"Tax law changes that allowed households repeated exemptions of up to $500,000 on housing capital gains coupled with an innovative mortgage market that simplified withdrawal of accumulated gains, even from unsold housing, added to the fire under the housing market. As a result, housing replaced tech stocks as the 'hot' way to accumulate wealth for most American households."
Not to mention the cumulative effects of the Bush administration's various tax cuts, most of which were targeted toward increasing the supply of capital to already-glutted capital markets.
I'm no fan of Greenspan, but it seems a bit unfair to expect the Fed to clean up not only messes that occurred despite reasonably good government fiscal policy under you-know-who, but also those that occurred because of bad government fiscal policy under you-still-know-who. Is it my imagination, or is this guy foisting onto Greenspan criticism that rightly should be directed at the Bush administration?
Tom, knowing the AEI (strong Bush backers), my reaction was this commentary is an attempt to deflect criticism from Bush. Another person suggested to me that the phrase "Ownership society" will probably disappear when housing slows down.
The most interesting (and to me original) comment I saw on the worldwide housing bubble was from one of the China-based economists from Morgan Stanley, Andy Xie-
"Globalization has altered how the global economy works. The globalization of supply has integrated labor surplus in low-cost economies into the global economy. The neutral monetary policy should target lower inflation levels than before. Because monetary authorities have not considered this fact, they have oversupplied liquidity and created the massive global bubble.
...
There are two obvious trends in this bubble: Anglo-Saxon consumers have been borrowing a lot against their rising property values to support consumption, and Chinese companies (actually, government-related entities) have been borrowing a lot to create production capacities. To mirror the surge in liquidity, the indebtedness of Anglo-Saxon consumers and Chinese investors has risen sharply. The current boom, therefore, is debt-funded. Debt levels can continue to rise as long as asset prices keep rising.
Whatever triggers the collapse, it will show up first in declining asset prices. Property is the likely candidate. Property prices in New York, London, and Shanghai could decline at the same time. When property prices begin to decline, it would cause the global economy to weaken. The weakening economy would decrease the cash-flow of property speculators who would have to sell to unwind. The unwinding would lead global asset prices to collapse in general."
This is what really dismays me. When the Bushes and their buddies yap about "ownership" they know what real ownership is and they know they are peddling snake oil.
Very very few Americans own anything at all. I have friends who boast, "I pay off the credit cards each month" as if that is "ownership" when they still owe the bank on the cars and the houses and everything that is substantial.
Real ownership means you owe nothing on anything. And have capital to invest to boot plus savings! This is now indeed a rarity.
I feel that politically Greenspan has alid himself more with Bush and rightwing economists than is seemly. He also has a history under previous administrations of a bias towards encouraging or at least tolerating the inflating of certain assets. This amoounts to a philosophy that hopes the gain is greater than potential consequences along with affirmation of an "immediate gratification" approach. This latter has come to imbue much of "conservative" politics. Such people often boast how they spent their tax cuts to help the economy.
My own inclination is to hold that politics are usually independant of medium term economic fluctuations. Long term is more of an issue such as the decision starting with Reagon and essentially continued to downplay energy conservation. However with this administration and the loosely aligned fed there is clear cut responsibilities. We can see how choices such as creating "investment capital" (read real estate and artificially mantained stock prices) through tax cuts and increased federal deficits will have clear cut effects in the economy.
If thinggs work out the way Kudlow promises the administration will have established the value of a moderately radical approach, if these choices aggravate (by delay and bubbles) problems then it is the end of "neo supply side economics." Or at least one hopes.
The problem I have with the current economic situation is that while seemingly more responsible on some issues the Democrats have been selective. For example it has been apparent for will over a year that many have taken in dangerous debt through refinancing, others have taken on dangerous and probably nsustainable loads for the promise of "ownership."
Democrats have not spoken up against this party, even when it meant people committing close to half of their income on an interest only, variable rate loan. To give warnings would be unpopular, thus moral leadership is lacking in politics.
