Linking ≠ endorsement.
↑ [Highly recommended] mainly macro: Draghi at Jackson Hole
Should we celebrate the fact that Draghi is now changing the ECB’s tune, and calling for fiscal expansion? The answer is of course yes, because it may begin to break the hold of balanced-budget fundamentalism on the rest of the policy making elite in the Eurozone. However we also need to recognise its limitations and dangers. As the third sentence of the quote above indicates, Draghi is only talking about flexibility within the Stability and Growth Pact rules, and these rules are the big problem.
The danger comes from the belief that the size of the state should be reduced. Whether this is right or not, it leads Draghi later on in his speech to advocate balanced budget cuts in taxes. He says: “This strategy could have positive effects even in the short-term if taxes are lowered in those areas where the short-term fiscal multiplier is higher, and expenditures cut in unproductive areas where the multiplier is lower.” My worry is that in reality such combinations are hard to find, and that what we might get instead is the more conventional balanced budget multiplier, which will make things worse rather than better.
We both agree and disagree with Simon Wren-Lewis.
What we think Mario Draghi is more than hinting at is that the EU needs political integration, with which we fully agree. We felt that when the EU was form that it was a huge mistake not to create full-fledged federalism.
Of course, the Germans’, and to a lesser degree the Brits’, “Austrian School of Economics” errors would have remained. They were really the reason for the mistake in the first place.
Otherwise, Simon is very close to the correct view.
↑ [Recommended] Chinese government policy change kills Coastal California housing market – OC Housing News [cached]
Larry Roberts (aka “Irvine Renter”):
What happens if the Chinese buyers that represent 5% to 7% of our housing market become sellers instead of buyers? What if the pretenders who borrowed their way to prosperity (yes, some Chinese did this too), what if they need the money to make debt-service payments?
Those who don’t have issues with debt will likely be very happy they parked their money in California real estate, and they will hold their properties, assuming the Chinese government allows it; however, the ones who ran personal Ponzi schemes will implode, sell their properties to meet their financial obligations, and potentially disrupt our real estate market in the process. If a significant portion of our demand suddenly becomes must-sell supply, that will not be a boost to home prices.
An aside: Larry believes in regulation, but he is much less forgiving of the unsophisticated. We blame the elitists more for using other people’s ignorance and for even working to keep them that way: ignorant. Otherwise, we mostly agree with Larry’s analyses.
↑ It’s time to tell agents they can no longer meet with complete strangers in empty houses | Inman News
We need to explain to consumers why we need to know if they are qualified before we meet them at a home. The public needs to understand why we can’t meet them on a moment’s notice just to earn a possible commission.
This also applies to people showing rental properties.
↑ A European Lost Decade? by Michael Heise – Project Syndicate
Japan’s real monetary-policy lesson is that prolonged monetary accommodation with near-zero rates enables banks to delay any serious effort to clean up their balance sheets. For about eight years after the crisis began, banks simply used their massive stocks of government bonds as collateral to obtain liquidity from the BOJ, which they then used to finance loans to weak companies. The result was widespread financial forbearance, often described as “zombie lending.”
The good news is that the ECB, recognizing this danger, has been calling for a rigorous cleanup of European banks’ balance sheets and is submitting the banks under its supervision to an asset quality review and stress tests. The bad news is that extreme monetary accommodation continues to undermine these efforts.
Europe cannot avoid a Japanese-style lost decade just by upping the dose of monetary medicine. No amount of extra liquidity will entice overleveraged companies and households to borrow more. This was the case for Japan in the 1990s, and it is true for the eurozone (and the United States) today.
That’s all true, but it is only about monetary policy. We have been advocating for fiscal policies that inject new money directly into the real economy. Germany has been the obstacle to that in Europe. In Japan, they’ve shot themselves in the foot via their sales-tax hike and plan to do it yet again. In the US, our fiscal spending was too little, too late to pull us all the way out of the slump in short order.
