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Just thought I'd get that out there after watching Ian Bremmer on Charlie Rose (long sweep of history and all that). Clearly, I'm not the first, but still...
Thinking about subscribing to The Economist again for a little better perspective on things...
Don't know what might appear here in the days, weeks, or months ahead, but figured I'd see if the old blog still works. It seems to...
Read more...Please update your bookmarks, RSS readers, or any other means that you might have used to read what is written here because The Mess That Greenspan Made has moved to:
It's been exactly five years since publication began at this blog and, if all goes well, this will be the second-to-last post at this location since a new and better self-hosted blog has been taking shape over the last month and, quite frankly, your humble scribe has long since grown tired of double-posting everything.
Rest assured that the name will remain the same, however, the URL is shorter and it is a WordPress blog instead of a Blogger blog. After a few rough patches early on, Blogger has been quite good - very reliable and easy to use - but, after working with WordPress in recent weeks, it has become clear why everyone likes it so much. Anyway, here it is:
The new URL is: http://www.timiacono.com and the next (and last) post that you'll see here at this blog will have additional information about RSS, Twitter, and the like, though most of you can probably figure that stuff out on your own.
As for the five year anniversary, the previous item about our old rental house brought back some memories of working a full-time software job, writing the blog, and launching the investment website back in Southern California.
I must say, I'm happy to be out of there, though, I do sometimes miss the weather.
As has become the custom around here on this day, looking back to March 26th, 2005 we find this very first post on a Stephen Roach commentary, one that still rings true today.An appropriate first post - Stephen Roach hits another home run with his latest missive The Test. The last paragraph serves as an excellent premise for this blog:
Recall that, at the time, short-term rates had just begun to rise from 1.0 percent in mid-2004 and the housing bubble was entering new and more dangerous phases about every six months. This five-year old commentary seems all the more strange as many people are already talking about short-term rates beginning to rise once again sometime in the next year."It didn’t have to be this way. The big mistake, in my view, came when the Fed condoned the equity bubble in the late 1990s. It has been playing post-bubble defense ever since, fostering an unusually low real interest rate climate that has led to one bubble after another. And that has given rise to the real monster -- the asset-dependent American consumer and a co-dependent global economy that can’t live without excess US consumption. The real test was always the exit strategy."
Yes, it's easy on the way up. Ever increasing liquidity to meet every emerging problem and everyone gets rich - not rich in the old sense, of course, with higher real income and savings, but through higher asset prices for stocks and homes."Asset markets around the world are now quivering at just the hint of an unwinding of this house of cards. And they quiver with the real federal funds rate barely above zero. What happens to these markets and to an asset-dependent US economy should the Fed actually complete its nasty task of taking its policy rate into the restrictive zone? "
All aquiver, that's right. Paul Volker must be so proud of his successor ... about to bring down the whole house of cards with quarter point increases to the Fed Funds rate in the low single digits."I still don’t think America’s central bank is up to the task at hand. In the face of disruptive markets or growth disappointments, this Fed has repeatedly opted to err on the side of accommodation. I suspect that deep in its heart, the Federal Reserve knows what’s at stake for the US -- and for the world -- if the asset-dependent American consumer were to throw in the towel. "
This is my central belief on this issue, and the motivation for this blog - that given the choice of some economic pain and a long slow death by inflation, the Fed will opt for the latter. It will never be able to raise interest rates like Paul Volker did, in order to put this fiat currency system back on a track that is sustainable for another generation or two - instead, we will continue to swim out to the deep water and hope for the best.
Dan, feel free to comment...
In a bit of irony that is quite appropriate for today, the five-year anniversary of this blog (more on that in an hour or so), it looks like the rental home in Southern California - where we spent more than three years during the middle of the last decade as the housing bubble reached its peak and where this blog was first written - is now up for sale.
If memory serves, the owners paid $555K for it in late-2003 while it was still under construction and we moved in not long after, following the sale of our house a mile away.
That was back in the days when homebuilders could, basically, do as little as possible and people would still come with their "loan pre-approval" papers to buy real estate.
In this case, there was no landscaping provided, no window coverings, and not much of anything else, so the owners must have put about $50K into it at the start, bringing their cost basis up to around the current asking price of $599K which is about what Zillow says its worth.
