Mortgage credit and the housing boom
Note: This is a guest post by Paul Swartz. I appreciate Brad giving me the opportunity to fill in while he is on vacation.
Last Tuesday Timothy Geithner argued that a working economy requires a functioning banking system. This connection is conceptually clear to most people. If you can’t get a loan to go to school, buy a car or house or some consumer good, you are likely to delay or go without the consumption or investment. Forgone spending meaning forgone income for someone else.
If tight credit is a part of the problem now, easy access to credit was a key source of the getting us where we are today. Consider the following graph – based on the Fed’s Flow of Funds. It shows a tight correlation between the growth in home mortgage credit and the appreciation in the housing market (for the more technically minded, the quarterly correlation since 1980 is over 60%).
Correlation is not causation but it makes sense that easy access to credit would contribute to a rise in home prices and that a lack of credit could facilitate a housing collapse.
A valid question about this story is ‘did mortgage home prices appreciation increase credit or did credit increase home prices?’ Likely a bit of both; as home price appreciation accelerated more people had the capacity to use their home as an ATM and take out a home equity loan. Cash-out refinances average 37.2 Billion between 1991 and 2000 and 152.7 Billion between 2001and 2005. A similar question can be asked on the downside. Namely did falling home prices – through its impact on the banking system – lead to a tightening of credit, or was a tightening of credit a cause of the home price depreciation.
The Fed flow of funds data allows for a decomposition of the sources of mortgage credit. What stands out is the growth of “private label” mortgage securitization from 2002 through 2006 – and the subsequent collapse of the private securization market. The agencies (Fannie, Freddie) initially offset some of the contraction in demand for mortgages from private issuers. They have not – in large part due the high level of credit extension – been able to maintain positive aggregate home mortgage credit growth. To be fair they were pseudo private companies so it is not clear that they should have taken on a moderator role at all; in fact if they were simply trying to preserve their own existence they should have contracted credit not expanded it. It is interesting to compare the agencies moderating role in 1990. At that time they offset the contraction in bank lending and home mortgage credit continued to growth. [See a combined graphic on the CGS home page].
The agencies played – to a degree – a normalizing force as credit expanded as well. Unlike the credit contraction in 1990 they did not fully offset the credit creation which during the middle of this decade was driven by securitization. A full offset would have required the agencies to start withdrawing credit which would have been a structural and political challenge. Although the rise in the pace of mortgage credit growth a few years back should have set off a few alarm bells, so should have the fact that a subsidized and moderating branch of the credit market wasn’t extending any credit at all (it was being crowded out).
We have entered a negative credit growth environment; something which has not been seen for a long time.
NOTE: Mortgage Credit Growth is defined as dollar growth in home mortgage credit as a percentage of GDP. Banks (blue) corresponds to the FoF sectors commercial banking, savings institutions, and credit unions. Government (red) corresponds to the FoF sectors GSE and GSE mortgage backed pools. Securitization (Green) corresponds to the FoF sectors ABS issuance and finance companies.
[...] Brad Setser: Follow the Money » Blog Archive » Mortgage credit and … [...]
As of 2007, there was one housing unit available for every 2.35 persons in the United States. As of 2007, around 5.61% (7.19 million out of 128.20 million) of housing units were newly constructed within the previous 4 years. Around 10.22 % of housing units (13.11 million out of 128.20 million) in 2007 were technically ‘vacant’ (they were either just vacant, or were meant for occasional use).
This data shows that in 2007 an equilibrium between the number of available housing units of good quality, the U.S. population, and the average size of an American household was approaching. Even as housing starts were proceeding at a hectic pace, occupation demand for new units peaked out, with more than 10% of existing units being technically vacant.
Increasing inventories, decreasing starts, flattening home prices, and unwinding of highly leveraged housing investments marked the market adjustment to this new equilibrium.
In 2008, the correction over extended itself, leading to a general implosion of credit in unrelated sectors. A housing recovery is on since December 2008 with falling inventories, and increasing sales volumes. My guess is that home prices will just stabilize somewhere, and mortgage credit will gorw very slowly, allowing further re distribution of home ownership over time rather than a further rapid expansion of the supply of homes in the U.S.
Data Summary:
As of 2007, there were 128.20 million housing units in the United States. Of these , 13.11 million units were vacant. Owners occupied 75.65 million and renters occupied 35.05 million units. Of the 13+ million units considered vacant, 2.94 million units were for occasional use. So it seems that holiday homes, etc are included in that 13+ million as ‘vacant’. As of 2007, out of the total 128.20 million units, 7.19 million units were newly constructed within the previous 4 years. Around 8.71 million of these units were mobile/manufactured homes.
As of July 01, 2007 the population of the United States is estimated to be 301.29 million and as of July 01, 2008 the population estimate is 304.06 million.
Dividing the 301.29 million population by the 128.20 million housing units, you can conclude that there was one home for every 2.35 persons in the United States as of 2007.
Data sources:
Housing units data:
American Housing Survey:2007
(U.S. Census Bureau)
http://www.census.gov/prod/2008pubs/h150-07.pdf
(Go to page 16 in the PDF file, enlarge to something like 200% and have a look at the bold line in Table 1A-1: Introductory Characteristics – All Housing Units)
Population Estimates data:
U.S. Census Bureau, Population Estimates Program, American Factfinder:
http://factfinder.census.gov/servlet/DTTable?_bm=y&-geo_id=01000US&-ds_name=PEP_2008_EST&-_lang=en&-mt_name=PEP_2008_EST_G2008_T001&-format=&-CONTEXT=dt
(The population estimates are in the table at this page above)
As of 2007, there was one housing unit available for every 2.35 persons in the United States. As of 2007, around 5.61% (7.19 million out of 128.20 million) of housing units were newly constructed within the previous 4 years. Around 10.22 % of housing units (13.11 million out of 128.20 million) in 2007 were technically ‘vacant’ (they were either just vacant, or were meant for occasional use).
This data shows that in 2007 an equilibrium between the number of available housing units of good quality, the U.S. population, and the average size of an American household was approaching. Even as housing starts were proceeding at a hectic pace, occupation demand for new units peaked out, with more than 10% of existing units being technically vacant.
Increasing inventories, decreasing starts, flattening home prices, and unwinding of highly leveraged housing investments marked the market adjustment to this new equilibrium.
In 2008, the correction over extended itself, leading to a general implosion of credit in unrelated sectors. A housing recovery is on since December 2008 with falling inventories, and increasing sales volumes. My guess is that home prices will just stabilize somewhere, and mortgage credit will gorw very slowly, allowing further re distribution of home ownership over time rather than a further rapid expansion of the supply of homes in the U.S.
Data Summary:
As of 2007, there were 128.20 million housing units in the United States. Of these , 13.11 million units were vacant. Owners occupied 75.65 million and renters occupied 35.05 million units. Of the 13+ million units considered vacant, 2.94 million units were for occasional use. So it seems that holiday homes, etc are included in that 13+ million as ‘vacant’. As of 2007, out of the total 128.20 million units, 7.19 million units were newly constructed within the previous 4 years. Around 8.71 million of these units were mobile/manufactured homes.
As of July 01, 2007 the population of the United States is estimated to be 301.29 million and as of July 01, 2008 the population estimate is 304.06 million.
