This Time it’s Bernanke’s Housing Bubble

“That men do not learn very much from the lessons of history is the most important of all the lessons of history.”  These are the simple, yet exceedingly relevant for our times, words of the famous English writer Aldous Huxley.

If only Federal Reserve chairman Ben Bernanke would acquaint himself with this quote.

For three years, between 2001 and 2004, in an effort to boost the economy after the 911 terrorist attacks, his predecessor at the Fed, Alan Greenspan, kept the Federal Funds Interest Rate under two percent.  As a result, cheap money and low introductory teaser rates fueled the largest housing boom in American history.  Then, like all fake boom phases, when interest rates rose it came to an end.  The necessary correction phase started and all the mal-investment of the boom phase was no longer sustainable under higher rates.  Foreclosures increased.  As housing prices fell back to earth, underwater mortgages and abandoned homes were everywhere.  Many still find themselves unemployed and destitute.

Now, instead of letting the market go through a much needed correction after the crisis began, new Federal Reserve chairman Ben Bernanke pursued a policy bent on “stabilizing” the value of assets.  Since 2008, Bernanke’s Fed has kept the Federal Funds Interest Rate close to zero percent and it has increased its balance sheet by just under three trillion dollars by purchasing Treasuries and mortgage-backed securities from member banks.

Some economists believe Chairman Bernanke’s policies have created a housing recovery.  These economists believe this because they haven’t learned from history, especially recent history.

But, according to David Stockman, the former head of the Office of Management and Budget under Reagan, what Bernanke’s policies have created is simply another housing bubble.  He sees a similar combination of artificially low interest rates and speculation producing the current housing boom just like the boom during Greenspan’s tenure.

Nationally, the median price for existing single-family homes was $178,900 in the fourth quarter of 2012, up 10 percent over the same period in 2011.  This marked the greatest year-over-year price increase since the fourth quarter of 2005.

And there are local pockets of even greater price increases in real estate going on.  There is a farmland bubble taking place in the Midwest and Mountain states with non-irrigated cropland prices increasing on average by about 18 percent.  Southern California, Silicon Valley, Washington D.C., and New York City are all experiencing huge real estate booms with prices for pre-construction condos in Manhattan increasing on a bimonthly basis.

It is ridiculous to believe that what we are seeing is anything other than another housing bubble.  Unemployment and underemployment are still very high.  Many employed middle income buyers are still reeling from the last bust.  The huge price increases we are seeing is the work of speculators fueled by Bernanke’s easy money policies.

The bust will come when rates rise, the mal-investments of the boom become unsustainable at the higher rates, and the speculators liquidate their positions leaving small investors holding the bag.  It will be 2008 all over again for many, except this time it will be Ben Bernanke’s Housing Bubble.

Article first published as This Time it’s Bernanke’s Housing Bubble on Blogcritics.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina

Gap Between Rich and Poor Rooted in Government Policy

Anyone who proclaims the American economy is recovering from the financial crisis of 2008 is either lying or not paying attention.  The good people at the Economic Collapse Blog have aggregated 37 statistics that strongly indicate the economy continues to worsen under the financial leadership of President Obama and Federal Reserve chairman Ben Bernanke.  In particular, the figures indicate that it is the lower economic classes which have been most severely devastated by four years of reckless federal spending, bailouts for the well-connected, and artificially low interest rates.

For instance, since 2008 15 million more Americans rely on food stamps.  According to the Census Bureau, 146 million of us, nearly half of the U.S. population, are poor or low-income.  The Civilian Employment/Population ratio, which is the broadest measure of employment in the country, is the lowest it has been since the early 1980s.  Median household income has retreated to its 1995 level.  Lastly, the economy is not producing jobs for U.S. college graduates as 53 percent of them under the age of 25 are either unemployed or underemployed.  Given that many graduated with huge college debt, what could the future hold for these folks?

But, don’t despair.  Some in our society are doing quite well because of the federal largess thrown their way.  Most of them just happen to be located around New York City and the District of Columbia.  You see, the U.S. stock and bond markets are at, or near all-time highs.  Real estate in Manhattan and Washington, D.C. has bounced back nicely and are both at all-time highs.  Even the Contemporary Art market in the Big Apple has seen sales skyrocket in spite of higher prices.

But, this is predictable given that New York and the nation’s capital is where the Wall Street/Washington Axis of Financial Evil is headquartered.  It is where that axis prints the new money and injects it into the economy through its well-connected surrogates – i.e the “too big to fails”.

And it is all done in the name of stabilizing prices so the rest of us don’t suffer so much.  How nice it is that the powers that be are looking out for us working folk!

Don’t be fooled for a moment.

The financial establishment in this country, which includes the Federal Reserve and its “too big to fail” cronies, knew exactly what it was doing.  Through monetizing federal debt, a series of quantitative easing schemes and holding interest rates below market prices the banking establishment has succeeded at stabilizing the cost of living above market levels.  Put another way, if left to its own devices with no monetary easing from the Fed, the market would have rid itself of all the mal-investment built up from the previous Fed induced false boom period (housing boom).

