The Great Recession - post mortem

[sterlingice]

If you want to start that far out, you can start with these data points:

1) Have an introduction chapter or a prologue that starts in 1998 about LTCM, its chilling effects, and its foreshadowing to 2008
2) Explanation about the housing bubble that started around 1995 where housing no longer tracked inflation (see: Dean Baker)
3) A team at JP Morgan invents the credit default swap in 1997
4) The 1999 Repeal of Glass-Steagall

Then roll from there...

SI

[JonInMiddleGA]

Well this is a real confidence booster
Reports: Freddie Mac official found dead | ajc.com

WASHINGTON — David Kellermann, the acting chief financial officer of Freddie Mac, was found dead at his home Wednesday morning in what broadcast reports said was an apparent suicide.

WUSA-TV and WTOP Radio reported that David Kellermann was found dead in his Northern Virginia home. The 41-year-old Kellermann has been Freddie Mac's chief financial officer since September.

Sabrina Ruck, a Fairfax County police spokesman, confirmed to The Associated Press that Kellermann was dead, but she could not confirm that he committed suicide.

Kellermann's death is the latest blow to Freddie Mac, a government controlled company that owns or guarantees about 13 million home loans. CEO David Moffett resigned last month.

McLean, Va.-based Freddie Mac and sibling company Fannie Mae, which together own or back more than half of the home mortgages in the country, have been hobbled by skyrocketing loan defaults and have received about $60 billion in combined federal aid.

Kellermann was named acting chief financial officer in September 2008, after the resignation of Anthony "Buddy" Piszel, who stepped down after the September 2008 government takeover. The chief financial officer is responsible for the company's financial controls, financial reporting and oversight of the company's budget and financial planning.

Before taking that job, Kellerman served as senior vice president, corporate controller and principal accounting officer. He was with Freddie Mac for more than 16 years.

[albionmoonlight]

Pure anecdotal evidence, but my friend does commercial real estate law and, as you can imagine, business has been really bad for a while.

But, she says that, in the last couple of months, she's actually gotten quite busy again.

Take that for whatever it might or might not be worth.

[Mizzou B-ball fan]

I guess an executive finally took the Iowa Senator's comments to heart regarding suicide.

[Flasch186]

green shoot this green shoot that
I added a bit more on my short under my hat

[Edward64]

Originally Posted by Edward64

#113 5-6-2008. Okay, I know this may be an unpopular statement, but I am calling it. The market has hit bottom and it is rebounding. I've read bottom is hit approx 6 months into a recession and as the market is a leading indicator, I am predicting we are on the uptick.

Deja vu. Okay ... I am calling it. The market has hit bottom and it is rebounding (or at least that's the popular opinion on the TV pundits). Bottom seems to be around Mar 6 (?) which is approx 14-15 months into a recession.

Mar and Apr was good for my 401K. I want to start spending again. Work wise, there seems to be a slight uptick of positions I could go for.

How's everyone else doing?

[JPhillips]

Hopefully you are right. I've been reading about the ARM resets coming over the next year or two and I'm far less optimistic this is over.

[sterlingice]

Originally Posted by Edward64

Deja vu. Okay ... I am calling it. The market has hit bottom and it is rebounding (or at least that's the popular opinion on the TV pundits). Bottom seems to be around Mar 6 (?) which is approx 14-15 months into a recession.

Mar and Apr was good for my 401K. I want to start spending again. Work wise, there seems to be a slight uptick of positions I could go for.

How's everyone else doing?

I'm confident that the market is *not* a good indicator and more akin to gamblers on crack.

Even if the market bottomed out, the job market will traditional keep going down for another 9-12 months after the bottom of the market before it hits bottom so the real effects that people feel is still getting worse.

SI

[Galaxy]

Originally Posted by sterlingice

I'm confident that the market is *not* a good indicator and more akin to gamblers on crack.

I feel that market is being driven up by traders, not investors right now.

[Fidatelo]

Agreed. Market is not reflecting reality, but I suppose that shouldn't be a surprise anymore.

