News: Real Estate, Risk, Economics. Sept. 18, 2014

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Table of Contents
(Click to sections below.)

1) Wildfire razes homes, other buildings in Weed, Calif. – LA Times

2) Home builder confidence hits highest level since 2005

3) Bad Loans Could Bust China – Bloomberg View

4) Scotland's currency options | reszatonline

5) Michael Klibaner: For China's 'ghost cities,' ambition isn't enough- Nikkei Asian Review

6) Globalization Is in Retreat? Not So Fast – NYTimes com

7) What's Lurking in the Shadows of China's Banks | iMFdirect – The IMF Blog

8) Replaying the 30s in Slow Motion – NYTimes com

9) Making the case for Keynes | MIT News Office

10) Can New Economic Thinking Solve the Next Crisis? | The Fiscal Times

11) China Central Bank Appears to Inject $81 Billion Into Top Lenders – NYTimes com

12) Shadow banking and the economy | vox

13) American real estate's future: Older, poorer, and more diverse

14) How Millennials Could Be Housing Market Heroes – US News

15) China central bank struggles as borrowers hold off – MarketWatch

16) EM slide – is next taper tantrum starting? – YouTube

17) Press Conference with Chair of the FOMC, Janet L. Yellen – YouTube

18) Great Cities and Ghost Towns by Andrew Sheng and Xiao Geng – Project Syndicate

19) Why Can't Academic Economists Understand Endogenous Money? | Pragmatic Capitalism

20) Piketty's Missing Rentiers by Jeffrey Frankel – Project Syndicate

21) Upbeat Signs for Housing Market, Even as Construction Slows – DailyFinance

22) Home prices and sales velocity drop; ABOR president blames affordability issues – Austin Business Journal

23) Draghi's attempt to jump start stuttering eurozone falls flat – FT com

24) Plummeting Housing Starts Data Not as Scary as it Looks

25) Jim Rickards on China's slowdown & Marshall Auerback on independence movements – YouTube

  1.    Wildfire razes homes, other buildings in Weed, Calif. – LA Times

    …the fire in Weed was relatively small, scorching only 375 acres.

    Yet it destroyed or damaged 150 buildings, tearing at some of the town's most important institutions. The fire consumed two churches, a library and a community organization that aided the poor.

    Machinery at the town's mill, which processes materials for plywood, was destroyed, and it was unclear when scores of residents would be able to return to work there.

    Blocks and blocks of houses were reduced to piles of ash and charred kitchen appliances. Husks of cars sat in driveways.

    Add your comment.

  2.    Home builder confidence hits highest level since 2005

    Hope for a stronger housing recovery is surging among the nation's home builders. A monthly index of sentiment in the industry rose for the fourth straight month in September to the highest reading since November 2005.

    We think they are somewhat premature. It remains to be seen how the lending industry is going to deal with mortgage-refinance interest-rate resets coming soon. Will they give up waiting for decaying houses to regain value via local appreciation rates? Can they find a way to write off the bad loans and just move on? Probably not. They'll have to compromise though because many people won't be able to afford the resets.

    We think the Fed made a huge mistake artificially propping up the industry. The economy would be much further along now had the whole thing been marked down to market value and all the loans redone based upon those market values. Bank executives and shareholders would have taken the entire hit, which is how it should have been in a capitalist society, mixed or not. It should have been part of the risk of investing in deregulated banking.

    Add your comment.

  3.    Bad Loans Could Bust China – Bloomberg View

    William Pesek:

    China has spent much of this year adding to its debt and credit bubbles — not curbing them.

    If this were 1992, China could simply force state-owned banks and enterprises to rein in excesses and ride out the resulting modest hit to gross domestic product. But China passed the point of no return after the crash of Lehman Brothers in 2008, when it unleashed a $652 billion stimulus package, followed by untold smaller ones since. The moves put China, in the words of New York hedge-fund manager James Chanos, on a "treadmill to hell." If Beijing were to attempt a broad credit shakeout now, virtually every sector of the economy would suffer. The risks of social unrest would soar.


