Two overrated problems and two underrated problems

Karl Smith has a post on the recovery in the Las Vegas housing market.  I noticed there were a few suspicious statistics—for instance housing starts were up sharply, but from a very low base.   So I decided to check it out by googling stories on the Phoenix housing market, and immediately found similar stories:

In another sign that metro Phoenix’s housing market is slowly recovering, hundreds of homes across the region sold by banks after foreclosure or through short sales are being flipped by investors for almost double the price they paid just a few months earlier.

With metro Phoenix’s median home price steadily climbing this year, speculators have seized on an opportunity to make fast profits and are selling houses across the region at prices not seen since the beginning of the housing boom in 2003-04.

Home prices have climbed as the supply of houses for sale has shrunk. The number of homes for sale in the Phoenix area is half of what it was last May, and the median price is up by an astonishing 30 percent since then.

.   .   .

An east Phoenix home bought through a short sale for $218,000 in September sold in late February for $560,000. The home was completely remodeled, but the price was still an eye-popping 156 percent more than the investor paid.

A home in Chandler, built in 2005, sold through a short sale in November for $255,000 and was then flipped by an investor for $410,000 in March — a 61 percent profit in five months.

A former foreclosure home in central Glendale was bought for $131,000 in January and flipped in mid-April for $243,000, an 85 percent jump. The investor added stainless-steel appliances and replastered the swimming pool at the ranch-style home.

In Goodyear, a 2,000-square-foot home in the Estrella Vista community was purchased from the lender for $88,000 in January. The investor repainted the home, put in new carpet and resold it for $188,000 in mid-April for a 113 percent gain.

“There are hundreds of recent examples of foreclosure or short-sale homes that have sold to investors who have been able to resell them quickly for much higher prices,” said Tom Ruff, managing director of AZ Bidder, a Phoenix-based online foreclosure-auction firm.

.   .   .

It’s now clear metro Phoenix’s housing market hit bottom last fall, according to the experts.

Another article mentioned that Phoenix housing starts are up sharply, although the level remains well below the boom years. So it looks like Karl is right; the US housing market has found a sort of equilibrium.

I’d like to make four claims:

1.  The misinvestment in the housing boom was far smaller than widely believed.

2.  The cost of bailing out the big banks was much smaller than widely believed.

3.  The cost of bailing out small bank depositors was much bigger than widely believed.

4.  The 2008 policy errors of the Fed were the “real problem.”

The US population grows by almost 3 million per years.  The 2003-06 housing fiasco can be summed up as follows.  We allocated too many resources into housing construction, which meant we built a few million houses a few years too early.  How costly is that?  Well houses often last for 100 years.  I frequently visit a completely typical and fairly new house in Arizona, worth about $200,000.  It’s obvious this house will last well over 100 years.  If that sort of house is built a few years early, there is economic waste–but not as much as many people suppose.  One mistake is to look at the big fall in housing values.  Much of that is actually a fall in land values, which doesn’t represent resource misallocation.  The actual price of houses fell by much less.  The flow of wasted housing services is substantial, but trivial compared to the waste caused by mass unemployment.

The second overrated problem is the big bank bailout.  Like housing over-investment it is a big problem in absolute terms, but vastly overrated in relative terms.  The big banks are repaying the loans, which is rather amazing given this was a once in 100 year banking fiasco.  If they are able to repay their loans in this situation, what sort of disaster would be required for them to actually cost the taxpayers money?  Perhaps a once in a 1000 year fiasco.

In contrast, the small bank fiasco is vastly under-rated.  Just as in the 1980s, the smaller banks lent vast sums to risky development projects, and lost big when the Great Recession hit.  The cost to taxpayers will be well over $83,322,000,000.  BTW, contrary to widespread opinion, payments made by FDIC represent taxpayers money.  The FDIC fees paid by banks are simply a cost of doing business, and are passed on just as oil companies pass on most of the gas tax to consumers.

The most underrated problem of all is the Fed policy fiasco of 2008.  You’d expect a fierce Bernanke critic and supporter of higher inflation like Paul Krugman to be all over the Fed.  Their tight money policy of 2008 drove the economy into deflation by early 2009.  And by the fall of 2008 the TIPS markets told us this was happening.  So what does Krugman say about Fed policy during the crisis?

But surely, I argue, the Fed did deliver negative real interest rates by cutting rates quickly and avoiding deflation. This prods Krugman into rare praise: “I have actually very few complaints about monetary policy here through some point in 2009. I thought that Ben [Bernanke] responded aggressively and forcefully, which was the right thing to do. He stepped in with the original QE [quantitative easing] and stabilised the economy.

“The question is, what did he do as we started to look more and more like Japan? At that point the logic says you have to find a way to get some traction. Fiscal policy might be great. But if you’re not getting it you should be doing something on the Fed side and I think that logic becomes stronger and stronger as the years go by. And it’s sad to see that the Fed has largely washed its hands of responsibility for getting us out of the slump.

This quotation just blew me away.  And it made me realize just how big the gap is between market monetarists and mainstream Keynesians.  Recall that the big crash in both NGDP and RGDP occurred between June and December 2008.  At no time during this crash were we at the zero rate bound.  The Fed even refused to cuts rates after Lehman failed in September 2008, even though 5 year TIPS spreads had fallen to 1.23%, and it was obvious we were going into a recession.  Let me say that again, they had a meeting 2 days after Lehman failed and didn’t cut rates below 2%.  Rates didn’t get to zero until mid-December 2008 when the great GDP crash was nearly over. It was too late to prevent the Great Recession by that point.  How many more smoking guns do we need?

It seems like Krugman doesn’t take a “target the forecast” perspective.  He doesn’t seem to share Svensson’s belief that the Fed should always set interest rates at a level expected to hit the dual mandate.  After all, by October 2008 we were clearly going to fall far short of the mandate, and rates were still 1.5%.

Or maybe Krugman does agree with me, and like 99.9% of economists he was totally focused on the banking crisis in the fall of 2008, and never realized that Fed policy was far off course.  Perhaps some readers can dig up old Krugman posts from that period to see what he was saying about monetary policy.

I think it’s the age old problem of “the seen and the unseen.”  The housing fiasco and the big bank bailouts were headline news.  The news media didn’t spend much time on the massive bailout of small bank depositors, and provided zero coverage of the Fed’s ultra-tight money policy in 2008.  Still, one would hope that (nearly 200 years after Bastiat) economists weren’t still taking their lead from newspaper stories.

PS.  Here’s a graph showing NGDP at monthly frequencies:


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70 Responses to “Two overrated problems and two underrated problems”

  1. Gravatar of marcus nunes marcus nunes
    28. May 2012 at 11:18

    A related historical evidence in favor of MM´s – I think:
    http://thefaintofheart.wordpress.com/2012/05/28/three-panics-and-a-nonevent/

  2. Gravatar of Mark A. Sadowski Mark A. Sadowski
    28. May 2012 at 11:21

    I came across this today. I just thought I’d share it.

    http://hipsterjew.com/files/2010/05/16ben_CA2-articleInline.jpg

    P.S. Happy Memorial Day.

  3. Gravatar of flow5 flow5
    28. May 2012 at 11:30

    “Recall that the big crash in both NGDP and RGDP occurred between June and December 2008”

    Civil Wars have been started over lesser events. The unbelievable part is that it took such a long time developing into the eventual crisis (Great Recession), without some credible government interdication. And anyone that took the time to review the deceleation in nominal gDp (beginning in the 1st qtr of 2006 & lasting until the 1st qtr of 2009), should have ended up in cardiac arrest.

  4. Gravatar of flow5 flow5
    28. May 2012 at 11:44

    Professor your graph is wrong. That’s not how to calculate changes in nominal gDp.

    gDp is defined as the total value of all goods & services produced inside a country during a given year. gDp (% change) is calculated based on an annualized rate — from the prior quarter to the current quarter (the BEA reports gDp for a given year to minimize seasonal influences).

    The rates-of-change (roc’s) used by the BEA’s economists are specious (always at an annualized rate; which never coincides with an economic lag) – i.e., whether the economy is actually expanding (growing), contracting (slowing), etc.

    Roc’s in money flows [MVt=PT] – where PT is a proxy for nominal gDp, must always be measured with the same length of time as the specific economic lag (as its influence approaches its maximum impact (not an arbitrary date range), as demonstrated by the clustering on a scatter plot diagram.

