Interesting to see an article that recognises the role QE has played in driving inequality and disrupting political landscapes, but I wonder why Mr Lanchester doesn't consider the alternative policies that could have been enacted. i.e. if governments had focussed on spending money into the real economy instead, through infrastructure spending and real nation building projects - creating jobs, real (not paper) wealth and the platform for further economic growth - rather than spending funny money into existence supporting markets that blow up prices without any real addition of value.
> if governments had focussed on spending money into the real economy instead, through infrastructure spending and real nation building projects
The Federal Reserve is an independent agency. It repeatedly implored Congress to increase fiscal spending. That didn’t happen, so monetary policy had to attempt to compensate.
> creating jobs
At least in America, we did a good job of this. Ben Bernanke navigated us away from an alternate history in which the GFC was a second Great Depression. In New York, the Hudson Yards are coming up as one of the biggest public works project since the Great Depression. Things could have been better, but they could easily have been a lot, lot worse without QE.
We've done a pretty bad job at bringing back jobs. Labor force participation rate has fallen, while people are retiring later. Retirement/aging doesn't even help explain the drop. Especially since the younger generation has more than replaced the older one, and the older one isn't retiring at the same historic rate.
>Labor force participation rate has fallen, while people are retiring later. Retirement/aging doesn't even help explain the drop
Retirement/aging explains the largest component of the drop.
Much of the drop was predicted decades ago by Census based solely on demographics. The single largest factor in the current drop is exactly demographics. Here [1,2,3] are FRED papers on the topic with more references.
Almost everyone who wants a job has one. And real wages have been rising for a decade.
That’s pretty good shape.
Labour force participation is a complicated question deeply intertwined with the opioid crisis, increased rates of college attendance, the mis-use of federal disability insurance and other factors. Quoting labour participation without reference to demographic shifts creating more retirees, moreover, mischaracterises the statistic. Demographically, there is no world in which 2018 LFP would have been higher than 2008.
> Does your analysis account for quality of jobs available?
I was responding to a claim that the government should have focussed on "creating jobs". In that context, the employment-unemployment line seemed most significant.
Real wages have been rising for a decade, so the central tendency for employed persons is better than it used to be (or than it was pre-crisis). There is still unemployment, particularly among the undereducated [1]. But from an average worker's perspective, it's one of the best economies we've seen in years.
"It repeatedly implored Congress to increase fiscal spending. That didn’t happen, so monetary policy had to attempt to compensate."
This part is not true:
"At least in America, we did a good job of this."
High unemployment should have been brought down in 2009 but instead did not come down till 2013. Labor force participation remains suppressed. Wages for men have been in decline for most of the period since 1973, and that only includes their monetary wages -- if you consider the decline in what's covered by health insurance, then the situation is even worse.
The situation since 1973 has been bad, and the situation since 2000 has been awful, and the USA has yet to show the political regeneration that will be necessary to turn this situation around and resume the broad based prosperity that the USA enjoyed during the mid-20th century.
> High unemployment should have been brought down in 2009 but instead did not come down till 2013
That doesn't match any graph I've seen. The unemployment rate shot up in 2008 and continued in early 2009, but from that point forward, it was a pretty regular, almost linear drop in the unemployment rate to today. Nothing special happened in 2013.
They could have been worse, but QE could have been constructed very differently to move funds to people first while still bailing out the banks. e.g. you get xx% of fed money on a mutual required refinance at a now lower principal. The bank gets some money, people keep the property with still loan, but now a much smaller payment & principal. It would have spent/printed a similar amount of money, but left a lot more wealth in the hands of people. Instead the QE program resulted in more mortgage defaults while transferring down pmts & other equity from people to the financial system.
Ben Bernanke was responsible for the financial crisis of 2008. He was part of the group of people that wilfully and knowingly created the conditions for the crisis to erupt, becoming handsomely rich in the process. The suffering of billions of people is on his hands and those of similar ilk.
> people that wilfully and knowingly created the conditions for the crisis
This is unnecessarily conspiratorial. Particularly given the proximate causes of the crisis erupted from domains over which the Federal Reserve had pretty much zero pre-crisis oversight (broker-dealers and insurers).
Did Greenspan's policies throw fuel on the fire? Yes. Was that done to create a crisis? No.
I think a legitimate question is whether there was political motivation to inflate W's economy, and whether he should have known the consequences.
From wikipedia (and Barrons):
His dissertation is not available from the university[17] since it was removed at Greenspan's request in 1987, when he became Chairman of the Federal Reserve Board. In April 2008, however, Barron's obtained a copy and notes that it includes "a discussion of soaring housing prices and their effect on consumer spending; it even anticipates a bursting housing bubble".[18]
> To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.
The funny money goes on the central bank balance sheet and not onto the national debt. Therefore the national debt interest cost remains constant, therefore taxation isn't pushed up. In addition government is not well placed to make the investment decisions required; the hope was/is that bank lending would effectively make these decisions by keeping businesses open and facilitating new projects organically.
> If the FED is a USA government institution and new money was created by that institution
The Federal Reserve is a quasi public-private institution. It has a separate balance sheet from the U.S. government. Central bank liabilities are money--a dollar bill is a Federal Reserve Note and a dollar in a bank's reserve account is wirable cash.
National debt is debt accrued by politicians to pay for goods and services. Adding the money supply to the national debt would produce a meaningless number, so we don't do it.