You probably shouldn't feel sorry for the owners though. Not only are they very nice people but they own a ton of property in Santa Barbara and the only reason they bought this one was to do one of those tax exchange deals to reduce the tax owed on properties they sold up the coast where prices had gone parabolic.
I remember looking up houses in Santa Barbara on Realtor.com back then to see that you could get a 70-year old, 900 square foot two bedroom house - something like this - for about a million dollars. They're about half price now, which still seems way too high.
Well, it looks like many more billions of dollars will be spent to aid the nation's housing market in what is, in large part, an ultimately futile attempt to keep home prices above where the market would like to take them.
Freakishly low interest rates and $8,000 or more in tax credits for homebuyers apparently hasn't done the trick, so the White House today is launching a new program to help homeowners who can't afford to stay in their house by lowering payments through government subsidized financing and, in some cases, reducing mortgage balances.
Not long ago, a commenter here noted the following:
Unfortunately, that doesn't appear to be one of the options now being considered...I feel that another leg down is inevitable. I also think the government will try to intervene which may keep us in limbo for longer than necessary. The end could come and we could get back to business in a more stable, albeit lower price level, market if the government would just get out of the way. It is much harder to sell or rent in a market that is still trending downward or where there is a lot of lingering doubt. If we could reach a bottom and have prices stabilize on their own for a few months without any government action, it would become obvious to all that the worst truly is behind us and then all the pent up buying could come back. But as long as the market is being propped up superficially, the skeptics will continue to wait on the sidelines making recovery impossible. We need to bottom and start over so we can develop business models that will work. With the government involved and more bad news waiting in the wings, it is impossible to make long-term plans. The economy will just have to wait until the government gets out of the way, IMHO.
Barry Ritholtz also had some thoughts on this, arguing we need more foreclosures, not less:Between them, the federal government and central bank can lower mortgage rates, modify mortgages, use their power to get private lenders to modify mortgages, and create incentives to move inventory, such as the first-time homebuyer’s tax credit.
What they can’t do is manufacture enough artificial demand for an asset that was artificially inflated to begin with. Prices will have to fall, which is how supply is allocated in a market economy. (An occasional reminder is in order given the current spend-money-to-save-money mindset.)
...
I’m all for charity and doing what makes sense. If a lender decides it’s in his self-interest to reduce the loan balance on underwater or delinquent mortgages -- if modification is cheaper than foreclosure -- that’s between management and shareholders.
With government programs, those who lived within their means, who bought a home they could afford, are being asked to pay for the mistakes of others. Bankers and insurance companies weren’t the only ones who were greedy.
Yes folks, this is how you get a "lost decade", by again and again trying to: a) prop up assets that desperately want to return to levels supported by market fundamentals; b) keep insolvent banks solvent; and c) sustaining the misguided belief that a 70 percent homeownership rate is or ever was a desirable goal.I have been dismayed about the latest actions out of Washington and Wall Street. The banks are now pushing all manner of mortgage mods and foreclosure abatements. These are little more than “extend & pretend” measures, designed to put off the day of reckoning. They are not only ineffective, they are counter-productive. They reward the reckless and punish the responsible, and create a moral hazard. Worse yet, they penalize middle America for the sake of giant Wall Street banks.
It may sound counter-intuitive, but the best thing for the nation (but not necessarily the banks) is to allow the foreclosure process to proceed unimpeded. We need more, not less foreclosures.
...
We should allow the real estate market to experience a healthy price normalization process. Even though home prices have fallen dramatically, they have yet to reach their historical means relative to income or the cost of renting. This is to say nothing of the usual careening past the median towards under-valuation that typically follows a massive mis-allocation of capital.
As compared to activity last year at this time it wasn't much, but recent additions to the gold holdings at the SPDR Gold Shares ETF (NYSE:GLD) are certainly a move in the right direction if ETF demand is to again play any sort of major role in the gold market.
The "tonnes in the trust" rose by more than nine tonnes in just the last few days (circled in red) to 1125 tonnes, within striking distance of the all-time high set early last June at 1135 tonnes and then nearly equaled in late-December. The relative lack of ETF demand since the surge in early-2009 has been cause for concern and a new all-time high would certainly go a long way in allaying fears that investors have lost interest in this sector.
