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REMINDER: All investment, economics, and finance related material now appears at the new IaconoResearch.com. For the time being at least, this has become a personal blog covering a variety of mostly unrelated topics.

Fun with Multi-Decade Charts

On May 10, 2011, in Debt, Economy, by Tim

[In reviewing what was published here back in April of 2007, it appears that there wasn't a whole lot going on. At the time, we were preparing to pull up stakes in Southern California and head 350 miles north where we would spend the next two years before moving to Oregon and then Montana. Thank God we don't have to move any more! In any event, there will be only a couple of articles from four years ago since early-2008 proved to be a much more interesting period. This first item, originally published on April 3rd, 2007 should serve as a warning to anyone using long-term charts to make a point - they can be very deceiving. Unfortunately, you'll see lots of charts like this to this day, particularly in Washington D.C. as elected officials debate the nation's budget problems.]

ooo

Having seen more than my fair share of multi-decade charts showing one economic statistic or another, the same erroneous conclusions have oftentimes been observed based on a simple misinterpretation of the data.

Call it the “power of compounding” or whatever you wish, but many writers and commentators seem to mistake this very normal effect as a sign of impending calamity, sometimes building long and convoluted cases for or against one thing or another based on a simple chart which has been completely misread.

This same error had been made here on at least a few occasions long ago, before someone graciously pointed out the error of my ways.

Think of this post as a sort of Public Service Announcement for those of you who may feel compelled to make a case based on looking at a single data series on a multi-decade chart.

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Ameriquest Can Really Help

On May 8, 2011, in Housing, by Tim

[Back to the U.S. housing bubble in all its glory five years ago... This note came in the mail from the now-defunct Ameriquest Mortgage Company and was the subject of the item you see below on April 18th, 2006. In reading it over, you can almost relive those boom days of easy money, lax lending, and mortgages that later became albatrosses around the neck of  both homeowners and lenders. Those were the days when lenders were just begging people to borrow more money, in large part because the Wall Street securitization machine was begging mortgage originators for more loans to securitize so they could sell them off to investors around the world, backed by AAA credit ratings that held up as long as home prices did. It's funny how Ameriquest was advertising "no stress home loans"  since those home loans became quite stressful once the housing bubble burst...]

ooo

Somehow these things keep showing up in the mail. It’s starting to feel like companies and individuals are somehow finding our unlisted address and sending them here just so they’ll get posted on the blog, knowing, but not caring, that unkind comments will accompany their publication.

Like a partial-confessional. Like when a guy who’s cheating on his wife jokes to his pals, “What’s wrong with playing around a little on the side?” Deep down, perhaps he is hoping that one of his buddies will ask him to elaborate on that remark so he can confess his sins.

And, maybe not.

Anyway, David at Ameriquest went to the trouble of attaching that yellow sticky note (personalized and very neatly hand-written it appears), so maybe it deserves at least a quick read-through, even though we don’t own a home – this was all explained last week when Ms. Hernandez inquired about our housing status.

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Debunking the Dismal Duo

On May 6, 2011, in Housing, by Tim

[We now move on to 2006 to find the housing bubble in all its pre-burst or in-process-bursting glory (depending where you live) and to hear one of the many conflicting views amongst economists about what exactly was going on. I don't know if I've ever referred to this story in the five years since it was published  on April 5th, 2006 but, if I haven't, I should have. Below, you'll read about a paper by two Southern California economists that attempts to justify million dollar home prices, a paper that, as noted below, "will serve as yet another marker for the great American housing bubble that will only be appreciated for its profundity with the passage of time". Obviously, that time is now.]

ooo

So, the one economist says to the other, “Honey, how do you estimate the fundamental value of a Southern California house?” While it is not known what the response was, or in fact who asked the question, Pomona College economics professors Gary and Margaret Hwang Smith later purchased a $950,000 Southern California property and labored to produce a sixty page report to convince themselves and the rest of the world that they were not the greater fools about whom housing naysayers have spoken so often in recent years.

No, the Smiths are not the greater fools, they are the greatest fools – they should have known better.

But, then again, they are economists.

After getting so far into the production of a detailed report that actually contains a good deal of very interesting data about the buy/rent calculation that prospective owners/renters should consider, they just didn’t know when to stop.

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The Fed is Not to Blame

On May 5, 2011, in Banks, Debt, by Tim

[Just over six years ago, my wife and I visited Scotland for the second time and this book review that appeared here on May 1st, 2005 brings back some fond memories of late-night, jet-lag induced reading sessions, part of what was otherwise a wonderful trip. I'd long forgotten about this book, even after hearing about the Peter G. Peterson foundation, formed in 2008 (see this Wikipedia page for all the pertinent details about Peterson), but reading these thoughts on this book today kind of puts the foundation in a whole new light.]

