Do residential ABS traders ever see the physical addresses of the properties they are trading? I'm (mostly) sure it is in the REMIC reports, but are there 3rd party data vendors that track this & stay updated with servicers? In commercial MBS Trepp and Realpoint do this, but have heard this doesn't really exist for resi. Is there a way to audit negative pre-payments or workouts?
"Goldman Sachs was more aggressive than other firms in seeking collateral from AIG because the bank’s models showed a greater decline in the value of securities that had been insured, said two people with knowledge of the matter, who declined to be identified because the contracts were private.
“Goldman is to be congratulated for seeing the problem ahead of others and protecting itself from the impending failure of AIG,” said William Poole, former president of the St. Louis Fed, in an interview last week. “It’s not the responsibility of any private firm to determine what the public interest is -- that’s why we have a government.”
I say the people determine what the public interest is, and the government serves the people. Because "determine" can be active or passive.
GS's transactions with AIG should be investigated for insider trading, respective violations of fiduciary duty, and bribery of the Treasury Department. If they did nothing wrong, they should welcome transparency. There are no "trade secrets" of any "value' to protect with respect to dealing in credit default swaps.
A more careful look at the data, guided by economic theory, however, suggests that much of this evidence has been misinterpreted and that the reaction of consumption to housing wealth changes is probably very small.
Chicken entrails. "Economic theory," "suggests," "misrepresented," "probably." They don't say anything substantial except for proving economics is not a science.
Considering that the interest rates on RE backed loans are (or were) lower than the rates on other types of debt, there's some merit in borrowing against the house instead of against other things. So MEW/HELOC would make sense if other borrowing would be going on in its absence.
It isbeing reported the Italian embassy in IRan along with other Euro nations are taking in the wounded that are being denied access to hospitals. Should the Basij or Rev Guard fire on one of these embassies or embassy workers I think we have our "Black Swan" event.
Here is my recipe for collapse. You may use different ingredients, but this makes a tasty broth that can be refrigerated (if you can still power your refrigerator) and used for leftovers.
Start with declining top line world oil production.
Then add in the decline of oil available on world export markets because of rising producer country usage (Jeffrey and Khebab's Export Land Model).
Then add in producer countries holding back production for future generations (see the king of SA's comments).
Then add in the declining net energy of the remaining oil (EROEI).
Then add in the increasing disrepair of our basic infrastructure (water, sewage, electricity transmission, transportation) and our inability to pay to repair it.
Then make fertilizer very expensive and start decreasing food production.
Then add "hordes of unemployed" (from Hirsch's congressional testimony).
At this point, take note of the consistency of the human population when placed under this sort of stress. If it is calm and cooperative, you must be on a different planet making this dish and you should seek a different recipe.
Throw in a currency collapse as energy is taken away from the economy and the crushing debt remains.
Then start taking the nuclear power plants offline as they reach the end of their design life (about 25 more years) with insufficient replacements ready.
You really must add some fuel shortages or the spiciness won't be quite right.
All of these ingredients are easily obtainable from various well-sourced and credible reports.
If that doesn't get you a collapse soup unsuitable for company this Saturday night, nothing will.
Edit: Sorry, I forgot a major ingredient and it's quite embarrassing. Around the step where you add the currency collapse, add lowered crop yields, declining water supplies and major migrations of people due to climate change. You can also add depleted fisheries and massive releases of methane from the permafrost if you wish, but usually the soup is interesting enough at this point; more ingredients just crowd out the other flavors.
Economists still cant agree whether people consume based on current income levels or projected future flows.... Still I think that the authors of this article greatly underestimated the MEW effect (as CR said / has said over and over...)
shout out to Columbia....
.....
for anyone interested in seeing some great shots of Angkor Wat see the newest National Geographic
...
...Angkor is the scene of one of the greatest vanishing acts of all time. The Khmer kingdom lasted from the ninth to the 15th centuries, and at its height dominated a wide swath of Southeast Asia, from Myanmar (Burma) in the west to Vietnam in the east. As many as 750,000 people lived in Angkor, its capital, which sprawled across an area the size of New York City's five boroughs, making it the most extensive urban complex of the preindustrial world. By the late 16th century, when Portuguese missionaries came upon the lotus-shaped towers of Angkor Wat—the most elaborate of the city's temples and the world's largest religious monument—the once resplendent capital of the empire was in its death throes.
Scholars have come up with a long list of suspected causes, including rapacious invaders, a religious change of heart, and a shift to maritime trade that condemned an inland city. It's mostly guesswork: Roughly 1,300 inscriptions survive on temple doorjambs and freestanding stelae, but the people of Angkor left not a single word explaining their kingdom's collapse.
....
Recent excavations, not of the temples but of the infrastructure that made the vast city possible, are converging on a new answer. Angkor, it appears, was doomed by the very ingenuity that transformed a collection of minor fiefdoms into an empire. The civilization learned how to tame Southeast Asia's seasonal deluges, then faded as its control of water, the most vital of resources, slipped away.
...
is this what they are going to say about us and the creation of the fractional banking system one day? Angkor — National Geographic Magazine
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(on a side note Nat Geo implies a false implication in a photo of a wedding ritual showing the bride washing the feet of her soon to be husband.
what she is doing is getting her mind right, to make it as cool as the water she pours on his feet, to be chilled and balanced and a mind rid of anger towards the groom or family or anyone at that moment...
it's nice to have such lovely Khmer women here at the duke's version of the Brown Derby set National Geographic's mind right... silly white men, tricks are for kids and that crazy Mortgage Pig!
Economics and the practice of....are merely a rouse for which ever governmental policy is in effect at any given time. Just my opinion....Green Shootz and ALL
A couple of problems here...a lot of HELOC is line of credit that is issued, but now drawn down. When you look at the Federal Reserve's numbers, the home equity line of credit series in FOF does not help you understand what has happened. It basically soared, then looked like it was going to crash, flattened and rose again. This certainly isnt what was happening at the time when banks were cutting off HELOCs. And it isnt at all what was happening with the drawing down of those lines or the spending of the draw.
But this still gets back to the issue of the amount of HELOC still out there, that has not been accessed, as well as the amount that has been drawn, deposited and not spent. I know a few people near the end of the bubble that had taken lines ready to invest in more housing, then realized that wasnt a smart move. But the line is still there...if they drew down more or spent any who knows. People RARELY say, yeh, i bought that mercedes with my HELOC. It's a dumb move, and even dumber to admit to it. I mean, these are some of the worst loans out there.
CR
You post an estimate of MEW increasing GDP by 2.5%/year.
What is that in dollars.
If you factor out that number does it give sort of a baseline for how far our economy has to contract to get to a GDP based on earnings not spending?
wally, yes, the two are related - and I think that has made it harder to measure. I think you have to start with some anecdotal stories - and see if this is widespread (I believe using the Home ATM for consumption was widespread). I heard story after story of people using the equity in their homes to buy "toys". This made it easy to predict the collapse in consumption.
This is the same way I figured out that there was excessive speculation in housing. Start with the stories (I talked with a number of people in 2003 and 2004 that were buying homes at 10X their annual income - that set off alarm bells). I followed that up by asking lenders about their standards (none - "fog a mirror, get a loan") and from there it was pretty easy to figure out the bubble (and that prices would fall dramatically).
Housing wealth is an illusion. Houses depreciate. The so called housing wealth effect is actually an inflation effect that makes people poorer, not wealthier.
We're poorer today than ten years ago. It only seemed like we were getting wealthier when bankers were allowing idiots to impoverish themselves with debt.
Comrade K...
thanks for the info on the embassies in Tehran....
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just got an email from my couple of 'boots on the ground' in Yangon (Rangoon)....
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"I believe that when people refinance with cash out or draw down HELOCs, they usually spend the money."
Well, HELL YES! I could point to a dozen people who sucked the equity out of their home to buy some damned toys not ONCE, but MANY times. THAT money spigot has been capped!
"Do residential ABS traders ever see the physical addresses of the properties they are trading? I'm (mostly) sure it is in the REMIC reports, but are there 3rd party data vendors that track this & stay updated with servicers? In commercial MBS Trepp and Realpoint do this, but have heard this doesn't really exist for resi. Is there a way to audit negative pre-payments or workouts?"
Nope, you get a loan ID, it's meant to be a blind transaction. There's no way to look through to the property level.
CMBS is a totally different beast. Commercial properties are all explicit in the offering memo / prospectus of CMBS transactions, and the data is updated on a regular (or semi-regular basis).
Michigan : Bought in '99, by '08 taxable value appreciated 35%. In '08 poured over 50% of taxable value into a major remodeling. '09 taxable value went down two percent. Huh?
Comrade Kristina... if they fired on the embassies or consulates that would be a direct violation of the Vienna Convention '62...
not that they don't know this... do they now Jimmy?
I know of a couple in the CA central valley who had an income of 120k and bought 9 homes btwn 02-05 at about 300k each. Kid you not. Maybe only 1-2 were bought with cash.
I knew the renter of 1/10 units. they were always on cruises and the like. i wonder what they are doing now?
"economic theory" -- you keep saying that. I do not think these words mean what you think they mean.
And yet, the economics schools just march right on, indocrinating yet more students into a system that often doesnt come close to describing the real world behaviors of consumers. Firms, perhaps. Micro..yes. Macro..hell no.
I like to go back and see what people were saying in the past to judge what they're saying today. Calomiris less than a year ago:
"We conclude that declines in house prices are highly likely to remain small. Our analysis reveals, unsurprisingly, that foreclosures and home prices have negative effects on each other over time, but this does not imply a vicious cycle of collapsing prices. Our models predict that as foreclosures continue to climb in many states, house prices will remain flat or decline in those states -- but will not collapse."
How apropos would it be for the profs if a number of their students came to tell them they were dropping out of school. And when asked why they said "My parents couldn't get a HELOC to pay tuition".
Actually, with this kind of analysis (We put the data through numerous robustness checks, and found in most model specifications housing wealth had zero effect on consumption) they should demand their money back for past courses.
winstongator - always a good idea to know which school of thought your economic analysts have latched themselves to. If you ever see anything come out of the George Mason area...you can be assured that it is slanted right, and is in actuality wrong. Plenty of these folks out there.
It's not the responsibility of the public or the fed to change the rules in the middle of the game and pay out GS and others via FRE, FNM & AIG bailouts. GS was allowed to become a BHC and prior to that was given special access to the fed's printing presses via the cash for trash arrangements.
