Author Archive for Christopher Westley

How the Private Sector Might Colonize the Red Planet

Der Spiegel reports on the Mars One project to colonize Mars with funding coming from an 1440expected $6 billion in broadcasting rights in what would be a sort of interplanetary Truman Show.  Over 700 people are competing for four slots to make the trip 10 years from now, even though “a return ticket is not part of the deal.”

I don’t know who these 700 people are, but they provide a nice illustration of the subjectivity of value, given that

Mars is not a destination that sounds particularly attractive. It is bitterly cold and dust storms sometimes envelope the entire planet for weeks at a time. Its sights are also limited to gorges that are several kilometers deep and enormous volcanoes, one of which is the size of Poland and stretches 26 kilometers (16 miles) into the Martian sky.  For settlers there, though, the Earth would be but a tiny point in the heavens and if something happened, there would be no help available. The flight takes at least six months — and the two planets are close enough to each other for such a trip only once every two years.

That some might choose to live in such an environment is easily understood within the Austrian framework which argues that “the incentive of human activity is always some uneasiness and its aim always to remove such uneasiness as far as possible, that is, to make the acting men feel happier….”  How much better are such projects given that they do not rely on coercive redistributions of wealth, as is the case with NASA, the Russian Federal Space Agency, and all other state organizations that view space as simply an untapped area of potential control.

So go for it, colonizers, even though I may be cheering you back here on earth, poolside with gin-and-tonic in hand, wondering if, someday, there might actually be a Mises Institute Mars explaining homesteading to a distant generation.

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Default, Argentina!

Flag_map_of_Argentina.svgRegarding Nicolás Cachanosky’s insightful article this morning on Argentina’s coming default, I would just add that it can’t come soon enough.  Although one can only imagine what kinds of behind-the-scenes pressure Argentine President Cristina Kirchner and central bank head Juan Carlos Fábrega are under right now to pay these bonds, Argentina should continue with its default. It’s the only moral choice. If it doesn’t default, it will (i) maintain its creditworthiness in the future, which only puts off for another day the inevitable end to the government’s tax-borrow-spend policies that only favor the political class and well-positioned cronies, and (ii) it imposes Greece-like austerity on the remaining productive sectors and other innocent parties when real austerity would imply vastly reducing the size and scope of the Argentine state. If it defaulted and the government was finally deemed a credit risk by the World Bank (and its cronies), then the government’s ability to intervene in the economy would be severely hampered and incentives for real savings and sustainable economic growth would finally reappear.

I wrote about the “upside of Argentina’s default” back in 2002 here.  The argument still stands.  A default today can only help to normalize them in other western countries, to the great benefit to future generations.  Make those establishment parties who bought Argentina’s bonds assume the risk themselves.  Using international courts to bail them out only harms the Argentine people who will have to pay for them through taxes and inflation in the future while it perpetuates moral hazards that exist well beyond the confines of Manhattan and Buenos Aires.

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Did Amazon Just Unveil a Keynesian Smartphone?

Amazon’s new Fire phone is generating much buzz since being announce this week, and for good reason because it appears to be simply the latest impressive product a very impressive company has offered to consumers seeking to “alleviate the felt uneasiness” in their lives (to borrow a phrase from Mises). fire-phoneWill the Fire phone become as ubiquitous as the Kindle?  We’ll see.

Yet it already has detractors.  Bloomberg blogger Matt Levine disparagingly called it a “weapon of mass consumption,” which, if true, would seem to make the phone a far better contributor to civilization than nukes stockpiled by insecure nation-states.  Levine is cautious about one amazing feature of the Fire phone: the ability for brick-and-mortar shoppers to point the phone at a product to buy it from Amazon instead.  But is this such a bad thing?  The resulting downward pressure on prices will prove to be glorious for consumers, offering them relief in a persistently sluggish and uncertain economy.  Will the Fire phone provide yet another impetus for Mrs. Yellen to heat up QE to previous levels?  (Don’t think the idea has not already crossed the minds of the managers of our monopoly money.)

Still, Levine is worried:

[S]hopping convenience may come at a high cost for some people. The more removed people are from purchasing with cash the more they tend to overspend, behavioral finance experts say. Research shows that when people pay with plastic they can spend 20 percent to 30 percent more than when they use cash, says Denise Hughes, a financial coach based in San Carlos, California. Casinos use chips, behavioral experts note, to also remove the regulating “pain of paying.”