Dividing the 301.29 million population by the 128.20 million housing units, you can conclude that there was one home for every 2.35 persons in the United States as of 2007.
Data sources:
Housing units data:
American Housing Survey:2007
(U.S. Census Bureau)
(Go to page 16 in the PDF file, enlarge to something like 200% and have a look at the bold line in Table 1A-1: Introductory Characteristics – All Housing Units)
Population Estimates data:
U.S. Census Bureau, Population Estimates Program, American Factfinder:
(The population estimates are in the table at this page above)
PS: I have the links to the Census data above but when I upload the links it takes the comment to moderation by default. If you google the titles of the data sources above it’s easy to find the links.
I’ve been looking at this also. Can’t the Agencies step in and shore up the housing market? I think this needs to be done soon to keep the market from falling below trend price growth.
You raise an interesting and topical debate here Paul:
“This connection is conceptually clear to most people. If you can’t get a loan to go to school, buy a car or house or some consumer good, you are likely to delay or go without the consumption or investment. Forgone spending meaning forgone income for someone else.”
But surely the person who would have lent, via the bank, to the consumer now has to find a use for the resources themselves, so someone still receives some income even without the bank. This is essentially Fama’s point to Krugman about the fiscal stimulus. I guess the real added value of the bank (government) is that it is supposed to assist in the efficient allocation of savings and thereby improve the outcome.
The Treasury’s newest Financial Stability Plan (Bailout 2.0) is only the first step. It aims at putting in place enough new bank-lending capacity to start inflating prices on credit all over again. But a new bubble can’t be started from today’s asset-price levels. How can the $10 to $20 trillion capital-gain run-up of the Greenspan years been repeated in an economy that is “all loaned up”?
One thing Wall Street knows is that in order to make money, asset bubble prices need to rise again.
So here’s the situation. The first objective is to preserve the wealth of the creditor class – Wall Street, the banks and the other financial vehicles that enrich the wealthiest 1% and, to be fair within America’s emerging new financial oligarchy.
http://www.globalresearch.ca/index.php?context=va&aid=12265
indian:
That figure of 128.20 million housing units may mean single family houses and apartments added together. They call apartments “multifamily” in US reports.
Seems high if it’s all houses. I remember houses are about 80 million units total. But not sure if that’s correct.
“so should have the fact that a subsidized and moderating branch of the credit market wasn’t extending any credit at all (it was being crowded out).”
I must be missing something. On what planet can mortgages being sold at the top of the market to some of the riskiest buyers be crowding out a subsidized/implicitly guaranteed lending agency dedicated to helping people who are not easily able to get a mortgage?
The only sense that I can make of that is that the lenders were assuming an explicit government guarantee or weren’t particularly worried about the consequences of their lending practices. I don’t get it.
Wall Street’s credit-generating mechanism is kaput. That’s why the fall-off in auto sales, consumer spending and foreign trade has been so dramatic, unlike anything anyone has ever seen before. Wall Street’s credit model is broken. Shouldn’t there at least be public hearings before Geithner and Bernanke put Humpty together again and we resume the same tragic boom and bust cycle? There has to be another way.
Credit production should never be in the hands of speculators. It’s too dangerous. That’s why the banks need to be strictly regulated, because the power to create credit is “more dangerous than standing armies”.
According to the UK Telegraph:
“The past five quarters have seen 40pc of the world’s wealth destroyed and business leaders expect the global economic crisis can only get worse.”
Once again; 40 percent. The global economy is contracting to accommodate the new reality of less debt-fueled expansion. Wall Street (understandably) is looking for its next bubble, just like Geithner. But deflation follows its own inescapable logic, too. The excess leverage and unsustainable credit that was produced via complex debt instruments, derivatives contracts, and structured investments is being purged from the system causing a generalized shrinking throughout the economy. There’s no need for an oversized financial system; business activity is slowing, investment and trade are dwindling, and consumers are hunkering down.
Even in the best of times it would be difficult for Geithner and Co to achieve their goal of saving the big banks. But given the state of the economy–the wobbly dollar, falling tax revenues, the enormous deficits, rising unemployment, the erosion of household balance sheets and the massive system-wide contraction–a multi trillion dollar bailout that leaves the banks in private hands is just not realistic. Geithner will not succeed. Every attempt to save the banks will be met with greater and greater public resistance and rage. The banks that are underwater need to be put out of their misery and nationalized.
http://www.globalresearch.ca/index.php?context=va&aid=12301
Paul Swartz:Cash-out refinances average 37.2 Billion between 1991 and 2000 and 152.7 Billion between 2001and 2005.
The 152B/year sounds low to me. I remember at least a couple years this decade that the home ATM yielded 600B/year. But one of of those years was 2006, I believe.
“Correlation is not causation…”
In this case it is.
DCJ:”Once again; 40 percent. The global economy is contracting to accommodate the new reality of less debt-fueled expansion. Wall Street (understandably) is looking for its next bubble, just like Geithner.”
What we have now I like to describe as a liquidity trap inside a credit bubble. So I’m pretty sure the only thing that happens when the government pours cheap liquidity into the system is the banks use it for the treasury carry trade again. So the USG sells treasuries to give money to banks to buy treasuries. Whoopie for us.
The other thing that bozo economists and government officials keep ignoring is the aging demographic in developed countries. In the US it’s 80 million underfunded baby boomers scheduled to retire over the next 10 years.
So maybe our central planners just assume that our under saved, soon to be retirees will run out and take on a bunch of consumer debt and consequently go on the Smith & Wesson retirement plan. But I’m not absolutely sure they are correct in assuming that.
off topic
yen breakdown alert!
Looks like we are finally getting the weakening of the yen we were anticipating. It’s good to be in dollars. Last 4 days or so it has moved steadily from 89 to 93.5 today.
Say hello to all the Japanese investors lining up to buy treasuries. Something to look for in the march tic data.
Appreciate the comments and feedback.
II – I think of the housing supply and demand picture at a fundamental level (units and population) relationship to the housing market to being analogous to PPPs with the FX market. Conceptually appealing and predictive over the long term but not terrible useful in the short run. The other challenge with this aggregate is the distribution; if all the excess housing is in California and Florida real economic activity from home building could return sooner than the aggregates suggests. Although I think it is fair to note that this housing boom and bust has been the most national that we have seen.
AIM – It is hard to argue that we would be much worse off if it wasn’t for the agencies. Before the agencies were essentially received by the Federal Government it was not clear it was in their interest to provide a moderator role (one of the challenges of being a pseudo private entity). Now that the agencies are functioning off the balance sheet (capital) of the federal government and they could – if instructed via a policy decision to target credit growth in aggregate – offset the fall in bank and securitization lending. As far as I know this is not something that is a focus for the policy makers. Recapitalization of the banking sector and fixing the securitization market instead of requiring to GSE to carry the incredible load of private market deleverage seems to be the way we are headed.
RebelEconomist – When investment (lending) is deleveraged or when investment shifts toward cash (a form of deleveraging) money essentially shrinks, risking deflation. When done as a one off it is not problematic; when done as an economy wide basis the paradox of thrift is induced. Typically I’m quite adverse to non-automatic fiscal stimulus, based on the argument that the money is coming from somewhere and our inability to execute them well but this time around without someone taking the place of the marginal debtor (with demand for real economic activity) while the system deleverages will risk a destabilizing deflationary spiral.
