Archive for April 2013

Bubble, Bubble, Housing in Trouble

It appears that the Fed’s zero-interest-rate and QE policies have finally achieved its insane goal of re-igniting a housing bubble.

The Case-Schiller 20-City Index shows that housing prices increased by 1.2 percent in February and 9.3 percent year-over-year. All cities included in the index experienced substantial gains, which have been driven by staggeringly large increases in the bottom tier of the market. In Phoenix housing prices rose by 23 percent over the past year, but by 39 percent in the bottom third of the housing market. Las Vegas home prices were up by 17.6 percent in the past year while prices for houses in the bottom tier rose by 34.2 percent, and at an annual rate of 56.2 percent in the last three months. In Atlanta, bottom-tier home prices rose 36 percent year-over-year and at an annual rate of 70 percent in the past three months.

In light of the current data, Dean Baker, one of the few left-of-center economists to issue an early warning about the last housing bubble, sees signs of a renewed housing bubble on the horizon:

This rapid increase in house prices should be prompting serious concern among regulators. At the moment, it is not driving the economy in the same way as the housing bubble did in the last decade. Construction is still at very low levels, so a plunge in prices could not have impact on the economy through this channel. While saving rates are again low, possibly due in part to increasing home equity, it is likely that the data are somewhat distorted by the large dividend payouts of the fourth quarter. If the saving rate remains below 3.0 percent into the second half of the year (the post-World War II average is more than 8.0 percent) then this would suggest that inflated house prices are playing a role. If that is the case, a decline in house prices would lead to another hit to consumption.

However the main reason that the rapid run-up in prices in the bottom tier should be a cause for a concern is that moderate-income homebuyers may again take a big hit if these prices plunge in a correction.

For some compelling anecdotal evidence on the high-end market, consider this. Crain’s reports on the sale of three condos sold in the Gretsch Building, a former guitar factory in Williamsburg, Brooklyn:

Two of the condos, adjacent two-bedrooms on the ninth floor, closed this week for $1.4 million and $1.5 million, while a larger two-bedroom on the 10th floor will close next week for $2.5 million.
The units averaged $1,150 per square foot. That compares to a building-wide average of $750 a foot, though recent listings have topped out around $900 per square foot, according to StreetEasy—a clear sign of the soaring local market.

“It’s unbelievable, what’s going on out there,” declared the real estate agent involved in these deals.

Commenting on this story at Zero Hedge, Tyler Durden writes:

Great job Bernanke & Co. You have succeeded at rolling up the housing, credit, bond, tech and equity bubbles all into one. Watching the glorious unwind of all this unprecedented academic-created stupidity will be worth the hyperinflated price of admission alone.

Right on, Tyler.

I Agree with Paul Krugman

In an unusually perceptive post, Krugman complains that “again and again, people on the opposite side prove to have used bad logic, bad data, the wrong historical analogies, or all of the above.” He points out that one side of the macroeconomic debate “is, in essence, political,” driven by “hostility to any intellectual approach” that might cast doubt on its preferred p0licies. “Too many influential people just don’t want to believe that we’re facing the kind of economic crisis we are actually facing,” leading to “the spectacle of famous economists retreading 80-year-old fallacies, or misunderstanding basic concepts.”

Of course, Krugman is talking about all non-Krugmanians — he doesn’t provide names, because he sees Not Krugman as an amorphous blob of evil and stupidity — but he’s really onto something, just with the players reversed. Old fashioned Keynesianism, as practiced by the likes of Krugman, resembles a set of religious dogmas, not scientific propositions. Austrians view economics as a science, a body of theory and application that helps us understand the world. Keynesians see economics as a set of political tools useful to rationalize and justify an a priori faith in unlimited government. Krugman, like Keynes himself, dislikes businesspeople, consumers, and especially entrepreneurs and investors, and prefers a world in which an elite cadre of intellectuals and bureaucrats controls most investment, production, and consumption decisions. Fine, everyone has a right to his personal belief system. But let’s not pretend there’s anything scientific about the multiplier, the marginal propensity to consume, the liquidity trap, and the other relics and sacraments of the Keynesian religion.

Engaging True Believers like Krugman on economic theory and policy is mostly a waste of time — one side uses reason and evidence, the other appeals to personal faith. (BTW this doesn’t apply to New Keynesians such as Mankiw and the Romers, whom I regard as reasonable and serious folks.)

