Saturday, November 08, 2008

Two Ways to Say the Same Thing

Here are two ways of saying the same thing. The first in 2007 and the second in a letter written 1802.

“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

Thomas Jefferson, Letter to the Secretary of the Treasury Albert Gallatin (1802), 3rd president of US (1743 - 1826)
The reason why we are in this mess is credit -- too much of it, too cheap. That's why housing, tuition, etc. went through the roof. Now our country is desperately dependent upon it and doing everything it can to prop up these phoney prices.

Withdrawal's a bitch, ain't it? Price things based on what people actually earn for themselves and it would all be reasonably affordable and "the economy" would still be humming along nicely. Stop meddling in the market Mr. and Mrs. Congressperson, Mr. Bernanke, Mr. Paulson. Let the free markets work; let them discover the correct prices of assets. Yes, it would be painful in the short term but we'd all be better off for it in the end.

As credit tightens and the credit pendulum swings the other way, those of you who bought with borrowed dollars thinking the sky's the limit and those of you who are planning to do so now had better watch out.


Doug Thorburn said...

Good Austrian analysis. I think you'll enjoy mine at
You'll also find, should you glance at the top stories for my client newsletters, that I too have been writing about the housing bubble since '05 (with a warning in a late '04 newsletter as well). I only hope the rest of the population listens to us this time before we turn to too much state control.

Lisa said...

The gov't can do what it wants to try to prop up the phony prices. The temporary ban on foreclosures in MA went to pot immediately afterwards as foreclosures skyrocketed. The temporary raise in the GSE limits did nothing. The $7,500 first time buyer "tax credit" that was actually just a temporary loan did nothing. HOPE NOW has been a joke.

It still falls apart on the purchase end of things. The vast majority of buyers CANNOT afford bubble prices with conventional lending. And as the pain and uncertainty spreads, fewer people will want to sign up for what has clearly become a highly illiquid asset with an uncertain "profit" outlook.

As I've mentioned before on this board, I rent in a lovely neighborhood in San Anselmo. NOTHING is selling, and I mean nothing, and there are multiple houses for sale within a 5 minute radius.

Matthew said...

It is really quite remarkable when you think about all the education that our senior economic team has and how they've screwed up on the most basic of all economic lessons, which is "determining the market price for a basket of goods". Of course, in most people's case, that "basket of goods" includes housing.

Keep raising the price of that basket of goods, or some item within it, and not match those price increases with wage increases for the populous and you will reduce your available pool of potential buyers. Keep this up, and eventually people will look elsewhere and substitute other things for those basket of goods, such as renting for housing.

Seems pretty straight forward to me. Of course, the economic geniuses think they figured away around this simple and most basic of all economic relationships by creating debt instruments out of thin air to help expand the pool of available buyers for the same basket of goods in order to keep the inflated prices up. Well, patted themselves on the back and spewed out a bunch of gibberish in front of Congress on these new wealth creation tools (aka Greenspan) and were about to rewrite economic theory until this fundamental economic lesson reared it’s ugly head again. Yes, their new, ingenious plan to re-price the “basket of goods” was working well on paper, until, well, it stopped working and the market decided it need to puke all of it back up again.

The market will keep puking it up too until we reach the "market price for a basket of goods" for the locations in question based on all the normal economic drivers for that location. And chief amongst those economic drivers are wages. Of course, as well all know, there are other things that determine the price for a basket of goods in a certain location, such as supply or availability of course. Other things like local culture and tends factor in as well, but nothing is as important as wages when it comes to a basic basket of goods. Yes, I consider housing to be well inside the basic basket of goods, so the local wages will remain as the chief driver in determining it’s final market price.

Matthew said...

Does anyone who reads this board seriously think that we won't see an additional 20% or so (more) of a correction from the current housing prices here in Marin with the current state of economic affairs in this country ?

That is a serios question. If you do, please elaborate why we won't see that much more of a correction, as I'm very curious.

General Motors is about to go under, but a 3x2 house in Marin still fetches $800+K in some places? Really?

Although I am certainly seeing price declines (not that I'm looking very close at all, because the REIC here in Marin is still a joke IMO), prices are still out to lunch IMO. I personally cannot imagine prices holding much longer w/the happenings around the country, but I've been wrong before... I think we can see a sudden 10-15 or so percent snap down any day...

comments ? thoughts ?

Unknown said...

It's amazing how many games brokers are still playing. Hoping to hook that one FB left in the drying pond.

With respect to home prices, they are not holding up. Look at discounts from original list prices in South Marin (which, I'll concede, are at times still absurd), and you're sometimes seeing substantial reductions. And still, they're sitting, so yep, they're still overpriced. We're talking multiple 100k reductions and no dice. We're now far along in this to know that some homes were put on the market in '06 and '07, then removed due to little interest, then put back this Spring, then removed, then put back this Summer, or Fall and are still sitting. By doing this, stats get all screwed up and give a false sense of activity.

Are prices going to continue to decline; undoubtedly. Nothing like no credit and no jobs to bring prices down. This year's a bust and next year's not looking much better. More to come, I'm sure.

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