Don – Think about this from the borrower side. What I meant by crowded out what that the house that would have previously been bought by an agency backed mortgage (20% down and paperwork) was purchased by easier loans (no money down, no docs, …). This was in part substitution by eligible borrower (not necessarily high risk) and the introduction of buyers who really could not afford the house. Why go through the trouble of an agency loan when you can get a hassle free no doc loan with no money down. The lenders were willing to do these because they, as you said were not particularly worried, because in large part they didn’t know what they were buying.
Don asks “must be missing something. On what planet can mortgages being sold at the top of the market to some of the riskiest buyers be crowding out a subsidized/implicitly guaranteed lending agency dedicated to helping people who are not easily able to get a mortgage?”
On a planet where the “subsidized/implicitly guaranteed lending agency” has shareholders who are demanding increased return on their investment.
Management at Fannie Mae did not resist pressures to join the party. I believe they even bought some of the securitized mortgages that turned out to be toxic.
” Every attempt to save the banks will be met with greater and greater public resistance and rage. The banks that are underwater need to be put out of their misery and nationalized.
DJC is right here.
Addendum. I want the banks put out of their misery – period. Why nationalize a failure? Let them go, completely. Some way must be devised to reduce the volume of taxic assets on the books of banks, when they go under, rather than transferring these liabilities to another entity (whether private or public). Disolve the firm and simultaneously trash all the toxic assets.
would you have the same graph for corporate credit and the stock market boom ?
“The lenders were willing to do these because they, as you said were not particularly worried, because in large part they didn’t know what they were buying”.
It is true that they didn’t know what they were buying. But that does not explain why they didn’t care that they might be buying mortgages that would go into default.
Insurance against default is the important factor that created the willingness to buy anything. If I get my money back when the property goes into foreclosure, I am sitting pretty.
If the value of the property is going down, a profit-maximing owner of a mortgage that has insurance might prefer to collect his money via foreclosure today rather than tomorrow.
Cedric: The other thing that bozo economists and government officials keep ignoring is the aging demographic in developed countries. In the US it’s 80 million underfunded baby boomers scheduled to retire over the next 10 years.
I don’t think that anyone is ignoring it, it’s just that no one wants to talk too loudly about the obvious solutions, increase taxes, cut benefits, or increase immigration (either documented or undocumented).
Something that is very interesting is that the Federal government is very reluctant to crack down on undocumented aliens borrowing social security numbers in order to pay payroll taxes to fund social security. It would be relatively easy to do, but no one at the Federal level really wants to do it because of the economic consequences.
DJC: So here’s the situation. The first objective is to preserve the wealth of the creditor class – Wall Street, the banks and the other financial vehicles that enrich the wealthiest 1% and, to be fair within America’s emerging new financial oligarchy.
Anyone with a bank account is a bank creditor. Also, if you end up making the financial oligarchy wealthy and then extract some of that wealth with high capital gains tax rates to pay for health and education, I really think that this works out well for everyone.
ReformerRay: Some way must be devised to reduce the volume of taxic assets on the books of banks, when they go under, rather than transferring these liabilities to another entity (whether private or public). Dissolve the firm and simultaneously trash all the toxic assets.
Because when you wipe out a liability on someone’s books you are wiping out an asset on someone else’s books.
Also in the case of banks, the Federal government has already given guarantees on most of the asset base. If you just dissolve a commercial bank, then most of the liabilities of the bank get transferred to the Federal government anyway through depositor insurance.
Banks live in a mirror world. What most people would consider assets are liabilities to banks, and what most people consider liabilities are assets to banks. So to a bank, a bank deposit is a liability and a loan is an asset. If you mark the value of a loan to zero, you are making the problem worse.
ReformerRay: If the value of the property is going down, a profit-maximing owner of a mortgage that has insurance might prefer to collect his money via foreclosure today rather than tomorrow.
This isn’t true. Your standard 30 year mortgage is specifically designed so that the value of the property doesn’t affect the loan. You first put down a down payment and have equity in the house. This means that if the value of the house goes down, then the borrower gets hit and not the bank.
The second line of defense is that you lend to people with good jobs and credit. That way if the property goes underwater, then people with jobs and credit will still try to pay the mortgage, because they will have equity in the house.
The trouble is that over the last ten years, these defense mechanisms were systematically removed.
ReformerRay: Insurance against default is the important factor that created the willingness to buy anything. If I get my money back when the property goes into foreclosure, I am sitting pretty.
For prime mortgages you actually don’t. Most of the value of an MBS involves interest payments so if the borrower pays off principal for whatever reason, then the value of the note goes way down. This is especially the case because people tend to refinance when interest rates are low.
Mortgages like checking accounts are extremely complex financial instruments that have huge amounts of technology behind them. They seem simple to the borrower, but that’s because people have made a huge effort to keep the complexities hidden.
Pswartz,
Good anwers to Rebel and Don the Libertarian. I would add that the accounting identity between actual saving and investment says nothing about the equilibrium condition that desired saving equal desired investment. It is the latter condition that gives trouble when demand is deficient, as it is now.
According to the Alan Greenspan estimates in the paper linked in the above post, in 2005 the total value of existing home sales was $ 1920.9 billion. Of this, net proceeds of $914.5 billion were available to sellers of existing homes. Excluding repeat real estate investments, repayments of non mortgage debt, and other investments, $ 63.2 billion was utilized in personal consumption expenditure in 2005.
According to the Department of Commerce Bureau of Economic Analysis National Income and Product Accounts Table 1.1.5 (Gross Domestic Product):
Seasonally adjusted Q4 2005 GDP was $ 12,696.4 billion. Of that, personal consumption expenditures were $ 8,893.7 billion. $ 2,599.4 billion was spent on non durable goods in the United States in 2005, and $ 5,289.9 billion was spent on services.
Of a total expenditure of $ 7889.3 billion on non durable goods and services, $ 63.2 billion, i.e. 0.80%, came from the mortgage gains.
Consider only the total expenditure of $2599.4 billion on non durable goods in 2005. The $63.2 billion of personal consumption expenditure that came from home equity is only 2.43 % of the total expenditure.
This shows that the *rest* of the US economy, as the popular propaganda would have it was never funded by using homes as ATMs.
I’m willing to be contradicted and corrected if wrong, but the picture is absolutely clear from the above paper and the BEA’s GDP tables.
don (not the libertarian, I see),
In view of my discussion with Paul, perhaps you can explain what is wrong with the “treasury view” here (rather than on the earlier thread).
Wow. Very good responses. Thank you. Paul, I was agreeing with you, in that this situation seems odd on the face of it. I take the point about buying a CDS on your risky loan. But that CDS, if I’m not mistaken, is not government insured. So, I would expect that the CDS would have very high premiums or pay back only a fraction on the loss. I don’t see that. In fact, a CDS allows lower capital requirements. So my question would then become:
How expensive should premiums be to compete against an implicit government guarantee? My reading is that they were far riskier investments. Again, something in this situation didn’t make sense in the first place, even if you overlook the oddity of high risk buyers paying top prices for houses,often with ARMs. I simply want to know how much fraud contributed to this crisis, as opposed to simple stupidity. Such basic rules of sensible investing seem to have been violated that I can’t so easily accept stupidity.
