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A New Term For An Obvious Economic Problem

A weekend topic starting with J. Bradford DeLong, Professor of Economics at the University of California at Berkeley. “The 2008 financial crisis and subsequent recession left the Global North 10% poorer than it otherwise would have been, based on 2005 forecasts. For those hoping to understand this episode better, I have long recommended four books, in particular: Manias, Panics, and Crashes, by the twentieth-century economist Charles P. Kindleberger; This Time Is Different, by Carmen M. Reinhart and Kenneth S. Rogoff of Harvard University; The Shifts and the Shocks, by the Financial Times economics commentator Martin Wolf; and Hall of Mirrors, by my University of California, Berkeley, colleague Barry Eichengreen..”

“Now, I want to add a fifth book to the list: A Crisis of Beliefs: Investor Psychology and Financial Fragility, by the economists Nicola Gennaioli and Andrei Shleifer. It offers a welcome rejoinder to those who argue that the past decade was an unavoidable result of the housing bubble in the United States. Many experts still claim that the bubble’s deflation triggered the financial crisis. But the fact is that the bubble had already deflated substantially before the crisis erupted.”

“Gennaioli and Shleifer’s second important contribution is to show that ‘crises of beliefs’ like the one that precipitated the disaster of 2008-2009 are deeply rooted in human psychology, so much so that we will never be free of them. Thus, neither prudential policies nor crisis-response measures should treat these occurrences as flukes or one-off exceptions. Crises of belief are manifestations of a chronic condition that must be managed.”

“Thus, central banks and fiscal authorities should not use the end of a crisis as an excuse to step back or to take their hands off the wheel. Moreover, the seeds of the next Kindlebergian sequence – displacement, optimism, enthusiasm, crash, panic, revulsion, discrediting – have already been sown by the very policies that were needed to address the last downturn.”

“The third reason why Gennaioli and Shleifer’s book is important is more technical, and applies directly to the field of economics. Economists have long recognized that requiring one’s representative agent to hold rational expectations of the future tends to produce models that are profoundly inapplicable to the real world. But, until now, no alternative approach has ever gained any traction. Gennaioli and Shleifer’s investors-as-triage-nurses framework shows great promise for being considered alongside other model-building strategies.”

“For a decade now, people have been looking for a silver lining to the disasters of 2008-2018, hoping that this period will bring about a more productive integration of finance, behavioral economics, and macroeconomic orthodoxy. So far, they have been searching in vain. But with the publication of A Crisis of Beliefs, there is hope yet.”

From The Battalion. “September 2018 marked 10 years since Lehman Brothers filed for bankruptcy, throwing the global financial industry into crisis and sending the U.S. economy into the worst recession since the Great Depression. Some financial professionals predicted the crisis, with varying arguments, according to Anwer Ahmed, the department of accounting’s Ashley ‘88 and David Coolidge ‘87 chair in business.”

“With the benefit of hindsight, Ahmed said the financial crisis was deepened by some mix of government policies and private-sector actions.”

“‘It was a combination of factors including government policies such as keeping interest rates low to stimulate the economy, deregulation of banking and inadequate supervision of markets like the credit default swaps market,’ Ahmed said. ‘[Other factors included] incentive systems that motivated excessive risk-taking and deal-making, insatiable demand for securities that were considered low risk but offered relatively high returns and bursting of the real estate bubble.'”

“Ahmed said the Federal Reserve’s widely unpopular but effective bank bailouts helped put the economy back on track. ‘The Federal Reserve had to step in to save the banking system because without that, the crisis would have been worse and more widespread,’ Ahmed said.”

“At the time of the crisis, assistant professor of finance David Skeie was working at the Federal Reserve Bank of New York, which supervises and regulates financial institutions in addition to its typical role implementing monetary policy. Skeie said despite legitimate criticisms of the decisions that were made by government officials during the crisis, people should keep in mind the entire picture of the situation that these officials were responding to.”

“‘I think there’s definitely a lot of blame that could go around for what led up to the crisis,’ Skeie said. ‘But it wasn’t so much anybody particular’s fault. I don’t think anybody was especially negligent in any of these exact different bodies. It’s just simply not thinking outside the box about what potentially could really go wrong.'”