Levine’s post goes downhill from there, with the predictable Dan Ariely quote and a puritanical warning from the head of the Center for Internet and Technology Addiction that the phone may provide “an instant conduit to gratify yourself”—as though using it can lead to dirty actions that, in another context, you might confess to a priest.

So silliness abounds.  Still, it seems to me that consumers making emotional decisions in the market pose much less of a social problem than (say) voters making emotional decisions in elections, although the behavioral economists and nudge theorists appear to be much less concerned about the latter.  But hasn’t the whole point of New Keynesian monetary and fiscal policy since 2008 been to penalize saving and increase consumer demand?  If the Fire phone actually achieves this outcome, then perhaps an additional social benefit it provides will be the creative destruction of the many jobs assumed by would-be economic planners who have heretofore failed at these tasks.  One can hope.

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How Unions Coerce Workers to Withhold Production, Video Game Composing Edition

Grammy-nominated composer Austin Wintory , who composed the music for the acclaimed video games flOw and Journey, among many other accomplishments, discusses his fight with the American Federation of Musicians and why he refuses to live in fear.  (H/T Nikki Finke.)

The World Bank Admits No One Reads Its Research

downloadThe World Bank is a secretive multilateral organization that wastes many billions of dollars a year siphoning taxpayer dollars to foreign governments as part of a loan portfolio that emphasizes loan volume over loan profitability. Under normal circumstances, banks that reward volume over profit would not last long, but when the institution is protected from market forces and has access to conscripted capital emanating from member governments’ access to tax dollars, it can last many decades with the grateful support of crony firms that are the actual beneficiaries of its loans. (Seven years ago, I chronicled some of the World Bank’s waste and corruption in this book review of Jeffrey Hooke’s pithy book, The Dinosaur Among Us: The World Bank and its Path to Extinction.)

Among the many individuals working at the Bank include an army of economists producing policy report after policy report, all made available publicly in the form of PDF documents. Two of these economists, Doerte Doemeland and James Trevino, wondered whether anyone actually reads these documents and decided to investigate, with the result being yet one more report, entitled “Which World Bank Reports Are Widely Read?”

The answer: Not as many as you think. Studying a dataset of 1,611 policy reports written from 2008 to 2012, Doemeland and Trevino found that 31 percent were downloaded exactly zero times, while another 40 percent had been downloaded fewer than 100 times. While 13 percent of the reports were downloaded 250 times or more, some 87 percent were never cited in the academic literature (based on citation counts in Google Scholar). Twenty five reports, comprising 2 percent of all the reports, were downloaded over 1000 times.

The World Bank’s revelation that the many millions of dollars it devotes to research each year contributes to the occupation of its server space and little else does not exactly compare with the 2003 International Monetary Fund paper that found countries following IMF suggestions often suffer a “collapse in growth rates and significant financial crises.” But it’s close. In the World Bank’s case, maybe the intended recipients of its research have advance knowledge about its actual value. Regardless, both cases illustrate how when funding is assured outside of the market, the social utility of productive activities greatly declines.  Although I’m sure this is true, perhaps the World Bank will write a paper about it, just to be sure.

On This Day in 1914…

…newspapers buzzed with the news that former Secretary of State Richard Olney declined President Woodrow Wilson’s request that he serve as the first head of the newly-created Federal Reserve Board.

Olney’s refusal was considered a defeat for Wilson during his second year in office.  Wilson wanted a New Englander to head the board, in part (he said) to provide it geographic balance.  Olney fit the bill as an Ivy League-educated (Brown and Harvard) lawyer who became one of Boston’s leading railroad attorneys before being tapped to serve as the U.S. attorney general for Grover Cleveland in the 1890s.  From the New York Times, May 6, 1914:


Click on article for sharper image

Wilson’s interest in Olney reflects the purpose of the Fed, then as now, was to serve the interests of those elite parties connected to the government that would stand to benefit from the inflation it would soon create (and that would result in the short but severe Depression of 1920).  But perhaps Wilson was also impressed with Olney’s understanding of the implied relationship between the growing army of Progressive Era regulators and the regulated.  After all, as attorney general, Olney defended the Interstate Commerce Commission, saying this first federal regulatory agency “is, or can be made, of great use to the railroads.  It satisfies the popular clamor for a government supervision of the railroads, at the same time that that supervision is almost entirely nominal.  Further, the older such a commission gets to be, the more inclined it will be found to take the business and railroad view of things….  The part of wisdom is not to destroy the Commission, but to utilize it.”