Only 3 percent of spending (2001-2005) came from using homes as ATMs!!!
Reasoning and data:
Sorry, after a closer scrutiny of the paper, I seem to have considered only the home sales part of equity extraction above.
It’s easier to quote from the paper:
” According to our estimates, from 1991 to 2005, equity extracted from homes was used
directly to finance an average of close to $66 billion per year of PCE, about 1 percent of the total (lines 9 and 10). From 1991 to 2000, equity extraction financed an average of 0.6 percent of total PCE, but since then that share has risen to almost 1-3/4 percent. If we include non-mortgage debt repayments (in which, as mentioned above, installment debt is used as bridge financing for PCE, with home mortgage debt as the ultimate source of funding), equity extraction financed an annual average of about $115 billion of PCE from 1991 to 2005, 1.7 percent of total PCE (lines 12 and 13). By this broader measure of PCE funding, equity extraction financed 1.1 percent of PCE from 1991 to 2000 and close to 3 percent from 2001 to 2005.”
In my simpler words:
People got money out of the mortgage boom by selling homes, taking out new home equity loans and taking cash out refinancing loans. They repaid some non mortgage debt and spent other money directly on personal consumption expenditure. Taking the total money from the three cash items above, and looking at the total credit card, etc debt repaid, and total spending, surprise, surprise:
… Only 3 percent of spending came from using homes as ATMs.
I guess my point is that it seems odd to hedge a risky investment with a risky investment. That isn’t a great counterbalance, in my book.
Twofish,
Oh please, America’s financial oligarchy should be thrown in maximum security prisons for fraudulent business practices that include marketing subprime mortgages with AAA-ratings, financial derivatives of mass destruction, and various criminal ponzi schemes. US financial institutions commit outright fraud with billions of dollars in “toggle interest loans” which bank A lends to bank B which re-lends the money back to bank A, so Bank executives can pay themselves huge bonuses based on bogus accounting reports.
[...] here’s a few tidbits to think about: housing starts, the NAHB Housing Market Index, mortgage credit levels, and architecture billings are all at record low levels. Could this be a panic bottom? If you are [...]
Looking at only 2005 data, line (1) in Table 2 shows a total home equity free cash extraction of $ 1,428.9 billion. $ 143.9 billion of that was used to repay non mortgage debt(line 5), and $ 182.7 billion was used for PCE (line 9).
According to NIPA total PCE in 2005 was $8893.7 billion. $326.6 billion, or just 3.67% of PCE was financed by using homes as ATMS in 2005.
Suppose from the NIPA table you exclude “durable goods” PCE altogether. Of the total non-druable goods PCE, only 4.14% came from using homes as ATMs.
If using homes as ATMs only funded a small perentage of the PCE in US GDP, there’s a great deal of hope for US economic recovery once the credit squeeze is sorted out with the Geithner bank bailout plan.
As a financial insider who has acted as an agent for the Federal Reserve, Mr. Gross knows what he is talking about. According to Gross, the entire U.S. economy is a Ponzi tower waiting to fall. He calls it “our Ponzi-style economy.”
When the world’s biggest bond fund manager—whose investments are dependent on the value of the dollar—says the U.S. economy is a Ponzi scheme, people should wake up and take notice.
Social Security is probably the most blatant example of how the U.S. has turned the economy into an unsustainable Ponzi scheme.
America’s whole Social Security safety net is mathematically unsustainable. The model can’t help but crack.
But Social Security, Medicaid and Medicare are just part of America’s Ponzi economy. It gets much worse.
Take a look at our Ponzi-style capitalism at work in the housing market.
As home prices doubled and tripled over the past decade, most buyers probably never thought they were going to become victims of the biggest Ponzi-style scam in history.
Lost in the euphoria of supposed never-ending house-price appreciation was the fact that America’s population was only slowly growing. House prices were not going up because more people needed homes. Prices were going up because waiters and secretaries were buying two, three or more homes at a time to flip.
The Ponzi housing market had ramifications that spilled out into many other areas of the economy as well. It created a huge misallocation of capital. Homeowners, relying on their rising home equity, borrowed against their homes to eat out, purchase vehicles, and go on vacations. Businesses not realizing that the housing market was a bubble waiting to pop borrowed and spent even more money expanding their businesses to take advantage of rising but unsustainable consumer demand. Home builders also misinterpreted the artificial housing demand as real growth, borrowing billions to construct millions of unneeded homes.
Now that the housing fraud has been exposed, demand for housing has plummeted, prices are cascading, homeowners are defaulting on their mortgages at record numbers, and the banking system is in crisis.
http://www.thetrumpet.com/index.php?q=5865.4227.0.0
Bless you for this post and the graphs. This is the clearest description I’ve seen of this side of the issue – and the clearest pictoral demonstration of the relative roles of privates versus Agencies in fostering this mess. I’ve seen similar things but not in the context of mortgage credit.
As I read the graphs, one could argue the relatively late appearance of Agencies may have prevented a faster fall. I wonder what would have happened if that had been the trajectory? That would be a neat “what if.”
BTW, my take on housing markets is that limited numbers were massively over-built – the usual suspects – but many other markets are drastically affected by two other factors: the “good markets” inflated way above incomes so people needed to buy in with huge mortgages and other markets are being rocked by huge systemic changes in the economy. I’m not talking only Detroit, though it is a poster child.
As a note, I grew up in the rich Detroit suburbs and people simply don’t understand how much value the auto industry created; one can drive for well over an hour across the northwest suburbs without ever leaving upper middle class suburbs.
Rebel,
As simply as I can, actual saving equals actual investment, but that is no guarantee that desired investment will equal desired saving. If actual saving grows and forces actual investment to exceed desired investment (people don’t buy, so inventory is left on shelves), then business cuts back on output, forcing income (and actual saving) to decline. This is the so-called paradox of thrift.
In ‘normal’ times, I don’t like don’t like government spending as a solution to economic slumps, for the reasons given by Mankiw. But these are not ‘normal’ times.
I epected Lucas to miss getting the Nobel prize, because I expected a liquidity trap to happen before now. Anyway, Muth should have gotten that prize – he invented ‘rational expectations,’ not Lucas.
emtn
indian:
This shows that the *rest* of the US economy, as the popular propaganda would have it was never funded by using homes as ATMs.
I think this data doesn’t include home equity loans on existing home equity. Or something is incomplete.
I remember reading backward looking articles in 2005 that put the annual number at 600B, which is 5% of GDP (a lot, like a stimulus program every year). Also there was a John Mauldin article confirming numbers like that until the ATM machine broke sometime in 2007.
Unfortunately, I don’t know where to find the data right now, or I’d post it.
On another subject, buying CDS to insure bond interest. I don’t like the idea of counter party risk going up with interest rates on my interest rate insurance policy, so I’ll pass.
@Paul: Thanks a lot for some brilliant work in this essay. This post and the referenced paper indicates that only 3% of US consumption came from home equity cashouts b/w 2001 and 2005. Are you aware of any estimates for 2006-2008? Is the relevant data out yet?
