Inflation, interest rates, and the Fed

[poorgradstudent]

2009 saw DE-flation. 2010 so far has seen pretty “normal” inflation, around 2.5%/yr at most.

I’m not really a Bernanke fan, but I’m glad that the Fed is planning what to do if the recovery falters or inflation takes off.

[briansd1]

[quote=davelj]

Yup. We the People – in aggregate, if not individually – want inflation.[/quote]

I think that’s part of our animal hording instincts. We always want more.

Inflation is not a bad way of giving us more without really giving more.

Despite inflation, people will always feel better if whatever they bought ends up worth multiples of the purchase price.

[briansd1]

[quote=davelj]

Yup. We the People – in aggregate, if not individually – want inflation.[/quote]

I think that’s part of our animal hording instincts. We always want more.

Inflation is not a bad way of giving us more without really giving more.

Despite inflation, people will always feel better if whatever they bought ends up worth multiples of the purchase price.

[briansd1]

[quote=davelj]

Yup. We the People – in aggregate, if not individually – want inflation.[/quote]

I think that’s part of our animal hording instincts. We always want more.

Inflation is not a bad way of giving us more without really giving more.

Despite inflation, people will always feel better if whatever they bought ends up worth multiples of the purchase price.

[briansd1]

[quote=davelj]

Yup. We the People – in aggregate, if not individually – want inflation.[/quote]

I think that’s part of our animal hording instincts. We always want more.

Inflation is not a bad way of giving us more without really giving more.

Despite inflation, people will always feel better if whatever they bought ends up worth multiples of the purchase price.

[briansd1]

[quote=davelj]

Yup. We the People – in aggregate, if not individually – want inflation.[/quote]

I think that’s part of our animal hording instincts. We always want more.

Inflation is not a bad way of giving us more without really giving more.

Despite inflation, people will always feel better if whatever they bought ends up worth multiples of the purchase price.

[CA renter]

[quote=davelj][quote=Rich Toscano]As far as slack and all that goes, I agree with John Hussman’s view:

“The Phillips Curve is simply a standard economic argument about relative scarcity. It says that when the labor markets are tight, nominal wages rise faster than the rate of general inflation (i.e. real wages rise), and when unemployment is high, nominal wages rise slower than the rate of general inflation (i.e. real wages fall). As we observed in the 1970’s, high unemployment can exist in concert with high rates of inflation. All that happens, in that case, is that wages tend to rise slower than prices. Assuming labor productivity is growing as well, real wages don’t keep pace with productivity growth. In any event, unemployment emphatically does not prevent the inflationary consequences of reckless creation of government liabilities.”[/quote]

This is true… but we didn’t see the kind of asset deflation in the ’70s that we’ve seen over the last few years either. We’ve got too many homes, offices and pretty much everything else at this point, which wasn’t the case in the ’70s. All of which is deflationary. Also, capacity utilization is around 74% and, if memory serves, 81% is the mean historically, and 82%+ is where inflation tends to get triggered. (Capacity utilization was higher-than-normal during the ’70s, but not for the whole decade. Then Volcker came along and started unwinding things in 1981.) Anyhow, lots of moving parts. I agree that getting fixated on one number – like unemployment – is not a good idea. But taking into account unempolyment + capacity utilization + asset deflation + a low savings rate (which will increase and cut into consumption) + a massive amount of debt that needs to get paid down… probably leads to low inflation for a while. What “a while” is is hard to know…[/quote]

What if prices are 25%-50% higher than they should be, but lower than they were a few years ago? What if these prices are the result of quantitative easing and artificially low rates, as opposed to being based on fundamental values? Is this not a form of inflation?

I would argue that we do not have too many houses, office buildings, etc., (though some are poorly located) but that they are priced too high. Our problem isn’t due to overcapacity, but rather demand destruction because the pricing mechanism isn’t being allowed to work. Look at all the people who are taking on roommates, moving in with family members, etc., because they cannot afford to form their own households at these artificially inflated prices.

