From my favourite arch-Keynesian provocateur (and fellow sci-fi fan):
The basic point is that the recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.
He got his wish, and it ended in 2008 with the great crunching, squelching sound of death by delinquency (via securitisation).
But now the housing bubble is coming back — on steroids (or methamphetamine, whichever analogy is more appropriate).
Via the newly-extended HARP (HAARP?) program, for $100 down, under-water homeowners can pick up a $200,000 government-insured loan for “repairs” and “renovations”. That’s 2000:1 leverage — steep even for Wall Street.
A covert stimulus package by any other name — but more importantly, it’s another bailout to creditors who lent huge quantities of money to people who couldn’t afford to repay it.
From Of Two Minds:
President Obama is taking credit for a new government plan to “save homeowners.” That is of course pure propaganda to mask the plan’s true goal: the perfection of debt-serfdom. The basic thrust of the plan is straightforward: encourage “underwater” homeowners whose mortgages exceed the value of their homes to re-finance at lower rates.
The stated incentive (i.e. the PR pitch) is to lower homeowners’ monthly payments via lower interest rates.
This is the Federal Reserve’s entire game plan in a nutshell: don’t write off any debt, as that would reveal the banking sector’s insolvency, but play extend-and-pretend with crushing debtloads by lowering the cost of servicing the debt.
The key purpose of this “plan” is to leave the principle owed to banks on their books at full value while ensnaring the hapless debt-serf (the “homeowner”) into permanent servitude to the banks.
Moreover, all that easy capital will go toward (re-)inflating more bubbles beyond just housing. Bubbles replacing bubbles — just like Krugman envisioned.
Is that the model for sustainable economic development? Or is that the model for the disastrous crisis-bailout-crisis-bailout-crisis cycle that we see today in so many nations?
The problem is that with every cycle of government-driven malinvestment, productive capital gets diverted to bullshit that society doesn’t really need. Housing inventories are already overstocked — that’s why prices are weak. Blowing more money at the housing market might shore up too-big-to-fail balance sheets, but it’s not going to make housing any less overstocked. And all of those materials, time, energy and resources going into reinflating the housing bubble could go to things America actually needs — like better infrastructure, and a market-driven alternative energy strategy (sorry Solyndra) to reduce oil dependency.
But — with a financial system filled with junkies who only think about tomorrow — can anyone really be surprised that the Obama administration is employing such a short-sighted vision of economic development? Obama is just giving into the braying mob who live on speculative bubbles at the cost of America’s future.
Could you provide source information for the initial quote? I can’t believe he wrote that! That is madness. You put it perfectly, Mr. Nobel Prize (interesting timing of his award by the way) advocated for a “disastrous crisis-bailout-crisis-bailout-crisis cycle that we see today.” Madness, pure madness.
Keep up the good work. I’ve grown to be a big fan of your work and try to read as much as I can. Only so many hours in the day and in the last couple years there has been so much information out there its hard to keep up. Thanks John!
Sorry Aziz, I have to disagree. I think this is the only option. The USA has high Fixed rates. They need to adopt a Variable rate environment.
When ARM’s reset, that triggered the problem, I agree the rates were too low to begin with, but at the time the person took out the mortgage, they had the income to service it. I could not believe they raised interest rates like they did. And I suspect the borrower did not expect that either. It seemed lunacy when inflation was not running away. It was almost engineered, but I don’t think they are that smart. The Australian central bank does not raise and lower rates like the Fed Reserve. Look at Australia. Much more stability.
I agree they borrowed to much, but at the rate of interest, they could manage. Perhaps they were flippers hoping to make a capital gain. Many I susspect were people wanting to own their own home.
So I think people have had a good scare and will improve their saving rate. The USA has shown to improve their rate. Australia has a variable interest rate, so people have been paying down their mortgage and this has kept the housing market afloat.
2000:1 leverage is the only option? What about letting brokers and banks who lent at fixed rates and whose clients are defaulting go bust? Eventually, some event is going to bring down the entire system, and we are going to have to rebuild. The sooner that happens — and the sooner we can get on a sounder footing — the better.
The housing bubble isn’t coming back. Only a very few have even attempted to take advantage of the HAARP program. The problem is people have wised up- who wants to continue paying interest on a depreciating asset? They don’t want to refinance- they want out, and to run away.
The only solution is to reduce the debt, either through default or repayment. We’re seeing a little of each,but the pace is too slow and the result is choking the general economy.
I agree the solution is some sort of reset, and the sooner the better. We can’t build anything lasting on the current foundation of manipulated rates and government favoritism. Unfortuantely, it looks like managed decline may be successful both at preventing total collapse and in saving the instigator’s butts.
The whole idea of this new package is to re-inflate the bubble (and ignite some new bubbles) through throwing cash at anyone who will take it for almost no downpayment, (and no real oversight that it is not spent on stuff like iPhones — in fact, the central planners would be pretty happy if it goes on iPhones because that would “raise aggregate demand”). The Obama administration looked at the low participation rates (as you rightly note) and saw that opening it up to a whole new cadre of clients (read: willing victims) could be a whole new stimulus package. If Op Twist is QE 2.5 it’s not wholly inaccurate to compare this to QE 2.75.
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