I get the difference between "money" and value, but if you magic money into existence, you've caused inflation of your currency, increasing the amount of currency it would take to add up to the pre-magic "value" of your national debt number as measured in dollars. Therefore increasing it by definition.
Just saying it's meaningless sounds a bit disingenuous unless I'm missing something.
It's counterintuitive, but inflation is a good thing. It incentivizes people to invest their money into the economy in businesses and government projects (bonds) instead of hoarding away their money in a bank account.
Unfortunately how our economy works is a highly complex topic, so for most people the gut reaction is "hrmmm, that doesn't make sense at first glance to me, so it must be wrong." Thankfully, average Joe American doesn't even know the Federal Reserve exists, so the FED is able to operate with a level of sanity found no where else in government.
The fact is, the FED is one of the only institutions we have that actually works because it is largely managed by subject-matter academics and not politicians, most of whom are lawyers/pastors/TV stars and war heroes...a group generally dificient in their understanding of modern economic theory.
Do central banks make mistakes? Of course. Japan is a great example. But a quick look at history shows the world is better off with them than without.
"It's counterintuitive, but inflation is a good thing."
Inflation is neither bad nor good - it has costs and it has benefits and we as a democratic society need to decide where we would like to (attempt to) set that dial.
"Thankfully, average Joe American doesn't even know the Federal Reserve exists, so the FED is able to operate ..."
The degree to which average citizens are unaware of the fed is the degree to which it can behave outside of the bounds of our democracy - and that is negative.
Further, their ignorance which you so deride does not keep them from noticing when they are getting screwed. A great many elderly folks on fixed incomes and inflation adjusted COLAs have felt just that way for a decade.
The thing that bugs me is the idea that money is best handed to someone else to do something with.
The more one blindly invests with only seeking ROI with actors maximizing around the same metric is how you generate business landscapes that would seem incredibly hostile to competition if run to their logical conclusion.
> but if you magic money into existence, you've caused inflation of your currency
No, you've increased the amount of money. That's not the same as inflation.
Let's say I've got an economy with $1000 in it. That means that my GDP adds up to $1000, by definition. (I'm ignoring velocity here.) $1 has a certain value. Now Intel turns on a new manufacturing facility, and we have an economy just like it was, except it contains a lot more state-of-the-art chips. If we stay with $1000, then each dollar is worth 1/1000 of the economy, and since the economy now contains more stuff, the value of each dollar grew. To maintain the value of each dollar at a stable amount, we need to grow the total number of dollars as the economy grows.
2008 was different. In 2008, $4 Trillion had just evaporated. The Fed injected $4 Trillion into the economy to try to stabilize things. It more or less worked.
That doesn't really detract from my point though, and there seem to be some critics of fractional reserve banking that seem to home in on the exact point I'm calling out.
Every time a currency "inflates" any values measured in that currency by definition change.
Or is that what's meant by it's meaningless, since the value is now basically what it was plus the fraction by which the money supply just grew?
I.e.
V=value final
v=initial value
F=fraction of money supply ex nihilo'd
V=v+(v(1÷(F)))
>>"Adding the money supply to the national debt would produce a meaningless number, so we don't do it."
If the money created by the FED is just a meaningless number , why don't they finance the government directly and the USA would avoid to pay bond interests?
> If the money created by the FED is just a meaningless number
Money supply is not a meaningless number. The sum of money supply and the national debt is a meaningless number.
It would be like taking my checking account balance and adding it to the amount of cash JPMorgan Chase has on its balance sheet. Independently, they're meaningful figures. And one is related to the other. But the sum doesn't do anything useful.
> why don't they finance the government directly and the USA would avoid to pay bond interests?
This is called running the printing presses. Wherever it has been tried, historically, rampant inflation follows. The independence of the Fed is to ensure rate-making (and money supply) decisions, which have broader economic implications than the U.S. government's interest costs, are made apolitically. (That said, the Federal Reserve is the largest buyer of U.S. Treasuries and remits its profits to the Treasury.)
>>"This is called running the printing presses. Wherever it has been tried, historically, rampant inflation follows."
My understanding is that most of the cases of hyperinflation (Germany Weimar Republic, Zimbabwe..) were due to problems in the real economy, not to the printing of new money.
Anyway, it seems that, related to inflation, the important thing is the money that is spend in the economy in the current period, not the public debt (the money that has already been spent).
A big public debt doesn't mean inflation, as the case of Japan (or the USA) show. Public debt an inflation are two very uncorrelated variables.
@JumpCrisscross how independent are they really? The fact that they will not entertain a thorough audit is in itself instructive. Perhaps central banking is too "centralized" and susceptible to corruption even in a well-run system like the Fed (the fact that the dollar is the reserve currency and they fight inflation ruthlessly too the detriment of employment). Perhaps a p2p software system could help ;)
The Fed is audited by the GAO, the OIG, outside auditors, and its Board [1]. Its balance sheet is published weekly and closely scrutinized by the investing public as well as every bank.
> they fight inflation ruthlessly too the detriment of employment
The Fed has a dual mandate. Its post-crisis journey has been one of trying to stoke inflation.
You're right when I used the word I was referring to "Audit the Fed" slogan à la Bernie Sanders & Ron Paul. The bill in question that was striked down is here [0].
The bill's purpose
> ...If enacted, the bill would also have ensured that the
> audit results would be available to Congress. The audit
> would include the Fed's "discount window", its funding
> facilities, its open market operations, and its agreements with foreign bankers. [1]
This would effectively end the Fed's political independence. Agreements with foreign bankers seems acceptable, though even then it would be better to release it to a committee after a delay.