[RPI-Fan]

What the hell are you guys talking about with "not reflecting reality"? The market is what it is. One of many different economic indicators with its own characteristics and chronology relative to broad economic conditions.

[flere-imsaho]

I'm fairly confident that the DOW hit its bottom when it was in the 6000s. Whether or not it'll get above 10,000 anytime soon is another matter entirely.

[Flasch186]

Well I certainly have to revise my idea of it retesting THE low of 666 but I believe we will be below 800 again on the S&P....but this rally has certainly baffled me in its length and height.

[SteveMax58]

Originally Posted by Flasch186

Well I certainly have to revise my idea of it retesting THE low of 666 but I believe we will be below 800 again on the S&P....but this rally has certainly baffled me in its length and height.

Which is why...if you subscribe to the idea that the stock market is a giant Ponzi scheme (or scam, or legalized gambling, etc.)...you might be thinking this is how "they" do it. Defining "they" are is the baffling part, though...not how "they" do it.

I'm not on that train of thought myself...but if this thing tanks again to the 6000's...it just might make me grab a ticket (bad pun intended).

[Flasch186]

I dont subscribe to that, on the whole, although thingzs over the past 15 years have gotten bastardized I do not believe that on the whole investing in equities of companies is a scheme or gambling (although it always has some element of it).

I do believe that the banks are playing funny with their monies right now and Geitner is allowing them to try and grow their way out of it (as an aside which is why they are in no hurry to move on shortsales or foreclosures but I digress).

[SportsDino]

I've been sitting on longs for the most part since March, sometimes selling on particular companies when they are spiking big to lock in sure money (and buy on any that are having an off day). I still would like to see jobs, but like I said way back, everything was primed for a good quarter (stock wise).

I still think some banks are over-hyped, but it is hard to fight billions of dollars of government backed hype right now, better to just buy companies you know have to recover, and avoid risking shorts.

The market reflects what it is, when people are talking about reality I think they are mentioning real economic situations (i.e. the DOW doubling does not mean your personal health and welfare or the country is doubling). For most of the 90's and 2000's we were looking at prices that were absurdly higher than cashflows could support (most people learned that lesson hard when the tech bubble disappeared, but conveniently forgot it). When the change in spot price becomes the thing people are gaming for revenues (instead of dividends) then crazy things happen. Its more about psychology than math really (you could even just run a market with nothing as the good, just random ass confidence, and I'm sure it would get players).

I think to a large degree you need to treat it like gambling. Especially if the strategies and analysis being used is more similar to gambling than accounting. I'm basically treating it like a horse race, some horses look healthier than others, but you can never tell what will happen in a particular race, or when the fix is in.

[Kodos]

Economists are saying the recession is coming to an end soon. Resume your reckless spending!

[Desnudo]

Already set-up a 0% down 5 year mortgage

[Passacaglia]

Originally Posted by Desnudo

Already set-up a 0% down 5 year mortgage

You mean you didn't get cash back??

[Flasch186]

I made some awesome marketing material targeted towards lower income uneducated borrowers to help them get out of their falling down broken down home OR simply refi it to lower their payments...

they wont know what hit 'em.

[Fidatelo]

Originally Posted by Kodos

Economists are saying the recession is coming to an end soon. Resume your reckless spending!

According to an article I read this morning, Canadians never stopped. Apparently we've raised our consumer debt-load to 1.3 trillion from something like 900 billion a year or two ago. Yay!!

[Kodos]

Aww. Our little brothers are all grown up...

[Flasch186]

FWIW Jack Welch states this morning on CNBC that he believes Bernanke saved the financial world and is an "American hero".

[albionmoonlight]

Originally Posted by Flasch186

FWIW Jack Welch states this morning on CNBC that he believes Bernanke saved the financial world and is an "American hero".

Now, I'm not a big believer in jinxes, but come on. If anything is going to cause the Dow to drop 35% in one day, it would be a well known financial analyst getting on TV and making a hyperbolistic comment about how we avoided disaster. That's just how this shit always seems to go down.