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One of several books I was able to read over the last few weeks was Peter G. Peterson’s Running On Empty: How The Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It. This is an interesting read and is highly recommended to all – Peterson is a former chairman of the Federal Reserve Bank of New York, and, as he mentions about ten times – he’s a rich Republican.

It chronicles thirty years or so of failures by both the Democratic and Republican parties regarding fiscal discipline and long term planning. It places the blame for our current economic woes squarely on the politicians, political processes, interest groups, and various changes to American culture. The four solutions to all of our problems are:

  • Reform Social Security
  • Reform Medicare
  • Reform the budget process
  • Reform politics

Conspicuously absent from the discussion is the role of the Federal Reserve over the last thirty years. In fact the title of the book seems to absolve the Federal Reserve of any blame – politicians have bankrupted your future. They have borrowed and spent too much money and have made promises they can’t keep – where all this money comes from is not important.

How America has turned into a nation full of crazed consumers/speculators who have gotten hooked on cheap money and now believe that they are entitled to cheap money from the government is not addressed.

How we have developed a standard of living that is so far out of whack with the global labor marketplace is not addressed.

No, it’s all the politicians fault for not acting responsibly.

How can anyone talk about current and future financial problems in the US without talking about the role of the Federal Reserve since Nixon closed the gold window in 1971 and turned the US dollar, the world’s reserve currency, into pure fiat money. We all know what happens when a social democracy is combined with a currency backed by nothing other than faith in a government and an economy (i.e., the currency reverts to its intrinsic value of zero). The role of the Federal Reserve is to delay that ultimate outcome for as long as possible, as Easy Al has said, to “mimic” the gold standard.

Instead of mimicking the gold standard, and limiting the amount of money that can be created and spent by both the government and individuals, this Federal Reserve has done the exact opposite – they have used more money creation as the solution to every problem under the Greenspan Fed. They have enabled all this reckless behaviour.

I guess since I’m not an economist, I just don’t get it.

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Past, Present, and Future

On May 4, 2011, in Economy, by Tim

[This story about Paul Volcker, Alan Greenspan, and Ben Bernanke originally appeared here on April 11th, 2005 and, looking back at it now, it certainly bolsters the new conventional wisdom that there is only one good former Fed Chairman alive - the one who saw the late-2000s crisis coming and who now shies away from the limelight, rather than the one who still regularly appears in an "arsonist analyzing the fire" role on networks like NBC. As for Ben Bernanke, it's funny to think of him today back in 2005 when he was a relative unknown, about to begin work at the White House, then moving on to the Fed within a year.]

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They were all in the news in the last few days – Paul Volcker, Alan Greenspan, and Ben Bernanke – the past, present, and likely future Chairmen of the banking cartel more commonly known as the Federal Reserve.

Volcker was screaming at the top of his lungs “Somebody do something! Now! Before this thing explodes!” and Greenspan was pondering his legacy while at the same time trying to distance himself from the troubled GSEs.

And, young Ben was just giddy – with the prospect of hanging out with Dubya and Dick and the rest of the Bush economic dream team, until it’s time for him to take the con at the FRB and show us what he really meant when he said “helicopter money”.

Let’s recap.

Paul Volcker (Fed Chairman from 1979 to1987)

So , what did Mr. Volcker have to say this week? Let’s see. Last year he said “unless America changes course, there is a ‘75 percent’ chance of an economic crisis in the next five years”. This due to various global imbalances – international trade, savings rates, currency … you know the story. Has his view changed at all in recent months?

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Hat Trick!

On May 3, 2011, in Housing, by Tim

[And so we begin with another dive back into the archives while my wife and I consume an inordinate amount of our precious fossil fuels during another trip to the East Coast. This time, writings from the month of April (and maybe early May) over the last six years will be summoned, perhaps offering up a new perspective on our current condition. This first item originally appeared here on April 9th, 2005 and includes now infamous comments by former Fed Chairman Alan Greenspan - his lauding of advances in subprime lending...]

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Greenspan Week concluded on Friday when the Chairman spoke about Consumer Finance at the Community Affairs Research Conference in Washington. CNN/Money neatly summarized the message in their headline Greenspan: More credit is a good thing, but they left out the most important, and most disturbing parts of the speech.

For those who say that the Federal Reserve controls interest rates and liquidity only, and that it has little or no influence on where the money goes – read on. Amazingly, in this speech, sub-prime lending is presented as a great success story, not a potential problem – the potential problem, as identified here, is that too many people are being excluded from acquiring credit!

“Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s.”

So, Ameriquest is good for America – that’s the message.

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