Comments on: "Hold tight, the central banks have no plan" http://www.nakedcapitalism.com/2007/12/hold-tight-central-banks-have-no-plan.html Sun, 22 Nov 2009 15:18:28 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: NC Jim http://www.nakedcapitalism.com/2007/12/hold-tight-central-banks-have-no-plan.html#comment-2486 NC Jim Mon, 17 Dec 2007 22:11:00 +0000 http://www.nakedcapitalism.com/2007/12/hold-tight-the-central-banks-have-no-plan/#comment-2486 The problem with housing is that prices are out of line with incomes and ,until that is corrected, all else is BS. Inflation will do the job IF and only if median wages (not Goldman bonus pools) track inflation - not likely in a global economy especially one in recession.<br/><br/>IMO, housing will find a bottom when the mortgage payment on a median home equals one weeks take home pay of the median household. This was the standard for my adult life until recent years. Expect this process to playout over many years. The problem with housing is that prices are out of line with incomes and ,until that is corrected, all else is BS. Inflation will do the job IF and only if median wages (not Goldman bonus pools) track inflation – not likely in a global economy especially one in recession.

IMO, housing will find a bottom when the mortgage payment on a median home equals one weeks take home pay of the median household. This was the standard for my adult life until recent years. Expect this process to playout over many years.

]]> By: GeorgeNYC http://www.nakedcapitalism.com/2007/12/hold-tight-central-banks-have-no-plan.html#comment-2479 GeorgeNYC Mon, 17 Dec 2007 14:27:00 +0000 http://www.nakedcapitalism.com/2007/12/hold-tight-the-central-banks-have-no-plan/#comment-2479 "Inflation"" can mean a lot of things. This is a truly "simplistic" view of things. If inflation goes up, the value of housing goes up. However, what everyone is missing here is that "inflation" can mean simply that energy and food costs are going up. Absent an increase in income, where is the spending for housing going to come from? In fact, even with an increase in income, if it gets eaten up by all the other inflationary costs how can there be gains in housing? I think everyone needs to step away fro their spreadsheets and trend lines for a moment and start re-thinking the basics here. Housing is not really an "asset" except in the sense that it provides "shelter." In much the same way, my flat screen TV is an "asset" in that it provides "entertainment." The demand for all of this stuff can change over time. Not to mention that the higher carrying costs involved with bigger housing could decrease the demand for space. <br/><br/>Simply "allowing" home prices to "appreciate with inflation is an extremely simplistic approach. This would imply that allowing the fed to stoke inflation would "solve" the housing crisis. If the"inflation" does not also include higher wages for homeowners (as opposed to simply going to the top 1% in the form of higher profits) it will have no impact and could possibly boomerang given that the higher inflation could actually lower the value of houses because of the higher costs of ownership.<br/><br/>Again, I am not suggesting that what I am saying is dogma, merely that it is time to step away from the spreadsheets and have a good think about this stuff. “Inflation”" can mean a lot of things. This is a truly “simplistic” view of things. If inflation goes up, the value of housing goes up. However, what everyone is missing here is that “inflation” can mean simply that energy and food costs are going up. Absent an increase in income, where is the spending for housing going to come from? In fact, even with an increase in income, if it gets eaten up by all the other inflationary costs how can there be gains in housing? I think everyone needs to step away fro their spreadsheets and trend lines for a moment and start re-thinking the basics here. Housing is not really an “asset” except in the sense that it provides “shelter.” In much the same way, my flat screen TV is an “asset” in that it provides “entertainment.” The demand for all of this stuff can change over time. Not to mention that the higher carrying costs involved with bigger housing could decrease the demand for space.

Simply “allowing” home prices to “appreciate with inflation is an extremely simplistic approach. This would imply that allowing the fed to stoke inflation would “solve” the housing crisis. If the”inflation” does not also include higher wages for homeowners (as opposed to simply going to the top 1% in the form of higher profits) it will have no impact and could possibly boomerang given that the higher inflation could actually lower the value of houses because of the higher costs of ownership.

Again, I am not suggesting that what I am saying is dogma, merely that it is time to step away from the spreadsheets and have a good think about this stuff.