From News.com.au. “A set of worrying conditions known as ‘doom loops’ could soon trigger a fresh global financial crisis, a leading economist has warned. Dr John Llewellyn, the former chief economist of failed US investment bank Lehman Brothers, made the alarming prediction during a private OECD event last month.”

“During the forum, Dr Llewellyn argued economic conditions which could spark a fresh crash were now ‘not only serious, but intensifying.’ ‘Markets run on greed. While greed cannot be eradicated, it can be discouraged. But few financiers have been fined, and almost none have been jailed. Incentives remain unduly skewed towards risk-taking,’ said Dr Llewellyn. ‘Banks are now better capitalised, but still not sufficiently sound. Banks in Europe can still hold their own national sovereign debt without reserving any capital against it, sustaining the latent ‘doom loop’ between them and often barely-solvent sovereigns.'”

“And according to Dr Llewellyn, a combination of greed, debt at an ‘all time high, irrational exuberance’ and low interest rates were working together to push the world to the brink of financial crisis.”

“He said the US is ‘particularly at risk’ due to its ‘complex and unwieldy’ regulatory system, and that decision makers were failing to pick up the warning signs. ‘There is scant evidence of policymakers being able to recognise the early symptoms, let alone respond,’ he warned.”

“For several years now, Australian economist John Adams has warned of a looming global crash, based on record levels of public and private debt, ultra-low interest rates, excessive public spending and a massive housing bubble, among other indicators. The former Coalition adviser told news.com.au ‘doom loops’ was a new term for an ‘obvious economic problem.'”

“Mr Adams said the world was now ‘drenched in debt’ and experiencing the ‘biggest financial bubble in world history.’ ‘As interest rates continue to go up around the world, there will be individuals and institutions who will end up defaulting because they can’t make interest and principal repayments,’ he predicted.”

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This Post Has 64 Comments

  1. ‘Thus, central banks and fiscal authorities should not use the end of a crisis as an excuse to step back or to take their hands off the wheel. Moreover, the seeds of the next Kindlebergian sequence – displacement, optimism, enthusiasm, crash, panic, revulsion, discrediting – have already been sown by the very policies that were needed to address the last downturn’

    I remember being told in college that central banks were there to prevent this sort of thing. Oh well…

    1. “I remember being told in college that central banks were there to prevent this sort of thing.”

      They were there to take away the punch bowl once the party got started.

      Nobody anymore seems to get the joke.

      1. I like that analogy and will borrow it.

        And the Fed is certainly trying to remove the punch bowl now by raising rates.

        Let’s hope it is not too late and Republican politics don’t stop it.

        IMHO, It is our only hope for a soft landing if that is even possible.

        1. “Let’s hope it is not too late and Republican politics don’t stop it.”

          Given central bank independence, how do you envision Republicans stopping it?

          2. From the Bankrate article, an interesting opinion:

            ‘In a tweet, Ian Shepherdson, chief economist of Pantheon Macroeconomics, put Trump’s public criticism into perspective.

            “The Fed has no choice but to raise rates in (December), unless the sky really falls in on the stock market,” reads the tweet. “If they don’t hike, Powell will be tainted immediately and forever, and the Treasury market will crater.”’

            If he’s right, then the Fed really is between a rock and a hard place. There could be some good opportunities ahead in the bond market, regardless of the Fed’s December interest rate decision.

          3. Here’s what that means?

            Excuse me but the Fed seems to me to be a scam. We have a currency that is “printed” out of nothing. Fine. Who in their right mind would design a system where our Nation borrows its own Fiat at interest from a private bank? Sure, we get some of that interest back, but it really is stupid.

            I think everything the Fed does is to profit the banks. The routine of recent years of paying the banks interest on money the Fed created for free is hilarious. It does provide the banks a revenue stream.

            The Fed is a smooth talking wolf in a fine suit.

  2. ‘…policies that were needed to address the last downturn’

    I suppose we’ll never know how the post-financial-apocolypse world order would have emerged if the Fed hadn’t stepped in with over $4 trillion in bailouts.

    Interestingly, current news stories are claiming $5 trillion in global stock and bond market losses have occurred over the past month, despite the Fed having only barely started to take away the punchbowl.

    Easy come, easy go.

