The FED ruined young peoples ability to afford a home. This will have ripple effects across the next generation. Much harder to start a family, and if you do, you have a long road of hard work and stringent saving.
They claimed they were helping the middle and lower classes with all of that money printing, but what they really did is send a 600$ check and then push those classes further into wage slavery. We are watching the looting of the american citizen in real time, communism/collectivism is once again the wolf in sheeps clothing.
There is no free lunch.
Last thing, theres an equation in finance, I forget it, but roughly:
Cost to borrow money (for an institutional investor) and buy a home with that money, is generating a positive return. As long as that is true, they will continue purchasing homes at a rapid rate. This is a monetary issue, money should not be available to buy homes like this. This is incompetence and negligence from the financial elite governing our nation.
Wealth inequality did this. It would have happened with or without the fed. As long as r > g the problem will only get worse.
If the US returned to a 1950s style tax system or enacted very high wealth taxes this problem could be avoided, but the forces arrayed against you for proposing such reforms would mean political suicide for anyone who does it.
Which makes me think that the problem will get worse until some sort of structural break occurs (at which point, as with 2008, it'll probably get worse at an accelerated rate with a cure worse than the disease).
No. Just like the student loan crisis, when you make borrowing money really easy it drives prices up. Home prices vary inversely with interest rates. Student tuition well that's even worse because the risk to the bank is zero (because the government is backing those loans).
Unfortunately some people think they can spend their way out of problems without making worse problems - I'm looking at congress here.
As they say, when you're in a hole the first thing you need to do is STOP DIGGING. For personal finance this involves cutting up credit cards so you can't go further into debt. For the loans they need to stop talking about the government paying them off (or some of them) and STOP guaranteeing them - then we can talk about the people who are already fucked. For everything else we need the Fed to increase interest rates to a good 3 percent or so. Yeah that will tank the economy short term, but I say so what it's already going to crash lets get through the pain and straighten things out.
>No. Just like the student loan crisis, when you make borrowing money really easy it drives prices up.
Of course it does. However, the net result of lowering interest rates is just that the middle class pays through the nose for assets (housing) instead of for money (debt service).
The parasite sucks the same money from a different location.
Wealth inequality with high interest rates and with low interest rates are two sides of a very similar coin.
> No. Just like the student loan crisis, when you make borrowing money really easy it drives prices up. Home prices vary inversely with interest rates. Student tuition well that's even worse because the risk to the bank is zero (because the government is backing those loans).
This is unrelated to housing, but you have the order backwards. Prices went up, and students took out loans to pay them. The root cause of the increases in higher ed tuition is dis-investment in higher education by state legislatures, not increases in expenditures by colleges. Given that most colleges are state-run or non-profits, they can't just increase prices and dump the proceeds into profits; they have to spend the money they bring in, and I have yet to see any evidence that universities are spending 100% more (or any large number that scales with the recent increases in tuition) on a real per-full-time-student-equivalent basis.
>> Given that most colleges are state-run or non-profits, they can't just increase prices and dump the proceeds into profits
The school I went to in the 90's has been on a massive building spree the last 20 years. Many large new buildings. The number of students has nearly doubled in the same time so it's not a complete waste. They even built a new clock tower with funding from some rich donor.
No wealth inequality is coming from monetary policy. Its too cheap to borrow money and invest with it. Theres an equilibrium. People dont understand, when you make the interest rate on money so low, people can borrow billions and throw it into new assets, running the cost up on those assets. Thats whats happening with housing, cheap money is buying housing and generating a return
Had monetary policy not made borrowing cheap the wealthy would be lending everybody cash at high interest rates instead of buying up and renting out houses none of us can afford.
The net effect would be the same. It doesnt restructure everybody's relationship to capital it just restructures the form in which capital gets hoarded and deployed.
IANAE but this doesn't track, the amount of money people are willing to borrow at a high interest rate is less than what they are willing to borrow at a low interest rate.
A high interest rate with high wealth inequality just means that the wealthy suck wealth from the middle classes by lending out money instead of renting out property.
Either way you're still getting screwed it's just the delivery method that changes.
My parents were similarly middle class. They bought an enormous asset on credit and spent ~4x its purchase value on interest payments. This was pretty normal back when interest rates were high.
Had monetary policy not made borrowing cheap, the wealthy would have lost wealth too. To the point where economic activity would stop completely and we'd be in a great depression.
Monetary policy was necessary. Only lower interest rates for the poor, not for the wealthy or for institutions with assets.
I'm sorry it's simply not what's happening in housing. For a place that prides itself on logic and deductive reasoning, there's a whole ton of tinfoil hat economics around here.
Let's introduce some facts.
1. The inflation-adjusted cost in $/square-foot of a house in the United States remains unchanged from the 1970s according to BLS data. Wages kept pace with inflation (but not productivity). Okay, so why are houses more expensive then? [1]
2. New homes have on average twice the square footage that they did in the 1970s and this is particularly felt outside of urban areas. This is due to zoning rules, setback rules, minimum size rules, etc.
3. Since the 1970s, major metros have significantly restricted new development. San Francisco built less than half the homes needed to sustain the increase in demand over the same period. [3] This is managed through punitive zoning rules and obstinate city councils.
Houses in places people want to be became way more expensive because supply was not allowed to grow to meet demand. Houses outside of these urban areas are now twice as big. Housing is expensive because Americans believe housing should be an investment first - and the goal of an investment is to become less affordable over time.
You cannot have something be both a good investment and affordable. You must pick a lane.
We know it's not what's happening in housing because Japan has basically the same monetary policy, and the same low interest rates - and has tripled their M2 money supply since 1990. But their CPI and their cost of housing remain dead-ass flat for thirty years. Because they have federal zoning rules that allow supply to meet demand. Look at this graph. [2]
Your cause is noble but you're pointed in the wrong direction, Quixote.
> We are watching the looting of the american citizen in real time, communism/collectivism is once again the wolf in sheeps clothing.
We in this case is not the Fed (properly capitalized this way btw) it's city councils. And that's not communism, if anything it's feudalism.
I'm no better than a tinfoil hat economist, but is the house investment thesis really true? As a homeowner I'll just say in my experience owning a house is very expensive. Renovations, improvements, maintenance, etc.. cost a lot on top of interest, taxes, and insurance.
It's very true if you are lucky (or smart, depending on who you ask) with the location it can be an incredible investment. But there are many neighborhoods where houses barely increase or even decrease in value as well (relative to inflation).
If you compare it to the S&P 500 over the past 2 decades as well it probably fares far worse.
On average it tracks inflation, in metros it far outpaces it due to artificial supply constraints. Because you only make a 20% downpayment on the property, youre actually making a 5X leveraged bet on real estate at the outset. The S&P goes up what 7% geometrically on an annualized basis but due to the leverage inherent in your mortgage, your house only has to appreciate (at the start) 1.4% to achieve the same return on your equity.
Like all leveraged bets, if it doesn't beat inflation you get destroyed by interest. If we have a crisis like 2008 the leverage works against you.
I understand in certain markets if one is diligent they can be quite profitable as a real estate investor. That is not what I am talking about - I mean the median U.S. home. That's not quite as strong of a case for investment. I'd suggest most buy a home for lifestyle first, and maybe at best a forced savings account second.
But huge congrats to those living in areas which have seen incredible growth! Just understand it's not the norm.
Now what happened this past year is rather peculiar and it's going to be interesting to see how that unfolds.
> Like all leveraged bets, if it doesn't beat inflation you get destroyed by interest. If we have a crisis like 2008 the leverage works against you.
This isn't actually relevant because mortgage interest, minus tax credits, is well below inflation. The base case on a 30 year fixed is that you end up ahead just by having the loan.
> That is not what I am talking about - I mean the median U.S. home. That's not quite as strong of a case for investment. I'd suggest most buy a home for lifestyle first, and maybe at best a forced savings account second.
I'm not sure there is a "median US home" because it's super multi-modal. There's an urban homes, suburban homes and exurban/rural homes. Each will have a different risk/reward profile.
> Now what happened this past year is rather peculiar and it's going to be interesting to see how that unfolds.
Indeed.
By the way, all this is to say, I also do not think that buying a home a guaranteed win by any stretch. You have maintenance/upkeep costs, insurance costs, potentially HOA dues. You lose a lot of flexibility. And potentially most importantly, you lose out on the opportunity cost associated with your down payment. Plus, you have a lot more risk if the market moves against you. Returns are never guaranteed even if you're in a historically appreciating market.
There's some great calculators that cover all this to tell you if you should rent or own - and in my early 20s, the calculator rightly said I should not own, even though I was in an appreciating area. [1]
My house has more than doubled in value over the past 8 years. If you consider a 20% downpayment, it's nearly a 1000% return on the non-borrowed part of the investment, on something I needed to live in anyway. I can't say I'm unhappy about this, and yet it's also totally insane. And I agree with the GP, this is all thanks to city councils blocking market dynamics.
I think in this situation, comparing housing to stocks isn't quite apples-to-apples. One of the appeals of owning a house is the money you no longer spend on rent.