Wasn't QE only such a big part of the strategy because relentless political opposition to more stimulus spending, especially once the Democrats lose control of the legislature?
hindsight is 20/20, but does anyone recall some of the ludicrous things we actually did to prop up some of our structurally too-big-to-fail institutions?
as an automotive mechanic the one institution during this crisis that stuck out in my mind was "cash for clunkers." Essentially the government subsidized ordinary americans to trade in whatever car they had so long as it got relatively poor gas mileage and wasnt more than 25 years old. This was a 3 billion dollar program designed largely to get anericans to start spending money on cars --any car-- by bribing them to destroy their own car.
But I have still a deep sense of chagrin when I remember mixing sandy batches of "engine disablement compound" and pouring them directly into a perfectly good truck or minivan. Sure, it might not win an award for climate change but these cheap cars and trucks could have gotten a single mother to and from the grocery store or school once or twice a week as needed. We intentionally destroyed them all. For those thinking the process was sane and simple, it wasnt. Doing this is loud, dirty, and throws a cloud of smoke you can see for a mile or more.
We were even so desperate to fix the economy that the government basically started cutting people checks. The idea being they would spend the money on a shopping trip to the mall or something... https://en.wikipedia.org/wiki/Economic_Stimulus_Act_of_2008
I spent my check on groceries when I got it, and put the rest into savings.
"I spent my check on groceries when I got it, and put the rest into savings."
That is entirely appropriate. When the economy is depressed, we want people to both spend more and pay off any debts they might have, so your mix of spending and savings is just what the economy needed. The boost to consumption helps the economy get going again. And to the extent that people are paying off debts, their debts are moved on to the ledger of the government. Since the government pays a lower interest rate than private citizens, this reduces the overall burdens on the economy, and, again, helps the economy get going again. Both aspects of this help.
I think the point he is making is that he didn't "spend more".
He bought groceries, which he would have done any other week. If your economic stimulus bill is intended to help people buy groceries, then you ought to appropriately name it a economic relief bill.
Wasn't it Steve Keen (Australian economist) who wanted the cheque to go to debt forgiveness before cash and for that to get the funds that ultimately went into QE?
I'm hazy on the details now but I think the idea was it would both help the citizens and also help with deleveraging the banks.
He seemed to be cropping up in the media every other day in 09.
There may have been some missteps there, but for the most part I think Obama's problem was he was too timid to seriously hold anyone's feet to the fire and too anxious to restore the status quo ante.
For anyone interested in this line of thinking, I highly recommend reading Ron Suskind's "Confidence Men: Wall Street, Washington, and the Education of a President". [1]
As a Washingtonian, I can safely say that there are many actors who prefer the status quo, however flawed it might be, to an unknown other.
You alluded to it in your post, but an interesting side effect of Cash For Clunkers was that there is an entire set of model years basically missing from the used car market.
The people most likely to take advantage of the program were those who liked having new or nearly new cars, so the cars that got destroyed were actually on the newer end of the used car spectrum.
So then when people such as myself, who have no problem driving an older vehicle, went to upgrade, the cars weren't there.
I'm still driving a 1995 Pontiac Grand Prix largely because when I would have been interested in a cheap upgrade there weren't any moderately used cars to be found. At this point, I just plan to keep driving it until it finally gives out on me. It's lasted me this long, so why not?
Re: We were even so desperate to fix the economy that the government basically started cutting people checks.
That's pretty much how Keynesian economics is supposed to work: the gov't saves up during good times and distributes cash during bad times to get people to consume again. Otherwise, economies can get stuck in a circular rut where nobody is spending because they have no jobs, and there are no jobs because nobody is spending. (The problem is politicians don't bother to pay down debt during good times.)
"...According to calculations that Zucman himself says are conservative, the missing money amounts to $8.7 trillion, a significant fraction of all planetary wealth. It is as if, when it comes to the question of paying their taxes, the rich have seceded from the rest of humanity."
A sobering reality...especially when you consider the ultra rich design and run the political systems that define the tax bases and laws the rest of the world are organized under...
"A Pew Research Center analysis of IRS data from 2015, the most recent available, shows that taxpayers with incomes of $200,000 or more paid well over half (58.8%) of federal income taxes, though they accounted for only 4.5% of all returns filed (6.8% of all taxable returns)."
I agree with this. Folks earning $200k-$500k are paying most of the taxes because they have little-to-no political influence, and they're easy scapegoats because most people make less than them. This is the glass ceiling of the US tax code.
"The top 1 percent of income earners, those having an adjusted annual gross income of $480,930 or higher, pay about 39 percent of federal income taxes. That means about 892,000 Americans are stuck with paying 39 percent of all federal taxes."
This is a naive perspective, but, imagine someone has 10 million dollars banked, and earns 175,000 a year in dividends. S/he pay 26-35k in taxes (15-20%, cause I don't know tax code). Now, a couple has a combined income of 175,000 a year. They pay 40k in combined federal + FICA (used an income tax calculator). I think that 5-14k discrepancy is where the blame for "not paying taxes" comes from.
"... imagine someone has 10 million dollars banked, and earns 175,000 a year in dividends. S/he pay 26-35k in taxes ..."
