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Saturday, September 22, 2007

HOUSING BUBBLE REVISITED   I visit Sacramento, California several times a year, mostly the outskirts of town, former farmlands now converted into acre upon acre of tract houses presumably financed by subprime mortgages. I quipped in May that I had sighted the infamous "housing bubble" and captured it on film:

Now I'm back, and I've sighted it again, and again captured it on film:

Hmmmm... seems like there's something a little different this time. Something about low 400's and high 300's (and they've done away with the silly quotation marks). Sounds like prices are finding a new and lower equilibrium. But fear not. I've never seen the strip-malls as crowded as they were today. Parking spots at a premium. Longest lines I've ever seen at Old Navy, Borders and Starbucks. This isn't subprime hell. How come? Same answer as usual. The bears were wrong about the impact of mispriced housing and mispriced loans -- and the entrepreneurial class is rising up to ease the transition to a new reality (a phenomenon I've also sighted and caught on film).

Update [9/24/2007]... Reader Liv Douglas notes,

The subprime "bust" is probably going to turn out to be more of a BOOM than I had previously thought. I stand corrected. I thought the sub-primers would get 2 months of mortgage-free, rent-free life. It turns out, at least here in Colorado, that the [uncreditworthy] homeowner is guaranteed at least 6 months of mortgage-free, rent-free living (according to my realtor).

Here is the sequence of events. A homeowner fails to make mortgage payments for three consecutive months. Upon failing to make his mortgage payment at the beginning of the third month, the bank begins the foreclosure process. The bank then auctions off the home (this takes about 6 weeks to complete). The homeowner then has 75 days from the auction date to "make good" on his delinquent mortgage payments and retain ownership of the house.

At the end of the 75 days, the bank will begin the eviction process, which usually takes about 2 weeks. So, the bottom line is that the County Sheriff doesn't show up until about 6-1/2 months after the homeowner first stopped making mortgage payments. For HUD-related mortgages, the process takes about a year.

So why am I supposed to feel sorry for uncreditworthy people, who put no money down (and probably paid no closing costs), got to live in a nice home at a subsidized teaser-rate mortgage payment for awhile, then live mortgage-free for another 6 months, and lose no equity (since they had nothing invested in the home)?? Explain that one to me.

Expect to see the strip malls outside Sacramento even more packed over the next 1-2 years. The subprimers are getting a 6-month "mortgage-free" holiday, courtesy of lenders and investors.

Posted by Donald L. Luskin at 9:38 PM | link  

Friday, September 21, 2007

BEN BERNANKE, ACTION FIGURE   Another view on whether the Fed got it right this week.

Posted by Donald L. Luskin at 2:07 PM | link  

Thursday, September 20, 2007

TURNING OFF THE LIGHTS OF THE WORLD   The Associated Press reports:
The Golden Gate Bridge, City Hall, Alcatraz and other parts of the city will go almost completely dark for an hour next month as part of a campaign to conserve energy and fight global warming.

Organizers of Lights Out San Francisco are asking city residents and businesses to install energy-efficient bulbs and turn off all unnecessary lights for an hour on the night of Oct. 20, a Saturday. The goal is to save 15 percent of the electricity consumed on an average Saturday night.

In the next month, the campaign will give away more than 100,000 compact fluorescent light bulbs, donated by Pacific Gas & Electric Co. and Yahoo Inc., in an effort to help reduce greenhouse gas emissions and teach about energy conservation.

My DC-insider pal "Mick Danger" comments,
MEOW stands for ďMoral Equivalent of WarĒ, Jimmy Carterís ineffective rhetoric advancing his energy policy program, which, not so incidentally, was a complete failure. Carterís energy policy blocked the markets from adjusting, making medium problems into huge ones. Reagan swept out the most draconian element of Carterís plan when he deregulated crude oil on his 8th day at work. Oil prices fell, silencing (for a minute) even Ed Markey. By the end of Reaganís first term, all of MEOW had been repealed or rendered moot.

Today, we are bombarded with messages to save energy or we will kill the planet. Campaigns to give away energy efficient products are welcome, a good idea liberals and conservatives can both applaud.

Turning off the lights on a national treasure, though, is not a good idea. It is a kind of intellectual and emotional theft, actually. The Golden Gate bridge is a symbol of American accomplishment in engineering and in art deco design. It is a shrine to mobility as freedom.

Some want to convert it into a doomsday clock.

