Re: [Marxism] Dean Baker paper on the stock and housing markets in the US

["Joaquin Bustelo" <jbustelo@xxxxxxxxx>]

An interesting paper, but it seems to me the REAL bubble was and is neither
in the stock market nor the housing market but the financial markets
generally. The nominal price of housing is just capitalized rent, but that
has to be calculated at some given interest rate. Given the same rent, a
lower interest rate yields a higher price. People do not mostly act on the
basis of the nominal price but on the basis of the mortgage, which is
essentially a rent equivalent.

It was the fall in interest rates that caused housing prices to spike. The
argument presented in the paper cited by Louis that given more or less
constant rents (in real, i.e., inflation-adjusted terms), house prices
should also be constant has built-in the implicit assumption of a magical
constant, pre-ordained interest rate. The same is true of stock prices.

So, for example, say prevailing interest rates are 10%. A $1,000 bond with a
10% yield sells for $1000. If the interest rates fall to 5%, that bond will
sell for $2,000 (assuming the bond never matures, i.e., it pays $100/year in
perpetuity). If the interest rates fall to 2%, that bond now becomes worth
$5,000. 

What would cause interest rates to fall? The law of supply and demand, i.e.,
an overhang of liquid capital looking for a way to make money, and thereby
pushing rates down. 

And while I'm no expert, it would seem to me that this would be related to
the Fed maintaining its real rates in negative territory (i.e., less than
the inflation rate) over a period of several years.

Given a whole shelf full of new "products," complicated derivative financial
instruments, and ultra-leveraged operations by financial institutions, it
might not be easy or obvious to spot the decline in real yields. That
decline might take the form of increasing leveraging of financial assets,
multiplying risk.

The risk in such a tower of debts backed by more debts backed by more debts
backed by more debts is that with increasing complexity comes increasing
fragility. 

The recent actions by the fed, which not only lowered the interest rate at
which banks can borrow from it, but tremendously loosened the standards that
have to be met for the loans, and in essence transformed them from overnight
loans into short-term "commercial paper"-type loans, and the fed is allowing
the face value of mortgage paper, rather than their market value as
collateral, have for the moment restored a relative stability to markets,
albeit one marked by sharply increased liability. 

ON Tuesday, everyone is back from vacation in the world's financial
capitals, and there's going to be a single thought driving the actions of
money managers everywhere: get rid of these damn American mortgage-backed
securities, especially those issued in the last couple of years, whose real
risk level no one can possibly apprehend right now. 

The bursting of the housing bubble is likely to have graver implications for
the real economy than that of the dot-com bubble. It's not registering in
the unemployment statistics because such a large percentage of the
construction work force is undocumented and the increasingly hostile climate
towards Latinos and especially immigrants is driving the rate of
non-cooperation with the government's household surveys sky-high in the
Latino community. For example, last year's American Community Survey shows
an inexplicable DROP in the poverty rate among Latinos when those of other
sectors of the population --not even white people-- did not change. 

The easiest, most direct and most logical explanation is NOT that there was
a significant improvement in the socio-economic status of hundreds of
thousands of the poorest and most persecuted Latinos, but that the
increasing persecution of Latinos biased the sample. The change that was
picked up was the increasing terrorization of the Latino community, and
especially its poorest layers, which wound up excluding them from the
survey.

Talking to a couple of businesspeople recently at one of our Latino
community meetings, they said they could not recall business ever being this
bad in Atlanta. Community restaurants and shops are empty; some are starting
to close. As the article recently posted to this list by Walter from the
Wall Street Journal shows, this isn't just a local downturn, and its not
going to be one restricted to our community, although it appears to be
hitting us harder. But even big retailers like Wal-Mart are starting to feel
the pain. 

And increasingly, all over the country, Latino community leaders are
advising people to prepare to resist, including by cutting their spending to
the bone, postponing all major purchases and saving money instead. Three
years go, articles in the community press rarely echoed such sentiments;
instead they were full of advice on how to use a Tax ID to buy a home (and
also achieve quasi-legality).

Again, I'm no economist or financial expert, but I've got a gut feeling
we're headed towards some pretty rough times economically. 

Joaquin


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