14 May 2010

Treacle, Treacle, Little Star

I stumbled across this bit of nonsense yesterday. I was reminded of that ditty, suitably adapted: Treacle, Treacle, Little Star. The juvenile effrontery, of a PhD in economics (well, from Chicago), beggars the imagination. I was propelled to respond, and thus I did, and pass it on here.

You, and the rest of the FreshWater Crew, are such an idiot. You dress up your idiocy in flowery prose, but the base facts remain: the housing boom involved two factors; the need of the beleaguered middle class to maintain its status in the face of falling median income during the Bushie years, and your beloved Dr. Greenspan's foolish interest rates. Those such as you have turned Political Economics into just politics. Shame on you.

An even casual perusal of the historical record, not to mention regulation, shows that the ratio of median house price to median income is stable. Moreover, the news record makes it quite clear that from about 2002 mortgage companies, banks, and builders inflated house prices in response to low interest rates. Econ 101 teaches that interest rates and prices are inversely correlated. And it was so.

The creation of CDO and MBS and the like happened to satisfy a demand for "safe" instruments that paid higher rates than Greenspan countenanced. And it was so. First mortgage companies, then banks in response, fiddle mortgage contract terms in order to support increasing prices in the face of stagnant median income. As you should know, housing payment as a proportion of income is historically stable; both by regulation and prudent lending. The prudence part of the process was winked at; the payment remained stable by fiddling the calculation of that payment. Thus were born Alt-A, interest only, flex payment, and all the rest.

These factors were known by 2003. A recent article in the Times revealed that the Fed raised the issue internally by 2004.

It also well known in the profession that the USofA is one of the few where home mortgage interest is deductible, and that this leads to excess expenditure in housing.

The notion that housing is investment is poppycock. There is no real return on housing. Housing produces no output, whose value accrues to society. The "return" lies only in the ability of mortgagees to continue to pay. In times of inflation, real mortgage cost decreases in the face of the money illusion in increasing wages.

The fact that there was no wage inflation in place during the Bushie years is a head smacking clue that something corrupt was driving price appreciation; there was no pressure from rising median income to justify house price appreciation. Do you get it now???????????

"...it is too early to blame a majority of the housing boom on irrationally exuberant home buyers, because even without these things a historically unusual housing boom may well have been efficient."

That is the stupidest statement I have ever seen from a PhD in economics. You entirely ignore the factual historical record. Mortgage companies, bankers, and builders took advantage of an artificial (because it derived explicitly from Greenspan's decisions, rather than the Invisible Hand) demand for home mortgages to produce housing at prices they wished rather than what would be supported to the extant median income. You can't derive an explanation for the mess by ignoring the driving cause of all things economic: median income.

The FreshWater is dead, long live the SaltWater.

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