USA M2 graph is on pace to double in 5 years, that's quite a bit different than the 30 year comparison you make with Japan. Real estate happens on the margins, very few people are selling homes as a percent of homes owned. When I look at Japan's chart there are effectively zero inflection points after 1990.
There's no reason to think that, actually. Certainly not to think that it's responsible. You can pick from any of a large set of developed countries - Canada, the UK, much of Europe - they all had different monetary policies but punitive zoning rules and saw the same effects on housing prices.
The ones that stand out as having the most liberal zoning rules see the lowest increases in housing prices.
You seem to have identified a case where there is an obvious effect, but that shouldn't then be used to dismiss the obvious potential for other effects. Anyway that's besides the main thrust of my response, that is, M2 of USA in 2020-2022 is nothing like the 30 year history of Japans M2.
Do you have some evidence to support that causal relationship? Wealth inequality has been growing since long before current monetary policy in ~2008/2009. And I don't know that low interest rates generally create inequality - everyone borrows, not just wealthy people.
> People dont understand, when you make the interest rate on money so low, people can borrow billions and throw it into new assets, running the cost up on those assets.
People understand that very well: it's the fundamental reason for lowering interest rates, to encourage economic activity. Sometimes you need more economic activity, sometimes you need less.
Current monetary policy is literally a massive transfer of purchasing power from currency holders (poor and middle-class people who keep their savings in cash or low-interest bank accounts) to the first people to spend the money, which is the people and institutions working in the financial system. If I counterfeit a billion dollars and go out and spend it all, I've got more stuff and everyone else is a little bit poorer. If the central bank prints a bunch of money and lends it to its buddies in the finance industry for near-zero interest rates, they get more stuff and everyone else gets a little poorer.
Now this argument wouldn't apply if it was possible for the average person to borrow money directly from the central bank at the same near-zero interest rate the banks pay, but that isn't the case.
I believe there’s a name for what you’re describing: the Cantillon Effect.
> An 18th century French banker and philosopher named Richard Cantillon noticed an early version of this phenomenon in a book he wrote called ‘An Essay on Economic Theory.’ His basic theory was that who benefits when the state prints a bunch of money is based on the institutional setup of that state. In the 18th century, this meant that the closer you were to the king and the wealthy, the more you benefitted, and the further away you were, the more you were harmed. Money, in other words, is not neutral. This general observation, that money printing has distributional consequences that operate through the price system, is known as the “Cantillon Effect.” [1]
> Now this argument wouldn't apply if it was possible for the average person to borrow money directly from the central bank at the same near-zero interest rate the banks pay, but that isn't the case.
Any time you take out a mortgage (at well below inflation by the way) you are obtaining new money "from the printer." The same is true any time you take out a loan.
This whole cantillon effect business is trotted out and flogged each time we mention economics on here but as far as I can tell, nobody has ever even attempted to quantify the impact of the cantillon effect.
> If I counterfeit a billion dollars and go out and spend it all, I've got more stuff and everyone else is a little bit poorer. If the central bank prints a bunch of money and lends it to its buddies in the finance industry for near-zero interest rates, they get more stuff and everyone else gets a little poorer.
This isn't actually true. Japan tripled its M2 money supply since 1990 but both CPI and housing CPI remain dead-ass flat. This model is way too simplistic. Which is why it was thrown out alongside the rest of Austrian economics.
The poor and middle class aren't currency holders, they are debtors. Their savings are dollar denominated, but so are their debts, and their debts exceed savings.
This is an incredibly basic, fundamental fact, and your omission of it in your analysis is telling.
The poor and middle class cannot take out as large a debt at as low a rate as those closer to the money supply.
Debt at 3% against an asset will on average net 4% return just due to 7% inflation
So massively leveraging against a home is extremely beneficial as it is the closest the poor and middle class can get to taking advantage of our monetary system.
So, it's not about the poor being debtors or holding currency, but that their debt is at higher rates, in smaller amounts, and typically acquired for everyday needs instead of assets.
That is true regardless of where interest rates are, or whether inflation is happening, and thus, irrelevant to the initial nonsense claim of 'the poor and middle class are hurt by inflation because they mostly hold cash (never mind their debts...)'.
I mean, I'm willing to entertain the possibility that they are, but despite that claim's popularity in these threads, that claim can't be the reason for it.
> That is true regardless of where interest rates are, or whether inflation is happening
If there was no inflation, there would be no inherent profit from taking out a large loan.
From my comment above the math is 7% inflation minus 3% interest rate equals 4% profit just from taking the loan.
That's the problem.
It's not just that the poor can't start a business or buy an asset, it's that debt itself is incentivized, and those that are wealthy get the best access to that debt.
Our current monetary system then exacerbates that as the lower the interest rate, the higher the inflation.
Thus the looser the monetary policy, the greater the incentive to take out debt, the less the poor and middle class have access to debt.
Further, this all compounds into inflated asset prices for basic needs like housing.
> If there was no inflation, there would be no inherent profit from taking out a large loan.
Only if you are a spherical cow that intends to live forever.
Most people value money now more than money later. Money now lets you buy things you need, today. If you expect your earning power to increase (which happens for most people without inflation to one respect or another), but you need the asset today (a car to get to work, a house to live in), you'd still want to borrow money.
> It's not just that the poor can't start a business or buy an asset, it's that debt itself is incentivized, and those that are wealthy get the best access to that debt.
Yes, that's one major driving factor for inequality.
> Our current monetary system then exacerbates that as the lower the interest rate, the higher the inflation.
Okay, that's a far more persuasive argument than 'Bob's $500 savings account lost 2% of its value this year.' And it does hold true for asset inflation, as asset prices take a few years to normalize to, say, a P/E ~inversely proportional to the prime interest rate.
But once they do normalize, why do you expect asset price inflation to continue?
For sure, but you'd be met with market rates that tame your desire for money now. Buying a car on credit is a lot less tempting at 20% interest than 4%. Right now used car prices are going up and it's easy to get low interest financing.
Used cars are not supposed to go up in value. It's madness.
> But once they do normalize, why do you expect asset price inflation to continue?
I expect asset prices to continue to inflate as long as we continue with our current monetary policies.
I expect us to continue with our current monetary polices because the US would be unable to service its debts in about decade otherwise.
That's due to a demand spike and supply shortage. Blame bitcoin and video games and people not wanting to take public transit in the middle of a global pandemic. It's not because of monetary policy, or because Scrooge McDuck borrowed a trillion dollars for free to buy up a bunch of used cars, or because GOOGL doubled in value in two years.
> I expect asset prices to continue to inflate as long as we continue with our current monetary policies.
Why? If it didn't make sense to invest money at a P/E ratio of X at a Y%-for-you interest rate, why would you invest money at a P/E ratio worse than ~2X, at a Y/2%-for-you interest rate?
I get that the process of going from X to ~2X is painful, but why wouldn't it stop there?
As I frequently try to point out, wealth inequality seems to only meaningfully decrease during market corrections, which the Fed is determined to prevent at all costs, despite the side effect of increasing wealth inequality (which could be a feature rather than a bug) [0].
The more the Fed distorts normal market signals, like interest rates, the less efficiently capital is allocated, and so the wealth distribution morphs from one that roughly represents human skill at allocating capital to an extremely top-heavy skewed chart that rewards incumbents.
>The US didn't have a "wealth tax" in the 1950s, it had a very high marginal income tax rate which applied to a tiny slice of earners.
The net effect was the same. Putting an effective cap on income throttles wealth inequality growth.
>A wealth tax would be hard / impossible to implement
It absolutely would be. Any political effort to do so would be sabotaged every step of the way by institutions dedicated to protecting enormous agglomerations of private wealth.
Moreover, closer it got to the finish line the more willing American oligarchs would be to flirt with political violence and ally with and organize the underlying, disorganized currents of fascism in order to keep their wealth.
This is a path we've been along before, almost 100 years ago.
However, the US middle class was more willing to organize and fight to protect its interests back then. There were actual communists among them and the US government was legitimately afraid enough to kowtow to their demands every so often. Not any more.
You’re talking about political will/ability to implement.
It’s also operationally almost impossible to implement, as what counts as ‘wealth’ is highly ambiguous, and in most cases valuing it even in the best situation is nearly impossible. In a taxation situation even more so because it isn’t changing control between disinterested parties, so there is no one who has the time to really look at and form their own opinion and holding anyone accountable to it on a short timeframe.
A lot of the trump real estate scandals are from him (supposedly) manipulating real estate appraisals for favorable loan and tax purposes, and that is for something with relatively easy/straightforward/understood valuation and an army of appraisers.
Private equity? Partnerships in ongoing concerns? Controlling vs non-controlling interests in various things? Trusts?
There are so many valid ways to look at, account for, and structure these - and they all have wildly different values, levers to change those values, and short or long term valuations and cash flows. If you own a controlling interest in a large business, but don’t sell anything and don’t have income from it (you reinvest it in the business), that may or may not be a lot of wealth. If the business tanks without it, was the business worth anything? Or was it worth something and then it was another factor that killed it? If the business is producing a lot of cash and the owner pulls it out, that is clear measurable income and easy to quantity.