    1. Heavy selling marks end to wild week for stocks
      By Matt Egan, CNN Business
      Updated 4:32 PM ET, Fri October 26, 2018
      Howard: Populism is long-term risk for stocks
      The closing numbers are displayed after the closing bell of the Dow Industrial Average at the New York Stock Exchange on Wall Street on February 8, 2018 in New York. Wall Street tumbled back into sell-off mode Thursday, with the Dow plunging more than 1,000 points as worries over interest rate hikes continued to drag the market down. At the closing bell, the Dow Jones Industrial Average was at 23,858.90, down 4.2 percent. / AFP PHOTO / Bryan R. Smith (Photo credit should read BRYAN R. SMITH/AFP/Getty Images)
      – Why you should ignore the Dow
      – Sears shares tumble on bankruptcy fears
      – Why Howard Marks is cautioning investors
      – Workers are hurt when companies buy back stock
      – Why rising bond yields are spooking stocks

      New York (CNN Business)
      The bull market is under siege as extreme turbulence grips Wall Street.

      The Dow dropped 296 points, or 1.2%, on Friday, capping off another wild week of steep losses and fleeting rebounds.

      The Nasdaq tumbled 2.1% as slowing revenue growth from Amazon and Alphabet unnerved investors about richly-valued tech stocks. Amazon plunged 8%, its worst day in four years.

      The good news is that markets recovered from even steeper losses. The Dow had been down as many as 539 points and the Nasdaq had plunged 3.6%.

      The S&P 500 briefly slipped into a correction before bouncing off the lows.
      Still, it was another dreadful week on Wall Street, especially in the tech world. The Nasdaq plunged 3.8% on the week, its worst since March. The index is on track for its steepest monthly decline since November 2008.

      “The sentiment in tech is remarkably poor,” said Nicholas Colas, co-founder of DataTrek Research.

      “Technology was priced for perfection. But we live in an imperfect and increasingly unpredictable world.”

      Friday’s turbulence is just the latest in a series of erratic moves on Wall Street. The Dow soared 401 points on Thursday, after plunging more than 600 points the day before.

      The bout of volatility reflects mounting worries that the best days of the bull market and economic recovery may be over. The euphoria that carried stocks to record highs has morphed into sudden caution about the future. All of the Dow and S&P 500’s gains for the year have been wiped out.

      “We see this as much more likely to be a correction as opposed to a bear market,” said Evan Brown, head of macro asset allocation strategy at UBS Asset Management. “It’s very rare to get a bear market outside of a recession.”
      …

  3. Iceberg dead ahead!

    Markets
    China May Have $5.8 Trillion in Hidden Debt With ‘Titanic’ Risks
    By Eric Lam
    October 16, 2018, 12:30 AM PDT
    Updated on October 16, 2018, 1:52 AM PDT
    – Local governments relying on LGFVs to fund projects, S&P Says
    – Citigroup analysts agree markets right to worry over debt risk

    China’s local governments may have accumulated 40 trillion yuan ($5.8 trillion) of off-balance sheet debt, or even more, suggesting further defaults are in store, according to S&P Global Ratings.

    “The potential amount of debt is an iceberg with titanic credit risks,” S&P credit analysts led by Gloria Lu wrote in a report Tuesday. Much of the build-up relates to local government financing vehicles, which don’t necessarily have the full financial backing of local governments themselves.
    …

  4. I think they need to return to their roots, i.e., being the lender of last resort when interbank lending seizes up due to default fears.
    And I agree with Stephen Roach, that QE1 was probably necessary but all the subsequent QE creatures were a result of the Fed’s fascination with their new toy.

    The arrogance of the Fed is palpable and litters all their interviews “what we are watching for is…” What kind of person (or small group of people) thinks that they can grasp the intricacies of a diverse $20T economy? Their read of the ‘neutral rate’ is just as misguided as the old Soviet 5 year plans “let’s produce 50M pairs of shoes this year!”
    Give anyone massive power and watch how quickly they psychologically justify that power. Watch as they develop difficult to understand terms to invoke their “special knowledge.” I call it rationalization after the fact, when the brain seeks to justify power/privilege/behavior in retrospect. This, in spite of the fact that the power/privilege/behavior can’t be justified by any sound reasoning.

