Rybczynski's second reason is development restrictions that artifically lower the supply of housing

TO BE NOTED: From Mother Jones:

"The Cost of Housing

— By Kevin Drum | Sat May 9, 2009 9:33 AM PST

Why do houses cost so much today? In the Wilson Quarterly, Witold Rybczynski writes that even when you adjust for inflation and home size, prices are still considerably higher today than they were 50 years ago. There are two reasons, he says:

The first is Proposition 13, the 1978 California ballot initiative that required local governments to reduce property taxes and limit future increases, and sparked similar ­taxpayer-­driven initiatives in other states. Henceforth, municipalities were unable to finance the ­up-­front costs of infrastructure in new communities, as they had previously done, and instead required developers to pay for roads and sewers, and often for parks and other public amenities as well. These costs were passed on to home buyers, drastically increasing the selling price of a house.

Interesting! If Rybczynski is right, we now have lower taxes but higher house prices. And perhaps that's fair. But it's also a godsend for everyone who bought a house more than 20 years ago. In California, it means that your original home price was low because taxes paid for the property improvements. Then the high taxes that built your neighborhood were capped, which drove up the price of building new neighborhoods, and since housing is fungible it also drove up the price of existing homes like yours. In other words: low price, low taxes, lots of appreciation. That's great news for all us baby boomers, but I'm afraid the Xers are paying the price. Par for the course, isn't it? Someday you guys are going to figure out just how badly we've screwed you over and it's going to be Soylent Green time.

(Rybczynski's second reason is development restrictions that artifically lower the supply of housing. Read the whole piece for more details.)"

Me:

Housing Prices

Submitted by Don the libertarian Democrat (not verified) on May 9, 2009 - 12:38pm.

The main cause of housing price appreciation is regulation:

http://www.cato-at-liberty.org/2008/09/22/blame-urban-planning/

"The housing bubble was not universal. It almost exclusively struck states and regions that were heavily regulating land and housing. In fast-growing places with no such regulation, such as Dallas, Houston, and Raleigh, housing prices did not bubble and they are not declining today.

The key to making a housing bubble is to give cities control over development of rural areas — a step that is often called “growth-management planning.” If they have such control, they will restrict such development in the name of stopping “urban sprawl” — an imaginary problem — while their real goal is to keep development and its associated tax revenues within their borders. Once they have limited rural development, they will impose all sorts of conditions and fees on developers, often prolonging the permitting process by several years. This makes it impossible for developers to respond to increased housing demand by stepping up production.

Before 1960, virtually all housing in the United States was “affordable,” meaning that the median home prices in communities across the country were all about two times median-family incomes. But in the early 1960s, Hawaii and California passed laws allowing cities to regulate rural development. Oregon and Vermont followed in the 1970s. These states all experienced housing bubbles in the 1970s, with median prices reaching four times median-family incomes. Because they represented a small share of total U.S. housing, these bubbles did not cause a worldwide financial meltdown."

"We know that if the regulation is left in place, housing will bubble again — California and Hawaii housing has bubbled and crashed three times since the 1970s. We also know, from research by Harvard economist Edward Glaeser, that each successive bubble makes housing more unaffordable than ever before — and thus leaves the economy more vulnerable to the inevitable deflation. This is because when prices decline, they only fall about a third of their increase, relative to “normal” housing, before bottoming out."

The housing bubble, higher home values, also led to Prop. 13, since the assessments of the values of houses led to higher property taxes, leaving people on fixed incomes, for example, facing rapidly rising taxes on their homes.

And:

Regulation

Submitted by Don the libertarian Democrat (not verified) on May 9, 2009 - 2:10pm.

I love when people use a logical fallacy to make a point:

"Poisoning the well (or attempting to poison the well) is a logical fallacy where adverse information about a target is pre-emptively presented to an audience, with the intention of discrediting or ridiculing everything that the target person is about to say."

I'm sure some people make similar well-reasoned points about Mother Jones. Try this guy:

http://www.nytimes.com/2005/08/08/opinion/08krugman.html

"In Flatland, which occupies the middle of the country, it's easy to build houses. When the demand for houses rises, Flatland metropolitan areas, which don't really have traditional downtowns, just sprawl some more. As a result, housing prices are basically determined by the cost of construction. In Flatland, a housing bubble can't even get started.

