Monday, June 27, 2011

Dr. Housing Bubble Talks Minsky


We went from normal finance in housing (that is paying for the mortgage with current income), to speculative finance (where paying for the mortgage was based on cheap financing tools and projected incomes), to Ponzi financing where current income was unable to pay for even the servicing of debt.

This is Hyman Minsky's financial cycle.

The Ponzi financing era is over yet banks want to pretend that it will come back soon. For this reason we have an enormous pipeline of shadow inventory properties....
Housing in the U.S. has reached a debt spiral. No longer can people use Ponzi financing to service their debts....
The only factor I see causing home values to rise is higher household incomes. Do we see that? Here in California the underemployment rate is close to 23 percent....
Both parties currently stand to protect the wealthy financial class. Yet Americans are largely catching on to this fine tuned orchestra of financial swindling. This is why the “housing bailouts” have done very little in actually boosting home prices. They have boosted banking profits however....
The only answer is to clear the inventory and move on without protecting the “too big to fail” and their scare tactics....
The fear of course is of doom but ironically flooding the market with cheaper homes will actually bring in new buyers that actually can afford the properties with the new lower range of American incomes. This will also free up more disposable income to spend on other goods that keep the market moving. The ‘doom’ scenario is merely for the banks. We agree that banks are a necessity but more so like a utility, strictly regulated (for checks, savings, and regular retail banking). Investment banking can do what it likes but failures will fall completely on the shoulders of their banking enterprise. The commingling of these two functions, retail and investment banking has been disastrous for the typical hardworking family....
No matter how you slice it, the era of Ponzi finance is over.

14 comments:

googleheim said...

@Mario :

just to make up for the Argentina post - the Fed can set rates at whatever they want to.

There is nothing to tell - currency markets, bond holders, or anything else ... as per MMT and reality - nothing to force them where to put interest rates.

of course they listen to things and set them in some astute way but they have complete freedom.

googleheim said...

@Tom :

If Ponzi fiancing is over, then there must be a good old fashioned bank run again.

What is the deal with interest rates lately ...will they rise as they release all these homes ?

Craig Austin said...

Hey MMT community. I’ve spent some time trying to reframe MMT into laymen terms. I would appreciate any and all feedback. www.DollarMonopoly.com

Tom Hickey said...

Goog, I think that the big banks are in trouble. They are holding this paper hoping it will revalue. The Fed gave reflation it's best shot and failed. It doesn't look like there is political will for another bank bailout, and fiscal policy is now contracting. Moreover, the ROW is no longer helping out as the EZ implodes, the UK is reeling from austerity, Japan is knock down by the disaster, and China is trying to deal with inflation. Stand by for the second leg down. I think that the housing bubbles in Canada and Oz are precarious too. Looks to me like 1936. I'm betting the bottom is not in yet.

Ralph Musgrave said...

“The era of Ponzi finance is over???” LOL. The human race never learns. It’ll happen all over again in ten or twenty years time.

wh10 said...

Craig- your site looks beautifully designed. This will be a great contribution to the MMT blogosphere. MMT needs marketers! If I might suggest, you should consider adding http://pragcap.com/resources/understanding-modern-monetary-system to the resources. Cullen has developed the most dumbed down, succinct primer I have seen yet.

My one critique, which is my own personal bias, is that MMT marketing should refrain, as much as possible, from attacking mainstream economics and other economic schools of thought (e.g., "intellectually bankrupt"). While I sympathize with your feelings, statements like these are hyperboles, lack academic integrity, hurt credibility, and are more likely to push the mainstream away than attract them (regardless if they are true). If MMT is the best way to think about the modern economy, then the theory will speak for itself; we don't need to play the name-game and use ad-hominem attacks.

I know, for example, Bill Mitchell clearly does not use this approach, but I disagree with him. I like MLK/Ghandi approach, if I can stretch that analogy.

googleheim said...

@ Tom :
Yes, Mosler warns against a deflation spiral on reuters. That includes paper held by banks.

@ Musgrave :
Of course, that's obvious. But carbon credits are a ponzi scheme / CDO swapperooni and it's not 10 years away - it's brewing in London right now brought to you by Shell, Exxon, Total, and all the others.

Mario said...

No matter how you slice it, the era of Ponzi finance is over.

hmmmm....that would be nice...but I am not holding my breath.

@googleheim

thanks man...I have to go back and see what I asked/said that you're responding to though. LOL Cheers

Mario said...

@craig

dude awesome stuff man!

I don't know how people can help you but maybe people could write up their description of MMT in the simplest terms they know how and send it to you via the contact me button on your website. Then you can pick and choose and put it all together. I don't know about copyright or legal stuff like that but that's an idea for ya.

Good luck and keep us posted on progress and how we can help!!

Tom Hickey said...

Ralph: “The era of Ponzi finance is over???” LOL. The human race never learns. It’ll happen all over again in ten or twenty years time.


I don't think that Dr. HB is saying it won't happen again. He is saying that this Ponzi run if finished and to forget the possibility of reflation fixing it up. Without a significant increase in personal income that is distributed among the middle class, housing prices are coming down further to adjust to the actual income, tighter credit standards, and a pile of inventory to work through based on these conditions.

Anonymous said...

Ponzi finance is alive and well, it's just moved on from housing to other parts of the economy. Ever hear of LinkedIn, Zynga, GroupOn? Bigger ponzi scheme developing now than the first Internet ponzi scheme.

Matt Franko said...

Anon,
I dont know if those are Ponzi schemes, I look at them as your basic stock rip-offs...

Craig Austin said...

@wh10 Thanks for the feedback. I completely agree with you about toning down the rhetoric. I've noticed as i continue to refine things that the rhetoric dissipates. I still haven't found my writing voice or whatever you want to call it. I'm not a writer by any stretch of the imagination. My gosh you should of seen my first draft - I was brutal. Thanks for the links. I'll check them out.

Craig Austin said...

@mario

good idea. your right i need to figure out a way for people to help. any and all input is welcome. i couldn't do any of this stuff without being able to listen in to all your conversations. i've noticed everybody is trying to explain MMT in their own way so i figured i give it a shot.