I think that the Daily Show should probably just go ahead and start working on the compare-and-contrast-this-guys-statments-to-reality piece right now and get ahead of the curve. I have a bad feeling that they will probably be able to run it sometime in the next two weeks.

[Flasch186]

well, my point being is that Jack Welch is one of the most well repected businessmen in the world and he is in my camp of saying Bernanke 'saved' us from the 'doom and gloom' scenario I was yelling about (with help from Bush [in the end] and Paulson [pre-torpedo]). I feel good walking lock step with Welch.

[Fidatelo]

Of course businessmen love what Bernanke did... he robbed from the poor and gave to the rich!

[BishopMVP]

Originally Posted by Fidatelo

According to an article I read this morning, Canadians never stopped. Apparently we've raised our consumer debt-load to 1.3 trillion from something like 900 billion a year or two ago. Yay!!

1.3 trillion? Obama adds that much to our collective projected debt every week. :yawn:

I always thought Jack Welch was kind of a dick, but that's probably because for being one of the richest, most successful Fortune 500 CEO's Jack Welch donates an absurdly low amount to his alma mater (or anything for that matter). The scholarship fund in his name at school was actually donated by GE and not Welch himself.

[SportsDino]

I'm still not seeing the jobs roll in, and indications of inflation (in my opinion) are all there. Business still seems to think riding consumers into the ground and hoping for debt culture to provide the fuel is the way to go... so I still think we are in for a rude awakening when they put off hiring for so long that we get another credit shock from the bottom up.

How long can the U.S. face sustained unemployment growth and still put a rosy 'American hero' spin on things? Heroes fix problems, you might give Ben Fed credit for pulling the brake hard when the crap hit the fan.... but ever since he has been pulling the wrong levers (throwing money into holes, then BS about the money being paid back, which still does not add up to anything but the most minimal review which is all the media will do).

Overall, everything is going to cost more, and we'll probably be paid even less... so real wages will be in the toilet (ignore statistics that are based on working population, if you fire a few million people and calculate an average ironically average wages increase because of the change in sample size and distribution... need to look at statistics across the entire pool for it to be valid).

We need real economic development to happen soon, or I think the next year will be remembered as mostly depressing and stagnant (market may go up another 15%, but looming unemployment and inflation make everyone who is not an overpaid exec unhappy until we reach a critical mass where the economy recovers out of 'boredom' more than the actions of politicians or CEOs).

[Fidatelo]

Originally Posted by BishopMVP

1.3 trillion? Obama adds that much to our collective projected debt every week. :yawn:

2 things:

1) I'm talking consumer debt, not national debt.
2) Canada is one-tenth the size of the US, so straight number comparisons aren't very valid.

The key to the stat I mentioned is that our consumer debt increased by over 40% in just 1-2 years.

[albionmoonlight]

I have no idea how to fix health care, but one of the things that I think I think needs to happen is that it needs to be de-linked from employment. People seem paranoid about losing their employer-based health care. But, since the rising cost of that health care has kept wages pretty much flat, I think that people are shooting themselves in the foot with it.

Get rid of the health-care albatross, and we might see wages actually rise.

(Yes, I know that people would then have to buy health care with those higher wages, but it would be a lot easier for them to make the choices rationally and/or have a better sense of the true cost of rising health care costs).

[Flasch186]

Originally Posted by SportsDino

I'm still not seeing the jobs roll in, and indications of inflation (in my opinion) are all there. Business still seems to think riding consumers into the ground and hoping for debt culture to provide the fuel is the way to go... so I still think we are in for a rude awakening when they put off hiring for so long that we get another credit shock from the bottom up.

How long can the U.S. face sustained unemployment growth and still put a rosy 'American hero' spin on things? Heroes fix problems, you might give Ben Fed credit for pulling the brake hard when the crap hit the fan.... but ever since he has been pulling the wrong levers (throwing money into holes, then BS about the money being paid back, which still does not add up to anything but the most minimal review which is all the media will do).