Policy or Regime Uncertainty: Recovery Aborted

Bill McNabb, CEO of the Vanguard Group, in today’s WSJ op ed Uncertainty Is the Enemy of Recovery discusses Vanguard’s estimate that policy uncertainty has created a $261 billion drag on the U.S. economy.

While it is good to see policy uncertainty highlighted, the more relevant concept is Robert Higgs’s regime uncertainty as discussed in these Mises Dailies and Circle Bastiat posts:

Regime Uncertainty: Some Clarifications – Robert Higgs   – Mises Daily

Nov   19, 2012 A business-hostile administration will provoke more   apprehension than a business-friendlier administration.

Regime Uncertainty   and the Non-Recovery – Mises Economics Blog

Dec   14, 2011 Robert Higgs introduced the concept of “regime   uncertainty”, government policies and actions that threaten property   rights, in his outstanding

Malinvestment and Regime   Uncertainty – John P. Cochran – Mises

Oct   29, 2012 Robert Higgs’s concept of regime uncertainty has   caught on with businessmen and the press.

2013: William Butos Monetary Orders and Institutions: A Hayekian Perspective

William Butos was awarded the 2013 O.P. Alford III Prize for his paper Monetary Orders and Institutions: A Hayekian Perspective. The prize is given to the author of the paper that best advances libertarian scholarship.

Learn about Lincoln from his Greatest Critic

Thomas DiLorenzo will be teaching Lincoln: The Founding Father of the American Leviathan, starting May 9.

The Embarrassing Error of the Empirical Economists

Economic Policy Journal’s takeaway on the Reinhart-Rogoff fiasco:

Austrian economics reject empirical data as a method to prove economic theory, for Austrians it is all about logical deductions. Thus, there is not much for Austrians to do, relative to the current Reinhart-Rogoff destruction at the hands of a U Mass graduate student, other than to grab some popcorn and watch with bemusement from the sidelines.

Too much government can be bad for the economy´s health

In a comment on Reynolds and Cochran on the Slow Recovery, Marcus Nunes argued, “If there was a lesson in the R&R fracas is that you should take care with numbers, especially if you define “tipping points”. I think 15% is below what would account for the ‘core functions’ of government.” Nunes then referred the reader to ‘Keep it simple’. Nunes’s commentary is an interesting take on recent controversy over the coding error found in one of the Reinhart-Rogoff papers focusing on debt and growth.

‘Keep it simple’ is useful. It provides a summary of other evidence on the impact of the size of government on growth evidence. (John Taylor also focuses on size of government at Coding Errors, Austerity, and Exploding Debt.)

I agree whole heartedly with Nunes’s reflection on the R & R debate [For a summary of the details of this ‘debate’ see Mistakes by Greg Mankiw]. The focus should be on the source the size of government relative to the size of the economy not on the size of the debt or deficit, as Nunes succinctly point out:

I may be missing something vital, but what bothered me about the R&R ‘fall-out’ was that the original study was concerned with public debt/GDP levels. The major finding of the critics was that, contrary to the original study, no ‘tipping-point’ (after which growth is negatively affected) was found.

My take: Debt results from deficits. Deficits follow government spending (given revenues). So why not go to the ‘source’, i.e., government spending, and check if it has a measurable impact on growth.

While there may be a quibble on a ‘tipping point’, Nunes’s conclusion from the data provided is essentially consistent with my argument. His conclusion:

“So yes, “too much government can be bad for the economy´s health”!”

Dick’s comment reflects well my perspective on turning points:

It appears that Professor Cochran is closer with 10% than to consider 15%. Your averages tend to be on the high side because you are using more modern government spending levels. In a functioning economy there is little need for government because market driven production and processes are much more efficient with much higher quality.

Serious analysis would probably show that much less government is necessary to a properly function economy, even less than 10%.

Competing Currencies: The Euro and Gold

For those interested in the Euro, Andreas Hoffmann (University of Leipzig), has some interesting commentary at ThinkMarkets, A blog of the NYU Colloquium on Market Institutions and Economic Processes, “The Euro: a Step Toward the Gold Standard?”

The he sipports and critiques argument about the Euro where, in a recent piece [“An Austrian Defense of the Euro” ?],

Jesus Huerta de Soto (2012) argues that the euro is a proxy for the gold standard. He draws several analogies between the euro and the classical gold standard (1880-1912). Like when “going on gold” European governments gave up monetary sovereignty by introducing the euro. Like the classical gold standard the common currency forces reforms upon countries that are in crisis because governments cannot manipulate the exchange rate and inflate away debt. Therefore, to limit state power and to encourage e.g. labor market reforms he views the euro as second best to the gold standard from a free market perspective. Therefore, we should defend it. He finds that it is a step toward the re-establishment of the classical gold standard.