I am imagining this and I immediately also imagine that quite a lot of income and/or capital gains taxes were paid during the accumulation phase of that $10M.
I suppose she could have inherited $10M tax free[1] but whoever bequeathed it to her then paid the taxes on it during the earning/accumulation phase.
My point is, comparing the present day taxes on dividends on a nest egg to the income taxes someone else is paying is not a very useful comparison. All else being equal it should not be interesting or provocative to see the income taxes exceed the nest egg taxes in an example like yours.
Dividends are income. It's farcical that they are not treated as such in the US tax code.
I believe the point is that in the example above, someone living off their nest egg, able to do nothing, are paying less in taxes than someone still in the workforce, earning.
This exacerbates the concerns over wealth inequality because those who have built wealth, can then grow their wealth at a lower tax rate than those stuck at the bottom of the income ladder.
dividends are treated almost the same way. at least from tax rate point. now - you can offset dividends by other losses, but you can do similarly if you have just W2 income and run side business losing money (with few caveats)
EDIT: Thanks JediWing - I have no clue why I thought dividends are taxed at the same level. Thank you correcting me.
Dividends are a flat 15% for earners under ~425k income, and a flat 20% for those over.
This means that a stock grant with a generous dividend is a loophole for high earners...in addition to simply adding complexity and magic thresholds to the tax code. It seems to me to be just bad policy.
I'm not sure how you interpreted my comment, but I'm partially agreeing with you. "Tax the rich" never works out that way, since it's mostly people at the very bottom of the upper class paying most of the taxes.
The wealthy folks everyone gets in an uproar over don't pay any taxes, have the political power to avoid it, and even if they didn't, would be able to hire lawyers and accountants to help them avoid it. As a result, it's the people trying to claw themselves into the wealthy class that are most penalized by income taxes.
Let's go to a consumption tax with some kind of cash prebate to make sure the first $10k-$20k of spending is untaxed, and dispense with income taxes that have largely failed to do what they were designed to do.
I think the argument goes, people who make 500k per year are well off, but they are not running the country. People with 100 million, 1 billion, or hell, 100 billion dollars are the people not paying their fair share.
There is an undue burden on the middle and upper middle class.
To put it in perspective Leona Helmsley (real name Lena Rosenthal) was worth 8 USD billion when she said 'only poor people pay taxes' in the '80's, and she was one of the little people herself in comparison to the global elites...
If you are a rich individual, you will be paying the 20% capital gains rate. 15% is the middle-class rate.
And unless the government starts allowing people to deduct inflation losses on their investments (complicated), which can be substantial, long-term capital gains will always be at a lower rate than income taxes.
I guess it depends on your definition of rich, a married couple is allowed up to half a million dollars in 15% capital gains. Not exactly “middle class.”
If you and your wife took $1 million in cap gains every year you’d still only be paying 17.5% tax. Again, not exactly middle class.
Also, we have no inheritance tax up to $10 million dollars. The idea that even a sizable minority of rich people are “hiding” their money abroad is not true. Especially with FATCA.
It would be nice to be more specific then. I am, probably, a rich one. And such statements really hurts me after giving away a lot of cash to federal government. Money which I earned by living frugally (still am), working fulltime job + building businesses, and learning every day.
The problems in Greece were not caused by the credit crisis. Sooner or later Greece's model of government spending without a solid tax regime would have collapsed, the crisis only made the underlying problems more apparent.
Without the Euro, the greek central bank could have increased inflation and downvalued the Drachma, so the government could spend, spend, spend. This was the Modus Operandi before the Euro.
I don't say, that this is a responsible way of managing a countrys finances, but if the alternative is increasing infant mortality and extreme unemployment for almost a decade, I can't see whats so bad about that.
I certainly agree with the MO of inflation in Greece pre euro. I'm not sure about the real unemployment situation, but I only know about a few islands, not the mainland. There a lot of people work cash in hand in the tourist trade, they are technically unemployed (and their businesses pay very little in taxation as most of the money isn't declared)
Greece should never have been allowed into the euro in the first place. The EU is essential for Greeks, many of whom have gone to other parts of the EU to work, just like Americans left Detroit after 2008.
Italy's problems are a bit similar to Greece's but their economy is just a lot stronger. In Spain it was clearly the inflated housing market that caused the problems.
Italy is like two countries - the North has a strong economy, the South seems to have mainly agriculture, unemployment and mafia. Think of any famous Italian brand (or look at any Italian machinery), it's probably from north of Rome.
It doesn't help there massive amounts of refugees flooding into those countries as well. I realize people are fleeing war and violence, but they're going to countries where there isn't any jobs, and the economic situation is dire.
It's the worst possible scenario. They're leaving their home countries with nothing and arriving with an even bleaker future ahead of them.
There aren't, though. Immigration has dropped a lot in 2016, and again in 2017. Mediterranean crosses more than halved from 2016 to 2017. Last year, the EU only granted protection to 540k persons, in an EU with over 500M inhabitants.
It's not clear how many make it across. But last year alone, officials from Frontex, the EU's border agency, said they intercepted 5,500 illegal crossings, a whopping 80 percent rise compared to the previous year.
During that same period, Turkish authorities told the United Nations they had intercepted nearly 21,000 people, more than triple the number reported the previous year.
The number of people arriving, across land and sea borders, has more than doubled since the beginning of the summer. Authorities estimate arrivals are now at their highest level since March 2016, with over 200 men, women and children being registered every day.