To the point if you threw 5 independent evaluators at any of them you’re probably going to get 7 different actual numbers, all meaningfully different, and all of which could be argued are legitimate.
Your Trump example shows how possible a wealth tax is. Sometimes you need to show you have money and the wealth tax can be hooked into those situations (among others).
Not sure how since these specific transactions are still not cleared up, are already covered by existing laws quite thoroughly, and they’re by far the easiest types of things to tax in the ‘wealth but not income’ space, as real estate is pretty hard to hide and he was literally putting his name on it in giant letters.
If the wealth tax goes after real estate, folks just won’t put their name on it directly and voila, good luck.
This is also despite those alleged shenanigans being hamhanded and pretty obviously done and by probably the most well know and controversial ‘wealthy person’ in current society, enforcement still not only didn’t work, it still hasn’t actually been enforced. And is surrounded by massive controversy and legal BS and will probably drag on for another decade.
It’s like pointing to OJ Simpson’s murder trial as an example of swift and non-controversial justice that supports your legal policy?
> A wealth tax would be hard / impossible to implement.
The "impossible to do" is a common excuse for people just not wanting to do something.
The common excuse is that the ultra wealthy aren't actually cash wealthy. They have all their wealth in investments that are rarely if ever actually realized. People throw their hands up in the air and say we can't tax unrealized wealth. But how do wealthy people get cash? They borrow millions, hundreds of millions, or even billions against their unrealized wealth. So limit or tax their borrowing of this money such that it forces the realization of wealth, which would be taxed, or they are taxed on what they borrow, respectively.
The "hard / impossible" part is that the taxing unrealized gains requires a policy around recognition of unrealized losses, and a policy in either direction has empirical and well-understood adverse consequences. Governments generally avoid tax policies that unavoidably have nasty and unmanageable adverse consequences that exceed the value of the revenue generated.
If you do not recognize unrealized losses, it strongly biases investment toward low-risk rent-seeking investments because the expected return is much higher than long-term high-risk investments under this tax regime. Startups, biotech, etc become unattractive as a place to put money because the financials don't make sense relative to rent-seeking and investment is not a charity. Paying taxes on non-liquid assets is a massive risk for average people, greatly reducing the practical investment opportunities available to them.
If you do properly recognize unrealized losses, it creates a scalable new mechanism for tax avoidance that would reduce tax revenues. Not only are valuations strictly notional and effectively fictional for many assets, but intangibles are often entangled in asset values that can't be accounted for in a sane way (e.g. the act of transferring an asset can greatly reduce its value ipso facto). These intrinsic logical inconsistencies allow almost any tax story to be constructed using assets.
While no government wants to deal with the consequences of broadly recognizing unrealized losses, they also don't want to incentivize all investment to go into low-risk rent-seeking endeavors like real estate instead of long-term high-risk investments in technology and innovation. It is a damned if you do, damned if you don't, so governments generally opt out of this type of tax altogether.
But you're still discussing unrealized gains/losses, when I'm suggesting to ignore them. If someone is borrowing millions, hundreds of millions, or even billions against untaxed collateral, then they should be taxed on what they borrow, limited to how much they can borrow, and/or taxed more on what they buy. It's their and the bank's problem if they're borrowing against unrealized gains or losses.
The wealth inequality problem in the U.S. is INSANE. If the U.S. had a population of just 10,000,000, literally 12 people would have as much wealth as the bottom 60%, i.e., 6,000,000 people, combined. And yet, here we are talking about how "impossible" it is to simply tax wealthy people.
These systems were made by humans. They can be fixed. Wealth inequality and taxation of the wealthy are not laws of nature that can't be changed.
Finally someone who gets it. It isn't impossible to do but you have to take into accoutn that it isn't realized. Imo the best way to do that is actually aggressive consumption taxes on the things that the wealthy primarily consume (vacation properties, yachts, private schools, etc). Taxing loans directly is difficult to do because I imagine you don't want to be taxing student loans or mortgages. I guess you could tax all collateralized loans above a certain collateral value but that can be gamed. So personally I prefer consumption taxes.
> I guess you could tax all collateralized loans above a certain collateral value but that can be gamed. So personally I prefer consumption taxes.
Interesting idea. We sort of already do this, we apply property taxes based on the value of the property as pegged at purchase (re-assessed over time). We could exempt loans on collateral already subject to property (or other value-based) taxes, but could then put a wealth tax on any other asset used as collateral for a loan at the collateral value agreed on by the lender.
Wealthy person: whoops, my wealth ended up in a bank account in Vanuatu. Unfortunately it's held by a foreign corporation there that occasionally donates to my trust. I don't have control of it, it's in control of a lawyer who has strict contractual terms by which he can only transfer into a few trusts. Really is a shame!
> A wealth tax would be hard / impossible to implement.
What do you think property taxes are?
I agree it would be really hard to tax all forms of wealth. But I'm fine with rich people hiding their wealth in artwork or stamps or whatever to save it from taxation. Keeps the money out of useful assets like stocks and houses.
Property taxes are not wealth taxes in most locales. If it was then the tax on your house would only apply to the difference between your asset value and mortgage principal (liability). I can't think of any locale that lets you deduct your mortgage principal from your property tax bill.
I understand what you're saying. But I don't understand why the tax needs to be based on value minus mortgage balance to be considered a wealth tax. You get use of the entire asset even if you still owe the bank money. And the tax goes up (or down) with the assessed value of the property.
One massive difference: Property taxes are state and local taxes, which are not barred by the Constitution in the way that federal property/wealth taxes very likely are (absent an amendment, of course).
(There is debate on this point; I personally find the side arguing that such a tax would not be barred as needing to use fairly tortured lines of reasoning to arrive at their conclusion.) If you can’t pass a wealth tax federally, then whatever state wanted to compete on having a low/zero wealth tax would find plenty of wealthy takers as residents.
"2. A wealth tax would be hard / impossible to implement."
This is the standard excuse for stopping any thoughts of changes in the US. Let's not even think about improvements because they are impossible anyway. A sane health care system is impossible, doing something about rising wealth inequality isn't possible, reducing opioid deaths is impossible. The only things that seem possible are things to move even more money into the hands of wealthy people. I still remember how in 2008 Congress quickly was able to produce 750 billion when the banks and the banker's money was threatened.
The US had a whole host of laws that made pulling out cash from businesses very expensive, but investing in them very easy.
So you had a strong incentive to increase salaries, hire more workers, invest in more machinery, diversify, etc. simply because getting more cash out of a business wasn't worth it
"So you had a strong incentive to increase salaries, hire more workers, invest in more machinery, diversify, etc. simply because getting more cash out of a business wasn't worth it"
Unfortunately they focused on increasing executive salaries and forgot about the rest.
"If the US returned to a 1950s style tax system or enacted very high wealth taxes this problem could be avoided, but the forces arrayed against you for proposing such reforms would mean political suicide for anyone who does it.
"
It's also a culture thing. Companies used to accept some level of social responsibility outside of making money. The shareholder value over everything else since the 80s broke social contracts and made it ok for wealthy people to only look after themselves.
I think we have to get back to a place where it's shameful for companies to lay off people while making record profits and paying bonuses to execs.
How does a wealth tax help? I make 400k a year and can’t afford to buy anything. Even taking half of all the richest peoples wealth in the US does nothing to help. What would the government do? They spend that in a year. Wealth tax is a brain dead argument and I haven’t seen anyone explain how it would help the average person in anyway.
Wealth inequality isn't the problem IMO. Regulation, housing codes, zoning, and taxes are why housing is expensive. Let me build a yurt as primary residence on a 30x30ft dirt plot if I like; it would suit my family fine and get the job of housing done for under $50k yet in most cities this would be near impossible.
Even in city, land isn't that expensive outside the coasts. It's building up to code, while being restricted into what your zoning locks in, while maintaining all the permits and paying year after year of property tax.
The book Strong Towns covers this extensively. The modern standard of doing all new development at the peak standards basically ensures that neighborhoods can only ever go downhill, and leads to all kinds of other problems. It's a good read.
I live in a former communist country where taxes are still higher than 1950s US were, and our housing system is as fucked as yours.
There are two problems... first is, that "back then" you could build (almost) whatever, wherever, and people built stuff, now with NIMBY-ism and regulations, you can't anymore.
The second problem (the larger one) is, that what was once a thing you bought, because you needed one, and sold, because you moved somewhere else, is now an investment... noone invests in cars, in pasta, nor in pretty much anything that degrades with time.... somehow the housing market got so bubbled up, that it's worth it to buy a house, and instead of prices going down as it ages, the prices actually go up. Limiting investments or limiting number of houses a person can own, would solve a lot of those problems.
Of if consumers bought 1950 style houses there would be no problem, since they're incredibly cheap.