    For example, as soon as Bernanke was appointed to the Chairman of the Federal Reserve, he initiated a “contractionary” money policy for 29 consecutive months, or at first, sufficient to wring inflation out of the economy, but persisting until the economy plunged into a depression). I.e., MVt’s roc’s were NEGATIVE (less than zero), for 29 consecutive months.

    For example: nominal gDp’s 2 year rate-of-change peaked in the 2nd qtr of 2006 @ 12%. Bernanke let it fall to 8% by the 4th qtr of 2007 (or by 33%). It fell to 6% in the 3rd qtr of 2008 (another 25%). It then plummeted to a -2% in the 2nd qtr of 2009 (another [gasp] – 133%).

  5. Gravatar of D.Gibson D.Gibson
    28. May 2012 at 11:58

    The recent EconTalk podcast has a discussion on how Krugman criticized Friedman. Friedman said the FED *caused* the Great Depression. Krugman said the FED failed to react, but was not the *cause*. Krugman is consistent, but wrong. The FED has the exclusive job to react. When it doesn’t, it is broken. I agree that this is more than semantics.

  6. Gravatar of Major_Freedom Major_Freedom
    28. May 2012 at 12:03

    I’d make one claim that you are completely ignoring, just like you ignored it pre-2008:

    It was the policy failure of the Fed during the boom that was “the real problem.”

    The “over-investment” in homes is ultimately driven by cheap money from the Federal Reserve System. That is what is responsible for too many houses being built.

    Moreover, the fact that a substantial quantity of NGDP during the boom consisted of credit expansion created money, is also what made NGDP collapse post 2008, despite the Fed not stopping the printing press, despite nobody burning money. Why did NGDP collapse despite the Fed not stopping the printing press?

    What market monetarists don’t seem to grasp is that NGDP is composed substantially out of money that was created by credit expansion. What you really mean to say is that the Fed “failed” to give enough reserve money to the banks to convince the banks to create enough new credit to keep the credit boom going.

    The claim that the Fed “didn’t print enough” is really saying the banks didn’t create enough new loans ex nihilo.

    Well, is it really so difficult to believe that there is such a thing as “too much” credit expansion unbacked by prior real saving? That maybe, just maybe, increasing the supply of loans by means other than real saving, could cause problems in the market? That it may make investors engage in projects that require more real resources than really exist?

    The correct interpretation of the massive decline in NGDP post-2008, despite the Fed not stopping the printing presses, is that there was something seriously wrong with the previous NGDP.

    Here’s another lesson for market monetarists: Not all nominally identical NGDPs are alike. An NGDP composed of money spending that originated primarily from credit expansion is far different than an NGDP composed of money spending that originates from currency and the various forms of it, such as investment derived from real saving.

    The Federal Reserve System has turned the majority of money spending into credit expansion created money spending from the banks. A bank issues a new loan unbacked by prior real saving, that money is then spent and respent, propping up not only the direct investments made with the loans, but also all the other investments that depend on credit expansion indirectly after the money is respent.

    The reason why NGDP collapsed so fast, is because a substantial portion of total money spending is composed of credit expansion. That introduces a sickness into the economy, which only a reduction of that credit can cure. Of course a reduction of credit reduces the total money supply and thus total spending (NGDP), so you view the collapse in NGDP as a failure of the Fed to inflate enough, when it is precisely the Fed’s inflation that convinced the banks to expand credit in the massive quantities they did during the boom.

    Commercial banks simply cannot keep expanding new credit year after year without the Fed printing money to keep the overnight interest rate low, and without the Fed promising to bail out the too big to fails when the credit expansion comes back in the form of a credit crunch derived from real resource scarcity reasserting itself.

    You said:

    “We allocated too many resources into housing construction, which meant we built a few million houses a few years too early.”

    We also allocated too many resources into construction in general, as well as durable and non-durable goods in general, for these sectors collapsed quote a bit more than the retail and service sectors during the bust, as can be seen here.

    Why would construction and durable goods sectors collapse so much more than the retail and service sectors, unless there were too many resources allocated to the former, and not enough to the latter? Why would investors in general allocate too many resources to construction and durable goods in general, instead of retail and service in general?

    What oh what could have influenced investors to behave in this way? Could it be, maybe, perhaps, the Federal Reserve System itself DURING the “boom”? Could the Federal Reserve System’s reduction of interest rates, which is the only way to get more and more credit to more and more people, so that NGDP can rise all nice and smoothly, that is responsible for investors allocating resources in this way? After all, construction and durable goods sectors are far more sensitive to interest rates than are the retail and service sectors.

    The same questions I have asked market monetarists to answer for years, but to no avail, are these: Why did this difference in corrections across sectors occur? If aggregate spending is the culprit, why didn’t the collapse in aggregate spending coincide with equal collapse in all sectors? Why did construction suffer so much more than service? Why would there be such a larger decline in “spending” in the construction and durable goods sectors relative to the “spending” in service and retail sectors?

    You believe your NGDP theory is the most “persuasive” theory, and you believe it is most consistent with the historical data. After all, we all see a collapsing NGDP, and we also see during that time collapsing employment, production, and output. Since money is what “makes the economy move”, could the historical data be any more obvious in confirming the NGDP story? Even Hayek wanted stable spending, right?

    Here’s why people like Sumner can’t grasp any other explanation, let alone accept it:

    He isn’t subjecting his theory to a standard that is itself grounded in objectivity. His standard is hermeneutic. NGDP is “persuasive” to him while talking about it, and that’s good enough.

    Except, how “persuasive” was inflation targeting? It “persuaded” almost the entire mainstream economics profession at one point. But it turned out wrong, didn’t it? Well, shouldn’t that be a clue that “persuasiveness” isn’t a good enough standard after all? Or should we let market monetarists destroy what’s left of the credit sick economy, just so that they in their positivist fervor “can be sure”?

    One can never understand how the market process does not work, unless one can understand how the market process does work. Merely being “persuaded” of how the market works, which allows for any explanation whatsoever as long as Sumner is persuaded, is the wrong standard to use.

  7. Gravatar of ssumner ssumner
    28. May 2012 at 12:41

    Marcus, That’s a good post.

    Mark, Is that you?

    flow5, The graph doesn’t show changes in NGDP, it shows levels.

    D. Gibson, I’ve criticized Krugman on that in earlier posts.

    MF, You said;

    “We also allocated too many resources into construction in general, as well as durable and non-durable goods in general, for these sectors collapsed quote a bit more than the retail and service sectors during the bust, as can be seen here.”

    Wonderful logic. That means we must have allocated too much into almost everything in the 1920s, because almost all industries declined in the 1930s. Using a decline during a recession to prove a sector was overbuilt? I’m speechless.

  8. Gravatar of Steve Steve
    28. May 2012 at 13:01

    I noticed that the FDIC Loss / Total Assets of Failed Banks reached 23.2% in 2010. Perhaps we should institute a 25% tangible common equity requirement for the Too-Small-To-Diversify banks?

    “And it made me realize just how big the gap is between market monetarists and mainstream Keynesians.”

    No, Krugman just suffers from a severe affinity bias. He is a very very very reluctant critic of Bernanke (with frequent apologies that he is doing it to HELP him). Krugman wants to blame the financial crisis on GW Bush, Jamie Dimon, et al.

  9. Gravatar of Joe Joe
    28. May 2012 at 13:33

    Two questions,

    Should this be treated as the “definitive” post on your position on 2008, or do you have others? I ask because I have never been able to find them. It sounds like your views are scattered around.

    Also, where did you get the monthly GDP numbers? They exist?

    Best regards.

  10. Gravatar of Ritwik Ritwik
    28. May 2012 at 13:59

    1) Since the real human utility disaster is the great employment crash, how does that track the great GDP crash? Is a great GDP crash only preventable in real time? Why should the recession dynamics be ‘sticky’? Why should the second half of 2008 dominate all other time periods for the purpose of expectations formation?

    3) If there’s a crash for a year and the GDP growth reverts to its trend (but not level), why should unemployment persist? Why are lesser Americans employed than in ’08 even though America is producing more?