But in the Zoned Zone, which lies along the coasts, a combination of high population density and land-use restrictions - hence "zoned" - makes it hard to build new houses. So when people become willing to spend more on houses, say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up. And if people think that prices will continue to rise, they become willing to spend even more, driving prices still higher, and so on. In other words, the Zoned Zone is prone to housing bubbles.

And Zoned Zone housing prices, which have risen much faster than the national average, clearly point to a bubble.

In the nation as a whole, housing prices rose about 50 percent between the first quarter of 2000 and the first quarter of 2005. But that average blends results from Flatland metropolitan areas like Houston and Atlanta, where prices rose 26 and 29 percent respectively, with results from Zoned Zone areas like New York, Miami and San Diego, where prices rose 77, 96 and 118 percent."

And:

Demand for housing

Submitted by Don the libertarian Democrat (not verified) on May 9, 2009 - 3:28pm.

To be noted:

"Thursday, July 10, 2008
Houston population growth highest in nation
Houston Business Journal

More people moved to Houston than to any other large city in the United States in the 12 months up to July last year, according to a new report from the U.S. Census Bureau.

The Bayou City added 38,932 new residents between July 1, 2006, and July 1, 2007, leading the nation in numerical population increase among cities with more than 100,000 residents.

Other Texas cities featuring among the Top 10 for numerical population growth included San Antonio at No. 3, Fort Worth at No. 4 and Austin at No. 8.

New Orleans, which had the fifth-largest numerical population growth, was the fastest-growing city in terms of percentage. The city's population rose by 13.8 percent to 239,124 during the period.

The nation's largest city in terms of population continues to be New York with 8.3 million residents, more than double that of Los Angeles, which ranked second with 3.8 million residents. Chicago, with 2.8 million, was third, followed by Houston and Phoenix, each with 1.6 million residents."

http://www.bizjournals.com/houston/stories/2008/07/07/daily32.html

By the way, I didn't say that I was against zoning. In many cases, it makes sense. However, it's important to understand the trade-offs. I was addressing the issue of why home prices are so high in certain areas. You made an assumption about what I personally believe based on nothing.

And:

Zoning and home prices

Submitted by Don the libertarian Democrat (not verified) on May 9, 2009 - 4:53pm.

The name says Don the libertarian Democrat. That means that I belong to the Democratic Party. I took this name based on this post:

"The Libertarian Dem
by kos
Digg this! Share this on Twitter - The Libertarian DemTweet this submit to reddit Share This
Wed Jun 07, 2006 at 10:15:50 AM PDT
It's no secret that I look to the Mountain West for the future of the Democratic Party, people like Brian Schweitzer and Jon Tester. But I also look to candidates like Jim Webb in Virginia and Paul Hackett in Ohio.

And what is the common thread amongst these candidates?

They are all Libertarian Democrats.

Ack, the "L" word! But hear me out."

http://www.dailykos.com/story/2006/6/7/131550/7297

I don't follow your argument. The point about Houston, which isn't just one year but has continued, is that it did not have a housing bubble, but has had a very large increase in population. That's because it's cheap to build there. Krugman's point is that zoning restrictions, which exist in certain cities, but not others, cause higher home prices. He likes to use certain flashy terms when he writes, so I don't want to defend Flatlands. The issue is not which areas are currently most dense. You could have an area that isn't dense, but people want to live in it, but zoning doesn't allow any more construction, so the price of homes would rise. You could have a small area where a lot of people live, but you can build up and so keep the price of houses lower, especially if you can build condos. That's supply and demand.

Once again, for better or worse, zoning and regulations have a large influence on home prices. There's obviously a trade-off. I'm not going to generalize about it, because sometimes the regulations make sense, and sometimes they don't.

By the way, it was Flatland Cities Krugman was talking about. Here:

http://www.census.gov/Press-Release/www/releases/archives/population/011671.html

"RELEASED: 12:01 A.M. EDT, THURSDAY, MARCH 27, 2008

* Robert Bernstein
* Public Information Office
* 301-763-3030/763-3762 (fax)
* 301-457-1037 (TDD)
* e-mail:

* CB08-49
* Broadcast Release [PDF]
* Detailed tables
* State Contacts
* Graphic 1 [JPG] | Graphic 2 [JPG]

New Orleans Among the 10 with Fastest Growth Rate
Dallas-Fort Worth Leads Metro Areas in Numerical Growth

Dallas-Fort Worth had the largest numeric gain of any metro area between 2006 and 2007, increasing by 162,250, according to July 1, 2007, estimates of metro area population size and growth released today by the U.S. Census Bureau. Atlanta (151,063), Phoenix (132,513) and Houston (120,544) rounded out the metro areas with a gain of at least 100,000.