Massive increases in the stuff people want in a house over the past half century have driven prices more than anything. Triple or quadruple the area, expect triple or quadruple the inflation adjusted cost. And that is the majority of the cost increase.
r cannot possibly be greater than g over the long term.
It’ll revert to the mean. Even if it’s greater than g due to an exceptional investor like Warren Buffet, eventually his heirs will take over, and they are likely not as good as he is.
It is profoundly hard and unusual to keep a family rich for many generations.
The reversion to mean will probably happen as a result of a violent structural break, though, not as a gradual reversal.
This means economic or political crisis. And, the same people who were made so fantastically rich from r > g will likely be the ones deciding what to do about it.
It's not like governments will wake up from their stupor and implement a basic income. Whatever happens (fascism, war, financial crisis), it'll likely make us wish for the good old days of right here and now.
I'm almost more afraid of the structural break than I am the inexorable rise of wealth inequality.
Piketty’s empirical research has been thoroughly refuted and found to have major gaps that it’s not even funny anymore. This is why he hasn’t won the Nobel, for research that if actually accurate would have otherwise been a shoe in for the prize.
>Piketty’s empirical research has been thoroughly refuted
Your link is somebody arguing that perhaps the data doesnt look so bad if you squint at it in the right light.
It's not a refutation. it's not even a rebuttal. It's basically disapproving FUD - "oh well if you pretend the 2008 housing bubble never happened things dont look quite so bad...". Um, ok?
There's even a little plea at the end for the reader to "understand that this is all very complicated and hard to understand". How scientific.
It's absolutely a rebuttal. If you're making a statistical/empirical claim, especially one that goes against orthodox economic theory, than robustness to the underlying assumptions is really important.
Subsequently empirical research has found that Piketty's conclusions are extremely sensitive to the way he slices the historical data and the modeling parameters. At best that's evidence of an incompetent econometrician who doesn't understand the tools enough to perform the required robustness checks. At worse, it's evidence of data snooping to shoehorn the the results into a pre-determined hypothesis.
But you don't have to take my word for it. The IMF itself performed an exhaustive robustness check and found that Piketty's conclusions simply don't hold up:
r is not intrinsically a result of g, even if they are "supposed" to move in lockstep. The soviet union had g without corresponding r. A high g just makes a high r easier to stomach.
Inequality doesnt really have an inbuilt limit as such and we are still a way off people owning entire countries, which wouldnt be without historical precedent.
Wealth inequality did this all right, but that wealth didn't come from wages and you can't touch it with income taxes. The unconscionably wealthy in today's world are ordinary, sympathetic, everyday "middle class" families who own the land in productive cities.
If it became impossible to convert it into income without paying 98% tax for sure its price would fall eventually.
However, it probably wouldnt be the most effective way of extracting that wealth. A lot of families would try to restructure their holdings to convert income into unrealized capital gains and try to wait a few decades until the tax could be brought down again.
The wealth is the ability to live in a desirable place, that is structured so not many others can live there. You could mess with the accounting or the liquidity, but it is still wealth that few people have and most people don't. In fact most such real estate multimillionaires are not interested in cashing out. Only in continuing to live there, and making sure that not too many other people start to live there. Liquidity is worth something so it would reduce the price somewhat, but I don't think it's central.
> And this wealth inequality is mostly caused by people making dumb choices.
For what it's worth, people have studied this a lot. While it's true that bad choices can get you in financial trouble, it doesn't seem to be true that most people who are are financial difficultly got there due to poor choices.
It contributes, but on the whole a) it's way more complicated than that and (b) the general narrative around this stuff has very poor SNR.
In general "I did [path dependent thing] and so did my friends, so anyone should be able to" isn't a very good argument for nearly anything. It works as a solid existence proof, but has little to no value for anything else - too much selection bias and path dependence".
Note that previous works regardless of the negative/positive aspects of what you are claiming. Literally none of us have a good idea of how things work in general based only on observation of our own lives and those we know. To get anywhere real on this you have to go vastly broader (i.e. study real data, but first fight the uphill battle to figure out if you can get any that isn't fatally compromised). It's hard work.
Another point is that in general, unless you know someone incredibly well and intimately, your observations of them are by nature pretty weak. Drawing strong conclusions from any of it a dicey proposition.
>And this wealth inequality is mostly caused by people making dumb choices.
It was caused by economic parasites, not choices.
I know a fair number of people who inherited property and do almost no productive work.
They live lavish lifestyles and live almost entirely off the hard work of others while their wealth - the result of the hard work of others - both grows and sustains them.
I know a fair few others who are worth to society far in excess of what they are paid and have very little left of that once bills from monopolies, rent and taxes are accounted for.
Been going pretty well for about 1000 years now. ( how many revolutions have there been in the last 1000 years, and did wealthy people stop being wealthy? )
There are only about ~180,000 people with gender studies degrees in the US. I don’t think that’s responsible for an entire generation’s struggles. Furthermore, the average wage for somebody with such a degree is ~83K, which is pretty respectable.
> I live in a very nice neighborhood, million dollar houses. My neighbors are: a plumber, an accountant, a few programmers, an investor, a retired NASA guy. (...) All of my friends in their 40's are making at least $200K. (...) I literally don't see any poor construction workers, plumbers, electricians, nail or hair stylists.
This is one of the stupidest comments I've ever read in my many years here. You're the walking epitome of privilege and survivorship bias.
Of course you don't see any poor workers, you live among rich people. You have literally no knowledge on why others may struggle. Do you think those 99% of people worse off than you all are lazy and dumb? Really?
I always wonder if people live in such bubbles they really don't know or can't even perceive the struggles others deal with. To me it tends to feel disingenious most of the time. When I encounter these sort of retorts I like to sit down and force the person to consider the situation an average minimum wage employee is likely in or even someone doing a bit above minimum wage, say $20/hr, do a little basic arithmetic and budgeting. They usually end up "well that sounds rough, glad I don't have to deal with that" and brush it off where the creep back in their cushy little bubble.
I grew up poor and have plenty of money now so maybe I just have a more unique perspective that's difficult to have without living it. But I often find so many really just want to tow the narrative because they understand how much inequality really works and so long as they're doing better than most, the can continue to do fairly well as long as no one rocks the boat. They like hiring that person to do that thing for virtually nothing. They like all the services they get for marginal costs because the people who work there are being exploited. As long as it's not in their face as as long as they can br the lords and vassels of today, they get to enjoy enough of the spoils of human exploitation to ignore all the terrible ways we treat each other through financial abstractions.
So much success or lack there of has little to nothing to do with work ethic, value creation, or contribution to society and has so much more to do with gaming the current systems.
Human nature - it is a b*tch. Let's face it - as you say, most people are looking out for themselves; they rarely, if ever, think about the cashier or stock clerk who's working 3 jobs and still not making it. And it's not a "screw everyone else" sort of attitude, it's more of not even thinking about it because they're absorbed with their own lives.
Only when folks are faced with how such a reality affects them, such as when a company lays them off and they have little marketable skills after toiling away in a throwaway job for 10 years, do they actually give any real consideration to how others live - because they now are facing the same sort of conditions and giant concrete roadblocks.
You're acting as if getting that blue collar training is something people are rejecting.
The people who are truly broke don't have the option of choosing between a history degree and plumber training. They grow up in broken homes with parents working 3 part time jobs because no one will give them benefits. The benefit cliffs prevent their parents from jumping up in social status.
"The only people I see are struggling are the ones who have made dumb choices" is naive at best, dismissive, callous, and uncaring at worst.
> And this wealth inequality is mostly caused by people making dumb choices. Like getting a college degree that doesn't give you any marketable skills.
People with college degrees aren't the ones losing the wealth battle. Rather than looking around your circumstances, we should look at data [1]:
1) how many people with the unmarketable degrees work in completely different fields, and would be much better off studying in that field from the beginning
2) how much more money certain majors make. Most doctors have a net worth over a million. Most art majors - not even close.
If we want to improve the wealth inequality, we should start pushing young people to what society actually demands, not the "you can be whatever you want" nonsense.
> how many people with the unmarketable degrees work in completely different fields, and would be much better off studying in that field from the beginning
There is no majors for people who get into high-paying jobs like "Sales" or "Real Estate Broker". I also know the most successful people in those industries tend to have college degrees. People with those interests can use their college experience to make themselves more well-rounded humans. They can build their networks and improve future earning potential. They can focus on other disciplines (writing, marketing, pre-law, etc.) to make them more successful in their chosen career.
> how much more money certain majors make.
It sounds like you were surprised when you saw your initial example of a "dumb choice" major, Gender Studies, had an average wage over $80k; which is more than double the national median. Your second example International Relations, has an average wage of $97k [2].
Maybe it is your frame of reference that needs change rather than other people's major choices.
This is likely time biased. Future generations will not be so skewed towards those with degrees, in fact, it may revert slightly, as crushing student debt isn't rewarded for holders of worthless degrees. This should be a self correcting problem in the long term. Eventually society decides to punish those who aren't producing things it wants.
I feel like the logic of this solution doesn't exactly lead to a rosy conclusion.