Consequently, housing prices would be lower, commodity prices would be lower; in fact general price inflation would be lower.  The cost of hiring new workers would be lower causing an employment recovery.  Savers would have gotten a decent return on their money.  In short, working class Americans would have seen an enhancement in their standard of living.

On the flip side, many rich folks would have been devastated.  Their stock and bond portfolios would have been decimated.  Many would have lost their jobs through bankruptcy and restructuring.  The value of their homes wouldn’t have been restored on the backs of working men and women.

This is what should have happened.  After all, they caused the crisis along with their accomplices in government.  Didn’t they deserve the consequences of their actions?  That is capitalism.  That is the American way.

Article first published as Gap Between Rich and Poor Rooted in Government Policy on Blogcritics.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina

Keynesians are Clueless

Paul Krugman, New York Times columnist, Nobel Prize winner, and Keynesian economist extraordinaire is about to have his new book released entitled, End this Depression Now.  In it, the Duke of Deficit Spending argues that a speedy, robust recovery from the Great Recession which started in 2008 is just a quick policy decision away.  If only our leaders can muster the “intellectual clarity and political will” needed to raise federal spending further, Americans will begin consuming again, businesses hiring, and the current depression will be over in a flash.  Once again Krugman is being true to his economic philosophy – namely that increasing aggregate demand through loose fiscal and monetary policy is a cure-all for what’s ailing the economy.  Let it be said that there is not a more consistent deflationist than Paul Krugman in all of the economic profession.

Now, why anybody would still listen to Krugman is a mystery to me.  After all, he entirely missed calling the financial crisis of 2008 while Austrian economists were spot on with their prognostications.  I suppose most laymen don’t know the difference and most economists and academics are as Milton Friedman proclaimed so long ago “All Keynesians now”.  Thus ignorance of and loyalty to a failed philosophy are powerful forces to make people do irrational things.

In the first place, Krugman shows his ignorance with the title of his book, End this Depression Now.  The statistics indicate that we are not currently in a depression.  Secondly, current numbers indicate that the deflationary spiral that Krugman has been predicting and fears the most is not happening.  On the contrary, while he continues to fret over falling prices leading to a double-dip recession, long-term trends point strongly toward oncoming double digit price inflation.

What it all boils down to is that Krugman and other Keynesian economists are about to miss the next economic crisis.  Austrians have been arguing all along that we can’t solve our economic problems by doing the same things that got us into the mess in the first place.  Deficit spending and a ridiculously loose monetary policy will not cleanse the market of all the mal-investments made during the preceding artificial boom (housing bubble).  It will only put us deeper into trouble.  What was needed was a drastic cut in government spending, a cut in taxes, and the setting of interest rates by the market not the monetary oligarchs at the Federal Reserve.

So because policy makers in Washington listened to Krugman and his ilk over the voices of reason, we are about to enter the next cycle of boom and bust.  It will consist of phony growth, rising prices, and rising interest rates which will ultimately pop the bubble and send the economy into another tailspin.  The proof is in current trends.

In spite of Krugman’s ill-timed book, we are not in the middle of a depression.  Consumer spending is way up.  In the fourth quarter of last year balances on credit cards rose 9.27 percent.  In February, retail sales in the U.S. improved in 11 of 13 industry categories and marked the biggest gain in five months according to Commerce Department figures.

Then there is job growth.  400,000 private sector jobs have been created just in the first two months of this year.  More workers mean more spenders and more spenders mean more jobs, right?

Oh, and let’s not forget how well the financial markets are doing.  The Dow is up 7 percent YTD, the S&P 500 is up 11 percent YTD, the Homebuilders Index is up 23 percent YTD, and the S&P Financials are up 21 percent YTD.  These are not numbers indicative of a depression.

But, all of this good news is coming at a cost, literally.  We are approaching the place this commentator wrote about on October 16, 2009.  Bernanke and the Federal Open Market Committee are going to have a big decision to make in the near future – raise rates and burst the Fed induced bubble or leave rates low and watch prices skyrocket.

Price inflation is already heating up.  It was only a matter of time before all the stimulus, low interest rates, and money printing kicked in to produce higher prices.  The money supply has increased by 14.6 percent year over year ending in February.  That makes 39 consecutive months of double digit year over year rates of monetary inflation.

The result has been higher gasoline and food prices.  College and healthcare costs continue to rise.  And the Manufacturing ISM Report On Business® for the 4th straight month shows the number of industries experiencing higher raw material costs on the rise and the number of industries experiencing  lower raw material costs on the decline.  It will be just a matter of time before those higher raw material costs find their way into higher prices on the merchant’s shelf.

So while Krugman and other Keynesians clamor for more federal spending and easy money to produce a speedy, robust recovery from the Great Recession, they are missing that the next boom and bust cycle has already begun.  But, that’s okay because Austrians have been predicting it for some time.  In the words of Yogi Berra, “It’s déjà vu all over again”.

Article first published as Keynesians Are Clueless on Blogcritics.