Right now, our stock market is near the optimistic levels seen during the massive bubble years of ~1999 and ~2005, as are commodity, bond, and housing prices (in many locations). All this during the “Greatest Recession Since the Great Depression”! I see inflation all around us **right now.**

We didn’t have a crisis because of CDSs or “toxic” mortgages. The crisis was due to high prices that forced anyone who wanted to participate in the economy to take on risky debt, with the lenders trying to hedge against the obvious risk of default (because prices were too high!) via CDSs and other securities. It was a debt-price spiral that grew out of control, and it’s still with us because the govt has chosen to take on the risks and leverage in order to save the financial industry by keeping asset prices artificially high (inflated!).

IMHO, the **solution** to our problems is price deflation and much higher interest rates. Of course, you’ll never hear any of our politicians saying this.

[CA renter]

[quote=davelj][quote=Rich Toscano]As far as slack and all that goes, I agree with John Hussman’s view:

“The Phillips Curve is simply a standard economic argument about relative scarcity. It says that when the labor markets are tight, nominal wages rise faster than the rate of general inflation (i.e. real wages rise), and when unemployment is high, nominal wages rise slower than the rate of general inflation (i.e. real wages fall). As we observed in the 1970’s, high unemployment can exist in concert with high rates of inflation. All that happens, in that case, is that wages tend to rise slower than prices. Assuming labor productivity is growing as well, real wages don’t keep pace with productivity growth. In any event, unemployment emphatically does not prevent the inflationary consequences of reckless creation of government liabilities.”[/quote]

This is true… but we didn’t see the kind of asset deflation in the ’70s that we’ve seen over the last few years either. We’ve got too many homes, offices and pretty much everything else at this point, which wasn’t the case in the ’70s. All of which is deflationary. Also, capacity utilization is around 74% and, if memory serves, 81% is the mean historically, and 82%+ is where inflation tends to get triggered. (Capacity utilization was higher-than-normal during the ’70s, but not for the whole decade. Then Volcker came along and started unwinding things in 1981.) Anyhow, lots of moving parts. I agree that getting fixated on one number – like unemployment – is not a good idea. But taking into account unempolyment + capacity utilization + asset deflation + a low savings rate (which will increase and cut into consumption) + a massive amount of debt that needs to get paid down… probably leads to low inflation for a while. What “a while” is is hard to know…[/quote]

What if prices are 25%-50% higher than they should be, but lower than they were a few years ago? What if these prices are the result of quantitative easing and artificially low rates, as opposed to being based on fundamental values? Is this not a form of inflation?

I would argue that we do not have too many houses, office buildings, etc., (though some are poorly located) but that they are priced too high. Our problem isn’t due to overcapacity, but rather demand destruction because the pricing mechanism isn’t being allowed to work. Look at all the people who are taking on roommates, moving in with family members, etc., because they cannot afford to form their own households at these artificially inflated prices.

Right now, our stock market is near the optimistic levels seen during the massive bubble years of ~1999 and ~2005, as are commodity, bond, and housing prices (in many locations). All this during the “Greatest Recession Since the Great Depression”! I see inflation all around us **right now.**

We didn’t have a crisis because of CDSs or “toxic” mortgages. The crisis was due to high prices that forced anyone who wanted to participate in the economy to take on risky debt, with the lenders trying to hedge against the obvious risk of default (because prices were too high!) via CDSs and other securities. It was a debt-price spiral that grew out of control, and it’s still with us because the govt has chosen to take on the risks and leverage in order to save the financial industry by keeping asset prices artificially high (inflated!).

IMHO, the **solution** to our problems is price deflation and much higher interest rates. Of course, you’ll never hear any of our politicians saying this.