If everyone is sorted into a narrow range of Professional and STEM degrees, wouldn't this just lead to lowering of wages for degree holders in those fields to something marginally above unskilled labor, while giving the business class that have taken ahold of most institutions a greater excuse to keep more of the profit for themselves?
> wealth inequality is mostly caused by people making dumb choices. Like getting a college degree that doesn't give you any marketable skills.
What a miss. Teenagers being handed checks for 100K+ to study topics that wont get them a job is the fault of the... teenager? Maybe we should focus on outcomes from colleges instead of enrollments. Maybe high schooler guidance considers should actually help students discover career paths? Maybe financial institution shouldnt give teenagers unforgivable loans they will never be able to pay back? Maybe as a society we shouldnt set the standard that one has to and needs to go to college by and large to be successful?
There are a whole slew of things that cause wealth inequality but blaming it on someone taking a check to study a subject that doesnt translate to a real world job is so low on the list of concerns it shouldnt even be a part of the conversation.
> Teenagers being handed checks for 100K+ to study topics that wont get them a job is the fault of the... teenager?
Who else is responsible for their choice? They make the choice, nobody else. That 100K check doesn't force them to choose a particular degree.
I wish we had mandatory annual counseling for students that would inform them of the market demands. But again, at 18 you can just Google that info in 30 seconds.
Well we wont let those same people buy booze or rent a car so we clearly don't think they are responsible enough to make those big decisions.
If we are already deciding what people under the age of 21 can do we should probably add giving someone a unforgivable loan that could put them in debt for life to that list.
Also I'd argue that googling for 30 seconds to determine your future career is just as stupid as taking a check and figuring it out as you go.
I’ve made great choices my entire life and have a 200k salary in my twenties. I’ve been outbid on the last four houses I put offers on, including one that sold for 1.4 million, wait for it, in cash.
It’s nice your life has been so easy. Really. But please don’t use your rose-tinted glasses to accuse everyone else of being “dumb” - aside from how pretentious it comes off, it’s a wholly incorrect view. Does it factor in covid-related job loss? Inflation? Anything other than your dated experiences that no longer apply?
The icing on ththe cake is that you responded to someone else calling them “dishonest.”
> And this wealth inequality is mostly caused by people making dumb choices.
Sure, but where does that get us? What can we do about it? In the long run education should, one hopes, help. But given that wealth inequality is likely to be a feature of all but the most smurfy of societies, how do we want to manage it in ours?
(According to legend, the creator of the Smurfs was a staunch Communist and he designed the Smurfs to be a model Communist society. Supposedly the Smurfs are a kind of revenge for being denied entry to some nation or other for his political beliefs. I swear I 'm not making this up. The smurfs are ruled by a red father, they each are defined by their profession or main talent, they "give according to their ability and receive according to their need" without any money or economic system, and the guy who is their nemesis wants to eat them or turn them into gold. Oh and they have no women at first, and then they have one woman and her job is "woman". I don't know if that last part is particularly communist, but it's pretty messed up if you think about it. "Smurfs don't lay eggs! I won't tell you that again!")
We should spend more time informing students of their future prospects. So they have a chance to change the direction of their studies. Or not take a college degree at all and learn some trade skills, which will be in demand until robots take everyone's jobs.
While I agree with you on most of your points, one angle that adjusted my thinking was that the degrees you mentioned are typically the first step in higher level skills like Law, politics, or pre-med.
It is definitely a huge problem if you don't continue your education into higher value areas, but I don't think getting one of those degrees is necessarily a 'dumb choice'
One could argue that the dumb choices are being rewarded. Houses, the ultimate passive asset but what everyone's mom tells them to buy, make a lot of sense to buy when the fed is propping them up.
There are plenty of people with non technical degrees who do well in this world too, propped up by unpopped malinvestment.
lol what a simplistic take. i have a degree in southern studies and i work in tech. i took a lot of sociology classes about gender and race, and it made me a better writer, communicator, researcher, and more compassionate as a teammate.
>The FED ruined young peoples ability to afford a home.
House prices have certainly risen substantially in the last few years [1]. But if the FED is to blame, why has the same thing happened in the UK [2], Germany [3] and Australia [4] ?
Because interest rates went down in those countries as well? We're only just coming off the lowest rates ever in the UK. The Euro hasn't existed for long but record lows there too. Oz as well.
Why hasn't the same thing happened in Japan, which has tripled its money supply since 1990? House prices (and the price of everything else) has remained dead-ass flat. The difference is the have federal zoning rules that allow the supply of houses to meet the demand of houses.
Japan price to income ratio is bad but that speaks more to horrifically low wages.
They've also been more aggressive about taxing real estate investment (they leaned their lesson in the 80s) and their zoning laws aren't captured by local busybodies.
If a growing region is declining, I would expect building to be outpacing growth, or a cultural trend away from wanting to own (reduction in demand for purchasing despite growing population)
It's also worth mentioning that every developed nation has a heavy interest in the value of the dollar, because of trade with the US, petrodollars, etc.
The USD is the world's reserve currency and loose monetary policy since 2008 is likely spilling over into economies across the globe. If you can get an artificially low rate loan in USD you can convert it to your local currency. It doesn't matter so much what your central bank does.
Oh right, you want to have one of those useless internet arguments instead of focusing on the spirit of the discussion. Ok then. Well Investopedia says:
> A reserve currency is a large quantity of currency maintained by central banks and other major financial institutions to prepare for investments, transactions, and international debt obligations, or to influence their domestic exchange rate. A large percentage of commodities, such as gold and oil, are priced in the reserve currency, causing other countries to hold this currency to pay for these goods.
So I don't know, maybe I was focusing on how commodities are priced in the USD. Have a great day!
>Oh right, you want to have one of those useless internet arguments instead of focusing on the spirit of the discussion
When people make stuff up they feel is related, but do not check if it is actually relevant or possible, or even really understand the terms, then double down, it derails the discussion. It's not "in the spirit" of the discussion.
>So I don't know, maybe I was focusing on how commodities are priced in the USD.
Which foreign housing markets price their houses in USD? You replied to a comment about houses in UK, Germany, and Australia, none of which do.
Did you notice not a one of the many reasons a country holds a reserve currency is to make loans for local housing stock be more available? No? Read it again.
Pick a country, like I did the UK. Show the size of their USD holdings relative to their housing stock loans. Tell me again how such absolutely tiny ratios are relevant to the availability of loans. I showed one case where the relative sizes of the numbers makes it absolutely silly to claim their related. But since you made the first claim, and it on face value seems completely nonsense, then you provide some correlation or peer reviewed paper or whatever you think makes availability of loans in the foreign countries the OP mentioned tied to the face that USD is a reserve currency, and not more to simply local or global economic conditions, unrelated to the fact that USD is (but one) of reserve currencies.
I get you're likely Dunning Krueger and know nothing about finance or central banking or how housing markets work. Or you could admit you don't know and didn't know there is a relation or not and you simply threw two terms you knew little about, then when called on it, got upset.
But go ahead, and show me the link you claimed to start this with. Good luck.
The reason is simple: the corrupt nature of the global financial system today, which is based on strictly immoral and parasitic practices such as money lending with interest, money printing, gambling (e.g put and call options), selling debt for debt, shorting (selling what you don't own), etc. It's one big casino folks, and it is rigged to benefit the select few at the top.
The $600 check isn't what caused house prices to go through the roof it was the too-low-for-too-long interest rates. Historically the mean mortgage rate is about 7%. I suspect that we'll see a reversion to mean for rates as the Fed tries to fight inflation. If that inflation turns out to be "sticky" like it was in the 70s rates could overshoot and go well over 7%. If that happens... well, take a look at home sales data from the early 80s. People looking to buy a house at this point should cheer rising rates because it will mean lower prices. Buy at a high rate but lower price, refi when rates fall.
There is also a pretty severe housing shortage in most urban areas. I'm not so sure prices are going to be that sensitive to interest rates, however they could be sensitive to purchasing power. But historically, US housing is so much cheaper to buy than say, any country in Europe, it can sustain quite some rise.
It's all about that monthly cash-flow. If too many buyers are priced out (by either high prices or high interest rates or a combination of both) then we'll see markets stagnate. The housing market in an area can only remain stagnant so long before some sellers become desperate to sell and start lowering prices. Also, with more liberal WFH policies we should be seeing a spreading out as people who want to buy a house seek out places where homes are cheaper/more available.
> If too many buyers are priced out (by either high prices or high interest rates or a combination of both) then we'll see markets stagnate.
Not if there’s a supply shortage. If there is a supply shortage then that necessarily means that some people will be priced out without corresponding downward price movement.
10 people, 5 houses, the market-clearing price is the 5th highest price any of the people are willing to pay. Remove the 5 people on the low end and that’s still the market-clearing price.
The equilibriating force of price increases causing demand to drop causing downward price pressure only keeps prices in equilibrium around the market-clearing price. Supply shortages shift the supply curve and cause the market-clearing price itself to move. The equilibriating force that should address this is that increased prices should incentivize new supply to be created from sources that were previously uneconomical, but the supply shortage exists because of legal restrictions that distort the market.