    1. “I call it rationalization after the fact, when the brain seeks to justify power/privilege/behavior in retrospect.”

      Also known as curve fitting one’s hypothesis. Post hoc ergo proctor hoc.

  5. ‘The 2008 financial crisis and subsequent recession left the Global North 10% poorer than it otherwise would have been’

    Yeah, so lets keep repeating this over and over. In the summer of 2005 I was on a radio show with this professor. I said the housing market was in a bubble that would end in disaster with cascading defaults. He said they weren’t making any more land. He did say if it was a bubble we would “find out how good our central bankers are.”

    Now in 2018, facing what we are, I think that has become clear at least. At the root of the problem is again dishonesty. For example, we laugh about the “no one could have seen it coming” line, but there’s a big problem with letting them shrugging off responsibility so easily. Why isn’t this Berkley professor writing papers on how he was completely wrong and a blogger with no budget was completely right? Actually, did anyone, anywhere ever take him to task for such a blunder? And do they now question his slavish devotion to a central banking system that screwed everything up and continues to year after year?

    It’s that devotion that is why he is a highly paid professor, IMO. Deviating from that is anti-establishment, no matter how wrong they are. Anti establishment is derided. It isn’t tolerated. Why men in expensive suits know it all. And who is some yokel in Arizona to say there’s trouble ahead because shacks prices are insane. How can such a simple interpretation be true?

    Over the years I met a bunch of posters and readers of this blog. A very common thing they told me was their “something isn’t right” moment about the housing market that lead them here. It turns out anyone could have seen it coming. Anyone should know that wages have to stay in line with shack prices. Anyone can see the speculation and greed at every level. How about the “skin in the game”? How many thousands of Rocket Mortgage ads will run today?

    1. “It’s that devotion that is why he is a highly paid professor, IMO.”

      It’s a bit more involved than that, including the Harvard PhD and peer reviewed publications in a wide variety of fields. I can assure you that a big investment of time and effort was involved.

      If your point is that an anti-establishment orientation would preclude his employment as a tenured economics professor at Berkeley, then I’m less sure. Does the Fed get a tacit veto in top academic posts?

      2. Not only that academics give central banks a pass before the SHTF:

        ‘Gennaioli and Shleifer’s second important contribution is to show that ‘crises of beliefs’ like the one that precipitated the disaster of 2008-2009 are deeply rooted in human psychology, so much so that we will never be free of them. Thus, neither prudential policies nor crisis-response measures should treat these occurrences as flukes or one-off exceptions. Crises of belief are manifestations of a chronic condition that must be managed’

        1. ‘Skeie said despite legitimate criticisms of the decisions that were made by government officials during the crisis, people should keep in mind the entire picture of the situation that these officials were responding to.’

          ‘I think there’s definitely a lot of blame that could go around for what led up to the crisis,’ Skeie said. ‘But it wasn’t so much anybody particular’s fault. I don’t think anybody was especially negligent in any of these exact different bodies. It’s just simply not thinking outside the box about what potentially could really go wrong.’

          Well invite this man to Jackson Hole!

          1. “Crises of belief are manifestations of a chronic conditions that must be managed”.

            I would love to see the prescription policy set to manage these chronic conditions. Sounds quite Orwellian. Crimethink or wrongthink would be questioning the valuation of real estate mantras.

      3. It is a point that the professor has schooling and peer reviewed publications. This does not preclude an arrogant, presumptuous interpretation of available data.
        Denying the existence of a bubble by repeating the platitude that “they aren’t making more land” suggests a myopic reading of all the data. His schooling may prove raw intelligence and accumulated knowledge but his remarks reveal a lack of ability to assemble *all * available data. It appears that he is one of those who cherry pick the data to bolster their pre-existing beliefs (confirmation bias).

        I like Einstein’s view that “The true sign of intelligence is not knowledge but imagination”

          1. It’s not quite like that. Publications that merely restate the consensus can be rejected for a lack of originality. There’s a middle ground between too much in line with the established consensus and too far out of line where publications are accepted.