Posted by Donald L. Luskin at 7:21 PM | link  

DID THE FED DO THE RIGHT THING BY CUTTING RATES?   Here's a Club For Growth symposium on that question, in which my contribution is to say "no." An excerpt:
The reactions to the Fed's rate cut this week of surging gold and oil prices, and a dollar falling to all-time lows on forex markets, confirms that there are serious inflationary consequences in our future. Inflation is monetary crack - it promotes short-term euphoria, but in the end leads to ruin. Any short run growth effect will be more than offset by the dislocations and arbitrary transfers of wealth created by higher inflation, and ultimately by ruinously high interest rates that the Fed will eventually have to enforce in order to rein in the inflation it has created.
Here's a sample of the "yes" view from Paul Hoffmeister:
In real terms, the value of the nation's 500 largest companies appreciated 1.92% Tuesday in response to the 50 basis-point funds rate reduction. This is based on the facts that the S&P 500 increased 2.92% in nominal terms, while gold appreciated by approximately 1%. This real appreciation in the nation's capital stock suggests the FOMC made the right decision.
I leave it as a challenge to readers to come up with the all the reasons why this analysis is incorrect -- and will publish them as updates (if space permits).

Update... Reader Richard Ridgeway takes a whack at it:

Well. I am a 'challenged' reader, but I'll give it a shot in taking on Mr. Hoffmeister's paragraph.

Unless I missed something; I'm guessing that all trading markets have continued to be open for business more than just the day of the Fed rate cut. Yes, I see that they are. Gold now trades at $734.55 (at 8:45 pm, central time, Thursday the 20th).

Damn, it's now at $735.15 (at 8:51pm) as my wife made me feed the dog at 8:46. Let's see, the S&P closed this Thursday at 1,518.75. On Tuesday it went to 1520 after the Fed announcement. Wednesday S&P closed 1529ish. Gold on Tuesday closed $723.60 and closed $722.40 Wednesday (from my Oanda XAU/USD charting).

Ummm, carry the 1 divide by 3, multiply by 4 and it is very clear. Mr. Hoffmeister is advocating a Fed cut / raise/ hold every day.

Gold has risen about 1-1/2% since Tuesday close and the S&P is back where we started, suggesting the Fed needs to intervene, for today, I think.

Or it could mean that it's now time to feed the cat...

Update 2... Reader Larry Eisen has a different view:
The dirty little secret about the gold price is that it is not determined in a free market. Central banks have a vested interest in the distortion the price of gold to maintain public confidence in paper currencies.

Making Mr. Hoffmeister's conclusion based on today's price of gold is not dissimilar to concluding that in Venezuela, drinking water is more scarce than gasoline, because the government fixes gasoline at 5-10 cents per gallon.

Alan Greenspan in 1998 stated before Congress, "Central banks stand ready to lease gold in increasing quantities should the price rise." Do they stand ready to lease S&P 500 futures should the price rise as well?

Update 3... Rich Sinda says,
Being a believer in market efficiency, I would have to agree with Mr. Hoffmeister. Cutting rates was a good short run decision. Then again, going out last night for a couple of drinks was a great short run decision for me that I am now really regretting.
Update 4... Matthew Cowie says,
Mr. Hoffmeister is wrong on this point for several reasons. Firstly, as of last month, the Zimbabwe Stock Exchange absolutely crushed inflation over the past year, rising 12,000% versus only 1,700% inflation. Nonetheless, Zimbabwe's economy is in shambles, in part because of inflation. Inflation distorts price signals, increasing uncertainty, leading to reduced investment and eventually reduced economic growth. So if S&P 500 rises 1.92 pecent and gold rises 0.0%, that's far better than 2.92% and 1.0%.

Another argument is that the S&P 500's largest sector is financials and the Fed rate cut directly benefited this very weak sector. They got a lot of bang for their buck. Next, if you pull up a list of the best performing sectors from Tuesday, here's what you'll see: financials, materials, and energy. The Fed bailed out the banks, which recovered sharply, and two beneficiaries of inflation, energy and materials, beat the market. The S&P 500 itself is sending a noisy inflation signal. As for gold, while it is mostly purchased for jewelry, marginal demand is an inflationary indicator. Nobody rushed to buy gold for any other reason than they think the dollar will weaken. Therefore, the rise in the S&P 500 was a weak inflationary indicator, while gold sent a clear signal.

Although I can't criticize him too much, at the end of his argument he says the Fed should adopt a defacto gold standard.

Posted by Donald L. Luskin at 6:58 PM | link  

ARGH, ME BUCKO!   My DC-insider pal "Mick Danger" tells me this is making the rounds on Capitol Hill. Before you leap to the unwarranted conclusion that this means these stiffs have a sense of humor, consider the high likelihood that they think it's real research.

