Ezekial on the mortgage crisis

Because the Fed cleverly found a way to bypass accounting for the inflation in the housing market, we’ve been in a strange situation, econometrically speaking, in the last ten years: both dependent on that inflation (the Fed assiduously fed that bubble) and pretending, for official purposes, that it doesn’t exist. Now LI doesn’t necessarily think feeding a bubble is wrong. Cheney, that monster of depravity out of a theater of cruelty production, was right about one thing when he said, to some conservative bemoaning the fact that the Bush budget was awash in red ink, that deficits don’t matter. By which he meant that nobody has ever gotten voted out of office in these here states cause of a stinkin’ deficit. We were founded by bankrupts and we aren’t fooled by suits – we know the wild west lurks under the surface of Wall Street. Deficits are good things in times of recession. If there is one lesson in affluence we all learned in the 30s, it was to borrow to keep demand up when you have a classic depression: too many goods and services, too little demand. The reality of that is tiresome for economists, who believe, as Robert Lucas once put it, in Say’s law as a parameter of intelligibility. The problem, of course, is what the Bush administration borrowed for. It is one thing to go in debt to build a house; quite another to go into debt to burn a house down. Non-creative destruction is the Bushite creed.

The real difference, broadly speaking, between the EU’s economy and ours is that we employ Keynsian economics to prop up a conservative politics, while the EU employs a neo-classical fiscal policy to prop up legacy socialism. The EU fear of inflation overrides its good sense, and the American advice to the EU is always to … Americanize. Destroy the unions, create a vastly more unequal distribution of wealth, etc., etc. It is terrible advice, and we doubt that even Sarkozy, that menace, will take it, although he claims to be eager to sick Thatcherism on France. For both the EU and the US, policy is an expression of structure. The EU can actually afford more unemployment, having a perfectly good social welfare system. The U.S has a perfectly good social welfare system for unemployment too: it’s called jail. Between prison and education, the U.S. can keep a goodly numbered of the able bodied off the employment roles without anybody calling a foul. Still, having less, shall we say, strata of social welfare, and having a criminally weak labor sector, the U.S. has become, out of necessity, a sort of virtual economy – the first economy in which credit has so totally penetrated the economic mindset that it has erased longstanding definitional differences between savings and investment, along with the remnants, in the 19th century, of the need to make money correspond to some standard of value. Money is now simply an excuse for credit, secondary to it, a sidekick. As we have often emphasized, having no power to extract wage increases from capital, the mass of Americans just borrow their wage increase. This should make them ever alert for better paying jobs, but for all the talk about the mobility of Americans, the figures don’t show a lot more mobility now than there was twenty years ago. After all, to quit means quitting, among other things, your medical benefits.

Which is why a specter haunts U.S. capitalism: foreclosure.

We thought these grafs from this article in the NYT this weekend worth quoting:

“A study conducted by Kristopher Gerardi and Paul S. Willen from the Federal Reserve Bank of Boston and Harvey S. Rosen of Princeton, Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market (National Bureau of Economic Research Working Paper 12967), shows that the three decades from 1970 to 2000 witnessed an incredible flowering of new types of home loans. These innovations mainly served to give people power to make their own decisions about housing, and they ended up being quite sensible with their newfound access to capital.
These economists followed thousands of people over their lives and examined the evidence for whether mortgage markets have become more efficient over time. Lost in the current discussion about borrowers’ income levels in the subprime market is the fact that someone with a low income now but who stands to earn much more in the future would, in a perfect market, be able to borrow from a bank to buy a house. That is how economists view the efficiency of a capital market: people’s decisions unrestricted by the amount of money they have right now.
And this study shows that measured this way, the mortgage market has become more perfect, not more irresponsible. People tend to make good decisions about their own economic prospects. As Professor Rosen said in an interview, “Our findings suggest that people make sensible housing decisions in that the size of house they buy today relates to their future income, not just their current income and that the innovations in mortgages over 30 years gave many people the opportunity to own a home that they would not have otherwise had, just because they didn’t have enough assets in the bank at the moment they needed the house.”

“The size of house they buy today relates to their future income…” What a phrase! To unscrew the top of it, and peer inside, one definitely needs to be a poet or a prophet.