]]> By: Anonymous http://www.nakedcapitalism.com/2007/12/hold-tight-central-banks-have-no-plan.html#comment-2477 Anonymous Mon, 17 Dec 2007 13:32:00 +0000 http://www.nakedcapitalism.com/2007/12/hold-tight-the-central-banks-have-no-plan/#comment-2477 Perhaps we should attempt to consider the present crisis as non-systemic (though widespread). More like a sector recession, in this case finance and housing. Maybe we are mistaken about how crucial the New York based finance system is. The partial buyout of Citi indicates that there are other sources of capital in the world. Maybe a growth scenario is conceivable even if English and American financial sectors are in recession. So maybe anxiety about the lack of central bank control is misplaced. Maybe this should be celebratged -- at least from an economic perspective. Perhaps we should attempt to consider the present crisis as non-systemic (though widespread). More like a sector recession, in this case finance and housing. Maybe we are mistaken about how crucial the New York based finance system is. The partial buyout of Citi indicates that there are other sources of capital in the world. Maybe a growth scenario is conceivable even if English and American financial sectors are in recession. So maybe anxiety about the lack of central bank control is misplaced. Maybe this should be celebratged — at least from an economic perspective.

]]> By: Steve http://www.nakedcapitalism.com/2007/12/hold-tight-central-banks-have-no-plan.html#comment-2474 Steve Mon, 17 Dec 2007 09:48:00 +0000 http://www.nakedcapitalism.com/2007/12/hold-tight-the-central-banks-have-no-plan/#comment-2474 Munchau's math is a little off. The implied inflation over the period would need to be 66%, not 37%, for a 40% drop real prices to keep the nominal price more or less constant. The inflation rate required to bring nominal prices back quickly after a 10% or 15% one year decline is never going to be a central bank target. Anyway, if one asset class deflates while others inflate, the loss is still very much there and readily noticed by both the equity (home) owner and the lender. Munchau’s math is a little off. The implied inflation over the period would need to be 66%, not 37%, for a 40% drop real prices to keep the nominal price more or less constant. The inflation rate required to bring nominal prices back quickly after a 10% or 15% one year decline is never going to be a central bank target. Anyway, if one asset class deflates while others inflate, the loss is still very much there and readily noticed by both the equity (home) owner and the lender.

]]> By: a http://www.nakedcapitalism.com/2007/12/hold-tight-central-banks-have-no-plan.html#comment-2469 a Mon, 17 Dec 2007 08:16:00 +0000 http://www.nakedcapitalism.com/2007/12/hold-tight-the-central-banks-have-no-plan/#comment-2469 "Here is the basic arithmetic. Let us assume that the housing downturn is going to last eight years. A 2 per cent annual inflation rate – the target of many central banks today – adds up to 17 per cent inflation for the entire period; and a 4 per cent annual rate adds up to 37 per cent. So if UK house prices have to fall 40 per cent in real terms – which is not exaggerated given the extent of the bubble – an annual inflation rate of about 4 per cent would take care of the problem. Nominal houses prices would then not have to fall."<br/><br/>Here's some more basic arithmetic. 2 - (-2) = 4. So one can get a 40 per cent fall in real terms by having an inflation rate of 2 per cent and a fall in nominal prices of housing at a rate of 2 per cent a year. The financial system should be able to take that as well as four per cent inflation. “Here is the basic arithmetic. Let us assume that the housing downturn is going to last eight years. A 2 per cent annual inflation rate – the target of many central banks today – adds up to 17 per cent inflation for the entire period; and a 4 per cent annual rate adds up to 37 per cent. So if UK house prices have to fall 40 per cent in real terms – which is not exaggerated given the extent of the bubble – an annual inflation rate of about 4 per cent would take care of the problem. Nominal houses prices would then not have to fall.”

Here’s some more basic arithmetic. 2 – (-2) = 4. So one can get a 40 per cent fall in real terms by having an inflation rate of 2 per cent and a fall in nominal prices of housing at a rate of 2 per cent a year. The financial system should be able to take that as well as four per cent inflation.

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