Posted by Donald L. Luskin at 6:05 AM | link  

Wednesday, September 19, 2007

NOTE FOR OUR SEATTLE READERS!   Our "public editor" Irwin Chusid is the leading authority on Jim Flora, the influential pre-pop American artist (Irwin is author of two sensational Flora books, The Mischievous Art of Jim Flora and The Curiously Sinister Art of Jim Flora). He tells me there's a Flora exhibit opening Saturday in Seattle, the first exhibit since the artist's death, and featuring a number of works not previously seen by the public.
Fantagraphics Bookstore & Gallery in Seattle will host a rare exhibition of Jim Flora's original art, fine art prints, and Flora ephemera from September 22 through October 24, 2007.

The opening reception on Saturday, September 22 from 6:00 to 8:00 PM will feature appearances by Flora scholars Irwin Chusid and Barbara Economon, as well as musical interludes of period exotica by the Moon Spinners. Many works will be available for sale at remarkably affordable prices.

Fantagraphics Bookstore is located at 1201 S. Vale Street in Seattle's lively Georgetown district.

Open daily 11:30 to 8:00 PM, Sundays until 5:00 PM. 206.658.0110.

For more information...

Posted by Donald L. Luskin at 5:05 PM | link  

WE LEARN A NEW WORD: "VENTRIPOTENT"   Our monetary affairs correspondent "Irrational Exuberance" cites a peculiar turn of phrase:
At the introduction for Greenspan's Barnes & Noble talk on Monday, the speaker cited an LA Times book review that described Greenspan as "the most powerful economic central planner the world has ever seen." The phrasing seemed generally odd even beyond the obvious cognitive dissonance of hearing a one-time Ayn Rand acolyte labeled as a "central planner." I should have guessed it was the ventripotent Marxist Brad DeLong that penned the quoted phrase from the LA Times.

(The most amusing sentence I read in a review was written by James Grant: "An only child of divorced parents growing up in New York City in the 1930s, Mr. Greenspan had seemed destined for better things than a career in interest-rate manipulation.")

Posted by Donald L. Luskin at 4:12 PM | link  

LUCAS NAILS IT   Nobel laureate Robert Lucas explains perfectly why yesterday's Fed action was a mistake:
The need for a lender-of-last-resort function is one qualification to the discipline of inflation targeting, but it is a necessary one. There is a second line of argument that seems to me much less compelling. It starts with the fact that monetary policy necessarily affects future inflation rates, not the current rate: That has already been determined when the open market committee meets. We also know that whatever funds rate target is chosen, all kinds of others forces -- anything that happens to the real economy -- will affect next quarter's rate of inflation, or next year's. So we would like to forecast these other forces as well as possible and take them into account.

There is nothing wrong with this logic, but how useful it is depends on how good we are at forecasting the non-monetary determinants of prices. In fact, inflation forecasting is notoriously one of the squishiest areas of economic statistics. In this situation, it is all too easy for easy money advocates to see a recession coming and rationalize low interest rates. They could be right -- who really knows? -- and in any case we may not know enough to prove them wrong.

So I am skeptical about the argument that the subprime mortgage problem will contaminate the whole mortgage market, that housing construction will come to a halt, and that the economy will slip into a recession. Every step in this chain is questionable and none has been quantified. If we have learned anything from the past 20 years it is that there is a lot of stability built into the real economy.

To me, inflation targeting at its best is an application of Milton Friedman's maxim that "inflation is always and everywhere a monetary phenomenon," and its corollary that monetary policy should concentrate on the one thing it can do well -- control inflation. It can be hard to keep this in mind in financially chaotic times, but I think it is worth a try.

Posted by Donald L. Luskin at 5:57 AM | link  

Tuesday, September 18, 2007

THE TIMES GIVES UP...   ...on "TimesSelect," its online paywall for opinion columns. Damn! This mean that Paul Krugman is going to be relevant again? Thanks to Chris Ciancio for the link.

Posted by Donald L. Luskin at 2:57 PM | link  

WORTH SOMEWHAT LESS THAN A THOUSAND WORDS   This diagram is an informational embarrasment of riches, attempting to explain the flow of political discourse in the blogosphere. Get it? Good. There will be a test.

Posted by Donald L. Luskin at 9:32 AM | link  

THERE'S A FIRST TIME FOR EVERYTHING   I've never been called a "middle-of-the-roader" before!

Posted by Donald L. Luskin at 7:03 AM | link  

Sunday, September 16, 2007

HEY THERE, BOYS AND GIRLS!   Order your Government Insect Trap today! Think of all the government insects you can capture! Look at what I've done with mine!

Posted by Donald L. Luskin at 2:22 PM | link