Worth a read. The exchange between Andreas and O’Driscoll in the comments is interesting as well.

Philipp Bagus author of The Tragedy of the Euro has also commented extensively on the Euro. See especially “Is There No Escape from the Euro?” and “The Eurozone: A Moral-Hazard Morass”.

Reynolds and Cochran on the Slow Recovery

Earlier this month I chatted with with fellow economist Morgan Reynolds on his Reynolds Reveal . Issues ranged from slow recovery to debt and deficits and empirical work with a good theoretical foundation by Gwarnty, Lawson, and Holcombe  showing how government spending in excess 15% of GDP retards economic growth (see here). Vedder and Gallaway also address Government size and economic growth.

Reynolds summary of the hour :

Episode #009 – Reynolds Reveal – Reynolds discussed the industrial accident at Nuclear One near his home in Arkansas; the March employment/unemployment report released the previous Friday; and another Paul Krugman column in the NYT opposing ‘liquidation’ via recession and pushing more and more federal spending and money printing to gin up economic growth. Talk about repeated failure! Guest economist John Cochran of Metropolitan State University in Denver Colorado patiently discussed the many problems of the massive interventions which harm economic expansion. In particular, recent economic statistical studies show government spending consistently impairs economic growth when government’s share of GDP exceeds 18 percent. During the Clinton era federal spending was about 18 percent of GDP but currently is in the range of 23-24 percent. Cochran pointed out that the key problem is not so much deficit spending as total spending far in excess of optimal, although he believes optimal is even lower, probably in the range of ‘tithing,’ or about 10 percent of GDP.

A fun afternoon thanks to modern technology. Morgan was on Alabama gulf coast in a moter home enjoying spring weather and I was in the comfort of my own home in the Denver area talking and sipping a nice IPA while a blizzaed raged outside.

Against Monetary Disequilibrium Theory and Fractional Reserve Free Banking

The Lawrence W. Fertig Prize in Austrian Economics for 2013 was awarded to Laura Davidson for her paper Against Monetary Disequilibrium Theory and Fractional Reserve Free Banking. It is a rigorous and insightful paper. The Fertig Prize is awarded to the author of a paper that best advances economic science in the Austrian tradition and includes a $1000 prize.

“Political Hacks, Statists, and Keynesians” (Or Do I Repeat Myself)

“[T]he clique of political hacks around Karl Rove who ran the Bush White House were so unlettered in the requisites of sound money and free market economics that, over and over, they caused the nation’s top economic jobs to be filled by statists and Keynesians.  Thus, professors Glenn Hubbard, Greg Mankiw, and Ed Lazear had no problem whatsoever advising George Bush that two giant tax cuts and two unfunded wars were entirely copacetic from a fiscal viewpoint.  After all, the huge resulting deficits provided a Keynesian pick-me-up to the prosperous classes.”

– David Stockman, The Great Deformation: The Corruption of Capitalism in America, p. 50.

The Ultimate Stress Test

Peter Schiff makes a few calculations on Japan’s anti-deflation campaign.

In the years following the global financial crisis, economists and investors have gotten very comfortable with very high, and seemingly persistent, government debt. The nonchalance may be underpinned by the assumption that globally significant countries that can print their own currencies can’t get trapped in a sovereign debt crisis. However, it now appears that Japan is preparing to put this confidence to the ultimate stress test.

David Stockman on Mises and Hazlitt

“Henry Hazlitt . . . titled his March 1969 Newsweek column “The Coming Monetary Collapse.”  Hazlitt publicly warned the White House that ‘one of these days the United States will be openly forced to refuse to pay out any more of its gold at $35 an ounce.’  The result, Hazlitt insisted, would be a ‘run or crisis in the foreign exchange market’ that could end convertability entirely.  ‘If it does . . . the consequences for the United States and the world will be grave.’  Hazlitt could not have been more clairvoyant.  The postwar monetary order was at a crucial inflection point.  It would soon lurch into a forty-year spree of global debt creation, financial speculation, and massive economic imbalance . . .”

–David Stockman, The Great Deformation, p. 117.