Overall, everything is going to cost more, and we'll probably be paid even less... so real wages will be in the toilet (ignore statistics that are based on working population, if you fire a few million people and calculate an average ironically average wages increase because of the change in sample size and distribution... need to look at statistics across the entire pool for it to be valid).

We need real economic development to happen soon, or I think the next year will be remembered as mostly depressing and stagnant (market may go up another 15%, but looming unemployment and inflation make everyone who is not an overpaid exec unhappy until we reach a critical mass where the economy recovers out of 'boredom' more than the actions of politicians or CEOs).

In the end we'll both be able to say we were right. Ive realized that much.

[sterlingice]

Originally Posted by SportsDino

We need real economic development to happen soon, or I think the next year will be remembered as mostly depressing and stagnant (market may go up another 15%, but looming unemployment and inflation make everyone who is not an overpaid exec unhappy until we reach a critical mass where the economy recovers out of 'boredom' more than the actions of politicians or CEOs).

You think the economy will recover out of boredom? I see the economic power of the overpaid exec crushing anything even a bunch of "bored" near-unemployed people have.

SI

[SportsDino]

Regardless of whether some bank exec has finally reconfigured his balance sheet from red to black... people with assets/resources/products/money that are just sitting around collecting dust will get back to business, at some price.

Only a socialist-backed economy can persistently suck just because an oligarchy is feeling gloomy. In a supposedly free economy there are just too many options for 10% of the population to sit on the sidelines (unless its voluntary welfare exploiters, but we all know this unemployment consists of a large number of many types of employees).

When its a choice between ten people fighting over one opening among three big companies, or those ten people either pooling together or being organized by some other actor with capital into a new business... the more idiotic and silly the established players are with their downward spiral, the more motivation and opportunity for a new entrant to get in there and take their dwindling market share.

[BishopMVP]

Originally Posted by Fidatelo

2 things:

1) I'm talking consumer debt, not national debt.
2) Canada is one-tenth the size of the US, so straight number comparisons aren't very valid.

The key to the stat I mentioned is that our consumer debt increased by over 40% in just 1-2 years.

Eh, I know, I was just trying to make a bad joke. The government is still screwing up so many things in such a myriad of ways anything other than resigned humor seems out of place at this point.

[albionmoonlight]

I have a question.

On the one hand, the government is talking about helping us out of the recession by creating new jobs in, among other things, the health care industry.

On the other hand, the government is talking about helping us out of the long-term fiscal deficit by reducing, among other things, health care costs.

Why are these not mutually exclusive (or at least hard to reconcile) policy goals?

[Fidatelo]

Originally Posted by albionmoonlight

I have a question.

On the one hand, the government is talking about helping us out of the recession by creating new jobs in, among other things, the health care industry.

On the other hand, the government is talking about helping us out of the long-term fiscal deficit by reducing, among other things, health care costs.

Why are these not mutually exclusive (or at least hard to reconcile) policy goals?

Hire lots of people and pay everyone half as much?

[SteveMax58]

Originally Posted by Fidatelo

Hire lots of people and pay everyone half as much?

Now you're just being.....uh, nevermind.

It's sort of like my wife (who stays home with the kids) saying she is going to save money by not giving them an allowance any more...but will now just buy everything they would otherwise buy for themselves instead.

I have come to begrudgingly agree with Flasch over the past 2 months that the Bank bailouts were a necessary(but counter-productive long-term, IMO) step. The amount of financial fallout that would have occurred would have likely been "Armageddon" (or Amrageddon x 10 if you believe we just went thru Armageddon) due to a complete collapse of trust in the US banking system.

The problem of inflation, however, will continue to grow as we see stagnant employment (or continued unemployment) numbers...and this to me is still the biggest issue. While I think there is plenty to do about Health Care costs...it seems to me that in the grand scheme of things...reducing the outgoing US money (with high prioritization of money which ends up in Russia, Iran, & even Saudi hands) is the more important and vital way to not only stimulate, but to create a basis to sustain longer term. Not surprisingly, this means replacing foreign-sourced oil ASAP.

