8/08/2007

Government Economists

Sowell makes a great point about elected (and non-elected) government officials trying to control and plan the economy. He argues that the "creative" financing that led to the subprime mortgage implosion was caused in large part due to skyrocketing home prices which was caused in large part by "open space" and "smart growth" policies.

"Yet with all the finger-pointing in the media and in government, seldom is a finger pointed at the politicians at local, state and national levels who have played a key role in setting up the conditions that led to financial disasters for individual home buyers and for those who lent to them."

Meanwhile, like Nero, our politicians seem incapable of casting the eyes upon that 800 lb. gorilla in the room.

19 comments:

Anonymous said...

Well, I must disagree on this one. The subprime lending scheme originated NOT with politicians, but rather on Wall Street. Check it out. The govt's involvement was simply to stay outta things and not regulate. Remember deregulation? Who's mantra was that?

LK

GeeGuy said...

I think you might be missing his ultimate point, though, LK.

I think he is saying that the market force that drove housing prices in the first place was scarcity. That scarcity is caused, according to Sowell, by government regulation (zoning, open space, etc.). When housing prices skyrocketed, the financial markets responded with 'new' lending devices to put money into the hands of people who, in hindsight, perhaps really couldn't afford it.

I am not certain I entirely agree with his point, nor do I completely discount it. I think that land use regulation is far more significant in more populated areas so I think he probably does have a point.

As far as 'regulation,' I have no problem with the limited regulation in the financial markets, provided the taxpayers are not ultimately asked to bail out the lenders for their bad decisions.

7:46 AM, August 08, 2007

Anonymous said...

I'll sell you my shares of Novastar:(

WolfPack said...

Who's the victim here? The lender who charged extra for a risky loan, the borrower who defaulted on his loan, the bought in early home owner who is in a great equity position or the guy who has a terrible commute because he can't afford to buy in the high dollar areas and doesn't want to move?

I don’t see the problem. If communities want open space laws and are OK with high home values, why not? How much sympathy can I have for a guy who can’t afford a $750,000 home? I have even less for a lender that makes risky loans that go into default. I agree with Geeguy limited regulation to ensure no deceptive practices and definitely no S & L style bailout.

Treasure State Jew said...

Geeguy;

Around 2002-03 I remember reading a front page WSJ story about a doctoral thesis by then-Fed chief Alan Greenspan, written while he was still a young man.

Greenspan's thesis in his early paper was that when the economy of a country took a body blow due to some catastrophic event, that economy could be propped up if interest rates were kept artificially low.

Artificially low rates would spur a bubble in housing prices, which then could be used by homeowners through the mechanism of equity loans.

After 9/11, it seems to me that Greenspan just dusted off his old thesis and put it into practice. Six years later, the bill is coming due.

Treasure State Jew said...

Geeguy;

By the way; I don't discount your 800 lb. Gorilla. However, I submit to you that China would be slitting its own throat if it took steps that would devalue the dollar.

Think about it; most of its currency reserves are invested in dollar denominated securities. If they started rapidly selling off reserves to initiate a devaluation, then their own reserves would lose most of their value.

Of course, if the PRC were smart (and they are) they would begin slowly selling dollars and buying other first world currencies (namely, the Euro) to move their eggs into multiple baskets.

Still, the situation shows we live in interesting times. You know what Confucius said about living in interesting times?

GeeGuy said...

There's another issue, too, TSJ. If our dollar is devaluted, doesn't that then make Chinese goods more expensive? And if we stop buying Chinese goods, what keeps all those factories running? And if they're not running, whose feeding all those people?

Treasure State Jew said...

Geeguy; Exactly. That isn't to say that it won't happen. However, this is a zero-sum game. They have to want to hurt us bad enough to be willing to hurt themselves as well.

Of course, 1989 might have proved that Beijing really doesn't care that much about hurting its own citizens ...

WolfPack said...

How did the conversation turn to low interest rates? Doesn't subprime mean high rates? I assume meaning that the rate is less attractive i.e. higher?

Treasure State Jew said...

no subprime means poor. Low bank rates = increased property values. The resulting equity enables subprime loans.

Wulfgar said...

Oh for pity's freaking sake. Can we all just quit pretending that we're econo-geeks and recognize the *real* 800# gorilla in the room?

We're spending more than 2 Billion dollars a week on an unsustainable adventure in democracy crapping out in the Middle East. China would have no sway over our markets ... none, I remind you ... if we weren't buying the farm with borrowed money to pay for a stupid experiment and oil prospecting.

China's proposed sell of the dollar is to accomplish one thing: to remind us that as long as we are hemoraghing money, we need them as much if not more than they need us.

It's very easy to pretend that this has nothing to do with the mortgage bubble, but seriously, come on. Sowell is completely full of it, here. He's skirting the idea of real property value reflecting the debt load, while claiming that the higher debt load of development is artificially inflating value? It's the dirty damned hippies and there liberal ideas of regulation and taxation? Does that even make sense?

Geeguy, you're right. Tax-payers should not be asked to bail out speculators. But that is precisely what we are being asked to do; not because of regulation, but because we are being asked to borrow huge amounts of money to pay for the speculation of property markets in the middle east.