10 U.S. Metro Areas with the Highest Numerical Growth

The Midwest metro area with the greatest numeric change between July 1, 2006, and July 1, 2007, was Chicago (seventh overall nationally), while the Northeast metro area with the greatest numeric change over the same period was New York (21st overall nationally). (See Table 1 [Excel].)

Eight of the 10 fastest-growing metro areas between 2006 and 2007 were located in the South. (See Table 2 [Excel].)

Four of these fast-growing Southern metro areas were not only among the top 10 in percent growth from 2006 to 2007 but also among the 20 largest numeric gainers during the same period. Raleigh, N.C., was the third fastest-growing metro area, 4.7 percent, as well as the 12th largest numeric gainer, at 47,052. Austin, Texas, was the fifth fastest-growing metro area, 4.3 percent, as well as the eighth largest numeric gainer, at 65,880. Charlotte, N.C.-S.C., was the seventh fastest-growing metro area, 4.2 percent, as well as the sixth-largest numeric gainer, at 66,724. (See Tables 1 [Excel] and 2 [Excel].)

The fourth metro area in the South, New Orleans, was the eighth-fastest growing metro area between July 1, 2006, and July 1, 2007, as its population climbed 4 percent. It also was the 16th largest numeric gainer over the same period, with an increase of 39,885. The metro area previously had the highest rate of decline between July 1, 2005, and July 1, 2006.

In addition to New Orleans, other Gulf Coast metro areas where populations increased between 2006 and 2007 after having experienced 2005-2006 population declines included Gulfport-Biloxi, Miss. (1.8 percent population growth from 2006 to 2007); Pascagoula, Miss., (1.6 percent); Beaumont-Port Arthur, Texas (0.5 percent); and Lake Charles, La. (0.4 percent).
10 Fastest-growing U.S. Metro Areas
The 50 fastest-growing metro areas were concentrated in two regions — 27 in the South and 20 in the West. One metro area, Fayetteville, Ark.-Mo., straddled both the South and Midwest regions. Sioux Falls, S.D., and Springfield, Mo., were the two metro areas among the 50 fastest-growing located completely in the Midwest. None of the 50 was in the Northeast. That region’s fastest-growing metro area was York, Pa., which ranked 107th.

New York was the most populous metro area on July 1, 2007, with 18.8 million people, followed by Los Angeles (12.9 million) and Chicago (9.5 million). Nine metro areas had 2007 populations of 5 million or more. (See Table 3.)

More than four-fifths of all U.S. metro areas (303 out of 363) had a larger population on July 1, 2007, than on July 1, 2006. The 50 fastest-growing metro areas grew by at least 2.3 percent during this period, which is more than double the nation’s total population gain of 1 percent. As of July 1, 2007, the 363 metro areas in the United States contained 251.9 million people — 83.5 percent of the nation’s population."

I think that these are largely Flatland cities, but, again, that's Krugman. All that I'm arguing is about the connection between zoning and prices, without, as yet, giving any opinion on whether that's good or bad in a particular place.

Anyway, I'm off to dinner, but thanks for the comments.

Take care,
Don

The overall return on lobbying investment for business interests is probably no more than, oh, three or four thousand percent.

TO BE NOTED: From Mother Jones:

"The Power of Lobbying

— By Kevin Drum | Mon April 13, 2009 10:19 AM PST

The Washington Post reports on a new study about the fantastic efficiency of K Street lobbying:

In a remarkable illustration of the power of lobbying in Washington, a study released last week found that a single tax break in 2004 earned companies $220 for every dollar they spent on the issue — a 22,000 percent rate of return on their investment.

The study by researchers at the University of Kansas underscores the central reason that lobbying has become a $3 billion-a-year industry in Washington: It pays. The $787 billion stimulus act and major spending proposals have ratcheted up the lobbying frenzy further this year, even as President Obama and public-interest groups press for sharper restrictions on the practice.