Median house and apartment prices in Sydney are completely out of control. As I state in ‘Australia: Boom to Bust’, if the Sydney property bubble pops, it will take the rest of Australia down with it. A property market with such outrageous multiples can only be achieved through the banks lending an incredible sum of toxic debt to homebuyers. Arguably, no city in modern Western history has ever achieved such price multiples relative to income. These numbers are simply off the charts. Look at the table below to see how out of touch Sydney real estate prices have become.
If China pops (if the Chinese government can’t continue masking their problems), Sydney will pop too.
↑ “Extorting” Is the Word for Action Against Bank of America | RealClearPolitics
We are fiscal liberals here. We don’t lean toward the Austrian School at all. Therefore, we typically post mostly from that liberal perspective, but here’s something different. Warning to other such liberals: heavy fiscal-conservative slant:
He [Dick Kovacevich ] then concluded, “Why are we charging the stockholders instead of going after the people who did wrong? Corporations don’t engage in criminal behavior. People do.”
Now, I strongly believe that individuals who broke the law and deliberately wrote bad mortgage securities should be punished. But as Dick Kovacevich argued, corporations are different from individuals. So bust the individuals. Don’t crush investors. And finally end Too Big to Fail.
And nobody should forget that BofA purchased Countrywide and then Merrill Lynch at the behest of the Federal Reserve and the Treasury. Former Treasury man Hank Paulson threatened to fire then-BofA CEO Ken Lewis if he didn’t buy Merrill. And Fed officials wanted to close the Fed’s lending facility to Countrywide. So BofA did Uncle Sam a favor, and then got slammed for it.
Lawrence Kudlow is host of CNBC’s The Kudlow Report and co-host of The Call. He is also a former Reagan economic advisor and a syndicated columnist.
Please note that Larry Kudlow was a strong supporter of Alan Greenspan’s deregulation mania and for the reasons Alan gave at the time. After the crash of the Great Recession, Larry confessed, as did Alan, that he had been wrong. That’s why he knows that the Wall Street bankers (investment and commercial) sold junk/toxic securities knowing that’s what they were selling while passing them off as AAA, rated via those at the rating agencies they were paying to rate them that way.
↑ FHFA Seeks Input on Single Security for Fannie, Freddie | realtor.org
We’ve often wondered why there are even two entities.
…the Federal Housing Finance Agency (FHFA), the regulator of Fannie Mae and Freddie Mac, published a proposed framework for how the two mortgage-finance companies might issue and back a single-type of mortgage-backed security (MBS).
↑ Mortgage Foreclosures 2015: Why the Crisis Will Flare Up Again | New Republic
This is the opposite of what Larry Roberts, above, believes. David Dayen:
This didn’t have to happen. Loans originated since the crisis have performed exceptionally, although efforts to artificially change credit scores to juice riskier lending could change that. This is mostly about the failure to properly fix the crisis when the fire was burning. Obama Administration officials were primarily concerned in their relief efforts with “foaming the runway” for the banks, spreading out foreclosures so they could be absorbed more slowly. That’s why they resorted to fleeting solutions of dubious quality rather than principal reductions, proven as the most effective way to prevent foreclosures. “Getting write-downs was a far more permanent solution than temporary interest rate reductions,” said Dean Baker.
Kevin Whelan of the Home Defenders League believes principal reduction remains a good alternative to prevent the destruction that would accompany a second wave of foreclosures for hard-hit communities. “It’s long overdue but not too late for various parts of the Administration to make much more of this happen,” referring obliquely to Fannie Mae and Freddie Mac, which own or guarantee the majority of the nation’s mortgages and have still not agreed to principal reduction as a foreclosure mitigation strategy.
A second foreclosure spike could stunt the housing recovery and really smash communities just rising from the ashes of the crisis. Permanent solutions could have been explored when it counted to prevent this from occurring. Now we’ll have to hope things don’t go as badly the second time around.
We lean in David’s direction in that we believe most people were suckered by the elite bankers and mortgage brokers, etc., rather than trying to cheat the system. There was cheating though. People did go along with liar’s loans, though many of them didn’t even know their documents were altered or wholesale-fake documents added during the loan process.