Poole is disingenuous idiot. If GS could see the "problems" then why couldn't the fed???? So much for nobody could have seen this coming. Nobody except the people that committed the fraud!
My view of the limited fallout rests on eight empirical observations:
Housing prices may not be falling by as much as some economists say they are.
Although the inventory of homes for sale has risen, housing construction activity has fallen substantially.
The shock to the availability of credit has been concentrated primarily in securitisations rather than in credit markets defined more broadly (for example, in asset-backed commercial paper but not generally in the commercial paper market).
Aggregate financial market indicators improved substantially in September and subsequently. Stock prices have recovered, treasury yields rose in September as the flight to quality subsided, and bond credit spreads have fallen relative to their levels during the flight to quality (although Tbill yields remain low relative to other money market instruments).
As Figure 15 shows, nonfinancial firms are highly liquid and not overleveraged. Thus, many firms have the capacity to invest using their own resources, even if bank credit supply were to contract.
As David Malpass (2007) has emphasised, households’ wealth is at an all-time high and continues to grow. So long as employment remains strong, consumption may continue to grow despite housing sector problems.
Of central importance is the healthy condition of banks. As Fed Chairman Ben Bernanke noted from the outset of the recent difficulties, financial institutions’ balance sheets remain strong, for the most part, even under reasonable worst-case scenarios about financial sector losses associated with the subprime fallout. Bank lending has been growing rapidly, which is accommodating the transfer of securitised assets back onto bank balance sheets. The high capital ratios of banks at the onset of the turmoil is allowing substantial reintermediation to take place without posing a threat to the maintenance of sufficient minimum capital-to-asset ratios.
Banks hold much more diversified portfolios today than they used to. They are less exposed to real estate risk than in the 1980s, and much less exposed to local real estate risk, although US banks’ exposure to residential real estate has been rising since 2000 (Wheelock 2006)."
How can someone who wrote such garbage in LATE 2007, when the bubble was already deflating, still be taken seriously?
Anyone out there know how it is in grad school econ these days? Are you still looked at like a wing nut if you subscribe to any of the theories of the behavioralist economists...I know the austrians have gained some stature of late, but I also dont know how much. Probably not enough.
"David Malpass (2007) has emphasized, households’ wealth is at an all-time high and continues to grow. So long as employment remains strong, consumption may continue to grow despite housing sector problems."
Hank Paulson was really really smart when at GS, then really really stupid when working for the "public interest".
We should have paid him more to work harder, that's the answer. He made a hundred million a year at GS, and only a few hundred thousand at Treasury.
Oh, wait, he made a hundred million at Treasury also. Special tax break windfall selling GS stock. Damn you Pharaoh, you should have seen the moral hazard. (Oh, the oligarchy installed the Pharaoh? Never mind)
" The National — All Property Type Aggregate Index measured an 8.6% decline in April 2009. The index now stands 29.5% below the peak measured in October 2007.
· Transaction volume continues to fall in both repeat-sales and the overall market. April’s large price decline on the heels of a 5.5% monthly decline in January hints at an ongoing process of capitulation.
· The repeat sale transactions in the month of April for the first time showed more negative than positive annualized rates of return.
· Apartments are faring better than any other property type in the Eastern region, although all four types measured significant annual declines.
· The South was the worst performing region overall. All four property types saw annual value declines of more than 20%, with industrial measuring a decline of 28.8%.
· All four property types in Southern California underperformed the western market as a whole. Office was the worst performer with an annual value drop of 22.2%.
· The three major office markets measured significant annual declines. In the East, both New York and Washington DC outperformed the eastern office market, with annual declines of 12.9% and 21.1% respectively.
· The Florida apartment market, like the apartment market in the South on the whole, has experienced three straight years of falling prices. Florida apartment values are now down 31% from the peak.
"California is America’s most populous state with 38 million people. Its GDP of $1.8 trillion is the largest in the U.S. Its economy is bigger than those of Russia, Brazil, Canada, or India."
How can the BRIC countries possible pull us out anytime soon? Bull argument=FAIL
MEWgilt meant the means to realize your dreams! As a means to spend, at least it is measurable.
Same gotta have it now mentality manifested itself in all manner of dis-saving, low 201-K contributions, financing smaller purchases, huge cc balances, paycheck to paycheck financial planning, etc. At least that's how it seemed when I visited the states during those years.
There seemed to be no chilling awareness among American consumers of the cyclical nature of life. Everybody had to get what they wanted, right now. Gotta think that what the house across the street sold for contributed to ease the minds of the lotus eaters.
All I know that now that's it's been withdrawn from them I sure don't feel any more wealthy. Have no interest in acquiring distressed assets yet.
With the tax credit scheduled to expire in fall, some business groups say the amount of the credit, now capped at $8,000, should be raised to $15,000 and applied to anyone who buys a home.
The White House had no immediate comment Sunday.
Current proposals:
•A Senate bill to expand the tax credit to $15,000 for any home buyer regardless of income was introduced this month by Sen. Johnny Isakson, R-Ga. It is co-sponsored by Senate Banking Committee Chairman Chris Dodd, D-Conn.
"It would go a long way toward inducing trade-up buyers into the market," says Lawrence Yun, chief economist at the NAR.
•A House bill to keep the $8,000 credit in place until June 2010 and expand it to all home buyers was introduced last month by Rep. Kenny Marchant, R-Texas. It also would provide a $3,000 credit to homeowners who refinance.
•Another bill in the House, introduced by Rep. Eddie Bernice Johnson, D-Texas, would extend the credit to all home buyers through 2010.
WTF? Where are the academic analysts on the topic of the effect on governmental budgets?
When home prices go up, in many states revenues to state and local government also increase without any borrowing activity, through increases in property taxes.
The money from cashout refis, helocs, and profitable sales where the owner rents or downsizes always makes its way into the economy. Not many people borrowed on helocs or refis in order to invest the money in something besides real estate. If proceeds were used for consumption or real estate, it stimulated government budgets. If they bought consumer goods, they paid sales tax. If they paid for local services (e.g., getting their nails done), that business or person probably paid income tax. If they improved their home, they generated sales tax for materials. If they bought a new home, there was often a transfer tax, and almost certainly there were realtors paying income tax, title companies, paying income tax, and appraisers paying income tax.
When the financing bubble bursts, it's like winter. There just isn't as much sunlight for things to grow or thrive.
From a government budget standpoint California is in the financial equivalent of a nuclear winter.
Calomiris and Longhofer were walking down the street when they came upon a hot dog vendor. They observed a customer choose a wiener and pay. Calomiris turns to Longhofer and remarks; "Interesting behavior. I wonder if it will work in theory?" A little later they come across a twenty dollar bill on the sidewalk. Longhofer asks "I wonder if it is economically advantageous to pick up that twenty?" Calomiris replies "Nah! If that were the case it would have been picked up already."
CR, good analytical post. I like seeing you voice your opinion when quoting others.
It's all just anecdotal, but, having observed otherwise normal people who spent like crazy from 2002-06, I don't doubt that house pricing creates a wealth effect. The MEW/HELOC situation is pretty clearly demonstrated by the numbers, but that isn't the whole story.
In my experience there were several landowners who had various forms of liquid assets or investments that they liquidated and, in either case, spent simply because those liquid assets or other investments were no longer 'needed' given the rise in real estate values. In their world real estate appreciation substituted for other items on the balance sheet.
To suggest, as the three gentlemen do, that there was only a small wealth effect from the huge runup in prices simply makes no sense at all.
Here you go Rich, sorry I had to eat last night. There is plenty more on last night's "LA, NY..." thread at 10:45 et seq. Enjoy:
[Yogi]:I pray that solar and wind power become so cheap nobody makes a dime off the business.
[Rich]It's amazing the naivete, or stupidity, that exists in regard to solar and wind power. This post is evidence.
There is enough solar and wind power to provide vast quantities of energy at affordable prices. That isn't debatable.
If you have half a brain, you won't be praying that solar and wind power becomes so cheap nobody makes a dime on the business. That's like praying for arrogant fat cat electric power monopolists to get richer. You will pray for a level playing field where all producers of electricity can get equal opportunity to produce and sell power under the law.
You, sir, have half a brain.
A kilowatt of power that you can efficiently feed into the grid, from solar or wind, is no different than a kilowatt produced by coal, hydro or nuclear. It should sell for the same price.
Even a neanderthal knew that when he burned a log, it was not there in the morning, but the sun rose and the wind blew.
The real problem is the capital investment required to produce that energy, which is primarily a function of credit availability, interest rates, tax policy and friction.
No, it is primarily a function of technology and division of labor, which are possible under different economic systems and modes of taxation. Israel produced efficient solar energy panels in the 60's under a radical socialist system.
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1 currency now -yogi (profile) wrote on Sun, 6/21/2009 - 10:39
If you have half a brain, you won't be praying that solar and wind power becomes so cheap nobody makes a dime on the business. That's like praying for arrogant fat cat electric power monopolists to get richer. You will pray for a level playing field where all producers of electricity can get equal opportunity to produce and sell power under the law.
If you can't understand that in an efficient economy profits go to zero in the long run, you shouldn't be on this board. But I'll try to educate you. By "nobody makes a dime on the business" I mean by profiting individually from others' labor, in the long run. Think Linus Torvalds. I pray that wind turbines and solar panels are developed that can be produced so cheaply and easily by sharing the code that a teenager could assemble one from local materials, with his own labor. No patent lawyers, no bankers, no stock brokers, just shared code.
Tim, since you asked, I'm just a middle class WASP male from the midwest with two kids. Right handed even. I just have been in Asia since the Reagan admin, weathering booms and busts all the way.
I'd have thought I had a country to repatriate to, and I'm still waiting. Aghast, as it turns out.
La Cour-Little's study, which CR reviews a short while ago, provides some indication that Home ATM usage was significant since the turn of the century.
For example, for the early November 2008 data sample, he tracked 2,358 properties. Here’s what he found:
•They were purchased at an average price of $354,000 and average year of 2002 (long before the housing peak of 2005).
•Total debt on the properties averaged $551,000 at time of foreclosure. That’s 56% more than the properties were worth when purchased, meaning at least that much was cashed out!
•An automatic valuation model estimated average value at time of foreclosure was $317,000, which suggests a combined loan-to-value at foreclosure of more than 170% ($551,000/$317,000). And that is a conservative estimate. Properties that banks later sold had an average resale price of $271,000!
