Housing Doom

Just, wow. (OK, this has been in the wild for weeks, but we’ve been buried under snow up here and this is the first time I’ve watched it.  I think Tufte would approve.)

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

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Something between recession and depression might better serve to describe the relentlessly worsening pickle we’re in, and perhaps convey its urgency without igniting widespread panic. Addressing the appellative problem, that estimable pair Jay and David Levy have dusted off a label they’ve pinned on earlier serious setbacks, calling the current state of the economy a "Contained Depression." [1]

Maybe it’s just because they’re getting paid and I’m not, but I love to see mainstream scribes squirm.  Propaganda often becomes educational when it starts breaking down.  This piece asserts the meme that "depression" has been overexposed in the news for a long time, when in fact it only emerged beyond the blogosphere a couple of weeks ago.  The only intellectual weapon Doomers need to fight tripe like this is a memory.

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One word: waste

My heart swells with pride at the thought of the courage and brilliant achievement that went into making that self-licking ice cream cone work at all (click on the pic for the Osprey’s Wikipedia article).  I wouldn’t want to minimize the trickle-down effect from all the research, either.  To a large extent the whole microcomputer revolution was a direct spinoff from my own father’s efforts between 1969 and 1978 to get some onboard processing stuffed into the AIM-7, but at least that bird was arguably useful.  This latest raptor looks to be vulnerable to air defense systems no more sophisticated than a brawny teenager with 5 smooth stones and a pair of used pantyhose.

However, the important point is the sheer expense of the program.

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“We’re going to take a commercial break and get them out of the way, so that when something really substandard is happening, we don’t have to interrupt them.” - CNBC’s Mark Haines (right at the end of the YouTube) following the inadvertent release to a national audience of this Ron Paul summary of the historical basis for the present financial crisis.

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It’s not often that I agree with the NAHB. [National Association of Home Builders] However, when I read  that they felt that financing the president’s health care initiative by reducing the value of mortgage interest and RE tax deductions could be counterproductive, I thought they had a point:

WASHINGTON–(BUSINESS WIRE)–Joe Robson, chairman of the National Association of Home Builders (NAHB), today issued the following statement on President Obama’s proposal to reduce the value of the mortgage interest and real estate tax deductions for home buyers and home owners in order to pay for an expanded health care initiative:

“With the housing market still reeling from its worst downturn since the Great Depression, this is not the time to talk about raising taxes on home buyers and home owners. This proposal will increase the cost of housing for many middle-class families, particularly in high-cost areas such as California and the Northeast, which will only further undercut the housing market, exert more downward pressure on home values and work against the President’s efforts to stabilize housing and turn this economy around.

“The proposed budget would also tax a ‘carried interest’ as ordinary income, which could significantly impact the multifamily and commercial real estate sectors at a time when they are already experiencing a severe downswing. At this critical point in the recession, we should be doing everything we can to stimulate demand in housing and avoid proposals that would reduce housing affordability and further destabilize prices.

“The notion of ‘robbing Peter to pay Paul’ just won’t work. Not when the stakes are so high with our economy. This week alone, existing home sales dropped another 5.3 percent and new homes sales plunged 10.2 percent. Inventory of unsold homes is at an all-time high. Financing health care reforms by chipping away at the mortgage interest and real estate tax deductions is certainly not the answer. This will only hurt the ailing housing market and U.S. economy.”

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It’s Friday, and it looks like misery loves company.  China, like the United States, has a glut of vacant commercial property, and now that the Olympics are over, it looks like this could be a drag on their banks:

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Wednesday’s auction also alleviates analysts’ fears that massive U.S. borrowing would deter foreign buyers from increasing their holdings in U.S. government securities. [1]

Wednesday’s headline reasured with "Foreign Central Banks Snap Up Treasuries," [1] but yesterday’s Fed numbers tell a more ambiguous story. This week’s Reuters report [2] posts a marked week-over-week reduction in net buying of Treasury Debt by foreign central banks, although the number is still positive. Partially offsetting this trend was a recovery in the Agency Debt number — cenbanks managed a small net buy after last week’s moderate selloff. Agencies have been just holding their own over the last 8 weeks (following a 6 month selling spree) during which time treasuries added about $60 billion. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.[3] Here is Doom’s updated CSV version of the agencies and treasuries foreign central bank holdings data set.[4]

The components swung into something like balance this week, with treasuries up $5.453 billion and agencies up just $1.730 billion. The net rise in obligations then came in at $7.183 billion, sagging roughly a third from the increase posted last week and the one before. It’s possible the strong buy observed in Wednesday’s auction (and anticipated [5] in Thursday’s) will filter through to the Fed numbers next week. Doomers should watch for that, because a billion-dollar-a-day uptake of American obligations by cenbanks like we’ve been seeing over the last couple of months would not seem to be enough to effectively support the supply of the stuff coming down the pipe as the stimulus and bailouts kick in.

UPDATE: On Thursday Brad Setser had an important discussion [6] on whether central banks would reduce their buys, and if private investors would take up the slack.

Moreover, with global reserve growth slowing — total reserve growth was close to zero in q4, and it may not be all that much higher in q1 — central bank demand for Treasuries is likely to fall. Central bank purchases in the last part of 2008 were inflated by a shift out of Agencies, but that (presumably) won’t continue forever.

That implies, I think, that the ability of the US to finance large deficits at low rates depends far more than it has in the past on private investors willingness to buy Treasuries. That was in doubt a few weeks ago when the markets were focused on the risk of a Treasury bubble and the scale of the Treasury issuance associated with the stimulus and various bailouts. Now the market is more focused on the risks tied to a strong global downturn — and the remaining risks in the financial sector …

Both components of the raw numbers graph headed up this week, with minor divergence.