  11. Gravatar of dlr dlr
    28. May 2012 at 14:00

    It isn’t so surprising that people mistake zero rates and huge bank reserves with loose money, but it really is as you point out shocking that the Fed goes largely uncriticized for the critical post-Lehman period. I bet if the WSJ took a poll that asked “The Fed Funds rate was 2% on Friday, September 13 before Lehman collapsed, what was it on October 1?” the vast majority of people would say lower. It is mind boggling that the Fed gets a pass for this. At the time, it was easy for everyone to get caught up like the Fed probably did in the water bailing (bank and money market facilities, broadening collateral, swap lines) and lose sight of the Fed’s main leak-plugging job, but what’s amazing is that hindsight hasn’t brought a more critical perspective. The Fed’s main instrument of monetary communication was unchanged from April 2008 under October 7, 2008. Is there any period since the 30s more in need of a change in the primary Fed signal? Bernanke tesitified on September 23 in front of the banking committee essentially warning that there is a huge flight to safety and the Fed’s action thus far might be insufficient while the Fed Funds rate was sitting still at 2% as if controlled by a different agency. Meanwhile, the September 16 post Lehman Fed Statement maintaing 2% literally said that inflation and downside were both “signficant” concerns of Fed.

  12. Gravatar of Major_Freedom Major_Freedom
    28. May 2012 at 14:06

    ssumner:

    “We also allocated too many resources into construction in general, as well as durable and non-durable goods in general, for these sectors collapsed quote a bit more than the retail and service sectors during the bust, as can be seen here.”

    Wonderful logic. That means we must have allocated too much into almost everything in the 1920s, because almost all industries declined in the 1930s. Using a decline during a recession to prove a sector was overbuilt? I’m speechless.

    it’s not about absolute over and underinvestment. It’s about relative over and underinvestment.

    I already explained many times that a general decline doesn’t disprove my theory. My theory in fact REQUIRES it.

    It’s not the case that if all industries decline in absolute terms, that it means all industries were overinvested during the boom. ABCT is a theory of relative overinvestment and underinvestment, not overinvestment of everything.

    You are forgetting that production takes time. If there is a relatively large collapse in construction and durable goods as compared to retail and service sectors, due to past monetary policy during the boom bringing about an unduly relative expansion of those sectors, than it’s not like retail and service sectors – which require ready made goods from construction and durable goods in order to expand – can keep on producing and selling like before as if construction and durable goods pipeline did not decrease!

    It would be like both of us observing the production of machines that produce bricks collapsing, and then acting all puzzled at why there was a collapse in the production of the final goods that require bricks, because you believe I expect smooth sailing in the industries that requires bricks. Then you conclude that because even the final stage collapsed, it somehow means my theory requires us to conclude that there was an overinvestment in EVERYTHING? I’m speechless yet again.

    You’re focusing too much on money flows, and not enough on real goods production. In order to know how the market works in the physical sense, of how raw materials are transformed into final goods, you have to abstract away from money, and look at the economy as producing and trading real resources from stage to stage, ultimately to the store shelf.

    A collapse in ALL sectors is perfectly 100% consistent with relative overinvestment and relative underinvestment between temporal sectors brought about by monetary policy. The productive stages are ultimately connected like a puzzle in the physical sense. Final goods like computers, can only expand in the physical sense when there is enough resources produced by the prior stages in the physical sense. If the initial stages collapse, so will the later stages, since the later stages DEPEND on those initial stages.

    This would not have happened if resources and labor were not relatively overinvested in those initial stages like construction and durable goods. If resources were invested according to real consumer saving interest rates, and not according to credit expansion interest rates, then we would not have seen a relative overinvestment in construction and durable goods, and there would not have been such a large decline in those sectors later on, which would not have then pulled down the retail and service stages that depend on those initial stages. There would have been a general sustainable expansion in all industries, and they would have been in sync in the physical sense by way of the regulating nature of non-hampered, free market interest rates, and the absence of a decline in the initial stages like construction and durable goods, would have made final stage production sustainable as well. We would have seen a generally expanding economy.

    It is the unhampered market interest rates that regulate the expansion of various sectors so that particular sectors don’t expand too much relative to other sectors. You do know that interest rates MEAN something, don’t you? They aren’t just fetters or barriers that prevent the economy from growing more than it could have otherwise grown if only interest rates were lower, or better yet, did not exist at all.

    With credit expansion, with the artificial lowering of interest rates, what happens is that the regulating mechanism of interest rates is lost. Investors expand construction and durable goods too much relative to retail and service, because money is cheap, and NOT because consumers are saving more and thus and making more resources and labor available to make such a capital intensive shift in the economy sustainable. Construction expands, durable goods expands, but more resources are required to keep that expansion going. Investors can’t see this because nominal profit making can be made by unduly expanding those industries in the physical sense. In other words, the connection between nominal and real is lost. When physical reality reasserts itself, as it always does, as construction and durable goods fall relatively heavily, then the retail and service sectors, since they depend on those prior sectors, they fall too.

    That’s why we see a “general” decline. It isn’t because general spending declined. The general decline in spending is just another symptom of the problems on the real side of the economy, which you can see with your own eyes, but you can’t correctly understand because your theory is wrong (we have recently seen how utterly vacuous your epistemology really is).

    The general decline has NOTHING to do with nominal aggregate spending falling. The only reason you believe it has something to do with it is because you ignore resource scarcity, you ignore the regulating nature of interest rates to keep the various temporal stages of production in sync, and you ignore the temporal dependency of the productive stages. You believe that the Fed bringing about an increase in total aggregate spending somehow all the drive needed to support all stages, when it’s really voluntary saving that supports the entire economy, which monetary policy distorts.

    All the money in the world cannot sustain projects the completions of which require more real resources than actually exists. The only cure is more real resources. If consumers aren’t willing to save more however, then you have to accept rising interest rates, you have to accept a collapse in credit expansion, which collapses NGDP, and you have to accept the market process to fix the mess the Fed made during the boom when NGDP was rising all nice and smoothly. The capital structure 2000-2008 was WRONG.

  13. Gravatar of JeffreyY JeffreyY
    28. May 2012 at 14:30

    A nit: if FDIC fees are passed on to bank customers, then payments made by FDIC represent *bank customer* money, not *taxpayer* money.

  14. Gravatar of Srw Srw
    28. May 2012 at 14:47

    If the fed failed to respond to the collapsing ngdp, are we really saying that they failed to respond to collapsing velocity? If so, why did velocity collapse? Not the housing problem…that was earlier. Not Lehman…that was later.

  15. Gravatar of Mark A. Sadowski Mark A. Sadowski
    28. May 2012 at 14:58

    Scott,
    “Mark, Is that you?”

    LOL! Heavens no, although I have similar shaggy photographs of myself from the 1980s when I was an undergrad at Chicago. That’s our fearless leader Benjamin Bernanke during his freshman year of grad school at MIT in 1975. Little did we know that he would one day grow up to ruin the global economy with inflation targeting.

  16. Gravatar of dwb dwb
    28. May 2012 at 16:21

    Or maybe Krugman does agree with me, and like 99.9% of economists he was totally focused on the banking crisis in the fall of 2008, and never realized that Fed policy was far off course. Perhaps some readers can dig up old Krugman posts from that period to see what he was saying about monetary policy.

    It’s a great point. Not much mention by either Krugman or CalculatedRisk, or just about anyone else about the decision to leave rates unchanged: Almost all mentioned the focus on inflation (at the time oil prices were highly volatile, above $130). I guess we tamed those oil prices!

  17. Gravatar of dwb dwb
    28. May 2012 at 16:24

    ^^ I should say, not munch mention because the singular focus was on TARP, global markets melting down, AIG bailout, Wachovia, WAMU…. the FOMC meeting was nary an afterthought (Bernanke was spending so much time testifying and negotiating, i doubt even he spent much time on it).

  18. Gravatar of Morgan Warstler Morgan Warstler
    28. May 2012 at 16:36

    97% of the housing market increase is from:

    The 8M homes being turned into rentals by fiat.

    That’s it, nothing else.

    We are keeping 8M off the single sales market for at least 5 years.

    In 5 years there will be multiple public traded companies that own rental 100K homes.

    This is GREAT policy, we need a more mobile workforce that the simply consumes housing.

    But it is THE PRIMARY reason for the market’s state today.

    Karl is right for the wrong reasons.

  19. Gravatar of Steve Steve
    28. May 2012 at 17:08

    Off-topic, but it’s good to know that Plosser thinks the EuroMess will help the US economy:

    http://finance.yahoo.com/news/feds-plosser-says-u-withstand-212448450.html

    (Reuters) – The United States is well poised to withstand any fallout from Europe’s escalating debt crisis, a top Federal Reserve executive told the Wall Street Journal.

    Charles Plosser, president of the Federal Reserve Bank of Philadelphia, said the United States should comfortably weather the debt crisis because its financial institutions have already cut their European exposure. Moreover, he said on the Journal’s Monday online edition that “a flood of liquidity” into the United States, as investors seek safer assets, is more likely “than the drying up of liquidity.”

