Use access key #2 to skip to page content.

We Really Need to Get These Tulip Prices Up

Recs

28

November 29, 2012 – Comments (17)

To really understand the absurdity of mainstream economics, one only needs to study the reaction to the current crisis.

The housing bubble, like all bubbles, finds its origin in an expansion of the monetary unit beyond market requirements.  To understand that sentence requires an understanding of how markets work.  Mainstream economists spend very little time investigating how markets work, instead focusing on all the ways (both real and imaginary) that they don't work (as they would like them to.)

Markets clear. And no expansion of the monetary unit can persist unchecked without intervention, be it a law that restricts market activity (your classic price control or regulatory incentive) or an institution created to purposefully keep the expansion going (central banking). 

However, no intervention has ever been able to keep a bubble inflated indefinitely - the bizarre goal of Keynesian economists.  They are not particularly concerned with understanding why a market would no longer demand goods and services available.  Rather, they focus on trying to re-stimulate that demand.  It matters little what is available. Just buy it.

In essence, the Keynesian says "I don't care if you don't like tulips anymore. Depressed tulip prices are damaging our economy and slowing our recovery.  We need to get that tulip industry going again, and that starts with bringing those prices back up!"

The Coming Boom

This illogic translates to cheers from economic journalists when post-bubble industries start to recover.  Little thought is given to whether this recovery makes any economic sense or as to the root of the problem.  Motley Fool journalist Morgan Housel worte such a piece recently:

"The new boom will be driven by three things: A rebound in housing construction, the rise in domestic energy production, and the end of consumer debt deleveraging."

That piece landed Morgan 264 recs and counting.  In the comment section, he offered a contrarian reason for optimism as well:

"Anyone who suggests anything about optimism is met with giggles and mockery. Quite telling." 

What journalists like Morgan fail to realize is that the difference in opinion is not the result of interpretation of data, not a dispute of the data itself.

Housing is Recovering

Make no mistake about it, housing is on the upswing.  Robert Wenzel of Economic Policy Journal has been following this trend for months.  The difference between an economist like Weznel and the mainstream opinion is in the interpretation of the consequences of such a recovery.

In the same way that a recovering Tulip Industry would have provided a temporary benefit to thousands of Dutch that lost their economic position from the predictable collapse, so will a housing recovery offer many benefits to the American economy in the short run.  It's also completely illogical to ignore the long term ramifications of such a recovery.  

We got into this mess by cheering bubbles brought to us by manipulation of credit.  Such manipulation distorts reality, causing a mismatch between consumer preferences and producer investment.  The market had no need for the millions of excess homes brought to the market.  There was a non-existent demand that had to be artificially created through credit expansion.  The longer the expansion persisted, the worse the resulting bubble.

Imagine the silliness in propping up the Tulip Bubble and you can start to understand why I can't be as optimistic about The Coming Boom as Morgan Housel.  

Yes, housing prices are on the rise, and yes, that will create a temporary feeling of economic recovery, particularly among those who will directly benefit.  But to imply that this is a good thing for the overall health of the economy, to ridicule those who attempt to look under the surface in order to understand the root problems, or to cheer the institutions and force used to create this fleeting euphoria is plain ignorant.

Sadly, such economic ignorance is perpetuated, not remedied by the constant mainstream media cheerleading over any econometric indicator of recovery.  Motley Fool's writers offer few exceptions.

David in Liberty

17 Comments – Post Your Own

#1) On November 29, 2012 at 1:13 PM, StuckinQatar (< 20) wrote:

Check out Doug French: Early Speculative Bubbles and Increases in the supply of money, for a great break down of the Tulip bubble. I know if I had not read this I would have had no idea what David was talking about when he was referring to tulips. Its available in PDF form at the Mises Institute.Thanks for another great read David.

Cheers!

 

Report this comment
#2) On November 29, 2012 at 1:16 PM, whereaminow (20.08) wrote:

StuckinQatar?

I know what that's like! Do I know you, are you a friend of a friend, or is this a coinkydink?

David in Liberty

Report this comment
#3) On November 29, 2012 at 1:24 PM, PeteysTired (< 20) wrote:

Have real wages increased?  My guess is no. So, for prices to continue to rise people will need to bring money from savings or borrow more.  

Can mortgage rates go lower?....maybe we can get paid to have a mortgage :)

Report this comment
#4) On November 29, 2012 at 1:39 PM, StuckinQatar (< 20) wrote:

Not sure what a coinkydink is, but yes you know me. I have been here for ever.

Cheers,

Rob

Report this comment
#5) On November 29, 2012 at 1:41 PM, whereaminow (20.08) wrote:

Haha, thanks Rob. Good to hear from you!

David in Liberty

Report this comment
#6) On November 29, 2012 at 2:23 PM, Louebsch (< 20) wrote:

+1 to PeteysTired.

