Another comment from someplace else. This time it's a Seeking Alpha thread, a review of Roger Lowenstein's review of the Great Recession, "The End of Wall Street". In the comments, is the assertion that the Great Recession was sparked by oil prices. Not even close. Oil, even with manipulation is a lagging indicator.
No. The crash was caused by the stagnation of median income, which is the root cause of all previous recessions/depressions (and this one too). Read economic history. Since Reagan, median income has either fallen or stagnant (depends on when you measure).
The dominoes:
- median income stagnates under Reagan/BushI
- demand for goods stagnates, as a result
- Greenspan cuts interest rates hoping for a monetarist recovery, as a result
- Wall Street (funds, largely) seek higher returns on "risk free" instruments, as a result
- housing, since it involves no heavy capital expenditure in the way manufacturing does and gets considerable government support, is the logical source of such instruments, as a result
- excess fiduciary capital exists in China, India, and it, too seeks such "risk free" instruments, as a result
- builders, seeing the inflow of money, decide to ignore the SMSA income data, and build out subdivisions at prices far in excess of established norms; median income and house payment track (until this mania) exactly; they make out like bandits (well, they are)
- subprime, Alt-A, and all other non-conventional loans depend on two assumptions: 1) household income will rise to meet the adjusted payment (it hasn't been for years, and there is no reason to conclude it will) and 2) prices will continue to rise sufficient to cover the adjusted payment and equity withdrawals (which are made to level consumption in the face of stagnant median income); neither is true
thus:
when the exotics begin to re-set, the Ponzi scheme falls. The only winners are the builders, who've gotten the money, dumped the houses, and fired all those nail hammerers. Well, the ones smart enough to realize what they were doing. Not all were.
All of this was obvious as early as 2003. It was to me, anyway, and it turns out, the Fed, recently reported. I felt so much better.
08 June 2010
04 June 2010
Dive Into the Shallow End
A really simple post today. Just this link. The posts from 28 May on are the ones that caught my interest.
28 May 2010
Tech Ed
The O'Reilly publishers web site has some interesting discussions. I visited recently and found this one dealing with bettering education through "entrepreneurship". My BS radar went off, and I was moved to comment. Here it is:
Be careful here. For profit "educational" companies are regularly taken to court for over-hyping and under-delivering, although not nearly often enough. I worked for one, thankfully it was closed down. Education is inherently philanthropic, and for profit outfits are inherently evil. Mixing them yields the expected results.
As to the assertion that "tech" is what makes education more "efficient", keep track of the reviews of "charter schools"; most do no better than the "union dominated" public schools they displaced.
It isn't the "unions" that choose books and establish the curricula, it's the managers, often political hacks.
The alternative schools that do better are those which require the parents to engage. Fact is, if your parents are poor, stupid, and don't care; odds are you'll grow up the same. It is no fluke that Mississippi and the other members of the Southern Flank have been at the bottom of achievement; the Southern Flank is all about being poor and stupid and NASCAR and fishin' and huntin'.
I can recommend the thread. The author does have something provocative to say, even agreed with my comment (of course, who wouldn't?), and some of the comments are thoughtful.
Be careful here. For profit "educational" companies are regularly taken to court for over-hyping and under-delivering, although not nearly often enough. I worked for one, thankfully it was closed down. Education is inherently philanthropic, and for profit outfits are inherently evil. Mixing them yields the expected results.
As to the assertion that "tech" is what makes education more "efficient", keep track of the reviews of "charter schools"; most do no better than the "union dominated" public schools they displaced.
It isn't the "unions" that choose books and establish the curricula, it's the managers, often political hacks.
The alternative schools that do better are those which require the parents to engage. Fact is, if your parents are poor, stupid, and don't care; odds are you'll grow up the same. It is no fluke that Mississippi and the other members of the Southern Flank have been at the bottom of achievement; the Southern Flank is all about being poor and stupid and NASCAR and fishin' and huntin'.