[BishopMVP]

Originally Posted by albionmoonlight

On the one hand, the government is talking about helping us out of the recession by creating new jobs in, among other things, the health care industry.

On the other hand, the government is talking about helping us out of the long-term fiscal deficit by reducing, among other things, health care costs.

Why are these not mutually exclusive (or at least hard to reconcile) policy goals?

They are, but people being unemployed now affects Obama's 2012 bid. A ballooning deficit in 2015 is someone else's problem.

Basically the only way you can have affordable national health care is by denying most end-of-life treatments, but no one's gonna go for that.

[Flasch186]

I need to go clean my computer screen from the coke I spit all over it...someone frickin agrees with me! holy shit!

[Fighter of Foo]

Originally Posted by BishopMVP

They are, but people being unemployed now affects Obama's 2012 bid. A ballooning deficit in 2015 is someone else's problem.

Basically the only way you can have affordable national health care is by denying most end-of-life treatments, but no one's gonna go for that.

Safeway's CEO gave the answer the other day: How Safeway Is Cutting Health-Care Costs - WSJ.com

At Safeway we believe that well-designed health-care reform, utilizing market-based solutions, can ultimately reduce our nation's health-care bill by 40%. The key to achieving these savings is health-care plans that reward healthy behavior. As a self-insured employer, Safeway designed just such a plan in 2005 and has made continuous improvements each year. The results have been remarkable. During this four-year period, we have kept our per capita health-care costs flat (that includes both the employee and the employer portion), while most American companies' costs have increased 38% over the same four years.



Safeway's plan capitalizes on two key insights gained in 2005. The first is that 70% of all health-care costs are the direct result of behavior. The second insight, which is well understood by the providers of health care, is that 74% of all costs are confined to four chronic conditions (cardiovascular disease, cancer, diabetes and obesity). Furthermore, 80% of cardiovascular disease and diabetes is preventable, 60% of cancers are preventable, and more than 90% of obesity is preventable.

As much as we would like to take credit for being a health-care innovator, Safeway has done nothing more than borrow from the well-tested automobile insurance model. For decades, driving behavior has been correlated with accident risk and has therefore translated into premium differences among drivers. Stated somewhat differently, the auto-insurance industry has long recognized the role of personal responsibility. As a result, bad behaviors (like speeding, tickets for failure to follow the rules of the road, and frequency of accidents) are considered when establishing insurance premiums. Bad driver premiums are not subsidized by the good driver premiums.

[SportsDino]

The answer is probably LOWER premiums for healthy folk, and a combo of shifting health care out of big company plans and more into a consumer product. When there is a positive incentive and realistic price competition maybe we'll see the net health care costs go down.

But with all the entitlement health care combined with our foolish notions of health care as a business without acting like a business at all... most likely result is just a giant mess. As it is health insurance is a racket and serves no economic value in this country, the government might increase efficiency in the short run (because ironically the current 'business' is built around bureaucracy)... but would eventually choke out and die when the government gets tired of it.

[SteveMax58]

Originally Posted by Flasch186

I need to go clean my computer screen from the coke I spit all over it...someone frickin agrees with me! holy shit!

Well...I'll caveat my agreement by saying that the "appearance" of a commitment of funds was needed...likely not much of the actual funds legislated for it. I suspect a reasonable strategy would be to continue to maintain the "appearance" of TARP while not actually spending very much of it.

Nothing like the "thought" of inflation to get those with the means to invest, to begin investing. I dunno...just my silly conspiracy theory of the day.

[Flasch186]

Oh no, Im totally with you. I felt the appearance of TARP was working and worked in the way it was supposed to until Paulson set it on fire. The schmuck. Anyways, the timing was awesome and I do believe it saved us from that Armageddon which would vary in description depending on whose opinion you get.

[JonInMiddleGA]

Originally Posted by SteveMax58

Nothing like the "thought" of inflation to get those with the means to invest, to begin investing.