    Add your comment.

  4.    Scotland's currency options | reszatonline

    We've been deliberately staying away from the Scotland issue. However, we found this article, by Beate Reszat, fairly thorough and atypical.

    One of the controversial topics in the debates of Scottish independence is the currency question. The other day, the Financial Times asked several economists to consider four options available to an independent Scotland: a currency union with the UK, sterlingisation (which would be the continued use of the pound sterling but without backing of the Bank of England), establishing a new Scottish currency, and joining the euro. Not surprisingly, opinions were divided.

    However, strictly speaking, the choice is not limited to these four options. Besides, there are others which deserve a closer look as well in this context.

    You may notice the issue of bonds missing from the article. Would an independent currency be issued without issuing corresponding bonds? Doing that would render the currency "debt-free." There would be no buildup of a national debt regardless of how much currency were issued. There would be no taxes going to pay interest on such debt. The currency would be as it was with United States Notes, all but phased out via Federal Reserve Notes, which bear interest/debt.

    The Modern Money Theory economic school of thought has chaffed at the use of the term "debt" there, but we really believe the MMTers will come around to allowing for the different connotation/context.

    Add your comment.

  5.    Michael Klibaner: For China's 'ghost cities,' ambition isn't enough- Nikkei Asian Review

    This is the most realist article about China we've ever seen from JLL. "Michael Klibaner is head of research for Greater China at JLL.":

    In the recent past, a "build it and they will come" approach was highly effective, with the state directing resources and guiding development. However, slowing growth is the new normal in China — 7.5% now and 6% in the not-too-distant future. As competitiveness plays an increasingly decisive role, projects like Yujiapu seem like the legacy of a bygone era.

    Hedging their bets?

    Add your comment.

  6.    Globalization Is in Retreat? Not So Fast –

    Eduardo Porter:

    For the last time the United States was as competitive as it is now, he added, "you have to go back to before the first oil shock in the 1970s." Of the $3.6 billion in acquisitions by Royal DSM since 2010, 80 percent has come to the United States.

    Could globalization make a U-turn?

    Over the last year or two, a growing number of business analysts have been arguing that we are entering a new era of global manufacturing, with the United States at center stage.

    Last month, the Boston Consulting Group, following up on an earlier survey that suggested "reshoring" of factories back to the United States was the new name of the game, issued a report that argued that the United States had the lowest manufacturing costs among major exporters in the developed world and was nearly competitive with China.

    But before becoming overly excited about the prospects for an American industrial renaissance, it is worth looking more skeptically at the claim that globalization has run its course.

    Add your comment.

  7.    What's Lurking in the Shadows of China's Banks | iMFdirect – The IMF Blog

    Steven Barnett and Shaun Roache:

    Shadow banking provides an opportunity to circumvent regulations, such as the deposit interest rate ceiling (but there are many others). For example, rather than putting money in a deposit, a bank's customer could buy a wealth management product from the bank that offers a higher return. This wealth management product, in turn, may invest in equities and bonds but can also, subject to a limit, invest through shadow banks in assets that look a lot like bank loans.

    More broadly, shadow banking moves intermediation outside of formal banking—which has safeguards such as capital requirements, provisions against loan losses, loan to deposit ratios, well-established supervision and regulation—to more uncharted territory.

    Add your comment.

  8.    Replaying the 30s in Slow Motion –

    In terms of the economics, an effective crisis response was followed by a wrong-headed turn to austerity and, in Europe, a combination of bad monetary policy with a currency system that in some ways is turning out to be worse than the gold standard. The result is that while the first few years of this crisis were far better than the 1930s, at this point Europe's economic performance is actually worse than it was in 1935.

    Austerity was the wrong thing to do, as we've written many, many times.

    Add your comment.