If you dig down into the details of this Rockefeller Institute report, you'll see that a national decrease in retail sales tax reported by the Wall Street Journal is actually a phenomenon highly skewed by the real estate bubble states of CA, FL, and AR. In reality, there was a drop of 3.2% in retail sales in 47 states and double digit sales tax losses in three states.
MEW was 9% of national income when it peaked in Q4 2006, and was significantly higher in the states where housing prices were high, escalating faster, and the loan industry was basically fraudulent.
The California economic base was artificially inflated by at least 10% by MEW, and no projection that ignores MEW will be accurate.
That's why California is like a locomotive hurtling off a missing section of the railroad bridge, pulling 49 states behind it into a depression.
good work winstongater....
my shout out to Prof Colostomy Calomiris at Columbia I'm trying to jam back into the toothpaste tube..
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one note on that World bank post:
“Unemployment is on the rise, and poverty is set to increase in developing economies, bringing with it a substantial deterioration in conditions for the world’s poor.”
.. yes, I can say that I'm witnessing a large increase of people sleeping on the streets here, usually near where tourists might be... it's off season, yet tonight I've never seen so many women with babies sleeping on the pavement on Sisowath Quay... what is stunning to me is the velocity of it. hey, I lived in NYC all through the 80s and I remember all the homeless but it didn't look quite this...
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yes, you geniuses of capitalism out there in NYC & London and elsewhere, this is the whipsaw effect of
your financial engineering idiocy...
Although the MEW decline may have bottomed, the important problem for the recovery going forth is what will replace MEW now that the housing boom is over. I can't what will replace the the 2 to 3% of GDP that MEW supported. That strikes me as a huge obstacle to any recover.The only thing I can see is for wages to increase. The problem with that is that wage increases raise a danger of serious 70s style stagflation due to a wage-price spiral. Any thoughts on that?
Outsider (profile) wrote on Mon, 6/22/2009 - 7:51 am
There are two parts here: 1) how do changes in house prices effect consumption, and 2) how does access to the Home ATM effect consumption. OCD kicking in
"effect" is the noun, and "affect" is the verb. A lot of people get that confused.
maynardGkeynes (profile) wrote on Mon, 6/22/2009 - 8:10 am
...The only thing I can see is for wages to increase. The problem with that is that wage increases raise a danger of serious 70s style stagflation due to a wage-price spiral. Any thoughts on that?
Very slim chance of wage growth in an environment of global wage arbitrage.
If we somehow start a trade war and then have massive commodity inflation due to bottlenecks in distribution (nationalism) I could see it, but no other way. Too many BRIC people waiting in line, ready to work.
Logically, there certainly would seem to be a wealth effect beyond "active" MEW. Take your average, cautious 45-50 year-old homeowner in Southern California who refinanced wisely to get a better rate without lengthening the life of the loan, he/she makes a sizable contribution to his/her 401k, has a Roth IRA on the side.
The job is fairly safe, but all his/her assets have dropped 30% in the past year. Is that going to effect spending over the next few years? Doesn't it seem obvious it would?
Calomiris, et al., sound delusional. That's the type of nonsense people spewed in 1930. By 1932, they had quieted down some.
CR says, However, on the key point, I think most of the decline in consumption related to declining MEW is behind us.
Yes, the spigot is firmly closed, but the secondary effects of the downturn take a while to spiral downward through the economy, especially in California where a massive reset is taking place.
California's government at every level is facing massive shortfalls, with current sales tax down over 20% against projections made a year ago, and down almost 12% YTD. California income tax collections are down over 20%, property tax collections are dropping faster than anyone estimated, and all other taxes like hotel taxes and franchise taxes are taking hits. The Orange County Transit Authority recalculated the probable income from a 1/2 cent sales tax over the next 30 years, and their forecast dropped 38%.
This loss of revenue will force over 20 billion in revenue cuts through state and local government during the next 12 months, pushing more job losses through the general economy, where housing starts have already dropped 84% from the peak, and 7 out of 100 retail jobs are gone.
The cumulative impact of government job cuts will push U3 from 11.5% to 13.5%.
Tim, with Spain you could make the case that they caught the English malady due to investments from les albion perfides. It does look more Anglo than not, in principle. The continentals will gloat till they're burnt in the spillover.
As for the US, I like all I've seen. But remaining family will keep me close (mentally) to black soil w/ good water on a major rail link in the Central Time Zone. We're going to give it another couple years I guess.
"California is America’s most populous state with 38 million people. Its GDP of $1.8 trillion is the largest in the U.S. Its economy is bigger than those of Russia, Brazil, Canada, or India."
How can the BRIC countries possible pull us out anytime soon? Bull argument=FAIL"
Well, if chief polices and ordinary physicians are making 200 000+ dollars per year, somebody has been playing with the reserve currency status to the max and then some. US economy is one bloated paper dollar pig.
Good points here, but is it possible that there's a certain "convexity" to the housing wealth effect? Where an increase in housing prices don't necessarily translate into consumption (save the MEW phenomenon, as this piece suggests) because it is essentially reinvested in a more expensive house... but a large decrease in housing prices forces the lost equity to be recovered in different ways, e.g. through savings. Just a thought.
... We put the data through numerous robustness checks, and found in most model specifications housing wealth had zero effect on consumption. In those few cases where housing wealth did have an impact on consumer spending, the impact was always smaller in magnitude than that from stock wealth, contrary to Case, Quigley and Shiller’s findings. We conclude that the impact of housing wealth on consumption, if it exists at all, is much smaller than popularly feared.
I think it's been too long since this guy has been rubbing shoulders on Main Street.
Easy credit increases consumer spending. Is that even debatable? MEW is (or was) basically easy credit against one's house.
And the spigot might be turned off for now, but I still would like to know whether the proposed new 125% or higher LTV refi's will include a cash out option. That might get that spigot flowing again.
Here's another potential phenomenon from Irvine Housing Blog.
Right now the California economy is being propped up by the large number of people (call it 2% of homeowners) who have stopped paying their mortgages and are now putting that money into the general economy. When they either finally go through foreclosure or renegotiate their loans and start paying rent or mortgages again, there will be another hit to the consumer economy.
No kidding Rob Dawg. If I sent a scientific paper for even "in house review" (which is done each and everytime) that contained even one "weasal word" like you listed, I would find myself dealing with phrases like your are "probably" going to unemployed, or your paper "suggests" that you might want to look for a job elsewhere. Sheesh! There are no real social sciences. They like to cover their ass in scientific terms but there are too many variables involved and they don't deal with numbers on the order of magnitude that permit statistical analysis that even approach what the hard sciences deal with.
My first reaction was the same as that of sportsfan, "To suggest, as the three gentlemen do, that there was only a small wealth effect from the huge runup in prices simply makes no sense at all."
But on further reflection, I concluded that if you look at the data over the long term, their hypothesis is probably correct, because as anyone with that uncommon attribute "common sense" knows, bidding up asset prices doesn't increase real wealth, but only moves it around.
Long-term, even "medium-term", from an academic analysis viewpoint, we'll probably find that the recent housing bubble didn't increase consumption -- because the five-year upward burst it caused will probably be more than offset by the long bust we're in as a result.
So I suspect that they've proven that the booms are evened out by the busts. If that's what you're interested in, mybe this is interesting and useful.
If you're interested in preventing busts, with their awful effects on so many innocent bystanders, it's not.
as was pointed out before previously in the Prof Colostomy econ res:http://www.voxeu.org/index.php?q=node/739
As Figure 15 shows, nonfinancial firms are highly liquid and not overleveraged. Thus, many firms have the capacity to invest using their own resources, even if bank credit supply were to contract.
....
Note: Gross corporate leverage is defined as liabilities divided by assets. Net corporate leverage is defined as liabilities, less cash, divided by assets. Cash is defined as total financial assets, less trade receivables, consumer credit, and miscellaneous assets.... [this is not adequate definition]
....
look, I still remember many of the numbers from '86 to '90, after all, I was fixed income analyst at a big time bond house.... (my sector: top 100 banks)
the FED stats seem almost about right, in that period (yet something is rejiggered 2nd Q '87... ) but going forward what happened is the real leverage of banks got abstracted out of the balance sheet, and/or
was incorrectly tracked by the FED. that graph is wrong in my eyes in so many ways...
....
What made the recent increase in "housing wealth" different was, as CR noted, the ability to borrow of people who had no prospect of repayment. If those people had been able to service their debt, the short-term burst in consumption would have been offset by the future decrease in their consumption as they repaid the loans. Instead it's going to be offset by a decrease in the future consumption of the other people whose money they spent. That's probably what these guys' theoretical model shows, and to that extent, it's probably correct. The Lexus the HELOC borrower bought will be offset by the Lexus never bought by the responsibly saving retiree who will get zero income from his or her savings thanks to the Fed's bank bailouts.
Except for Russia, most RE bubbles in Eastern/Central Europe were driven by Brits investing in buy-to let properties, much like they fueled the worst of the Costa del Sol bubbles. Building in Spain for Spainiards was very late in the game, much like condos was in America.
OT/ but important nonetheless...
here's an arrest made today in Tehran of 2 men... the police goons look like
those in the movie Brazil except for the camo... YouTube -
Comrade Alexei, I guessed so. At least when the Brits withdrew from the E Asian colonies they left an administrative structure and milky tea. What will they leave in EE or Spain?
In EE, nice housing stock for the locals; in Spain I'd say nice housing stock for the Germans, but they usually don't co-mingle except in Palma de Mallorca.
Brits are evacuating family members of embassy workers and advising against travel to Iran. This could really get dicey, also reports of Iranian jets flying low over the Gulf (provocation maneuver)?
WASHINGTON (AP) - The wind, a favorite power source of the green energy movement, seems to be dying down across the United States. And the cause, ironically, may be global warming - the very problem wind power seeks to address.
.....
"It also makes sense based on how weather and climate work, Takle said. In global warming, the poles warm more and faster than the rest of the globe, and temperature records, especially in the Arctic, show this. That means the temperature difference between the poles and the equator shrinks and with it the difference in air pressure in the two regions. Differences in barometric pressure are a main driver in strong winds. Lower pressure difference means less wind."
"NEW YORK -- The Federal Reserve Bank of New York bought $7.5 billion in Treasurys maturing between 2016 and 2019 on Monday, the first of two operations this week. Dealers offered $20.7 billion to be purchased. The last two times the central bank made purchases from this maturity range, it bought about $7.5 billion. The buyback is the latest in the central bank's attempts to keep a lid on borrowing costs, though mortgage rates have jumped significantly in the last few weeks in spite of the Fed's efforts. After the buyback, Treasurys stayed higher, pushing yields on benchmark 10-year notes down 6 basis points to 3.72%."