I can recommend the thread. The author does have something provocative to say, even agreed with my comment (of course, who wouldn't?), and some of the comments are thoughtful.
26 May 2010
Too Stupid to Fail
The report, released (well, sort of) by the Interior Department Inspector General clarifies what those of us who are suspicious of the Right Wingnuts have long asserted: let the Fox guard the Chickens and the Fox will eat comfortably. What the ObamaNauts need to do, and haven't been willing to do, is to smear the Right Wingnuts with their growing pile of excrement.
The Bushies made all these messes, and the American voter needs reminding, daily, who did what to whom. They tend to believe the lies that come out of the Rovian Spin Mill; left to fester, they will seize the opportunity to blame Obama for BP's (and the Bushies MMS) perfidy. Democrats need to get some balls. If they don't, we're all toast.
According to today's news reports, BP is waffling about sealing the well. BP, not too surprisingly, is said to have overruled Transocean's men with regard to loading mud; BP took a "shortcut", presumably to save a few bucks. If ever there were a case of Too Big to Fail, it is these rigs. What was obvious to anyone with a smattering of engineering or physics training, that there is NO margin of error with these rigs, means that hard and fast rules have to be set and enforced. Break the rules, and you never, ever get to drill here again. One strike, and you're out.
Such a regime will only work, I should mention, if those guarding the Chickens aren't the Foxes. The Bushies did this, and must be held to account.
The Bushies made all these messes, and the American voter needs reminding, daily, who did what to whom. They tend to believe the lies that come out of the Rovian Spin Mill; left to fester, they will seize the opportunity to blame Obama for BP's (and the Bushies MMS) perfidy. Democrats need to get some balls. If they don't, we're all toast.
According to today's news reports, BP is waffling about sealing the well. BP, not too surprisingly, is said to have overruled Transocean's men with regard to loading mud; BP took a "shortcut", presumably to save a few bucks. If ever there were a case of Too Big to Fail, it is these rigs. What was obvious to anyone with a smattering of engineering or physics training, that there is NO margin of error with these rigs, means that hard and fast rules have to be set and enforced. Break the rules, and you never, ever get to drill here again. One strike, and you're out.
Such a regime will only work, I should mention, if those guarding the Chickens aren't the Foxes. The Bushies did this, and must be held to account.
19 May 2010
Dee Feat is in Dee Flation
Despite the continuing braying from the Right Wingnuts that Inflation is On The Way, Right Now, I'm Telling You, You Must Listen to Me; well, it isn't. Today's CPI shows that Core prices are down, again. The Core CPI has been bouncing back and forth between slightly up and slightly down for some time. They ain't no flation no how.
The Wingnuts/FreshWater economics crew must be having apoplexy. Inflation just won't happen. What they won't admit is that it has happened, but only in the limited arena where all the money went: the stock market. And, in just irony, the stock market has been experiencing deflation the last month or so. And not because there's any real economic reason, but because deflation is a self-fulfilling prophecy, particularly in a stock market. Buying a stock isn't buying any "thing", just a chit that you've bet that the share price will move up (or down) in the future; which future might be a few minutes, hours, days, etc.
Deflation is mostly propelled by the willingness to postpone consumption; in the depths of a Great Depression it will occur because consumers have less income, but that's rare. (The stagnant median income period of Reagan/Bushies would have been deflationary but for all that smart money housing equity, but that's another episode.) For real goods and services, postponing consumption leads to real loss: you don't get to play with the tchotchke. Stock market purchases, on the other hand, are only valuable unless they're appreciating (well, if you're not shorting, but that's for another episode) in value. Not even Buffett made his money from the dividends; he, along with the rest of the trading crowd, was/is into "buy low, sell high". So, if the share prices drop a bit, that's enough incentive to stop buying. People stop buying (take money out of the market) and all share prices go down. Note, that nothing bad has happened in the real world. Just some traders who've decided to enter into a death spiral.