Our taxes will go up to pay back Chinese debt when the speculation real estate market falls. Boo Hoo. What we're really gonna be paying for is the fantasy that we were going to profit *so huge* from our liberation of a country that we never should have invaded.

Quit blaming the politicians. It's not their fault. We bought into the dream that no one should sacrifice their sub-prime home ideal to preserve a tax break we couldn't afford. We screwed up. We started a fight we can't pay for. Taxes need to go up, and the sub prime mortgage industry needs to die a painful death. We're at war. Hasn't anybody clarified that?

Anonymous said...

There is a big difference between a $750,000.00 home in Bozeman and
a $750,000.00 home in a Seattle suburb.

One can only wonder when the real estate market in some markets is going to collapse.

Anonymous said...

This is an interesting line of thought:

July 27, 2007
Surprises in the Bullish GDP Report
by Tim Kane, Ph.D.

WebMemo #1572

On Wall Street, there is a widening gulf between bulls and bears, and today's GDP report has surprises for both sides. On its face, the overall real growth rate of 3.4 percent in the second quarter of 2007 was higher than expected and higher than the average of 3.2 percent over recent decades. Yet the report cannot dispel the genuine threats to the economy, notably the continuing weakness in the housing and specifically subprime mortgage sector; oil prices nearing $80 a barrel; and the likelihood of Congress passing protectionist legislation later this year. Congress must reject such action for strong economic growth to continue for the rest of the year.

Behind the Numbers
The number one concern of market watchers is that the American consumer is losing steam. The cliché is that consumption makes up two-thirds of GDP, and so any sluggishness in consumer buying power (higher interest rates, lower home prices, and, therefore, weaker equity credit lines) will curtail spending. That was the dominant story when GDP growth all but flatlined in the first quarter of 2007. The consumption cliché played out again this morning, which is to be expected with the annualized growth rate dropping from a 3.7 percent annualized growth rate last quarter to just 1.3 percent. Yet the other shoe did not drop, because overall GDP surged at its fastest rate in a year.

More surprisingly, the trade balance has turned around; net exports actually added to GDP growth rather than taking away from it (which is all international trade does, according to many in Congress). According to the Commerce Department's press release:

Real exports of goods and services increased 6.4 percent in the second quarter, compared with an increase of 1.1 percent in the first. Real imports of goods and services decreased 2.6 percent, in contrast to an increase of 3.9 percent. (italics added)

When examining the reasons for GDP growth, the report shows that roughly one-fourth of the second quarter's growth is due to consumption (0.9 of the 3.4 percent). A similar percentage is attributed to rising government expenditures, while half a percentage point comes from gross private investment. The surge in net exports is the largest slice, accounting for 1.2 of the 3.4 percent GDP growth.

Today's report marks the first time since 1991 (65 quarterly reports ago) when the contribution from net exports exceeded consumption. This fact is especially significant when one observes that net exports, like profits, frequently go into negative territory, unlike consumption which is almost always growing to some degree. Some will argue that the declining dollar is helping to restore the trade balance, but investment flows are a much larger influence on exchange rates. Furthermore, it is investment policy where the U.S. may face the most significant downside risk.

Conclusion: Protectionist Agenda Threatens Economy
Congress has all but shut down the trade agenda in recent months and is prepared to pass a dramatic new law to "fix" currency misalignment—a euphemistic approach to raising tariffs on trade with China. Likewise, congressional efforts to "fix" inequality have focused on raising taxes, notably on capital formation. The rhetoric of fighting inequality plays well politically, but if anti-capital legislation moves ahead, the main casualties will be American jobs and wages. Investors will not wait for the bills to become law and will preemptively start pulling out of U.S. equities and bonds as soon as the bills move through committee.

The debate between bulls and bears will continue for at least one more quarter. It will likely be Congress that decides the winner three months from now.

Tim Kane, Ph.D., is Director of the Center for International Trade and Economics at The Heritage Foundation.

Anonymous said...

And if you missed the President on Your World with Neil Cavuto you can see it here.

WolfPack said...

TSJ - Subprime does mean high risk high interest loans.

Wulfgar- Iraq??? Smooth post hijack.

GeeGuy said...

Wulfgar, you're right. I'm not an econo-geek. That's why I am discussing this on a blog rather than acting as Senior Fellow at a Standford University like...oh, I don't know...Thomas Sowell.

But I digress. I must admit that I am not entirely sure of your point. You seem to be saying that the side issue I raised, China's possession of huge amounts of our currency, is the fault of the Iraq war and the borrowing utilized to finance it. You also seem to be saying that Sowell's point is wrong too, in that the subprime mortgage disaster is the fault of the Iraq war and the borrowing utilized to finance it.

While I took quite a bit of undergrad economics back in my day, international economics was certainly no specialty of mine. Thus, I freely admit that what I offer are barely educated guesses.

You blame the Iraq war for the fact that we owe China lots of dollars. I think, to a point, that is a fair statement. You point out that we're using 2 billion dollars a week, some of which is borrowed and some of which might well be borrowed from China.

