The US Housing ‘Bubble’ that Wasn’t
Some refreshing ‘bubble’ scepticism from Casey Mulligan:
Adjusted for inflation, residential property values were still higher at the end of 2009 than 10 years ago. This fact raises the possibility that at least part of the housing boom was an efficient response to market fundamentals.
posted on 07 May 2010 by skirchner in Economics, House Prices
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Abusing the 2004 FOMC Minutes
Vince Reinhart on the abuse of the March 2004 FOMC minutes to attack Alan Greenspan:
Greenspan was noting that letting the world know that top Fed officials were considering an issue would draw attention to that issue, which might sometimes be uncomfortable. This is a debatable proposition, to be sure, but not one that sounds conspiratorial.
That is, unless you have the imagination of Ryan Grim, who linked this obviously general discussion of the timing of the release of the minutes to the specific mention of housing prices 45 pages (and four hours in real time) earlier. To do so, Grim also had to elevate a mention about real-estate speculation by the president of the Federal Reserve Bank of Atlanta, Jack Guynn, into Cassandra’s warning.
posted on 05 May 2010 by skirchner in Economics, Monetary Policy
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The Market Believes the RBA is Targeting House Prices
The weighted average of capital city established house prices rose a Steve Keen-busting 4.8% q/q and 20% y/y for the March quarter, with gains in Sydney and Melbourne in excess of 20% y/y. This saw three-year bond futures savaged by around 7 basis points and the implied probability of a 25 basis points tightening from the RBA tomorrow surge from around 50% to around 65% on iPredict. The ugly 3.4% annualised result for the trimmed mean of the TD-MI inflation gauge released an hour earlier should be more important for the RBA’s deliberations, but it is house prices that are grabbing the market’s attention.
posted on 03 May 2010 by skirchner in Economics, Financial Markets, House Prices, Monetary Policy
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The RBA’s Perception Problem
Regardless of whether the RBA still backgrounds journalists on the monetary policy outlook, the perception that it does so remains alive and well in financial markets. Yesterday’s column by Terry McCrann confidently declared that ‘the Reserve Bank is all-but certain to deliver its third successive interest rate increase next Tuesday.’ At the same time, the implied probability of a 25 bp tightening priced into inter-bank futures rose from around 32% Wednesday to around 48% Thursday. There was a similar increase in the probability of a tightening on iPredict.
This suggests that the market doesn’t believe RBA Governor Glenn Stevens’ denial that the RBA leaks, although that denial was couched in very narrow terms. Of course, current pricing also implies that the market doesn’t have complete confidence in Terry McCrann either, but the change in market pricing is still significant.
Chris Joye speculates that this might be part of a RBA sting operation designed to finally put to rest the idea that the RBA leaks. Yet even if the punditocracy is deliberately wrong-footed on this occasion, it may not be enough to change market perceptions. When I worked in financial markets, I was often asked by clients whether I had ‘contacts’ at the RBA, with the clear implication that anyone who did was more likely to have the inside running on monetary policy. I always thought these clients had a greatly exaggerated view of the extent to which any such contacts might be useful in calling the interest rate outlook and the amount of media and other backgrounding that actually takes place. But that perception, even if exaggerated, is still a problem for the integrity of monetary policy.
UPDATE: Friday’s Reuters poll has the median financial market economist giving a 60% chance to a 25 bp tightening on Tuesday. Not quite the ‘all-but’ certainty expressed by McCrann.
posted on 30 April 2010 by skirchner in Economics, Financial Markets, Monetary Policy
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Why the Financial Reform Bill Will Help Rather than Hinder Goldmans
The always insightful Eric Falkenstein:
Blankfein is a crony capitalist, begging for more ‘regulation’ because he knows that a 1300 page bill basically only helps those with connections and extant massive legal infrastructure, and hurts potential competitors who merely have good ideas
posted on 29 April 2010 by skirchner in Economics, Financial Markets, Rule of Law
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Three Wasted Years
Former federal Labor minister Gary Johns on three wasted years of government:
a government without purpose roams the stage with nothing to show and looks to pick a fight or blame others, in this case state governments for allegedly choking the hospitals.
The Department of Prime Minister and Cabinet is overwhelmed by constant requests from the Prime Minister’s office for new and better schemes and promotions and photo opportunities. There is no agenda, no priority setting and no point at all except to get Rudd on the front page…
The electoral timidity, the profligacy, the spin, the lack of reason, the internal bullying, the vast waste of money, the interminable photos with children, the transparent use of religion with the photos at church on Sunday, have all embittered his already unimpressed caucus colleagues.
posted on 29 April 2010 by skirchner in Economics, Politics
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Don’t Blame Migrants for Home Grown Problems
I had an op-ed in yesterday’s Canberra Times (‘Migrants add to growth hopes’) arguing that politicians are using migrants as scapegoats for the many public policy problems they have been unwilling or unable to tackle themselves. No link, but full text below the fold (text may differ slightly from published version).