EU Steers Greece to IMF, Pledges Loans as Last Resort - Bloomberg
Obama To Order Lenders To Cut mortgage Payments For Unemployed - HuffPo
JPMorgan, Lehman, UBS Named as Conspirators in Muni Bid-Rigging - Bloomberg
Whistleblower Speaks Out On Silver Market Manipulation, Reports to CFTC - Jesse's Cafe
Government Authorities are Looking Out for Themselves, As Should Everyone - Aucontrarian
Lower Home Prices Can Fix What Government Can’t - Baum, Bloomberg
Economics focus: Tricky Dick and the dollar - Economist
The US default-risk meme - Salmon, Reuters
Left sitting in my draft folder for a few days are these thoughts from Peter Schiff about the former Fed chairman following his 48-page defense of monetary policy last week. Now seemed like a good time to hoist it up to the main page.
Toward the end of this New York Times story about the Social Security "trust fund" experiencing net withdrawals this year for the first time are a few words from former Fed chairman Alan Greenspan about the system that he helped "fix" back in the early 1980s.
Although Social Security is often said to have a “trust fund,” the term really serves as an accounting device, to track the pay-as-you-go program’s revenue and outlays over time. Its so-called balance is, in fact, a history of its vast cash flows: the sum of all of its revenue in the past, minus all of its outlays. The balance is currently about $2.5 trillion because after the early 1980s the program had surplus revenue, year after year.Recall that payroll taxes were raised back in 1983 and the Federal Government has been spending the Social Security surplus every year since that time, in the process making the government's annual budget look a lot better than it actually is. This no doubt helped to make the former Fed chairman quite popular with elected officials, that is, until the whole financial system melted down a couple years ago.
...Mr. Greenspan recalled in an interview that the sour economy of the late 1970s had taken the program close to insolvency when the commission he led set to work in 1982. It had no contingency reserve then, and the group had to work quickly. He said there were only three choices: raise taxes, lower benefits or bail out the program by tapping general revenue.
The easiest choice, politically, would have been “solving the problem with the stroke of a pen, by printing the money,” Mr. Greenspan said. But one member of the commission, Claude Pepper, then a House representative, blocked that approach because he feared it would undermine Social Security, changing it from a respected, self-sustaining old-age program into welfare.
Stan Humphries, the chief economist at Zillow.com talked to Aaron Task of Tech Ticker and inadvertently ended up generating the somewhat sensational headline that now accompanies the related story at Yahoo! Finance, a headline that has been embellished a bit above as detailed below. (Hopefully it's not too late already, but that Tech Ticker story begins playing the video automatically, something that I, for one, find quite annoying).
With the likely exception of real estate agents who are now working with hesitant buyers, no one really disputes the fact that there are a ton of houses that are likely to come on to the market over the next year or two both from distressed sales and from sellers who think the market has recovered enough that they'll get a decent price.
More evidence of how wacky things have become in today's real estate market comes via the overlap of the expiring Federal homebuyer tax credit of $8,000 with local versions of the same, in particular the one in California where another $10,000 in government money is being offered as detailed in this item at the WSJ real estate blog.
The $200 million program, split between first-time buyers of existing homes and new units, should keep the Golden State’s sales moving along post spring-selling season.Since there is a dollar limit rather than a time limit for the California tax credits, don't be surprised if the same kind of mania develops as was seen last summer for the "Cash for Clunkers" program. Dangling not just $8,000 but a whopping $18,000 in front of someone who might be sitting on the fence is sure to have an extreme mood-altering affect.But, it might not get off to a peaceful start on May 1: Get ready for a stampede early on as some buyers rush to overlap with the federal tax credit that’s dangling as much as $8,000 to buyers. (Yes, that’s up to $18,000 for buying a house.)
For the federal incentive, contracts must be inked by April 30, while closings have to happen by June 30. The California credit covers closings on existing or new homes on or after May 1, leaving a short window for double dipping.