    2. Anybody can see this is headed for disaster:

      May 25, 2018

      “In his corner of American finance, where hard selling meets hard luck, Angelo Christian is a star. Each time Christian sells a home loan, the company he works for, American Financial Network Inc., takes as much as 5 percent. Many of Christian’s customers have no savings, poor credit, or low income—sometimes all three. Some are like Joseph Taylor, a corrections officer who saw Christian’s roadside billboard touting zero-down mortgages. Taylor had recently filed for bankruptcy because of his $25,000 in credit card debt. But he just bought his first home for $120,000 with a zero-down loan from Christian’s company. Monthly debt payments now eat up half his take-home pay. ‘If he can help me, he can help anyone,’ Taylor says. ‘My credit history was just horrible.’”

      “Christian can do this kind of deal because he is, in effect, making the loan on behalf of the federal government through its most important affordable housing program. It’s a sweet deal: He gets his nearly risk-free commission. Taylor puts no money down. If things go south, the government ultimately bears the risk. Many borrowers ‘are living paycheck to paycheck and, if they lose their jobs, they go into default immediately,’ says John Burns, a housing consultant.”

      “One reason more borrowers may be stretching: Real estate prices are soaring again.”

      http://thehousingbubbleblog.com/?p=10443

    3. anyone could have seen it coming

      Any One. Much more likely than Any Group. Thinking in a group is harder because of the boundaries.

      1. And a lot of people don’t really think at all, they just outsource it to the experts until you’ve got an Emperor’s new clothes phenomenon going on.

        1. Is it the wisdom of crowds or extraordinary popular delusions? Both of these phenomenons exist.

        2. Isn’t that why experts exist? People can’t know everything and they are busy with their lives. We shouldn’t give experts a free pass to give advice and then blame people for taking it.

    4. “recession left the Global North 10% poorer than it otherwise would have been”

      Oh, if only unqualified bloggers hadn’t spread unnecessary panic, then the glorious bubble would have continued and we would all be rich.

      This is like saying that Madoff’s victims were XX% poorer than they otherwise would have been if only the Ponzi scheme had been allowed to continue. Which is basically what a group of them argued in court.

      And this is why I keep coming back to the morality issue lately. The bubble and speculation culture turn all participants into con artists and defenders of corruption. It is the job of bubble cheerleaders to make people feel as if they have a stake in the corruption continuing, while hiding the fact that it is corruption at all. But if plenty of regular people can see that it obviously is, then maybe it’s not such a muddled moral issue after all.

      1. It’s a rentier economy now. We still have some portion of the economy that is trying to make goods and services cheaper and of higher quality. But increasingly our economy is a zero-sums extracting exercise.

        1. “make goods and services cheaper and of higher quality.”

          And these are the people often portrayed as the suckers. Leaving money on the table! While all the flippers and gamblers are portrayed as savvy. That’s really the problem – there will always be greed and speculation, but the cultural embrace of it and the way it has infiltrated some people’s thinking across all classes and age groups is something I don’t think a crash will necessarily cure at this point.

          I still find that post-Madoff court case shocking. One set of victims trying to screw over another set of even less fortunate victims of the same scheme! The Ponzi imploded and that first set of victims STILL could not equate their profit with someone else’s loss.

          1. The end of the movie Wolf of Wall Street was good. It showed Jordan Belfort played by Leonardo DiCaprio rehabilitated as a motivational speaker. The real Jordan Belfort actually introduces Leonardo DiCaprio in the cameo. The crowd is spellbound by this Wall Street swindler. For all the excesses and moral depravity of the Wall Street culture, the striking thing is the end of the movie in which you see the absolute greed. But the twist is that it isn’t the greed of Wall Street, it is the greed of those in the audience that enable those in Wall Street. There is a tragic complicity in the fact that greed and the something-for-nothing culture has permeated deep into the American cultural fabric.

      2. such a muddled moral issue

        Not at all. Buying something that you can not actually pay for until after 20 or 30 years of remarkable good fortune is dishonest to the core.

    5. A very common thing they told me was their “something isn’t right” moment about the housing market that lead them here.