[CA renter]

[quote=davelj][quote=Rich Toscano]As far as slack and all that goes, I agree with John Hussman’s view:

“The Phillips Curve is simply a standard economic argument about relative scarcity. It says that when the labor markets are tight, nominal wages rise faster than the rate of general inflation (i.e. real wages rise), and when unemployment is high, nominal wages rise slower than the rate of general inflation (i.e. real wages fall). As we observed in the 1970’s, high unemployment can exist in concert with high rates of inflation. All that happens, in that case, is that wages tend to rise slower than prices. Assuming labor productivity is growing as well, real wages don’t keep pace with productivity growth. In any event, unemployment emphatically does not prevent the inflationary consequences of reckless creation of government liabilities.”[/quote]

This is true… but we didn’t see the kind of asset deflation in the ’70s that we’ve seen over the last few years either. We’ve got too many homes, offices and pretty much everything else at this point, which wasn’t the case in the ’70s. All of which is deflationary. Also, capacity utilization is around 74% and, if memory serves, 81% is the mean historically, and 82%+ is where inflation tends to get triggered. (Capacity utilization was higher-than-normal during the ’70s, but not for the whole decade. Then Volcker came along and started unwinding things in 1981.) Anyhow, lots of moving parts. I agree that getting fixated on one number – like unemployment – is not a good idea. But taking into account unempolyment + capacity utilization + asset deflation + a low savings rate (which will increase and cut into consumption) + a massive amount of debt that needs to get paid down… probably leads to low inflation for a while. What “a while” is is hard to know…[/quote]

What if prices are 25%-50% higher than they should be, but lower than they were a few years ago? What if these prices are the result of quantitative easing and artificially low rates, as opposed to being based on fundamental values? Is this not a form of inflation?

I would argue that we do not have too many houses, office buildings, etc., (though some are poorly located) but that they are priced too high. Our problem isn’t due to overcapacity, but rather demand destruction because the pricing mechanism isn’t being allowed to work. Look at all the people who are taking on roommates, moving in with family members, etc., because they cannot afford to form their own households at these artificially inflated prices.

Right now, our stock market is near the optimistic levels seen during the massive bubble years of ~1999 and ~2005, as are commodity, bond, and housing prices (in many locations). All this during the “Greatest Recession Since the Great Depression”! I see inflation all around us **right now.**

We didn’t have a crisis because of CDSs or “toxic” mortgages. The crisis was due to high prices that forced anyone who wanted to participate in the economy to take on risky debt, with the lenders trying to hedge against the obvious risk of default (because prices were too high!) via CDSs and other securities. It was a debt-price spiral that grew out of control, and it’s still with us because the govt has chosen to take on the risks and leverage in order to save the financial industry by keeping asset prices artificially high (inflated!).

IMHO, the **solution** to our problems is price deflation and much higher interest rates. Of course, you’ll never hear any of our politicians saying this.

[CA renter]

[quote=davelj][quote=Rich Toscano]As far as slack and all that goes, I agree with John Hussman’s view:

“The Phillips Curve is simply a standard economic argument about relative scarcity. It says that when the labor markets are tight, nominal wages rise faster than the rate of general inflation (i.e. real wages rise), and when unemployment is high, nominal wages rise slower than the rate of general inflation (i.e. real wages fall). As we observed in the 1970’s, high unemployment can exist in concert with high rates of inflation. All that happens, in that case, is that wages tend to rise slower than prices. Assuming labor productivity is growing as well, real wages don’t keep pace with productivity growth. In any event, unemployment emphatically does not prevent the inflationary consequences of reckless creation of government liabilities.”[/quote]

This is true… but we didn’t see the kind of asset deflation in the ’70s that we’ve seen over the last few years either. We’ve got too many homes, offices and pretty much everything else at this point, which wasn’t the case in the ’70s. All of which is deflationary. Also, capacity utilization is around 74% and, if memory serves, 81% is the mean historically, and 82%+ is where inflation tends to get triggered. (Capacity utilization was higher-than-normal during the ’70s, but not for the whole decade. Then Volcker came along and started unwinding things in 1981.) Anyhow, lots of moving parts. I agree that getting fixated on one number – like unemployment – is not a good idea. But taking into account unempolyment + capacity utilization + asset deflation + a low savings rate (which will increase and cut into consumption) + a massive amount of debt that needs to get paid down… probably leads to low inflation for a while. What “a while” is is hard to know…[/quote]

What if prices are 25%-50% higher than they should be, but lower than they were a few years ago? What if these prices are the result of quantitative easing and artificially low rates, as opposed to being based on fundamental values? Is this not a form of inflation?

