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

["John A Imani" <johnaimani@xxxxxxxxxxxxx>]

Thanks for this posting.  Even some bourgeois hack-men are crying foul at the 
robbery of interest-capitalists being held up by the Fed.  The first 1 1/2 
minutes are the devoted to finding "Good News on Wall St" then at 2:15 Michael 
Pento gives an observation exactly paralleling the last quoted sentence below:



Michael Pento on Bubbles

 

"It looks like Bernanke is going to follow in the footsteps of Alan Greenspan.I 
think this insanity of bubbles blown has to stop."  Interview by Bob Pisani on 
"Kudlow and Company."  8/22/2007 2:01PM EST. 

http://www.cnbc.com/id/15840232?video=480635685

<<Message: 17
Date: Sat, 1 Sep 2007 20:43:43 -0400
From: "Joaquin Bustelo" <jbustelo@xxxxxxxxx>
Subject: Re: [Marxism] Dean Baker paper on the stock and housing
markets in the US
To: "'Activists and scholars in Marxist tradition'"
<marxism@xxxxxxxxxxxxxxxxxxx>
Message-ID: <000601c7ecfa$510723b0$030ba8c0@albanta>
Content-Type: text/plain; charset="us-ascii"

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...>> 

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