The CFTC (Commodities Futures Trading Commission) is meeting today to discuss the trading of futures and options in metals markets and the possible use of prophylactics, but not the kind of prophylactics that you were probably thinking of as a simple search on "CFTC prophylactics" reveals this term is used frequently to describe action that the group might take to protect market participants from one thing or another.
You can watch or listen to the proceedings here and the two charts below showing the volume of gold and silver trading on exchanges around the world are from first panel that just included two CFTC officials. The second panel is now underway.
As shown above, most of the gold futures trading is done in London via the LBMA (London Bullion Market Association), the world's leading gold market for centuries.
In contrast, more than half of the silver futures trading occurs at the COMEX in New York as shown below where JP Morgan traders have a big presence.
It's possible that things could get interesting this afternoon as GATA Chairman Bill Murphy will be part of a panel discussion and, according to this BNN report from late yesterday, he may have a surprise or two in store in the form of someone who has come forward to reveal some sort of untoward market activity that might be aimed at suppressing prices.
TOP STORIES
Merkel Sets Greek Terms, Calls IMF-EU Aid Last Resort - Bloomberg
European Central Bank Blasts Merkel on Greece - Spiegel Online
US CFTC faces naysayers on metals trade limit idea - Reuters
Behind Consumer Agency Idea, a Tireless Advocate - NY Times
California’s Tax Credit: Will Home Buyers Stampede for $18,000? - WSJ
Bank of America sued for not modifying mortgages - Reuters
Brown's Bottom Is an Enormous Issue In the UK - Jesse's Cafe
Why this is a rich man's recovery - MSN
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The lone dissenter at the last two Fed meetings, Kansas City Federal Reserve President Thomas Hoenig, talks to Fox Business news about, among other things, the perils of short-term interest rates that are left "too low for too long".
One of the things that many people go through their entire lives without ever realizing is that conditions haven't always been the way they remember them to be. Due to the length of a typical lifetime and the number of those years that individuals are productive, it's reasonable to think that someone in their mid-60s could retire today and look back at the last 40 years only to conclude that what they just experienced was normal.
But, what if the last 40 years were anything but normal?
What if, in the world of finance and economics, it was all just a big bubble?
One look at the chart below from this recent Wall Street Journal story and it becomes instantly clear that stock market valuations over the last twenty years have been nowhere near normal. In fact, what were deemed "generational lows" for valuations at the peak of the financial market crisis a year ago look like nothing of the sort over the broad sweep of time.
And when you consider what happened in the natural resource sector in the 1970s and then what followed in Japan in the 1980s, it's quite easy to come to the conclusion that, since the world left those last vestiges of sound money when Nixon closed the gold window in 1971, we live in a radically different world.
While some quickly dismiss ideas like this, reminding anyone who will listen that "correlation is not causation" while citing technological advances made during this time as just cause for the changes we've seen in financial markets, breakthroughs such as railroads and electricity a hundred or more years ago likely had a bigger impact on the world than computers, communication, and medical technology more recently.
The sad possibility that so few consider is that, what has happened in the last 40 years probably has much more to do with the financial system, credit, and debt than the technological advances themselves.
A brief stroll through history might be helpful in seeing just how accustomed we've become to bubbles and, as if we don't know it already, how dangerous the financial world has become.
The Era of Disco and Inflation
Having survived World War II and emerged as the only superpower in the West, the U.S. navigated the early years of the Cold War with aplomb before embarking on Great Society spending in the 1960s and then positioning themselves for defeat in Vietnam only to go stumbling into the 1970s with, perhaps, its best years already behind it.
The decisions made in the 1960s set off the first series of financial market bubbles during the previous secular bull market in the natural resource sector, an incompetent Arthur Burns at the helm of the Federal Reserve bending to political will and feeding an extended bout of inflation never before seen in the U.S.
As U.S. energy demand was soaring and U.S. oil fields were peaking, crises in the Middle East caused multiple oil price spikes and, by the end of the decade, a full-blown commodities bubble was in process.
The oil price moved from an inflation-adjusted $15 or $20 a barrel to $100 a barrel or more late in the decade and the gold price rose from its former $35 peg to a peak of over $800 just after the decade came to a close.