I would argue that we do not have too many houses, office buildings, etc., (though some are poorly located) but that they are priced too high. Our problem isn’t due to overcapacity, but rather demand destruction because the pricing mechanism isn’t being allowed to work. Look at all the people who are taking on roommates, moving in with family members, etc., because they cannot afford to form their own households at these artificially inflated prices.

Right now, our stock market is near the optimistic levels seen during the massive bubble years of ~1999 and ~2005, as are commodity, bond, and housing prices (in many locations). All this during the “Greatest Recession Since the Great Depression”! I see inflation all around us **right now.**

We didn’t have a crisis because of CDSs or “toxic” mortgages. The crisis was due to high prices that forced anyone who wanted to participate in the economy to take on risky debt, with the lenders trying to hedge against the obvious risk of default (because prices were too high!) via CDSs and other securities. It was a debt-price spiral that grew out of control, and it’s still with us because the govt has chosen to take on the risks and leverage in order to save the financial industry by keeping asset prices artificially high (inflated!).

IMHO, the **solution** to our problems is price deflation and much higher interest rates. Of course, you’ll never hear any of our politicians saying this.

[CA renter]

[quote=davelj][quote=Rich Toscano]As far as slack and all that goes, I agree with John Hussman’s view:

“The Phillips Curve is simply a standard economic argument about relative scarcity. It says that when the labor markets are tight, nominal wages rise faster than the rate of general inflation (i.e. real wages rise), and when unemployment is high, nominal wages rise slower than the rate of general inflation (i.e. real wages fall). As we observed in the 1970’s, high unemployment can exist in concert with high rates of inflation. All that happens, in that case, is that wages tend to rise slower than prices. Assuming labor productivity is growing as well, real wages don’t keep pace with productivity growth. In any event, unemployment emphatically does not prevent the inflationary consequences of reckless creation of government liabilities.”[/quote]

This is true… but we didn’t see the kind of asset deflation in the ’70s that we’ve seen over the last few years either. We’ve got too many homes, offices and pretty much everything else at this point, which wasn’t the case in the ’70s. All of which is deflationary. Also, capacity utilization is around 74% and, if memory serves, 81% is the mean historically, and 82%+ is where inflation tends to get triggered. (Capacity utilization was higher-than-normal during the ’70s, but not for the whole decade. Then Volcker came along and started unwinding things in 1981.) Anyhow, lots of moving parts. I agree that getting fixated on one number – like unemployment – is not a good idea. But taking into account unempolyment + capacity utilization + asset deflation + a low savings rate (which will increase and cut into consumption) + a massive amount of debt that needs to get paid down… probably leads to low inflation for a while. What “a while” is is hard to know…[/quote]

What if prices are 25%-50% higher than they should be, but lower than they were a few years ago? What if these prices are the result of quantitative easing and artificially low rates, as opposed to being based on fundamental values? Is this not a form of inflation?

I would argue that we do not have too many houses, office buildings, etc., (though some are poorly located) but that they are priced too high. Our problem isn’t due to overcapacity, but rather demand destruction because the pricing mechanism isn’t being allowed to work. Look at all the people who are taking on roommates, moving in with family members, etc., because they cannot afford to form their own households at these artificially inflated prices.

Right now, our stock market is near the optimistic levels seen during the massive bubble years of ~1999 and ~2005, as are commodity, bond, and housing prices (in many locations). All this during the “Greatest Recession Since the Great Depression”! I see inflation all around us **right now.**

We didn’t have a crisis because of CDSs or “toxic” mortgages. The crisis was due to high prices that forced anyone who wanted to participate in the economy to take on risky debt, with the lenders trying to hedge against the obvious risk of default (because prices were too high!) via CDSs and other securities. It was a debt-price spiral that grew out of control, and it’s still with us because the govt has chosen to take on the risks and leverage in order to save the financial industry by keeping asset prices artificially high (inflated!).

IMHO, the **solution** to our problems is price deflation and much higher interest rates. Of course, you’ll never hear any of our politicians saying this.