“We’re living the days of 2015,” said Pantelis Dimitriou from Iliaktida, a local NGO on Lesbos operating accommodation and support centres for the newly arrived. “The flows have become huge. From around 50 to 60 in early July they are now at more than 200 every day.
But it is also a reflection of Italy’s years on the migration front lines with little help from the rest of Europe. More than 82,000 people have arrived in Italy this year, a 20 per cent increase over the same period last year, according to the United Nations refugee agency.
Under current EU rules, asylum seekers are supposed to apply for protection in the first EU country that they enter. At the height of the refugee crisis in late 2015, EU leaders set up a quota system to try to distribute some of the refugees from the main arrival nations of Greece and Italy, but it has barely gotten off the ground.
The influx has strained Italian infrastructure — and the goodwill of Italian voters.
You're seeing peaks and overestimating. For example, in the first report Frontex talked about a 80% increase, but that was just about those 3 months. Look at their full year report:
"Frontex reported on Tuesday that the number of people illegally crossing into the European Union had fallen by 60 percent in 2017 compared to the previous year. "
That second link is also about a short period where they were seeing a lot of people per day, but that has nothing to do with the total numbers on a year basis.
Yes, the start of 2017 was high, yet the total was much lower.
I know some Mediterranean economies could be a bit stronger and the Dublin Regulation isn't really working that well, but you'll have a hard time convincing anyone fleeing barrel bombs that things are better in Eritrea or Syria than in Spain.
If they are leaving a place of "war and violence", I am sure some unemployment as the worst social condition hardly could be construed as an "even bleaker future ahead".
2008 didn't happen because house prices were high, it happened because bad mortgages were labeled as good and then financial institutions placed levered bets on them.
Downturns have reasons - Savings and Loans issuing long-term fixed rate loans at low interest rates, investors finally waking up to the shaky financials of dot-coms plus some accounting scandals, and mortgage defaults finally breaking through. If we want to predict the next recession we have to point at a reason not just high prices.
Love this. I can't see a specific bubble yet. As someone in the tech industry, I'm tempted to say startups, but while the latest batch of IPOs seem underwhelming, none of them seem like out-and-out dotcom-style failures. SnapChat, Dropbox, Airbnb and their ilk seem like viable businesses to me.
Are current valuations correct, though? That's not nearly as easy a question to answer. If in reality Snapchat is worth $8b, not $16b (current market value), then $8b of capital gets destroyed the moment everyone realizes the "true" value. Now, repeat that process over every highly valued and highly leveraged tech company that exists. Many billions of dollars could cease to exist in a short matter of time, which would impact bonds issued by, and loans taken out by, these companies, the bond market more generally, and the stock market.
Maybe, but how much overvaluation is there? $100 billion? $500 billion?
There needs to be trillions of dollars of overvaluation and a huge amount of leverage to constitute a financial crisis. I'm open to being wrong, but I don't see that here. Valuations may cut back a bit, but as you say, it's not like these companies are worth nothing, like Bear Stearns and Lehman and most other investment banks in 2008.
If there's a market correction in startups, I don't see it necessarily leading to a systemic financial crisis. More like a mild recession.
Ah, I don't think there will be a financial crisis like 2008. I do think there will be a retrenchment involving securities and bonds that will cause home prices to move downward or possibly just drift sideways for a long time.
Maybe, but it's hard to predict. I don't think real estate prices are going to crash unless mortgage delinquency rates go up dramatically, which hasn't started yet: https://fred.stlouisfed.org/series/DRSFRMACBS
At least not nationally, maybe in some metro areas it has.
Mortgage lending standards have started to loosen though, but I think it'd take a while for that to have a substantial effect. Housing prices tend to increase because good land is scarce in most places people want to live.
>prices tend to increase because good land is scarce in most places people want to live.
Prices are driven by demand. A crash will inevitably reduce demand. Just like equities, real estate involves speculation. It may not be as bad as 2008, but we will still see a significant drop in real estate prices.
I don't think this analysis tells the whole story because it doesn't explain where the crash would come from. Demand is high (and likely to remain high) because good land is scarce. Developers can't create large amounts of new housing because of zoning and also because if they create too much they won't be able to make a profit (they take out loans to finance their projects too).
So supply is likely to be less than demand for the foreseeable future in most locations. Supply could increase rapidly if the mortgage delinquency rate rises rapidly. There aren't signs of this happening soon that I'm aware of, although mortgage lending standards have lowered a bit.
I don't see good evidence for an imminent crash, and saying prices will decline if a crash occurs is tautological.
House prices are the most expensive they have ever been relative to average income in 41% of markets [1]. Further, in 83% of markets the ratio of home price to income is growing. For the majority of US counties, we are seeing prices increase in both absolute and relative terms.
At the same time, wage growth is nil and household debt has now exceeded 2008 levels [2].
We can argue about the implications of the trends, but the gist of my point is that an increasingly smaller pool of individuals is capable of affording houses in the majority of US markets. If the demand of that small pool of individuals, which is strongly tied to the health of the industry providing their wages, declines then we are in for a significant correction in home prices.
No, the direct cause was the drop in demand. Cutting off the spigot of loans was itself a direct cause of the decrease in demand: less financing means less quantity demanded at any given price.
Demand, remember, is the function mapping price to quantity demanded.
