TCS Daily


Wall Street Bailout, Congressional Cover-up, or Sarbanes-Oxley?

By Steven Selengut - October 1, 2008 12:00 AM

Every new controversy demands a look at similar situations of the past. Just what is a bailout anyway? In the early 80's, Lee Iacocca arranged a government loan and tax concessions to bring Chrysler Corporation back from the brink of bankruptcy--- during the Carter Administration, to save you a Google.

The economic domino effect of a major corporate death was clear, and Congress acted wisely when it saved this American icon from extinction--- the loans were repaid. But was it poor management or shortsighted government that caused the problem. Politicians massaged and empowered the labor unions, implemented minimum wage legislation, and protected the steel industry from foreign competition.

Similar financial problems existed throughout the automotive industry and lower cost, better product was just starting to come ashore. Bailout or fix-up? Voteless corporations were perfect patsies then, and remain so today. But the average Joe's investment in the success of these perennial scapegoats for bad government has risen from zero dollars to all of our dollars. Every failure takes a piece of your retirement program with it.

All employed John Q's are investors; all taxpayers are investors; all Americans have a vested equity interest in the success of all publicly traded corporations in our "regulated capitalism" economy. Most politicians still can't connect the dots, and seem to be formulating policy based on the latest consensus of public blogs.

It wasn't the financial institutions that decided to make mortgage money available to practically anyone who wanted to own a home--- regulators permitted (encouraged) a relaxation of the qualification requirements. In effect, they enabled the predatory lending practices that misguided many first time homebuyers.

The easy-money lending practices, and sky rocketing housing prices, brought speculators into the mix and home flipping became as popular as Monday Night Football. Speculators accept the risks of loss; it's what they do. But allowing the creation of high risk where none is expected is unacceptable. The creative products developed by the financial institutions must be examined more closely and labeled more effectively.

Speculative bubbles always implode--- this time taking down speculators and marginally qualified homebuyers alike. It's ever so easy to blame the corporations, but who called off the regulators? Brokerage Firms have entire divisions whose only job is to make sure that nobody looks cross-eyed at any SEC regulation (real, contemplated, or anticipated).

The SEC itself requires full disclosure from all registrants. The interests of the customer are always placed first--- except of course, as was the case with Collateralized Debt Obligations (CDOs), when an act of Congress prohibits the SEC from having a look. Could they have stemmed the tide? It doesn't matter. What matters is that complicated products are reviewed more carefully in the future.

Fannie Mae and Freddie Mac have a similar tale not to tell. Congress was closely involved in their charade as well, with conflicts of interest that are certainly worthy of extensive investigations, but, again, not now. Now we need to get this credit driven economy out of the emergency room and back out there where it belongs, greasing the wheels of all industries, growing jobs, and reaffirming the strengths of our system.

This is not a situation where an innocent government is bailing out an evil industry that has lost its credibility (the financial sector deserves little credibility). This is an opportunity for Congress to save and strengthen an economy that has suffered from a government-initiated relaxation of lending rules, a government-mandated ban on regulation of derivative products, and accounting rules that just don't make sense for mortgage backed (or any fixed income) securities.

Politically, using the financial institutions as a scapegoat is easy and, judging from Internet polls, effective. John Q is furious, but at only half of the problem causers, and for the wrong reasons. How many of you have stopped making your mortgage payments just because the market value of your home has fallen?

Less than 5% would be a fair estimate. Yet a much more significant amount of the collective mortgage debt in the USA (not in any stage of default) has been arbitrarily erased from institutional balance sheets. Even within the "toxic" products the government would purchase, 80% of the loans are solid and meeting their monthly commitments. The cash flow from these products is more than adequate to keep things moving, were it not for Sarbanes-Oxley.

Congress passed the Sarbanes-Oxley Act in 2002, placing some very stringent, inappropriate, and inflexible reporting rules on financial institutions. Under this law, financial assets must be valued at fair market value--- even if they are not for sale! The Working Capital Model eliminates this problem entirely, but it is difficult to apply when the individual securities are not identifiable.

More than 95% of Americans are making their mortgage payments right on schedule, yet there is no market for the financial products that contain these mortgages. Consequently, balance sheets reflect trillions of dollars less than the maturity value of the securities held by the financial institutions.