Knowing that only a small %age of US consumption came from home equity increases should convince people of the likelihood of a strong recovery soon. However, I’m not sure the US economy can expand through the housing industry route in the near future.
Secondly, as long as there’s a zero interest rate policy in force there seems to be a natural case for USD funded carry trades, which is perhaps being held back by USD appreciation expectations.
don,
You seem to be assuming that interest rates do not fall to equalise desired saving and desired investment, and that producers do not cut prices to clear their unwanted inventory. No criticism of you intended, but this is what, as a former scientist who came late to economics, I find so frustrating about economic debate. It should be possible to narrow debate down to key facts and logic (eg the stickiness of prices) and resolve these. I think one of the reforms that will be needed in the light of the present crisis is of academic economics.
@Cedric: the Greenspan/Kennedy paper includes all the relevant data. HELOCs, Cash out refinancing, outright existing home sales. It also adds the repayment of non mortgage debt as PCE.
Reformer,
1. DJC is wrong on the nationalization as you ve noted. The fdic insured deposit only transfer into the good bank is right.
2. As for »fiat insurance against default« being the motor of willingness you are right there though at the same time it is here you enter the realms of schemes that i call some italian sounding name starting with P. let s put it this way – buying fiat insurance insures nothing (but it enables the scheme to run another round). Bail outs do and eventually nationalisaion will too (make the P financiers whole again).
Looks like we do not know enough:
-where are the surplus houses?
- are they trailers or mansions?
- who blinked first: buyers, builders or lenders?
If you wait long enough, even throwing money at prospective buyers with iffy credits (almost anyone in the US who needs a roof above her head) will not make people buy. HOwever, the silly US system of non recourse mortgages may make people take a punt.
Mr Obama’s latest epiphany seems to aim for the obvious way out: swamp the GSEs in capital and force them to lend. A year ago this may have worked, but now?
I do not know. This is a stupid, exaggerated sort of correction with lots of people (who may hurting a little, but as far as I can see, through voluntary actions in the past) believing that we are going for a remake of the Great Deprssion. If we all try hard enough, that is what may happen.
Is this a conspiracy of wannabe Baruchs trying to buy lots of things on the cheap?
Paul Swartz: Conceptually appealing and predictive over the long term but not terrible useful in the short run.
Me: I got a link from Bridget Magnus blog to an article on the latest housing start numbers. In January, housing starts fell to a SAAR of 466,000.
The relevant census report is here:
http://www.census.gov/const/www/newresconstindex.html
Even if you assume that 3 people live in one census housing unit, there are too many houses in the United States. It’s more likely to become a home improvement market than a housing start market in future. Unless the census population estimate, or its housing unit estimate are seriously off.
PS: Cedric, it might well be that apartments are counted as housing units. That shouldn’t go against the logic that there are far too many houses in the US already. Building more houses at the rate of half a million a year just to leave them empty doesn’t make sense to me.
Because when you wipe out a liability on someone’s books you are wiping out an asset on someone else’s books.
It makes a difference whose ox is gored. Toxic assets on banks balance sheets are pulling down the world economy. The speculator who purchased “bad” mortgages gets gored when credit default swaps are wiped out and insurance on a investment that never should have been made is canceled.
Banks are important institutions. Seculators are not.
Rebel –
You are right. That is the essence of the liquidity trap and sticky wage arguments. Anyway, empirically, there is little evidence that either saving or investment respond much to interest rates. That is why the stylized facts built into the Keynesian model show investment fixed and saving dependent on income. (In theory, the effect of interest rate changes on saving are ambiguous.)
Rebel -
Would you argue that there is no such thing as involuntary unemployment? That position is becoming daily more untenable, and that (IMO) is the main reason for the resurgence of the Keynesian insights.
“Twofish responds:
ReformerRay: Insurance against default is the important factor that created the willingness to buy anything. If I get my money back when the property goes into foreclosure, I am sitting pretty”.
Twofish answers this point by talking about prime mortgages that are paid in full after 30 years.
I am talking about something else – the eagerness with which all kinds of bad mortages were sought after by investors. I think a very large percent of th em knew exactly what they were doing. Insurance made them indifferent to the consequences of their actions.
Now that Freedie and Fannie have been taken over by the government, a new law is needed restricting the option of insurance on a mortgage in the U.S. to those two entities.
indian:
Found a RGE article on HEW. Down at the bottom they have some graphs HEW over the years. Unfortunately, even with my glasses on the graph numbers look fuzzy to me. But they do look like around 600 of something. I can’t make out the scale note on the chart. Have a look and see if you can make it out.
http://www.rgemonitor.com/roubini-monitor/253392/life_without_home_equity_withdrawal__down_to_24bn_in_q1_2008
Thanks don – useful food for thought. It would have been better had the Krugman / Fama debate proceeded like this. I would next ask (but don’t go to any trouble to answer) for the source of the evidence for the (to me) surprising facts that saving and investment do not respond to interest rates, and that the effect of interest rates on saving are ambiguous. And then I would wonder how the government is able to obtain the resources for stimulus without prompting an offsetting fall in private sector expenditure. I hope to get my head around this eventually!
indian
“PS: Cedric, it might well be that apartments are counted as housing units. That shouldn’t go against the logic that there are far too many houses in the US already. Building more houses at the rate of half a million a year just to leave them empty doesn’t make sense to me.”
There are a lot of old crappy ones. Greenspan noted that in a comment he made back in 2002, which is one of the Greenspan musings which in retrospect makes me believe he intended to start a housing bubble. Maybe not this big, but that was where he thought jobs could be generated. It just became too much fun.
So it still would make sense to bulldoze large sections of inner cities and replace the 1940’s energy inefficient housing with affordable “multi-family” residential buildings (indian to american translation:apartments).
But the price boom made it much more expensive to do that.
Thanks for the continued comments; sorry to those who I don’t give adequate response but here a quick few.
ReformerRay: (1)‘Why nationalize a failure’ One argument to nationalize the banks is that it is the quickest way to get the credit markets working again. Letting the banking system (credit) fail has serious knock on effect that can create a downward spiral. The question is how to wait the cost of recapitalizing them vs the cost of failure. It is a tough question; I fail on the side that holding them up (which could be through nationalization) makes sense. (2)
Df: Sorry don’t have that chart. It could be done using the F.101 (in the flow of funds) Non-financial business table increase in liabilities. It breaks out into CP, bonds, banks loans, other, mortgages, and muni. The connection is not as clear to me because equity purchases are not as dependant on credit (although via the stock buyback connection they might be connected).
II – (1) on MEW: You might want to take a look at MEW (mortgage equity withdraw) on a change basis instead of a level basis. My impression has been that it wasn’t that all purchases were financed via MEW but that growth was being held up by MEW. And given we knew that MEW growth was unsustainable it was creating a dynamic where growth could fall rapidly. But my point about MEW in the post related to the fact that mortgage credit could go other places besides homes. MEW data is not a specialty of mine but table F.218 in the flow of funds has an quarterly view (through 3Q08) which gives some of this information. (2) Without arguing the merits of carry trades I suspect that large thing that is holding them back is the deleveraging in the HF sector and the capital losses taken by old carry traders. They don’t have the balance sheet capacity to support risk trades at the moment.
