A Fed Official That Actually Makes Sense

Delaying Tactics on Condominiums Runs Out of Time?
I came across the item from the always great Housing Doom site. It seems the FHA is seeing loan losses in the condo market that are bad enough to scare them out of making loans in that market. I think we should all be very scared that they are holding many loans like this right now.

Phoenix Condo Market Given a "Death Sentence"
The new restrictions won’t directly affect high-end, luxury condos that sell for more than the Federal Housing Administration’s roughly $350,000 lending limit, but Hoogendyk said FHA loans are by far the most commonly used loan among condo buyers. Without that option, buyers would have to obtain conventional loans, which are more expensive and difficult to qualify for, or they would have to pay cash.
Hoogendyk said the FHA rules amount to a death sentence for the Phoenix-area condo market, which had only been kept on life support by the continued availability of FHA loans.

The whole article is worth a read.

British Government are not "Idiots"
I spend plenty of time bemoaning the lack of sustainable economic policy here in the United States. Of course, the USA is not alone in their Keynesian journey to wonderland. The United Kingdom has long been on the fast track to bankruptcy and they are looking to take the next step very soon.

In an effort to raise capital, the British government is looking to sell off some public assets:

Britain sells off public assets to boost finances
Britain holds public asset fire sale as PM Brown warns that recession not yet over
LONDON (AP) -- The British government is holding a fire sale of public assets including the undersea Channel rail link to raise 16 billion pounds ($25 billion) as Prime Minister Gordon Brown warned on Monday that the country is "only halfway there" in overcoming the recession.

The sale of assets, which also includes the government's 33 percent stake in European uranium consortium Urenco, spearheads the ruling Labour Party's attempt to boost its economic credentials as it loses ground to the opposition Conservative Party ahead of next year's general election.

Brown has maintained that the government must continue to spend its way out of recession, in contrast to the Conservatives' position that spending cuts are necessary to prevent a blowout in the public finances and turn the economy around.

I have to admit, this guy rivals Greenspan and Bernanke with his own "Fed-Speak". It seems ingrained that spending oneself out of recession is the only policy that can be tried, nothing else need be considered. Good luck on reducing deficits while expanding stimulus. More fun a bit later in the piece:

Nonfinancial assets to be sold over the next two years include the Channel Tunnel rail link, the Dartford bridge and tunnel crossing the River Thames and betting company the Tote.

Local governments will sell off another 13 billion pounds ($21 billion) in assets such as business parks and leisure centers.

The Liberal Democrat party, the secondary opposition in Britain, said the asset sales made sense in principle, but criticized the timing.

Leaving aside the question as to who would want to buy all this stuff, let's take a closer look at the British record on selling assets.

While Peter Mandelson is sure he and his ilk are not "idiots", his boss Gordon Brown has plenty of experience with selling assets at the best possible time and price. Namely, he was the force behind the UK selling half of their entire gold reserves in 1999-2000. This amounted to about 400 tons of the shiny stuff. As a visual picture for the wise and well timed sale, please consider the following graph of the gold spot price:

Heck of a job Brownie.

Rare (Presumed Extinct) Creature Sighting
I have a rare treat for the readers today. After setting up motion detecting night vision cameras, laying out bait in the form of common sense, and waiting patiently even in the face of despair, Economic Disconnect can report to you tonight that we have proof of one of the rarest, most reclusive creatures hoped to still exist. Rumors of their extinction were not true, I present a Fed official that actually makes sense. I know, you don't believe me, but take a look (via Clusterstock):

Fed Governor Slams Krugman's "Output Gap" Argument
Paul Krugman has been a major proponent of the idea that since the economy is facing a so-called output gap, then we needn't worry about inflation. Basically, since we have so many idle workers and factories, there's really no chance we could overheat, face supply constraints, and thus cause prices to spike. So, we might as well keep printing.

Reuters' Rolfe Winkler points to a presentation given by the Fed's James Bullard that's clearly a direct rebuttal to Krugman. The argument is pretty simple and intuitive: When you're coming off of a bubble, the previous full potential of the economy is nothing that could be considered sustainable or re-achievable.

I about fell out of my chair this morning when I read that opening. Long time readers will note that I have been making this argument for a long time. From Mr. Bullard:

“It has been popular to describe recent events as a collapse of a bubble in housing. A look at the housing data makes a convincing case,” Bullard said. “But when it comes to calculating traditional output gaps, there is no notion of a bubble. If part or most of the fall in output was a collapsed bubble, then today’s output gap would be smaller than it appears.” This would mean that inflation risks in the medium term are higher than otherwise thought.

I most recently commented on this very subject in an article titled "Economists Can Only Answer How, Not the Why". Key excerpt from myself:
My own parable:

A man sits at a bar, and strikes up a conversation with the fellow next to him. He discovers the stranger is an economist, which delights the man, as he has a business quandary he needs help with. The man offers the economist a beer in exchange for advice on his current endeavor. The man asks "I am thinking about building this huge mall, that will sit vacant because business is so bad, but I just thought why not? Do you think this makes sense?. What do you think?"
To this the economist answers "I really cannot advise you on that at all, I have no opinion."
The man, a little put off, asks the economist "How can you have no opinion! I need to do this to save my company! How can it be done?"
At this the economist perks up and answers "My dear sir, you did not ask my why at first, but now you are asking me how, and on that I can greatly advise!".

Yes, very simplified, but still true to the core.

Ask an economist today about the "output gap" or the unemployment rate, and they will effuse mountains of words describing how to restore the old "normal". Ask them if the old normal is sustainable, or if it was a gross application of capital, and all you get is a shrug.

It seems there is one Fed Governor that thinks like I do. Surely he will be fired very soon.

All kidding aside, there is a monstrous blind spot for economists (Keynesian ones mainly) about what is quality capital application, sustainable growth, and mania cycles (bubbles).

The basic refrain of an economist today is "The house is burning so we cannot argue principles, we must save the house!". This is a non starter. If it is the stated goal to enforce economic activity on par with the tops of asset (credit, stock, housing, etc) bubbles then you are not contributing anything of substance, merely providing a mechanism for an end result. It is the total lack of substance that upsets me when consider the policy desires of Keynesian clowns like Paul Krugman.

Can Mr. Krugman answer in a Yes/No fashion the following question:
-At the height of the housing bubble, housing "output" was X. We have seen that this was clearly not sustainable, and even worse, dangerous. Should we attempt to bring housing output back to X? Yes or No.

Of course you are likely to get some kind of pie in the spending sky answer like:
-We should maintain housing output at .25X while at the same time making up the difference through government spending to reach output X until the economy magically resumes growth at that level all by itself, then we just unwind all the excess money. Got it? Great, let's get a taco.

Hats off to my new hero, Fed Governor James Bullard.

Comments

[Roger Knights:]

"a gross application of capital,"

I think you meant "mis-application"

Oct 13 05:25 AM

[Alan Young:]

Of course, political forces want to push us out of recession ASAP —or at least before the next election! Perhaps efforts to get ahead of the natural economic cycles are counterproductive; but I fail to see how you get from that argument to an increased expectation of inflation.

Oct 13 10:33 AM

[De Graaf:]

Good article. Love the sarcasm.

Keep it up.

Oct 13 01:44 PM