[davelj]

[quote=CA renter]

What if prices are 25%-50% higher than they should be, but lower than they were a few years ago? What if these prices are the result of quantitative easing and artificially low rates, as opposed to being based on fundamental values? Is this not a form of inflation?[/quote]

It is, but I doubt it will last for long. I suspect both the stock market and the housing market will revert back to long-term trend over the next couple of years (that is, decline from here). There is one major upside to the Fed’s handling of the crisis thus far (granted, they played a large part in creating the crisis, but…) – that is, providing liquidity to push prices back up – and that is that banks have been able to raise hundreds of billions in equity capital that We the People didn’t have to provide. Now, you may correctly think, “But those people are going to regret giving the banks that capital when prices start to fall again,” and you’ll be right. But, frankly, that’s not our – that is, yours and mine – problem; that’s their problem. I’m just glad it’s not MY capital. And it provides a cushion that lessen’s (but certainly doesn’t eliminate) the possibility that these dickwads will need taxpayer capital in the future. Where home prices are concerned, I think lots of folks are probably buying mildly over-valued houses right now (granted, on very good long-term financing terms), but I doubt most of the folks are just going to roll over if prices decline 10%-20% from here (that is, back near the prior trough). I think they’ll tough it out. Now, if prices decline 30%+… that’s another story. But I think the Fed’s drawn a line in the sand with house prices around the long-term trend (i.e., the prior trough) below which they will move heaven and earth to maintain.

[quote=CA renter]
I would argue that we do not have too many houses, office buildings, etc., (though some are poorly located) but that they are priced too high. Our problem isn’t due to overcapacity, but rather demand destruction because the pricing mechanism isn’t being allowed to work. Look at all the people who are taking on roommates, moving in with family members, etc., because they cannot afford to form their own households at these artificially inflated prices.[/quote]

I think we have too many houses – irrespective of prices. If you look at the long-term trend of housing units relative to the population and household formation, we’ve got maybe 2.5 million or so excess housing units. I agree that there’s been demand destruction due the artificial goosing of prices, but… we still simply have too many units – that’s really the larger problem. (We also have too much CRE, but CRE isn’t as overbuilt as SFRs.) But I also think a lot more of these units will start moving if prices move back to last year’s levels (which gets to your point) and rates remain low.

[quote=CA renter]
Right now, our stock market is near the optimistic levels seen during the massive bubble years of ~1999 and ~2005, as are commodity, bond, and housing prices (in many locations). All this during the “Greatest Recession Since the Great Depression”! I see inflation all around us **right now.**[/quote]

I think the stock market, housing, and commodity post-bubble mini-bubbles are going to pop shortly. (Although, the stock market is well below the Super Bubble levels of 1999 and 2006 – and you know that.) I think a slowing economy will take care of them. Hopefully, the Fed will sit back and let the markets clear this time around (but I’m not gonna hold my breath if prices REALLY start swan-diving into the shitter).

[quote=CA renter]
We didn’t have a crisis because of CDSs or “toxic” mortgages. The crisis was due to high prices that forced anyone who wanted to participate in the economy to take on risky debt, with the lenders trying to hedge against the obvious risk of default (because prices were too high!) via CDSs and other securities. It was a debt-price spiral that grew out of control, and it’s still with us because the govt has chosen to take on the risks and leverage in order to save the financial industry by keeping asset prices artificially high (inflated!).[/quote]

I think the high prices were caused by under-regulated reckless lenders who enabled under-capitalized reckless borrowers to do very stupid things. And the Fed aided and abetted both with lower-than-justified rates and lax oversight.

[quote=CA renter]
IMHO, the **solution** to our problems is price deflation and much higher interest rates. Of course, you’ll never hear any of our politicians saying this.[/quote]

Unfortunately, we probably need low interest rates for a while so that the banks can repair their balance sheets and so that folks can suck up the excess inventory of houses (hopefully at prices lower than they are now). I don’t think the Fed fears a falling stock market or modestly lower home prices right now. I think if prices fall back to their long-term trend levels the Fed will let it happen. But if shit really hits the fan, expect to see a(nother) mountain of liquidity.