But on further reflection, I concluded that if you look at the data over the long term, their hypothesis is probably correct, because as anyone with that uncommon attribute "common sense" knows, bidding up asset prices doesn't increase real wealth, but only moves it around.
Long-term, even "medium-term", from an academic analysis viewpoint, we'll probably find that the recent housing bubble didn't increase consumption -- because the five-year upward burst it caused will probably be more than offset by the long bust we're in as a result.
jm, I don't think that is what the profs were saying. Basically, they are arguing that the 'negative wealth effect' of the current bust won't impact consumption expenditures as much as is generally thought. To support their argument, they claim that the 'positive wealth effect' of the bubble years didn't increase spending that much.
In the long term there's no doubt that busts will offset booms and likely overshoot to the downside. What the profs want us to believe, though, is that the housing price boom and bust really didn't impact the economy that much. I think they are wrong.
Also, on your point that bidding up asset prices only moves the wealth around, I would agree, but only for the relatively small percentage of people who moved up to more expensive housing during the boom. The rest of us, who didn't, still felt the wealth effect of price increases and many of us spent accordingly. Hence the anecdotes I offered.
Comrade Christina....
thanks, sounds like a provocation move to me... crude and I doubt anyone will bite, even if they were in Israeli airspace....
any one know their aircraft array?
Well, if nothing else, when I sell my house that at one time could have been sold for 300K, and maybe, just maybe, could now be sold for 200K, there is 100K less to spend (or, gasp, and heaven to Betsy, SAVE!!! - O, the horror of not spending!). Yeah, I was thinking about all the travelling I could do when I retire with that extra 100K - or the 5K in interest income (uh, that was before the 100K evaporated and you could still get 5% interest on bonds - something you young folks never knew, kinda like phonographs).
In addition to home equity extraction, money was extracted in the form of transaction costs (real estate agent fees, broker fees, appraiser fees, etc) and home builder profits. Rising home prices most definitely affected consumption.
"On the second point, I think the answer is MEW had a significant impact on consumption ... I frequently heard from auto, RV, boat, motorcycle, and home accessory retailers that their customers were borrowing from their homes during the boom to buy these products. All of these areas have seen sharp declines in consumption as MEW had declined."
Isn't it about incremental purchasing. If MEW substitutes for an auto loan or boat loan then there is no wealth effect. Tax deductiblity of interest caused some purchasers to switch to MEW.
"sharp declines in consumption" is a sign of the recession and not necessarily a sign of decreased MEW -- could be coincident.
Anybody seen Byz lately? We enjoyed an Iranian student's stay at our house immediately pre-rev in the mid-seventies. Ever since I've been convinced that he came from a place very difficult for me to understand.
Midnight looms so I'm over and out, but will chk tomorrow.
Economics professors must be wondering exactly what to teach their students this year as the free market, invisible hand, neoliberal theories have been shown to be utter rubbish. Good luck to them. Perhaps they should just concentrate on the economics of corruption, oligarchies and market rigging.
Tim waiting for 2012 (homepage, profile) wrote on Mon, 6/22/2009 - 7:35 am
CR You should start a confessional for home buyers/Home ATM's on a sister site "Reckless Gamble"
Yes I agree because most Americans had better start making gradual shift to a lower standard of living and be recalibrating their American dream.
Isn't it about incremental purchasing. If MEW substitutes for an auto loan or boat loan then there is no wealth effect. Tax deductiblity of interest caused some purchasers to switch to MEW.
"sharp declines in consumption" is a sign of the recession and not necessarily a sign of decreased MEW -- could be coincident.
In some cases MEW would have substituted for an asset purchase loan, but certainly not in all cases. MEW went into home improvements that would otherwise not have been done, into vacations, into private school tuition where a public school would have done fine, and into all sorts of living the 'good life.'
There's also a question whether some of the MEW users would have qualified for asset purchase loans.
As cited above, some foreclosure data shows total debt on houses at 170% of the original purchase price. That's an awful lot of MEW to get passed around. I don't think a lot of it was invested wisely.
So far as coincident indicators go, I would say 'sharp declines in consumption' match up perfectly with decreased MEW and a recession, but match up equally well with the 'negative wealth effect' as house prices plummet.
If the past year was bolstered by MEW, or in America's case , wealth that really didnt exist, or that did, but is now correcting, it is not because of home value decreasing that consumer spending decreases. It is because they no longer have the ME to tap into that they had the past 5 years. Now the spending should reflect pre bubble spending. Anything below prebubble spending would be negative and attributable to savings or BK's.
Gareth G: "Economics professors must be wondering exactly what to teach their students this year as the free market, invisible hand, neoliberal theories have been shown to be utter rubbish."
The free market has been shown to be utter rubbish? That statement presupposes that there was a free market to begin with. Free markets work; we just haven't had them in this country in a long, long time.
The idea that housing wealth is offset by increased costs for future housing services (apparnetly the core of their argument) is a crock. Does, CPI for shelter (largely OER) have any relationship to the CS index? The answer is a resounding NO. Given the number of people who had housing equity as a main pllar of their retirement and kids college funding plans, the housing welth effect is likly to be verysignificant.
Some markets are more free than others, but ALL markets are managed.
WIth this in mind, prior generations in the West insisted that all privilege be squeezed out of economies via low inflation, anti-trust regulations, wind fall profits taxes, etc.
Nowadays, eCONomic privilege is known as the "free market" at work in CONgress with public money.
Continental Europeans would say its an Anglo-Saxon problem but its the same argument. Its in essence down to national attitudes to credit which having lived in the UK,Germany and Belgium are very different in relation to availability of credit and usage of credit by individuals.
I think you've demonstrated before CR that MEW was very important for consumption. But that consumption didn't benefit the US - it went on imports, paradoxically subtracting from US growth. The proposition that US growth may not be too effected by the collapse of MEW proposed by the authors isn't in fact correct...it will in fact increase faster without it!
CR, it's obvious that in my absence you haven't had anyone around to call you on questionable conclusions when the facts don't fit.
Like your opinion on the "wealth effect", supported by your "Active Mortgage Equity Withdrawal" chart. From looking at the chart one would have to conclude that both the wealth effect and its associated spending had been cliff-diving. But if one were to look at income and outlays in the GDP detail, your "Active Mortgage Equity Withdrawal" chart looks pretty far from an accurate reflection of reality.
On the right hand side of this page there are links to data. "Tables only" (Excel 144KB) will give us what we want to see. If you go to Table 10 in that spreadsheet, that is "Personal Income and Its Distribution."
Looking at "Personal Income", "Disposable Personal Income", or "Personal Outlays", it's immediately clear that in no way have those numbers fallen as implied by you or your chart. MEW may have dropped off substantially, but income and spending have scarcely budged by comparison! MEW fell off a cliff, but that "loss" was largely offset from other sources, despite falling home prices!
I'm not saying income and spending growth haven't slowed, because they clearly have, and the recession continues. But the academics are right: MEW isn't nearly as big a factor, either before or now, as you imply.
"Very slim chance of wage growth in an environment of global wage arbitrage."
The idea of wages rising to address the affordablility of housing, seems to me to only be achievable via inflation, given global wages, immigration and job portability.
Well this thread has been pigged but.... Anecdotally consumption decline is proceeding as many here predicted. Big ticket items, cars, RVs, major remodelings have declined precipitously, but smaller items haven't declined as much. IMHO this is becuase MEW PRECEEDES the purchase of major end items, but it is also FOLLOWS minor items by being used to pay off CC balances.
If the truth were being reported we'd be having riots in the streets. And meanwhile the top
execs in banks and brokerages that caused such a mess are STILL employed and making
millions while laying off THOUSANDS of people that actually do work. If you know anyone in
banking that's still employed, odds are they are doing the work of three people so the top
execs can show 'savings' and continue collecting mega-incomes.
"[W]e estimate that the average homeowner extracts 25 to 30 cents for every dollar increase in home equity."
"[T]hese findings lend support to the view that home equity-based borrowing is used for consumption."
WHY PCE has not bottomed....
Do residential ABS traders ever see the physical addresses of the properties they are trading? I'm (mostly) sure it is in the REMIC reports, but are there 3rd party data vendors that track this & stay updated with servicers? In commercial MBS Trepp and Realpoint do this, but have heard this doesn't really exist for resi. Is there a way to audit negative pre-payments or workouts?
Bloomberg.com
"Goldman Sachs was more aggressive than other firms in seeking collateral from AIG because the bank’s models showed a greater decline in the value of securities that had been insured, said two people with knowledge of the matter, who declined to be identified because the contracts were private.
“Goldman is to be congratulated for seeing the problem ahead of others and protecting itself from the impending failure of AIG,” said William Poole, former president of the St. Louis Fed, in an interview last week. “It’s not the responsibility of any private firm to determine what the public interest is -- that’s why we have a government.”
I say the people determine what the public interest is, and the government serves the people. Because "determine" can be active or passive.
A more careful look at the data, guided by economic theory, however, suggests that much of this evidence has been misinterpreted and that the reaction of consumption to housing wealth changes is probably very small.
Chicken entrails. "Economic theory," "suggests," "misrepresented," "probably." They don't say anything substantial except for proving economics is not a science.
Considering that the interest rates on RE backed loans are (or were) lower than the rates on other types of debt, there's some merit in borrowing against the house instead of against other things. So MEW/HELOC would make sense if other borrowing would be going on in its absence.
OT but important on the World stage
It isbeing reported the Italian embassy in IRan along with other Euro nations are taking in the wounded that are being denied access to hospitals. Should the Basij or Rev Guard fire on one of these embassies or embassy workers I think we have our "Black Swan" event.
Money is not wealth.
//The Housing Wealth Effect?//
Recipe of the day: (HT:aangel)
Here is my recipe for collapse. You may use different ingredients, but this makes a tasty broth that can be refrigerated (if you can still power your refrigerator) and used for leftovers.
Start with declining top line world oil production.
Then add in the decline of oil available on world export markets because of rising producer country usage (Jeffrey and Khebab's Export Land Model).
Then add in producer countries holding back production for future generations (see the king of SA's comments).
Then add in the declining net energy of the remaining oil (EROEI).
Then add in the increasing disrepair of our basic infrastructure (water, sewage, electricity transmission, transportation) and our inability to pay to repair it.
Then make fertilizer very expensive and start decreasing food production.