…the Congress won’t help with the cyclical problem, but a) that’s old news, and b) as I’ve shown in various places, their impact on growth has actually moved from fiscal drag to fiscal neutrality, and “do-no-harm” is the best you can hope for from this lot.
…it is essential for the recovery to persist and accelerate to squeeze out the cyclical weakness documented by J&H. …if that does not occur, there is the very real potential for cyclical to morph into structural. That’s why the stakes for supportive monetary policy remain so high. Get this wrong by listening too closely to the voices cited above, and the damage will not be fleeting. It will be lasting.
↑ Shareholders, public deserve tax transparency – The Washington Post
Tax inversions. Double Irish with a Dutch sandwich. Spinning off tangible assets into real estate investment trusts. Son-of-BOSS shelters.
These are among the array of eye-glazingly complicated tax avoidance strategies adopted by America’s biggest companies. Each gets a moment in the sun when some enterprising journalist stumbles upon a particularly egregious example of its use; the public expresses outrage; policymakers denounce the behavior, which they themselves have incentivized; and then maybe Congress plays whack-a-mole trying to close the loophole. Then the public forgets, firms come up with inventively aggressive new strategies, and the pattern repeats.
Here’s a proposal to try to curb this cycle: Require all publicly traded companies to make their tax returns public. Period.
Be sure to read the next post below too, as it is in direct competition with this one.
↑ One Way to Fix the Corporate Tax: Repeal It – NYTimes.com
A long tradition in political philosophy and economics, dating back about four centuries to Thomas Hobbes, suggests that the amount that a person consumes is the right basis for taxation. A broad-based consumption tax asks a person to contribute to support the government according to how much of the economy’s output of goods and services he or she enjoys. It doesn’t matter whether the resources for that consumption come from wages, interest, rent, dividends, capital gains or inheritance.
So here’s a proposal: Let’s repeal the corporate income tax entirely, and scale back the personal income tax as well. We can replace them with a broad-based tax on consumption. The consumption tax could take the form of a value-added tax, which in other countries has proved to be a remarkably efficient way to raise government revenue.
Some may worry that a flat consumption tax is too easy on the rich or too hard on the poor. But there are ways to address these concerns. One possibility is to maintain a personal income tax for those with especially high incomes. Another is to use some revenue from the consumption tax to fund universal fixed rebates — sometimes called demogrants. Of course, the larger the rebate, the higher the tax rate would need to be.
Doing away with the corporate tax would eliminate double taxation. After that though, we run in to the issue of whether to tax everyone more the same, such as with a flatter, or even flat, tax and then provide governmental benefits and services according to need or continue offering tax deductions and credits or a mixture (which is what we have now).
We prefer the former (flat tax and then provide governmental benefits and services according to need) and would rather not move to an increased consumption tax but rather eliminate all sales and property and other taxes in favor of a flat, personal-income, single tax, no deductions or credits.
↑ Why Interest Rates Need to Stay Low – NYTimes.com
Second NYT piece in a row: Editorial Board:
It is also unknown whether growth and hiring, if and when they fully recover, will spark inflation. For that to occur, wage increases would have to be substantial enough to push up prices, meaning annual raises in excess of 3.5 percent given present rates of inflation and productivity growth. Wage increases of that magnitude are not in the cards, and neither is any hint of worrisome inflation. Since the economic recovery began in mid-2009, hourly wages have risen by a mere 1.9 percent a year on average.
Against that backdrop, arguing in favor of a near-term rate increase is to argue for subpar wage growth and for continuing a status quo in which economic gains flow largely into profits rather than wages.
↑ Poll: Should municipalities charge banks hefty fines for overgrown properties? | NJ.com
A new law, sponsored by Assemblyman Paul Moriarty (D-4 of Washington Township) allows municipalities to charge hefty daily fines to banks that own vacant and abandoned properties, as well as require out-of-state creditors appoint an in-state individual to oversee property maintenance.