      For some of us it’s more than just a “something isn’t right” about the housing market. It’s more like discovering everything my 8th grade civics teacher told me about how our system of government operates was a lie. Policy makers who were captured by the banks repealed Glass-Steagall and the Depression-era regulations put into place to prevent the kind of speculative excesses and manias that caused the first Great Depression. When people like Jon Corzine walk free with complete impunity despite bilking MF Global clients of $1.6 billion dollars, and not a single banker is jailed for causing the 2008 financial crash with their greed and recklessness, something is seriously wrong with the system. The book “The Big Short” and others like it detail the systemic corruption and collusion between the investment banks, the ratings agencies, and the worthless and complicit SEC and other regulatory and enforcement agencies. Ten years of Fed “accommodative” policies have completely distorted normal market forces and price discovery while creating moral hazard on a vast scale and rewarding greed and recklessness. The media, owned by six corporations, have become shills and propagandists for the Oligopoly.

      Americans are gong to pay a heavy price for their abandonment of the virtues and morality that used to be the bedrock this nation’s prosperity was built on, and for abdicating their responsibilities as citizens of the Republic to stop it from being hijacked by the “monied interests” Thomas Jefferson repeatedly warned Americans to be eternally vigilant against.

  6. The Fed was allegedly “created” in 1913 to prevent The Panic of 1907 from recurring. However: DJIA: 1907 Panic losses=-49%; 2008 Panic losses=-53%. And what about The Great Depression, and numerous other significant market declines and economic contractions since then?

    So it’s a given that the Fed and Keynesian economics are an abject failure in this regard. Perhaps it’s real purpose was to replace free markets and sound $ with a debased currency via inflation to facilitate wealth transfer from the 99% to the 1% (kind of like today), and to allow virtually unlimited gov’t. borrowing for progressive policies via debt monetization? That couldn’t be it, right? It’s probably also just a coincidence that The Revenue Act of 1913, which re-imposed the Federal Income Tax, was enacted that same year.

    Without free markets and sound $ we can expect more of the same in terms of “boom and bust” economy and a general decline in the Middle Class overall standard of living. There will always be economic cycles, but they are made worse by “fast and easy” policy during the boom phase, which was initiated to address the bust phase from the last cycle.

    “One of the great mistakes is to judge policies and programs by their intentions rather than their results.” – Milton Friedman

    “Permit me to issue and control the money of a nation, and I care not who makes its laws.” – Mayer Amschel Rothschild, International Banker

    “None are more enslaved than those who falsely believe they are free.” – Goethe

    “’The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in iniquity and born in sin. Bankers own the Earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough money to buy it back again… Take this great power away from them and all great fortunes like mine will disappear, and they ought to disappear, for then this would be a better and happier world to live in. But if you want to continue to be slaves of the banks and pay the cost of your own slavery, then let bankers continue to create money and control credit’.” – Sir Josiah Stamp Director, Bank of England 1928-1941 (reputed to be the 2nd richest man in Britain at the time)

    “Whoever controls the volume of money in our country is absolute master of all industry and commerce…and when you realize that the entire system is very easily controlled, one way or another, by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate.” – James A. Garfield, assassinated president of the United States

    “There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.” – Ludwig von Mises

    2. “However: DJIA: 1907 Panic losses=-49%; 2008 Panic losses=-53%.”

      Epic fail.

      I believe this points directly to the fatal flaw in premium-free, comprehensive macroeconomic crisis insurance coverage, which is the moral hazard for foolish risk taking which results from providing free bailouts the moment systemic risk rears its ugly head.

    3. “Perhaps it’s real purpose was to replace free markets and sound $ with a debased currency via inflation to facilitate wealth transfer from the 99% to the 1% (kind of like today), and to allow virtually unlimited gov’t. borrowing for progressive policies via debt monetization?”

      The Fed’s target inflation rate of 2% is an implicit 2% tax on dollar savings in perpetuity, and decreases the value of fixed dollar holdings by 50% over 36 years time. I’ve never heard any reasons given as to why this is a legitimate form of taxation without representation.

      1. I’ve never heard any reasons given as to why this is a legitimate form of taxation without representation.

        La$h together a horse, a mule, a donkey, a burro & a oxen … Connect it to the buckboard$ of commerce, here are your tool$ for control of the bea$t$: rein$ & a whip.

        Now yell: “yeaha! giddyup!”

        What can po$$ibly go wrong?

        1. Keeps you working. Poor donkey the food in your feedbag is decreasing by 2% an hour motivates you to get to the barn.

          1. I think you should attack the arguments, not the publication. For what it’s worth, I think the narrow banking charter that was denied by the Fed earlier this year was egregious.

