Just What I Would Imagine

Brad Delong quotes Mike Boskin on comparing talking to Principles of Economics students vs. being Chair of the President’s Council of Economic Advisors:

I think that one of Christie Romer’s predecessors as CEA Chair, Stanford economist and Republican Mike Boskin, says it best. Being Chair of the CEA and advising all the political appointees in the White House is, he says, a lot like teaching Econ 1 at Stanford. Only at Stanford your students do their reading, pay attention, and ask deeper and more thoughtful questions.

I think it would be a lot like explaining economics to my students, too.  Except most of the students might learn more than the pols.

MMT Isn’t All That New

Modern Monetary Theory, MMT, is still considered a heterodox theory and a bit outside the mainstream.  That’s largely because of two factors.  First, graduate economics education in money is largely stuck in quasi-gold standard era stuff from pre-1971.  Milton Friedman and his disciples still dominate, despite the facts.  Empirical evidence and knowledge of how banks & central banks actually work doesn’t support the theories, but we publish the stuff anyway.  Second, central banks actually dominate the research agenda and funding of monetary economics research.  Getting central banks to research and publish MMT stuff is a little like getting big Pharma to publish research on nutrients being superior to drugs.

Anyway, I came across this quote from Thomas Edison from 1928.  He and his good friend Henry Ford knew quite a bit about how to generate real economic wealth and well-being, and, it seems, they understood some basics of MMT, too. (from http://www.michaeljournal.org/appenD.htm)

“That is to say, under the old way, any time we wish to add to the national wealth, we are compelled to add to the national debt.

“Now, that is what Henry Ford wants to prevent. He thinks it is stupid, and so do I, that for the loan of $30 million of their own money, the people of the United States should be compelled to pay $66 million — that is what it amounts to with interest. People who will not turn a shovel full of dirt nor contribute to a pound of material, will collect more money from the United States than will the people who supply the material and do the work.

“That is the terrible thing about interest. In all our great bond issues, the interest is always greater than the principal. All of our great public works cost more than twice the actual cost on that account. But here is the point.

“If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good, makes the bill good also. The difference between the bond and the bill is that the bond lets the money brokers collect twice the amount of the bond and an additional 20 percent, whereas the currency pays nobody but those who contribute directly to Muscle Shoals in some useful way…

“It is absurd to say that our country can issue $30 million in bonds and not $30 million in currency. Both are promises to pay, but one fattens the usurers and the other helps the people. If the currency issued by the Government was no good, then the bonds would be no good either. It is a terrible situation when the Government, to increase the national wealth, must go into debt and submit to ruinous interest charges at the hands of men who control the fictitious value of gold.”

By the way, if you really want to dig in and begin to understand MMT and it’s implications, read Bill Mitchell’s blog at http://bilbo.economicoutlook.net/blog/


Alan Simpson – FAIL again

More from Alan Simpson, the man who wants to cut your social security:

Simpson said that while every interest group that testified before his committee agreed that the mounting federal debt is a national tragedy, they would then talk about why government funding to their area of interest shouldn’t be touched.

“We had the greatest generation — I think this is the greediest generation,” he said.

Source: his home state newspaper.

Apparently it is lost on Mr. Simpson that the huge Social Security trust fund balance (over $2.5 trillion and still building) is actually the baby boom generation paying for both the previous generation’s retirement AND pre-paying their own.  According to Mr. Simpson, that’s just “greed” – wanting to get back what you already paid in.

For more from Mr. Simpson see Watch the Dealer, you “Lesser People”. The Deck is Stacked.

House Prices Resume Falling

The fall in house prices appears to have resumed.  Remember the collapse of the house-price bubble in 2006-7 was what largely triggered (triggered, but not the only cause) the Great Recession and the Great Non-Recovery.  Late last year and earlier this year it looked as if the home-buyer credit and record low mortgage rates had stabilized house prices and ended the fall.  It now appears the fall has resumed.

Now the tax credit’s gone.  The ongoing and growing legal mess of foreclosure fraud is beginning to show it’s impact.  As it becomes clearer that the banks and mortgage servicers have played fast and loose with legal requirements for mortgages, deeds to properties, especially foreclosed properties, become clouded and uncertain.  And that scares off buyers.  A lack of buyers, as supply-and-demand tells us means lower prices.

I look for more substantial declines in house prices nationwide, though I’m still praying my neighborhood gets spared further damage!  One reason I’m so pessimistic is because historically over the last 50 years, median house prices have tended to be approximately 2.2 times the median household income.  Even after the severe declines of the last few years, house prices are still largely well above that historical ratio.  There’s no law saying the ratio must hold, but it’s a pretty long-term stable, fundamental relationship. So buckle up for another dip.

Reporting on the latest release from the S&P Case-Shiller House price index is Calculated Risk:

From S&P: Broad-based Declines in Home Prices in the 3rd Quarter of 2010

Data through September 2010, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices … show that the U.S. National Home Price Index declined 2.0% in the third quarter of 2010, after having risen 4.7% in the second quarter. Nationally, home prices are 1.5% below their year-earlier levels. In September, 18 of the 20 MSAs covered by S&P/Case-Shiller Home Price Indices and both monthly composites were down; and only the two composites and five MSAs showed year-over-year gains. While housing prices are still above their spring 2009 lows, the end of the tax incentives and still active foreclosures appear to be weighing down the market.

Case-Shiller House Prices IndicesClick on graph for larger image in new window.

The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 29.8% from the peak, and down 0.7% in September(SA)…….graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.
Case-Shiller Price DeclinesPrices increased (SA) in only 1 of the 20 Case-Shiller cities in September seasonally adjusted. Only Wash, D.C. saw a price increase (SA) in September, and that was very small.

Prices in Las Vegas are off 57.6% from the peak, and prices in Dallas only off 8.1% from the peak.

Prices are now falling – and falling just about everywhere. And it appears there are more price declines coming (based on inventory levels and anecdotal reports).