No Monkey Business: a no nonsense clearing in the personal finance jungle

Sunday, September 23rd

US house prices: the world's 'Achilles heel'

Previous posts have focused on the unprecedented boom in US house prices, as the source first of liquidity problems, then credit problems and eventually recession. America has been in denial. Read this very measured testimony to a Congressional Committee by Prof Shiller (creator of the house price index used on this site) to get a sense of the impending disaster in America. The rest of the world is always a party to any US recession but it also carries a lot of the dodgy loans on its own books - in banks, hedge funds and therefore indirectly in individual portfolios and corporate pension funds. When you look at the accompanying graph of real house prices (ie deflated by general inflation or relative to the prices of everythign else) remember that this is absolutely unprecedented in the US, where both land and building costs have been quite stable relative to prices generally since the 1950s. The bricks and mortar route to riches is a totally new popular myth in the US. To think the near 100% gain in real terms since the late 1980s would just conveniently level out, which even Fed Chairman Bernanke thought, was always nonsense.

Now that real prices are actually falling, denial is out. Many Americans are beginning to agree with Robert Shiller: "I am worried that the collapse of home prices might turn out to be the most severe since the Great Depression. It is difficult to predict the depth, duration and all of the consequences of such a decline operating in a much more complex modern economy."
Stuart Fowler on 09.23.07 @ 07:24 PM GMT [">link]

The politics of Northern Rock

When Chancellor, one of Gordon Brown’s first initiatives in 1997 was to make the Bank of England operationally independent of the Government. Depoliticising the setting of interest rates was widely praised at the time as both politically astute and technically sensible, and generally still is. The Government of the day was still responsible for defining the Bank’s remit. But Labour’s initial remit, which never changed, was extraordinarily focused on the problem of the past: to keep inflation within a narrow band of explicit targets. The Bank then still had its regulatory responsibilities for supervising banks but in 2002 Labour’s Financial Services and Markets Act moved supervision from the Bank to the FSA, marking a highly unusual separation of powers.

In both respects, PM Brown is likely to want to deflect responsibility for the institutional context of the failure of Northern Rock to meet its liabilities to other banks, even though he was significantly involved as its architect. He will have to work hard to blame the Bank for not preventing a debt-fuelled housing boom: it was never in its remit - unless the boom caused inflation to breach its limits. Whether delegating or not, the Treasury is responsible for prudent management of a sustainable, well-balanced economy. It was quick enough to claim credit for this when it looked superficially like we had one. It should not lightly be let off the hook when it turns out we had precisely the opposite.
Stuart Fowler on 09.23.07 @ 04:52 PM GMT [">link]

Tuesday, September 18th

Falling house prices mark the end of the Great Stability

Governments’ boast that they had succeeded in taming both inflation and the business cycle was always a hollow one. The lie was given by rampant house prices and commodities, massive speculation in investment structures that barely existed a decade ago and record levels of debt on both governments’ and households’ balance sheets. Monetary authorities succeeded in cheating recession after 9/11, which coincided with an incipient downturn, but economic activity continued to expand only at the cost of unsustainable strains in financial balances between the key sectors making up the economy. Thanks to a feeding frenzy in the housing market, none was more extreme (in terms of flows as well as balances) than the US household sector.

This US bubble has now indisputably burst and has taken with it a less extraordinary but equally unsustainable bull market in UK house prices. You do not even need evidence from house price databanks to realise that the psychological shock of queues of depositors outside Northern Rock branches has irreversibly increased risk aversion for borrowers, lenders and depositors on whom the debt mountain depends for both refinancing and growth.

My first post on the emerging liquidity crisis explained the difference between a liquidity hiatus (potentially short-lived) and a credit cycle (with much longer-lasting dynamics). Subsequent developments mark this out as a credit problem. A downturn in the economy, driven by credit rationing and balance sheet rebuilding, is likely. After fifteen years of barely interrupted expansion, forecasting a conventional business cycle path is bound to look hazardous. Weak real estate values, undermining balance sheets as well as cash flows in banking, households and institutionalised investment products, are a rare source of predictability. The house price story (UK and US) has featured regularly on this site (search term: house prices). This is the reason.
Stuart Fowler on 09.18.07 @ 11:05 AM GMT [">link]

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nomonkeybusiness.org

a no-nonsense clearing in
the personal finance jungle

By whom

For whom

Business connections

US house prices: the world's 'Achilles heel'

The politics of Northern Rock

Falling house prices mark the end of the Great Stability

Topical Index:

External Links:

nomonkeybusiness.org

a no-nonsense clearing in the personal finance jungle

By whom

For whom

Business connections

US house prices: the world's 'Achilles heel'

The politics of Northern Rock

Falling house prices mark the end of the Great Stability

Topical Index:

External Links:

a no-nonsense clearing in
the personal finance jungle