  9.    Making the case for Keynes | MIT News Office

    Temin and Vines make the case that Keynesian deficit spending by governments is necessary to reignite the levels of growth that Europe and the world had come to expect prior to the economic downturn of 2008. But in a historical reversal, they believe that today's Germany is being unduly harsh toward the debtor states of Europe, forcing other countries to pay off debts made worse by the 2008 crash — and, in turn, preventing them from spending productively, slowing growth and inhibiting a larger continental recovery.
    Today, opponents of Keynes argue that such public spending will offset private-sector spending without changing overall demand. But Temin contends that private-sector spending "won't be offset if those people were going to be unemployed, and would not be spending anything. Given jobs, he notes, "They would spend money, because now they would have money."

    We completely agree with that statemnt by Temin.

    Add your comment.

  10.    Can New Economic Thinking Solve the Next Crisis? | The Fiscal Times

    Mark Thoma:

    The problem with macroeconomics is not that it has become overly mathematical — it is not the tools and techniques we use to answer questions. The problem is the sociology within the economics profession that prevents some questions from being asked. Why, for example, were the very questions we needed to ask prior to the Great Recession ridiculed by important voices within the profession?

    The key to a better economics is to ask better questions, and that will require a much more open mind — particularly from those in charge of what gets published in economic journals — about the kinds of questions economists are allowed to ask.


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  11.    China Central Bank Appears to Inject $81 Billion Into Top Lenders –

    With industrial production growing at the slowest pace since the worst of the global financial crisis and foreign direct investment in a tailspin, China appears to have taken the unusual step of using monetary stimulus in an attempt to forestall further economic weakness.

    China's central bank has lent 100 billion renminbi, or $16.2 billion, to each of the country's five main, state-controlled banks, bankers and economists said Wednesday, although the central bank and the five banks involved stayed silent.

    They are desperately masking worsening problems rather than dealing with them head on the way they should. We stand by our earlier statement that China is headed down. It's only a matter of time before the world will be able to look back at when that slide became inevitable (inevitable because China refused to correct its wrong trajectory). Could they yet correct? They could but not enough to avoid a serious hit. They don't have the necessary vision.

    Add your comment.

  12.    Shadow banking and the economy | vox

    Alan Moreira, Alexi Savov don't seem to agree with the first next paragraph:

    shadow banking is about evading capital requirements, exploiting 'too big to fail', and marketing risky securities as safe to unwitting investors. The right response is to bring shadow banking into the regulatory and supervisory regime that covers insured banks.

    …when it comes to reforming the shadow banking system, there are serious tradeoffs. Six years after the collapse of Lehman, these tradeoffs need to be understood so that we can grapple with the question: By how much should we lower the height of the boom to ensure a softer landing in the bust?

    Are you in favor of merely lowering the height of the boom to ensure a softer landing in the bust, or are you for doing away with the whole boom/bust cycle?

    Add your comment.

  13.    American real estate's future: Older, poorer, and more diverse


    Myers argues that foreign born Americans are less likely to be homeowners than the native born, and when they do buy they tend to buy at an older age. The Millennial generation is far more diverse and more likely to be foreign born than any previous generation.

    Add your comment.

  14.    How Millennials Could Be Housing Market Heroes – US News

    One way to ease some households into ownership is to ease access to credit. Jennings noted that changes to the FICO score would make it easier for young adults with a thin credit history to qualify for a home loan. For example, on-time utility bill payments and other obligations not reported to the Credit Bureau would work on their favor.

    "The tightness of credit doesn't have to be this way. We can certainly make credit more widely available certainly for young households, minority households and low to moderate income households without sacrificing any of the safety and caution that we need to have," UNC's Ratcliffe says.

    We'd need to know a great deal more about this before signing on.

    Way too much money is going to the top. That's the problem.

    Add your comment.

  15.    China central bank struggles as borrowers hold off – MarketWatch

    "Banks are willing to lend to me, but I'm borrowing less because I'm not expanding my business that much," said Mr. Li, chairman of Jiangsu Haihao Agriculture Development Co. "The market is not looking good, which makes me more cautious."

