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Article Artículo

Housing Wealth Effect: Robert Samuelson Never Heard of Inflation

That's what readers would probably conclude from a column headlined "Americans have record wealth but aren't spending it." The first paragraph begins:

"In the economic history of our time, June 6, 2013, ought to occupy a special place. That’s the day the Federal Reserve disclosed that the net worth of American households — the value of what they own minus what they owe — hit $70 trillion, a record that exceeded the previous peak before the 2007-09 financial crisis. Higher stock prices and a long-awaited housing recovery are slowly restoring Americans’ lost wealth. By all rights, this symbolic crossing ought to improve confidence, prompt consumers to spend more freely and increase the economy’s growth."

Okay, let's first check the story that consumers are not spending freely. If we turn to the most recent data we see that the saving rate for the first quarter was 2.3 percent. That is slightly higher than the 1.5 percent saving rate we saw at the peak of the bubble in 2005 and 2006, but it's not hugely different. (Arguably, because of the statistical discrepancy in the national accounts we should view the saving rate as being somewhat lower at the bubble peak.)

It is possible that the first quarter saving rate was somewhat lower than normal because households were taking time to adjust their consumption to the ending of the payroll tax cut. Also, they may have been spending part of the big dividend payouts that were made in the 4th quarter to beat the rise in tax rates. If we average in the 5.3 percent saving rate from the 4th quarter, we get an average of 3.8 percent for the last two quarters, 2.3 percentage points above the saving rate at the peak of the bubble. So the question is why consumption is not back to its bubble peaks if wealth is back to its bubble peak.

Samuelson tells us:

"Here’s where the process seems to have broken down. Before the financial crisis, says economist Mark Zandi of Moody’s Analytics, an added dollar of housing wealth might produce 8 cents in extra spending, and an extra dollar of stock wealth, 3 cents. The overall effect was about 5 cents per dollar of new wealth, Zandi says. Now, 2 or 2.5 cents 'seems more likely to me.'" 

Okay, let's check that one.

Dean Baker / June 17, 2013

Article Artículo

How Do You Say "Housing Bubble" In Canadian?

Paul Krugman has a nice post on the housing bubble in Canada. Needless to say, I strongly agree. It is painful how so many people refer to this downturn as the result of a financial crisis.

I have often posed the simple question of what would be different right now if we had not had the crisis but house prices were exactly where they are today. Would firms be investing more, would people be consuming more, would we see more building in spite of near record vacancy rates? It's hard to see the answer to any of these questions as being yes.

The failure to recognize the last housing bubble and its risks was an act of astounding incompetence by people in policy positions and really the economics profession as a whole. The failure to see the continuing risks posed by renewed bubbles should be enough to sentence these people to the sort of hardcore unemployment experienced by people with no marketable skills.

One item that Krugman misses in comparing household debt in the U.S., U.K., Canada, and the euro zone is that the overwhelming majority of the debt in the U.S. is 30-year fixed rate mortgages. The interest rate on these mortgages will not change if long-term rates rise by 2-3 percentage points as folks like CBO predict.

On the other hand, the standard mortgage in the UK is an adjustable rate mortgage. In Canada it's typically a 5-year mortgage that has to be paid off or refinanced at the end of the period. It's easy to see what happens in these cases when interest rates rise and it's not pretty.

 

Addendum:

Since I've been asked in e-mails and twitter comments I'll present again the patented Dean Baker Bubble Bursting Formula for Central Bankers:

1) Talk

2) Regulatory Powers

3) Higher Interest Rates

Dean Baker / June 15, 2013

Article Artículo

Latin America and the Caribbean

Bad Cop, No Dollar

Yet another investigative report from the Associated Press’ Alberto Arce reveals more details on the extent of corruption within the Honduran police. Arce describes how a recent U.S.-funded program aimed at cleaning up the Honduran National Police ended in dismal failure:

One by one, hundreds of police officers were called to a hotel in the capital and subjected to polygraph tests administered by Colombian technicians funded by the U.S. government. "Have you received money from organized crime?" they were asked in a series of questions about wrongdoing. "Have you been involved in serious crimes?"

Nearly four of every 10 officers failed the test in the first five months it was administered, some giving answers that indicated that they had tortured suspects, accepted bribes and taken drugs, according to a U.S. document provided to The Associated Press.

Then, despite the clear indications of serious wrongdoing, the police cleanup effort went nowhere.

By April of this year, the Honduran government said it had dismissed a mere seven officers from the more-than-11,000-member force, a vivid illustration of the lack of progress in a year-old effort aided by the U.S. to reform police in a country that's swamped with U.S.-bound cocaine and wracked by one of the world's highest homicide rates.

Some of the seven officers have since been reinstated, the minister of public security told congress.

Arce notes that recent efforts to purge the police forces of dirty cops were opposed by “dozens of officers [who] simply refused to accept a mass polygraph exam, seizing a police building until the government backed down” after 1,400 of them were suspended last week and told to take the test.

CEPR / June 13, 2013