    Uncertainty in Europe might even help the U.S. economy in the short run by pushing down U.S. interest rates and energy prices, Plosser said in an interview, conducted in Eltville, Germany.

  20. Gravatar of dwb dwb
    28. May 2012 at 17:10

    In 5 years there will be multiple public traded companies that own rental 100K homes.

    there are already lots of publicly traded REITs that own both single family and multifamily rentals – i still don’t see your point. So what if we turned them into rentals.

    I think he’s right for the right reason: there is some price that clears the owner-occupied housing market. Since rentals are a close substitute, its a function of the price/rent ratio.

    Owning ones home has absolutely nothing to do with “mobility” unless you are underwater. During normal times there is no barrier to moving.

    http://www.calculatedriskblog.com/2012/04/real-house-prices-and-price-to-rent.html

  21. Gravatar of M.R. M.R.
    28. May 2012 at 17:32

    Scott, you’ve used the Macroeconomic Advisers graph before, and I’m still wondering about its reliability. We had an exchange about it here: https://www.themoneyillusion.com/?p=12938

    You originally posted that graph on 7/16/11. Two weeks later, the BEA released its revised (quarterly) GDP estimates for 2008. That release showed a much more significant contraction in 2008Q4 and 2009Q1 than previous estimates, and a smaller contraction in 2008Q3. Here’s the link: http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_adv.pdf

    Since you’re using the same graph again, I gather that Macroeconomic Advisers hasn’t updated their monthly figures. If not, are you concerned that the graph might be stale?

    That graph has always seemed like the linchpin of your argument that the severe phase of the financial crisis could not have been responsible for the severe output contraction. How confident are you that it’s reliable?

    As I mentioned in my prior comments, I’m part of the conventional wisdom that says the financial crisis bore primary responsibility for the recession. So I’m always interested in the argument that this view is mistaken.

  22. Gravatar of dwb dwb
    28. May 2012 at 17:34

    We are keeping 8M off the single sales market for at least 5 years.

    ok i also read your comment on modeled behavior, i dont know where you are getting the 8 MM homes number, the largest I have seen is about 2.2 MM. There are various industry estimates, but “shadow inventory” is down to about 1.6 MM (normal household formation is ~1 Million). The actual REO inventory is down to about 600k.

    Also: most of the rentals being turned over to private companies from the GSEs and banks are already occupied (google the FHFA Fannie/Freddie investor prez).

    The key number to watch is vacancies: Young couples tend to rent. Once they form a household, they need to live somewhere. Demographics either pushes up rents (because vacancies are low), or pushes up home prices (either investors buy vacant properties and convert them, or people get tired of renting and by – either equilibrates the two).

    There are definitely more REOs and foreclosures to hit the market, but existing homes sales run about 4.7 MM/yr so the market will almost certainly absorb it.

  23. Gravatar of Morgan Warstler Morgan Warstler
    28. May 2012 at 17:40

    The avg. length of home ownership is like 6 years. Folks down under 5 in a housing market that has very little appreciation are losing money vs. renting.

    I know you want to talk about “demand.”

    And again I’m fine with the policy.

    BUT, if we just dumped 8M homes on the market, we’d see rents plummet, home values would take another hit, and a bunch of primes would suddenly be under-water.

    Which is the big UH OH in Greenspan speak.

    So, I’m not talking “demand” I’m talking price subsidies, right now there is a big new public policy that is having as much affect as the mortgage deduction.

    And it is causing the new home construction for new home buyers that Karl was speaking about.

    Let me say it another the the price being paid for these new homes in bulk is below what happening at court-house steps, and if they all went to single auction, those new home buyers would be getting the sweets deals they aren’t getting now.

    Losses are being taken in the bulk sales.

  24. Gravatar of Mark A. Sadowski Mark A. Sadowski
    28. May 2012 at 18:02

    @Steve,
    Plosser is the original SuperHawk and one of the founding fathers of RBC. Whatever he says, the opposite is usually true.

    If there’s a flight to safety this will boost demand for US dollar denominated safe assets which will be a positive shock to US dollar demand. If the Fed is passive while this occurs this will effectively lead to a tightening of US monetary policy and a drop in US AD. It’s hard to spin this in a positive fashion but somehow Plosser tries.

    For example, remember the first round of the euro sovereign debt crisis two years ago? The dollar rose, T-bond yields fell and inflation expectations began their summer long float downward. It led to Bernanke’s announcement of QE2 at Jackson Hole.

    P.S. I hear if you read Plosser’s speeches backwards they say “obey me, I am Satan.”

  25. Gravatar of dwb dwb
    28. May 2012 at 18:09

    “Folks down under 5 in a housing market that has very little appreciation are losing money vs. renting.”

    yes, generally you are right, the average length of home ownership is 7 years. thats relevant why?

    “So, I’m not talking “demand” I’m talking price subsidies, right now there is a big new public policy that is having as much affect as the mortgage deduction.”

    Huh? what policy is that? What price subsidies? Your thinking on this is not clear. Bulk sales are typically already rented out, not vacant. Also, only about half of new home construction right now goes to *owner occupied* housing, the rest goes to rentals – Karl picked one anecdote but that’s typical across all buyers.

    your 8 MM number is ludicrously high.

  26. Gravatar of dwb dwb
    28. May 2012 at 18:10

    “Karl picked one anecdote but that’s not typical across all buyers.”

  27. Gravatar of Matt Waters Matt Waters
    28. May 2012 at 19:20

    I’m not so sure of the cost of big bank bailouts. As long as the government backstops big bank liabilities, the banks could theoretically be very insolvent and still not actually run out of cash. That’s where capital requirements come in and eventually they would not be able to issue enough equity to meet those capital requirements. Equity, unlike liabilities, does not have a government guarantee and investors are not in the business of charity to the banks.

    However, if the bank assets are still marked to high and banks are actually insolvent, then banks would pay back Federal govt. loans, meet capital requirements and still eventually fail in the long run as their assets don’t pay.

    A couple of the big banks, such as Citigroup, do seem to be in exactly that situation: perhaps fundamentally insolvent but still having liquidity from the government backstop and having capital through assets marked too high. At some point, the assets would be marked down and either the government would have to make good on the guarantee or people who expected government to make good on the guarantee lose money. Even in the latter case, Citigroup’s failure would cause a lot of taxpayers losses similar to if the government took the losses.

    But yeah, in any case banking or housing were not the cause of high unemployment. Why exactly should too many houses or the banking crisis cause mass unemployment among teachers?

    “Plosser is the original SuperHawk and one of the founding fathers of RBC. Whatever he says, the opposite is usually true.”

    Heh.

  28. Gravatar of Steve Steve
    28. May 2012 at 20:21

    Another explanation for the European crisis, according to Der Spiegel:

    http://www.spiegel.de/international/zeitgeist/study-finds-germans-incapable-of-enjoying-life-a-834973.html

    Study Finds Germans Incapable of Enjoying Life

    With low unemployment and solid economic growth, things are going better than ever for Germans. But a new study shows they’re practically incapable of enjoying it. Not only do they find it difficult to cut loose and experience pleasure, but their “joy gene” is broken, researchers say.

    The results conform to the image that many Europeans have of Germans in this era of economic crisis as self-denying overachievers who can’t even turn off the fun-brakes when vacationing at the beach. The positive image that they enjoyed during the 2006 soccer World Cup in Germany seems gone.

    “At that time, Germans really radiated a zest for life,” says Rheingold psychologist Ines Imdahl. “But this mood shifted beginning in 2008.” The problem, she believes, is that Germans feel weighed down by the ongoing European debt and currency crisis. “It’s more than simple complaining,” she adds. “People have the feeling that we have to shoulder the entire crisis here.”

    But the Germans aren’t just burdened with the crisis. The main thing standing in their way is their own perfectionism. During hours of individual and group interviews, the researchers analyzed how 60 subjects felt pleasure. They also scrutinized the results of a representative survey of 1,000 men and women commissioned by the liquor companies Diageo and Pernod Ricard.

    Among survey respondents, 81 percent said that they experience pleasure best when they have managed to achieve something first. “As the saying goes, business before pleasure,” said 61-year-old female participant Wiltrud.

    Yet another phenomenon also comes into play in the German culture of pleasure — jealousy of others’ well-being. “Many think, ‘man, how does he do it,'” psychologist Imdahl said. It’s a Teutonic mentality one can also see in the euro crisis. “When we get agitated about the Greeks’ high pensions and ample vacation days, naturally pleasure-jealousy plays a role,” she says. But would Germans rather be Greek? “That doesn’t suit us,” she says.