Housing is fungible. Lower rents decrease demand for purchasing and vice versa. There will of course be a subset of people who will exclusively only buy regardless of price, but in aggregate the principle applies
I'm not convinced by this[1]. It is true, if all municipalities suddenly let anyone build wherever they want, we would see prices fall. But that isn't the cause of the current price surge. The _cause_ is a surge in demand, not a restriction of supply.
If corporate profits didn't outpace inflation, no businesses would ever exist. The only time that's possible is hyperinflation or a business with declining profits which is certainly not what we want.
Also the fed printed tooooons of money besides the $600. The $600 is the only bit that ended up directly in citizen's hands.
It really doesn't help when you see a constant barrage of headlines that read
"Corporation X is raising prices 10% due to inflation."
headline next quarter:
"Corporation X announces 10% profit margin growth despite inflation pressures."
This is happening every day now. Corporate profits are at record highs across the economy. It's hard to take them seriously when they are crying about workers demanding raises and increases in raw materials when they are posting the largest profit margins in history.
Profit is a lagging indicator, you can't set your prices based on what supplies used to cost and expect to stay in business.
My local pizzeria had their best 2 years ever during the pandemic, yet they still raised their prices this year due to labor and supply cost. I can't really fault them for not wanting to lose a bunch of money this year to somehow make up for that.
You hand somebody 1000 dollars, they spend it one time, and where did that money go in the end?
Primarily on corporate balance sheets, paid to investors via dividends, buybacks etc. Of course also used to hire new workers and so on.
The point being handing somebody money in a one time transfer only helps them in the immediate term but the inflationary impacts actually harm them longer term.
I would venture to guess most of the stimulus money ended up in pockets of already wealthy asset holders at the end of the day.
In the end, maybe. As you noted, corporations spend money on employees but also goods and services, so it doesn't all end up in a corporation's warchest account just sitting under a mattress as cash. In the interim however, it went to things like food and gas to survive, among other things. The fact that, due to shutdowns (whatever your opinion of them) that the money was needed by some of the countries' poorest members to not go hungry (and I'm sure some did anyway), but we had no good way of determining exactly who needed that and who didn't.
What it comes down to, is really which inflation numbers you believe, as the numbers really run the gamut as well as their causes if you really dig into the reports and the details. If inflation only looks high due to used cars being wildly expensive these days due to the chip shortage vs inflation causing cheap staple goods to increase in price, then that'll change your conclusion of inflation's effects.
Still, if we want a stimulus to go places other than corporations and CEOs then we need to dramatically rework how the economy works, including food distribution, and de-corporatization and strict limits on CEO pay.
Why pay people 50% more than they made before? Why not just replace lost incomes?
This whole inflationary disaster could have been avoided while still pursuing a compassionate policy response. There was no logical thinking in the level of fiscal handouts done.
Larry Summers did a presentation in Feb 2021 before the ARP was even passed predicting why it would cause inflation, due to the stimulus far exceeding lost wages.
You can find it on YouTube, but he empirically walks through why the magnitude of the package was a bad idea
There were also $6.3 trillion in MBS purchases, as well as other asset purchase programs. One might speculate that taking assets off the hands of financial institutions, gives them quite a bit of freedom to allocate that capital to new assets.
Yes and the investor class are the rich. Profit margins should not be rising in a time of scarcity. It's profiteering and nobody is doing anything about it.
Why wouldn't profit margins be rising in a time of scarcity? Fundamentally, prices are how we choose to allocate scarce resources, and if demand outstrips supply prices have to go up until it doesn't - if the companies don't increase prices, scalpers will gladly take the extra profit instead. Also, there seem to be a bunch of key manufactured products like commodity ICs which are only viable at the current price due to the equipment to produce them having been bought long ago, which means that it's only viable to make the investments needed to increase production if prices and profits go up in a substantial and sustained way.
How are you suggesting we "do something" about it? Lowering margins will not fix scarcity, it may even make it worse, so this seems more like a resentment of "they have more than other people" and thinking that it is wrong, not so much a concern over scarcity. There was a proposal to do something, stop increasing liquidity and raise rates, because these are some primary levers we have available to "do something" about the economy.
Blaming inflation on corporate greed is a tale as old as time. And it's largely debunked economic pseudo science.
Companies and people are greedy all the time, that's the fundamental basis of capitalism. Capitalism is an acceptance of this and regulations to shape around actors working in their own self interest.
Are companies more greedy now than they were in 2019? No
An opt in moralism based economy will never work and has been tried and failed many times.
It's implied. Clearly the comment above is suggesting corporate greed is partly contributing to cost pressures. I countered this thinking with my own set of thinking.
And if my comment is vapid, yours seems a tier below. You've said nothing other than a personal attack.
In the 70s they tried price controls to curb "corporate greed" and it led to mass shortages.
How about use some brainpower to refute something I've said rather than insult? Do you have any critical thought?
> Clearly the comment above is suggesting corporate greed is partly contributing to cost pressures.
Inflation is not related to greed, regardless if you want to say that astrology influences your lottery results. So no. You can be frustrated about it all you like. Good luck with that.
This has very little to do with $600 checks and everything to do with the policy response to 2008.
We’ve had over a decade of cheap money creating asset price inflation and exacerbating inequality, not to mention the total collapse of the home building for several years and the exodus of qualified talent from that period drained much needed supply from the market.
All of this happening while the largest generation since the baby boom entered prime home buying age.
This has been a 15 year trend. It didn’t start yesterday and it won’t end for a long time.
And when the Fed went to course correct in 2018, they immediately bailed after markets started to decline to historically normal levels.
Fiscal policy should be used to address economic gaps, not distortion through monetary policy. Of course, very hard to achieve alignment and consensus in the US political system.
Despite the inflation, it's pretty clear the recovery after 2008 could have been much more rapid with greater fiscal injections.
The Fed should be an algorithm IMO. Way too politically influenced.
Your last sentence really hits the nail on the head.
In a lot of ways, the feds hands are tied by the political dysfunction in our political branches. They’re just putzing along, trying to plug the holes in a leaky ship.
> In a lot of ways, the feds hands are tied by the political dysfunction in our political branches
It's not so much that the Fed’s “hands are tied” preventing them from monetary policy they should, as a central bank, take. Rather, Congress just isn't taking fiscal policy actions that they, as the government outside of the central bank, should take, and (in some cases, especially on the Right) blaming the Fed for for their own nonfeasance.
Yeah, and they tend to operate with short term thinking front of mind.
I mean the Fed didn't even flinch at all in 2021 as all asset valuations reached bubble territory. Real estate appreciated faster than anytime in history. This becomes a real liability down the line if normalization of policy is ever needed. Bubbles can be disastrous to the economy longer term.
They removed the moral hazard of risk taking for the past decade or so.
I think it’s less short term thing vs being plain reactive.
The policy response to 2008 has shown that next to nothing is going to happen on the fiscal side (though this did change in response to COVID, hopefully this is a positive sign), so the fed has been backed into a corner without a whole lot of room to run.
When a major swing happens, if they do nothing, then it’s “the fed let a recession happen!!!”
Not that they should have done nothing, but clearly they could have addressed the acute crisis, and then normalized when that passed.
Instead they addressed the acute crisis, and continued the same policy for 2 years with no change.
What they should have done was 6 months or so after peak covid panic, start to normalize interest rates and QE. They also didn't consider at all the velocity of the economy and just looked at point in time employment numbers to drive their policy thinking.
It was clear the job market was already overheated at 5% unemployment, for example, due to the historical number of job openings and increasing pace of those job openings, plus record high quits rate. Plus retail sales/inflation.
> And when the Fed went to course correct in 2018, they immediately bailed after markets started to decline to historically normal levels.
“Markets” you are discussing aren't part of the Fed dual (actually, triple) mandate, and are of only intermediate, instrumental relevance.
> Fiscal policy should be used to address economic gaps,
Yeah, but Congress has been basically asleep at the switch on fiscal policy for a long time, and to the effect their failures effect the things that are part of the Fed mandate, it is legally the Fed’s job to act via monetary policy, whether or not fiscal rather than monetary policy is the better choice.
I'm very familiar with the Fed and their mandates. To say they don't consider asset prices is simply wrong judging by history.
If they didn't care about markets, they would have ended QE abruptly, and started raising rates months ago. They only avoided doing this to prevent a market selloff. Every rational thinking person thinks it's absurd for them to be buying MBS when housing is appreciating at record levels amid an inflationary environment.
They spend a lot of time talking about market expectations, market levels in their notes.
They also have a price stability mandate that they've ignored for over a year.
I contextualized the role of those prices as intermediate and instrumental rather than ultimate goals (and, as such, they are targeted for what, in consideration of other circumstances, they appear to indicate about the things that are mandate goals.)
Clearly correcting the market would help resolve inflationary pressures, while not seriously dampening the jobs market.
So if your supposition is correct, they should engineer a decline in the market and real estate to achieve their price stability mandate.