I could see the tax cuts if what they were trying to do was spur investment by freeing up capital. But investment in industry has not been spurred, instead, we get a housing bubble since the market is seen as risky and housing is seen as a safe investment. By holding interest rates artificially low, the fed has discouraged saving. There's no point in saving money when the return is lower than actual inflation.
And a lot of our money is going offshore because there's really no growth industries in the United States. Even as consumers, I think we're about played out - we can buy cheap clothes and Walmart crap or fancier cars or the latest tech gadgets, but that's about it, really.
We should be saving. But we can't, because the fed keeps the interest rate too low. We should be investing, but there's nothing worth investing in. So we buy bigger houses, or specualte in the housing market. But that forces those who really need housing out of the market. How long can all this stupidity continue???
One problem I have with "investment" is that the vast number of stock purchases don't really do this. They support previous investments, often absurdly. Only with a new offering or if a company sells stock does it go directly into production. I think the stock market is a necessary structure, but it does not necessarily create many new enterprises, when it does produce quite a few as in the nineties they are often absurdly financed and wasteful.
The market can also distort production, there is much to be said for the argument that it skews companies to the short term and inessential. And while much juggling is done to get the price high, minimal respect is often shown for the alleged owners and executive pay demonstrates.
Right now the only way for the avrage person to get money into business is through bank accounts and corporate bonds. In terms of the former banks seem to be increasingly independant of actual savings.
I would like to see some sort of business like "venture capital for the masses." Unlike existing VC it would work in many niches, for example one appealing idea would be skilled individuals helping set up ventures in one's region. It seems to me that there is a lot of regulation designed to protect people from getting involved in risky ventures and I can see limiting investment size, but overall the current situation results in the following:
the good potential profits are limited to those with money and connections.
the protections don't really work, those with enough money to attract hustlers are sucked into all sorts of questionable schemes, in part our medical bills are so high because of doctors who bought into vineyards, and those who don't attract this type still find things like beanie babies to invest in.
My feeling is that many worthwhile concepts are denied capital and many promising small businesses fail because they don't have the expertise to guide them.
A better set of institutions to atract small investments, select opportunities and help direct them would be a useful development. A number of mechanisms are possible, one aspect that could be very useful is the investors themselves providing feedback and loyalty to the enterprises they are funding.
I'm getting old and experience has taught me that I'm not real good at figuring out how to make a small business work. But I do think that the desire to be able to invest resources directly, as Friedman put it to vote with our money, is there. Or rather it would be there if people thought about it. So I mention it as one of those vague dreams that seems to be realizable. We have this medium where we can drop ideas about and if they catch others drop them a few more places.
We must be close to meltdown if AEI is already downplaying AGs role such that it will be old news when the bubble pops. So who will be the villains? My vote: Freddie & Fannie, the discredited Franklin Raines and of course Clinton (who appointed Raines). The campaign to hail AG as the man who prevented an even larger disaster is well underway: Fannie Mae Shares Fall to 4-Year Low (washingtonpost.com)
The Republicans really do know how to write compelling narratives and this one stars the retiring AG as the flawed but ultimately heroic financial genius who stopped the evil Democratic big government mortgage giants from ruining the entire economy or something.
Just to clarify & state the obviousI didn't disagree with my own comment; but someone did. I hope whoever it is turns out to be right; but I still think the odds favor the Bushco distract and blame strategy.
Where is Fannie's and Freddie's money coming from? Here's one take, from Blogger: Page not found
"Brad (Setser) winds up his missive by stating 'The result: plenty of investment in hard-to-export residential housing ...', but in fact housing has become rather easy to export thanks to the mortgage-backed security and US government agencies like Fannie Mae and Freddie Mac which create and sell them. In fact, exporting our houses is precisely part of the US strategy for financing the trade deficit...
"The goal seems to be to create or provide the context for the creation of expensive new assets with which the US can trade for goods and services. Thus the US sells the means of production and the means of reproduction to foreign capital for current consumption.
"A profoundly short-sighted strategy, indeed, almost a form of voluntary colonization. It is also a strategy which only delays the pain. Yet it's also a strategy which I think can still work for a while still. The US has clearly been getting out of the production of goods for over twenty years, and it will take an experience as humbling as was Britain's 1976 IMF crisis to begin a turnaround."