    Perhaps the Germans could never achieve a Southern European kind of ease, but one might think they could at least relax during their most intimate moments. Not true, the study found. The highly personal interviews revealed that Germans can’t even let go during sex. Many reported constantly having film and advertising images run through their minds. “This results in the requirement to cut a good figure even during sex,” Imdahl says. That is, to hold in their bellies instead of enjoying the moment.

  29. Gravatar of Liberal Roman Liberal Roman
    28. May 2012 at 20:31

    Another underrated problem:

    Construction Permits Approved YTD (in # of units approved):

    http://www.census.gov/construction/bps/txt/t3yu201204.txt

    Phoenix: 4,715
    Las Vegas: 2,226
    Colorado Springs!!: 937

    San Jose: 1,134!
    San Francisco: 1,500!

    How much resources are we wasting in not allowing the expansion of a highly productive area? How costly is it that we have people leaving in droves to less productive ones?

  30. Gravatar of Liberal Roman Liberal Roman
    28. May 2012 at 20:39

    Just wanted to add the numbers for last year:

    2011:

    Houston: 30,865
    Dallas: 24,443
    Phoenix: 9,009
    Las Vegas: 5,074
    Colorado Springs: 2,276

    San Jose: 3,089
    San Francisco: 5,748

    Truly stunning.

  31. Gravatar of Major_Freedom Major_Freedom
    28. May 2012 at 21:24

    Liberal Roman:

    How much resources are we wasting in not allowing the expansion of a highly productive area? How costly is it that we have people leaving in droves to less productive ones?

    You don’t know that there is waste, and you don’t know that some sectors are more productive than others, without recourse to information borne out of an unhampered price system subject to profit and loss. NGDP distorts this information.

  32. Gravatar of Bonnie Bonnie
    28. May 2012 at 21:26

    At least Krugman isn’t making excuses for the Fed anymore. Maybe that’s progress? It’s amazing that he is card-carrying liberal, I am not, and I am more angry about what Bernanke’s Fed has done to the point where I am not at all bashful about calling for Bernanke’s resignation. Bernanke’s obsession with controlling inflation at the cost of all else has been completely counterproductive, is largely responsible for near economic collapse, and there isn’t any evidence of the policy changing to where market stability has any import at all. We are not any better off now than we were at the end of 2007, despite all of the opportunities for learning lessons. The Fed is not just washing its hands of getting us out of the slump, it is also washing its hands of doing anything to prevent crisis from other parts of the globe becoming ours. It really is no wonder we can’t recover with all of the hawk talk and hesitation to do anything about problems before they become problems, and we won’t as long as Bernanke is there. He needs to go.

  33. Gravatar of The Fed even refused to cuts rates after Lehman failed in September 2008, even though 5 year TIPS spreads had fallen to 1.23%, and it was obvious we were going into a recession « Economics Info The Fed even refused to cuts rates after Lehman failed in September 2008, even though 5 year TIPS spreads had fallen to 1.23%, and it was obvious we were going into a recession « Economics Info
    28. May 2012 at 22:01

    […] Source […]

  34. Gravatar of Liberal Roman Liberal Roman
    29. May 2012 at 04:22

    Major Freedom,

    You really know nothing about land use policies in Bay Area. I’m actually pushing the free market approach here and what I wrote has nothing to do with NGDP or monetary policy. Bay Area planning authorities block more development than any other region in the US. The numbers I highlighted show how pitifully low the number of approved real estate development permits are for this area.

    Sadly, the Bay Area is also one of the most productive areas in the world and home to some of the highest incomes. Simple logic and supply & demand reasoning should tell you that more people should be moving here and taking the high paying jobs. But they are not, because there is no housing here for them. And housing isn’t there for them, because the planning authorities block development.

    This is all very simple stuff here MF. Do you not understand anything except calls for tighter money?

  35. Gravatar of Brendan Darcy Brendan Darcy
    29. May 2012 at 04:22

    Scott
    Are you saying that if he fed dropped rates to zero straight away in early 2008 and started QE at the same time then we would have avoided the NGDP crash? Is monetary policy that effective in the heart of a panic?
    B

  36. Gravatar of Steve Steve
    29. May 2012 at 05:21

    Krugman glowingly quotes from Martin Wolf at the FT:

    “It may be humiliating for the government to offer such a speech now. But there is no reason why the people of the UK should suffer [austerity] for its mistake, indefinitely.”

    But he omits the next, final, and most important paragraph:

    “There is, however, one interesting alternative to reconsidering fiscal policy. It would be to CHANGE THE REMIT OF FOR THE BANK OF ENGLAND, TO FOCUS ON NOMINAL GDP, instead of inflation. I intend to examine the advantages and disadvantages of that possibility in a future post.”

    http://blogs.ft.com/martin-wolf-exchange/2012/05/28/#ixzz1wGSQsyqg

  37. Gravatar of dwb dwb
    29. May 2012 at 05:25

    @Liberal Roman,
    NIMBYism: I am a big fan of restricting supply in my neighborhood because i like it here, keeps my property values up, and the riff-raff out. I am a big fan of loosening restrictions in your neighborhood. But since my elected representatives work for me, well, you can predict how that works out almost every time.

  38. Gravatar of johnleemk johnleemk
    29. May 2012 at 05:56

    Brendan Darcy:

    Are you saying that if he fed dropped rates to zero straight away in early 2008 and started QE at the same time then we would have avoided the NGDP crash? Is monetary policy that effective in the heart of a panic?

    It certainly worked on Black Monday, 1987… (though some blame poor monetary policy for triggering that particular panic in the first place)

  39. Gravatar of Liberal Roman Liberal Roman
    29. May 2012 at 06:07

    @dwb,

    I am a big fan of my local representatives not granting any more business licenses to my future potential competitors. And so, since my representatives work for me, is it legitimate for them to screw over any potential future businesses in favor of the incumbent, me?

    This is unAmerican, a violation of property rights and should be declared unconstitutional based on the evidence I presented.

  40. Gravatar of Tom Tom
    29. May 2012 at 06:45

    Even an emergency drop to 0% and immediate QE would not have saved the economy from a big drop, but it would be less severe, perhaps more like the dot.com bubble pop.

    Perhaps … but perhaps not. Perhaps the malinvestment in housing and overvaluation of housing led to excess lifetime consumption decisions based on higher expectations of wealth. Once house prices stopped increasing, so that speculative investment in housing was no longer profitable, millions of home-equity borrowers found out they had far far less wealth than they had expected, or had been basing their pre-2008/2006 buying decisions upon.

    Even with massive monetary response, 0% interest, QE, even $1000 per taxpayer rebates (from helicopters!), the overvaluation of housing meant a huge wealth mirage. I have yet to read, from Scott or anybody, how the Fed could maintain the overvaluation of US houses. And there is no good macro theory about how to maintain consumption when such a huge wealth effect changes buying habits.

    Of course, this is the first such fully national housing wealth bust in the US, the prior Savings & Loan debacle more localized. But Japan had a similar real estate boom/ bust — which is why their example might be the closest for the US to learn from.

    In any case, there is no scientific way to find out which policy, after the Lehman bankruptcy, would minimize the problems. It should be clear that one goal of the Fed, or somebody with responsibility for the economy, should be to reduce bubbles — but nobody really knows how to do that.
    NO BAILOUTS might not end bubbles, either, BUT it means the taxpayers don’t lose.

    2. The cost of bailing out the big banks was much smaller than widely believed.

    Since I believe the Too Big To Fail banks acted, rationally, based on the bailout of Long Term Capital Management in 1998, and their internal failure was based on the LTCM response, I claim that some of the cost of failure belongs on the cost side to that LTCM bailout.

    But at and soon after the time, most economists would argue that the “cost” of the LTCM bailout was very modest.

    Thousands of construction companies went belly up. The real production economy would have been better off if the big banks had all gone mutually bankrupt with mutual debt to equity swaps (and equity share investors wiped out), and all the top management kicked out by new boards of directors. Or even cease operations altogether, with depositors getting their FDIC, only.

    The claim that “the whole financial system” would collapse is a laughable ruse used be elitists for the elites to be taxpayer protected from their own mistakes.

    The big banks are paying back money to the taxpayers because 1) The Fed is paying them interest on reserves,
    2) They are keeping higher reserves (and getting higher interest).

    The Fed should only be paying interest on reserves during boom times, as well as requiring increasing reserves at those time. In the recession, what is needed for jobs is for banks to make more loans to small businesses, not for them to keep their money safe and making interest with the Fed.