So it was Olney’s view, as early as 1894, that big business firms should welcome federal regulation because, over time, they would surely manipulate the regulators to further their interests.  Indeed, this “nod-nod, wink-wink” justification for the ICC would also be used to justify the Fed two decades later.  The Fed was also created (ostensibly) in response to public clamor for government supervision of banks, especially with respect to the creation of a new, legal-tender currency.  (The popular term for the Federal Reserve Act was the Currency Bill.)  Since its creation, the value of the Fed’s dollar and the size of government proved to be inversely related.  While banks that joined the new banking system ceded both their bullion supplies and the ability to create money based on them to the Fed, in return they received regulatory protection such that, today, the banking industry is highly concentrated and characterized by banks deemed too-big-to-fail.

As Olney might say, the older the Fed got, the more inclined it became to find the banking cartel’s view of things, and that their part of wisdom was not to destroy the Fed, but to utilize it.  We would be wise to recognize those who maintain the Olneyan tradition, and to beware of its effects.

Postscript: Wilson eventually chose Olney’s fellow Boston lawyer, Charles Sumner Hamlin, to head the board.  For more information, see Roger T. Johnson’s official history of the Federal Reserve, published by the Boston Fed.  (One wonders how much this entity with no budget constraint paid for it.)  See also Murray Rothbard’s masterful A History of Money and Banking in the United States: The Colonial Era to World War II, as well as Thomas E. Woods’ article, “Warren Harding and the Forgotten Depression of 1920.”

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How Terrible Are Some Scientific Journals?

Recently, a reporter for the Ottawa Citizen wrote a completely fabricated and incoherent paper on soils, cancer treatment, and Mars. Its full title? “Acidity and aridity: Soil inorganic carbon storage exhibits complex relationship with low-pH soils and myeloablation followed by autologous PBSC infusion.” The paper, comprised solely of unrelated phrases lifted from existing research, was then submitted to 18 low-level, for-profit journals that cater to the segment of the academic market comprised of individuals willing to pay for publication and, by extension, their own tenure and promotion.

The result? Eight quickly responded with offers to publish the work for payments between $1000 and $5000.

Was Hy Minsky a Blockian?

151165810_6930a33a4f_zHardly, especially given his endorsement of the view that markets are inherently unstable and prone to failure, thus requiring extra-market supervision and control.  But I couldn’t help but to think of Walter Block when listening to this part of Duncan Weldon’s recent segment about Minsky on BBC 4 (around the 6:00 mark):
Weldon:  [Minsky] sounds like someone not afraid to challenge authority.  I mean, can you see that in his work as well?
Laurence Meyer:  Well, yes, because I think he always felt that he was treated like an outsider.  Okay?  He wasn’t really part of the mainstream.  And he took great joy in taking on that mainstream for how simplistic their views were and failing to pay attention to something that seems so obvious.
One can’t help but to think that part of the reason mainstream central bankers like Meyer and Janet Yellen appreciate Minsky today because Minsky not only missed the role of central banks in causing financial instability, he also endorsed their expanded role in addressing the adverse economic effects of bubbles they themselves helped inflate.  Today, this role takes the form of (faddish) “macroprudential” policies that assume central banks are capable of seeking out and eliminating sector bubbles all while pumping new money into the economy so desired by the political class and the cronies attached to it.  It’s not what Minsky got right that makes him relevant to them, but actually what he got so wrong.

Minsky may have had something of a Blockian spirit that we can admire, but such a spirit can prove damaging when backed more by ideology than logical consistency and right reason.

Here’s the Google Books version of the Elgar Companion to Hyman Minsky.

Here’s Frank Shostak on Minsky from 2007.

A Slice of Life in the Former East Germany

I received the following in an email from a reader in response to my Mises Daily article for today:

I grew up in East Germany – a similar economic environment as there was in the former Soviet Union. For (equally) poor East Germans, buying a new dryer would have been utterly impossible. Firstly, central planing never allocated enough resources to buy cloth dryers or virtually any other consumer product. Secondly, income levels were too low to afford a $500 cloth dryer. Hiring a state-approved dryer repair man was also not a option as there were only very few. These few professionals were busy meeting the needs of state officials.