            To your point, the Fed is targeting 2% inflation, which is analogous to a real decline in purchasing power if productivity and quality improvements doesn’t match that 2%. I would rather it target 0% inflation and then US implement a wealth tax on assets over $250 million. It would function as sort of a progressive inflation scheme. A land tax also would function as a good proxy for this.

          2. the Fed is targeting 2% inflation

            This is a false claim. The bankers know that inflation is an increase in the money supply, yet they wave CPI at us. Not the same thing. It obfuscates what they are doing to the money supply.

  8. US Fed must put floor under home prices
    By By Garry Shilson-Josling
    26 February 2008

    Housing prices in the US must not be permitted to continue falling, says the chief investment officer of a fund with $US750 billion of fixed-income assets under management.

    The outlooks for Australia and the US are at two different extremes, said Bill Gross, chief investment officer for US fixed interest funds management giant PIMCO.

    The US economy was financial asset-based while the Australian economy was driven by commodity exports, he told funds management professionals in Sydney through an international video hook-up.

    “And so Australia is doing well, the US is not, really because of the nature of the economies themselves” he said.

    He said the US economy has had “a long wonderful secular run”.

    “Ever since 1981 lower interest rates and in effect accelerating asset prices, whether they’re stocks, bonds or real estate/housing, have led to the continued success of consumption, and indeed over-consumption, in this finance-based economy.”

    But this has come unravelled.

    He said the current situation had not been seen since at least the 1980s and probably since the 1930s.

    “For the first time in decades the totality of US finance-based assets – stocks, bonds, real estate – are going down in price, are deflating,” he said.

    When looking at bonds, Mr Gross includes not just government bonds, whose prices have been firm, but also corporate and mortgage-backed bonds, whose prices have fallen after the sub-prime loans crisis that emerged after the US housing boom fizzled out.

    “It means simply that this finance asset-based economy, which is so dependent on rising asset prices is now beginning to experience a lengthy period of time, over two years in fact, when these asset prices are declining.

    He said the US Federal Reserve had tried to reverse the outgoing tide by reducing interest rates but without success.

    “It’s not working,” Mr Gross said,

    He said bank loan and other market rates are much higher than they were before the Fed starting cutting official interest rates last year.

    “The totality of private credit is higher in yield, lower in price since the Fed began to cut interest rates.”

    It was “paramount” for the Federal Reserve through fiscal policy measures “to in effect put a floor under housing prices in order to stop the deterioration in this asset-based economy”, he said.

    He said it was a “very dangerous situation at the moment”.

    He said the “shadow banking system”, the array of non-bank financing structures multiplying the flow of credit in the economy, was contracting.

    He said all of these financial conduits were suspect in their ability to generate future lending, which was having a substantial effect on all asset prices.

    This would create a negative environment for the US economy and asset prices until either monetary policy or fiscal policy, or a combination of both, put a floor under US home prices.

    He said home prices in the US were declining at an annual rate of seven to nine per cent.

    “This is something that truly cannot be permitted to continue if in fact the US economy is to stay above the line as opposed to below the line,” he said.

    https://www.canberratimes.com.au/business/us-fed-must-put-floor-under-home-prices-20080226-1uru.html

    1. Gross was talking his book, as the same rock-bottom-rate policies which support housing values are also very supportive of bonds.

    2. “Ever since 1981 lower intere$t rate$ and in effect accelerating a$$et price$, whether they’re $tocks, bond$ or real e$tate/housing, have led to the continued succe$$ of con$umption, and indeed over-con$umption, in this finance-ba$ed economy.”

      1. Credit monie$ for Human$
      Application$ :
      A. Food
      B. Rare coin$
      C. Furniture
      D. Vehicle$
      E. Fa$hion
      F. Entertainment$ (digital)
      G. Entertainment$ (analog)
      H. $helters/$hacks/hou$ing
      I. Education (post high school)
      J.
      K.
      L.

      Follow the Credit$ Trail$ … to find U$ual $uce$$ful $uspect$!

      $ome trail$ lead to deep vein$ of Trea$ure$, more so, than other$ (imhto)

    3. Ever since 1981 lower interest rates and in effect accelerating asset prices

      Keep an open eye for how things were priced in 1981. When the ponzi economy implodes that could well be the trajectory. The Bubble in Everything goes back that far.