Twist’s ratios graphs resumed a down trend, but at a much reduced rate this week.

Interestingly, the Setser 52-week change graph is still testing records for treasuries (net buys since a year ago) and agencies (net sells).

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A big hat tip to our regular poster Hutch, who sent us a link to this very funny interview conducted by the "Department of GDP" as reported on the Easy Opinion blog:

You can spend, or the government will do it for you.

 (Setting: a large waiting room in a giant federal building)

Desk Clerk: Ticket 363. Is ticket 363 here?

Joe: I have number 363.

Desk Clerk: (without looking up) Go to cubical 26, through the gate, turn right, left down the corridor, on the right.

(Joe finds his way. The water fountain doesn’t work.)

Official: (behind desk, seated, remains seated) Please close the door and have a seat.

Joe: (sits down)

Official: Do you know why you are here?

Joe: Something about GDP?

Official: As you can see from the sign on my desk, I am a case officer for the new Department of GDP Oversight and Improvement. The government, your government, measures it’s success through GDP. Higher GDP is better. We want to talk to you about how you can do your part to increase GDP. Your government is absolutely committed to increasing GDP. It would be unpatriotic not to. Do you agree?

Joe: Uh, sure. I’m patriotic. May I ask, what is GDP?

Official: GDP is Gross Domestic Product. That is the market value of all goods and services produced in the U.S. It is the total of all the things that society can eat, drink, and work with. You can also think of it as the total income of the U.S. The government wants everyone to have more income.

Joe: I support that.

Official: Good. (flips through manila folder) Now, I see that you don’t go to restaurants enough. Why is that?

Joe: My wife is a great cook. We eat at home most of the time. I even like cooking with her sometimes, and the kids help too.

Official: Yes, that comes up a lot. People are denying themselves the pleasures of fine dining. You can see how this decreases employment and GDP. From now on, you will dine out at least twice per week, with the kids please.

Joe: That is going to cost me a lot of money! I really don’t see how …

Official: (writes a note into the file) We all have to do our part to employ others, and restaurants are a huge employer of the less educated. You earn a good income, you should spend more. It is the patriotic thing to do.

Joe: But, I won’t be able to save as much for my kid’s college and my retirement.

Official: I know it seems that way, but a better economy in the future will pay you back. I’m no economist, but our department has done the analysis, I can assure you. You see, savings are a selfish, lazy way to use money. You should understand that many people don’t have any savings. What good are your savings if the economy suffers?

Joe: I am depending on my savings to …

Official: No need to answer, that is what we in the department call a rhetorical question.

Joe: I thought my savings support businesses and home ownership. That isn’t an answer.

Official: I don’t mean this as an insult, but you are very ignorant about economics. The department has a giant computer to figure out the effects of spending, savings, and employment. And, we will have that figured out when we have entered all of the details, approximately 5 billion data points per month. This is in progress.

In the meantime, we have an estimate under the "one transaction" rule. We track things for one transaction. When you get your salary, that is GDP. When you pay a restaurant, that is GDP. When you put your money in the bank or invest in stock, we lose track. It’s an estimate.

Joe: (confused)

Official: Now, under our Direct Employment program, we are assigning you a gardener and a family care worker. You will find them a wonderful help, freeing up a lot of your time for relaxation. You will be responsible for paying them. I see that you have plenty of income if you don’t save anything. Savings are bad for the economy, so you won’t miss them.

Joe: (restraining himself) That is not possible! I don’t need a gardener or a home worker. I need to save for the future. I don’t need all that leisure and don’t want to pay for it.

Official: (writes a note into the file) I don’t really understand. I myself love leisure. I have many plans for my pension. But, if you feel you have extra time, the department can arrange more work for you.

Under our Neighborhood Exchange program, you will mow one of your neighbor’s lawns in Summer, and shovel his driveway and sidewalk in Winter. Another of your neighbors will do the same for you. You will all pay each other at the GFR (Government Fair Rate). This will produce a lot of measurable GDP that was hidden in the old way of doing things, and you won’t have so much non-GDP leisure. This also generates valuable tax payments on the extra income.

Joe: (a bit upset) What if I don’t cooperate?

Official: (writes a long note into the file) There is no need to be upset. I should have emphasized that this is a voluntary program, for now. You don’t have to cooperate, but there may be unfortunate consequences for you and the economy if you don’t. You certainly have the time until your next appointment to think about it. Find out what other non-cooperators have experienced. I certainly would not want to question your patriotism at this time.

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I was in agreement with Rick Santelli of CNBC when he lamented that those who pay their mortgages are being saddled with subsidizing those that don’t.  A lot of people were in agreement with Santelli- so many in fact that it brought a response from Federal Reserve chairman Ben Bernanke: [Thanks L!]

You could punish him by refusing to send the fire dept and then he would learn his lesson, but unfortunately in the process you’d have the entire neighborhood burning down.

CNBC’s Michelle Caruso-Cabrera quoted a reader who gave the following response:

My neighbor was smoking in bed, his house did burn down, and half of my house was destroyed with it. The Fire Department hit the snooze button on the fire alarm several times, showed up late (house was fully engulfed and ready to collapse) and, had a squirt gun to fight the fire.

 Cabrera’s response:

Now they are going to waste precious and expensive water (taxpayer money) by pouring it all over the embers.

To this I would add a slightly different view:

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