Thursday, November 22, 2012

Happy Bernanke Thanksgiving...

...another developing housing bubble.


  1. How is yet another housing bubble forming? I thought trying to reinflate the biggest bubble of all time, once it has been popped, would be futile. I mean, shouldn't money be pouring into another asset class, besides housing? In my view the last big housing bubble hasn't even fully deflated yet. Think about it: can you think of a single large home builder that went bankrupt during the bursting of the bubble? Toll Bros., Lennar, NVR, etc. are all still around and still building. This sector was never fully purged of its excesses. If housing prices are really on their way up again in the U.S., I can only imagine that the price of commodities will start increasing in earnest in the near future. Every market is manipulated by FED and government policy to such a mind boggling extent, I don't really know what to think anymore. If the housing market bubble is indeed able to be reinflated, what do you think the consequences for the larger economy will be?

    1. Inflation will be serious in 2013. Already people are squeezed. Yes, bubbles can be reinflated. The increase in prices will bump a lot of people out of certain markets, like housing, while rewarding key players connected to the reinflated industry. The press likes to hammer government bailouts to the gov't-connected 1%. But Fed policy of QEi is no different than the bank bailouts in 2008 and TARP 2009. The beneficiaries of the 2008 bailouts ran a propaganda campaign that made their existence, and approval of a near trillion-dollar bailout, sound indispensable to the American people and to the global economy. You can't be more important than that! QEi is still a bailout, but without all of the "global crisis" rhetoric attached to it. Some call inflation insidious for its gradual and negative effects. Negative, of course, but those with a fixed income or slow-to-grow incomes, inflation is not so gradual. It's alarming. Anybody shopping on a daily basis and whose wages are stagnant, which is everybody, notice that a pound of bacon is $7, $8 or $9 a pound. Inflation also redefines terms: for a pound of bacon today, you only get 10 ozs instead of 16. Inflation is an under-the-radar bailout.

  2. From a paper received at a recent presentation by Vernon L. Smith (2002 Nobel Prize in Economic Sciences winner) Balance Sheet Crises: Causes, Consequences and Responses.
    "We propose the severity of the Depression beginning in 1929 were twin household-bank balance sheet crises-events... Each episode, we hypothesize, was preceded by unsustainable rises in expenditures on construction of new housing units and in mortgage credit for purchases of new and existing homes. In both cases housing values rapidly collapsed by over thirty percent but mortgage debt obligations fell only very slowly, so that housing equity fell sharply.
    ...The interaction between Federal Reserve monetary policy and the housing-mortgage market was a clearly discernable feature."

    A point that I was unaware of is how significant a role housing plays in the U.S. economy, in a whole host of ways. Bernanke and his handlers want the sector juiced and home prices back up thinking this will create another good times boom on their watch. Local taxing authorities want high home prices as most base their property tax take on home valuations.

    But what does housing(or commercial construction) add to an economy in terms of vibrancy, I would suggest not that much. It has little to do with innovative breakthroughs or new frontiers, it creates make work in financing, sales, manual labor, some capital goods(many likely made outside the U.S.).

    Managed economies decline, the U.S. is very much a managed economy, and the trend is apparent insofar as this continues.

  3. I am glad to see you referring to it as a bubble Bob. I agree with you that it is unsustainable. The only question is how long this one lasts...but under the notion that each successive stimulus is shorter in duration and less effective I would be surprised to see this one last 3 years.