I don't disagree; the crash in the housing market was a direct result of a demand decrease which resultrd from credit tightening, which was itself a result of the wave of defaults which both revealed that current lending practices were unsustainable (which on its own would have led to tightening) and collapsed the huge market for mortgage-backed securities (which, itself, would have led to tightening). And so, as you say, the whole house of cards collapsed.
As a side note, holy hell I didn't realize that the delinquency rate made it up to 11.5% after the financial crash... As someone in my early 20s, I remember that the crash was bad, but it's hard to appreciate the scope of it sometimes.
My wife and I have been looking to purchase a house, and it’s amazing how many people tell us “it’s a terrible time to buy. Don’t do it”.
That’s fine advice, as far as it goes, but what would we be wait for - another crash? This chart does suggest that prices are inflated, but what do I do with that information? Wait for a downturn in two years? Ten?
The best advice I can give you is to not buy more house than you need (too expensive will run the risk of negative equity). But also make sure what you get will meet your needs for at least a decade or so. And watch out for potentially high property taxes.
One guy I worked with had an issue where his family outgrew the house he bought, but he couldn't get enough out of it for a down payment on a bigger place (even though the bigger house was cheaper than what he bought his small 2-bedroom for). So you don't want to get into this situation either.
Another situation that just happened to someone else I work with, she bought a house that she thought was reasonable. However her property taxes took a bit of a jump (the previous owner had lower taxes due to some senior discount). And it will be a few more years before she gets enough equity in it that can be used towards another house.
This is a complicated question, depending on your cash position, where you want to buy, alternatives to buying, risk tolerance, future interest rates, and forward plans (5-10 years).
No one else can tell you that you shouldn't buy right now, if you can afford a house, need a house, and are willing to potentially be stuck under water for 5-10 years if prices go down, there are good reasons to purchase in this market. Just know going in that inventories are at historic lows, prices are very high, terms for purchasers are bad (in many markets), and many people are going to regret rushing in and purchasing homes in haste because they are worried about missing out, due to how quickly homes are selling.
The average home price going up more than 80% from 2000 to 2006 is extreme. The average home price going up 100% from 2000 to 2018 isn't that crazy. Maybe prices will go down, maybe not, I wouldn't call it a bubble yet. There are also a higher percentage of people living in cities, and I would suspect more people renting, which can drive purchase prices up for legitimate reasons.
Hmm... After reading the index methodology, I think you're right. I had thought their indexing accounted for inflation, but it doesn't seem to based on the PDFs I skimmed.
I said "not crazy", I didn't say normal. Do the math. 4% a year, compounded over 18 years, is 102.6%. 4% a year in the US is above inflation, but not crazy.
It was probably the expansion of financial instruments like Collateralized Debt Obligations (CDOs) [0] along with shadow banking mortgage companies (like Country Wide [1]) that simply sell mortgages to banks that in turn securitize the mortgage into CDOs.
This is the correct answer, I think. The people who made the mortgages were no longer the people that owned the mortgages. The banks didn't even hold on to them, they sold them in tranches to investors. So no one in the actual industry had any incentive to do anything other than close mortgages.
People could get no down-payment mortgages, could get mortgages with bad credit, could get mortgages on houses they couldn't afford, because all the mortgage originators just fudged the paperwork. No one wanted to find a reason to not provide the mortgage.
Everyone being able to buy a house heated the market up, and as people got used to the market going up and up, it was seen as a good investment, and more people bought more expensive houses they couldn't afford, and mortgage originators did more shady things to make it happen.
A lot of these mortgages were adjustable rates that started at a really low rate, and in 3 years could shoot up to a much higher rate. An optimistic consumer wouldn't worry much about that. But when the time came, some people couldn't pay the crazy increase in their mortgage. The foreclosures coming onto the market depressed the market.
So the bubble finally popped, and someone owned a house that they bought for $750,000 with no money down, an adjustable mortgage for the whole $750,000 that started at 4% and in three years shot up to 8%, and when that happened the house could only be sold for $450,000. So they just stopped paying the mortgage and walked away. The foreclosures further depressed prices, created a very nasty cycle.
I worked in land records at the time, and the standards for the mortgage originators were just horrible. Not bothering to record mortgages in the correct town, not bothering to do a lot of things.
There are a few movies that are really interesting that described what happened, real life thrillers IMO. "Margin Call" is awesome, "The Big Short" explains what happened really well and is pretty funny at times, and "Too Big to Fail" is from the regulators point of view. It's kind of awkward but still really interesting.
I got my start as a DBA working for a company that was founded to serve as oversight for this process. We'd assign a risk label to a loan (from the originator) and then weight our aggregate risk against the documented risk of the financial instrument (a security from the "bank"). Finally, there was a group within the company to follow up with the loan servicers to ensure that they were properly servicing (erm, collecting) loans within that instrument.
It was insane how many new dimensions we'd have to create (on what seemed like a daily basis) for the variety of security and documentation types that the banks would generate.
Baby boomers paid of mortgages and use the savings to start buying houses to add to their retirement portfolio
More and more dual income housing, people can afford to spend more on a house so prices go up, then families have to have two incomes to have the same house that the previous generation had on one income
More households -- parents get divorce, now it's 2 houses needed for 2 parents and 2.4 kids
“What if the governments of the developed world turned to their electorates and explicitly said this was the deal? The pitch might go something like this: we’re living in a competitive global system, there are billions of desperately poor people in the world, and in order for their standards of living to improve, ours will have to decline in relative terms.”