    For the economy, lower bank reserves at this point would be better, even tho that means riskier bank portfolios.

    The economy, with small businesspeople NOT getting loans, is still paying for the Big Bank Bailout — and the unseen lost opportunity costs make it is far more net expensive than the seen numbers indicate.

  41. Gravatar of dwb dwb
    29. May 2012 at 06:58

    @Liberal Roman,
    “This is unAmerican, a violation of property rights and should be declared unconstitutional based on the evidence I presented.”

    There is a local zoning fight near me regarding a big box store that wants to put in a big liquor store next door. I wondered what all the big deal was (lots of liquor stores around here). Turns out, much of the huffing and puffing was generated by those same liquor stores who did not want the competition. Duh. job losses! bad for the economy! Didn’t Andrew Carnegie and JD Rockefeller enshrine our constitutional right for businesses to protect their monopolies? lol. works for me (not for you though). I am with you, i hope you see the sarcasm.

  42. Gravatar of Matt Waters Matt Waters
    29. May 2012 at 07:22

    @Liberal Roman

    I’ve honestly skipped through MF’s posts in these comments, but his response on Bay Area housing insanity is a good example of my point about it’s hard for him to believe anything about anything.

    Sure, it’s a conjecture to say that more people living in the Bay Area would mean more productivity. There are many studies showing how higher density means higher productivity due to lower transaction costs, higher specialization, etc. But in the end, humans being more productive because they moved to the Bay Area is a hypothetical we can’t ever know with absolute certainty.

    The issue is that the argument relies on actual evidence and not some logical contortions. The only reason for those logical contortions on the part of so many Austrians is that the evidence just doesn’t match their monetary arguments.

  43. Gravatar of dwb dwb
    29. May 2012 at 07:39

    @Matt, Liberal Roman

    I don’t even get what MF is actually against with the frothing of the mouth Austrianism. Less regulation? Really?

    I am pretty sure that if you said the sky is blue he would say “You don’t know that the sky is blue, and you don’t know that some light wavelengths are different than others, without recourse to information borne out of an unhampered price system subject to profit and loss. NGDP distorts this information.”

  44. Gravatar of Mike Sax Mike Sax
    29. May 2012 at 08:35

    “You don’t know that there is waste, and you don’t know that some sectors are more productive than others, without recourse to information borne out of an unhampered price system subject to profit and loss. NGDP distorts this information.”

    So MF NGDP distorts information but world NGDP-which you admit Hayek supported doesn’t?

  45. Gravatar of Mike Sax Mike Sax
    29. May 2012 at 08:36

    In addition MF I appreciate you playing the “hermenutics” card. You do seem to have an onus against persausion. If it makes you feel better you aren’t at all persausive.

  46. Gravatar of Major_Freedom Major_Freedom
    29. May 2012 at 09:33

    Liberal Roman:

    You really know nothing about land use policies in Bay Area.

    I didn’t claim to. All I said was that you can’t know whether a particular resource is wasted without recourse to the unhampered price system.

    I’m actually pushing the free market approach here and what I wrote has nothing to do with NGDP or monetary policy. Bay Area planning authorities block more development than any other region in the US. The numbers I highlighted show how pitifully low the number of approved real estate development permits are for this area.

    Of course, the problem of zoning laws exists in virtually every country in the world.

    This is all very simple stuff here MF. Do you not understand anything except calls for tighter money?

    I am not calling for tighter money. I am also not calling for the false dichotomy flip side of looser money. I am calling for free market in money.

    Matt Waters:

    @Liberal Roman

    I’ve honestly skipped through MF’s posts in these comments, but his response on Bay Area housing insanity is a good example of my point about it’s hard for him to believe anything about anything.

    Hahahahaha, you guys are foaming at the mouth so badly that you will even attack each other if you believe you’re attacking me. I didn’t even respond to Liberal Roman’s discussion on Bay Area housing, Matt.

    The issue is that the argument relies on actual evidence and not some logical contortions. The only reason for those logical contortions on the part of so many Austrians is that the evidence just doesn’t match their monetary arguments.

    False. The evidence is perfectly consistent with Austrian theory. It always has been. Austrian theory is logic based. Logical arguments cannot possibly be refuted or even verified, by empirical data. Empirical data is always necessarily consistent with it.

    dwb:

    @Matt, Liberal Roman

    I don’t even get what MF is actually against with the frothing of the mouth Austrianism. Less regulation? Really?

    No, I said Liberal Roman doesn’t know which lands are more valuable and which are less valuable without the information provided by the unhampered price system. I didn’t argue against deregulation of zoning laws.

    I am pretty sure that if you said the sky is blue he would say “You don’t know that the sky is blue, and you don’t know that some light wavelengths are different than others, without recourse to information borne out of an unhampered price system subject to profit and loss. NGDP distorts this information.”

    I’m pretty sure you’ll keep straw manning me.

    Mike Sax:

    “You don’t know that there is waste, and you don’t know that some sectors are more productive than others, without recourse to information borne out of an unhampered price system subject to profit and loss. NGDP distorts this information.”

    So MF NGDP distorts information but world NGDP-which you admit Hayek supported doesn’t?

    Wonderful. Another who can’t read.

    They both do, Mike. I never said I SUPPORTED Hayek’s world NGDP ideal. I only insisted that was Hayek’s actual position because Sumner is claiming Hayek would have been in favor of his NGDP targeting governmental plan.

    It wasn’t an endorsement of Hayek. I even disagree with Hayek more than I agree with him.

    In addition MF I appreciate you playing the “hermenutics” card. You do seem to have an onus against persausion. If it makes you feel better you aren’t at all persausive.

    It wasn’t a “card”. It is Sumner’s actual epistemology. He is a follower of Rorty.

    Yes, I am against “persuasion” as a valid epistemology, because it is self-refuting.

    And don’t flatter yourself, I don’t care if I am not “persuading” you either. It would be just as horrifying for me if I couldn’t “persuade” a drunk that the year is 2012.

  47. Gravatar of Mike Sax Mike Sax
    29. May 2012 at 09:46

    Well if you think lack of persausivness is a virtue MF you certainly are a vrituous man as to speak Rorty’s language you certainly haven’t persauded your “peer group.”

    Perhaps believing that the lack of popularity of one’s views is somehow a proof of truth is the way you like to flattter yourself.

  48. Gravatar of Major_Freedom Major_Freedom
    29. May 2012 at 09:59

    Well if you think lack of persausivness is a virtue MF you certainly are a vrituous man as to speak Rorty’s language you certainly haven’t persauded your “peer group.”

    I don’t think lack of persuasiveness is a virtue. I just reject it as a valid epistemology. There is a difference.

    It’s like saying courage is a virtue, and then going too far and claiming that courage is a valid foundation for an epistemology, where as long as the person has courage in their convictions, they must be right.

    An argument being persuasive doesn’t mean it is correct. Yes, I know even asking the question “Is one being persuaded of the truth?” is totally inappropriate to hermeneuticists.

    And what is the basis for your claim that I “certainly haven’t persuaded my peer group”? You are not a representative of my peer group. I could just as easily say you haven’t persuaded your peer group.

    Perhaps believing that the lack of popularity of one’s views is somehow a proof of truth is the way you like to flattter yourself.

    It is impossible for me to flatter myself by others agreeing or disagreeing with me. It would be like claiming a rock star is flattering himself when the crowd cheers for him.

    Perhaps your inability or refusal to think independently and stand up to criticism has lead you to find popularity as a virtue, so as to defend your individual ideas from criticism by genuflecting to the “experts”, or what you flatter yourself in labeling, your “peers.”

  49. Gravatar of flow5 flow5
    29. May 2012 at 14:02

    “The graph doesn’t show changes in NGDP, it shows levels”

    Absolutes are virtually unusable.

  50. Gravatar of Morgan Warstler Morgan Warstler
    29. May 2012 at 15:02

    “Huh? what policy is that? What price subsidies? Your thinking on this is not clear. Bulk sales are typically already rented out, not vacant.”

    dwb, you are wrong. I have a pretty good seat to watch this stuff from.

    About 35% of the bulk sales to date (they just started but it was still 5K+ homes), and the 8M in general, are occupied – either by owner, renter, or squatter.

    I actually am advocating that the bulk sales be split into vacant and occupied and sold because it take a very light touch, and almost $10K to take possession from occupier.

    The bidding on bulk suggests a price to market discount of 30% on avg. depending on market.

