Very good paragraphs

From Timothy Taylor, spotted by Arnold Kling:

Through much of the 1990s, the ratio of owner’s equity to GDP fell, but in the early 1990s, that was partly a result of depressed regional real estate markets in certain states in the aftermath of the collapse of many savings and loan institutions in the late 1980s and early 1990s (which made the numerator of the ratio decline), and also a result of fast economic growth from the mid-1990s on (which made the denominator of the ratio rise). Again, the bottom line is that the spike in the total value of housing that ended around 2006 is well outside the post-World War II historical experience. And the drop since 2006 takes this ratio from by far its highest value since 1950 to by far its lowest value since 1950.

We are not as wealthy as we had thought.

Comments

Only because we have a much worse Fed than we had thought.

I've never gotten any response when I post this:

http://www.fundmasteryblog.com/wp-content/uploads/2008/06/stlouisfed-fed-funds-5-08-600-researchstlouisfedorg.PNG

Note how it demands an answer to the question of whether The Fed caused the last two recessions and destroyed the decade.

My take on this graph: The Fed was responding, but not fast enough.

But if wealth is now valued at its lowest value since 1950 and the Great Stagnation didn't start till the mid 70's, then aren't we now likely not as poor as we think?

Since I've never owned property, or anything of significant value besides a car (and myself), I suppose I've always been as wealthy and/or as poor as I thought I was.

Hayek vindicated. Hayek's mechanism turns on the causal role of the expansion and contraction of shadow money and the increasing and decreasing liquidity and risk of assets which serve as substitutes for money and as equity for borrowing and spending,

Securitized housing mortgages were at the center of this over the last decade, a core part of the yo-yo which stretched out and snapped back investment in long term production goods (housing & transportation, etc.) and all associated production processes -- and all of the enmployment & unemployment associated with this yo-yo process. (By far the largest cohort of the unemployed are in the construction industry and nearly a majority of the long term unemployed are in the construction industry, and all associated trades and industries have also been hit disproportionately hard.)

As I understand the Hayekian mechanism, we should have seen "erroniuous" overproduction of housing during the bubble. That "false" wealth -- unwanted houses -- would show up as a fall in real wealth That hardly happened. What happened is that people saved less. When the financial crisis hit, they started tryingt to repair their balance sheets, but monetary policy has not been accomodating enough to do so rapidly. AD shock.

No, its exactly what happened. Look at what happened with housing sizes and the number of houses that where left empty. Heck look at Detroit.

Admittedly, "We are not as wealthy as we had thought." But how wealthy we thought we were is just how wealthy we actually were, so you had better have said: "We are not as wealthy as we were."

we won't know how wealthy we are until we spend what we have got.

after the stock bubble 2000 and the house bubble 2007, there is still the bond bubble waiting to burst in 2014.
US & UK still have either a 5 % aggregate demand AD cliff ahead in 2013, or some very serious political changes.

What is it gonna be ?

Why haven't cars had the save value swings that real estate has had over the past three decades when construction cost and depreciation ceased to be an anchor on values?

I have three used cars I'm waiting to go from $100 to $1000 in value thanks to innovative financing and market valuation dynamics. Unfortunately they have been stubbornly anchored to original cost depreciated with age and decay.

Millions of houses have similarly aged and decayed, but millions were valued in excess of the construction cost of totally new replacement with improved design and materials, which were sold for prices far in excess of cost, making cost irrelevant to value.

Economists need to reenter the natural world and teach students that cost is an anchor on value and price.

And this applies to the intangibles like ideas/invention/innovation/patents. A decade ago, RIM was unstoppable with its Blackberry, but even with RIM getting new patents and defending its patents, the cost of new inventions and innovation was lower enough to allow Apple to deliver the iPhone and the required environment to destroy RIM's dominance in just five years, and Apple's dominance is challenge by Google and Microsoft who are collectively going to destroy the cell phone manufacturers as the ones putting a phone in your hand.

Why did economists not raise big red flags about the irrationality of market, which economists credited with correctly forward pricing everything, when pets.com took off and crashed and burned just like many others in the NASDAQ?

What happened with housing from 2001 to 2006 was no different than the rise of pets.com and all the other NASDAQ stocks in the 90s because the pricing of housing was set by Wall Street trading of securities and derivatives and derivatives of derivatives and derivatives of derivatives of derivatives, just like pets.com.