Just to clarify & state the obviousI didn't disagree with my own comment; but someone did. I hope whoever it is turns out to be right; but I still think the odds favor the Bushco distract and blame strategy.
dd - the distractions will ONLY work IF the pain isn't so severe that people can be distracted... If this thing really caves in... say a lot of folks lose jobs, homes, savings, everything... and have time to reflect on how this happened and who benefited and who's to blame... BELIEVE ME... they will focus on those in power NOW (the GOP & AG) and also those among the Dems who were enablers... and not let little red herrings throw them off the sent...
On the other hand if it is a minor crunch... say 7% UE and a two year recession but the vast majority of Americans DON'T lose their jobs, homes, savings, etc... don't even think itis likely to lose them... then the distraction politics will work like a charm one more time.
dry fly: I wouldn't discount the possibility that when people reflect, that quite a few will "realize" (perhaps with some help courtesy of talk radio and its TV counterpart) that all the undesirable elements in society are at fault -- non-white immigrants, snotty liberals, gays, and the decline in moral values they bring about ...
That one would wish everybody will see right through things doesn't necessarily make it so.
What happens to real estate personnel during the bubble bust? Should they bail out or ride on?
And if a person was considering entering the real estate profession at this time, which end of it should such a person pursue? (I was asked this question recently and aside from my smile, I didn't have a good answer.)
I happen to be fairly optimistic about the American people or at least the system. I think it a fairly "cybernetic" structure with all sorts of feedbacks which adjust and balance. And I think it has muddled through far worse situations than this.
Overall the Republican argument has been that Bush "reforms" have put us on the road to unimagined prosperity. We've had "proof" just about every quarter for the last few years with DOW 12,000 reached last October (whoops!)
The ideologically correct have based their investment decisions on the advice of Mr. Kudlow. I doubt if they will forget or be distracted if this proves wrong.
One question is whether the Democrats have a good approach that among other things responds to legitimate critiques various conservatives have made. I think the answer is no.
There are alternative approaches with some promise. The net is one of them. ebay is a "leftist" enterprise designed to brinmg markets to the people. "Open source" software and shared resources built the net and are still crucial in it's mantainence. And note how many conservatives have naturally accepted this "paradigm." They offer free information and pragmatically celebrate the "power of the commons" the "techno lefts" answer to the tragedy.
To get a sense of alternatives I will flog one of my favorite "charities."
Note the original Bangladesh version does not take money, you have to go the American or Australian attempts at imitation on the right. By it's own resources the original has grwown to one billion.
credit is a right especially for those who have nothing.
no collateral and a 99% repament rate.
the majority of borrowers women in an Islamic country.
innovative business ideas, providing beggars with credit to buy items to sell, repayment must be made with these proceeds not money from begging. cellphones are provided to individuals who rent them...
More aspects can be found if you scan the page. This is not banking as most define it, according to our dominant theories it can not work, but it is an example of welding markets with other elements of the human condition.
To me it is an example of where we're trying to head, a synthesis of approaches and views from either "side," sides which I happen to think are more the creation of political play (a nasty sport) than what people really feel below their rhetoric.
MG, I think that depends on the individual. First, housing might surprise us (at least me) and continue on this path for another year or more.
If a person is good at their job, there will still be business in RE. The volumes will drop, but houses will still sale. That is true for agents and mortgage brokers. It might be a struggle.
One of my best friends is an agent in one of the hottest markets. She has been in RE for almost 20 years, so she survived the '90s bust in California. It was tough, but she made a lot of contacts during that period, so the last 5+ years have been incredible. Luckily her husband has a good job, so they didn't need her income in the early '90s.
I guess that is long winded way of saying: "I don't know!"
Wait a minute...
"Tax law changes that allowed households repeated exemptions of up to $500,000 on housing capital gains coupled with an innovative mortgage market that simplified withdrawal of accumulated gains, even from unsold housing, added to the fire under the housing market. As a result, housing replaced tech stocks as the 'hot' way to accumulate wealth for most American households."
