Tuesday, February 16, 2016

Housing: Part 117 - The canary had it coming

Scott Sumner references this nice summary, on Facebook, of the market monetarist argument, by Eliezer Yudkowski.  (Well, a long summary.)

One of the comments was: "I think I finally understand why so many people keep saying inflation is a good thing.  I still disagree, because it seems to be mostly for the benefit of foolish people who haven't saved enough for deflation to be helpful to them."  This seems to be a common theme among monetary hawks and populists.  Monetary stability is a bailout for irresponsible speculators.

A century ago, populists held the opposite view.  William Jennings Bryan made a political career out of demanding inflation for the common man.

Think of all those irresponsible, greedy 19th century banks.  Some farmer waltzes in to their loan office in the spring and says, "Hey, if you loan me some cash now for seed, I will pay you back, with a hefty profit, in the fall, when I harvest."  And, banker after banker, with dollar signs in their eyes, agreed.  Never mind that for this unlikely speculation to be sustainable, they needed to depend on the farmer to get out of bed each morning to plant, weed, fertilize, and harvest.  They needed to assume he would be healthy and functional throughout the summer.  Oh, and there needed to be some rain the spring, but not too much.  Don't forget that hoards of insects infesting whole regions was not uncommon at the time.  The farmer would need to time just right when he planted and harvested to account for fickle and unpredictable weather.  Compared to our defunct subprime mortgage originators, Bryan's agricultural bankers were daredevils.

The whole system was built on a façade of greed and over-optimism.  And Bryan wanted to just come along and bail out the farmers who were foolish enough to put themselves in a position where deflation would hurt them.

Here's the problem.  The most leveraged, risky economic participants will always be the first harmed in the face of an economic shock.  Our obsession on this fact has led us, maddeningly, to a place where economic stability, itself, is now considered to be a moral hazard issue.  This is why I think our current economic policy is a policy of self flagellation.  There is a plurality of support in this country for imposed self-harm, explicitly because it harms those people who are most vulnerable to potential harms!

It's even worse than that.  The problem at the core of finance is the intractable comingling of desert and luck.  In a world of abundance - of extended education, saving, and retirement - we are all like Bryan's farmers.  And we're not comfortable with it.  Many households, faced with the dilemma that the privilege of living in California means spending 35% or more of their incomes on rent, decided that ownership, even leveraged ownership, was a useful hedge of that high and uncertain cost.  They experienced the modern equivalent of a farmer's ill-timed flood.  And, come to find out, our public policy was to seed the clouds.  And, when some of us yell, "Stop it!  This is harming people."  The response is, "How else will they learn?  They keep borrowing money to plant their seeds, assuming they will have a hearty harvest in the fall.  They need to understand that crops can fail.  How will they understand that if their crops don't fail?"

And, just like Bryan's farmers, it seems as though whenever thing go sour, whenever the risks we exposed ourselves to turned against us, there's a God damned banker doing the devil's work.  The banker made the loan that ended up failing, and the banker demanded the keys to the house when the farm was auctioned off.

Bryan hated the banks, too.  But, he wished to push the harm to them through the soft default of inflation.  Today, we won't settle for that.  We want hard defaults.  Lessons need to be learned.  Even our progressive president has peopled the FOMC with monetary hawks.  And, shelves full of books about the inevitable housing bust complain that we should have bailed out the borrowers instead of the banks.  OK.  How about some monetary support so the bust wasn't so inevitable?  I'm not even talking about hyperinflation.  What if we had just mimicked the policy regimes of the 1980s and 1990s, when home prices fell in real terms, but were relatively stable in nominal terms?  Meet Bryan halfway.  But, nothing but a bust will do.  We imposed this on ourselves, and it's not even controversial.  The median household can barely get a mortgage today.  Where is the outrage from the median household?  Nothing is so damningly pro-cyclical as public sentiment and public policy.

Our proverbial fields lay fallow because many housing "farmers" can't even fund their "seed", yet the political winds demand monetary contraction, for fear of a too-abundant harvest.  If eating requires credit, we resolve to starve, valiantly.


  1. This is America, I've seen enough movies to know that the "valiant but stupid" path of action is always the best choice. Can't wait for the book!

    1. So, you're saying we should split up to look for the psychokiller that might be hiding in the woods? Mmmm. OK, I guess.

  2. The need-to-suffer gene exists in northern cultures. That's how winter was survived. And if excess was indulged in...old man winter killed you. Discipline counted.

    In modern settings, northern cultures and economies trump all others.

    However, even admirable instincts do not always work in modern-day monetary policy.

    1. I'm afraid you're right.

      Hey. It's been funny. I've been going back through all the old posts in preparation for writing the book, and I noticed that way back, you kept noting that zoning issues probably explained whatever I was talking about, and I'd say, "Yeah, you're probably right. But, I'm talking about other stuff mostly." Then, halfway through, I really hit on the data that brings out the supply problem, and without skipping a beat, I just clamped on to it like I invented the idea. And, here you are, still with me, without so much of a, "I was telling you that was the central issue for months, bozo.", which you would be totally justified in saying.

      When I started the blog, I said I'd like to have just a few readers and commenters, but really, really good ones. Somehow I got that. I hope it lasts.

    2. I did? Like I said once before, you pass the big 60 and every day becomes fresh.

      Actually, your blog has somewhat radicalized me even further down the libertarian path. I am now a fan of no zoning at all, although I might relent and think about zoning in broad categories such as agricultural or industrial or residential.

      Still, I see futility. No matter what ones political background, when it comes to putting up a high-rise condo in a single-family detached neighborhood... or more density in your traffic-jammed urban neighborhood...

  3. Great post and great line that sums it all up here: "Our obsession on this fact has led us, maddeningly, to a place where economic stability, itself, is now considered to be a moral hazard issue."

  4. TravisV here.

    Fantastic post!

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