However, under these conditions there was a thriving black-market of covert repair men. Through hearsay, one would to know the home address of such a “miracle worker,” meet him at home, and posed as friends and not as customers (since private businesses were not allowed), ask for the repair of the dryer. These “customers” typically didn’t pay with paper money, instead with more valued commodities such as high-quality meat, imported bananas or oranges, rare booze or, as my dad often did, with cleaning clothes which he found in the trash of the textile manufacturing plant he was working for.

Thanks to you and other Austrian economists, I begin to understand many “peculiarities” of socialist economics of my former home.

Monetary Policy’s ‘Unsustainable Conceit’

The inestimable Jim Grant of Grant’s Interest Rate Observer reminds Washington Post readers that the United States has defaulted on its debt in the past and will do so again in the future.  Almost as educational as Grant’s op-ed are the accompanying comments from beltarians who are simply shocked–shocked!–that there are people beyond its border who study unapproved financial history and take notions such as government default seriously.

Grant’s op-ed is a useful companion to Peter Klein’s Mises Daily, also published today, which also places government default in perspective.

Grant concludes:

In other words, the value of money has become an instrument of public policy, not an honest weight or measure. In such a setting, an old-time “default” is impossible. How can a creditor cry foul when the government to which he is lending has repeatedly said that the value of the money he lent will shrink?

The post-1971 dollar derives its value from the stamp of the government that issues it. Across the seas, this imprimatur is starting to look a little tenuous. Lend us your dollars for 10 years, the Treasury proposes. We will pay you the lordly interest rate of 2.7 percent per annum. And at the end of those 10 years, we will hand you back your principal, which will almost certainly buy less than the money you lent.

This is the unsustainable conceit of the world’s superpower-cum-super debtor. By deed, if not audible word, we Americans say: “The greenback is the world’s great monetary brand. You have no choice but to use it. Like it or lump it.” But the historical record of paper currencies is clear: Governments always over-issue it. The people finally do lump it.

Read the whole piece here.



Have You Heard the One About the Fiat Money Printing Central Banker?

Here’s the abstract from a new paper in the October 2013 issue of Economic Inquiry:

During their meetings, the members of the Federal Open Market Committee (FOMC) make monetary policy, but they also make each other laugh. This article studies the amount of laughter elicited by members of the FOMC during their meetings. The study finds that a member elicits more laughter if he or she expects higher inflation, other things being equal. This finding suggests that members may use humor to cope with the threat of inflation. (JEL E52, E58, C23)

They use humor. One wonders what savers and pensioners use.

On This Day in 1933

You were considered a hoarder and a slacker if you still resisted turning over your gold to the government. From the New York Times, June 13, 1933:


(Click on the image for a sharper picture.)

Roosevelt had only been in office for 101 days and while there was broad bipartisan support for inflationary policies in Congress, it’s safe to say that most of those who voted for FDR never expected him to confiscate private holdings of gold coins, bullion, and certificates. Roosevelt called the measure a temporary one (it wasn’t), and he followed it up by invalidating gold clauses in private contracts that obligated payment in gold dollars, which had the effect of devaluing the assets of bond and contract holders. Many of these hoarders and slackers purchased gold as a hedge against the (Fed-fueled) inflationary boom of the 1920s and then hung on to it during the Hoover years when his crazed and unprecedented interventions in wages and prices caused a normal market correction to devolve into a depression. Why would they trust Roosevelt any more?

They were smart not to. By January 1934, Roosevelt increased the dollar price of gold from $20.67 to $35, thus devaluing the dollar by 70 percent while increasing the value of gold that the government now owned.


Gold flowed to the United States because the new price exceeded the world price, causing Fort Knox to become, well, Fort Knox. Since the Treasury was authorized to maintain the new dollar-gold exchange rate, it increased the money supply accordingly. Over the next three years, M2 increased by an average of 13.4 percent a year. Congress and the president with strong ties to Wall Street got the inflation they wanted.

Queue the tape: “Happy Days Are Here Again.

A major constraint on the federal government’s ability to spend had been lifted, and by the end of the decade the balance of political power had shifted from the states and the cities to Washington, D.C. It remains to be seen whether inflating the money supply will have any different effect in the 2010s than it did in the 1930s.