“There a billions of desperately poor people in the world, and in order for them not to have a strong interest in either immigrating into the developed world by any means necessary or smashing the international order, both of which produce adverse consequences that was have to deal with, their relative standard of living must improve, which also had costs for the developed world, but much less than continuing to deal with the consequences of the current level of structural inequality.”
I think if you finish reading that part to the end it seems much more reasonable. Cutting him off seems unfair. To wit:
> Perhaps we should accept that on moral grounds: we’ve been rich enough for long enough to be able to share some of the proceeds of prosperity with our brothers and sisters. I think I know what the answer would be. The answer would be OK, fine, but get rid of the trunk. Because if we are experiencing a relative decline why shouldn’t the rich – why shouldn’t the one per cent – be slightly worse off in the same way that we are slightly worse off?
The problem is that the economic argument is nonsensical unless you significantly raise taxes on people who are not in the 1%, as the amount of potential revenue involved is a pittance. At least in the US, only 20% of the population pay net taxes (tax payments minus transfers from all sources), so even if you raised effective tax rates to 100% on the upper few percent, ignoring the immediate collapse of that tax revenue, the amount of new revenue would be underwhelming.
For the US, the policy challenge is that the distribution of net tax payers is significantly more biased toward the top end of the income range than in many countries in Europe (i.e. it is more progressive, ironically). There is no practical way to sustainably raise substantial tax revenues without expanding the number of people who pay net taxes. This means substantially raising taxes in the 2nd (60-80%) quintile, who have five-figure household incomes on average, and probably the 40%-60% quintile as well.
Any definition of "rich" that could generate substantial net tax revenue is going to come significantly out of the pockets of the middle class. Convincing someone earning $90k in California that they are so wealthy that they should downgrade their lifestyle would be an unenviable task for a politician.
The economic effect is occurring. See the chart towards the end of the article.
"From another perspective, the story of the last ten years has been one of huge success. At the time of the crash, 19 per cent of the world’s population were living in what the UN defines as absolute poverty, meaning on less than $1.90 a day. Today, that number is below 9 per cent. In other words, the number of people living in absolute poverty has more than halved, while rich-world living standards have flatlined or declined."
The proposal is to make the effect explicit rather that political populism of trying to reverse the current trend for those at point B in the chart.
I mean, the latest tax bill involved taking money away from those people to give it to people far richer than they are. In particular, look at the changes to deductions for mortgage interest.
Exactly, this is where he lost me. The pitch is incredibly naive.
If the latest presidential election in the US has taught us anything it should be that middle class people with stagnating wages couldn’t care less about the troubles of the worlds poor.
The argument is kind of two-pronged and would involve wealth transfers from the rich to the middle and lower class. Heard anyone railing about elites lately?
The middle class doesn't see themselves as net beneficiaries in wealth transfers, so you have to completely rewire their thinking.
Also, roughly 50% of the country isn't interested in any additional taxation, period. They don't care if you try to tell them how they will benefit because they see themselves as the aspiring rich.
Finally, the goal is of this policy is to increase taxation of the top x%. The same people with armies of lobbyists and the majority of politicians (GOP or DFL) already in their pockets. Good luck.
> Finally, the goal is of this policy is to increase taxation of the top x%. The same people with armies of lobbyists and the majority of politicians (GOP or DFL) already in their pockets. Good luck.
Well "nothing can ever get better" doesn't sound like much of a winner either.
Basically, any forward looking plan is on hold until people get off their butts and actually vote democrat/notGOP on voting day. Until certain portions of the ruling class lose their positions, they hold enough power to prevent anything from hurting them
I think this gets it backwards. If you want people to turn out and vote for Democrats, or anyone else, you have to offer them a program they can mobilize around and support.
Unless you are specifically talking about Minnesota state politics, the two major parties are not the Republican Party (nickname “Grand Ole Party”, or GOP for short) and the Democratic-Farmer-Labor Party (DFL for short.)
It's also preposterous. Wealth isn't a zero-sum game. Compared to our ancestors in, say, 1000 BC, the vast majority of humanity is far, far, wealthier while the few who are arguably no better off are not worse off either. That's all wealth we've created.
We can talk about whether it's a good or moral idea to transfer wealth, but let's not pretend like that's the only way to deal with poverty.
It expressly refers to relative, not absolute, wealth, which necessarily is zero-sum. (There's also quite a lot of evidence that relative, not absolute, wealth is the more important driver of exoerienced utility: humans are strongly programmed to be satisfied or not based on performance relative to expectations set by social environment, not absolute material condition. For this reason relative wealth is generally more important.)
There's also human ingenuity, technology, and gov't stability which are multipliers on those finite land/natural resources. Skyscrapers increase real estate/land for example, courts protect property rights enabling one to invest capital in venture X.
I've never understood this argument. Sure, wealth/trade isn't a zero sum game. That means that the net wealth in the system increases. But that doesn't mean each individual participant in the game is better off. The game night have a large competition component (which is zero sum) and would mean that the participants are not better off.
Watching what happened in the UK it appeared we were making a lot of poor decisions on the hoof. In particular pushing Lloyds into buying HBOS didn't work out so well.
I often wonder what would have happened if we hadn't bailed out the banks.
Well, the UK government seemed to genuinely believe that had they not bailed them out that we might have been in a pretty bad situation: looting, troops on the streets etc.
However, with the benefit of some hindsight - I do wonder if these stories were just a bit exaggerated for political reasons.