[davelj]

[quote=CA renter]

What if prices are 25%-50% higher than they should be, but lower than they were a few years ago? What if these prices are the result of quantitative easing and artificially low rates, as opposed to being based on fundamental values? Is this not a form of inflation?[/quote]

It is, but I doubt it will last for long. I suspect both the stock market and the housing market will revert back to long-term trend over the next couple of years (that is, decline from here). There is one major upside to the Fed’s handling of the crisis thus far (granted, they played a large part in creating the crisis, but…) – that is, providing liquidity to push prices back up – and that is that banks have been able to raise hundreds of billions in equity capital that We the People didn’t have to provide. Now, you may correctly think, “But those people are going to regret giving the banks that capital when prices start to fall again,” and you’ll be right. But, frankly, that’s not our – that is, yours and mine – problem; that’s their problem. I’m just glad it’s not MY capital. And it provides a cushion that lessen’s (but certainly doesn’t eliminate) the possibility that these dickwads will need taxpayer capital in the future. Where home prices are concerned, I think lots of folks are probably buying mildly over-valued houses right now (granted, on very good long-term financing terms), but I doubt most of the folks are just going to roll over if prices decline 10%-20% from here (that is, back near the prior trough). I think they’ll tough it out. Now, if prices decline 30%+… that’s another story. But I think the Fed’s drawn a line in the sand with house prices around the long-term trend (i.e., the prior trough) below which they will move heaven and earth to maintain.

[quote=CA renter]
I would argue that we do not have too many houses, office buildings, etc., (though some are poorly located) but that they are priced too high. Our problem isn’t due to overcapacity, but rather demand destruction because the pricing mechanism isn’t being allowed to work. Look at all the people who are taking on roommates, moving in with family members, etc., because they cannot afford to form their own households at these artificially inflated prices.[/quote]

I think we have too many houses – irrespective of prices. If you look at the long-term trend of housing units relative to the population and household formation, we’ve got maybe 2.5 million or so excess housing units. I agree that there’s been demand destruction due the artificial goosing of prices, but… we still simply have too many units – that’s really the larger problem. (We also have too much CRE, but CRE isn’t as overbuilt as SFRs.) But I also think a lot more of these units will start moving if prices move back to last year’s levels (which gets to your point) and rates remain low.

[quote=CA renter]
Right now, our stock market is near the optimistic levels seen during the massive bubble years of ~1999 and ~2005, as are commodity, bond, and housing prices (in many locations). All this during the “Greatest Recession Since the Great Depression”! I see inflation all around us **right now.**[/quote]

I think the stock market, housing, and commodity post-bubble mini-bubbles are going to pop shortly. (Although, the stock market is well below the Super Bubble levels of 1999 and 2006 – and you know that.) I think a slowing economy will take care of them. Hopefully, the Fed will sit back and let the markets clear this time around (but I’m not gonna hold my breath if prices REALLY start swan-diving into the shitter).

[quote=CA renter]
We didn’t have a crisis because of CDSs or “toxic” mortgages. The crisis was due to high prices that forced anyone who wanted to participate in the economy to take on risky debt, with the lenders trying to hedge against the obvious risk of default (because prices were too high!) via CDSs and other securities. It was a debt-price spiral that grew out of control, and it’s still with us because the govt has chosen to take on the risks and leverage in order to save the financial industry by keeping asset prices artificially high (inflated!).[/quote]

I think the high prices were caused by under-regulated reckless lenders who enabled under-capitalized reckless borrowers to do very stupid things. And the Fed aided and abetted both with lower-than-justified rates and lax oversight.

[quote=CA renter]
IMHO, the **solution** to our problems is price deflation and much higher interest rates. Of course, you’ll never hear any of our politicians saying this.[/quote]

Unfortunately, we probably need low interest rates for a while so that the banks can repair their balance sheets and so that folks can suck up the excess inventory of houses (hopefully at prices lower than they are now). I don’t think the Fed fears a falling stock market or modestly lower home prices right now. I think if prices fall back to their long-term trend levels the Fed will let it happen. But if shit really hits the fan, expect to see a(nother) mountain of liquidity.