Both the Obamanauts and the Tea Baggers use the line about Wall Street being separate from Main Street. It always has been, and always will be. What happens on Wall Street is fundamentally a world apart, and should be. It has no real connection to the Real World; no more than any casino does.
The Wingnuts/FreshWater economics crew must be having apoplexy. Inflation just won't happen. What they won't admit is that it has happened, but only in the limited arena where all the money went: the stock market. And, in just irony, the stock market has been experiencing deflation the last month or so. And not because there's any real economic reason, but because deflation is a self-fulfilling prophecy, particularly in a stock market. Buying a stock isn't buying any "thing", just a chit that you've bet that the share price will move up (or down) in the future; which future might be a few minutes, hours, days, etc.
Deflation is mostly propelled by the willingness to postpone consumption; in the depths of a Great Depression it will occur because consumers have less income, but that's rare. (The stagnant median income period of Reagan/Bushies would have been deflationary but for all that smart money housing equity, but that's another episode.) For real goods and services, postponing consumption leads to real loss: you don't get to play with the tchotchke. Stock market purchases, on the other hand, are only valuable unless they're appreciating (well, if you're not shorting, but that's for another episode) in value. Not even Buffett made his money from the dividends; he, along with the rest of the trading crowd, was/is into "buy low, sell high". So, if the share prices drop a bit, that's enough incentive to stop buying. People stop buying (take money out of the market) and all share prices go down. Note, that nothing bad has happened in the real world. Just some traders who've decided to enter into a death spiral.
Both the Obamanauts and the Tea Baggers use the line about Wall Street being separate from Main Street. It always has been, and always will be. What happens on Wall Street is fundamentally a world apart, and should be. It has no real connection to the Real World; no more than any casino does.
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.
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.
12 May 2010
A Capital Idea
Your house is just a home. It ain't no investment. This is one of the fundamental themes proposed by this endeavor from Day One. One of the more poignant ways of stating it: there's nothing useful, from a capital investment point of view, to be gained by employeeing rednecks to pound nails in Nevada, Arizona, and Florida. One Florida politician remarked that a large part of the problem there was that in order to restore the state's economy, it is necessary to pay rednecks to pound nails, again.
The USofA is the most extreme of the developed countries in its treatment of house building. Not only are we one of just a few which permits the deduction of mortgage interest, we permit and encourage sprawl, and we have the wonders of the Home Equity Loan. We I was a kiddie, these were referred to as Second Mortgages, and having one was a blot; only Bad People took out Second Mortgages.
The ground, so to speak, shifted with the 1973 OPEC oil embargo. Interest rates were forced to sky high levels (the foolishness of this is a matter for another episode), thus depressing home prices. Those who bought then began to reap windfall capital gains beginning with Reagan as interest rates fell and house prices rose. They, of course, saw this turn of events as spectacularly smart decision making. Umm. No, they were just lucky. Most rich folk got there because they were lucky.
So, we get to the Dot Com bust, and Greenspan's urge to lower interest rates. As rates dropped, prices rose. And Bushies everywhere took credit for their genius at making money flipping condos. It all came crashing down, and would have whether or not SubPrime and Alt-A loans had been created. The ratio of median house price to median income is, to all intents and purposes, fixed.
The demand for "safe" securities exceeded what was available, so the collateralized debt obligation and mortgage back security were created. To satisfy this demand, mortgage companies (not, by and large, banks; no matter what the Wingnuts say) started to fiddle the rules in order to produce more and more high value mortgages. No one cared to look at the base assumption: home mortgages are "safe" only so long as the ratio of median house price to median income holds. Break that assumption, and you break the "safety". And so it was.