Then add "hordes of unemployed" (from Hirsch's congressional testimony).
At this point, take note of the consistency of the human population when placed under this sort of stress. If it is calm and cooperative, you must be on a different planet making this dish and you should seek a different recipe.
Throw in a currency collapse as energy is taken away from the economy and the crushing debt remains.
Then start taking the nuclear power plants offline as they reach the end of their design life (about 25 more years) with insufficient replacements ready.
You really must add some fuel shortages or the spiciness won't be quite right.
All of these ingredients are easily obtainable from various well-sourced and credible reports.
If that doesn't get you a collapse soup unsuitable for company this Saturday night, nothing will.
Edit: Sorry, I forgot a major ingredient and it's quite embarrassing. Around the step where you add the currency collapse, add lowered crop yields, declining water supplies and major migrations of people due to climate change. You can also add depleted fisheries and massive releases of methane from the permafrost if you wish, but usually the soup is interesting enough at this point; more ingredients just crowd out the other flavors.
Economists still cant agree whether people consume based on current income levels or projected future flows.... Still I think that the authors of this article greatly underestimated the MEW effect (as CR said / has said over and over...)
shout out to Columbia....
.....
for anyone interested in seeing some great shots of Angkor Wat see the newest National Geographic
...
...Angkor is the scene of one of the greatest vanishing acts of all time. The Khmer kingdom lasted from the ninth to the 15th centuries, and at its height dominated a wide swath of Southeast Asia, from Myanmar (Burma) in the west to Vietnam in the east. As many as 750,000 people lived in Angkor, its capital, which sprawled across an area the size of New York City's five boroughs, making it the most extensive urban complex of the preindustrial world. By the late 16th century, when Portuguese missionaries came upon the lotus-shaped towers of Angkor Wat—the most elaborate of the city's temples and the world's largest religious monument—the once resplendent capital of the empire was in its death throes.
Scholars have come up with a long list of suspected causes, including rapacious invaders, a religious change of heart, and a shift to maritime trade that condemned an inland city. It's mostly guesswork: Roughly 1,300 inscriptions survive on temple doorjambs and freestanding stelae, but the people of Angkor left not a single word explaining their kingdom's collapse.
....
Recent excavations, not of the temples but of the infrastructure that made the vast city possible, are converging on a new answer. Angkor, it appears, was doomed by the very ingenuity that transformed a collection of minor fiefdoms into an empire. The civilization learned how to tame Southeast Asia's seasonal deluges, then faded as its control of water, the most vital of resources, slipped away.
...
is this what they are going to say about us and the creation of the fractional banking system one day?
Angkor — National Geographic Magazine
...
(on a side note Nat Geo implies a false implication in a photo of a wedding ritual showing the bride washing the feet of her soon to be husband.
what she is doing is getting her mind right, to make it as cool as the water she pours on his feet, to be chilled and balanced and a mind rid of anger towards the groom or family or anyone at that moment...
it's nice to have such lovely Khmer women here at the duke's version of the Brown Derby set National Geographic's mind right... silly white men, tricks are for kids and that crazy Mortgage Pig!
"Instead of focusing on the wealth effect from house prices, I think the more important channel for consumption was home equity extraction."
There is a fine line between the two, if any line at all... but I certainly think you are correct about where to take the best measurements.
Economics and the practice of....are merely a rouse for which ever governmental policy is in effect at any given time. Just my opinion....Green Shootz and ALL
A couple of problems here...a lot of HELOC is line of credit that is issued, but now drawn down. When you look at the Federal Reserve's numbers, the home equity line of credit series in FOF does not help you understand what has happened. It basically soared, then looked like it was going to crash, flattened and rose again. This certainly isnt what was happening at the time when banks were cutting off HELOCs. And it isnt at all what was happening with the drawing down of those lines or the spending of the draw.
But this still gets back to the issue of the amount of HELOC still out there, that has not been accessed, as well as the amount that has been drawn, deposited and not spent. I know a few people near the end of the bubble that had taken lines ready to invest in more housing, then realized that wasnt a smart move. But the line is still there...if they drew down more or spent any who knows. People RARELY say, yeh, i bought that mercedes with my HELOC. It's a dumb move, and even dumber to admit to it. I mean, these are some of the worst loans out there.
CR
You post an estimate of MEW increasing GDP by 2.5%/year.
What is that in dollars.
If you factor out that number does it give sort of a baseline for how far our economy has to contract to get to a GDP based on earnings not spending?
wally, yes, the two are related - and I think that has made it harder to measure. I think you have to start with some anecdotal stories - and see if this is widespread (I believe using the Home ATM for consumption was widespread). I heard story after story of people using the equity in their homes to buy "toys". This made it easy to predict the collapse in consumption.
This is the same way I figured out that there was excessive speculation in housing. Start with the stories (I talked with a number of people in 2003 and 2004 that were buying homes at 10X their annual income - that set off alarm bells). I followed that up by asking lenders about their standards (none - "fog a mirror, get a loan") and from there it was pretty easy to figure out the bubble (and that prices would fall dramatically).
best to all
Housing wealth is an illusion. Houses depreciate. The so called housing wealth effect is actually an inflation effect that makes people poorer, not wealthier.
We're poorer today than ten years ago. It only seemed like we were getting wealthier when bankers were allowing idiots to impoverish themselves with debt.
"guided by economic theory"
it makes my sides hurt
Comrade K...
thanks for the info on the embassies in Tehran....
....
just got an email from my couple of 'boots on the ground' in Yangon (Rangoon)....
....
"I believe that when people refinance with cash out or draw down HELOCs, they usually spend the money."
Well, HELL YES! I could point to a dozen people who sucked the equity out of their home to buy some damned toys not ONCE, but MANY times. THAT money spigot has been capped!
Anyone who thinks otherwise is an idiot.
"Do residential ABS traders ever see the physical addresses of the properties they are trading? I'm (mostly) sure it is in the REMIC reports, but are there 3rd party data vendors that track this & stay updated with servicers? In commercial MBS Trepp and Realpoint do this, but have heard this doesn't really exist for resi. Is there a way to audit negative pre-payments or workouts?"
Nope, you get a loan ID, it's meant to be a blind transaction. There's no way to look through to the property level.
CMBS is a totally different beast. Commercial properties are all explicit in the offering memo / prospectus of CMBS transactions, and the data is updated on a regular (or semi-regular basis).
Hard to measure, you bet!
Michigan : Bought in '99, by '08 taxable value appreciated 35%. In '08 poured over 50% of taxable value into a major remodeling. '09 taxable value went down two percent. Huh?
Comrade Kristina... if they fired on the embassies or consulates that would be a direct violation of the Vienna Convention '62...
not that they don't know this... do they now Jimmy?
CR
I know of a couple in the CA central valley who had an income of 120k and bought 9 homes btwn 02-05 at about 300k each. Kid you not. Maybe only 1-2 were bought with cash.
I knew the renter of 1/10 units. they were always on cruises and the like. i wonder what they are doing now?
"economic theory" -- you keep saying that. I do not think these words mean what you think they mean.
And yet, the economics schools just march right on, indocrinating yet more students into a system that often doesnt come close to describing the real world behaviors of consumers. Firms, perhaps. Micro..yes. Macro..hell no.
I like to go back and see what people were saying in the past to judge what they're saying today. Calomiris less than a year ago:
"We conclude that declines in house prices are highly likely to remain small. Our analysis reveals, unsurprisingly, that foreclosures and home prices have negative effects on each other over time, but this does not imply a vicious cycle of collapsing prices. Our models predict that as foreclosures continue to climb in many states, house prices will remain flat or decline in those states -- but will not collapse."
Charles W. Calomiris, Stanley D. Longhofer and William Miles - Housing Collapse Ahead? - washingtonpost.com
I try to find those that were saying in 06/07 that there was no housing bubble, or that 'subprime's contained'.
To simply throw off MEW as impacting consumption is ridiculuous.
How apropos would it be for the profs if a number of their students came to tell them they were dropping out of school. And when asked why they said "My parents couldn't get a HELOC to pay tuition".
Actually, with this kind of analysis (We put the data through numerous robustness checks, and found in most model specifications housing wealth had zero effect on consumption) they should demand their money back for past courses.
winstongator - always a good idea to know which school of thought your economic analysts have latched themselves to. If you ever see anything come out of the George Mason area...you can be assured that it is slanted right, and is in actuality wrong. Plenty of these folks out there.
Regarding Poole & GS
It's not the responsibility of the public or the fed to change the rules in the middle of the game and pay out GS and others via FRE, FNM & AIG bailouts. GS was allowed to become a BHC and prior to that was given special access to the fed's printing presses via the cash for trash arrangements.
Poole is disingenuous idiot. If GS could see the "problems" then why couldn't the fed???? So much for nobody could have seen this coming. Nobody except the people that committed the fraud!
This severe decline in consumption was easy to predict - and it happened. Meanwhile these authors dismiss it as simply "a theoretical possibility".
In theory, there is no difference between theory and practice.
In practice, there is.
didn't take much longer to find a 'subprime's contained' note from Calomiris:
Subprime: Turmoil or 'Minsky moment'? | vox - Research-based policy analysis and commentary from leading economists
"Reasons to be cheerful
My view of the limited fallout rests on eight empirical observations:
How can someone who wrote such garbage in LATE 2007, when the bubble was already deflating, still be taken seriously?
CR
You should start a confessional for home buyers/Home ATM's on a sister site.
"Reckless Gamble"
Anyone out there know how it is in grad school econ these days? Are you still looked at like a wing nut if you subscribe to any of the theories of the behavioralist economists...I know the austrians have gained some stature of late, but I also dont know how much. Probably not enough.
Anything coming out of William Poole's mouth is some type of vomit.
oh my god...these dudes quote MALPASS!!!! They should be denounced on that basis alone.
"David Malpass (2007) has emphasized, households’ wealth is at an all-time high and continues to grow. So long as employment remains strong, consumption may continue to grow despite housing sector problems."
So much for that.
California Collapsing
California Collapsing | Money and Markets: Free Investment Email Newsletter
@Tim - maybe "iwishidanode.org"?
I actually liked #5 - financial firms are highly liquid and not overleveraged...
If someone looked at the sky yesterday and told you it was green, why would you listen if he said tomorrow it will be clear and blue?
So long as employment remains strong, consumption may continue to grow
=====
So long as the coyote does not look down, he may continue running through air without falling
Lucifer LOL COTD
Hank Paulson was really really smart when at GS, then really really stupid when working for the "public interest".