I have recently been looking into buying a new home. I currently "own" a home that is underwater even after using HARP 2.0 to reduce my mortgage rate. So there is still no chance of me selling my current home unless I short sell, and to me that's not really a great option. I chose not to just walk away from the property out of moral obligation to family not to bankers, but this is a different discussion.

So my plan has been to buy a new home, as my wife and I are ready to step up into a bigger place, and then rent out the current home. However, in doing my research, I have found that homes are now being propped up by the banks and realty investors. The banks are foreclosing on properties slowly so they do not flood the market. Then, they sell the homes that they have already foreclosed on, in blocks to large real estate investors. These investors then either rent the homes out in current condition or sell the junk they don’t want. They also sell at the escalated prices because foreclosed homes are no longer cheap thanks to the banks preventing the market from becoming flooded.

Additionally, the small time investors are going to court house steps to pay in cash and refurbishing the homes and renting them out or selling at a profit. So now, joe six pack, who has not had a significant pay raise in the last 5 years has to compete with multiple types of investors, and the banks.

So in two years when the market is flooded with rental properties and rental prices start dropping like a rock, won’t all these investors start to sell their homes? Suddenly the market is flooded with homes for sale, by investors that have no cares about the state of the property and are just looking to profit from the sale. So now we have foreclosures coming onto the market, beat up rental properties, and regular sales, on top of high unemployment for as far as the eye can see. Then throw in higher mortgage rates at some point, and poof goes the housing bubble again.

I think I’ll just save my money for now and wait for the next bubble to break.

 

Report this comment
#7) On November 29, 2012 at 2:48 PM, whereaminow (20.08) wrote:

Lou,

In Hulsmann's Ethics of Money Production, he attempts to make the case that paper money distorts society's morality as well as its economy.  Particularly, this comes about by rewarding the irresponsible at everyone else's expense.  Your situation is similar to many people that have tried to do the right thing only to find out that they live in a system that punishes moral behavior.

Another thing that paper money does is that it turns everyone into a gambler.  Even the apologists of paper money laugh at the idea of saving in order to have a secure future.  They know it's a joke, but can't make the connection between the system and its consequences.  

Homeowners are forced to gamble today.  They have to try to guess where home prices will be in 2, 5, or 10 years before making a buying decision.  That's supposed to be the behavior of non-dividend stock speculators, not families looking for a place to live.

But that's the world of paper money and the one given to us by the intellectually bankrupt Keynesian revolution.

Market money is honest money.  Peper money is a license to steal.

David in Liberty

Report this comment
#8) On November 29, 2012 at 4:05 PM, smartmuffin (< 20) wrote:

As someone who currently rents, but would like to own a home someday, I am constantly rooting for housing prices to fall, and I fail to see why it's automatically considered "good news" when they rise.  When the price of anything else rises, say, gasoline for example, we consider it a terrible tragedy that must immediately be resolved.  Housing is an even more critical good for the average person than gasoline, and rent prices are directly affected by home prices.

So why do the elites who claim to care about the poor so much also celebrate when the price of housing rises?  The shenanigans that took place due to the easy credit David describes might have distorted this economic reality somewhat, but in general, the REAL poor people don't own houses.  They rent.  Lower prices makes it far more likely that home-ownership is within the reach of the average person, like me.  "Easy credit" might do so as well, but only for those who don't have any particular desire to be responsible.  For example, the reason I haven't bought a house yet isn't becuase the banks are evil and won't give me a loan, but it's because I cannot yet afford any houses that I desire.

As a side note:  the price of a home matters remarkably little to somone who buys a home for the sole purpose of simply living in it, another category that is far more likely to include the "poor" than the "rich."  My parents bought a house, a simple 3-bedroom in a not-incredibly-great neighborhood back in 2002.  When this whole bubble started to unravel, I used to ask them frequently how the value of the house was holding up.  The answer was consistently:  "We don't know, and it doesn't matter."  You see, my parents did a prudent thing.  They took out a fixed-rate mortgage and selected a home whose payment they would have no problem making.  They bought the house, not as an "investment" but to actually live in it, so the nominal value of it was completely irrelevant to them.  They couldn't care less.  They bought the house for the utility it provides, not as some sort of capital good or speculative investment or whatever.  The utility that a house provides does not typicall change with the market value of the house.

Just a few random thoughts.

Report this comment
#9) On November 29, 2012 at 11:43 PM, Eudemonic (64.73) wrote:

"Little thought is given to whether this recovery makes any economic sense"..I'm still baffled at this 'housing recovery'..It doesn't make sense to me...Is it "Liar Loans" 2.0? As long as everybody gets a cut of the deal and the staus quo remains,the risk is public while reward is public, nothing will change.

 

I recently bought a house. Went to local bank for financing. For six months I sent bank my payments. Then I received notice that the bank sold loan to some US Gov't agency (public risk)  Of course, the bank will still service my account (private reward) and will continue to handle the monthly payment. 