On the other hand, in 2005 we had a 200 billion dollar a year trade imbalance with China. If you want to discuss why China has an awful lot of our currency, I would suggest that this imbalance might well be at least as large a factor as the war in Iraq.

You then state: "It's very easy to pretend that this has nothing to do with the mortgage bubble, but seriously, come on. Sowell is completely full of it, here. He's skirting the idea of real property value reflecting the debt load, while claiming that the higher debt load of development is artificially inflating value? It's the dirty damned hippies and there liberal ideas of regulation and taxation? Does that even make sense?"

The last thing you said before that was "China's proposed sell of the dollar is to accomplish one thing: to remind us that as long as we are hemoraghing money, we need them as much if not more than they need us." So I think you mean that I might think that "China's proposed sell of the dollar" has nothing to do with the mortgage bubble.

I don't know if I do think that. You think that China's acquisition of dollars plays a role, apparently along with the Iraq war, in creating the subprime mortgage fiasco. I'm not sure I follow this one.

You apparently believe that people's high debt load contributes as much to high real estate values at least as much as high real estate values contribute to high debt loads, right? I don't follow this one either.

His ideas about limiting the access to realty for construction of homes as a cause of higher prices for those homes actually do make sense to me. This is something I did learn in early Economics. If there is a high demand for something and you artificially limit supply, price goes up. Why do you disagree with that?

You're not saying, are you, that the Chinese hold all the subprime debt? I'm not sure of your claimed relationship of our real estate markets to the debt held by the Chinese. I am also not sure of your claimed relationship between the debt held by the Chinese and their glut of US Dollars.

But I do understand that you think it is all the fault of the Iraq war. Help me out here.

Wulfgar said...

wolfpack, I'm not attempting a 'thread hijack' at all. GeeGuy just brought up the 800# Gorilla and then refused to deal with it. I'm a bit annoyed by that fact.

GeeGuy, I don't have the time to parse your critique of my toss-off comment very thoroughly at all. But I think you got the gist of it. People are ready to go for sub-prime deals when they are in debt and still being told to follow the American dream (didn't Dumbya tell us to shop?) Opportunity, method and motive. It's a crime. As with the large scale so goes the small scale. The country goes deeply into debt to pay for what we can't afford, and we lower the means to generate funds? Sowell would have us lower them further. That makes no damned sense at all. When supply and demand are artificially manipulated, then yes, throw the rules of Econ 101 out the window. The government has orchestrated the illusion that we don't have a high debt load. And yet we do. People react to the illusion by buying even more (homes they can't afford except at sub-prime rates). All of this can work, and work well, until someone throws a monkey wrench into the illusion. Money markets, inflated by the seeming unending flow of cash from federal contracts and administration lies are waking up to the illusion that we aren't growing cash on trees (the Chinese are growing it on us). Real earnings haven't increased for the vast majority of us,and yet the lenders look to that as a revenue current for money speculation? Is it really that mysterious that the fear of sub-prime (deficit) lending coincides with the Chinese threat to sell off our money and devalue the dollar? If the lenders can't make profit, they are 'bankrupt' (whioch to them means that they can't make money. To the rest of us, it means we're out of money or the resource to get it. Let's not confuse the two). The people they lied to about the great American ideal are just screwed. And Sowell argues that the egg laid the chicken. The "creative financing" was driven by the borrow economy, nothing more. Without it, we'd not have ever higher home prices.

You're right: demand creates the price. And in this case, the demand was for higher profits based on a lie that we had a strong revenue stream. No. We have a strong stream of credit, and it's about tapped. Now, everyone wants their take, before it collapses. I don't blame them; I do to. But the rich will remain protected. They bet on gullibility (a sucker's wager). The rest of us ... won't fare so well. (For the record, I have a standard mortgage, thank you very much.)

Anonymous said...

Wulfgar,

You are wrong to imply President Bush encouraged those in debt to go further into debt by taking on high risk mortgages. You could imply some lenders are predatory and did not do their clients any favors and you could be right. But you are really wrong to blame President Bush.

You are right that National debt is not good. But that has nothing to do with people who foolishly go into ridiculous levels of debt.

Speaking as one who bought a house recently, I can tell you the level of National Debt and the trade situation of China had absolutely nothing to do with that decision.

Your arguments are fallacious. (Real earnings haven't gone up but they haven't gone down either.) The bottom line is some people are greedy. Since water seeks its own level many foolish and greedy people bought into a scheme instead of wisely living within their means.

Oh, by the way, speaking of opportunity, method and motive, it's a crime for congress to continue to expand government programs. When will bureaucrats wake up to their lies and illusions? Why do they continue to live out of the pockets of taxpayers?

You are right if you are saying living within ones means used to be an American Value.

Nothing Personal

Anonymous said...

Giving way to situational ethics is an ideology that suggests we ought not label unethical behavior.

The reality is moral conduct is tied to personal ethics. When teachers, parents, or any of us abandon commitment to values necessary to build character then honesty and integrity is easily replaced by moral relativsim.

No matter how innocently materialsim works it way into an individuals heart, when moral relativism is the accepted standard, then the law will not be enough to curb fraud.