We should have paid him more to work harder, that's the answer. He made a hundred million a year at GS, and only a few hundred thousand at Treasury.
Oh, wait, he made a hundred million at Treasury also. Special tax break windfall selling GS stock. Damn you Pharaoh, you should have seen the moral hazard. (Oh, the oligarchy installed the Pharaoh? Never mind)
Moody's/REAL CPPI June 2009
" The National — All Property Type Aggregate Index measured an 8.6% decline in April 2009. The index now stands 29.5% below the peak measured in October 2007.
· Transaction volume continues to fall in both repeat-sales and the overall market. April’s large price decline on the heels of a 5.5% monthly decline in January hints at an ongoing process of capitulation.
· The repeat sale transactions in the month of April for the first time showed more negative than positive annualized rates of return.
· Apartments are faring better than any other property type in the Eastern region, although all four types measured significant annual declines.
· The South was the worst performing region overall. All four property types saw annual value declines of more than 20%, with industrial measuring a decline of 28.8%.
· All four property types in Southern California underperformed the western market as a whole. Office was the worst performer with an annual value drop of 22.2%.
· The three major office markets measured significant annual declines. In the East, both New York and Washington DC outperformed the eastern office market, with annual declines of 12.9% and 21.1% respectively.
· The Florida apartment market, like the apartment market in the South on the whole, has experienced three straight years of falling prices. Florida apartment values are now down 31% from the peak.
"California is America’s most populous state with 38 million people. Its GDP of $1.8 trillion is the largest in the U.S. Its economy is bigger than those of Russia, Brazil, Canada, or India."
How can the BRIC countries possible pull us out anytime soon? Bull argument=FAIL
MEWgilt meant the means to realize your dreams! As a means to spend, at least it is measurable.
Same gotta have it now mentality manifested itself in all manner of dis-saving, low 201-K contributions, financing smaller purchases, huge cc balances, paycheck to paycheck financial planning, etc. At least that's how it seemed when I visited the states during those years.
There seemed to be no chilling awareness among American consumers of the cyclical nature of life. Everybody had to get what they wanted, right now. Gotta think that what the house across the street sold for contributed to ease the minds of the lotus eaters.
All I know that now that's it's been withdrawn from them I sure don't feel any more wealthy. Have no interest in acquiring distressed assets yet.
There are two parts here: 1) how do changes in house prices effect consumption, and 2) how does access to the Home ATM effect consumption.
OCD kicking in
"effect" is the noun, and "affect" is the verb. A lot of people get that confused.
/OCD
Tax credit for home purchase could rise
Tax credit for home purchase could rise - USATODAY.com
With the tax credit scheduled to expire in fall, some business groups say the amount of the credit, now capped at $8,000, should be raised to $15,000 and applied to anyone who buys a home.
The White House had no immediate comment Sunday.
Current proposals:
•A Senate bill to expand the tax credit to $15,000 for any home buyer regardless of income was introduced this month by Sen. Johnny Isakson, R-Ga. It is co-sponsored by Senate Banking Committee Chairman Chris Dodd, D-Conn.
"It would go a long way toward inducing trade-up buyers into the market," says Lawrence Yun, chief economist at the NAR.
•A House bill to keep the $8,000 credit in place until June 2010 and expand it to all home buyers was introduced last month by Rep. Kenny Marchant, R-Texas. It also would provide a $3,000 credit to homeowners who refinance.
•Another bill in the House, introduced by Rep. Eddie Bernice Johnson, D-Texas, would extend the credit to all home buyers through 2010.
WTF? Where are the academic analysts on the topic of the effect on governmental budgets?
When home prices go up, in many states revenues to state and local government also increase without any borrowing activity, through increases in property taxes.
The money from cashout refis, helocs, and profitable sales where the owner rents or downsizes always makes its way into the economy. Not many people borrowed on helocs or refis in order to invest the money in something besides real estate. If proceeds were used for consumption or real estate, it stimulated government budgets. If they bought consumer goods, they paid sales tax. If they paid for local services (e.g., getting their nails done), that business or person probably paid income tax. If they improved their home, they generated sales tax for materials. If they bought a new home, there was often a transfer tax, and almost certainly there were realtors paying income tax, title companies, paying income tax, and appraisers paying income tax.
When the financing bubble bursts, it's like winter. There just isn't as much sunlight for things to grow or thrive.
From a government budget standpoint California is in the financial equivalent of a nuclear winter.
Calomiris and Longhofer were walking down the street when they came upon a hot dog vendor. They observed a customer choose a wiener and pay. Calomiris turns to Longhofer and remarks; "Interesting behavior. I wonder if it will work in theory?" A little later they come across a twenty dollar bill on the sidewalk. Longhofer asks "I wonder if it is economically advantageous to pick up that twenty?" Calomiris replies "Nah! If that were the case it would have been picked up already."
Anak While I agree the same phenomenon manifested itself in Aus, UK, IRE, etc. Where are you from?
CR, good analytical post. I like seeing you voice your opinion when quoting others.
It's all just anecdotal, but, having observed otherwise normal people who spent like crazy from 2002-06, I don't doubt that house pricing creates a wealth effect. The MEW/HELOC situation is pretty clearly demonstrated by the numbers, but that isn't the whole story.
In my experience there were several landowners who had various forms of liquid assets or investments that they liquidated and, in either case, spent simply because those liquid assets or other investments were no longer 'needed' given the rise in real estate values. In their world real estate appreciation substituted for other items on the balance sheet.
To suggest, as the three gentlemen do, that there was only a small wealth effect from the huge runup in prices simply makes no sense at all.
Here you go Rich, sorry I had to eat last night. There is plenty more on last night's "LA, NY..." thread at 10:45 et seq. Enjoy:
[Yogi]:I pray that solar and wind power become so cheap nobody makes a dime off the business.
[Rich]It's amazing the naivete, or stupidity, that exists in regard to solar and wind power. This post is evidence.
There is enough solar and wind power to provide vast quantities of energy at affordable prices. That isn't debatable.
If you have half a brain, you won't be praying that solar and wind power becomes so cheap nobody makes a dime on the business. That's like praying for arrogant fat cat electric power monopolists to get richer. You will pray for a level playing field where all producers of electricity can get equal opportunity to produce and sell power under the law.
You, sir, have half a brain.
A kilowatt of power that you can efficiently feed into the grid, from solar or wind, is no different than a kilowatt produced by coal, hydro or nuclear. It should sell for the same price.
Even a neanderthal knew that when he burned a log, it was not there in the morning, but the sun rose and the wind blew.
The real problem is the capital investment required to produce that energy, which is primarily a function of credit availability, interest rates, tax policy and friction.
No, it is primarily a function of technology and division of labor, which are possible under different economic systems and modes of taxation. Israel produced efficient solar energy panels in the 60's under a radical socialist system.
While I agree the same phenomenon manifested itself in Aus, UK, IRE, etc
So it's an Anglo-American phenomenon.
.
1 currency now -yogi (profile) wrote on Sun, 6/21/2009 - 10:39
If you have half a brain, you won't be praying that solar and wind power becomes so cheap nobody makes a dime on the business. That's like praying for arrogant fat cat electric power monopolists to get richer. You will pray for a level playing field where all producers of electricity can get equal opportunity to produce and sell power under the law.
If you can't understand that in an efficient economy profits go to zero in the long run, you shouldn't be on this board. But I'll try to educate you. By "nobody makes a dime on the business" I mean by profiting individually from others' labor, in the long run. Think Linus Torvalds. I pray that wind turbines and solar panels are developed that can be produced so cheaply and easily by sharing the code that a teenager could assemble one from local materials, with his own labor. No patent lawyers, no bankers, no stock brokers, just shared code.
Tim, since you asked, I'm just a middle class WASP male from the midwest with two kids. Right handed even. I just have been in Asia since the Reagan admin, weathering booms and busts all the way.
I'd have thought I had a country to repatriate to, and I'm still waiting. Aghast, as it turns out.
I know David Malpass and family, so I'll stay out. Very nice people. I don't agree with almost anything he writes.
Anak..........what a nightmare this must be from afar.
La Cour-Little's study, which CR reviews a short while ago, provides some indication that Home ATM usage was significant since the turn of the century.
Foreclosures and the Home ATM
For example, for the early November 2008 data sample, he tracked 2,358 properties. Here’s what he found:
•They were purchased at an average price of $354,000 and average year of 2002 (long before the housing peak of 2005).
•Total debt on the properties averaged $551,000 at time of foreclosure. That’s 56% more than the properties were worth when purchased, meaning at least that much was cashed out!
•An automatic valuation model estimated average value at time of foreclosure was $317,000, which suggests a combined loan-to-value at foreclosure of more than 170% ($551,000/$317,000). And that is a conservative estimate. Properties that banks later sold had an average resale price of $271,000!
If you dig down into the details of this Rockefeller Institute report, you'll see that a national decrease in retail sales tax reported by the Wall Street Journal is actually a phenomenon highly skewed by the real estate bubble states of CA, FL, and AR. In reality, there was a drop of 3.2% in retail sales in 47 states and double digit sales tax losses in three states.
MEW was 9% of national income when it peaked in Q4 2006, and was significantly higher in the states where housing prices were high, escalating faster, and the loan industry was basically fraudulent.
The California economic base was artificially inflated by at least 10% by MEW, and no projection that ignores MEW will be accurate.
That's why California is like a locomotive hurtling off a missing section of the railroad bridge, pulling 49 states behind it into a depression.
BSR, there are islands of sanity-- these boards and your stool next to Milkshake being among them. Ever the voyeur am I.
OT-my bad if repost...
Roubini this morning on NBC Europe-see video at bottom of article.....good points to ponder
Oil at $100, Interest Rates May Stifle Recovery: Roubini - CNBC
good work winstongater....
my shout out to Prof Colostomy Calomiris at Columbia I'm trying to jam back into the toothpaste tube..
....
one note on that World bank post:
“Unemployment is on the rise, and poverty is set to increase in developing economies, bringing with it a substantial deterioration in conditions for the world’s poor.”
.. yes, I can say that I'm witnessing a large increase of people sleeping on the streets here, usually near where tourists might be... it's off season, yet tonight I've never seen so many women with babies sleeping on the pavement on Sisowath Quay... what is stunning to me is the velocity of it. hey, I lived in NYC all through the 80s and I remember all the homeless but it didn't look quite this...
....
yes, you geniuses of capitalism out there in NYC & London and elsewhere, this is the whipsaw effect of
your financial engineering idiocy...