  9. Nice to see articles acknowledging the role of psychology, and by inference, human nature. The metrics that are used in analysis are the results of the data points. Each data point is a financial decision that was made based on optimism or pessimism of a human. These tend to be driven by greed or fear. Fear created the sell offs or turning keys back to lenders 10 to 12 years ago, and will dictate what happens going forward.

    I think the Australian guy is spot on in his assessment of the US sentiment. Perfectly fine with me since I am looking to move back to the island area here were I grew up. Prices there have already been stagnating and very large price reductions are becoming common, although I think prices need to reduce further. For single family houses in that area, there have been 5 properties close in the last 30 days and currently 132 active listings and about 15 pendings. Summer is slow season but these numbers are out of whack. Local paper and news not reporting. Several active listing have been on market for between 180 to 400+ days.

    Folks, I believe this is the beginning of the next fall of Rome.

  11. “Mr Adams said the world was now ‘drenched in debt’ and experiencing the ‘biggest financial bubble in world history.’ ”

    Exactly. The everything bubble is much more bloated than before the last meltdown, and debt levels are much, much higher. Who can look at the DOW with a straight face and not laugh at how ridiculous the valuations are, or browse houses for sale in areas with $50k household incomes and $450k median prices?

    When everything is in a bubble except for wages, there’s simply no way to stop it from blowing up big. Nothing can be done at this point. The seeds of collapse were sown when the bubble was intentionally inflated.

    1. The only shame when the credit bubble pops and bubble jobs and Ponzi fortunes are lost is they were ever created in the first place.

    2. The Sword of Damocles is hanging over many a household. Any stock market gyration, interest rate adjustment, or other type economic shock risks upsetting the fragility of the status quo. The result will be catastrophic.

      1. Borrowing rates have been adjusting for a year and the economy has been accelerating.

        Remember…. Nothing accelerates the economy and creates jobs like rising interest rates and falling prices…… Nothing.

        Cypress, CA Housing Prices Crater 7% YOY On Looming Excess, Empty Housing Inventory Across The Nation

        https://www.movoto.com/cypress-ca/market-trends/

      2. And many of those households didn’t get to share in the “prosperity” of the last 8 years either. A lot of resentment is brewing.

  12. Just looking at drudge a minute ago…

    OCTOBER WITCH: Long-Anticipated Crash Upon Us?

    Wall St sours on Silicon Valley…

    Economy Flashes Signs It’s Downhill From Here…

    I expect front page stories like those to be the ‘new normal’ for a good while from here on out. And what’s that going to do to everything from investor strategies to consumer sentiment? (as if we haven’t already discussing and debating that here for a long while now…)

    Good thing we’ve stocking up on popcorn…

    1. And an especially good thing we’ve invested in security, not borrowed long for an SFH at bubble prices and put cash in the drawer rather than debt payment invoices.

      1. You know, some security is what most of the middle class wants, and overall they feel like there’s less of it with each passing decade.

        Still, there are plenty of people out there who are driven to ‘strike it rich’ at any cost, monetary or human. And the even bigger players – wall street mega firms, etc – are happy to take them for a ride for a chance to roll the dice. Privatize the winnings, socialize the losses – they believe they are the only people who really matter.

        Yeah, I’m in a philosophical mood today.

        1. I’ve been on a ride or two, but now I’m on the other side of chasing the brass ring. I am so lucky I did not end up at this point in life believing I should and would be miraculously rich by rolling the dice.

  14. “He said the US is ‘particularly at risk’ due to its ‘complex and unwieldy’ regulatory system, and that decision makers were failing to pick up the warning signs. ‘There is scant evidence of policymakers being able to recognise the early symptoms, let alone respond,’ he warned.”

    Regulators, enforcers, and policy makers have all been captured and co-opted by the Wall Street firms and corporations they’re supposed to be overseeing. From the moment of the Federal Reserve’s establishment in 1913, America ceased to be a Republic and instead became an oligarchy where a corrupt and venal .1% in the financial sector have since 2008 dramatically escalated their swindles and racketeering against the 99%.

  15. This may well be the finest and most interesting set of comments I’ve ever seen on this blog. Well done, all.

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