That’s part of the cost of taking property as collateral. Mortgage-agreement conditions should prevail. What does the mortgage say about it? Thoughts?
↑ 12 startups that are changing the way we interact with real estate | Inman News
Are you ready for a glimpse into the future of real estate? Real Estate Connect’s “New Kids on the Block” session and an eye-opening Agent Reboot session called “9 technologies that will change the real estate landscape forever” provided a preview of coming attractions that may dramatically change the real estate industry.
↑ Napa quake shines light on Bay Area’s hazardous old masonry buildings – San Jose Mercury News
NAPA — Nearly 30 years after California adopted a law designed to spur the retrofitting of buildings at risk in an earthquake, thousands of Bay Area structures still are not updated, a laggard pace officials attribute to the complex politics and economics of making old buildings safe.
Many of these so-called “unreinforced masonry buildings” dot the downtowns of cities like Napa, where a 6.0 earthquake early Sunday morning seriously damaged more than 170 structures and injured more than 200 people.
↑ California wine country quake losses seen in the billions | Reuters
A strong earthquake that jolted residents of California’s Napa Valley wine country from their beds on Sunday caused insured property damage likely in the hundreds of millions of dollars, but the region’s total economic losses will be several times that, experts said on Monday.
The magnitude 6.0 quake, the biggest to hit California’s Bay Area in 25 years, struck before dawn on Sunday near Napa, injuring more than 200 people and damaging dozens of buildings in the picturesque community northeast of San Francisco.
…only about 6 percent of Napa area homes are covered by earthquake insurance….
↑ What matters more to housing: Price or rates?
“Sellers are finally getting the word that this is a different market than 2013,” said Nela Richardson, Redfin’s chief economist. “We are seeing the gradual end of multiple offers, and escalation clauses are becoming a thing of the past in all but the most desirable markets.”
That leaves mortgage rates as the wild card as the housing recovery enters the fall season, a period historically driven by first-time buyers. Those buyers have been disproportionately hard hit by the recession and slowest to return to the market. Rates are still low, but buyers today are extremely sensitive to the slightest moves.
…Some claim affordability is still good enough to drive demand through the fall and into 2015. Others claim rising rates, weak income growth and a conservative lending environment will stall the market in its tracks. …
Wages and hours: Jobs, jobs, jobs.
↑ The Myth of Real Estate Stigma – Bloomberg View
As you can see, housing prices in these communities didn’t show any particular pattern after their respective tragedies receded from the national spotlight. Whether justice was served or closure was achieved, these communities seemed to move forward based on underlying economic strength or weakness rather than stigma. I believe Ferguson, Missouri, will do the same.
We think the results of natural disasters versus potential systemic violence should be segregated. That said, we don’t think Ferguson’s recent problems, regardless of which side one comes down on, will become “systemic.” We certainly hope they don’t.
In addition, the steps taken to prevent or mitigate future so-called natural disasters should be factored in. Where memories survive and steps are not taken, prices will surely be negatively impacted.
↑ A New Reason to Question the Official Unemployment Rate – NYTimes.com
The response rate of the Labor Department’s monthly jobs survey is far higher (about 89 percent) than that of a political poll, but it has also fallen (from 96 percent in the 1980s). Not surprisingly, the people who do not respond have different experiences in the job market than those who do.
Over time, the kinds of answers that people give — or the kinds of people who respond — change. In later months as part of the survey panel, people who aren’t working are less likely to report being available to work and having looked for a job in the previous four weeks, which is the definition for unemployment. The differences are big, too.
Assumptions are made about them. They are lumped together. They are the reason the available labor force is reported as having shrunken when many of those people really still want to work and would if the jobs market were to pick up enough that their services would be demanded again.
It’s not good methodology.
↑ Why Many Millennials Aren’t Eager to Buy Homes | Zillow Blog
Sean Gibbons, 28, has a college degree and makes $65,000 a year as a contract worker for Microsoft.