The paper by three Kansas professors examined the impact of a one-time tax break approved by Congress in 2004 that allowed multinational corporations to "repatriate" profits earned overseas....The researchers calculated an average rate of return of 22,000 percent for those companies that helped lobby for the tax break. Eli Lilly, for example, reported in disclosure documents that it spent $8.5 million in 2003 and 2004 to lobby for the provision — and eventually gained tax savings of more than $2 billion.

Not bad! But Eli Lilly is a piker. Pfizer saved a cool $11 billion. Here's the Top Ten:

Honesty compels me to to point out that this research overstates the value of lobbying by choosing only a single, particularly lucrative tax break to examine. The overall return on lobbying investment for business interests is probably no more than, oh, three or four thousand percent. Hardly worth getting in a lather about, really. Please go about your business, citizens."

Why? Because they can. And in the past they've wielded enough political power to prevent Congress from doing anything about it.

TO BE NOTED: From Mother Jones:

"Big Banks

— By Kevin Drum | Mon April 13, 2009 8:55 AM PST

Ezra Klein writes that big banks are bad for small depositors:

They're about the pros rather than the amateurs. Which may be why they're so cavalier about exacting fees and penalties on individual depositors at levels they'd never consider applying to professional markets. Indeed, pretty good research suggests that as banks get bigger — which tends to mean more competitive on the global financial market — they begin charging consumers more.

This seems to be true. Take a look at the chart on the right from today's Wall Street Journal. It shows that banks receiving bailout funds have increased fees at a far higher rate than banks that haven't.

Does this show that banks receiving federal assistance are more likely to raise their fees and penalties? Of course not. This trend is nine years old. However, it's big banks that have received most of the TARP money, so you can pretty much replace "Banks receiving TARP funds" with "Big banks." So what the chart shows is that big banks have increased their fee and penalty structure far more than small banks.

Why? Because they can. And in the past they've wielded enough political power to prevent Congress from doing anything about it. If there's any justice — and needless to say, that's still an open question — those days are finally gone."

Cap-and-trade, because it uses market mechanisms, has a proven track record with acid rain control, and raises money via auctions rather than taxes

TO BE NOTED: From Mother Jones:

"The Circular Firing Squad

— By Kevin Drum | Thu April 9, 2009 12:45 PM PST

We liberals are our own worst enemies sometimes. Take climate change. For over a decade we've been promoting the idea of cap-and-trade as a way of dealing with carbon emissions, partly for technical reasons (unlike a carbon tax, it imposes firm caps) but also — in fact, mostly — for pragmatic and political reasons. A carbon tax, even if it has some theoretical advantages, is unlikely ever to happen. We all know why. Cap-and-trade, because it uses market mechanisms, has a proven track record with acid rain control, and raises money via auctions rather than taxes, has at least a fighting chance.

So now that liberals are in control of Congress and the White House and have an actual chance to pass legislation, what happens? Everyone starts talking about carbon taxes instead. Because, you know, in some theoretical economic sense you can argue that they're more efficient. It's enough to make you scream sometimes. At least, that's what it did to David Roberts, who must have been reading my mind after digesting Tom Friedman's most recent column:

So now, on the cusp of an enormous fight against dishonest and well-funded proponents of doing nothing, Friedman decides it’s time for “an alternative strategy, message and messenger”? Are you f*cking kidding me?! The only conceivable effect Friedman’s endorsement of an alternative bill can have is to divide support and distract attention from the best chance for a serious energy/climate bill in 30 years. His timing could not possibly be worse.

I’m sure Friedman would respond that hey, he’s not a Democratic operative. He’s an independent thinker. He’s under no obligation to stump for a bill that doesn’t make his mustache tingle. And in this he’s like all progressives. They all want to be the Smartest One in the Room. None of them want to sully their purity by compromising or rowing in the same direction. They all want to show how you clever they are, how their pony plan, their messaging, their strategy is the one those silly legislators ought to be using. Meanwhile, the coordinated opposition kicks their ass, over and over again. But at least they’re clever!

Be sure to read the rest of the rant. As David points out, the key part of cap-and-trade is the cap, not the trade. And contra Friedman, it's not hard to explain a cap on carbon. In fact, it's a lot easier than trying to explain why a tax will reduce global warming. Here's the elevator pitch: "We're going to reduce carbon emissions by setting a nationwide cap on carbon emissions." See? It's easy!