[davelj]

[quote=CA renter]

What if prices are 25%-50% higher than they should be, but lower than they were a few years ago? What if these prices are the result of quantitative easing and artificially low rates, as opposed to being based on fundamental values? Is this not a form of inflation?[/quote]

It is, but I doubt it will last for long. I suspect both the stock market and the housing market will revert back to long-term trend over the next couple of years (that is, decline from here). There is one major upside to the Fed’s handling of the crisis thus far (granted, they played a large part in creating the crisis, but…) – that is, providing liquidity to push prices back up – and that is that banks have been able to raise hundreds of billions in equity capital that We the People didn’t have to provide. Now, you may correctly think, “But those people are going to regret giving the banks that capital when prices start to fall again,” and you’ll be right. But, frankly, that’s not our – that is, yours and mine – problem; that’s their problem. I’m just glad it’s not MY capital. And it provides a cushion that lessen’s (but certainly doesn’t eliminate) the possibility that these dickwads will need taxpayer capital in the future. Where home prices are concerned, I think lots of folks are probably buying mildly over-valued houses right now (granted, on very good long-term financing terms), but I doubt most of the folks are just going to roll over if prices decline 10%-20% from here (that is, back near the prior trough). I think they’ll tough it out. Now, if prices decline 30%+… that’s another story. But I think the Fed’s drawn a line in the sand with house prices around the long-term trend (i.e., the prior trough) below which they will move heaven and earth to maintain.

[quote=CA renter]
I would argue that we do not have too many houses, office buildings, etc., (though some are poorly located) but that they are priced too high. Our problem isn’t due to overcapacity, but rather demand destruction because the pricing mechanism isn’t being allowed to work. Look at all the people who are taking on roommates, moving in with family members, etc., because they cannot afford to form their own households at these artificially inflated prices.[/quote]

I think we have too many houses – irrespective of prices. If you look at the long-term trend of housing units relative to the population and household formation, we’ve got maybe 2.5 million or so excess housing units. I agree that there’s been demand destruction due the artificial goosing of prices, but… we still simply have too many units – that’s really the larger problem. (We also have too much CRE, but CRE isn’t as overbuilt as SFRs.) But I also think a lot more of these units will start moving if prices move back to last year’s levels (which gets to your point) and rates remain low.

[quote=CA renter]
Right now, our stock market is near the optimistic levels seen during the massive bubble years of ~1999 and ~2005, as are commodity, bond, and housing prices (in many locations). All this during the “Greatest Recession Since the Great Depression”! I see inflation all around us **right now.**[/quote]

I think the stock market, housing, and commodity post-bubble mini-bubbles are going to pop shortly. (Although, the stock market is well below the Super Bubble levels of 1999 and 2006 – and you know that.) I think a slowing economy will take care of them. Hopefully, the Fed will sit back and let the markets clear this time around (but I’m not gonna hold my breath if prices REALLY start swan-diving into the shitter).

[quote=CA renter]
We didn’t have a crisis because of CDSs or “toxic” mortgages. The crisis was due to high prices that forced anyone who wanted to participate in the economy to take on risky debt, with the lenders trying to hedge against the obvious risk of default (because prices were too high!) via CDSs and other securities. It was a debt-price spiral that grew out of control, and it’s still with us because the govt has chosen to take on the risks and leverage in order to save the financial industry by keeping asset prices artificially high (inflated!).[/quote]

I think the high prices were caused by under-regulated reckless lenders who enabled under-capitalized reckless borrowers to do very stupid things. And the Fed aided and abetted both with lower-than-justified rates and lax oversight.

[quote=CA renter]
IMHO, the **solution** to our problems is price deflation and much higher interest rates. Of course, you’ll never hear any of our politicians saying this.[/quote]

Unfortunately, we probably need low interest rates for a while so that the banks can repair their balance sheets and so that folks can suck up the excess inventory of houses (hopefully at prices lower than they are now). I don’t think the Fed fears a falling stock market or modestly lower home prices right now. I think if prices fall back to their long-term trend levels the Fed will let it happen. But if shit really hits the fan, expect to see a(nother) mountain of liquidity.