Don/Rebel – Although the identity is trivially true (savings = investment (including deposits), while spending = income), part of the challenge in the current environment is that savings is going into cash and is unable to attract investment in part because (1) rates can’t go below zero in nominal space and bring inflation up to push real rates down is tricky (thus not pulling in borrower via low rates) and (2) risk capital (balance sheet capacity) to support investment has been destroyed and thus intermediation is non functional as long as deleveraging continues.
don,
Good question. I have been wondering about how much the present unemployment is voluntary or involuntary. I suspect that a lot of it is “voluntary”, in the sense that there is an excess of people whose skills and experience were best suited to boom conditions – eg realtors, retail workers, etc – who prefer to live on their savings or unemployment benefit than give up looking for work in their own line that pays massively better than the kind of job that they could readily get (eg picking crops). What worries me is that, while I can see that stimulus funded by borrowing from overseas might create jobs for these people, if these jobs are just disguised, more expensive, unemployment benefit, the stimulus might leave us worse off than it would have been if the resources had been not spent at all, or targeted on incentivising adjustment. I can imagine, however, that the idea that the former prosperity was unsustainable, and that people are going to have to do less attractive jobs, is a hard sell.
easy access to credit was a key source of the getting us where we are today
This was more an issue of bad credit than loose credit. I wonder where we would be if only good loans were made but because there were so few of them interest rates would have had to have been much lower making even risky loans reasonable. Still a boom, but a sustained one.
Paul,
I have not thought it through fully yet (you can see from my other comments that I have more questions than answers), but I am sceptical that it is a problem that “savings are going into cash”. A banknote is just a non-interest-bearing loan to the government, so provided that the government uses the loan (say to lend to GM), holding banknotes is not a great deal different from lending money (say by buying GM bonds).
Rebel – Sorry about that, I should be clearer, when I said cash I’m thinking about bank deposit. If it stop on the banks balance sheet as a deposit which given banks are deleveraging seems common then it doesn’t make it to spending, thus does not make it to income.
Paul,
Same issue, almost. Banks have to lend the deposit to someone, and they are not going to borrow unless they have a use for the funds. Of course, the banks may lend their deposit to the Fed in the form of excess reserves, but that is just base money, in which case my previous argument applies.
Rebel,
Stimulus spending paid for with foreign borrowing does not help U.S. employment – the entire effect on aggregate demand gets lost in an increased current account deficit. The U.S. taxpayer is still stuck with the bill, though (unless we default on the foreign loan).
ReformerRay: The speculator who purchased “bad” mortgages gets gored when credit default swaps are wiped out and insurance on a investment that never should have been made is canceled.
As does the depositor (i.e. you) that unknowingly lent him the money that he used to buy the mortgages. You didn’t think that the speculator was foolish enough to use his money for the speculation, did you? Nope. He was using yours.
ReformerRay: I am talking about something else – the eagerness with which all kinds of bad mortages were sought after by investors. I think a very large percent of th em knew exactly what they were doing. Insurance made them indifferent to the consequences of their actions.
Frankly, I don’t think it made a difference. People were buying and selling bad mortgages for the fees. It didn’t matter whether or not the mortgages went bad after five years. After all, when the mortgages went bad it wasn’t going to come out of the buyer or seller personal account.
Look at this way. You have a mortgage broker who was selling a mortgage to someone that wasn’t going to repay. The mortgage broker makes a commission, the buyer gets cash. Neither of them care if the mortgage is going to go bad. Ultimately the money comes from bank depositors, who really don’t care where their deposits go because everything is FDIC insured.
RebelEconomist: . I can imagine, however, that the idea that the former prosperity was unsustainable, and that people are going to have to do less attractive jobs, is a hard sell.
Especially if it doesn’t happen to be true.
RebelEconomist: Banks have to lend the deposit to someone.
No they don’t. They can take deposits and just keep them as cash in the vault.
don,
I am sure externally funded stimulus can lower US unemployment. For example, an unemployed worker would require, say a car, to dig pointless holes in the ground and fill them in again for a year. OK, so import cars from Japan on treasury credit, and give them cars! The US taxpayer gets stuck with the bill, but unemployment is still reduced for a while (unless ricardian equivalence makes taxpayers reduce their spending to prepare for the higher taxes of course). That is what I had in mind by disguised, more expensive unemployment benefit.
Q: I guess my point is that it seems odd to hedge a risky investment with a risky investment. That isn’t a great counterbalance, in my book.
It actually works pretty well if you have two risky investments that aren’t correlated. CDO’s came out of the corporate bond market where they work rather well. You have a basket of junk bonds in different industries, and then by ordering them, you end up so that the super-senior’s only get smashed when everyone goes bankrupt.
The trouble with using CDO’s in subprimes is that when residential housing goes bad in one place, it goes bad everywhere, and everything falls apart.
Also Fannie and Freddie would not have gotten into trouble had they stayed with selling prime mortgages which all have extremely low default rates. The problem with prime mortgages is that they aren’t very profitable to write. Subprimes are much more profitable.
Twofish,
“No they don’t. They can take deposits and just keep them as cash in the vault.”
And what is “cash in the vault”?
(hint: read the other comments before you comment yourself)
Well, 2fish likes to go on and on trying to convince us that bankers are brilliant sociopaths who are able to stick “we the depositors”, or “we the taxpayer” with all their anti social actions.
And I couldn’t agree more.
Then he always concludes that we will all be better of for it. hehe.
Right now I’m thinking that the brilliant folks are insuring against rising interest rates, which is like insuring against a snow storm in Buffalo, NY.
I know were that’s headed. Another problem for the taxpayer.
RebelEconomist: A banknote is just a non-interest-bearing loan to the government, so provided that the government uses the loan (say to lend to GM), holding banknotes is not a great deal different from lending money (say by buying GM bonds).
It’s very different. If you lend money to GM, then you don’t know if you are going to get any of it back. If you lend money to the government, you know that you are going to get something back. Governments can tax and print money, which is something that private corporations can’t do.
If you don’t think that there is a difference, then I’ll gladly give you a promise to pay you $1 million in a years time, if you give me $1 million in cash right now.
Cedric: Well, 2fish likes to go on and on trying to convince us that bankers are brilliant sociopaths who are able to stick “we the depositors”, or “we the taxpayer” with all their anti social actions.
Cedric: Well, 2fish likes to go on and on trying to convince us that bankers are brilliant sociopaths who are able to stick “we the depositors”, or “we the taxpayer” with all their anti social actions.
Personally, I don’t think that bankers are less sociopathic or more brilliant than anyone else. Perhaps a bit more realistic about human nature.
Also “we the taxpayer” is quite different from “we the depositors.” One of the brilliant scams that rich people have been able to foist on the American public is the idea that tax cuts mainly benefit the middle class. They don’t.
If you want rich bankers to pay for the mess, then raise taxes. Otherwise, you are just getting scammed worse than you’ve already been.
To Huizer: We know quite a bit….
- where are the surplus houses?
Heavily in Florida and California. Areas which had lots of land until recently.
- are they trailers or mansions?
A lot of McMansions. Mostly middle class suburban housing.
- who blinked first: buyers, builders or lenders?