Yet everything they do is dragging their feet to support asset prices. So I agree with your assessment in theory, but don't see them living or acting by that logic.
They could have ended QE overnight in January, for example. Why not?
They continue to pursue low volatility when the times of today warrant higher volatility and less risk taking/speculation.
> They could have ended QE overnight in January, for example. Why not?
Probably because no one has confidence enough in any model of the effects of such a large change to base policy on it short of a much more glaring problem than any the Fed is actually facing. The combination of unwinding QE over the period between the last meeting and mid-March and the predicted 25-50 basis point rate hike in mid-March is actually the Fed pumping the brakes on the economy really hard.
The Canadian central bank ended QE overnight with no problem.
The obvious reason they didn't do it is because they knew markets would decline 5-10% on the surprise. Which would actually aid them by curbing risk taking/speculation, raising the cost of borrowing.
I do think Powell is motivated by his reappointment, so that's also playing into his inaction. It's just backfired at this point.
We are clearly entering a wage price spiral. Wages rose an annualized 9% last month. To suggest even a 50 bp hike would put us anywhere close to aggressive tightening is just not true. The traditional thinking is that interest rates must exceed rate of inflation to be in a tightening policy regime.
The Fed pushed job market past the natural rate of unemployment, and now the only way out is a hiking induced recession.
Yet instead of trying to cut off this possibility early, they'll slowly plod along until it's inevitable. There was probably a chance to short circuit the spiral a few months ago.
>And when the Fed went to course correct in 2018, they immediately bailed after markets started to decline to historically normal levels.
I suspect Jerome Powell will be looked back on as a disaster. That Biden renominated him out of deference to the political norms that were broken to get him in place is a massive black mark on his record.
Lenders were granting loans last year for 5% down at below 3% interest and prices went up accordingly. Homes were more affordable than ever from the perspective of the cost of a mortgage per dollar. They became unaffordable due to the surge in demand because money was so cheap!
What do you want the Fed to do? If they make money more expensive then mortgages become less affordable and housing prices slump, but if they make money easier to get then housing prices go up. Meanwhile, the Fed's mandates are maximum employment at sustainable inflation - not home ownership. The cost of housing has been dominated by local and state regulations for quite some time, it's not something the Fed can or should fix.
What that means is that last year you could have bought a $300k home for $15k in cash and pay around $2k in mortgage/taxes/insurance. The real problems are that there were so few $300k homes and the vast majority of Americans don't have $15k for a downpayment. The Fed can't fix those problems.
If you want to point a finger, point it at municipalities and who don't care about home ownership rates. They could make holding single family homes as long term investment properties unaffordable tomorrow, but choose not to. They could encourage new home construction, but they don't.
(side note, "Fed" is not an acronym, it's an abbreviation for the Federal Reserve)
>Lenders were granting loans last year for 5% down at below 3% interest and prices went up accordingly. Homes were more affordable than ever from the perspective of the cost of a mortgage per dollar. They became unaffordable due to the surge in demand because money was so cheap
I had to scroll distressingly far to see this post. The record set was going from ~13% investor bought to ~15%. It's a marginal change. Prices sky rocketed because, as you noted, (1) it was/is one of the best financial environments for home buying ever and (2) Covid accelerated timelines for home buying.
I think the point I'd like to harp on is that money was extremely cheap last year and it was the best time to buy a home - if you had the savings for a downpayment, that 30 year fixed rate mortgage was cheaper than rent!
The problem is that half of Americans don't have more than a thousand dollars in the bank, and we need to focus less on the sheer cost of homes (when homes were incredibly affordable) and more on why Americans can't save for down payments.
> last year you could have bought a $300k home for $15k in cash and pay around $2k in mortgage/taxes/insurance.
How do I find these loans? My partner and I are looking to buy our first home soon and have been agonizing over whether or not to go for a lower down payment % at the cost of higher monthly payments, or a higher down payment % at the cost of not being able to afford much for our area (where 500k is about the minimum for a house)
More debt is better when money is cheap, but money is getting more expensive the longer you put off making a decision.
But I'm not a financial advisor so don't listen to me, I'm just some dude on the internet. Those loans are gone, since interest rates are continuing to climb and that trend will continue for years.
> Cost to borrow money (for an institutional investor) and buy a home with that money, is generating a positive return. As long as that is true, they will continue purchasing homes at a rapid rate. This is a monetary issue, money should not be available to buy homes like this. This is incompetence and negligence from the financial elite governing our nation.
It is not strictly a monetary problem but you are close. It is a allocation of money problem.
When the FED increases supply of money and/or lowers interest rates, people think that this will help the poorest get on the debt and get themselves going.
But reality is that it is the rich (and institutions) that have assets good enough for collateralization. Which means that in a low interest rate environment the rich (and institutions) can borrow MUCH MORE than the poor, more easily.
It plays out very simply. Banks literally salivate at lending to the rich in a low interest rate environment because the counterparty risk is super low. Just take the free money. With poor people the counterparty risk does not disappear with low interest rates.
Over decades, the rich (or institutions) keep getting richer with the same mechanism.
It's a misallocation. When the FED reduces rates, the rate reduction should not allow the rich to borrow at lower rates. The inequality is spiraling out of control at this point.
"This is incompetence and negligence from the financial elite governing our nation."
Wrong.
This was a deliberate and planned response to protect their true stake holders from the liquidity crunch that COVID lockdowns almost unleashed. Asset owners. For all intents and purposes it worked extremelly well.
Nothing incompetent about it. This is moral hazard in action and has been the bull case for some time now. Fundamentals don't matter anymore because anytime the market gets rickety its been a safe bet that either the Fed will swoop in with more QE and low interest rates or the federal government will issue more bailouts.
Nah the next president will just start offering government backed 100 year mortgages with 0 down.
Really the most concerning aspect is that the cost to build new housing has drastically gone up. We are at an all time housing deficit. I don’t see how that corrects itself unless we get to the point where building a new house is cheaper than buying an existing house.
> Really the most concerning aspect is that the cost to build new housing has drastically gone up.
Any idea why? This is a life plan for my wife and I, we're currently looking for the right spot of land (~10 acres) and then we hope to start building in ~5 years after significant saving and planning.
We're in the initial stages of planning out our floor plan/etc, and costs are high, but we haven't really noticed a huge difference between building and buying. .. but i suppose we also aren't far enough long that we're getting real price estimates either.
From what I heard, from an architect friend, the difference in price between a builder and custom home is 10% premium. Because whatever economy of scale saved by the build is taken up in profit. To the buyer prices are just about the same. And conveniently, the commission for an architect is also 10%. So if you can design and self certify you also save a bit.
There's a large gradient between "custom" and custom. Modifying an already designed home is so much cheaper than something from the ground up. As in, thousands vs tens of thousands. Depending on where you live and what you're building, that's a decent % of the total cost of a house.
Lumber, materials, labor. Homebuilding needs to be disrupted with more automation, use of cheaper, sustainable materials (3D printed concrete, for example).
Cost to borrow money (for an institutional investor) and buy a house with that money generates a return. Meaning they can buy these homes up all day long and make a profit.
Single family home are poor long term investments for institutions, outside of maybe California. Prices tend to follow inflation while property taxes and maintenance eat growth. States without income taxes tends to make up revenue through higher property taxes.
Because of these facts, I don't see this trend of investors gobbling up SFHs to be sustainable. I suspect most of them are in this for a quick buck, and will quickly dump these homes the minute it becomes obvious that this was a dumb idea.
I haven't really seen much written on this (maybe I'm just not looking) but what does the future look like when only the top 10-20% can afford a home? Do 80% of families rent forever with no real possibility of being able to buy a home near an economic center? What does that look like for the broader society when so much of the American dream and self-worth is built on being a homeowner?
I live in LA and I think about this a lot when I see the only homes for sale here going for $3-4+ million. How much longer can this continue?
I have mixed feelings on this. On the one hand we have a massive wealth/power gap and I desperately want myself and every other human to have a shot at owning a single-family home in a desirable area with all of the comforts of modern life.
On the other hand I know that we are overtaxing the world's resources and short of some massive changes in our system many middle class folks in the western world are going to see a drop in their quality of life as globalization continues and our living standards average out with those of people in developing nations.
A mass-affordable Los Angeles is geometrically impossible. The single-family house and car culture are central to what it means to be "LA" and there are fundamental scaling limits on those.
It's not impossible, but people are stubborn and the voices of home owners/drivers dominate the conversation over anything else.
Those things are scalable -- LA's light rail network is one of the biggest in the country and it's incredible efficient. Over a million people (of a city of 4 million) use LA Metro on a daily basis.
There's no reason LA's fundamental character as a city would change if we allowed duplexes in already dense neighborhoods or as much BRT as possible. But instead we've prioritized voices like the Bel-Air Homeowners Association or some NIMBY idiots in Santa Monica to make policy decisions and are stuck with environmental review on projects that demolish, say, 4 parking spots to build 40 affordable housing units.