[davelj]

[quote=CA renter]

What if prices are 25%-50% higher than they should be, but lower than they were a few years ago? What if these prices are the result of quantitative easing and artificially low rates, as opposed to being based on fundamental values? Is this not a form of inflation?[/quote]

It is, but I doubt it will last for long. I suspect both the stock market and the housing market will revert back to long-term trend over the next couple of years (that is, decline from here). There is one major upside to the Fed’s handling of the crisis thus far (granted, they played a large part in creating the crisis, but…) – that is, providing liquidity to push prices back up – and that is that banks have been able to raise hundreds of billions in equity capital that We the People didn’t have to provide. Now, you may correctly think, “But those people are going to regret giving the banks that capital when prices start to fall again,” and you’ll be right. But, frankly, that’s not our – that is, yours and mine – problem; that’s their problem. I’m just glad it’s not MY capital. And it provides a cushion that lessen’s (but certainly doesn’t eliminate) the possibility that these dickwads will need taxpayer capital in the future. Where home prices are concerned, I think lots of folks are probably buying mildly over-valued houses right now (granted, on very good long-term financing terms), but I doubt most of the folks are just going to roll over if prices decline 10%-20% from here (that is, back near the prior trough). I think they’ll tough it out. Now, if prices decline 30%+… that’s another story. But I think the Fed’s drawn a line in the sand with house prices around the long-term trend (i.e., the prior trough) below which they will move heaven and earth to maintain.

[quote=CA renter]
I would argue that we do not have too many houses, office buildings, etc., (though some are poorly located) but that they are priced too high. Our problem isn’t due to overcapacity, but rather demand destruction because the pricing mechanism isn’t being allowed to work. Look at all the people who are taking on roommates, moving in with family members, etc., because they cannot afford to form their own households at these artificially inflated prices.[/quote]

I think we have too many houses – irrespective of prices. If you look at the long-term trend of housing units relative to the population and household formation, we’ve got maybe 2.5 million or so excess housing units. I agree that there’s been demand destruction due the artificial goosing of prices, but… we still simply have too many units – that’s really the larger problem. (We also have too much CRE, but CRE isn’t as overbuilt as SFRs.) But I also think a lot more of these units will start moving if prices move back to last year’s levels (which gets to your point) and rates remain low.

[quote=CA renter]
Right now, our stock market is near the optimistic levels seen during the massive bubble years of ~1999 and ~2005, as are commodity, bond, and housing prices (in many locations). All this during the “Greatest Recession Since the Great Depression”! I see inflation all around us **right now.**[/quote]

I think the stock market, housing, and commodity post-bubble mini-bubbles are going to pop shortly. (Although, the stock market is well below the Super Bubble levels of 1999 and 2006 – and you know that.) I think a slowing economy will take care of them. Hopefully, the Fed will sit back and let the markets clear this time around (but I’m not gonna hold my breath if prices REALLY start swan-diving into the shitter).

[quote=CA renter]
We didn’t have a crisis because of CDSs or “toxic” mortgages. The crisis was due to high prices that forced anyone who wanted to participate in the economy to take on risky debt, with the lenders trying to hedge against the obvious risk of default (because prices were too high!) via CDSs and other securities. It was a debt-price spiral that grew out of control, and it’s still with us because the govt has chosen to take on the risks and leverage in order to save the financial industry by keeping asset prices artificially high (inflated!).[/quote]

I think the high prices were caused by under-regulated reckless lenders who enabled under-capitalized reckless borrowers to do very stupid things. And the Fed aided and abetted both with lower-than-justified rates and lax oversight.

[quote=CA renter]
IMHO, the **solution** to our problems is price deflation and much higher interest rates. Of course, you’ll never hear any of our politicians saying this.[/quote]

Unfortunately, we probably need low interest rates for a while so that the banks can repair their balance sheets and so that folks can suck up the excess inventory of houses (hopefully at prices lower than they are now). I don’t think the Fed fears a falling stock market or modestly lower home prices right now. I think if prices fall back to their long-term trend levels the Fed will let it happen. But if shit really hits the fan, expect to see a(nother) mountain of liquidity.

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