In the past 30 years, securities have defined prices for assets that are totally detached from the cost and depreciation of those assets. The past three decades has been one tulip bubble after another - at least the Dutch learned from the first tulip craze not to repeat it.

Re: used car prices - you waited too long. See:

Have You Priced A Used Car Lately? January 29, 2012
http://www.thetruthaboutcars.com/2012/01/have-you-priced-a-used-car-lately/

Used Car Prices Heading South, May 31, 2012
http://www.thetruthaboutcars.com/2012/05/used-car-prices-heading-south/

Ask The Best And Brightest: Can The Used Market Stay This Crazy For Long? August 11, 2011
http://www.thetruthaboutcars.com/2011/08/used-car-prices-soar-media-notices/

Used Car Prices Rise, But Is Cash For Clunkers To Blame? August 26, 2010
http://www.thetruthaboutcars.com/2010/08/used-car-prices-rise-but-is-cash-for-clunkers-to-blame/

The used car marked DID IN FACT have huge price swings.

Giffen goods = iPod?

OTOH, if you can buy property now you can live in some pretty nice places for a lot less than you could in 2007, so living standards actually rise considerably for property buyers.

It's interesting, in my personal experience a lot of people with roots in China, India, and the Philippines are buying property here right now. Not sure if that's a broader trend, though.

I think Americans often grossly overestimate the potential contribution of property to living standards. De gustibus I guess......

Indeed, non est disputandum. Utility is in the eye of the beholder!

Are Americans an outlier in regards to real property? I wonder if it's because of a stronger correlation between property values and better schools (Sweden, for instance, seems not be in thrall to teacher's unions the way we are)? Or maybe it's just because we have more land per capita.

Western Europeans tend to have much smaller houses. But like you say, that could be per-capita-land induced.

How about Australians, or Canadians? Or Scandinavians? Do they go for American sized homes? Roughly comparable wealth and plenty of land too.

"Western Europeans tend to have much smaller houses."

I suspect that if Western Europeans could buy houses as cheap as Americans they'd live in much bigger houses.

They would need higher incomes too, most of Western Europe is considerably poorer than the U.S.

But this graph is probably more important.

http://soils.usda.gov/use/worldsoils/mapindex/popden.jpg

The assumption underlying the absurd housing prices in California, Arizona, Nevada, and Florida during the middle of the last decade was that Hispanics were going to be able to earn enough money to make the valuations work. After all, diversity is our greatest strength.

So people who saw through the diversity crap didn't invest in the bubble? Diversity worshiping liberals are plentiful and rich enough to prop up an entire housing market?

Are there any problems that you think are not immigration induced?

Diversity is true. It's just that we aren't really doing it. Or, we're doing it exactly wrong. We pursue diversity in things where there is "the right thing" and reject diversity in the things that if diverse would mitigate the problems of crowding.

Yes there are. Some problems are induced by native blacks and hispanics. Right, Steve?

Many efforts have been made by the right to blame the housing bubble on blacks and Hispanics but it doesn't work. There is simply not enough of either group to have made a real estate bubble work just by increasing their ownership rates. Even worse for that hypothesis, a lot of the increase in ownership among minorities was at the low end of the housing market. The build up of 'McMansions' and high end listings during the bubble was simply not caused by 'do gooder' banks or regulators trying to get banks to give more loans to poor minority borrowers.

The Bubble was caused by innovation, namely the idea that CDO's could turn a pile of crappy loans into a pile of super safe near Treasury bill quality loans. The fact is it was an innovation and it does work if it is done right. But that's the problem with bubbles, the value of an innovation is overestimated and taken to extremes. The dot-com innovation was just as real. But that fact remains no less true than the equallly true fact that most dot-com businesses went belly up in the 2000 era crash after scoring hundreds of millions from gullible stock investors.

And who took those crappy loans? Who were the government forcing banks to make crappy loans to? Could it, possibly, be low income Hispanics and blacks?

http://www.gobankingrates.com/mortgage-rates/sub-prime-mortgages/fed-fines-wells-fargo-record-85-million-poor-lender-conduct/

"According to the Federal Reserve, Wells Fargo, the nation’s fourth largest bank by assets, steered potential borrowers with credit scores that could have qualified them for prime rates into more expensive subprime loans."

No, the government made them do it.

Can a conservative please provide an argument that is stronger than (a) government wanted home ownership rates to increase and (b) banks made poor loans and therefore (a) caused (b). Is it too much ideological blasphemy to believe that perhaps that, just maybe, private companies just made bad decisions. Does everything have to be the government's fault? Why can't a conservative ever man up and take responsibility for an error instead of always blaming someone else?