Housing as a sector that absorbs fiduciary capital, is a Bad Idea. It is not investment, simply because, unlike a newer and better machine tool or factory building, housing does not aid in the production of any good or service. It is this increase in productivity that drives what economists call Real Return on Investment. The only way that housing pays any return is if the owner remains gainfully employed, and the building doesn't *decrease* in value. Housing is *merely* fiduciary investment, not unlike buying stocks. Buying stock is a bet that the seller is too stupid to see that the sale price is lower than it will be in the future.
It's no accident that as the USofA has declined, a growing percentage of corporate profits comes from financial manipulation, reaching 40%. It is no accident that Banksters (Morgan Stanley, most recently) are happily walking away from housing that no longer is worth the mortgage balance. It is no accident that mere civilians have figured this out, too. An economy (or the country) is as strong or robust as the physical goods it produces. The American Revolution has many causes, depending on whom one reads; economists tend toward the anti-Mercantalist argument, which is an economic system where a dependent economy exports raw materials (often food stuffs and related) to a Mother Country in exchange for manufactured goods; we wanted no part of being on the losing side of the trade. Currently, such goods make up an increasing proportion of what the USofA exports. We have, by de-industrializing and financializing, turned the calendar back 200 years. Now, that's nostalgia. All we need now is plantations and slavery.
The USofA is the most extreme of the developed countries in its treatment of house building. Not only are we one of just a few which permits the deduction of mortgage interest, we permit and encourage sprawl, and we have the wonders of the Home Equity Loan. We I was a kiddie, these were referred to as Second Mortgages, and having one was a blot; only Bad People took out Second Mortgages.
The ground, so to speak, shifted with the 1973 OPEC oil embargo. Interest rates were forced to sky high levels (the foolishness of this is a matter for another episode), thus depressing home prices. Those who bought then began to reap windfall capital gains beginning with Reagan as interest rates fell and house prices rose. They, of course, saw this turn of events as spectacularly smart decision making. Umm. No, they were just lucky. Most rich folk got there because they were lucky.
So, we get to the Dot Com bust, and Greenspan's urge to lower interest rates. As rates dropped, prices rose. And Bushies everywhere took credit for their genius at making money flipping condos. It all came crashing down, and would have whether or not SubPrime and Alt-A loans had been created. The ratio of median house price to median income is, to all intents and purposes, fixed.
The demand for "safe" securities exceeded what was available, so the collateralized debt obligation and mortgage back security were created. To satisfy this demand, mortgage companies (not, by and large, banks; no matter what the Wingnuts say) started to fiddle the rules in order to produce more and more high value mortgages. No one cared to look at the base assumption: home mortgages are "safe" only so long as the ratio of median house price to median income holds. Break that assumption, and you break the "safety". And so it was.
Housing as a sector that absorbs fiduciary capital, is a Bad Idea. It is not investment, simply because, unlike a newer and better machine tool or factory building, housing does not aid in the production of any good or service. It is this increase in productivity that drives what economists call Real Return on Investment. The only way that housing pays any return is if the owner remains gainfully employed, and the building doesn't *decrease* in value. Housing is *merely* fiduciary investment, not unlike buying stocks. Buying stock is a bet that the seller is too stupid to see that the sale price is lower than it will be in the future.
It's no accident that as the USofA has declined, a growing percentage of corporate profits comes from financial manipulation, reaching 40%. It is no accident that Banksters (Morgan Stanley, most recently) are happily walking away from housing that no longer is worth the mortgage balance. It is no accident that mere civilians have figured this out, too. An economy (or the country) is as strong or robust as the physical goods it produces. The American Revolution has many causes, depending on whom one reads; economists tend toward the anti-Mercantalist argument, which is an economic system where a dependent economy exports raw materials (often food stuffs and related) to a Mother Country in exchange for manufactured goods; we wanted no part of being on the losing side of the trade. Currently, such goods make up an increasing proportion of what the USofA exports. We have, by de-industrializing and financializing, turned the calendar back 200 years. Now, that's nostalgia. All we need now is plantations and slavery.
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