This was the first of many recent financial market bubbles in a new era of pure fiat money all around the world where rising and collapsing asset prices became an increasingly dominant theme, interrupted only briefly by the early-1980s "tough love" by a new, stern Fed chairman.
Not the Reagan Revolution You Thought
Many think that the main force behind the "Reagan Revolution" in the early-1980s was the embrace of free markets and a tilt toward conservatism, but, this only tells part of the story. Aided by the advancement of computer technology, credit markets in the U.S. and in other parts of world expanded by leaps and bounds and both public and private debt began to grow more quickly, bolstering economic growth.
Fed chairman Paul Volcker induced two debilitating recessions during Reagan's first few years, breaking the back of wage-driven inflation that came before the waves of cheap foreign imports and the removal of actual costs of homeownership (replaced with the nefarious "owners' equivalent rent") in the consumer price index that would forever distort the government's measure of inflation.
Bond markets saw their first large-scale excesses and the stage was set for a two-decade long bull market in U.S. stocks. Meanwhile, a housing "warm-up" bubble inflated in some parts of the country, aided by a Savings and Loan crisis that now looks almost quaint in comparison to the more recent banking crisis.
But, the real action in the 1980s was in Japan where both real estate and stock prices rose to heights that, even in comparison to recent events, are still quite impressive. As always seems to be the case, too few questions were asked during the inflation of the bubble and too few lessons were learned after it burst.
By the end of the decade, people everywhere were already becoming conditioned to expect financial market bubbles - periods of rapid price increases and heady economic growth that would only accelerate in the decades ahead.
Another "New Economy" Era
Major changes in retirement planning driven by the growing use of 401k plans, ongoing advancements in personal computing, and a rapidly growing financial services industry led to the greatest expansion in stock ownership in history during the 1990s and the U.S. was primed for a major stock market bubble of its own.
Widespread use of the internet by corporations early in the decade led to a similar adoption for residential users and the great broadband infrastructure roll-out provided high speed internet access to a growing number of individuals. Meanwhile, NASDAQ stocks began to climb at a dizzying pace.
Fed chairman Alan Greenspan, who had set the tone early in his tenure through both word and deed following the 1987 U.S. stock market crash, retreated from mid-decade "irrational exuberance" warnings to embrace the "New Economy" along with its new, higher stock prices.
After being credited with "saving the world" during the 1997 Asian financial crisis, the man once referred to as "the greatest central banker ever" watched as a new century was ushered in and NASDAQ stocks soared past the 5,000 mark only to find that this bubble too would finally meet its pin.
In what would soon become a recurring nightmare, many retirement dreams were dashed as investors of all stripes reflected on what they had just seen. Though Japan had experienced much the same thing the decade before, this was the first time that the American people participated broadly in the inflation and bursting of a major asset bubble and many of them were chastened. Unfortunately, many others were emboldened.
Bursting Bubbles Everywhere
In a previous era or under different circumstances, the 2000 stock market crash might have been followed by a long period of bubble-free reflection on what had just transpired as millions of Americans looked back at how they were so caught up in such ridiculous ideas as Pets.com, but, that was not to be.
In a system of money and credit where there is virtually no limit on how much of the stuff can be created, there was a natural remedy for the economic downturn that followed the bursting of the internet bubble and the attacks that are now forever referred to as simply 9/11.
All through the 18-year bull market in stocks, the nation's housing market had been just sitting there waiting to be goosed, experiencing only short-lived, localized bouts of irrational exuberance and disappointment in such places as Houston during the U.S. oil boom and parts of California and Massachusetts later on.
Under the guiding hand of a revered Fed chairman, interest rates were slashed and a refinancing boom was kicked off only to be followed by some of the most outrageous excesses in mortgage lending the world has ever seen.
Despite signs that were obvious to many as early as 2002 and 2003, the housing bubble morphed into a broader credit bubble and the two proceeded to inflate to ever more dangerous levels as banks, hedge funds, governments, and the real estate industry joined forces to create the biggest and most dangerous bubble yet.
Beginning in 2006 and culminating with the global financial market crash in late-2008, another massive financial market bubble met its fate and, now, the world sits and waits.
Where to from Here?