Not to mention the cumulative effects of the Bush administration's various tax cuts, most of which were targeted toward increasing the supply of capital to already-glutted capital markets.
I'm no fan of Greenspan, but it seems a bit unfair to expect the Fed to clean up not only messes that occurred despite reasonably good government fiscal policy under you-know-who, but also those that occurred because of bad government fiscal policy under you-still-know-who. Is it my imagination, or is this guy foisting onto Greenspan criticism that rightly should be directed at the Bush administration?
Tom, knowing the AEI (strong Bush backers), my reaction was this commentary is an attempt to deflect criticism from Bush. Another person suggested to me that the phrase "Ownership society" will probably disappear when housing slows down.
Regards!
The most interesting (and to me original) comment I saw on the worldwide housing bubble was from one of the China-based economists from Morgan Stanley, Andy Xie-
"Globalization has altered how the global economy works. The globalization of supply has integrated labor surplus in low-cost economies into the global economy. The neutral monetary policy should target lower inflation levels than before. Because monetary authorities have not considered this fact, they have oversupplied liquidity and created the massive global bubble.
...
There are two obvious trends in this bubble: Anglo-Saxon consumers have been borrowing a lot against their rising property values to support consumption, and Chinese companies (actually, government-related entities) have been borrowing a lot to create production capacities. To mirror the surge in liquidity, the indebtedness of Anglo-Saxon consumers and Chinese investors has risen sharply. The current boom, therefore, is debt-funded. Debt levels can continue to rise as long as asset prices keep rising.
Whatever triggers the collapse, it will show up first in declining asset prices. Property is the likely candidate. Property prices in New York, London, and Shanghai could decline at the same time. When property prices begin to decline, it would cause the global economy to weaken. The weakening economy would decrease the cash-flow of property speculators who would have to sell to unwind. The unwinding would lead global asset prices to collapse in general."
Morgan Stanley
Truly food for thought. Is this just one of the Morgan Stanley naysayers trying to hedge their typically bullish bets, or is he on to something...
CR,
Well, then, don't we both have a remarkable grasp of the obvious? Har har. I did laugh out loud at the 'ownership society' prediction.
IMO, it'd be helpful if deflecting blame from the Bush administration wasn't a key objective of what passes for US economic policy...
This is what really dismays me. When the Bushes and their buddies yap about "ownership" they know what real ownership is and they know they are peddling snake oil.
Very very few Americans own anything at all. I have friends who boast, "I pay off the credit cards each month" as if that is "ownership" when they still owe the bank on the cars and the houses and everything that is substantial.
Real ownership means you owe nothing on anything. And have capital to invest to boot plus savings! This is now indeed a rarity.
I have friends who boast, "I pay off the credit cards each month" as if that is "ownership"
How much lower can the bar be set?
What irony if home ownership, one of the most touted administration successes, winds up saddling many with bankruptcy, inescapable bankruptcy.
I feel that politically Greenspan has alid himself more with Bush and rightwing economists than is seemly. He also has a history under previous administrations of a bias towards encouraging or at least tolerating the inflating of certain assets. This amoounts to a philosophy that hopes the gain is greater than potential consequences along with affirmation of an "immediate gratification" approach. This latter has come to imbue much of "conservative" politics. Such people often boast how they spent their tax cuts to help the economy.
My own inclination is to hold that politics are usually independant of medium term economic fluctuations. Long term is more of an issue such as the decision starting with Reagon and essentially continued to downplay energy conservation. However with this administration and the loosely aligned fed there is clear cut responsibilities. We can see how choices such as creating "investment capital" (read real estate and artificially mantained stock prices) through tax cuts and increased federal deficits will have clear cut effects in the economy.
If thinggs work out the way Kudlow promises the administration will have established the value of a moderately radical approach, if these choices aggravate (by delay and bubbles) problems then it is the end of "neo supply side economics." Or at least one hopes.
The problem I have with the current economic situation is that while seemingly more responsible on some issues the Democrats have been selective. For example it has been apparent for will over a year that many have taken in dangerous debt through refinancing, others have taken on dangerous and probably nsustainable loads for the promise of "ownership."
