pity on them and give them donations of food or cigarettes or money.

2) Government goes out and takes money via taxes. So it has a pool of money to spend (convincing politicians and agency heads to give you money can be quite lucrative).

3) Money represents the value of everything that can be purchased with that money. If the level of goods and services rises while the money supply remains stable, each dollar becomes worth more. If the money supply rises while the level of goods and services remains stable or drops, each dollar becomes worth less (most assuredly these are not the only factors determining prices, but would be true, all other things being held equal, which they often aren’t. Economic phenomena are typically due to multiple factors, f(a,b,c,d … n), not merely one factor, f(a)). In a very small society, 10 people, 20 cattle, 5 wheelbarrows, it’s easy to see the money supply represent the total stock of goods and services. Once society grows beyond one person’s view, they can only see the sliver of the economy visible from their own two eyes.

4) Printing money as stimulus merely dilutes the purchasing power of the existing money supply. It does however give the printer the ability to direct that extracted wealth to causes he or she sees fit.

5) Financial alchemy, the getting of something for nothing, the free lunch, is still a siren song for even the most august central bankers and economic thinkers.

6) The financial sector has become much more consolidated since the 90s. Banks, savings and loans, stock and bond trading companies and more all merged with the final elimination of Glass Steagall. This creates unknown counterparty risks and takes consumer deposits hostage. It’s as if in the 90s, the financial sector made a deal with the decision makers (politicians and the central bank): “Point this spring-loaded dagger at your heart. We’ll tie a string to the trigger. If we get in trouble we start pulling the string until you bail us out. It will result in prosperity beyond your wildest dreams.” It did - but only for the financial sector. This is the structure which allows the financial sector to continue to suck money out of the society, funneling it from the many to the few (”reverse Robin Hood”). The financial sector has consolidated into a house of cards. Damage one part and the whole edifice can come down.

7) Consolidation breeds fragility in the financial sector. A fragile consolidated financial sector provides cover for bailouts. In order to avoid continuing this phenomenon, the financial sector must be broken up, re-modularized into its various components, and those individual units must be allowed to fail individually, or in groups, without credibly risking the entire system. Now… if you have a house, if you have stocks and a 401K - this current state of affairs is just peachy, the government and central bank are working for you in the best way possible. However, many of the people creating the actual wealth are being stripmined. Young people see a resource flow from them to existing asset holders. One wonders how long this can continue without pushback (some would say the unexpected election results here and in Britain and Europe are the beginning of that pushback).

Government spending is merely redistribution of resources. It goes out and collects money (as taxes). And it borrows from those who buy Treasuries, or it borrows from a central bank which prints money. Printing money extracts value from existing money. Hillary famously said “the government can spend money better than the private sector”. This hubris is unavoidable with top level leaders, has always been unavoidable throughout history, despite the experiments with central planning.

9) Keynes great insight in the 30s was that “aggregate demand” was lacking in the economy. So government should step in and be the buyer of last resort, injecting money into the economy to increase aggregate demand (Also there was the bright idea of government becoming the lender of last resort as well). Then, yadda yadda, the economy starts growing again and social welfare increases. The devil though, is in the details, in the yadda yadda. This effect, if it exists at all, is poorly understood. What it does do is allow top level leaders to indulge their hubris that they can spend more deftly, in a more socially beneficial way than the market can (and with that power of course, they can direct a little something for family and supporters). Granted, if taxation was indeed taking from the rich and giving to the poor, and if government borrowed actual money only, without the central bank printing to buy government debt… who knows, it is within the realm of possibility that this could have some beneficial effect. But… politicians are the ones directing this effort. Many of whom are feckless and venal, which is unavoidable. This cannot be ignored.

10) A speculative bubble does increase the wealth of a society. Suddenly there are items shooting up in value, as evidenced by the higher and higher prices people are willing to pay. The money supply is increased to maintain stable prices and the money velocity increases. People’s expectations about future wealth increase leads to more spending now. But speculative bubbles are inherently fragile, and lead to dislocations once the “greatest fool” buys and seeks to profit and cash out. Speculative bubbles in discretionary items like stocks allow those who want to play, to play. A speculative bubble in necessities forces those who don’t want to play to play, leading to resource transfer from new buyers to existing holders of the bubble good. A speculative bubble in a necessity, which also requires debt, is deflationary (like a housing bubble), as it forces people to reduce their other spending and leading to wealth transfer to existing asset holders.

Response:

So: coming around to responding to Krugman’s famous “Debt Moralizers” article, he advocates for government borrowing and spending (”stimulus”) and debt reduction in the form of principal writedowns and bailouts (”Try to explain why mortgage relief is better for America than foreclosing on homes that must be sold at a huge loss, and they start ranting like Mr. Santelli”). What loss if global net debt is zero, as Krugman notes? The money was transferred willingly with the expectation it would be paid back, with interest. That second part (paid back with interest) won’t happen, and while corporate expectations of future income will drop, money is not going poof. Global net debt is zero. It was just transferred in an unexpected way. However value is going poof. This is where value un-cleaves from money. The total value of goods and services represented by the money supply is dropping.

