Saturday, February 27, 2016

Housing Prices and Usury

Mish Shedlock Gets This Exactly Right:

Dual Mandate Equals Mission Impossible
Here's the deal.
1. The Fed can control money supply but it will have no control over interest rates (or anything else).
2. The Fed can control short-term interest rates, but then it would have no control over money supply (or anything else).
That is the full and complete extent of the Fed's "control". Note that neither price stability nor unemployment is in either equation. The reason is the Fed controls neither.
That is a mathematical certainty, yet people have preposterous beliefs that the somehow the Fed can not only control inflation but also unemployment.
If the Fed, the Bank of Japan, the Reserve Bank of Australia, the ECB, or the Bank of England, or the central bank of China could control the unemployment rate, rest assured they would have done so long ago.
The economic illiterates will point out the unique nature of the Fed's dual mandate, but I will counter with the mathematical stupidity of such an idea.
At best, the Fed can control (using the word loosely) a maximum of one thing at at time, and employment is not one of those things.
He does a very good job defending deflation (properly understood). Then he flubs this a bit...
Lower Prices Spur Sales 
People hold on to things when replacement costs are high. Lower prices, not higher ones, spur sales. Sales spur employment!
Think about cars. If prices dropped 20% would that spur cars sales? I think so. If you could replace your aging car 20% cheaper and it had more features, would you do so?
What if they rose 20%? My guess is that, all thing being equal, car sales would plunge.
Well, I watched auto prices rise 20% ...  and houses 50% over a short several year period, and sales of both jumped up.  So is he wrong?  Well, no because he added "all things being equal.."
What also changed was usury, "cheap interest rates" distorted a market already distorted by usury itself, in which one who could afford the payment on a $200,000 at 9% could afford the payment on a $300,000 house at 6%.   What happened (new market entrants, over time) is such people merely paid $300,000 for a $200,000 home.
And it gets worse, that local property tax jumped up 50% to with the nominal increase in the value of the house.  An increase of taxes without a vote!  No wonder government loves Wall Street.

Once the camel's nose, in the form of usury, is in the tent, the loan sharks then can do what they want, there are no rational limits.

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