LA was zoned for ~10 million as recently as 1960. While I think you're right that the problem is probably intractable—who would want to give up their house for an apartment, unless maybe a dense, walkable area appeared overnight?—I wonder if there are legislative solutions, like rolling back Prop 13 (which will probably never happen).
But people don't have to give up single family homes to create density -- we just need to build more of everything else, wherever we can, to increase housing.
No one is coming for existing single-family homes -- they can peacefully co-exist alongside properties that house 5x the amount of people.
I'm not even talking about mass-affordable, I just mean being able to buy a home on less than a $600k/yr income. Do wages and housing prices continue to grow at 20% YoY indefinitely in cities like this, eventually pricing out everyone except the ultra high net worth?
Exactly this. Look at the slow-moving nightmare happening in Berkeley because of NIMBYism and CEQA reviews. The city/state/UC system is going to lose an incredible amount of funding and student enrollment is going to plummet because some rich Berkeley assholes don't want new apartments in their neighborhood.
California (and all states) need to build massive amounts of housing (any kind! public, social, market-rate, affordable -- it doesn't matter just do all of it at once) to address the immediate demand while we also work on destroying the concept of housing as an asset and not a guaranteed right.
And now they're in a catch-22 because any significant decrease of housing prices would cause ripple effects throughout the system too. Which is why I think they're pursuing an inflationary policy to simply inflate their way out of it, but that also has negative consequences. There's not really a good way out of it at this point. It's almost like the free lunch they bought by setting rates to next-to-nothing after 2008 wasn't actually free.
Communism? We sit here and allow wealth inequality to take record highs and then we're shocked when the capitalists are so strong that they own the government?
This is uncontrolled capitalism imo. When the rich have such buying power that they own governments, as they do now, you can't really call it communism now can you? The government is just an arm of the rich now, and nothing will change until that is brought into check. Getting rid of government wouldn't stop the rich either.
Came here to ask similar questions/take a similar argumentative position.
I don't know what in the eyes of cop is supposed to be communist about the current US social structure. I see (from the outside) modern feudalism and a social structure that, despite a simulation of democracy, is closer to European industrialization and its industrial barons and their working precariat than to a modern, democratic and fair society.
In the US, anything you think is bad is "communism/Marxism" if you're on the political right, and "unrestrained capitalism" if you're on the political left. Don't fall into the trap of thinking there's any logic behind any of this.
I think everyone is right there, to a degree. Ie yea, the government is at fault, but who is controlling the government here? etc
The solution is balance. I'm a capitalist, but unrestrained capitalism is difficult to impossible. Unrestricted government or capitalism will fail in both cases imo.
You have no idea what you're talking about. The Fed didn't send checks, Congress did. Fed has a dual mandate to curb inflation and maximize employment. They have zero obligation to home buyers or home owners and have never said otherwise. It is entirely up to Congress (and state governments) to manage housing issues. The Fed can't create loans, they can't create housing stock, they can't control supply, they can't control a pandemic, they can't keep investors out of consumer markets. That's all up to legislators. Home prices are rising along with everything else right now and the Fed is almost certainly going to start to tighten very soon, but everything for the past two years and really the past 20 years has been emergency measures against perceived looming disaster. I'd rather deal with high house prices than famine or some other truly existential crisis.
If the latest FOMC minutes are still relevant given the subsequent data drops showing even hotter inflation, then it looks like the FED will be scaling back mortgage purchases soon while continuing to support a lower federal funds rate. I don't know, but this seems like it screws individual home owners/buyers, where most middle class folks store their wealth, while continuing to support elevated commodity and equity prices where the rich store the majority of their wealth.
Hopefully the recent data will force the rich bastards who run the fed to stop putting themselves and their elite compatriots first and finally slow down inflation and asset prices but given their history that seems like wishful thinking.
> This is incompetence and negligence from the financial elite governing our nation.
that is one possibility, the other is that their intent is different than what one would expect, it's pretty much impossible to tell which is it.
consider the war on drugs, an utter failure if one believes that it's actually intended to diminish drug use. however given it only recently begun slowing down, without real signs of stopping, I cannot help but consider the possibility that the actual intentions behind it have been a great success but then that means the american government has intentionally caused terrible evil towards most of latin america.
this is why I consider the possibility that it might not be incompetence in this case either
On the contrary, housing is more affordable now than at any time in the last 40 years, except for the period right after the 2008 crash.
Higher prices are more than offset by lower mortgage costs. Money got cheaper faster than housing got more expensive. Most people who are not rich are buying money with a house kicker in 30 years, so the cost of money is the important factor.
Article is dated. Mortgage rates are up over 1% since then, and slated to continue rising rapidly.
Affordability will be just about record lows at 5%. Inflation adjusted home prices have already surpassed the 2000s peak, and are a few std deviations above historical norms.
If inflation doesn't abate, we can expect 6% mortgages in the near future.
I don't think rates are going to go up like they came down, maybe ever again unless there's some kind of bretton woods reset.
This is because of maths and the inverse effects of downward and upward shifts.
- If you borrow $100 at 5% your interest is $5pa, which matches your discretionary repayment ability.
- Rates drop to 3% and you can afford to borrow $167 at 3% for the same $5pa. This is a 2% or 40% of total drop.
- New buyer buys in at cost of $167.
- To make it somewhat realistic lets say inflation comes along and income rises, now you have $6pa repayment ability.
- With a larger $167 loan, your $6 repayment can afford a rate rise to only 3.55%, this is a .55% rise or 18% total increase.
.
So while the rates dropped 2%, a rise of more than .5% bankrupts all the new buyers. The government is sensitive to this because many people just bought together at the new prices and low rates, and it becomes untenable when large amount of the population lose their homes at once.
The same dynamic applies to business loans, government balance sheets.
US is an outlier with 30 year fixed loans, the rest of the world basically does loans on variable rates or fixed for maybe 5 years a time.
There is more resistance to the upside, for sure. But the free market sets the long duration interest rate. If core inflation persists at 5%, rates will surely rise to compensate.
They are mostly held low right now due to belief that CPI spike is transitory.
You're right that once rates rise sufficiently, it creates recession risk, which then puts downward pressure on rates. But we can likely get to 3% on the 10y and 5% mortgages before hitting that ceiling.
Keep in mind how sharply rates rose in the 70s. Though at the time debt burdens were not very high, for sure. But persistently high inflation will lead to a similar effect.
We are seeing strong signs of a wage price spiral starting to form in the data
The US is going through the housing boom that happened in the UK about 20 years ago, nothing to do with giving everyone $1k for free.
You think that $400b is a lot to "print"? Billionaires increased their wealth 10-fold in the same time, let alone the millionaires that have made a fortune from 10 years of rocketing stock market growth and leverage availability.
How does communism relate? What's happening in the U.S. is state sanctioned class separation and a beyond disproportionate support of the so-called elite class. The U.S. has essentially had a non-violent coop in the sense of the ultra wealthy owning politicians and the government. The ultra wealthy and by extension the politicians they support are national security risks.
for those who dont know. Read about "Cantillon Effect", it basically means whoever gets newly printed money first benefits the most at the cost on whoever gets it later.
Nobody, and I mean nobody, seems to have quantified the Cantillon effect. Money is "printed" when a fractional reserve loan is issued. That means when people borrow money. Everyone borrowing new money is doing so from the printer.
Please either quantify the Cantillon effect or find a new scapegoat.
In what meaningful sense could either the current or previous administration's policies be characterized as either communism or collectivism?
It's hard to take this kind of rhetoric seriously, given that investors are the ones fomenting inequality here. There's no point in speculating on real estate/house value in a society where everyone is guaranteed a home -- where would the demand be?
Some would argue that ability of the capital class to convert everything including the basic necessities of life such as housing into commodities, whilst convincing much of populace to blame boogeymen like "communism" for their decreasing social mobility, is why you're in this mess.
> communism/collectivism is once again the wolf in sheeps clothing.
Yes. The use of capital to purchase large scale investments causing negative ripple effects on society is communism. The system that famously loves and allows for private capital.
> communism/collectivism is once again the wolf in sheeps clothing
Authoritarian communism certainly is, no disagreement there. But in America, everything left of the GQP is branded as "communism" these days, including stuff that is considered a basic part of the system in Europe like public, affordable healthcare.
If Americans were able to debate the successes of European policy - and that includes even part of what the former GDR did, like providing access to childcare for mothers so they could work, or provide access to safe abortions - on face value, without resorting to "but that's communism!!!", your life would be so much better.
They claimed they were helping the middle and lower classes with all of that money printing, but what they really did is send a 600$ check and then push those classes further into wage slavery. We are watching the looting of the american citizen in real time, communism/collectivism is once again the wolf in sheeps clothing.
There is no free lunch.
Last thing, theres an equation in finance, I forget it, but roughly:
Cost to borrow money (for an institutional investor) and buy a home with that money, is generating a positive return. As long as that is true, they will continue purchasing homes at a rapid rate. This is a monetary issue, money should not be available to buy homes like this. This is incompetence and negligence from the financial elite governing our nation.