I'll use this short quote for a drive-by posting/thought to ponder.

Invest in what?

Yeah, that's damned short question I know but I'm pretty much dead serious.
What industry/product/service right now do you actually have enough confidence in to put cash behind it? Damned if I can think of one off hand.

[SteveMax58]

Originally Posted by JonInMiddleGA

Invest in what?

I think it's the counter-intuitive nature of it...in other words, the more you can make people with money believe their money is going to be worthless, the better the odds of them putting it "somewhere else". So if you scare enough people (presumably those who pulled their money out of the stock market, which is not the 401k types) to put it into something...anything else...you delay the downward spiralling effect of short-term hoarding, and perhaps avoid the entire house of cards from crumbling under it's own weight. People buy (or invest) when they believe the price will go up...inflation does this as well. Doesn't mean investors will begin investing in popcorn machines or new clothing lines...but if they put it somewhere...it's better than putting it under their mattress. Or, I should say, this is my theory on what the Bush & Obama administrations have attempted to do.

As we've seen with Madoff, real estate, and the like...the "system" doesn't necessarily rely on good investors to survive...quite the contrary IMHO, it relies on enough misfortunate investors to lose for the common good. The lottery is a good example of this (albeit with less strategy).

I have a question for those that are well-researched (or moreso than myself, which isn't saying much)...are there statistics available which show the relation (or percentage) of "conventional investment" dollars vs. 401k-backed investments? Or is this impossible to determine due to being lumped into other accounts, etc?

[SportsDino]

Not sure what your question is about 'conventional investment dollars'. It should be possible to get an estimated figure of the entire amount invested in 401k accounts though.

Bernanke's actions last October or so (I think that was when it happened), in my opinion, had little to do with expecting people to run out and put there money in to save the economy. In fact I hope that did not occur, as we shed TONS of money from October to March, I know because I was shorting on about every thing I could.

The emergency actions to stop a complete credit crash were important, where I differ with Flasch quite strongly is that TARP itself was useless towards that end. In fact all the money thrown around to increase 'confidence' in fact did absolutely nothing except provide buffer room for the super rich needing to escape/maintain their long position, and increase the profits of repeat shorters who knew we had an inevitable downward trend and were handed a dominant strategy against government backed investments.

What the banks NEEDED to do, and arguably could be called 'necessary' although I would stop far short of the term 'heroic'... was to halt the massive worldwide margin call, and in the interim freeze the balance sheet (with government injections of money as backing where needed, not as TARP but the direct rapid fire money the Fed was sending out in the back room in secret as loans).

Subsequent actions demonstrate they cared much more about protecting well connected actors, rather than economies, and the damage inflicted will be felt for a long time. Remember while a billionaire is calling someone a savior, that your wages are stagnant, if not outright cut, and that your day to day position seems a whole lot harder while the media is spouting off about how the economy is so great because the DOW jumped 200 points that day.

[sterlingice]

Originally Posted by SportsDino

Subsequent actions demonstrate they cared much more about protecting well connected actors, rather than economies, and the damage inflicted will be felt for a long time. Remember while a billionaire is calling someone a savior, that your wages are stagnant, if not outright cut, and that your day to day position seems a whole lot harder while the media is spouting off about how the economy is so great because the DOW jumped 200 points that day.

This paragraph sums things up perfectly. But I'll get into that in my next post...

SI

[sterlingice]

It just struck me when I was driving this past weekend. No, not a car- but a simplified version of how the economy is going to play out over the next, oh, I dunno 20 years. There's a distinct possibility that I'm very wrong but it passes the "smell test" in my mind.

$450K House

My wife and I were seeing signs for houses here in Richmond and a neighborhood that "starts in the 450s". I don't even understand how you have the balls to do that as a developer at this time, particularly here. The city has had its share of issues with regards to the recession- Circuit City, who had its corporate HQ here, went under; the state government shed a lot of jobs to try to meet budget; but it did have some jobs added with government stimulus money and while times are rough here, they're rough all over.

