Wednesday, May 16, 2018

Brian Romanchuk — Canadian Housing And Perpetual Motion

Why the Canadian "housing bubble" hasn't burst.

Quick summary: it's a policy choice, but this comes with some consequences, like pricing some cohorts like unendowed youth out of the market, and also some uncertainty, like what happens if there is a recession and debt cannot be serviced. 

Moreover, Brian explains why this cannot be modeled. While it is foreseeable as a contingency, the timing is not forecastable. Although this is based on a policy choice and determined by Canadian law and institutional arrangement, it is also generally instructive about how socio-economic systems work regarding finance and government backstops.

Moral: A lot of what is interesting in economics and finance is based on contingencies and therefore not amenable to forecastable modeling. This is the case in the Canadian housing market because is based on policy choices that can change, some of which may not be sustainable politically owing to socio-economic effects. 

Significant social cohorts can't be screwed forever. and it is unknowable when and how they will react politically. On the other hand, trends can persist for a longer time than "seems reasonable" for various reasons that are not quantifiable empirically. Steve Keen got caught out in making a bet on the collapse of the Australian "housing bubble" that still hasn't crashed.

So all that can be said is to agree with (Herbert) Stein' s Law:  "If something cannot go on forever, it will stop.

But the timing cannot be pinned down in an empirically based model. Non-empirical model are just guessing, and good guesses are not necessarily repeatable. Thinking they are is an example of recency bias, which is right up there in economics and finance, along with confirmation bias and anchor bias.

So Stein recommended letting a process run its course, since it would be self-correcting by signaling it own ending. But this has socio-economic consequences that depend on who gets hurt, how many, and how much political influence they wield. 

Bond Economics 


Bob Roddis said...

To solve the problem that doesn't actually exist and is itself the problem, Keynesianism PURPOSEFULLY create unsustainable asset bubbles and prices young people out of the housing market. That also would tend to induce sprawl and the destruction of open natural land.

And, it causes the boom/bust cycle.

What an amazing legacy. Be proud.

Brian Romanchuk said...

Speaking as a pinko Canadian Keynesian, it wasn’t Keynesians who set up the Canadian housing. Free market loving neoliberals who imported American libertarian ideas loosened lending standards. Us Keynesians had set lending standards extremely tightly, making housing bubbles very difficult to inflate. (There was a condo bubble in the early 1990s, but I believe that it relied bypassing mortgage regulations, which shocks us pinko Keynesians.)

Bob Roddis said...

Funny Money fiat loans have nothing to do with libertarianism, the free market or laissez-faire. MMT starts with he emphatic statement that our modern monetary system is completely different than the old historical system. Blaming the free market for the failures of the Funny Money Fiat system is pathetic.