Buyers. House prices have been going down for quite some time now.
DJC: When the world’s biggest bond fund manager—whose investments are dependent on the value of the dollar—says the U.S. economy is a Ponzi scheme, people should wake up and take notice.
Yes. We all know that hedge fund managers are acting in the public good, and we should take everything they say at face value because they couldn’t possibly be making money by making the markets move in a certain direction.
Twofish,
The discussion was about flows. Of course, the credit risk of lending to the government (which I will take to include the Fed) is much less. If the private sector has irrational fears about the creditworthiness of GM, it should be profitable for the government, and welfare enhancing, for the government to print banknotes and lend to GM. This is essentially what the Fed is doing by “credit easing”.
2fish:If you want rich bankers to pay for the mess, then raise taxes. Otherwise, you are just getting scammed worse than you’ve already been.
So if we tax Bankerman, Bankerman will save Gotham City?
RebelEconomist: If the private sector has irrational fears about the creditworthiness of GM…..
They aren’t irrational fears. When the CEO of a company says “if we don’t get funding then we go bankrupt” I’d say that the fears of not getting your money back are quite rational.
RebelEconomist: it should be profitable for the government, and welfare enhancing, for the government to print banknotes and lend to GM.
If it was obviously profitable then someone else would be doing it. It’s not. There is a very high probability that the government will put money into GM and get no financial profit in return.
Cedric: So if we tax Bankerman, Bankerman will save Gotham City?
Right now bankers are trying to save Gotham because if the ship goes under than everyone drowns. Once we have a total bill it makes sense to charge the people that 1) can afford it, 2) got us into this mess in the first place, and 3) are making money in getting us out.
2fish:
Does Bankerman have 3 trillion, or 4 or 5?
So you are against the Fed’s credit easing, Twofish?
RebelEconomist: “I can imagine, however, that the idea that the former prosperity was unsustainable, and that people are going to have to do less attractive jobs, is a hard sell.”
Twofish: “Especially if it doesn’t happen to be true.”
But it surely is true.
Rebel: To begin, let me avoid confounding stocks and flows by clarifying that my point is that an increase in net foreign lending to the U.S. does not help U.S. employment when we have deficient aggregate demand. To take your example, suppose we import a car and use it to pay a worker we hire to dig useless ditches. But when we imported the car, we displaced U.S. aggregate demand, because it is a net increase in the trade deficit (the other side of the coin from the increase in net foreign lending). If we are demand-constrained (the Keynesian case), total employment is the same as without the loan.
of course he has 5 trillions, even more. he just needs to get it first before somebody gets him.
do you not listen to (scheme feeding but now temporary to the pr stunts – forced “acrobat”) ben?
locococococococo
Methinks that when Bankerman first catches wind that the government will send him a $5 trillion dollar tax bill, that Bankerman hops aboard his trusty Learjet. He takes off and circles the Statue of Liberty, shreds all US citizenship papers, drops them out the window on the old girl in one last nostalgic ticket tape parade, then orders his pilot and consortium of co-pilots to set the controls for Monte Carlo.
Then it’s time to relax with a martini delivered on gilded tray by half a dozen young French clad flight attendants.
Look at this way. You have a mortgage broker who was selling a mortgage to someone that wasn’t going to repay. The mortgage broker makes a commission, the buyer gets cash. Neither of them care if the mortgage is going to go bad. Ultimately the money comes from bank depositors, who really don’t care where their deposits go because everything is FDIC insured.
Well, Twofish, some of us care. My family cared. We thought we had some responsibility to keep the U.S. on the straight and narrow. What we have allowed, the collective irresponsibility we built into the private sector in control of money, is going to affect my grandchildren.
You can add to your list of actors who didn’t care the people who securitized the bad loans and the people that bought them and the people that insured them – all private sector actors.
Eliminate the option of private sector insurance of mortgages and see how quick the U.S. returns to a sensible course.
Paul Swartz has a reasonable argument with which I disagree : “ReformerRay: (1)‘Why nationalize a failure’ One argument to nationalize the banks is that it is the quickest way to get the credit markets working again. Letting the banking system (credit) fail has serious knock on effect that can create a downward spiral. The question is how to wait the cost of recapitalizing them vs the cost of failure. It is a tough question; I fail on the side that holding them up (which could be through nationalization) makes sense.
I am not obsesed with getting the credit markets working again – for businesses, OK but for consumers, no. Comsumers should reduce debt during a recession. That lays tghe foundaion for a recovery.
The cost of either holding them up or allowing them to fail is unknown. We know the cost of holding them up. No one is working on the question of the cost of failure. How do we measure the cost of failure? The important issue for me is that the cost of failure falls on the private sector. The cost of holding them up falls on the public sector. I am looking ahead. I assume the U.S. is really going to increase taxes and reduce spending so as to reduce the U.S. debt. No need to increase that burden until we see what can be done by sticking the private sector with the bill.
Cedric Regula repeats the common argument that we can’t tax rich folks because they will just take themselves and their money to another nation.
To which, I say, good riddance. Wealth is created in the U.S. by the society as a whole. If any one individual leaves, and takes his money with him, that merely opens the door for someone else.
I say tax the heck out of the extremely successful. Some of them are hard workers who contributed to the good of us all – others are high earners for a variety of reasons, not all of those reasons provide a benefit to the rest of us. The good ones are rich because they enjoy what they are doing and they will keep on doing it. In any case, this country has to get over the notion that rich people have the rest of us over the barrel. They have power but so does the majority of voters.
RebelEconomist: So you are against the Fed’s credit easing, Twofish?
No. What gave you that idea?
Cedric: Methinks that when Bankerman first catches wind that the government will send him a $5 trillion dollar tax bill, that Bankerman hops aboard his trusty Learjet.
Most people that work in Wall Street investment banks, ride the subway and live in Queens or New Jersey. Sure the CEO’s of investment banks have private jets, but the CEO’s of all big corporations have access to jets.
ReformerRay: Well, Twofish, some of us care. My family cared. We thought we had some responsibility to keep the U.S. on the straight and narrow. What we have allowed, the collective irresponsibility we built into the private sector in control of money, is going to affect my grandchildren.
And letting everything fall apart is going to help them how exactly? The problem is that if you let everything fall apart you punish both the innocent and the guilty, and if you punish the innocent then what you’ve done is to encourage them to be guilty the next time things go bad.
If everyone ends up poor and unemployed then you were a fool for not stealing everything you can while you could, and that is what people in societies with broken financial systems learn.
ReformerRay: Eliminate the option of private sector insurance of mortgages and see how quick the U.S. returns to a sensible course.
No, because then people will learn to play silly games with public sector insurance of mortgages. Economics is hard because you are dealing with people,
As soon as you change the system people will game it, which means that when you look at what you need to do, you need to look in detail at what is being proposed. Simple “magic bullet” solutions just will not work, because people will find ways around those solutions and as people find ways to game the system, and people plug the holes, then things get complicated.
ReformerRay: he cost of holding them up falls on the public sector. I am looking ahead. I assume the U.S. is really going to increase taxes and reduce spending so as to reduce the U.S. debt.
I don’t think so. Once people get used to a government program it becomes politically very difficult or impossible to justify shutting it down. All of those programs that got passed with the stimulus program will have lobbyists and politicians fighting for them years after this crisis passes.