At his age and income, economists might expect him to buy a house of his own, or at least a condo. Instead, Gibbons is paying about $600 a month in rent to live with nine roommates in a house on Capitol Hill, one of Seattle’s most walkable urban neighborhoods.
“The thought of purchasing a home hasn’t crossed my mind,” he said. “I don’t see myself settling down. … I just have other things that I care more about, like my social life. It’s a time-consuming thing, and if you want to be a homeowner you really have to be knowledgeable about those things, and there’s a fear of making the wrong decision.”
↑ China Will Need Stimulus to Hit 7.5% Growth Target, KC Fed Paper Says – Real Time Economics – WSJ
The latest figures out of China indicate recent stimulus attempts have yet to relieve distress in lending and real estate markets.
↑ [Highly recommended] Embargoes Work — Just Not the Way We’d Hope – Andrea Ovans – Harvard Business Review
it may not surprise modern readers to learn that unilateral action by the U.S. didn’t have much effect on the rest of the world. Spulber finds that Western Europe imported slightly more in 1951 than it had in 1948, despite a U.S. threat to withhold post-war aid to any non-cooperative ally. Undeterred, Spulber finds Western Europe (particularly neighboring Scandinavia) continuing to import iron, steel, copper, lead, zinc, and tin from the Eastern Bloc, and to export heavy machinery, railway vehicles, motor vehicles, and even ships to it. And that was just the legal trade. Predictably, contraband flourished, just as it did during Prohibition. When the U.S. extended its embargo to China, Spulber finds the effort entirely futile, since trade was simply rerouted from Western Europe through Macao and Hong Kong.
The second lesson is that, as a tool of isolation, embargoes are frighteningly effective, isolating embargoer as much as the embargoee.
↑ Draghi steals the show at Jackson Hole | Gavyn Davies
The seemingly always clear writer, Gavyn Davies:
In Draghi’s model, there is a clear distinction between the aggregate demand curve in the economy, and the aggregate supply curve. There was an almost explicit recognition that demand in the euro area currently falls short of supply, which amounts to saying that the real interest rate is too high to achieve equilibrium in the labour and product markets. This is close to accepting, for the first time, that the economy is facing a liquidity trap, with nominal rates now stuck at the zero lower bound.
Even more interesting, Draghi suggested a series of policy steps that would have been unthinkable in earlier ECB orthodoxy. With a shortage of demand while interest rates are at the zero lower bound, he said that the overall stance of eurozone fiscal policy needed to be reconsidered. He also hinted that the US had benefited from its programmes of quantitative easing in ways that were unavailable to the euro area, and that it was right for America to delay the onset of fiscal tightening, in contrast to the front-loaded fiscal tightening that was necessary to restore confidence in the crisis economies of the euro area.
↑ One solution to flooded basements? Foreclosed properties – Business Of Life – Crain’s Chicago Business
Despite Deep Tunnel, the $4 billion project to collect storm runoff, flooding has become a major problem in Illinois. That’s due to the type and frequency of the storms here, says Kevin Hebert, rain garden consultant, stormwater storage specialist and owner of Kevin’s Rain Gardens in Barrington. Until a few years ago, 90 percent of storms in Illinois produced less than 1 inch of rain, but there has been an increase in the occurrence of 2- to 3-inch rainstorms in the past couple of years, Mr. Hebert says, citing data from the National Oceanic and Atmospheric Administration which he compiled.
“We could handle those storms if it was spreading out over two or three hours, but it’s happening over one hour,” he says.
…within the next three months, some foreclosed properties in Chicago will be razed to convert the land into “rain gardens,” or deep holes filled with native plants that allow stormwater to soak into the ground as opposed to letting the water rush into the streets. The goal is that the rain gardens ease the flooding that’s been ravaging Illinois.
↑ Concerns grow over China’s property market – YouTube
Where’s the demand?
The FT’s Beijing Bureau Chief, Jamil Anderlini, reports on China’s real estate sector and examines the signs of a property bubble developing in the market.