On This Day in 1913

Congress had just passed the Underwood Tariff (reinstating the federal income tax following the passage of the 16th Amendment) and, miracle of miracles, the stock market began to slump.  While the trade-off for passing the income tax was a reduction in tariff rates—this way, the tax’s proponents could claim pro-trade motivations—the powers-that-were wanted to inflate the currency to counter any adverse economic effects of the new tax.  They thus began promoting  the need for a currency bill that would consolidate many competing currencies into one that would be both subject to legal tender law and administered by a federal agency.

From the New York Times (“Hostile Action to Currency Now” June 12, 1913, p. 4):

From the time the tariff bill reached the Senate a month ago Republican Senators have been trying to obtain promises that a currency bill will not be pushed.  Democrats have evinced in private an equal earnestness in their desires to go home as soon as the tariff bill is out of the way.  The possibility of increasing the present financial uncertainty by threats of immediate tariff revision merely supplied another argument.

As a matter of fact, [President Wilson] has let it be known that he wishes prompt currency revision to supply easy money for what hardships might arise in the first months of reduced protection.  The inference was openly drawn by Senator Tillman in discussing the letter he received from the President that the Republicans want to block currency revision for the simple purpose of giving full headway to any [financial] panic which might arise and which could be ascribed to the Democratic customs policy.  The shortage of the money in New York, London, Berlin, and Paris, which, of course, cannot be attributed to the promise of reduced protection in the United States, would thus seem to be another argument for the prompt provision of an elastic currency.

We now know that Wilson would get his way and that, in fact, he surely knew legislation had already been drawn up in secret in Jekyll Island, Georgia, less than three years earlier by leaders from the public and private sectors who were waiting for such a political environment to introduce it.  In November 2010, the Fed held a conference to commemorate this meeting, entitled “A Return to Jekyll Island.”  The Fed’s return, however, occurred some nine months following the Mises Institute’s conference at Jekyll Island, entitled “The Birth and Death of the Fed.”

As a side note, according to the Bureau of Labor Statistics, the dollar has lost 6.27 percent of its value since the Fed’s November 2010 conference.  Although this is a gross underestimation (see, it nonetheless proves that the Fed has remained true to its original purpose to inflate.

Sign of the Times

A new book by Portuguese economist João Ferreira do Amaral entitled Why We Should Leave the Euro is outselling Fifty Shades of Grey there. This makes sense given that both books center on painful relationships in which one party is being spanked and that are apparently difficult to dissolve. (h/t Bill Easterly)

Thomas Sowell on Why the Intelligencia Pay No Price for Being Wrong

Thomas Sowell recently sat down with Peter Robinson to discuss his latest book, Intellectuals and Race. Here’s a short excerpt:

Robinson: …[N]ow you’re saying that multiculturalists [who argue for] bringing kids into [academic] institutions for which they’re ill-qualified — you take bright, hard-working, otherwise perfectly well-qualified students and put them in the wrong institution and you set them back in life.
Sowell: Yes.
R: And they’re culpable as well. They had ought to know better.
S: Yes.
R: Intellectuals and Race, quote: “The Intelligencia pay no price for being wrong.”
S: I think that’s the secret of their influence.
R: How’s that?
S: Well, if you come up with a lot of wrong ideas and pay a price for it, you’re forced to think about it and to change your ways or else get eliminated. But there is no such test. The only test for most intellectuals is whether other intellectuals go along with them. And if they all have a wrong idea, then it becomes invincible.
R: Tom, you’re coming pretty close to saying that intellectuals aren’t very smart.
S: [Laughs.] They are very smart in very limited areas. And they don’t realize [it]. That’s the problem.

Although Sowell’s book isn’t explicitly about epistemology, it does deal with critiques Austrians have long made to understand why false ideas persist. For instance, Keynesian ideas persist among intellectuals in large part because so many intellectuals accept them uncritically. Indeed, to point out the failures of massive Keynesian stimulus since 2008 is the intellectual equivalent today of pointing out the emperor is not wearing any clothes. In both cases, too many careers and incomes depend on ignoring what is actually quite obvious. Mises pointed this out in Human Action (Scholar’s Edition, p. 868) as well when he noted that “[t]ax-supported universities are under the sway of the party in power. The authorities try to appoint only professors who are ready to advance ideas of which they themselves approve.”

