Slow Crash — Andrew Cockburn in conversation with Michael Hudson

Two years before the 2008 Wall Street crash that toppled the global economy into deep recession, Harper’s Magazine published a dark prophecy of what was to come. In “The New Road to Serfdom,” economist Michael Hudson laid out how millions of Americans had taken on huge debts to buy houses on the presumption that they could later sell them at a profit. “Most everyone involved in the real estate bubble so far has made at least a few dollars,” he wrote. “But that is about to change. The bubble will burst, and when it does the people who thought they would be living the easy life of a landlord will soon find out that what they really signed up for is the hard servitude of debt serfdom.” As the twenty million people who lost their homes discovered, Hudson got it entirely right.
Today, unemployment is at record lows, and the stock market is at record highs. Allegedly, we have recovered from the disaster. I talked to Hudson, Distinguished Professor of Economics at the University of Missouri-Kansas City and the author, most recently, of J is For Junk Economics, A Guide to Reality in an Age of Deception, about his pre-crash prediction, and what he now sees in our future.

Browsings —Then Harper's Blog
Slow Crash
Andrew Cockburn in conversation with Michael Hudson
Crossposted at Micheal Hudson

Also

Cancel Odious Greek Debts (video)

Brad DeLong — Misdiagnosis of 2008 and the Fed

Alan Greenspan revisited.

WCEG — The Equitablog
Misdiagnosis of 2008 and the Fed: Inflation Targeting Was Not the Problem. An Unwillingness to Vaporize Asset Values Was Not the Problem…
Brad DeLong

Winterspeak — The Housing Bubble involved banks

Where Amir Sufi and Atif Mian go wrong in their explanation of the different economic consequences of the dot-com bubble and the housing bubble,

In general, economics treats money as an "illusion" in that it facilitates the trade and exchange of real goods and services, but fundamentally does not impact or distort that exchange (at least to no great degree). A rose is a rose is a rose, and therefore a good is a good is a good regardless of whether it's prices in dollars or shekels. Therefore, money in general and banks in particular do not play a central role in macro monetary models, which instead focus on things like time preference, consumer expectations, etc. 

In reality, money, or more particularly credit, plays a central role in the economy because of how bank lending works. When banks lend, they lever up their balance sheet, and therefore create money out of "thin air", constrained only by capital requirements on the supply side, and the number of qualified borrowers on the demand side.…

These two $6T are not comparable. In the dot-com bubble, the loss wiped out venture accounts and household wealth in brokerage accounts, but neither was enabling additional lending (and therefore money supply). In the housing bust, $6T of bank capital (which collateralized the loans) was propping up an additional $120T or so (at a 5% capital requirements ratio) of money supply, so the impact on the economy was over an order of magnitude greater.…

Winterspeak.com
The Housing Bubble involved banks
Winterspeak

Bill McBride — Tenth Anniversary of Greenspan's "Froth" Testimony

 Lest we forget.

For fun ... tomorrow is the tenth anniversary of then Fed Chairman Alan Greenspan's "Froth" testimony on June 9, 2005:

Calculated Risk
Tenth Anniversary of Greenspan's "Froth" TestimonyBill McBride

Bill Black — Krugman Is Half Right

The most logical explanation for such a bubble is a rational explanation – widespread “accounting control fraud” by lenders and loan purchasers. Orthodox economists make a standard assumption of rational behavior, including by criminals. But orthodox economists have a primitive tribal taboo against the “f” word – fraud. When it comes to bubbles, therefore, orthodox economists overwhelmingly simply assume mass irrationality. They would rather drop their most cherished assumptions about economic behavior than admit the reality that there are elite white-collar criminals and that their crimes can become epidemic when the incentive structures are so perverse that they produce a criminogenic environment.

This problem of dogma is compounded by the problem that the orthodox responses to a bubble are clumsy, slow, and awful in terms of their “collateral damage” to the Nation, particularly those most in need. Basically, the orthodox response is to throw the economy in a recession – hoping to kill off the bubble and reduce the severity of the eventual recession it would have caused when it collapsed on its own. Worse, the orthodox policy recommendation to avoid future bubbles is permanent monetary austerity and higher interest rates to deter bubbles – producing rolling recessions and weak growth. Indeed, orthodox economists are so dubious of their ability to correctly identify a bubble and so cognizant of the grave harms and risks posed by trying to use orthodox responses to bubbles that their standard recommendation is to do nothing even if they suspect that a bubble is developing.