The highly readable Chris Berg made similar arguments in a piece for ABC The Drum Unleashed.
continue reading
posted on 27 April 2010 by skirchner in Economics, Population & Migration
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The Fix is In
In a previous post, I warned that:
The danger now is that the government implements another of its short-term political fixes ahead of this year’s federal election and re-tightens the rules [on foreign direct investment in residential property] rather than addressing the supply-side constraints besetting Australian residential property.
In the event, we have this:
FEDERAL and state governments have commissioned a working party of officials to hold a no-stone-unturned inquiry into all factors contributing to record house prices, as Labor senses the issue is becoming a political danger.
The inquiry, to deliver its first report within weeks, will examine sensitive areas such as tax breaks for negative gearing, land banking by developers, and whether grants to first home buyers push up house prices.
More wide-ranging than I expected, but also a waste of time, something the government is fast running out of ahead of this year’s federal election. As Christopher Joye notes, these issues have already been extensively studied and the policy solutions are well-known. The likely outcome is a short-term political fix designed to serve as a holding action ahead of the election. Do we really need an inquiry into whether grants to first home buyers push up house prices? Even Steve Keen and I agree on that. Did we really need a review by a former senior public servant to tell us that the home insulation program was a waste?
While the Prime Minister has an underserved reputation as a policy wonk, the reality is that he is what former Prime Minister Paul Keating would call a ‘policy bum’.
posted on 23 April 2010 by skirchner in Economics, House Prices
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Goldman Sachs and Gangster Government
Michael Barone highlights the real lesson from the fraud case brought against Goldman Sachs:
Republicans have been accurately attacking the Dodd bill for authorizing bailouts of big Wall Street firms and giving them unfair advantages over small competitors. They might want to add that it authorizes Gangster Government—the channeling of vast sums from the politically unprotected to the politically connected.
That can boomerang even against the latter. Goldman Sachs employees gave nearly $1 million to the Obama campaign and $4.5 million to Democrats in 2008. That didn’t prevent the Goldman from being shoved under the SEC bus. Gangster Government may look good to those currently in favor, but, as some of Al Capone’s confederates found out, that status is not permanent, and there is always more room under the bus.
Eric Falkenstein asks whether investments banks are committing fraud by selling State of California debt:
I bet all of the major investment banks are facilitating debt issuance by the State of California and its various agencies, counties, and municipalities. I bet also there is a small but spirited set of shorts, trying to make money off of the inevitable bankruptcy. With hindsight it will be obvious, and everyone currently buying California-related debt will develop amnesia and claim they never liked California debt, and were hoodwinked by greedy bankers.
At that point, should all the investment banks be liable? If so, is every bank facilitating California debt issuance committing fraud right now?
posted on 22 April 2010 by skirchner in Economics, Financial Markets, Rule of Law
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The SEC’s Long Bias
Holman Jenkins on the SEC’s prosecution of those who shorted housing:
you can’t go wrong betting on the media’s unwillingness to unwrap itself from the errors of hindsight bias—that bet by the SEC has paid off. But there are bigger fish being fried. For more than a year, certain knowledgeable bloggers and investigative reporters have argued that such deals—Goldman’s was hardly unique—exacerbated the bubble, with special focus on the activities of a Chicago hedge fund called Magnetar.
It’s true that such deals gave housing bulls an additional way to lose money. But to blame shorts for making the bubble worse comes close to saying salvation for the markets is to exclude participants who are bearish…
The SEC certainly understands the need for a rapid route to rehabilitation for itself if it hopes for a share of the power and budget up for grabs in the Senate debate over financial reform. If you don’t think this played a role in the suit it sprang on Goldman last week, we have a CDO to sell you.
Goldman will have to decide for itself if its business model can be defended in the court of public opinion. But let’s admit there’s an implicit long bias to the SEC’s case. Nobody would give a hoot if Mr. Paulson were the party who lost money. The SEC would never have gone on its hunt for something, anything, to hang a fraud case on.
posted on 21 April 2010 by skirchner in Economics, Financial Markets
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The Real Giant Vampire Squid
Sucking up $381 billion and counting, according to the CBO. Pete Wallison lays responsibility firmly at the feet of Barack Obama:
It was in 2005 that the GSEs—which had been acquiring increasing numbers of subprime and Alt-A loans for many years in order to meet their HUD-imposed affordable housing requirements—accelerated the purchases that led to their 2008 insolvency. If legislation along the lines of the Senate committee’s bill had been enacted in that year, many if not all the losses that Fannie and Freddie have suffered, and will suffer in the future, might have been avoided.