Democrats have not spoken up against this party, even when it meant people committing close to half of their income on an interest only, variable rate loan. To give warnings would be unpopular, thus moral leadership is lacking in politics.
I could see the tax cuts if what they were trying to do was spur investment by freeing up capital. But investment in industry has not been spurred, instead, we get a housing bubble since the market is seen as risky and housing is seen as a safe investment. By holding interest rates artificially low, the fed has discouraged saving. There's no point in saving money when the return is lower than actual inflation.
And a lot of our money is going offshore because there's really no growth industries in the United States. Even as consumers, I think we're about played out - we can buy cheap clothes and Walmart crap or fancier cars or the latest tech gadgets, but that's about it, really.
We should be saving. But we can't, because the fed keeps the interest rate too low. We should be investing, but there's nothing worth investing in. So we buy bigger houses, or specualte in the housing market. But that forces those who really need housing out of the market. How long can all this stupidity continue???
Spur what investment? They couldn't even give money away @ 2%.
Isn't it a riddle? (not)
Like Jack and the Beanstalk: we met this guy on the road and exchanged our cow for a handful of beans because this will make us really rich.
One problem I have with "investment" is that the vast number of stock purchases don't really do this. They support previous investments, often absurdly. Only with a new offering or if a company sells stock does it go directly into production. I think the stock market is a necessary structure, but it does not necessarily create many new enterprises, when it does produce quite a few as in the nineties they are often absurdly financed and wasteful.
The market can also distort production, there is much to be said for the argument that it skews companies to the short term and inessential. And while much juggling is done to get the price high, minimal respect is often shown for the alleged owners and executive pay demonstrates.
Right now the only way for the avrage person to get money into business is through bank accounts and corporate bonds. In terms of the former banks seem to be increasingly independant of actual savings.
I would like to see some sort of business like "venture capital for the masses." Unlike existing VC it would work in many niches, for example one appealing idea would be skilled individuals helping set up ventures in one's region. It seems to me that there is a lot of regulation designed to protect people from getting involved in risky ventures and I can see limiting investment size, but overall the current situation results in the following:
A better set of institutions to atract small investments, select opportunities and help direct them would be a useful development. A number of mechanisms are possible, one aspect that could be very useful is the investors themselves providing feedback and loyalty to the enterprises they are funding.
I'm very interested in your ideas, David. I wish you success if you plan to implement them.
Yusef:
I'm getting old and experience has taught me that I'm not real good at figuring out how to make a small business work. But I do think that the desire to be able to invest resources directly, as Friedman put it to vote with our money, is there. Or rather it would be there if people thought about it. So I mention it as one of those vague dreams that seems to be realizable. We have this medium where we can drop ideas about and if they catch others drop them a few more places.
We must be close to meltdown if AEI is already downplaying AGs role such that it will be old news when the bubble pops. So who will be the villains? My vote: Freddie & Fannie, the discredited Franklin Raines and of course Clinton (who appointed Raines). The campaign to hail AG as the man who prevented an even larger disaster is well underway: Fannie Mae Shares Fall to 4-Year Low (washingtonpost.com)
The Republicans really do know how to write compelling narratives and this one stars the retiring AG as the flawed but ultimately heroic financial genius who stopped the evil Democratic big government mortgage giants from ruining the entire economy or something.
dd-I don't think it will work because Clinton has been out of office too long. I think Bushco will get the blame for this one.
David Bennett
Fine comments.
Pobbibly the weak stock and bond market will make real estate speculation yet a little more attractive.
Always excellent and exciting work, CR.
Just to clarify & state the obviousI didn't disagree with my own comment; but someone did. I hope whoever it is turns out to be right; but I still think the odds favor the Bushco distract and blame strategy.
Where is Fannie's and Freddie's money coming from? Here's one take, from Blogger: Page not found
"Brad (Setser) winds up his missive by stating 'The result: plenty of investment in hard-to-export residential housing ...', but in fact housing has become rather easy to export thanks to the mortgage-backed security and US government agencies like Fannie Mae and Freddie Mac which create and sell them. In fact, exporting our houses is precisely part of the US strategy for financing the trade deficit...