“Newly minted central bank money stimulated rapid private debt extensions, which was used to bid-up asset prices, which elicited more collateralized credit, which drove asset prices even higher.  The Austrian economist Ludwig von Mises had explained this type of credit boom cycle way back in 1911, but by the 1990s the hubris of monetary central planners superseded the plaintive monetary wisdom of an earlier age.  In those benighted times, economists and legislators alike knew the difference between the honest savings of the people and bank credit made out of thin air.”

– David Stockman, The Great Deformation, p. 337.

Ben Bernanke’s Sole Contribution to Economic “Scholarship”

“[T]he stated purpose of the Wall Street bailouts — to avoid a replay of the 1930s — was drastically misguided.  It was based on a phantom threat which arose overwhelmingly from the faulty scholarship of a single official . . . who had come to head the nation’s central bank. The analysis was actually not even his own, but was the borrowed theory of Professor Milton Friedman.”

“Forty years earlier, Friedman had famously claimed that the Fed’s failure to run its printing presses full tilt during certain periods of 1930-1932 had caused the Great Depression.  Bernanke’s sole contribution to this truly wrong-headed proposition was a few essays consisting mainly of dense math equations.  They showed the undeniable correlation between the collapse of GDP and the money supply, but proved no causation whatsoever.”

“In fact . . . the great contraction of 1929-1933 was rooted in the bubble of debt and financial speculation that built up in the years before October 1929 . . . . the . . . central bank [is] now led by an academic zealot who had gotten cause and effect upside down.”

– David A. Stockman, The Great Deformation: The Corruption of Capitalism in America, pp. 42-43.

Walter Block: Doug Casey Is an Optimist

Walter Block is interviewed by Louis James, the Editor of the International Speculator. Topics include Murray Rothbard, Ron Paul, Milton Friedman, the gold standard, his new book, and how to invest during this economic crisis.

Why Irish Banks Are Not Smiling

Great chart from Moody’s:


Ireland’s banks received bailouts in the billions of euros in 2009 and 2010, including €67.5 billion from the EU, other European countries, and the IMF as part of a larger overall bailout effort. While the lion’s share of these funds have flowed to bondholders outside of Ireland, they have done little to promote real wealth creation and regime certainty in the Irish economy. One wonders how the situation would be today if Ireland had, like Iceland, required its banks to internalize their losses (which would have resulted in some to fail), defaulted on its bond debt, and allowed many of its malinvestments created during the boom to be restructured in a correction.

Regardless, the “best and the brightest”–people like Klaus Masuch and Poul Thomsen–who argued for the bailouts back then envisioned a different situation in Ireland today. If Cypress provides any lesson, Irish depositors should hold cash and be wary of any “bail-in” programs that might be implemented there in response to a banking crisis.

Tom Woods interviews Mark Thornton

Here is my interview by Tom Woods on the Peter Schiff Show. We discuss gold prices, where is all the inflation, and what central banks are up to.

Lew Rockwell interviews Shawn Ritenour

I have found that when teaching economic principles it is important to raise questions concerning the ethical implications of those principles, the free market, and government intervention. It not only stirs the interest of students, it also helps drive home the intended lessons. In this interview, Shawn Ritenour and Lew Rockwell discuss the role of ethical considerations and why Christians who ignore the principles of economics, do so to the peril of their own faith.

Jim Grant on the Gold Price

Here is a video interview of Jim Grant discussing the steep drop in the gold price. He says it was the result of the “structure” of the market. I interpret “structure” to mean who is invested in gold and how are those investments financed, along with “technical” factors. He compares it to the 1987 stock market crash and the 1994 bond market crash. Both were dramatic, but did not leave a lasting impact on the future course of those markets.

Grant says that gold is an investment in our destiny.

Fed Seen Paying Banks $77 Billion

Interest payments to banks (for money held on account wit the Fed) could rise from $1 billion in 2012 to $77 billion in 2016. Link to Bloomberg article.

“Essentially the Fed paid the banks $4 billion last year, which is about $12 per American,” David Howden, a professor of economics at Saint Louis University’s campus in Madrid, Spain, said in an e-mail.

Howden analyzed interest on reserve payments so far for the Ludwig von Mises Institute, named for an Austrian free-market economist and philosopher.

“If your bank called you up and said you have a new service fee of $12 because they screwed up in the crisis, you’d be livid, but that is basically what they are doing and no one knows about it.”

William C. Dudley, president of the New York Fed, has said interest payments on excess reserves are “not a subsidy to the banks.”