    The 8M is a two prong hit:

    “1) There are 8 million in the delinquent, default and foreclosure pipe per the most recent MBA report (14.01% of 57 million mortgages). Of these, 80%, or 6.4 million, should end up in liquidation.”

    http://mhanson.com/archives/99

    The kicker is that IF these houses went out via the court house steps, the fall in home values would push the prime underwater to default.

    Prime have been holding on, but they are underwater, and the Fed did studies to figure out what it takes for prime to go jingle mail and the answer is like 35% underwater (from memory), this is why they care so much about keeping home values up.

  51. Gravatar of dwb dwb
    29. May 2012 at 18:19

    @Morgan:
    you are seated in the galley compared to where i sit.

    I agree with “bulk sales be split into vacant and occupied”

    I have seen various reports on the cost to take possession ranging from 10% to 20% of value depending on the maintenance needed, property management, HOA/taxes, etc. 30% discount to market does not sound unreasonable.

    “the Fed did studies to figure out what it takes for prime to go jingle mail and the answer is like 35% underwater”

    Yes, models are in that range (typically a little higher).

    IF these houses went out via the court house steps, the fall in home values would push the prime underwater to default.

    not exactly: underwater-ness affects borrower behavior *after* they become seriously delinquent (i.e. walk away or protect the asset), while unemployment pushes them into delinquency – which affects the level of delinquencies. Many 30-60 day delinquencies cure, so as the UE rate comes down so will the delinquencies.

    There are 8 million in the delinquent, default and foreclosure pipe per the most recent MBA

    Your data is very old, the current number is much less than half, and only the 90+days delinquent are really relevant:
    http://www.calculatedriskblog.com/2012/05/q1-mba-national-delinquency-survey.html

    (you can also google the Fed credit survey, Corelogic, or the LPS mortgage monitor report)

    * only about 7.5% are now in the seriously delinquent 90+ or foreclosure bucket (only about 30% of the 30-60days will become seriously delinquent right now, the rest cure). That’s about 3.7 million.

    * already accounted for: about 2.1 MM foreclosures “in the pipeline” (of this Fannie, Freddie, FDIC, FHA inventory is ~500k; the GSEs/FDIC/FHA start & close about 100k homes/month; bulk sales come from this pool).

    * That leaves about 1.6 MM unaccounted for. Many of these are in states where it is hard to foreclose so these will be around a while stretched out over the next year or so (the so-called “judicial states”). I know banks would like to clear this but in many cases you have to get on the judicial calendar so clearing this is mostly bureaucracy.

    * LPS shows about 200k foreclosure starts / month against annual sales of 4.7MM. The distressed sale share nationally is about 26%, but still 70% in NV (in NV, median existing home $ are 100k whereas new homes are 200k). I have seen a lot of indications lenders are now leaning heavily to short sales not foreclosures going forward due to the paperwork and mortgage servicer settlement.

    So from where I sit I see a declining share of distressed sales, not a policy, and ample sales volume to dispose with the remaining pipe over the next year or so (CME Case/schiller futures are now back on the upswing).

    happy hunting, the delinquencies in AZ and a lot of states is back down to normal levels. NV is still high but i would not be shocked to see normalcy there by year end.

  52. Gravatar of dwb dwb
    29. May 2012 at 18:23

    @Morgan,
    March LPS mortgage monitor report

    http://www.lpsvcs.com/LPSCorporateInformation/CommunicationCenter/DataReports/MortgageMonitor/201203MortgageMonitor/Mortgage_Monitor_March_2012.pdf

    in case you are wondering why i follow this so closely, i work for the evil empire, darth vader himself. keep that in mind.

  53. Gravatar of Morgan Warstler Morgan Warstler
    30. May 2012 at 09:24

    dwb,

    I work a bit from memory, so I will go hunting, but I believe the Fed data showed that prime (even current) walk away when they are underwater at 35% (the % maybe be off, but I took it as they were testing exactly for when the very best amongst us just shrug and take the hit).

    I’m so glad to hear from Darth Vader. I am on the get_bulk side.

    Whoever you can tell this to, please say it loudly: SPLIT the tapes in vacant / not. The last thing officials need is 100% of bulk buyers each trying their hand at evicting 75 year old women. Suicide is not an option.

    There ought to be a test of “25 occupied” that bulk buyers have to do decently – that’s a pure process enterprise value thing, that buyers of occupied tapes should have to prove themselves on.

    Maybe, I’m wrong, but I view Calculated Risk as being a cheerleader, not a reporter.

    On the 8M, take me through true shadow inventory, my understanding is that 90+ days late isn’t in there:

    http://www.thetruthaboutmortgage.com/2-1-million-mortgages-90-days-late-but-not-in-foreclosure/

    More importantly, the current “positive data” we see today is because a year ago this was happening:

    “During the quarter, loan servicers implemented 473,415 “home retention actions,” which include loan modifications, trial payment plans, and so forth, compared with 146,132 completed “home forfeiture actions,” which include short sales, foreclosures, and deeds-in-lieu-of-foreclosure.”

    And it continued like that through 2011

    http://www.thetruthaboutmortgage.com/87-6-percent-of-mortgages-are-current/

    Effectively shuffling a huge percentage current foreclosures” into “future foreclosures” off the books.

    Essentially, we should assume all retention is a pipe dream.

  54. Gravatar of ssumner ssumner
    30. May 2012 at 12:09

    Steve, I agree about banks, indeed I believe that 100% of insured deposits should be backed with Treasury securities or other safe assets that are continually marked to market. Loans to developers should be made with uninsured funds.

    Yes, Krugman likes to blame the crisis on the evils of deregulation, and thus blaming the Fed would weaken that argument.

    Joe, I have lots of others, including a new one today. The monthly GDP estimates are from Macroeconomics Advisers.

    Ritwik, You said;

    “3) If there’s a crash for a year and the GDP growth reverts to its trend (but not level), why should unemployment persist? Why are lesser Americans employed than in ’08 even though America is producing more?”

    Productivity keeps growing. But employment changes are highly correlated with GDP.

    dlr, Excellent comment.

    Jeffrey, No, it’s a tax on bank customers, no different from a tax on gasoline consumers.

    srw, You asked;

    “If the fed failed to respond to the collapsing ngdp, are we really saying that they failed to respond to collapsing velocity? If so, why did velocity collapse? Not the housing problem…that was earlier. Not Lehman…that was later.”

    It’s complicated. The onset of the recession was caused by a sharp slowdown in monetary base growth, velocity was rising in late 2007 and early 2008. Then when rates fell to low levels, velocity fell and the problem became the Fed’s refusal to supply enough base money to offset the fall in velocity.

    Mark, I’m relieved!

    dwb, That doesn’t surprise me.

    Morgan, I’d be surprised if that many were being rented out.

    Steve, The US stock market understands what’s really going on much better than Plosser.

    MR, These are the most recent figures for MA, I just checked their website. But note that this graph actually shows NGDP rising between 2008:2 and 2008:3, whereas the new BEA figures show NGDP falling in Q3. I know it doesn’t look that way, as NGDP peaks in June and then heads downward, but the average level in the 3rd quarter is above the average of the 2nd quarter, according to MA figures. So more accurate numbers would show an even bigger fall in Q3.

    Matt Waters, You might be right. But I still find it interesting that this is the second massive bailout of small bank deposits in the past 25 years, and everyone focuses on the big banks.

    Steve, I’m not going to touch that topic.

    Liberal Roman, I can sort of understand San Francisco, but the San Jose numbers are amazing. They are much less hemmed in.

    Bonnie, Yes, but he’s still making excuses for their behavior in 2008-09

    Brendan, You asked:

    “Are you saying that if he fed dropped rates to zero straight away in early 2008 and started QE at the same time then we would have avoided the NGDP crash? Is monetary policy that effective in the heart of a panic?”

    No, I’m claiming that committing to a policy of NGDP level targeting in 2008 would have resulted in a dramatically milder recession. But given they didn’t do that, cutting rates sooner would have helped, as would earlier and larger QE.

    Steve, He didn’t want to fully quote Wolf because that might confuse the message.

  55. Gravatar of dwb dwb
    30. May 2012 at 14:50

    @Morgan,
    “but I believe the Fed data showed that prime (even current) walk away when they are underwater at 35%”

    There are many studies, its in that neighborhood, but specific to the homeowner’s situation and whether for example the mortgage is recourse or non-recourse.

    “The last thing officials need is 100% of bulk buyers each trying their hand at evicting 75 year old women.”

    i could tell stories. The good news is that if there is a way for the GSEs or government to mess it up, they will do it (I am not a govt or GSE employee thank god its awful over there). oh, but that is the good news.