The vastly better response to a bubble like the housing bubble is unknown to orthodox economists and is never taught to students. The answer is to (1) put the fraudulent lenders and loan purchasers out of business by vigorous supervision, enforcement, and prosecution and (2) to limit their growth by effective regulation and bans on loan products most conducive to fraud. The regulators and prosecutors must break the “Gresham’s” dynamic that can make fraud epidemic.

New Economic Perspectives

Krugman Is Half Right

William K. Black | Associate Professor of Economics and Law, UMKC

Steve Randy Waldman — Some thoughts on QE

I really dislike QE because I have theories about how it actually does work. I think the main channel through which QE has effects is via asset prices. To the degree that QE is taken as a signal of central banks “ease”, it communicates information about the course of future interest rates (especially when paired with “forward guidance”). Prolonging expectations of near-zero short rates reduces the discount rate and increases the value of longer duration assets. This “discount rate” effect is augmented by a portfolio balance effect, where private sector agents reluctant (perhaps by institutional mandate) to hold much cash bid up the prices of the assets they prefer to hold (often equities and riskier debt). Finally, there is a momentum effect. To the degree that QE succeeds at supporting and increasing asset prices, it creates a history that gets incorporated into future behavior. Hyperrationally, modern-portfolio-theory estimates of optimal asset-class weights come to reflect the good experience. Humanly, momentum assets quickly become conventional to hold, andmanagers who fail to bow to that lose prestige, clients, even careers. So QE is good for asset prices, particularly financial assets and houses, and rising asset prices can be stimulative of the economy via “wealth effects”. As assetholders get richer on paper, they spend more money, contributing to aggregate demand. As debtors become less underwater, they become less thrifty and prone to deleveraging. Financial asset prices are also the inverse of long-term interest rates, so high asset prices can contribute to demand by reducing “hurdle rates” for borrowing and investing. Lower long term interest rates also reduce interest costs to existing borrowers (who refinance) or people who would have borrowed anyway, enabling them spend on other things rather than make payments to people who mostly save their marginal dollar. Whether the channel is wealth effects, cheaper funds for new investment or consumption, or cost relief to existing debtors, QE only works if it makes asset prices rise, and it is only conducted while it makes those prices rise in real and not just nominal terms.

I think that the asset prices the Fed was targeting was residential housing. A price correction that wiped out the gains from the bubble would have left many bank insolvent and greatly exacerbated the crisis. So the purpose of QE was to prevent liquidation. This had the collateral effect of driving the price of risky assets such as equities higher than they would have been otherwise, adding to the wealth effect. However, I think that supporting housing price was the real aim of the program rather than a broader wealth effect, which the Fed did not mind since it would likely add to spending as a counter to deleveraging.

Interfluidity
Some thoughts on QE
Steve Randy Waldman

Marshall Auerback — Home Construction Crashing In China

Looks like the Chinese RE bubble may be popping. If that's the case, will the Chinese government deal with the consequences of a financial crisis more effectively than the US in preventing contagion that takes down the real economy with it?

Macrobits by Marshall Auerback
Home Construction Crashing In China
Marshall Auerback

Zero Hedge — Furious Chinese Demand Money Back As Housing Bubble Pops

The Chinese liked markets on the way up. On the way down, not so much.


Zero Hedge
Furious Chinese Demand Money Back As Housing Bubble Pops
Submitted by Tyler Durden

Bill McBride — Housing bubble: The "Wealth" is Gone, but the Debt Remains

As Norris noted, the bubble wealth is gone, but the debt remains (still high on a historical basis). This was especially hard on younger households since they bought during the housing bubble.

Calculated Risk
Housing bubble: The "Wealth" is Gone, but the Debt Remains
Bill McBride

Dr.Housing Bubble — All Cash Buying Spree

All cash buying hits a record in 2012: Parts of Florida see investors buying up 70 percent of all home sales. California all cash buying hit a record in 2012 at over 32 percent of sales.
Dr.Housing Bubble

Dr Housing Bubble — The echo housing bubble across the United States – Rising home prices in the face of stagnant household incomes. How the Fed is manipulating the monthly payment to keep home prices inflated.