It's true that the trade part of cap-and-trade makes things more complicated, but it's not all that complicated. It's just designed to lower the cost of complying with the cap and make everything a little more efficient. Still, the cap is the key. And as for complexity, anyone who thinks that a carbon tax — an actual, real-world carbon tax, not the chalkboard variety — would be nice and simple, hasn't been paying attention to the way Congress has been making tax policy for the past 200 years. "Simple" is not a word that usually gets used in the same sentence."

My tentative preference is to keep mark-to-market but soften its impact with a system of countercyclical regulatory forbearance.

From Mother Jones:

"Mark to Market

— By Kevin Drum | Tue March 31, 2009 10:34 PM PST

The Wall Street Journal reports that FASB will vote soon on a proposal to loosen rules that force banks to value toxic assets at market prices:

The Financial Accounting Standards Board is proposing significant changes to its mark-to-market rules, allowing banks to set their own values for certain hard-to-value troubled mortgages, corporate loans and consumer loans. The new proposal, called FAS 157-e, is scheduled for a vote this Thursday.

The change was meant to assist U.S. banks after bankers complained current mark-to-market accounting rules forced them to undervalue their assets, by setting prices at deeply discounted, fire-sale values.

This is a complex issue, and it's true that mark-to-market can cause problems during financial panics as firms all start selling assets at once to cover losses, which in turn produces a spiral of plummeting prices, leading to losses, leading to more selling, leading to lower prices. Rinse and repeat. Unfortunately, the alternatives are generally worse, allowing banks to value assets using models that can be tweaked so egregiously that they bear only the vaguest relation to reality. That's how IndyMac could claim it was "well capitalized" right up until the day it was taken over and shown to be a shell of its claimed self.

My tentative preference is to keep mark-to-market but soften its impact with a system of countercyclical regulatory forbearance. The whole point of bank capital is to act as a cushion against losses, and in good times a bank might reasonably hold capital equal to, say, 8% of assets. During a recession, as loans and other assets lose value, that capital is going to get eaten way, but then, that's the whole point of having it in the first place. So why force asset sales in order to maintain arbitrary capital ratios when capital erosion is entirely predictable during recessions? Why not instead require higher capital ratios in good times (which would reduce leverage and slow down credit expansion) and lower capital ratios in bad times (which would reduce fire sales and encourage banks to expand credit)?

Because banks are so good at lying about the quality and value of their assets, we're better off with a system that gives them as little leeway as possible when it comes to recognizing losses. We're should force them to face the music honestly, but then allow a certain amount of capital forbearance during economic downturns. Mark-to-market isn't appropriate for every asset, but it's appropriate for most. It should be watered down as little as possible."

Me:

"MTM

Submitted by Don the libertarian Democrat (not verified) on April 1, 2009 - 7:21am.

Here's another issue that came up in late September after AIG. Since it's a Calling Run, let's stop the calling. Of course, the downgrade, which caused the raising of collateral, was due to the fact that somebody thought that AIG might not be able to honor its CDSs in a foreclosure tsunami.

In my view, the posting of more capital is to keep investors from pulling their money out in a panic. It's like FDIC insurance on deposits. After all, if a company is bleeding money, an investor wants to know if they can get their money out if they desire it. The extra collateral is to let them know that the business can raise the money if it needs to. Otherwise, if it's me, I'm going to go in and get my money if I can.

Here's what I thought in October:

My idea was that businesses have both methods at hand, and, during a crisis, exemptions could be granted on a case by case basis, with the transparent model still available for analysis.

I still believe that. Keep MTM, and allow an exemption in a crisis. Leave it vague, because a fixed rule for a crisis seems useless.

Given all the problems caused by banks too big to fail, should we just put a cap on bank size and be done with it?

From Mother Jones:

"Keeping Banks Small

— By Kevin Drum | Tue March 31, 2009 10:19 AM PST

Given all the problems caused by banks too big to fail, should we just put a cap on bank size and be done with it? Rortybomb says big banks don't charge lower interest rates, Steve Waldman says big bank size is a proxy for a lot of other problems, and Felix Salmon agrees with all of the above even if it's true that "there are no good and politically-feasible answers" for putting American banks on a diet.