Why was there no action in the full Senate? As most Americans know today, it takes 60 votes to cut off debate in the Senate, and the Republicans had only 55. To close debate and proceed to the enactment of the committee-passed bill, the Republicans needed five Democrats to vote with them. But in a 45 member Democratic caucus that included Barack Obama and the current Senate Banking Chairman Christopher Dodd (D., Conn.), these votes could not be found.
Recently, President Obama has taken to accusing others of representing “special interests.” In an April radio address he stated that his financial regulatory proposals were struggling in the Senate because “the financial industry and its powerful lobby have opposed modest safeguards against the kinds of reckless risks and bad practices that led to this very crisis.”
He should know. As a senator, he was the third largest recipient of campaign contributions from Fannie Mae and Freddie Mac, behind only Sens. Chris Dodd and John Kerry.
posted on 20 April 2010 by skirchner in Economics, Financial Markets
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True Confessions of Steve Keen on the Road to Mt. Kosciuszko
The Business Spectator’s Rob Burgess, who has joined Steve Keen’s housing doomsday cult, reveals the real story behind Keen’s highly publicised decision to sell his unit in Surry Hills:
It turns out that Steve has a cunning get-rich-quick plan. In late 2008, just after Lehman Brothers crashed and a month after he’d made the house-price bet with Rory Robertson, Keen sold his house, taking large capital gains out of the market. Now, if he can only crash the housing market, he’ll make a killing! (Cue fiendish laughter from evil Dr Keen.)
It is, of course, absurd to think that even a cash-strapped academic would manipulate the market to extract relatively small sums of money (in fact, says Keen, the sale was divorce-related).
posted on 20 April 2010 by skirchner in Economics, House Prices
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Sticking it Up the Wrong People
Steve Keen’s housing doomsday cult is wending its way up Mt Kosciuszko with an ETA of 23 April. By my count, only ten people turned up to see him off from Canberra, but Keen is quoted as saying:
’‘This has actually garnered me support,’’ he said. ‘‘People are saying, thank god someone is sticking it up the property industry.’‘
A theme of Keen’s housing doomsday cult is that hapless home buyers are being manipulated into buying property, resulting in a ‘housing mania.’ Like many of his fellow travelers, Keen sees housing affordability as a demand-side rather than a supply-side problem.
Yet it should be obvious that it is in the interests of the property industry to promote housing affordability so that it can sell more houses. The industry’s lobby groups and industry associations consistently argue for an easing of the tax burden on housing, development restrictions and other supply-side constraints on the provision of new homes. The property industry’s interest in building and selling more homes is aligned with the consumer interest in making housing more affordable. Keen is sticking it to the wrong people. Like any industry, it has its share of spruikers and shonks, but the property industry in general is the solution and not the problem.
posted on 17 April 2010 by skirchner in Economics, House Prices
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Cash Will Ease Your Pain
Behavioural economics to which I can relate.
posted on 16 April 2010 by skirchner in Economics
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Constitutional Challenge to the Bailout of Greece
Law professors’ constitutional challenge to EU plunder:
Dr Karl Albrecht Schachtschneider, law professor at Nuremberg and author of the complaint, told The Daily Telegraph that he will be ready to file within days and will ask the court for an expedited procedure. A ruling could occur within a week, but may take as long as six months.
The complaint will argue that the rescue contains an illegal rate subsidy, threatens monetary stability as encoded in the Maastricht Treaty, and breaches the ‘no bail-out’ clause. Greece is clearly responsible for its own mess.
“It is a question of law. The duty of the court to defend the German constitution. They have no choice other than reaching a lawful decision. This may cause a great crisis in Europe but we already have a crisis,” he said.
He will ask the court to freeze rescue aid while the case is pending. There is a precedent for this. It ordered Berlin to halt implementation of the Lisbon Treaty while it reviewed the treaty last year. Such a move would cause havoc on Europe’s bond markets.
“This court hearing is going to be very dangerous,” said Hans Redeker, currency chief at BNP Paribas. “It could lead to Germany itself being catapulted out of the currency union. Once investors begin to fear this, there will not be single euro in further financing for the EMU periphery.”
Sounds like a plan!
posted on 16 April 2010 by skirchner in Economics, Financial Markets
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