Friday, 27 February 2009
Wednesday, 25 February 2009
The Housing Bubble
Our housing bubble is an excellent of the malinvestment and over consumption caused by credit expansion. Perhaps as much as $2 trillion or more of capital has been lost in the construction and financing of houses for people who, it turned out, could not afford to pay for them. The housing bubble was financed by the creation of
$1.5 trillion of new and additional money in the form of checking deposits created for the benefit of home buyers.
The creation of these deposits rested on the readiness of the Federal Reserve System to create whatever new and additional supporting funds were required in the form of bank reserves. In the three years 2001-2004, the Federal Reserve created enough such funds to drive the interest rate paid on them, i.e., the Federal Funds Rate, below 2 percent. And from July of 2003 to June of 2004, it created enough such funds to hold this rate down to just 1 percent. The end result was a substantial reduction in mortgage interest rates and thus in monthly mortgage payments, which served greatly to increase the demand for houses.
Government also greatly contributed specifically to loans being made to homebuyers who were not credit worthy. It did this through its various loan-guarantee programs, carried out by Fannie Mae, Freddie Mac, and the Department of Housing and Urban Development; and by means even of outright extortion, though the Community Reinvestment Act, which required banks to make sufficient such loans as would satisfy local "community groups."
In physical terms, the result of credit expansion was the passage of literally millions of houses that represented capital to the firms that built them, and to the banks and others that financed them, into the hands of consumers who not only had not contributed anything remotely comparable to the wealth and capital of the economic system but also had no realistic prospect of ever being able to do so. The further result has been that many of the builders of these houses are now ruined as are many of the banks and other investors that financed the construction and sale of those houses. And because so many lenders have lost so much, the business firms that depend on them for loans can no longer obtain those loans, and so they must close their doors and fire their workers.
The growing problem of unemployment that we are experiencing and the accompanying reduction in consumer spending on the part both of the unemployed and of those who fear becoming unemployed is the result of this loss of capital, not of any sudden, capricious refusal of consumers to spend or of banks to lend. Indeed, the kind of consumer spending that so many people want to revive and encourage, by means of "stimulus packages," played a major role in the loss of capital that has taken place and now results in unemployment and impoverishment.
During the housing boom, millions of owners of existing houses thought that they were growing rich as the result of the rise in the prices of their homes and that they could actually live to a substantial degree off the accompanying increase in the equity in their homes. They borrowed against the increased equity and spent the proceeds. This consumption was at the expense of capital investment in the economic system, which was rendered correspondingly poorer by it. And when housing prices collapsed, and fell below the enlarged mortgage debts that had been taken on, the effect was to add to the losses suffered by lenders. This was the case to the extent such equity-consuming homeowners then walked away from their homes, leaving their creditors to lose by the decline in the price of their homes.
Tuesday, 24 February 2009
We need to consider what government wants — more power and revenue — and the means available to attain it.
By fueling the exponential growth of the welfare state, fiat inflation fosters the decline of the family. Families become degraded into "small production units that share utility bills, cars, refrigerators, and especially the tax bill." The welfare state drives the family and private charities out of the "welfare market."
Monday, 23 February 2009
Sunday, 22 February 2009
Thursday, 19 February 2009
“We do not have to pretend to ‘find’ what the law is. We unashamedly make new ‘law’”, boasted Walter Merricks in a June 2001 speech to the Financial Regulation Industry Group
Monday, 16 February 2009
Tuesday, 10 February 2009
This is a graph based on data from the World Gold Council. Now, I am not saying that there are not other factors at work here (do we know whether we have discovered all the gold fields yet?). But it seems to me that there is a correlation between the exit from the Gold Standard and inflation. I am assuming that the Misian definition that inflation is the growth in money supply plus its reduction in quality, applies here. In other words the temptation is for Governments running monopoly fiat money to inflate away their self induced problems at our expense.
Just a thought. Happy to be argued with.
Monday, 9 February 2009
Bailouts and Stimulus Plans - Addendum 1/28/09
by EUGENE F. FAMA
In his NY Times blog Paul Krugman attacks my piece on the stimulus plan.
Again, here is my argument in three sentences.
1. Bailouts and stimulus plans must be financed.
2. If the financing takes the form of additional government debt, the added debt displaces other uses of the same funds.
3. Thus, stimulus plans only enhance incomes when they move resources from less productive to more productive uses.
Are any of these statements incorrect?
Liberal Fascism: The Secret History of the Left From Mussolini to the Politics of Meaning Jonah Goldberg Penguin £9.99, pp496 Nick Cohen finds much to admire in a blistering attack on liberalism.
Liberal Fascism is a bracing and stylish examination of political history. That it is being published at a time when Goldberg's free market has failed and big government and charismatic presidents are on their way back in no way invalidates his work. Hard times test intellectuals and, for all its occasional false notes, Goldberg's case survives.
Wednesday, 4 February 2009
(Galt Capital a Virgin Isles based Investment Advisor).
"Happiness is not to be achieved at the command of emotional whims. Happiness is not the satisfaction of whatever irrational wishes you might blindly attempt to indulge. Happiness is a state of non-contradictory joy—a joy without penalty or guilt, a joy that does not clash with any of your values and does not work for your own destruction, not the joy of escaping from your mind, but of using your mind's fullest power, not the joy of faking reality, but of achieving values that are real, not the joy of a drunkard, but of a producer. Happiness is possible only to a rational man, the man who desires nothing but rational goals, seeks nothing but rational values and finds his joy in nothing but rational actions.Just as I support my life, neither by robbery nor alms, but by my own effort, so I do not seek to derive my happiness from the injury of the favor of others, but earn it by my own achievement. Just as I do not consider the pleasure of others as the goal of my life, so I do not consider my pleasure as the goal of the lives of others. Just as there are no contradictions in my values and no conflicts among my desires—so there are no victims and no conflicts of interest among rational men, men who do not desire the unearned and do not view one another with a cannibal's lust, men who neither make sacrifices nor accept them.The symbol of all relationships among such men, the moral symbol of respect for human beings, is the trader. We, who live by values, not by loot are traders, both in manner and spirit. A trader is a man who earns what he gets and does not give or take the undeserved. A trader does not ask to be paid for his failures, nor does he ask to be loved for his flaws. A trader does not squander his body as fodder, or his soul as alms. Just as he does not give his work except in trade for material values, so he does not give the values of his spirit—his love, his friendship, his esteem—except in payment and in trade for human virtue, in payment for his own selfish pleasure, which he receives from men he can respect. The mystic parasites who have, throughout the ages, reviled the trader and held him in contempt, while honoring the beggars and the looters, have known the secret motive of the sneers: a trader is the entity they dread—a man of justice.John GaltAtlas Shrugged