The Case Shiller data is showing a steady increase in home prices across the United States. The headline figures are clear but rarely make the connection that much of this gain is coming on the back of unprecedented Federal Reserveintervention. Data is clear that household income is not making any significant gains. These gains are coming largely from added leverage produced by lower mortgage rates. We’ll go into the details on this but you will see how a tiny drop in mortgage rates can supercharge home prices especially in a market where inventory is tightly managed as the year comes to a close. The Case Shiller is a better measure of home prices because it looks at repeat home sales. Yet even here we are seeing signs of bubble like activity in a handful of markets. An echo housing bubble is a possibility in many markets.

Dr Housing Bubble
The echo housing bubble across the United States – Rising home prices in the face of stagnant household incomes. How the Fed is manipulating the monthly payment to keep home prices inflated.

Dr. Housing Bubble — Welcome back California home flippers!

It was only a matter of time for flippers to engulf the market once again. House flippers never really left but the magnitude hit a temporary lull during the housing crisis. Apparently all is well in SoCal once again and bubble 2.0 is back in full fashion. It is only a matter of time before the cable shows shift from the insane Canadian housing bubble and start filming our local neighbors taking a plunge into the new bubble market. Flipping at these levels can only exist in a partial mania like atmosphere. The constrained inventory and rising prices is pulling many people off the sidelines and I have heard this said a few times already, “I’m not missing the housing market this time!” Maybe it is the California sunshine that gets into our heads but we appear to have forgotten the housing bubble that just hit us a few minutes ago. Flippers are back in fashion and many hipster neighborhoods in SoCal and the Bay Area are bringing along a new party.

Dr. Housing Bubble
Welcome back California home flippers! Home flipping is back in fashion. 852 square foot home in hipster LA neighborhood bought for $211,000 in 2010 and flipped for more than double the price this year.

Here we go again. Chairman Bernanke will be pleased.

CR — Zillow's forecast for Case-Shiller House Price index in February

The composite 10 and 20 indexes declined 3.9% and 3.8% respectively in January, after declining 4.1% in December. Zillow is forecasting a smaller year-over-year decline in February.

Read it at Calculated Risk
Zillow's forecast for Case-Shiller House Price index in February

by Bill McBride

Housing recovery is key to economic recovery. Looks like the bottom may not be in yet, and typically there is V-shaped recovery in housing, especially in a recession due to financial instability and a long financial cycle bottoming. This will likely be a multi-year recovery process once the bottom is in, and another housing boom is likely at least a decade off after the market bottoms and begins to clear. There are still a lot of foreclosures in the pipeline, and many homeowners underwater. This creates a huge drag on the economy, which is exacerbated by a misguided political preference for austerity. Not an encouraging picture.

Matt Stoller — Fed Knew About Housing Bubble in 2004

Read it at New Deal 2.0
The Federal Reserve Knew About the Housing Bubble in 2004
by Matt Stoller

Dr. Housing Bubble — Canada bubble ripe to pop?

The other CA bubble – Canadian housing bubble ripe for popping. Vancouver real estate increased by 142 percent from 2002 to 2011. Average detached home in Vancouver costs roughly $1 million while the median household makes $67,000 per year.
by drhousingbubble

In the last few years I’ve noticed that many of the cable finance and housing shows highlight families in Canada.  Shows that talk about debt or home buyers are usually focused on families in Canada which is rather odd given that we are here in Southern California.  Yet the funny thing about these shows is that they rarely identify that they are in Canada although I recognize locations like Vancouver.  If one simply tuned into the show it would appear that a bubble was still going on in the states.  This is probably the point.  After all, the cable shows focused on flipping houses or making quick bucks on real estate started going off the air yet another bubble was still going on up north.  Obviously these shows had an audience otherwise they would not be on the air.  Now the focus is on the Canadian bubble and American audiences can swim in the nostalgic dreams of the glory days of domestic housing.  Yet the shows rarely mention their location as if English-speaking families and cookie-cutter condos and homes are so easily interchangeable that they will fool an audience.  Yet one thing the shows fail to acknowledge is that the Canadian housing bubble is even more pronounced than that in the United States.

Home sales and interest rates...you make the call

There's a widely held view that the Fed, under Alan Greenspan, created the housing bubble thanks to loads of "cheap money." The evidence seems to say this claim is rather dubious. At best it may show that home sales and prices were influenced by lower rates, but the correlation is spurious.

Rates have basically been falling for 30 years while home sales have been rising, falling, rising, falling, rising again and then really falling.