Eventually you will have government overregulation and overtaxation like in the 1970’s, and we’ll need a change in leadership to fix that. But that is something to worry about tomorrow.
It’s maybe because I’m Chinese that I see history moving in cycles rather than looking for the perfect system, which I don’t think exists. People have this (which I think is silly) notion that you can come up with a fix that will solve all of the problems for all time, you can’t.
All of the solutions that we have today, they are going to set the stage for problems tomorrow. Rather than try to find perfection which is impossible, you just try to do the best with what you have.
Cedric: He takes off and circles the Statue of Liberty, shreds all US citizenship papers, drops them out the window on the old girl in one last nostalgic ticket tape parade, then orders his pilot and consortium of co-pilots to set the controls for Monte Carlo.
If you talk about increasing the marginal tax rate to 90%, yes maybe that will happen, but the total marginal tax rates (state+federal+local) that people are talking about are 50%. That’s not enough to have capital flight, and you end up with much higher total return if you stay in the United States.
TWolfish and I have a disagreement about the consequences of letting banks fail.
“Letting everything fall apart” is Twofish’s picture of what happens if insolvent banks fail.
That assumes all banks are insolvent. Not true. Or assumes new banks cannot be invented. Not true. Or assumes U.S. government cannot fund new banks who have no toxic assets. Not true.
We are not in the panic mode of Sept. 2008. The U.S. economy can easily adjust to the failure of insolvent banks IF – this is is important – the FRB and Treasury prepare for it and publish a notice saying what they are going to do after the banks fail. Also, warn investors that they are going to cease supporting banks after X weeks or months.
That would give the speculators some scrambling room – and help identify the insolvent banks.
“ReformerRay: Eliminate the option of private sector insurance of mortgages and see how quick the U.S. returns to a sensible course.
No, because then people will learn to play silly games with public sector insurance of mortgages. Economics is hard because you are dealing with people,
Twofish has history on his side. But the future does not have to replicate the past.
I have seen private sector people out-manuver public employees again and again. But I say that is because the ultimate decision makers (elected officials) have been infected with the Ronald Reagan disease (if its public sector, kill it). I think arguments in support of the public interest will get more public interest in the future.
ReformerRay: Twofish has history on his side. But the future does not have to replicate the past.
It won’t, but you will still be dealing with people who are subject to the sins and flaws that flesh is heir to.
ReformerRay: I have seen private sector people out-manuver public employees again and again. But I say that is because the ultimate decision makers (elected officials) have been infected with the Ronald Reagan disease (if its public sector, kill it). I think arguments in support of the public interest will get more public interest in the future.
The motive behind most arguments in the public interest involves private gain. If you pay someone enough money, they can come up with a very nice sounding argument explaining why what they are doing is in the public interest. All of the expansion of credit in subprimes for example was justified as bringing home ownership to low income households.
The problem with rejecting all arguments that are self-interested is that from time to time, they may be correct. A small businessman that argues that governments should promote business friendly policies for the public good is really interested in making more money, that doesn’t mean they are wrong. The other problem is that we can talk about the “public interest” all you want. The fact remains that any non-trivial economic policy will help some people more than others, people ultimately define “public interest” as what is good for me and people that are close to them.
You may be doing something that you think is good for your grandchildren, but can I or should I really expect you to support a policy that is obviously great for someone else’s grandkids but obviously horrible for yours? Not really.
People hate thinking that they are doing something selfish, which means that there is a great demand for people that make people feel non-guilty about what they want and feel.
we have no idea that it is us and the ones before that are doing this. we ll swap till you drop and talf more and fight all those ill intentioned mal educated persons be they legal or physical who attack and destroy our precious money markets. we be transparent tho won t show you the over collateralized articles acquired for you since we uphold trade secrets laws. We ll continue to throw all the seniorage to the beast so that none gets to tim (and larry). apart from the above, there are no guarantees (tho feel free to purchase more of them default schnapps).
Why not employ a basic program?
10 print: “we lend to those with valid banking license only (gambling and insurance excl) at 3% against the non asset backed only over collateral”
20 go to 10
it ll save the mm , be more friedman-compliant + much cheaper (pr wise incl.). regulation and oversight will both need to leave the conflict here.
Gaming that would be so boring.
The motive behind most arguments in the public interest involves private gain. If you pay someone enough money, they can come up with a very nice sounding argument explaining why what they are doing is in the public interest. All of the expansion of credit in subprimes for example was justified as bringing home ownership to low income households.
This is a very old argument. Adam Smith used it to point out how arguements in support of trade barriers to imports were phrased in the public interests but really were based on selfish motives.
People listened to Adam Smith. Today, we have extreme irrational prejudice against anything that can be labelled “protectionism” because of the realism behind Smiths’ position.
However, because people are selfish does not mean that all arguments in favor of restrict imports into the U.S. are based on a selfish PERSONAL motive. The arguments I make are based on a selfish motive for the U.S. as a whole, including Twofisn’s Grandchildren.
The existence of self-serving interests I take for granted. The existence of an interest in protecting the future of the U.S. I also take for granted.
Arguments in defense of a legitimate public interests are very difficult to develop and defend. That does not mean that the interests of the U.S. as a whole does not exist. It just means that the U.S. interests is elusive, hard to pin down.
ReformerRay: The arguments I make are based on a selfish motive for the U.S. as a whole, including Twofisn’s Grandchildren.
Trouble here is two fold:
1) I have no particular reason to think that my grandkids will be living in the United States. Given that I don’t know in what country my grandkids will be living in, policies that benefit the United States at the expensive of Argentina aren’t obviously in their interest, should they end up living in Argentina.
2) With something as large as the United States, it is often really difficult to define what exactly the national interest is. The problem here is that if there is consensus that something is in the US national interest, then we aren’t arguing about it. The fact that we are arguing about something means that it’s not clear where the national interest is.
locococo says:
10 print: “we lend to those with valid banking license only (gambling and insurance excl) at 3% against the non asset backed only over collateral”
20 go to 10
Gaming that would be so boring.
Not really. First define “banking” and “banking license.” Who issues the license? What are the criterion for issuing the license? Are licenses transferable? Revocable?
Who values the collateral? What happens when collateral is impaired? What can the collateral holder do the the collateral? What is the payment structure of the loan? Is it callable? Putable? Can the loan be resold?
I see
My mistake. I apologize.
It was in fact – as pointed there rightly – much more boring gaming the ever falling real interest rates – for the last 25 years – the outcome »insured«, the cost of capital (thus capital itself) to go with the cost of labour (thus labour »itself«) lowered to destruction points and then the latter bails out parts of the suddenly quadrupling debt »interest« that came in late in that game as if “collaterlized” – all courtesy of fed – repeatedly, just before the end…
Of that cycle.
(with some “sophisticated” threads to go with and without even mentioning the schizophrenic pattern of the nominal one and thus corresponding behaviour / misallocation)
[...] http://blogs.cfr.org/setser/2009/02/18/mortgage-credit-and-the-housing-boom/ [...]
[...] http://blogs.cfr.org/setser/2009/02/18/mortgage-credit-and-the-housing-boom/ [...]