    …a lack of real demand for loans, rather than a shortage of credit, is holding the economy back. That explains a recent drop in the rate of overall credit expansion in China despite the PBOC's efforts, and shows the limited power the central bank has in getting the economy going.

    Add your comment.

  16.    EM slide – is next taper tantrum starting? – YouTube

    A strengthening US dollar could dampen US economic growth and employment prospects. It could cause the Fed to delay raising rates. Bonds could stay relatively strong due to more flight to safety. Mortgage rates could fall.

    Emerging market stocks are suffering their longest slide in a decade. James Kynge, emerging markets editor, discusses with capital markets correspondent Elaine Moore the factors behind the falling popularity of EM assets and whether an end is in sight.

    Add your comment.

  17.    Press Conference with Chair of the FOMC, Janet L. Yellen – YouTube

    There's nothing much new here. Janet Yellen did, however, state that credit standards are "abnormally tight." That indicates that the Fed won't move to keep them so. Also, you'll note that the press corp didn't ask about emerging markets and/or China and the rise in the USD, which is counter-inflationary.

    FOMC statement:…

    Projections materials:…

    FOMC statement on policy normalization principles and plans:…

    Add your comment.

  18.    Great Cities and Ghost Towns by Andrew Sheng and Xiao Geng – Project Syndicate

    Eternal optimists on the current Chinese situation: Andrew Sheng and Xiao Geng:

    …when viewed through the long lens of history, China's ghost towns will prove to be potholes on the path to development. China's massive infrastructure investment, funded largely through LGFVs, will most likely be remembered for its critical contribution to the country's economic modernization.

    Of course, the translation of infrastructure investment into economic progress is not guaranteed. The new infrastructure — together with on-the-job training that enables Chinese workers to manage it effectively — must boost the country's productive capacity sufficiently to offset the value destruction from obsolete fixed assets and underemployment.

    …the infrastructure boom was underpinned by the belief that local governments would always have access to easy credit, cheap land, and rising demand. When the market tightened in 2011, many projects' prospects diminished, spurring LGFVs to seek credit in the shadow banking sector, which has caused their borrowing costs to rise and introduced new market-based challenges to the reform process.

    Nonetheless, because China is a net lender to the world, LGFV debt has no global systemic implications. While China's outstanding local-government debt totaled CN¥29 trillion ($4.7 trillion) at the end of 2011, its land and fixed assets are worth some CN¥90 trillion, meaning that even if asset values were written down by half, local governments would remain solvent.

    This leaves only the issue of debt servicing. To resolve it, the government has announced fiscal reforms to split revenues between central and local governments and enable local governments to issue long-term municipal bonds.

    China's ghost towns and local-government debts are not harbingers of doom. They are bumps on the road to a developed economy, in which excesses will have to be resolved by the state or the market. In fact, overcoming these challenge s will make for a more resilient economy in the long run.

    Add your comment.

  19.    Why Can't Academic Economists Understand Endogenous Money? | Pragmatic Capitalism

    In this article, Cullen Roche presents the Modern Money Theory (MMT) position countering Noah Smith's notions.

    We agree with Cullen but caution people within MMT to also remain open to learning new things, including connotations of terms to which they had not been previously exposed and regardless if those new or different connotations don't work within MMT's historical explanations/models.

    Keeping larger contexts in mind is essential to real growth and to bridging language gaps between economic schools of thought.

    Add your comment.

  20.    Piketty's Missing Rentiers by Jeffrey Frankel – Project Syndicate

    Piketty's hypothesis is more a prediction of the future than an explanation for the past or an analysis of a recent trend. It is a prediction that interest rates will rise substantially above the growth rate, capital will accumulate, and the rich will get richer through inheritance and capital income, rather than through outlandish salaries and stock options. For all of Piketty's impressive historical data, his prediction is based mainly on a priori reasoning: income distribution must tend to inequality because savings accumulate.