Although the MEW decline may have bottomed, the important problem for the recovery going forth is what will replace MEW now that the housing boom is over. I can't what will replace the the 2 to 3% of GDP that MEW supported. That strikes me as a huge obstacle to any recover.The only thing I can see is for wages to increase. The problem with that is that wage increases raise a danger of serious 70s style stagflation due to a wage-price spiral. Any thoughts on that?
Outsider (profile) wrote on Mon, 6/22/2009 - 7:51 am
There are two parts here: 1) how do changes in house prices effect consumption, and 2) how does access to the Home ATM effect consumption.
OCD kicking in
"effect" is the noun, and "affect" is the verb. A lot of people get that confused.
/OCD
Good for you Outsider. I can't turn mine off.
CC -
Sounds like you need a switch doctor.
I am adequately embarrassed. Thank you.
maynardGkeynes (profile) wrote on Mon, 6/22/2009 - 8:10 am
...The only thing I can see is for wages to increase. The problem with that is that wage increases raise a danger of serious 70s style stagflation due to a wage-price spiral. Any thoughts on that?
Very slim chance of wage growth in an environment of global wage arbitrage.
If we somehow start a trade war and then have massive commodity inflation due to bottlenecks in distribution (nationalism) I could see it, but no other way. Too many BRIC people waiting in line, ready to work.
Civil unrest has broken out in Arkansas.
- NY Times
Basel Anglo-American? Well there's Spain and...
Anak thanks for the response. If you repatriated where in the US do/did you like?
rb Damn you got me.
I can't what will replace the the 2 to 3% of GDP that MEW supported.
It was artificial and can't be replaced.
When you coming to town Duke?
"Space available" signmakers are experiencing real growth, not financial.
Where is the money going to come from to replace MEW for consumption?
Not paying taxes. Check
Not paying credit cards. Check
Not paying mortgages. Check
When these, ahem, stimuluses play out, then what?
CR,
Logically, there certainly would seem to be a wealth effect beyond "active" MEW. Take your average, cautious 45-50 year-old homeowner in Southern California who refinanced wisely to get a better rate without lengthening the life of the loan, he/she makes a sizable contribution to his/her 401k, has a Roth IRA on the side.
The job is fairly safe, but all his/her assets have dropped 30% in the past year. Is that going to effect spending over the next few years? Doesn't it seem obvious it would?
Calomiris, et al., sound delusional. That's the type of nonsense people spewed in 1930. By 1932, they had quieted down some.
CR says, However, on the key point, I think most of the decline in consumption related to declining MEW is behind us.
Yes, the spigot is firmly closed, but the secondary effects of the downturn take a while to spiral downward through the economy, especially in California where a massive reset is taking place.
California's government at every level is facing massive shortfalls, with current sales tax down over 20% against projections made a year ago, and down almost 12% YTD. California income tax collections are down over 20%, property tax collections are dropping faster than anyone estimated, and all other taxes like hotel taxes and franchise taxes are taking hits. The Orange County Transit Authority recalculated the probable income from a 1/2 cent sales tax over the next 30 years, and their forecast dropped 38%.
This loss of revenue will force over 20 billion in revenue cuts through state and local government during the next 12 months, pushing more job losses through the general economy, where housing starts have already dropped 84% from the peak, and 7 out of 100 retail jobs are gone.
The cumulative impact of government job cuts will push U3 from 11.5% to 13.5%.
Tim, with Spain you could make the case that they caught the English malady due to investments from les albion perfides. It does look more Anglo than not, in principle. The continentals will gloat till they're burnt in the spillover.
As for the US, I like all I've seen. But remaining family will keep me close (mentally) to black soil w/ good water on a major rail link in the Central Time Zone. We're going to give it another couple years I guess.
"California is America’s most populous state with 38 million people. Its GDP of $1.8 trillion is the largest in the U.S. Its economy is bigger than those of Russia, Brazil, Canada, or India."
How can the BRIC countries possible pull us out anytime soon? Bull argument=FAIL"
Well, if chief polices and ordinary physicians are making 200 000+ dollars per year, somebody has been playing with the reserve currency status to the max and then some. US economy is one bloated paper dollar pig.
Good points here, but is it possible that there's a certain "convexity" to the housing wealth effect? Where an increase in housing prices don't necessarily translate into consumption (save the MEW phenomenon, as this piece suggests) because it is essentially reinvested in a more expensive house... but a large decrease in housing prices forces the lost equity to be recovered in different ways, e.g. through savings. Just a thought.
... We put the data through numerous robustness checks, and found in most model specifications housing wealth had zero effect on consumption. In those few cases where housing wealth did have an impact on consumer spending, the impact was always smaller in magnitude than that from stock wealth, contrary to Case, Quigley and Shiller’s findings. We conclude that the impact of housing wealth on consumption, if it exists at all, is much smaller than popularly feared.
I think it's been too long since this guy has been rubbing shoulders on Main Street.
Easy credit increases consumer spending. Is that even debatable? MEW is (or was) basically easy credit against one's house.
And the spigot might be turned off for now, but I still would like to know whether the proposed new 125% or higher LTV refi's will include a cash out option. That might get that spigot flowing again.
Here's another potential phenomenon from Irvine Housing Blog.
Right now the California economy is being propped up by the large number of people (call it 2% of homeowners) who have stopped paying their mortgages and are now putting that money into the general economy. When they either finally go through foreclosure or renegotiate their loans and start paying rent or mortgages again, there will be another hit to the consumer economy.
No kidding Rob Dawg. If I sent a scientific paper for even "in house review" (which is done each and everytime) that contained even one "weasal word" like you listed, I would find myself dealing with phrases like your are "probably" going to unemployed, or your paper "suggests" that you might want to look for a job elsewhere. Sheesh! There are no real social sciences. They like to cover their ass in scientific terms but there are too many variables involved and they don't deal with numbers on the order of magnitude that permit statistical analysis that even approach what the hard sciences deal with.
(EHP - If you're around anymore - maybe your oil price decline is finally taking place)
My first reaction was the same as that of sportsfan, "To suggest, as the three gentlemen do, that there was only a small wealth effect from the huge runup in prices simply makes no sense at all."
But on further reflection, I concluded that if you look at the data over the long term, their hypothesis is probably correct, because as anyone with that uncommon attribute "common sense" knows, bidding up asset prices doesn't increase real wealth, but only moves it around.
Long-term, even "medium-term", from an academic analysis viewpoint, we'll probably find that the recent housing bubble didn't increase consumption -- because the five-year upward burst it caused will probably be more than offset by the long bust we're in as a result.
So I suspect that they've proven that the booms are evened out by the busts. If that's what you're interested in, mybe this is interesting and useful.
If you're interested in preventing busts, with their awful effects on so many innocent bystanders, it's not.
sp899..hmmm
Well that's twice now the s&p has dipped under 900, this is going to be an interesting day.
as was pointed out before previously in the Prof Colostomy econ res:http://www.voxeu.org/index.php?q=node/739
....
Note: Gross corporate leverage is defined as liabilities divided by assets. Net corporate leverage is defined as liabilities, less cash, divided by assets. Cash is defined as total financial assets, less trade receivables, consumer credit, and miscellaneous assets.... [this is not adequate definition]
....
look, I still remember many of the numbers from '86 to '90, after all, I was fixed income analyst at a big time bond house.... (my sector: top 100 banks)
the FED stats seem almost about right, in that period (yet something is rejiggered 2nd Q '87... ) but going forward what happened is the real leverage of banks got abstracted out of the balance sheet, and/or
was incorrectly tracked by the FED. that graph is wrong in my eyes in so many ways...
....
"However, on the key point, I think most of the decline in consumption related to declining MEW is behind us. "
And most of the decline related to falling employment and a higher savings rate is ahead of us.
What made the recent increase in "housing wealth" different was, as CR noted, the ability to borrow of people who had no prospect of repayment. If those people had been able to service their debt, the short-term burst in consumption would have been offset by the future decrease in their consumption as they repaid the loans. Instead it's going to be offset by a decrease in the future consumption of the other people whose money they spent. That's probably what these guys' theoretical model shows, and to that extent, it's probably correct. The Lexus the HELOC borrower bought will be offset by the Lexus never bought by the responsibly saving retiree who will get zero income from his or her savings thanks to the Fed's bank bailouts.
Except for Russia, most RE bubbles in Eastern/Central Europe were driven by Brits investing in buy-to let properties, much like they fueled the worst of the Costa del Sol bubbles. Building in Spain for Spainiards was very late in the game, much like condos was in America.
OT/ but important nonetheless...
here's an arrest made today in Tehran of 2 men... the police goons look like
those in the movie Brazil except for the camo...
YouTube -
Comrade Alexei, I guessed so. At least when the Brits withdrew from the E Asian colonies they left an administrative structure and milky tea. What will they leave in EE or Spain?
It appears the "housing wealth effect" was even good for the local preacher - Preacher's Home Purchases Draw Inquiry - House And Home News Story - KPHO Phoenix
In EE, nice housing stock for the locals; in Spain I'd say nice housing stock for the Germans, but they usually don't co-mingle except in Palma de Mallorca.
Duke, just updated OT
Brits are evacuating family members of embassy workers and advising against travel to Iran. This could really get dicey, also reports of Iranian jets flying low over the Gulf (provocation maneuver)?
Not so windy : Research suggests winds dying down
WASHINGTON (AP) - The wind, a favorite power source of the green energy movement, seems to be dying down across the United States. And the cause, ironically, may be global warming - the very problem wind power seeks to address.
.....
"It also makes sense based on how weather and climate work, Takle said. In global warming, the poles warm more and faster than the rest of the globe, and temperature records, especially in the Arctic, show this. That means the temperature difference between the poles and the equator shrinks and with it the difference in air pressure in the two regions. Differences in barometric pressure are a main driver in strong winds. Lower pressure difference means less wind."
"NEW YORK -- The Federal Reserve Bank of New York bought $7.5 billion in Treasurys maturing between 2016 and 2019 on Monday, the first of two operations this week. Dealers offered $20.7 billion to be purchased. The last two times the central bank made purchases from this maturity range, it bought about $7.5 billion. The buyback is the latest in the central bank's attempts to keep a lid on borrowing costs, though mortgage rates have jumped significantly in the last few weeks in spite of the Fed's efforts. After the buyback, Treasurys stayed higher, pushing yields on benchmark 10-year notes down 6 basis points to 3.72%."