Eureka! Regulate the product creating mechanism better, so that the productive value of the underlying assets is measurable. But, in the meantime, suspend the Sarbanes-Oxley restrictions and re-evaluate their applicability to packaged mortgage products in existence now.

Bonds, mortgages, preferred stocks, etc. are contracts that are honored 99% of the time. They are held for the income they promise. These promises are being met while the government tells holders that they can't be booked at full value. Have they all gone mad?

This is no bailout of an industry, it's a transfusion of capital needed to allow an industry to comply with legislation that just doesn't make sense. And while the politicians posture and pontificate, bluster and blame, banks are failing and irreparable harm is being done to John Q's nest egg--- yours and mine!

Telling me that my house has dropped in market value does me no harm, and I continue to make my monthly payments--- the lower (more realistic) market value may reduce my carrying costs. Telling banks that the mortgages they are collecting on need to be written down, because they can't be sold, is lunacy.

Tell John Q more about the source of the problem, and different heads will roll.


Steve Selengut
http://www.sancoservices.com/
http://www.kiawahgolfinvestmentseminars.com
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"
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147 Comments

Not me, I rent
We shouldn't be 'investing' in housing anyway. It is a sink hole for money that is better invested in economic sectors that bring true prosperity -- productivity gains. Housing ain't it -- especially housing that is already built.

"Land -- they ain't makin' it anymore." --Will Rogers
You rent from an 'owner' right?

yes, but I am not over my head in debt
And it is an apartment owned by a corporation. They already get to write off the debt.

Thats how they provide 'afordable' housing in the Bay Area?
In any event, no one really owns their land in a socialist state, even if you have a deed.

In the Bay Area...
..the percentage of mortgages made in the last 5 or so years that were 0% down, interest-only ARMs is like over 50%. To quote the good Rev. Wright: "The chickens...are coming home to ROOOOST!"

THAT is the meaning of 'affordable housing' in the Bay Area.

Yes, but it isn't a liquid investment
...and we invest more and more into it. How many radio commercials do you see trying to get you to invest in real estate? They aren't talking about your primary residence, are they?

If you, the individual, can buy a place and rent it out for enough to have a positive cash flow, then that is good. But for the economy as a whole, too much investment in that is not good. Real wage increases, lower prices and the positive effect both have on living standards really only happen from productivity improvements in the goods and services we produce, not more housing.

Investing in a factory that makes a better widget or expands to take advantage of potential growth of the widget market is way better than using it to buy a house -- even for a rental -- as far as where the real productivity gains are.

Real wealth and investment
Your point is well taken and true; but it is more true in a very large city than in a small city or town. No one in rural america, and damn few in small cities, were getting 0%, interest only ARMs. The banker had to look his customer in the eye in church on Sunday. Also, these areas didn't see exploding real-estate prices like the big metro areas did.

Why own? Simple - Let's say you are 25 to 30 and make good money (not great, but you can certainly afford a mid-range priced house that will handle your needs for the foreseeable future). If you take out a 15-20 year fixed rate mortgage (even with 0 down) at a payment you can easily afford, you will be 40-50 when it is paid off (assuming you don't get caught in the refinancing revolving door). After that you will have just taxes and insurance to pay (roughly 10-20% of any rental price). If you retire at 65, you will have 15-25 years to invest that money you saved on rent for retirement (or whatever).

At retirement you have choices; you can live there the rest of your life and pass on the property in your estate, you can sell it and have the added cash for your investment portfolio (probably 1 1/2 to 3 times what you paid for it), you can get a reverse mortgage (it can be the best of both worlds for some) and there are other options as well.

I owned my own home by age 40. Not haveing those rental payments every month has given me the freedom to do a lot of things.

The only down side is the committment. I really would not suggest a home purchase unless you can firmly commit to living there for, at least, the duration of the mortgage; that is one reason I suggest the shortest mortgage you can afford (I went 10-years; but I got my home pretty dirt cheap too!)

house not only an investment
It's also often a life-style choice. Even tho it's cheaper in some areas, and cases to rent, some guys want to own the house so they can be creative in their decorations, improvements, etc. I know many such people who don't consider it mainly an investment.