    But one could just as easily find a priori grounds for predicting that countervailing forces will emerge if the gap between rich and poor continues to grow. Democracy is one such force. After all, the rise of progressive taxation in the twentieth century followed the excesses of the Belle Époque.

    A few years ago, the US reduced federal taxes on capital income and phased out the estate tax, benefiting only the upper 1% — moves widely viewed as demonstrating the political power of the rich. But imagine that in the future we lived in a Piketty world, where inheritance and unearned income fueled stratospheric income inequality. Could a majority of the 99% still be persuaded to vote against their self-interest?

    We think Jeffrey Frankel's point is actually Thomas Piketty's: that the common people need to vote in ways that will keep worse economic things from happening.

    Thomas Piketty's position isn't Marxian, but (and correct us if we're wrong) he does lean decidedly to the progressive side within the mixed economy.

    Add your comment.

  21.    Upbeat Signs for Housing Market, Even as Construction Slows – DailyFinance

    Mixed news:

    Housing starts and permits fell in August, but upward revisions to the prior month's data suggested the housing market continued to gradually improve.

    Housing is clawing back after suffering a setback following a spike in mortgage rates last year. It, however, remains constrained by a relatively high unemployment rate and stringent lending practices by financial institutions.

    Ostensible "stringent lending practices " isn't a real issue. The real issue is the combination of wage rates and number of hours worked.

    Add your comment.

  22.    Home prices and sales velocity drop; ABOR president blames affordability issues – Austin Business Journal

    For the second month in a row, the Austin housing market has seen sales on the decline compared to the year-earlier period. The Austin Board of Realtors released its monthly statistics for August on Thursday, and president Bill Evans said he has a hunch about why the moderating trend is happening.

    Add your comment.

  23.    Draghi's attempt to jump start stuttering eurozone falls flat –

    Mario Draghi's latest attempt to stave off economic stagnation in the eurozone had a faltering start on Thursday when demand for the European Central Bank's first offer of cheap four-year loans fell far short of expectations.

    The low take-up of the loans piles pressure on the ECB to consider more radical measures such as quantitative easing, though the idea continues to face resistance in Germany, Europe's largest economy.

    With rates at rock bottom, the only real option left in the ECB's toolkit as it seeks to revive an economy hit by weak demand and the east-west stand-off over Ukraine is quantitative easing, or large-scale purchases of government debt.

    Add your comment.

  24.    Plummeting Housing Starts Data Not as Scary as it Looks

    "Bottom line, today's report was actually pretty good," said Mortgage News Daily COO Matt Graham, "certainly not as bad as the headline might make it seem. Multifamily stats have been a volatile contributor to the data. They made several weaker reports look stronger and now the opposite. I'd personally focus on the fact that Single Family Starts were only down 2.4 percent from a really stellar reading in July. In fact July was the 3rd highest month since the crash and today's report is the 5th highest."

    Add your comment.

  25.    [197] Jim Rickards on China's slowdown & Marshall Auerback on independence movements – YouTube

    Jim Rickards runs more libertarian than do we ("gold"?), but he is a realist and does see through the wasted aspect of Chinese GDP, as he stated. We think that's right on. We know about Keynes digging holes to refill them to pay wages to get the economy moving again (which does work if done correctly, though it's wholly unnecessary to just make make-work), but what China has been up to is not really akin to that. What China has been doing is creating a systemic hole. Keynes' plan didn't include endless make-work. His was a temporary measure until the real economic gains could take over again.

    We were wary about adding anything more dealing with Scotland, but Marshall Auerback's analysis is excellent.

    [@ 3:57] Erin sits down with Jim Rickards, economist and author of "Currency Wars: The Making of the Next Global Crisis," to discuss Europe and China. After the break, [@ 15:05] Erin speaks with Marshall Auerback, director of institutional partnerships of the Institute for New Economic Thinking, to continue the discussion on Europe.

    Add your comment.

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