 I'm still livid..

 

Report this comment
#10) On November 30, 2012 at 5:49 PM, HuellHowser (< 20) wrote:

Another fine blog David. 

I don’t know much about economics, Keynesians…isn’t that what Obama is?  And Austrians…put another shrimp on the barbie!  But I still like your blogs.

One thing I’ve been thinking about lately and this blog kind of reminded me of it and I’d be curious your thoughts on it. Seems to me that the American economy has been artificially propped up for a while now.  From the Buying on margins during the 1920’s that lead to the crash of 1929, to the expansion of individual credit, to the tech boom of the late 90’s, to the recent housing bubble and I’m sure there are more examples out there...

Feels like we’re in a never ending cycle of finding the next big thing, inflating the hell out of it then letting the bottom fall out.    

Would you agree with that?  Am I onto something?  If so, I don’t think anyone would say that’s a sustainable model.  How long until we run out of markets to exploit? 

Report this comment
#11) On November 30, 2012 at 6:00 PM, whereaminow (20.08) wrote:

 HuellHowser,

It's a great question, and I'll try to write something intelligent tonight that explains the business cycle you are correctly noticing.

In the meantime, enjoy this:

David in Liberty

Report this comment
#12) On November 30, 2012 at 7:35 PM, zymok (< 20) wrote:

DiL,

Thanks. That video is priceless.

Report this comment
#13) On November 30, 2012 at 8:03 PM, ChrisGraley (29.73) wrote:

Mississippi bubble

Report this comment
#14) On November 30, 2012 at 9:58 PM, whereaminow (20.08) wrote:

HuellHowser,

Feels like we’re in a never ending cycle of finding the next big thing, inflating the hell out of it then letting the bottom fall out. 

Well I guess the best thing to say is that this statement is going to take you on a long journey if you try to discover why this is the case.

What you say is true.  Generally, this phenemonen is called the Business Cycle. And there are MANY theories as to its existence.  Keynesians will tell you that they are the natural outgrowth of capitalism, manifesting itself in wild swings of greed and exploitation.  Schumpeter felt that it was natural and necessary as a why to creatively destroy the old, outdated technologies and usher in the new era.   Milton Friedman theorized that all cycles were purely random deviations from normal business activity, with no appearant rhyme or reason.  Marxists have decided that capitalist system overproduces and outruns the wages of laborers to consume the never ending products put forward for profit.

And on and on it goes.  

I believe I've tried to break down every business cycle theory I could find in these blogs.  I don't feel that any of those listed even remotely explains the true cause.

While I can't say with 100% certainty that the Austrian School's theory of the cycle is everywhere and all times correct, I have found that it is the most logical, consistent, and explanatory.

There are a ton of resources I can point you to that can explain of these theories. Hit me up on the side and I'll give you some tips on where to look.  It's not important to me that everyone become "Austrian" (named so because the tradition was advanced by an Austrian scholar, Karl Menger, in the late 1800s).  But if you really want to know about economics, you have to know the business cycle and business cycle theories. 

David in Liberty 

Report this comment
#15) On December 01, 2012 at 10:02 AM, HuellHowser (< 20) wrote:

Thanks for indulging me.  Great video!  

Report this comment
#16) On December 02, 2012 at 4:01 AM, dag154 (59.79) wrote:

You over-simplify Keynesian economists, and this does not do you any credit.  

As Warren buffet has often pointed out, markets can panic. Beyond miss-pricing assets, this irrational behavior can cause huge damage or even a systemic collapse.  During the worst of the crisis, even Mc. Donald’s was having trouble financing itself!

 If you can have grossly over-priced assets, then you can also have grossly under-priced assets.  A Keynesian will tell you that you have the ability to provide liquidity when things are under-priced and reduce liquidity when things are over-priced.  Like a good doctor, you can watch over the health of the economy rather than watch it die and philosophize about the harshness of life. 

The fact that this point of view has been used to run long term and unabated budget deficits, is no justification for your approach.  ‘Let Detroit go bankrupt’ is just as destructive.  Good governance needs to be balanced and this will at times include the actions of Keynesian economists.     

 

Report this comment
#17) On December 02, 2012 at 2:57 PM, whereaminow (20.08) wrote:

dag154,

I'm trying to figure out if your comment is a joke or not.  

The nature of blog is to keep things simple, though I readily endorse that all interested in economics study competing theories.  Keynes' and Samuelson's work should be studied as readily as that of Mises and Rothbard.

Do you not see the hypocrisy in claiming that I oversimplify and then stating "'Let Detroit go Bankrupt' is just as destructive"?  C'mon...

Instead of doing the tired old back-and-forth Internet thing, if you can demonstrate a basic understanding of Austrian School Business Cycle Theory, I might be willing to engage you in debate.

David in Liberty

Report this comment

Featured Broker Partners


Advertisement