Sure, as I've been saying for years, government regulators used to restrain overly optimistic mortgage lenders. But decades of denunciations of racist redlining left moonshooters like Angelo Mozilo, Roland Arnall, and Kerry Killinger with a free hand from 2002-2004 onward. These rich guys used the sacredness of Diversity to justify being allowed to hand out mortgages with zero down payments and doubtful documentation.

Er, areas that were "redlined" didn't exactly see a great deal of development, as redlining has historically occurred in the inner cities. You can't really redline a suburban area that hasn't been developed yet.

And of course you totally ignore the profit motive because laughably, executives at these firms were actually interested in uplifiting minorities rather than earning record profits. I mean seriously, I provide an example of a company that basically steered customers into more profitable subprime loans when they could have qualified for loans at prime rates. It had to be in the name of diversity! Why look at the most sensible and straightforward explanation when we can concoct and stretch some "what kind of feelings did they have on diversity?" ideological explanations!

Your link about Wells Fargo says that "up to 10000" borrowers were pushed into subprime loans: hardly enough to cause a house price bubble in a nation of 300 million. Private companies sure made bad decsions based on simple greed, as they always have, but that doesn't explain why Fanny Mae and Freddie Mac were making the same mistakes. It doesn't explain why the POTUS was saying "Too many American families, too many minorities do not own a home. There is a home ownership gap in America", without asking why that might be.

http://georgewbush-whitehouse.archives.gov/news/releases/2002/06/20020617-2.html

And it doesn't explain why people still refuse to understand that poor people with low human capital can't afford to live in or buy expensive houses.

Are minorities the only guilty party in the house price bubble? No. Are they innocent? No.

"Private companies sure made bad decsions based on simple greed, as they always have, but that doesn’t explain why Fanny Mae and Freddie Mac were making the same mistakes."

Actually, we do know that too, it was greed again. Can you explain why Iceland, Spain, Ireland, the UK, Latvia, Estonia were making the same mistakes? Was it that the well-regarded, centuries old tradition of Icelandic commitment to multiculturalism or that Irish dedication to improving home ownership within the African American community.

"It doesn’t explain why the POTUS was saying “Too many American families, too many minorities do not own a home."

This is pretty much where every conservative starts, and just kind of ends.

1. The president wanted to increase home ownership in America
2. ???
3. Housing bubble

Therefore the government caused it to happen! Because when someone in the government says something, he's basically forcing them to do it through the power of . . something!

"And it doesn’t explain why people still refuse to understand that poor people with low human capital can’t afford to live in or buy expensive houses."

"Are minorities the only guilty party in the house price bubble? No. Are they innocent? No."

I don't know what to make of this statement. You would think this solid block known as minorities had possibly the most unstoppable force of political clout possible.

Are minorities the only guilty party in the house price bubble? No. Are they innocent? No.

i.e. Race neutral explanations.

>> It doesn’t explain why the POTUS was saying “Too many American families, too many minorities do not own a home.”

> This is pretty much where every conservative starts, and just kind of ends.

> 1. The president wanted to increase home ownership in America 2. ??? 3. Housing bubble

That's why I helpfully included the link to the speech, which you didn't bother to read. The President opens by asserting the nation must set goals to increase minority home ownership by 5.5 million, back-slaps his minority HUD placemen, and thanks representatives of Fannie and Freddie (though he doesn't say for what). Then he gets down to the means: poor people can't make down-payments, so he'll give them tax money to do it; there's a shortage of housing in poor areas, so he'll use tax money to pay for construction; minorities can't follow the fine print in buying homes, so he'll "streamline the process... so everybody understands"; then there's vouchers for first-time home buyers. Then he boasts of how much more money Fannie and Freddie will give to minorities, and how many initiatives they'll have.

Is it stretching credulity to believe all that money and political pressure failed to help inflate a bubble?

"There is simply not enough of either group to have made a real estate bubble work just by increasing their ownership rates."

The government collects a huge number of statistics on who gets mortgages (and fewer statistics on who pays them back, but the ones I've seen are most interesting). You really need to become better informed about the numbers.

If we really aren't "as wealthy as we thought we were," that means neoliberalism wasn't as great a program as we thought IT was. Certainly the condescension of "reformers" of the welfare state and advocates of deregulation toward their political opponents looks retrospectively unearned.

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