

Uncomfortable answers to questions on Economy - ranparas
http://www.nytimes.com/2008/07/19/business/economy/19econ.html?pagewanted=1&ei=5087&em&en=c29054f685d998d6&ex=1217044800

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tx
What I don't get is _why aren't housing prices falling even further?_ In my
recent memory (I moved to US in 2000) house prices rose by 200-400% and they
haven't fallen nearly as much lately.

A decent houses/condos in all interesting US metro areas are still in $400K+
range, which is absolutely insane, considering median family incomes.

Even most financial planning books/sites will tell you that it's "normal" to
spend about 30% of your after-tax income on housing. WTF? Since when it's been
"normal"?

~~~
nostrademons
Anchoring. It takes time for people's expectations to adjust to a new reality.
Folks are still saying "Well, if I can't sell for $400K [or $1M in my neck of
the woods], I'll just take my house off the market and wait for the market to
turn around." This'll continue until they realize that they're paying more in
taxes and mortgage payments than their house is likely to appreciate in the
forseeable future.

A good leading indicator for home prices is home inventories, which are still
at record levels (though they've seem to have stabilized for now). The
inventory report is a measure of how many homes are nominally on the market
but aren't selling because the price is too high - the price has to adjust
downwards until inventories reach normal, frictional levels.

~~~
curiousgeorge
The mortgage bailout is an effort to keep people in houses, even if they can't
afford them. It keeps homes from going back on the market where competition
would further lower the price level.

The Bush attempts to buy stock directly in the two Fannies are almost equally
embarrassing, being a bailout of shareholders that in no way affects the
viability of the business, which is guaranteed by the government anyway. Let
them all go broke.

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tdavis
At least to me, it seems this entire recession (or whatever you want to call
it) is an entirely natural occurrence. When the average debt for a household
becomes 120% of income, something is drastically wrong. From indiscriminate
lending to sub-prime mortgages, it all makes me wonder, "Well, what did you
_think_ was going to happen?"

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fharper1961
What this and other articles on the subject don't seem to explain very well,
is why this has happened.

A 1973 article from Time concluded :

"Today, outside the mortgage field, U.S. usury laws are full of holes;
business loans, car loans and charge accounts are almost always exempted. As
borrowers have been discovering since the federal Truth in Lending law took
effect in 1969, they pay as much as 20% on loans from finance companies and
even 36% annual interest on mail-order loans. So long as such rates are
permitted, usury laws are useless and should be scrapped."
[http://www.time.com/time/magazine/article/0,9171,907860,00.h...](http://www.time.com/time/magazine/article/0,9171,907860,00.html)

So guess what? People in government listened (or listened to the financial
industries lobbyists...), and they did scrap the few remaining usury laws that
were still effective.

25 years later we are seeing, in graphic detail, why all those usury laws
weren't so useless after all.

------
ars
One thing I'm wondering: where did the money go? Money is not destroyed (is
it?) it just goes to someone else, so where did it all go?

~~~
troystribling
Money can be destroyed by unpaid debts. The past bubble originated from money
creation by loans. Read Wikipedia article on fractional reserve banking
<http://en.wikipedia.org/wiki/Fractional-reserve_banking>

~~~
ars
The money was not destroyed, the person who took out the loan has it. Maybe he
spent it, so whoever he gave it to has it, but it was not destroyed.

Fractional reserve banking is a lovely canard that is trotted out constantly,
but it is not the monster the internet makes it out to be. Don't believe
popular logic just because it's repeated over and over.

Fractional reserver banking, at it's core, is a way of converting collateral
into cash, without having to sell it so someone. No value was created. Money
was created, but not value.

And writing that just helped me understand what happened: value (of houses)
was destroyed, so the money value that went along with it vanished too.

~~~
troystribling
I do not see fractional reserve banking as a monster but the mechanism that
makes banking a viable business. I have no problems with it or fiat currency

If the bank is unable to reclaim the physical money backing the loan, for
example by foreclosing and reselling or having and investor cover the loss,
the physical money would be destroyed. You see this happening now with banks
raising money by selling equity. In other words if the loaned money bought
things with no value or less value than paid then physical money is destroyed.
If the loaned money buys things with more value than loaned then physical
money would be created. This is simplistic description but I think accurate.

There has to be a mechanism for money and value creation and destruction.
Money cannot be conserved. There is clearly more value/wealth and money in the
world than 100 years ago.

~~~
ars
That's quite interesting what you write.

It makes me think about gold backed currency. Suppose someone builds a house,
there is now more value in the world, but there is the same amount of gold. So
if all currency was gold backed it would cause massive deflation as new value
was created in the world, but the amount of gold remained constant.

That makes me think that money is not backed by nothing - it's backed by all
sorts of physical stuff all over the world.

Am I wrong?

~~~
troystribling
I agree with what you say about a gold backed currency, or any static currency
supply, leading to deflation as new value is created.

I also agree with your other statement that money is backed by all the
physical things. I would have said that money is a representation or
abstraction of the value of all things that it can buy. As the number of
things that can be bought increases the money supply needs to increase to
maintain acceptable valuation. If the money available is static the value of
things that can be bought would have to deflate to accommodate the new things
that can be bought. It seems that the number of things that can bought
increases with time so we have to live with one of the two scenarios and seem
to prefer the the first. For most people the deflationary scenario would seem
more unsettling than the inflationary one.