But let's say this is all true, and that somehow it did become politically feasible to cap bank size. What would be the result? What follows is a little scattered, but maybe some other people who understand the industry better than me can pick it up where I leave off and provide some better analysis.

Felix suggests a cap of $300 billion in assets. Fine. But a cap on assets necessarily implies a cap on liabilities, and that means deposits are effectively capped too. Let's call the deposit cap $200 billion in round numbers. That means the end of nationwide banking since no bank that size can serve the entire country, but maybe you're OK with that. A small price to pay etc. etc.

So here's what I wonder: what happens when you have a whole bunch of banks all operating at their maximum allowed size? Do they keep taking in money but just sitting on it? Of course not. Do they essentially shut down, not taking any new customers? What about natural growth among existing depositors? (For that matter, what about natural asset growth?)

Even more important, what happens when banks can't compete with each other by growing? What would they compete on? My guess is that they'd compete on keeping the biggest, most profitable customers and would pretty much lose interest in smaller customers. So small depositors would find themselves increasingly unwelcome, paying higher fees and penalties, having a harder time securing loans, and so forth. After all, what incentive would a capped bank have to treat small depositors decently if they don't really want them in the first place?

Now, it might be that none of this would be a problem. Capped banks would still compete with other capped banks to some extent, and unhappy customers could presumably still leave for smaller banks, who would compete for their business. This is where I'd be interested in hearing from more knowledgeable people. If you game this out, what does the industry end up looking like? A regulated electric company that's effectively limited by the size of its service area? A monopoly cable company? A bunch of networks of loosely affiliated midsize banks? Or what? Anybody have a good idea?"

Me:

Narrow/Limited Banking

Submitted by Don the libertarian Democrat (not verified) on March 31, 2009 - 12:35pm.

I'm still pushing Narrow Banking:

http://shop.ceps.eu/BookDetail.php?item_id=1757

http://blogs.ft.com/economistsforum/2009/01/putting-an-end-to-financial-crises/#more-315

Buiter sums it up well:

"Narrow banking vs. investment banking

The distinction between public utility banking/narrow banking vs. investment banking; (the rest) has to be re-introduced. I advocate a form of Glass-Steagall on steroids, with a heavily regulated and closely supervised narrow banking sector, engaged in commercial banking (taking deposits and making loans) and benefiting from lender of last resort and market maker of last resort support. The investment bank sector will also be regulated and supervised, but more lightly, and according to the same principles as other systemically important highly leveraged non-narrow bank institutions.

Universal banking has few if any efficiency advantages and many disadvantages. Economies of scale and scope in banking are soon exhausted. They tend to be fat to fail, have a lack of focus, and suffer from span-of-control negative synergies etc. Universal banks or financial supermarkets use their size to exploit market power and try to shelter their risky, non-narrow banking activities under the LLR and MMLR umbrella of the narrow bank that's hiding somewhere inside the universal bank.
Penalise bank size

Splitting banks into public utility or narrow banks does not solve the problems of banks (narrow or investment) becoming too big or too interconnected to fail. It is therefore necessary to penalise bank size per se, to stop banks from becoming too large to fail (if they are interconnected but small, they are still not systemically important). I would penalise size through capital requirements that are progressive in size (as well as leverage)."

http://www.voxeu.org/index.php?q=node/3232

In other words, it makes sense as part of a package of reforms.

a clear message that the threat of deflation is being taken seriously

From Mother Jones:

"Helicopter Ben

— By Kevin Drum | Wed March 18, 2009 7:58 PM PST

Ben Bernanke has long said that even with interest rates near zero, the Fed still has plenty of monetary ammunition left to stimulate the economy. Today he put his money where his mouth is and announced that the Fed would be buying up a trillion bucks worth of treasury bills and mortgage securities. This is known as quantitative easing, aka printing money. The Wall Street Journal rounds up some reaction:

Guy LeBas of Janney Montgomery Scott provides the basics: "Even today’s announcement that the Federal Reserve plans on purchasing everything in America that isn’t nailed down raised relatively few eyebrows on our end....Effectively, the Fed is monetizing the Treasury’s debt, a strategy that appears in the encyclopedia under the heading 'how to trigger inflation.' "

David Greenlaw of Morgan Stanley says the purchase of mortgage securities is designed to drive down interest rates: "In 2008, the average mortgage rate on the outstanding stock of loans was about 6.50%. So, if the Fed brings 30-yr fixed rate mortgages down to 4.50% and all homeowners are able refi, the aggregate permanent cash flow savings would be on the order of $200 billion per year."