Also, if the implosion of the payment system is an existential threat to a country then why haven't done anything to ensure that this couldn't happen again? Yanis Varoufakis mentions in one of his books that he proposed a alternate government controlled payment system that could be used if Greek banks stopped functioning - why don't we have something like that prepared to fall back on in a future crisis?
They have in the UK at least - UK Banks have been forced to ringfence core retail banking, so that other arms could be allowed to fail, but customer banking be unaffected:
Unfortunately it appears history is probably going to repeat in more ways than just cycles of crisis and financial regulation. I expect trade war and then global war in the next decade - we’ve reached around 1935 by my estimation.
Thanks - I'd never heard of that - pretty surprised that a Conservative government implemented anything like that. having said that, maybe that's why it has been kept relatively quiet?
It's probably because if you build such a system the banks would believe the government could bin them next time around and consequently make a "run on the banks" more likely.
It feels like none of this is really over and we are currently paying for it in our political climate.
An awful awful lot of uncertainty and panic would've happened I think.
It's that old saying from General Patton "A good plan violently executed now is better than a perfect plan executed next week.", I think that very much applied in this situation, as bad as things were they could've been MUCH worse.
An awful awful lot of uncertainty and panic would've happened I think.
I don't doubt that, what I wonder is if it would all be a distant memory now instead of dragging on for decades (we still have a lot more debt than before the crisis).
In the US the failing banks' owners would have shared in the loss along with the govt to the extent of deposit insurance, but the remaining institutions would have been smaller, perhaps smarter, definitely better disciplined in the knowledge that they had "skin in the game."
Very interesting article! I agree and have felt the tremors the author mentions throughout my own work in a related field.
The last decade has taught me that corporations matter more than nations, at this point. In the case of corporate capitalism, governments act like special interest groups protecting the corporations that fund their lifestyles.
To that end, if a major bank like RBS were to go belly up and now be beyond the ability of the U.K. to save, what are the chances we see a “national merger” where a country offers to absorb the losses in the banking system in exchange for absorbing the entire nation (population, economy and all)?
This sounds extreme, but it’s effectively what happened in the feudal era. Wealthy nobles would support whichever king had the resources to protect them. Only thing I’m doing is replacing “wealthy nobles” with “corporations” — which are essentially “jointly owned” among the entire “nobility” (I.e. the capital class in the West).
Ultimately I think we will avoid World War III because the corporations don’t want it; and they control enough of the global logistics supply chain to prevent it. So a peaceful way to transition failed governments and financial systems back to prosperity will be needed if we want to avoid a repeat of the Weimar Republic.
> This sounds extreme, but it’s effectively what happened in the feudal era. Wealthy nobles would support whichever king had the resources to protect them. Only thing I’m doing is replacing “wealthy nobles” with “corporations” — which are essentially “jointly owned” among the entire “nobility” (I.e. the capital class in the West).
75% of the bank is owned by "institutions" like Vanguard, Blackrock, Fidelity, State Street, etc. which are mostly proxies for mutual funds, index funds, and ETF's. The largest individual fund is the Vanguard Total Stock Market Index Fund, followed by a number of other index funds from Vanguard and others.
War has always been great for plunder and profit. Some of the biggest corporations are in the war racket. Arms dealers arm both sides in a conflict, sit back and rake in the profits. Corporations constantly stoke the WWIII fire, little people like us are lucky that a situation beyond our ability to contain it hasn't developed.
"A crackdown on international evasion is difficult because it requires international co-ordination, but common sense tells us this would be by no means impossible. Effective legal instruments to prevent offshore tax evasion are incredibly simple and could be enacted overnight, as the United States has just shown with its crackdown on oligarchs linked to Putin’s regime. All you have to do is make it illegal for banks to enact transactions with territories that don’t comply with rules on tax transparency."
"From a sociological point of view, the crisis exacerbated faultlines running through contemporary societies, faultlines of city and country, old and young, cosmopolitan and nationalist, insider and outsider. As a direct result we have seen a sharp rise in populism across the developed world and a marked collapse in support for established parties, in particular those of the centre-left."
Weirdly, the "winners"[1] of the populism have been rural, older, nationalist, and very much insider[2]. Think of both Trump and Brexit supporters. I'm not entirely sure, but these don't seem to have been the people hurt the most by the economic crash. The whole situation has an incredibly strong disconnect between what's actually going on and the facade or veneer of what they think about it. Ideology trumps reality?
[1] I'm using "winner" because I can't think of anything better, but the "victory" is Pyrrhic. Not only are they shooting themselves in the foot, even if they weren't they would not have a good end game.
[2] Yes, the rhetoric is about outsiders, clearing the swamp and that sort of thing. But those are the most inside outsiders I've ever seen.
A really bizarre data that I saw during US elections, was that during pooling (before actual elections) the map of Trump voters, was almost identical to the map of places with high death rates.
Also largest trump voter demographic, as the media currently keep harping all the time as "racist whites males", is the only demographic in US with rising death rates.
I don't know why certain US demographics started since 2008 to die at such speed, suicides for example rising unusually fast, and "gun crime" when you actually split homocides and suicides, also show ludicrous numbers of suicides (while gun homicides are less than with other weaponry, like knives and bats).
So whatever happened, it affected a certain demographic epically bad...
And when someone propose to be a saviour, no matter how much you hate that person, you will vote for it... When people have literally nothing to lose and next "step" in their life, is death, anything else is better.