    “I view Calculated Risk as being a cheerleader”

    Bill McBride is an industry insider, bearish before most, with deep roots and connections who feed him stuff. highly reliable. He’s not always right, but bet against him at your peril. He’s more reliable than most investment bank stuff i read.

    “On the 8M, take me through true shadow inventory, my understanding is that 90+ days late isn’t in there:”

    that link you provided is based on the Dec 2011 LPS survey (click the link below and find the latest survey, you will can also see the Dec survey for comps.

    the “8 MM” was based on a 14% delinquency rate in 2010 that has now come down to about 7%. No, its not being hidden by mods and other stuff. The 14% is just 2 years old, we’ve done at least 2 MM foreclosures since that time (out of about 8 MM homes sold in two years).

    So: we’ve done 2 MM ish to-date, 2 MM are “in the pipe” and another 1.5 ish more to go (not all those will go to foreclosure).

    Go through the LPS deck, note the huge discrepancy in judical vs non-judicial states. that’s the real holdup, why many think it’ll just dribble through for a year or two more. Overall the proportion of distressed sales (short + REO) in existing home sales is declining.

    Two other things have changed: the “cure rate” is up significantly because unemployment is down; lenders are getting smarter about short sales (REOs are down). The number of short sales is up. Lenders have wised up that there is less paperwork and higher value in short sales.

    The “8 MM” number corresponds to the 5.57 MM number here:

    http://www.lpsvcs.com/LPSCorporateInformation/NewsRoom/Pages/20120522.aspx

    The foreclosure pipe is 2.048 MM and the 90+ days delinquent is 1.595. The remaining 1.93 MM in the 30-60 day bucket is actually historically relatively normal now (most will not go to 90+days delinquency).

  56. Gravatar of dwb dwb
    30. May 2012 at 15:11

    @Morgan,
    also, on the mods, here is the latest OCC report (see table 2 of the Q42011 report p 6:)

    there have been 2.4 MM mods since 2008. Of those, 46.9% are still current. The remaining 53.1% would already be included in one of the above delinquency buckets.

    http://www.occ.treas.gov/publications/publications-by-type/other-publications-reports/mortgage-metrics-2011/mortgage-metrics-q4-2011.pdf

    You could make a case to add some of the 46.9% of those that are “current,” since these have a high re-default (looks like about 25% stay current after three years, so about another 500k).

    Also, note that the OCC report also relies on the same industry loan database so there is a lot of overlap in these reports.

  57. Gravatar of Morgan Warstler Morgan Warstler
    31. May 2012 at 06:39

    So “‹5,570,000 + 1,595,000 + another 500K who fall back out

    minus some % of delinquents who will come back to current.

    And 2M foreclosures in past two years.

    On the assumption that short sales grow while outright foreclosures goes down.

    So far so good?

  58. Gravatar of dwb dwb
    31. May 2012 at 07:49

    So “‹5,570,000 + 1,595,000 + another 500K who fall back out

    5,570,000 = 1,595,000 (90 days delinquent not in foreclosure) + 2,048,000 (in foreclosure now) + 1,930,000 (in the 30-60 day bucket)

    Plus 500k that will fall out.

    Fed stats show (and internal models) than ~30% of the 1,930,000 will go to 90+day delinquent, the rest cure (people catch up).

  59. Gravatar of Greg Ransom Greg Ransom
    31. May 2012 at 10:02

    The houses were TOO BIG.

    It wasn’t just that we had too many houses.

    What is it that prevents your brain from ever thinking economically about malinvestment across time?

  60. Gravatar of Greg Ransom Greg Ransom
    31. May 2012 at 10:02

    The houses were TOO BIG.

    It wasn’t just that we had too many houses.

    What is it that prevents your brain from ever thinking economically about malinvestment across time?

  61. Gravatar of Greg Ransom Greg Ransom
    31. May 2012 at 10:05

    Growing up I knew all sorts of people who lived in houses not much bigger than the size of the garages of the houses dozens people have lost to foreclosure in my little community.

    And I’m guessing that the downpayment on both classes of homes at the time were cose to inflation adjusted equivalent.

  62. Gravatar of Greg Ransom Greg Ransom
    31. May 2012 at 10:08

    You can’t buy the living room of a condo in Silicon Valley or South Orange County for that …

    “I frequently visit a completely typical and fairly new house in Arizona, worth about $200,000.”

  63. Gravatar of Greg Ransom Greg Ransom
    31. May 2012 at 10:10

    Scott, are you really an economist?

    “We allocated too many resources into housing construction, which meant we built a few million houses a few years too early. How costly is that?”

    Time miscoordination is massively expensive — transaction costs are massively expensive. Finance and re-finance are expensive.

    Houses get _trashed_ and _looted_ when they are in foreclosure.

    Etc.

  64. Gravatar of Greg Ransom Greg Ransom
    31. May 2012 at 10:27

    Scott, you claim to believe two things as both true.

    1) that there was indeed an artificial malinvestment boom & bust

    and

    2) there was a drop in NGDP which had economic coordination consequences, e.g. unemployment and “demand deficiency”.

    But Scott, here’s what you fail to do — what your economics helpless to address because it is hollow at its core:

    A) Your economics is empty at the center leaving it incapable of connecting 1) to 2).

    And because your economics has empty handed when it comes to this core causal connection, you feel compelled to insist that 1) and 2) are necessarily rivals WHEN THEY ARE NOT.

    And you therefore feel compelled to wave your hands and make excuses to gin up 2) and the expense of 1), when your grounds for doing so require you to distort both a) the nature of the causal mechanism accounting for 1); and b) the nature of the empirical phenomena which exhibit the fact of the pattern of a).

    It’s as if you are a German biologist in 1900 who feels compelled to distort and disparage Darwin’s causal mechanism of natural selection because you think that it is a rival to the germ theory of the cell or to the classification of teleological & morphological kinds or to epigenetic level adaptation, etc., etc.

    And why did German’s feel compelled to do this? Because they were incompetent in explanatory specifics of Darwin’s causal mechanism, and they lacked the competence and imagination to fit Darwin’s causal mechanism to the phenomena which advanced their own scientific research project & career.

    We had to wait until the 1930s for Simpson & Mayr & Dobzhansky & Haldane & Wright to fix the pathology and put biology back on the road to global explanatory power and unification.

  65. Gravatar of Greg Ransom Greg Ransom
    31. May 2012 at 10:32

    Note well.

    Steven Horwitz has already done a good part of the job of connecting the economics of the artificial malinvestment boom & bust (Hayek etc) to the economics of NGDP / MV stabilization (Yeager, Bagehot, etc.) in his book Microfoundations and Macroeconomics.

  66. Gravatar of ssumner ssumner
    31. May 2012 at 14:34

    Greg, I see the same old insults that misrepresent my views.

  67. Gravatar of Greg Ransom Greg Ransom
    1. June 2012 at 08:30

    Scott, you’ve bragged about how your model ignores finance or banking and how these connect production goods through time (asset values) and various monies and shadow monies.

    This is not a misrepresentation of your views.

  68. Gravatar of Greg Ransom Greg Ransom
    1. June 2012 at 08:37

    Do you fail to see how insulting it is not to take the proponents of a scientific research program seriously, on the basis of all of these not serious & relatively superficial efforts at disparaging the empirical elements of the paradigm, and on the basis of an openly admitted deep ignorance of the explanatory elements of the theory?

    It’s flat out insulting.

    And if you are not thinking economically, its not an insult to say so, it’s an explanatory description, ie an empirical observation with explanatory power.

  69. Gravatar of Greg Ransom Greg Ransom
    3. June 2012 at 21:00

    You can’t assume that added population equals a significant increase in the number of people who can afford to buy and pay the mortgage on a California McMansion built between 1999 and 2008.

    For example, between the mid-1980s to 2005, California’s population grew by 10 million, while Medicaid recipients soared by seven million; tax filers paying income taxes rose by just 150,000; and the prison population swelled by 115,000.

    Over 40% of Americans receive food stamps, over 1/2 of all American receive direct transfer payments or subsidies from the government.

    This is not a population which is going to be making the monthly payment on a California McMansion.

  70. Gravatar of Update No. 62 – 01/06/12 – EGP Capital Update No. 62 – 01/06/12 – EGP Capital
    1. March 2017 at 02:38

    […] Here is more brilliance from Scott Sumner as he uses his usual unconventional thinking to interpret from another angle what the problems of […]

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