Paul Dales of Capital Economics isn't sure that $300 billion of Treasury purchases is enough: "This could just be the opening salvo....Overall, no one knows whether these measures will work. Much depends on whether banks loan out the cash they raise from selling Treasuries and whether households and businesses spend, rather than save, any extra borrowing....At the least, no one can say that the Fed isn’t trying."

So there you have it. $300 billion in new money, another $200 billion over time from lower mortgage rates, and a clear message that the threat of deflation is being taken seriously.

That's what the adults were up to, anyway. Back in make believe land, meanwhile, it was AIG bonus time 24/7. Gotta keep Congress busy with something, I guess."

Me:

Helicopter Money

Submitted by Don the libertarian Democrat (not verified) on March 18, 2009 - 8:42pm.

I've been for this. I sure hope it works. It's risky. If it doesn't work, I'm not going to make any excuses. I preferred Buiter's plan, but this should help.

"I think the big thing I'd add to that is growth in median incomes"

Kevin Drum on Mother Jones with a good post:

"MEDIAN WAGES....So let's assume that we manage to stabilize the economy sometime soon via whatever combination of stimulus spending, tax cuts, and bailouts you think is best. What's next? Where will demand come from to get the economy moving normally again? Paul Krugman comments:

I find it useful to compare U.S. spending in recent years with spending in the mid-90s, when things seemed much more sustainable. What changed? Well, we had bloated housing investment and bloated consumer spending. Meanwhile, nonresidental investment as a percentage of GDP was about the same in 2007 as it was in 1996.

So what offset the consumer/housing boom? A vastly increased trade deficit. And that suggests that a return to normalcy would involve getting savings up ( FINE ), housing spending down ( NOT NECESSARILY ), and a combination of more exports and less imports ( NO POSITION. POOR COUNTRIES NEED TRADE. I HAVE NO PERFECT NUMBER )

I think the big thing I'd add to that is growth in median incomes( YES ). One way or another, there's really no way for the economy to grow strongly and consistently unless middle-class consumers spend more, and they can't spend more unless they make more ( YES ). This was masked for a few years by the dotcom bubble, followed by the housing bubble, all propped on top of a continuing increase in consumer debt. None of those things are sustainable, though. The only sustainable source of consistent growth is rising median wages. The rich just don't spend enough all by themselves. ( I AGREE )

The flip side of this, of course, is that rich people are going to have to accept the fact that they don't get all the money anymore. Their incomes will still grow, but no faster than anyone else's. ( I DON'T CARE ABOUT THE RICH. I DO CARE ABOUT THE POOR AND MIDDLE CLASS )

How do we make this happen, though? I'm not sure. Stronger unions are a part of it ( NO POSITION ). Maybe a higher minimum wage ( NO POSITION ). Stronger immigration controls ( NO POSITION ). More progressive taxation ( IN SOME FORM ). National healthcare ( YES ). Education reforms ( FINE ). Maybe it's just a gigantic cultural adjustment ( BINGO! ). Add your own favorite policy prescription here.

This isn't just a matter of social justice. It's a matter of facing reality. If we want a strong economy, we can only get it over the long term if we figure out a way for the benefits of economic growth to flow to everyone, not just the rich. This is, by far, Barack Obama's biggest economic challenge. Until median wages start rising steadily and consistently, we haven't gotten ourselves back on track."

I also believe that there must be a rise in Median Wages, and, yes, I understand that there's a debate about the figures, but not for the same reason as Drum. In order to have less government intrusion in our economy and life, we need a Middle Class that feels itself to be middle class, not barely above subsistence level. In other words, the Middle Class must be and feel able to take care of more of its own expenses, leaving the government to provide for the truly needy and indigent. Without that comfort level, people will want more government help to keep them above water. That's the simple truth.

So, I would say that, second to trying to raise the people at very lowest earning levels to a point that they are not indigent, we need to have a rising middle class in this country for a more libertarian society to emerge as regards the economy. Strangely, this view does accord in some respects with views like Drum's.