The result is a herd mentality that affects the tenor and quality of much discourse in higher education today, whether it is about race, economics, the environment, marriage and the family, or “good citizenship.” The irony is that the Keynesian notion of animal spirits is actually strongest within the marketplace of ideas where, at present, state-supported research institutions exert the most influence.

For more, see Mises’ Epistemological Problems in Economics and Hayek’s Counter-Revolution of Science. For a personal account of these issues, also see Bill Anderson’s short article, “Austrian Economics and the ‘Market Test’: A Comment of Laband and Tollison”.

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.

“The Tax Was Most Popular Before It Was Laid”

On this date in 1913, from the New York Times:

The Chamber of Commerce has directed an inquiry into the administrative feature of the income tax after a debate in which it was said that the tax would not affect 99 per cent. of the citizenship. It was suggested that this deprived the bill of general interest, and that it was sure to be unpopular on account of the narrowness of its application.


The case is worse than this. It will tax the honest and allow the dishonest to escape. The administrative features which the Chamber is to investigate are so complicated that those who understand them will make their taxes light at the cost of those less well informed about the law. The income tax law may be considered good nevertheless by some, but even those who approve the tax despite its faults cannot contend that the same sums could not have been raised more certainly, more equitably, and with less trouble to both payers and collectors by a stamp tax.

The experience with the tariff shows how hard it is to reduce or remove a tax once laid. It always seems better and easier to devise ways to spend the money than to repeal the tax. This fact will be better appreciated as the years pass, and particularly when the time shall come when this extraordinary tax–as it ought to be–shall be needed for an emergency. Then it will appear that this resource has been utilized and that the tax must be doubled instead of imposed initially. The tax was most popular before it was laid. Its unpopularity will grow with its life.

Mainstream Economics

This new paper from Economic Inquiry provides a new meaning to Harry Truman’s famous desire for a one-armed economist:

ATTEMA, A. E., BROUWER, W. B.F. and VAN EXEL, J. (2013), YOUR RIGHT ARM FOR A PUBLICATION IN AER?. Economic Inquiry. doi: 10.1111/ecin.12013


The time tradeoff (TTO) method is popular in medical decision making for valuing health states. We use it to elicit economists’ preferences for publishing in top economic journals and for living without limbs. The economists value journal publications highly and have a clear preference among them,, with the American Economic Review (AER) the most preferred. Their responses imply they would sacrifice more than half a thumb for an AER publication. These TTO results are consistent with ranking and willingness to pay results, and indicate that journal preferences are not entirely determined by impact factors or by expectations of a salary increase following a publication in a prestigious journal. (JEL A10, B41, I10)

Greenspan: No Irrational Exuberance Here

On Squawk Box:

Host:  The question of the morning:  Do you want to break out the phrase again, irrational exuberance?

Greenspan:  [Chuckling] No, I don’t think it’s quite appropriate in this type of environment.  In fact the basic way of looking at this degree of exuberance or non-exuberance is to take a look at what we call the equity premium, as you know it’s the extent of the measure that stocks are overvalued or undervalued, and right now by historical calculations we are significantly undervalued.  The reason why the stock market has not been significantly higher is there are other factors compressing it lower.  But irrational exuberance is the last term I would use to characterize what’s going on at the moment.

Host:  Is this a Fed-fuel rally?

Greenspan: I think you can fully explain the rally in terms basically of the issue of the removal of what economists call tail risk, that is, what has been sitting out there virtually most of this year, and part of last as well, has been the European problems which have every characteristic of caving in the economies of the world as a whole, and that has been temporarily removed.  The result is removing that key factor has allowed the markets to move up.  It’s not because earnings are moving all that well.  As you know, earnings or expectations at least have been flat or down awhile.  What it’s basically doing is the valuations structure [sic], and still has quite a way to go as far as I can see.

Investor Bill Miller:  Mr. Chairman, how well grounded is the housing rally?  Housing starts are approaching a million–what’s equilibrium in your view, and how far along are we in the housing cycle?