No one's quite sure where we'll go from here, but an increasing number of people are beginning to wonder if this is the end of the road. That is, if the last forty years were all just one big money and credit bubble, temporarily misinterpreted as prosperity, that can produce no more bubbles except for the one that is most feared - another massive bubble in natural resources as a relatively fixed supply of goods meets up with an unlimited supply of paper money.
It's no coincidence that the almost non-stop sequence of financial bubbles over the last forty years followed the abandonment of anything resembling a system of sound money.
Contemporary economic thought posits that money is simply a "unit of account" and that there is no longer any need for it to maintain an intrinsic value of any sort. They say it's just "notations on paper" and that the world's economic and financial wizards, though set back a bit by their latest failure, have things squarely under control.
If you're anything like me, you don't believe that for a second.
In the fullness of time, the last forty years will likely be seen as an aberration - just one big bubble - as theories are abandoned and a more enlightened approach ultimately prevails.
Unfortunately, between now and then, things are likely to get worse before they get better.
The Commerce Department reports(.pdf) that new home sales reached all-time record lows last month, below the levels seen in early-2009 at the height of the financial market crisis.
Sales of new homes fell from an upwardly revised annual rate of 315,000 in January to just 308,000 in February as homebuilders continue to lose the battle they've been waging with low-priced distressed property in many parts of the country and the urgency of the original December expiration of the homebuyer tax credit has long since faded.
As in yesterday's disappointing report on existing home sales, the "Months of Supply" metric is back on an upward path and this could be the beginning of another leg down for home prices. The expiration of the extended homebuyer tax credit in the months ahead should boost sales to some degree, however, there is a good deal of uncertainty as to how big a boost will be seen, the more important question being what happens after that.
It's at times like this for situations like the one in Greece where indecision seems to be more harmful than making any decision at all. Bail them out, kick them out, just do something. In this report, Reuters has the latest developments in the ongoing Greek tragedy:
The Germans continue to dig in their heels despite continued reports about being open to compromise. Elections that are quickly approaching in May and an adamant public that sees no reason to aid the spendthrift Greeks after they lied about their finances for years is no doubt making the problems even more difficult than they would otherwise be.European Commission President Jose Manuel Barroso made a new call on Wednesday for countries using the euro to create a safety net to help Greece if it needs financial assistance.
Barroso told the European Parliament that although the Greek debt situation was not on the formal agenda of a meeting of European Union leaders on Thursday and Friday, he could not imagine the issue would not be discussed.
"It is now appropriate to create, within the euro area, an instrument for coordinated action which could be used to provide assistance to Greece in case of need," Barroso said.
"The framework for coordinated action should be understood as a safety-net to be used only in the case that all other means to avoid a crisis have been exhausted, including first and foremost exhausting the scope for policy action at the domestic level."
There's an interesting new website called Blytic that has all kinds of economic data for those who dabble in this sort of thing and, after speaking with its creator yesterday (who is also the author of the Paper Economy blog), it seemed like a good idea to share this chart with a somewhat surprising curve for home prices and give him a plug at the same time.
Shown below are the well known 20-City Case-Shiller Home Price Index (in blue) along with the less well known Radar Logic 25-city MSA Composite Index (in red) that appears to already be well into another leg down for property prices.
Yes, the chart is a little blurry, but the neat thing is that you can click on the image above and you will be transported to a much larger interactive version of the same graphic at Blytic where you can fool with scaling and all sorts of other things via the options panel on the right. Apparently, some older browsers require a plug-in, but my versions of Firefox and MS Explorer interacted with the graphic immediately.
The latest Case-Shiller data will be released on Tuesday and there are more than a few people who think that the blue line in the chart will soon adopt the trend of the red line above it.
TOP STORIES
Fitch Downgrades Portugal on Budget Concerns - CNBC
Germany Seems to Signal a Compromise on Greece - NY Times
Bank of America to start reducing mortgage principal - Reuters
TARP watchdog slams Obama foreclosure program - CNN/Money
Those Who’ve Provided Intellectual Cover For The Bulls - Reformed Broker
Names at heart of free speech case - Nashua Telegraph
California To Home Buyers: Here’s $10,000 - WSJ
Americans... Hate... Everything - EconomPicData
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