So the money supply remains the same while the value of that which the money represents declines. Each dollar represents less. This ought to be inflationary. But it’s deflationary, highlighting the complex driving forces in the economy. It’s deflationary because humans are the basis of the economy and they perceive they are less wealthy due to loss of a future income stream, or bubble pop dislocation has led to job loss and they have again lost a current income stream. They have less to spend and less inclination to spend. Then the expectation is government comes in and deftly redistributes (”injects stimulus”), and yadda yadda, the economy starts growing again? Or uses printed money to exract value from all money holders, and directs that wealth to the “optimal” sectors for superior economic benefit?

I understand where Summers and Krugman are coming from in their defense of bubbles. The level of wealth in society increases with bubbles or with technological breakthroughs, which also create wealth which people want. Asset prices increase, more money is injected into the economy, leading to more money circulation and aggregate demand. The problem is that bubbles are fragile, driven by speculative demand, not the more stable consumption demand. So they create massive dislocation and drops in social welfare when they pop. But technological breakthroughs are hard, and chaotic. Sparking bubbles is relatively easy. The former is persistent though, and the latter is ephemeral.

After a bubble, should government be the buyer of last resort, trying to prop up the asset prices through redistributive policies, which is all it can do? How does that benefit society? I agree that debt overhangs should be removed. But the question is, what is the most socially beneficial way to remove that debt? Through the “natural” mechanism of realizing losses between defaulters and lenders, or by redistributing wealth from the rest of the society to the defaulters and lenders? I would argue the former, because historically, undistorted markets are more effective at allocating wealth versus central planners. Also rewarding socially destructive behavior encourages more of that behavior (moral hazard).

Back to “Debt Moralizers”: Basically Krugman’s argument is that those who took out too much debt and defaulted should be allowed to keep their assets and the debt should be paid back by the rest of society. And that this will benefit everyone. Well it doesn’t benefit everyone. It merely redistributes wealth to the most financially illiterate and/or reckless and those who enabled the debt (this has consequences - it encourages that kind of behavior). He says that this will work down the debt overhang. Ray Dalio talked about the “Beautiful deleveraging”, where the losses are socialized - i.e. wealth is redistributed to the financial sector and defaulters. You know what would also work down the overhang? Accepting the defaults, and forcing lenders to accept the losses. But - see paragraph 4 above about the financial sector becoming consolidated into a house of cards. They’ve taken consumer deposits hostage, and they have created opaque counterparty risks. They’ve been allowed - encouraged - to point a spring-loaded dagger at the heart of the economy, which will fire if any part of the system fails, due to opaque counterparty risks and risk to consumer deposits.

The problem is, people don’t like being stolen from, either by street criminals who do it overtly (aside: a defense of theft, which could be written by any number of modern economists, is this: “well, criminals will get money to spend, increasing aggregate demand, and you’ll need to replace your stolen items, perhaps by taking out more debt, so getting stolen from is actually good for you!”), or by politicians and central bankers who do it somewhat covertly through flawed redistributionary policies and money printing.

The economy is a competition for resources. The reason we have a justice system is because Americans don’t like being stolen from or otherwise victimized. A dictator can transfer national wealth as he sees fit, in his hubris thinking he is a better allocator than the markets. In more democratic societies, people are willing to pay for public goods and some level of social welfare spending. But they’re not going to be content being stolen from, and the resources (money and assets) sent to the financial sector and the financially illiterate or reckless.

And no, this redistributive policy is not going to be good for everyone, which is Krugman’s basic point that it would be. It’s good for those receiving the redistributed largesse. There are other, more just, more socially and economically beneficial ways to work down the debt overhang. And ways which don’t encourage socially destructive behavior. The financial sector should be broken up, modularized and pieces of it should be allowed to fail. I think redistributive stimulus has a dim track record. “But what about World War II? Look at the vast government spending and the resulting boom!” Let’s look at WWII - the end of it heralded the dawn of the jet age, the dawn of the computer age, and the rapid increase in technology in all areas of life. I suspect that had more to do with the end of the Depression than redistributive war spending stimulus had.

Historically speaking, undistorted markets are better at increasing social welfare and allocating resources than central planners. WWII stimulus and deficit spending is commonly credited with ending the Depression, but I suspect the end of the Depression had more to do with the explosion in technology associated with WWII and the loss of a chunk of working age males rather than redistribution via government spending. There’s a lesson there. If government does choose to engage in redistributive stimulus, it should probably be R&D oriented, not merely firehosing it at the FIRE sector.

Also, many point to Japan as the model. The BOJ is in full money printing mode, expanding its balance sheet massively, year after year, buying government debt. It’s all redistributive. They need to increase the value of goods and services in their society. They could spark a speculative financial asset bubble, which they are trying to do, as well as trying to boost the price of assets and encourage financial asset (stock) purchases by keeping interest rates at zero. Has any of this managed to spark inflation or growth in Japan? No. There’s a lesson there too. And despite all of the touting of the positive indicators of Japanese social welfare, they do have a high suicide rate. Which is not typically indicative of high social satisfaction.

Another note: When people hear the word “stimulus” spoken by an economist, they should understand it’s short for “redistributive stimulus”.

If you are Asian (see photos), they are marketing to you for the Great Park (old Tustin air base)

So you’re saying that housing is overpriced. Now that’s progress.

Oh dear….

http://www.homecapital.com/press_releases/2017/Deposit%20Withdrawals%20Update%20final%202.pdf

Does Canada have a trusted celebrity a la Warren Buffet to trot-out and calm the steerage rats so the top hats and ladies can board the lifeboats politely?

8 years of bogus data. Houses are americas savings account now.

Right place right time…nothing else.