Greenspan:  Well, we’re I would say somewhere in the middle but we have a good way to go.  The data I look at  are essentially, well I should say, price is a critical issue.  Home prices are moving up and in fact they are moving up  a little bit faster than I think the data show largely because the data are delayed.   But the critical elements that determine whether market prices of homes are rising is essentially the issue of what is happening to home ownership.  The underlying demand for home ownership as you know has essentially gone down very sharply after the crisis, and … the latest data we currently have is that home ownerships rates are still at the bottom of their recent decline.  I am almost certain, however, they have already turned up and I am reasonably certain that the rise of home prices has generated a very significant and important rise in home equity, meaning the equity of homes which has basically moved a lot of underwater mortgages into positive ground, and in fact a goodly part of the seeming strength that we’re seeing in the economy very recently is coming from both the stock market and home prices.  That is, asset prices generally I think are underestimated with respect to housing, in fact  the economy as a whole, and both home prices and stock prices have been very powerful forces here.

View more at the link above. At the end of the interview, Greenspan expresses hope that Bernanke will remain Fed chairman beyond January 2014.

Surrendering to the Boom Bacillus

Doing some research the other day, I came across a 1926 article from Harper’s Monthly on the Florida real estate boom and how the journalist covering the story eventually succumbed to the boom mentality.  (Sorry, there’s no link.)  Here’s a short excerpt (from Gertrude Mathews Shelby, “Florida Frenzy,” Harper’s Monthly, January 1926, p. 177):

…I then was offered by a reputable firm a great bargain in a [Fort Lauderdale] city lot for $1000, an unusually low price.  Well-located $3000 fifty-foot lots are rather scarce.  This bonanza turned out to be hole, a rockpit–and I reflected on the credulous millions who buy lots from plats without ever visiting the land!

But to set against this experience I had one of exactly the opposite sort which left me with a sharp sense of personal loss.  An unimportant-looking lot several blocks from the center of Fort Lauderdale (whose population is fifteen thousand) on Las Olas Boulevard had been offered me about a week before at $60,000.  I didn’t consider it.  It now resold for $75,000.

“It doesn’t matter what the price is, if your location is where the buying is lively,” I was told.  “You get in and get out on the binder, or earnest money.  If you had paid down $2500 you would have had thirty days after the abstract was satisfactorily completed and the title was approved before the first payment was due.  You turn around quickly and sell your purchase-contract for a lump sum, or advance the price per acre as much as the market dictates.  Arrange terms so that your resale will bring in sufficient cash to meet the first payment, to pay the usual commission, and if possible to double your outlay, or better.  In addition you will have paper profits which figure perhaps several hundred per cent–even a thousand–on the amount you put into the pot.  The next man assumes your obligation.  You ride on his money.  He passes the buck to somebody else if he can.”

“But what happens if I can’t resell?”

“”You’re out of luck unless you are prepared to dig up the required amount for your first payment.  You don’t get your binder back.  But it’s not so hazardous as it sounds, with the market in this condition.”

Imagine how I felt two weeks later when the same lot resold for $95,000.  By risking $2500 with faith that I could have made $35,000 clear, enough to live on for some years.  Terror of an insecure old age suddenly assumed exaggerated proportions.  Right then and there I surrendered to the boom bacillus.  I would gamble outright.  The illusion of investment vanished….

Only two years later and a year before Black Tuesday, Joseph Kennedy would liquidate much of his investment portfolio and warn that “only a fool holds out for the top dollar.”  He later invested in Florida real estate at depressed, post-boom prices.

Shelby’s story reminded me of the boom mentality that pervaded the country in the 2000s, especially Florida and especially again in my hometown of Naples, where so-called investors driven by the “greater fool theory” were day-trading houses at one point.  Lost in most of the popular writings from the 1920s is any understanding of the role played by an activist Fed in expanding credit, lowering interest rates below market rates by its control of the discount rate, inflating the dollar in an explicit strategy to allow the British pound to find its pre-war exchange rate, and the general reinterpretation of the Fed’s implied mandate in the Federal Reserve Act to increase the money supply to ensure funds flowed to “legitimate business,” whether or not the economic was experiencing a panic, and even if this resulted in the bubbling land boom in Florida.

As people tended not to make those connections in the past, so they don’t today, following several years of massive and unprecedented increases in bank reserves engineered by the Bernanke Fed and optimistic news reports that the housing market is recovering.  Are happy times and land booms are here again?  As Clarence Darrow once said: “History repeats itself, and that’s one of the things that’s wrong with history.”