But the thing is, Richmond has been poor for quite a while. The median household and family incomes are $37K and $48K compared to national averages of $50K and $60K (*source below). We looked at the homes for a moment and both said "that's not a $450K house". But let me explain.

My parents bought a house in suburban Houston for a little over $300K in the late 90s before things went wonky. It's a giant brick McMansion (3000ish sqft) in a nice suburban neighborhood filled with similar homes. When I say before "that's not a $450K house"- we're comparing it on a similar scale. Those houses looked similar to my parents' house but were in Richmond, a place with a much worse job market.

I know Texas has very low home prices but, really, shouldn't suburban Houston be more costly to live in than, say, Richmond? Or when I was in Boise as this crash was just starting a year or so ago- one of the locals was talking about homes there in the $500K-$800K range. Who in Boise can make the money to sustain that sort of house? Nobody- it was transplants from Cali putting big wads of cash from their previous home sales towards new homes and then expecting to flip them a few years down the line. You know, the type of stuff that got us into this mess.

We're not talking about what should be the crazy exceptions where you have entirely different animals for job markets and subsequent housing costs- Cali, NYC, DC, maybe a Chicago or similar- places where it makes some semblance of sense. We could even throw in parts of Arizona, Nevada, and Florida tho they don't have the corresponding job markets those previous places do so that creates inefficiency in the system.

So, again, I ask, who, especially in this economic time can buy a $450K+ home in "average" nice neighborhood? This especially applies to a place where it's not the richest city in the world. And how is the market going to adjust to fix this easily evident inequity? And again, when I asked that question to myself- it hit me.

Real Prices

Now I'm not reinventing the wheel here but it just clicked in my head and all made sense. Housing prices have hit their "real" floor or at least will in the next year or so. That's not to say they won't increase again but they will level out with regards to inflation. I remember seeing a graph a while back about how home prices have been almost steady with inflation since something like WW2 until the housing bubble started in the late 90s.

But if housing prices stay steady with inflation- what about the disproportion between what houses cost and the cost of everything else? There's going to be inflation on so many other fronts to catch the cost of living up with the cost of houses. A $450K house doesn't seem so extravagant and crazy when you're paying $5 for a gallon of gas or milk.

The commodities are going to blow up again. Summer of 2007 saw prices starting to creep up by the time we got to mid 2008, things had gotten much higher. Everyone was familiar with the gas price situation where we saw gas go from $2 to well over $4 at the peak last summer. By extension, higher oil prices influence a lot of our other prices as well. If you checked your grocery bill, prices were going up there as well. I saw a lot of my prices go up 30-50% over the last 2 years and that was before I moved out to Richmond and got some sticker shock out here as well.

The steep recession put brakes on this but only temporarily. We've already seen gas prices start to creep up and demand only slightly slacked. It still has a pretty much inelastic relationship as it's the ever-increasingly demanded fuel that every economic engine runs. So, as supply dwindles, and price increase, demand won't slack as it is necessary.

It's simple, really. There are middle classes in other countries growing faster and faster and they want to share in those amenities that we enjoy. It's not just oil but there are more people jockeying for those "useful" resources. And those come from an array of locations around the globe so no one country can hope to control them.

As an aside: there's us, specifically the US. We could have spent the last 10 years paying down the debt so that when a financial catastrophe broke, we could help spend our way out of things quicker or at least soften the blow of a major hit to the economy. Instead, we wasted the opportunity, spending it on shiny baubles (or at least a tax cut for the wealthy and a needless war to the tune of $2.5T+) and now we're having to dilute the value of the dollar even more when we actually need to spend the money.

The Other Shoe

These prices for necessary commodities continue to rise- food, clothing, etc. Sure, no one needs that 3rd LCD in their house- the luxury goods market is already taking quite the beating as that's what often happens in recessions. But we had honed our economy to cater to those luxury seekers as there was the most money to be made. Those with the least amount of time and most money would pay excessive amounts. Basically, people were paying a lot of money for time. And companies that profited best off of that survived.