"The goal seems to be to create or provide the context for the creation of expensive new assets with which the US can trade for goods and services. Thus the US sells the means of production and the means of reproduction to foreign capital for current consumption.
"A profoundly short-sighted strategy, indeed, almost a form of voluntary colonization. It is also a strategy which only delays the pain. Yet it's also a strategy which I think can still work for a while still. The US has clearly been getting out of the production of goods for over twenty years, and it will take an experience as humbling as was Britain's 1976 IMF crisis to begin a turnaround."
Just to clarify & state the obviousI didn't disagree with my own comment; but someone did. I hope whoever it is turns out to be right; but I still think the odds favor the Bushco distract and blame strategy.
dd - the distractions will ONLY work IF the pain isn't so severe that people can be distracted... If this thing really caves in... say a lot of folks lose jobs, homes, savings, everything... and have time to reflect on how this happened and who benefited and who's to blame... BELIEVE ME... they will focus on those in power NOW (the GOP & AG) and also those among the Dems who were enablers... and not let little red herrings throw them off the sent...
On the other hand if it is a minor crunch... say 7% UE and a two year recession but the vast majority of Americans DON'T lose their jobs, homes, savings, etc... don't even think itis likely to lose them... then the distraction politics will work like a charm one more time.
It will be a wait and watch...
dry fly: I wouldn't discount the possibility that when people reflect, that quite a few will "realize" (perhaps with some help courtesy of talk radio and its TV counterpart) that all the undesirable elements in society are at fault -- non-white immigrants, snotty liberals, gays, and the decline in moral values they bring about ...
That one would wish everybody will see right through things doesn't necessarily make it so.
Just a caution.
CR,
This is a sidebar question.
What happens to real estate personnel during the bubble bust? Should they bail out or ride on?
And if a person was considering entering the real estate profession at this time, which end of it should such a person pursue? (I was asked this question recently and aside from my smile, I didn't have a good answer.)
I happen to be fairly optimistic about the American people or at least the system. I think it a fairly "cybernetic" structure with all sorts of feedbacks which adjust and balance. And I think it has muddled through far worse situations than this.
Overall the Republican argument has been that Bush "reforms" have put us on the road to unimagined prosperity. We've had "proof" just about every quarter for the last few years with DOW 12,000 reached last October (whoops!)
The ideologically correct have based their investment decisions on the advice of Mr. Kudlow. I doubt if they will forget or be distracted if this proves wrong.
One question is whether the Democrats have a good approach that among other things responds to legitimate critiques various conservatives have made. I think the answer is no.
There are alternative approaches with some promise. The net is one of them. ebay is a "leftist" enterprise designed to brinmg markets to the people. "Open source" software and shared resources built the net and are still crucial in it's mantainence. And note how many conservatives have naturally accepted this "paradigm." They offer free information and pragmatically celebrate the "power of the commons" the "techno lefts" answer to the tragedy.
To get a sense of alternatives I will flog one of my favorite "charities."
Grameen Bank | Banking for the poor - Home
Note the original Bangladesh version does not take money, you have to go the American or Australian attempts at imitation on the right. By it's own resources the original has grwown to one billion.
More aspects can be found if you scan the page. This is not banking as most define it, according to our dominant theories it can not work, but it is an example of welding markets with other elements of the human condition.
To me it is an example of where we're trying to head, a synthesis of approaches and views from either "side," sides which I happen to think are more the creation of political play (a nasty sport) than what people really feel below their rhetoric.
MG, I think that depends on the individual. First, housing might surprise us (at least me) and continue on this path for another year or more.
If a person is good at their job, there will still be business in RE. The volumes will drop, but houses will still sale. That is true for agents and mortgage brokers. It might be a struggle.
One of my best friends is an agent in one of the hottest markets. She has been in RE for almost 20 years, so she survived the '90s bust in California. It was tough, but she made a lot of contacts during that period, so the last 5+ years have been incredible. Luckily her husband has a good job, so they didn't need her income in the early '90s.
I guess that is long winded way of saying: "I don't know!"
Regards!
Far better than my answer.
Many thanks.