But on further reflection, I concluded that if you look at the data over the long term, their hypothesis is probably correct, because as anyone with that uncommon attribute "common sense" knows, bidding up asset prices doesn't increase real wealth, but only moves it around.
Long-term, even "medium-term", from an academic analysis viewpoint, we'll probably find that the recent housing bubble didn't increase consumption -- because the five-year upward burst it caused will probably be more than offset by the long bust we're in as a result.
jm, I don't think that is what the profs were saying. Basically, they are arguing that the 'negative wealth effect' of the current bust won't impact consumption expenditures as much as is generally thought. To support their argument, they claim that the 'positive wealth effect' of the bubble years didn't increase spending that much.
In the long term there's no doubt that busts will offset booms and likely overshoot to the downside. What the profs want us to believe, though, is that the housing price boom and bust really didn't impact the economy that much. I think they are wrong.
Also, on your point that bidding up asset prices only moves the wealth around, I would agree, but only for the relatively small percentage of people who moved up to more expensive housing during the boom. The rest of us, who didn't, still felt the wealth effect of price increases and many of us spent accordingly. Hence the anecdotes I offered.
you're two days late on the vid, Duke
Comrade Christina....
thanks, sounds like a provocation move to me... crude and I doubt anyone will bite, even if they were in Israeli airspace....
any one know their aircraft array?
Banks seem to be holding while commodity stocks are getting killed. bearish IMO.
Well, if nothing else, when I sell my house that at one time could have been sold for 300K, and maybe, just maybe, could now be sold for 200K, there is 100K less to spend (or, gasp, and heaven to Betsy, SAVE!!! - O, the horror of not spending!). Yeah, I was thinking about all the travelling I could do when I retire with that extra 100K - or the 5K in interest income (uh, that was before the 100K evaporated and you could still get 5% interest on bonds - something you young folks never knew, kinda like phonographs).
S&P negative for the year. I guess the World Bank report is he impetus. With all the trouble in Iran, I am surprised that oil hasn't risen.
In addition to home equity extraction, money was extracted in the form of transaction costs (real estate agent fees, broker fees, appraiser fees, etc) and home builder profits. Rising home prices most definitely affected consumption.
"On the second point, I think the answer is MEW had a significant impact on consumption ... I frequently heard from auto, RV, boat, motorcycle, and home accessory retailers that their customers were borrowing from their homes during the boom to buy these products. All of these areas have seen sharp declines in consumption as MEW had declined."
Isn't it about incremental purchasing. If MEW substitutes for an auto loan or boat loan then there is no wealth effect. Tax deductiblity of interest caused some purchasers to switch to MEW.
"sharp declines in consumption" is a sign of the recession and not necessarily a sign of decreased MEW -- could be coincident.
Anybody seen Byz lately? We enjoyed an Iranian student's stay at our house immediately pre-rev in the mid-seventies. Ever since I've been convinced that he came from a place very difficult for me to understand.
Midnight looms so I'm over and out, but will chk tomorrow.
Bankerwannabe
Armed conflict maybe? who said the markets were rational? Any geopolitical even would throw us into a depression overnite.
" Black Star Ranch (profile) wrote on Mon, 6/22/2009 - 11:04 am
Anak..........what a nightmare this must be from afar."
Don't worry; the fundamentals of the economy are strong-
/snark
Economics professors must be wondering exactly what to teach their students this year as the free market, invisible hand, neoliberal theories have been shown to be utter rubbish. Good luck to them. Perhaps they should just concentrate on the economics of corruption, oligarchies and market rigging.
Tim waiting for 2012 (homepage, profile) wrote on Mon, 6/22/2009 - 7:35 am
CR You should start a confessional for home buyers/Home ATM's on a sister site "Reckless Gamble"
Yes I agree because most Americans had better start making gradual shift to a lower standard of living and be recalibrating their American dream.
km4
"iwishidanode.org"" TARP From above
Anyone else notice selling right into the FED buying in treasuries?
S&P 500 below 900. Glad my puts all stopped out on Friday.
"...but going forward what happened is the real leverage of banks got abstracted out of the balance sheet, and/or was incorrectly tracked by the FED."
Duke: What do you think materially changed? Off-balance sheet leveraging & off-shoring of financial assets?
California & the stall of "practical politics" to solve problems. One thing he doesn't mention is redistricting and the safety of incumbents' seats.
California’s crisis and the collapse of the Republican Party. « The Edge of the American West
Krugman's take on Cali crisis...canary in the coal mine for other states:
OP-ED COLUMNIST; State Of Paralysis - NY Times
Isn't it about incremental purchasing. If MEW substitutes for an auto loan or boat loan then there is no wealth effect. Tax deductiblity of interest caused some purchasers to switch to MEW.
"sharp declines in consumption" is a sign of the recession and not necessarily a sign of decreased MEW -- could be coincident.
In some cases MEW would have substituted for an asset purchase loan, but certainly not in all cases. MEW went into home improvements that would otherwise not have been done, into vacations, into private school tuition where a public school would have done fine, and into all sorts of living the 'good life.'
There's also a question whether some of the MEW users would have qualified for asset purchase loans.
As cited above, some foreclosure data shows total debt on houses at 170% of the original purchase price. That's an awful lot of MEW to get passed around. I don't think a lot of it was invested wisely.
So far as coincident indicators go, I would say 'sharp declines in consumption' match up perfectly with decreased MEW and a recession, but match up equally well with the 'negative wealth effect' as house prices plummet.
RockyR
I feel you. Have shorts and payed out a lot of dividends over the past few months.
Perhaps they should just concentrate on the economics of corruption, oligarchies and market rigging.
Unfortunately, the group they are teaching is the next wave of the elite. Fictions must be maintained at all costs.
Real simple Professor,
If the past year was bolstered by MEW, or in America's case , wealth that really didnt exist, or that did, but is now correcting, it is not because of home value decreasing that consumer spending decreases. It is because they no longer have the ME to tap into that they had the past 5 years. Now the spending should reflect pre bubble spending. Anything below prebubble spending would be negative and attributable to savings or BK's.
Gareth G: "Economics professors must be wondering exactly what to teach their students this year as the free market, invisible hand, neoliberal theories have been shown to be utter rubbish."
The free market has been shown to be utter rubbish? That statement presupposes that there was a free market to begin with. Free markets work; we just haven't had them in this country in a long, long time.
The free market is the place that serves free lunches. It's a preposterous panglossian notion without any examples in known history.
Lucifer (profile) wrote on Mon, 6/22/2009 - 7:12 am
Money is not wealth.
//The Housing Wealth Effect?//
Lucifer is channelling Pavel!
The idea that housing wealth is offset by increased costs for future housing services (apparnetly the core of their argument) is a crock. Does, CPI for shelter (largely OER) have any relationship to the CS index? The answer is a resounding NO. Given the number of people who had housing equity as a main pllar of their retirement and kids college funding plans, the housing welth effect is likly to be verysignificant.
Some markets are more free than others, but ALL markets are managed.
WIth this in mind, prior generations in the West insisted that all privilege be squeezed out of economies via low inflation, anti-trust regulations, wind fall profits taxes, etc.
Nowadays, eCONomic privilege is known as the "free market" at work in CONgress with public money.
Is it any wonder that the majority are broke?
That statement presupposes that there was a free market to begin with.
No, it didn't at all.
Continental Europeans would say its an Anglo-Saxon problem but its the same argument. Its in essence down to national attitudes to credit which having lived in the UK,Germany and Belgium are very different in relation to availability of credit and usage of credit by individuals.
I think you've demonstrated before CR that MEW was very important for consumption. But that consumption didn't benefit the US - it went on imports, paradoxically subtracting from US growth. The proposition that US growth may not be too effected by the collapse of MEW proposed by the authors isn't in fact correct...it will in fact increase faster without it!
There are two parts here: 1) how do changes in house prices affect consumption, and 2) how does access to the Home ATM effect consumption.
CR, this thread is dead but my OCD just won't let this rest.
The first "affect" is fixed. But the 2nd one is still not fixed.
Just had to vent that.
No one could have predicted that something posted in a WSJ editorial forum would be a transparent lie.
Fracking economists... should be required to manage their own retirement money and make a public posting of their yearly and cumulative returns.
CR, it's obvious that in my absence you haven't had anyone around to call you on questionable conclusions when the facts don't fit.
Like your opinion on the "wealth effect", supported by your "Active Mortgage Equity Withdrawal" chart. From looking at the chart one would have to conclude that both the wealth effect and its associated spending had been cliff-diving. But if one were to look at income and outlays in the GDP detail, your "Active Mortgage Equity Withdrawal" chart looks pretty far from an accurate reflection of reality.
News Release: Gross Domestic Product
On the right hand side of this page there are links to data. "Tables only" (Excel 144KB) will give us what we want to see. If you go to Table 10 in that spreadsheet, that is "Personal Income and Its Distribution."
Looking at "Personal Income", "Disposable Personal Income", or "Personal Outlays", it's immediately clear that in no way have those numbers fallen as implied by you or your chart. MEW may have dropped off substantially, but income and spending have scarcely budged by comparison! MEW fell off a cliff, but that "loss" was largely offset from other sources, despite falling home prices!
I'm not saying income and spending growth haven't slowed, because they clearly have, and the recession continues. But the academics are right: MEW isn't nearly as big a factor, either before or now, as you imply.
Sebastian
"Very slim chance of wage growth in an environment of global wage arbitrage."
The idea of wages rising to address the affordablility of housing, seems to me to only be achievable via inflation, given global wages, immigration and job portability.
Well this thread has been pigged but.... Anecdotally consumption decline is proceeding as many here predicted. Big ticket items, cars, RVs, major remodelings have declined precipitously, but smaller items haven't declined as much. IMHO this is becuase MEW PRECEEDES the purchase of major end items, but it is also FOLLOWS minor items by being used to pay off CC balances.
If the truth were being reported we'd be having riots in the streets. And meanwhile the top
execs in banks and brokerages that caused such a mess are STILL employed and making
millions while laying off THOUSANDS of people that actually do work. If you know anyone in
banking that's still employed, odds are they are doing the work of three people so the top
execs can show 'savings' and continue collecting mega-incomes.
good articles: Financial Opinions Updated Daily iamned.com
I haven't read all the comments but my reply became lengthy so I made a post of it:
"However, this statement confuses a credit boom with real estate Return on Investment (ROI):"
Not One Cent: Housing Wealth Effect on Non-Housing Consumption: MEW Credit Bubble Vs Real Estate ROI