We're increasingly a hugely services-based economy (I have about half an essay written on this that I've had on a proverbial shelf for the last 6 months- I should dust it off). You have a pair of dominant dynamics at work- one, a separation of the "upper management class" and the rest. A lot of these services that required individual expertise are being "streamlined" and process engineered so that anyone can do them. It's the equivalent of mechanizing manufacturing- suddenly, you don't need nearly as much skill so you can replace people with cheaper, less skilled labor at home or abroad.

A second is the attritioning of people in the workplace. I see it all over my company- retiring out or laying off an older person who is making more and then replacing them with someone younger at half or a third the wage. In a system where good resource allocation and behavior is rewarded, this should harm companies. Instead, we've built a system with fat, bloated companies where money is best spent on peddling influence to open up legal and feduciary loopholes for your company and erect entry barriers.

These combine to keep drubbing our middle class so that their spending power as a collective is less and less. This, of course, is a huge issue since we built our current economy on it, but it's also something that can't be seen overnight or even a month to month scale. But the long term effect is that wages remain stagnant, or at best, go up nominally but still remain behind inflation.

The long term result is that our spending power gets disseminated to the rest of the world, bringing up everyone's standard of living and reducing ours.

Conclusion

So, to sum up- I really think housing prices near their "real" floor and that bubble is probably burst for a while as hard to save up money when everything else costs more. But, by that token, everything else is about to start costing more and with wages still stagnating. So, as I pointed out before, that $450K house isn't going to look nearly as much when you're paying $5 or even $10 for a gallon of gas or milk.

I really think that our parents, if you're in your 20s and 30s in the US, lived in perhaps the best time and location to be prosperous, as a whole, in the history of the world.

SI


*Oddly enough, the per capita income is $25K vs $26K nationally so I'm not sure what accounts for the huge disparity in the previous two numbers but I went with household and family since they're a better indicator of spending power.

Richmond city, Virginia - Fact Sheet - American FactFinder

[SteveMax58]

Nice post SI...I think your point about the relative view of housing cost vs. $5-$10 gallons of milk are precisely the reason I was concerned with all of the debt spending since Sept/October time frame. In an effort to make home prices level off in relation to the rest of the economy, it seems Bush & Obama economic policy has been that "controlled" inflation is the answer. Maybe this was necessary...IDK?

I'm not smart enough to have a great answer...other than the best way that I know of to make our money (i.e. the US) go further is to reduce our need to purchse essentials from abroad. It doesn't mean we boycott or become overtly-protectionist, but it does mean you figure out ways to reduce your outgoing money with home-grown initiatives. This is actually why I believe energy to still be a bigger issue than Medicaid, Medicaire, Universal HC, or North Korea, etc. in general. Much easier to pay for Universal HC when you find a way to save $300-400 Bil/yr on foreign oil (assumed if you can cut in half). Then numbers like $1tril look smaller and smalller...but I dont see how you get there without spending the money on technologies that can save you mid- to long-term money.

This is why I'm pro-nuclear energy...though I realize that's not an overly popular (or considered useful) opinion these days by many. Do I know the detailed costs of nuclear? Nope. But I would prefer to have that discussion/debate vs. Universal HC at the moment.

[sterlingice]

I actually agree with a lot of what you said and I've written quite a few words in the Obama thread about how I was happy he was talking about non-sexy stuff like infrastructure during the campaign and I'm a bit disappointed that I'm still waiting for those promises as that's what could really help us 20 and 50 years down the road.

I don't want to make this too overly political but it's one of the reasons I really look back with regret on the last 10 years. We're about to end a really pivotal decade where a lot of advancement and growth is happening all around the world and here. We took a pretty much hands off approach and those things we got into, we only looked at short term, so it's making those problems that much harder to solve.

Seemingly, at this time, I'm the only guy on the planet who liked Al Gore as opposed to "was holding his nose and voting for him" but would a guy known for being a techno-nerd ("I invented the internet" false meme and all) and an environmentalist really have been that bad in 2000 to shape the coming decade?

SI