No, it is because...
...my wife and I walked through an new open 'house' selling for over $600k.

Its the one pictured (cottages four): http://www.summerhillhomes.com/find/rosewood_cottages/plans.cfm

Skinny lot and tall, like the kind of houses you find in Amsterdam. Hardly any lawn to speak of either, really.

Meanwhile, the prices of existing homes (especially condos which are the 'plankton' of the housing 'food chain') are falling through the roof. No way will I buy. I can't afford that one, anyway. Could you? Do you have $60k for a 10% down on that thing? I don't. Even if I did, I'd think of moving to Walla-Walla and use it to make a 30% down + some home improvements/interior decorating instead.

But my position still stands regardless of my personal situation. Or, in other words, I'm sticking to my guns 'lawn or no lawn'. Housing is an 'investment sink' that cripples the true gains we could be getting in productivity as a society. I never said it was a bad deal for the individual --especially when folks like me have to carry YOUR water on taxes because of it.:) And, if you can get another place to rent out, even better. Having those income streams is wealth building, no doubt. Did I say otherwise?

But it also means there is less money to invest in more productive capital to build better and cheaper widgets. The only exception I see on the horizon where housing will give us real productivity gains of that nature is described here: http://www.singularity2050.com/2008/09/can-buildings-be-printed.html

But that's it, lawn or no lawn. Any economist will back me up on this position, also. Well, any that isn't employed by the mortgage/housing construction/real estate industry, that is. Roy is also disqualified since he doesn't possess a single economist bone in his body.

I see what you are getting at
But it does depend on whether you are talking the long term or short term.

Look, rent is not much cheaper, and often more expensive, than a mortgage. Sure, there is upkeep, maintainence, taxes and insurance that you don't have with a rental; but but all of that is still usually in the range of rent on a decent place. All-in-all you are not "sinking" any extra cash into home ownership that you are not sinking into rent. Individually people still have the same amount to invest overall. Better yet, once the mortgage is paid, you have a bunch more to put into investment than you would if you continued to rent.

In short, any economist worth his salt who agrees with you is not doing the math or is just flat wrong.

And it really doesn't matter if you are talking home ownership or business. Leases and rentals are often not enough cheaper than ownership to ofset the long-term financial and cash flow advantages in ownership. (There are some exceptions, but those are usually reserved for larger businesses and wealthier individuals).

Zyndryl, have you really looked into it? There are a lot of things to consider, but moving to a cheaper suburb may be the answer; looking for a "fixer-upper" may be the answer. Usually, for a financially savvy person with the credit rating and income, there is a real steal of a deal that can continue or increase your present investment portfolio.

I've talked about this very thing with several financial advisors and economist types as well. The only time I've heard the reference you make is when a person talks about buying a 5-bedroom, 3 bath, 2,500-3,000 sq.ft. million-dollar place to get out of their two-bedroom apartment. Of course that is a bad deal investment-wise. Even if you can afford it, you will have to put all your disposable income into the payments and invest little or nothing during the duration of the loan.

Very bad idea!!

I think you need to talk to a real financial advisor and look into properties in the area; but you need to look out further than a couple of blocks. Condos are stupid things for lazy people that want to pay both rent and mortgage expenses becuase they don't want to be bothered with maintenence. You never quit paying for a condo and you really own nothing because you don't even own a share in the land it sits on in most cases; you "own" your space, but none of the commons area or the grounds.

You should be looking into a single-family home close enough to work to not seriously raise you travel expenses to work or shopping and with a mortgage that is close to, or cheaper than, your present rent.

No, you don't see...in fact, I don't know what you've been reading
"In short, any economist worth his salt who agrees with you is not doing the math or is just flat wrong"

Uh...no. Regarding economics, I have repeatedly been making the distinction between what is economically better for us as a whole versus individual cases. I don't know what you are reading, but it wasn't what I've been writing, I assure you.

As for my personal situation in housing, I don't deny any of what you just said. I never did in the first place. Again, if you had gotten the gist of what I've been plainly saying, you would see that.

Other nations 'get it'. They do not subsidize home ownership as much as we do nor engage in such huge capital malinvestment into it at the expense of other, more productivity enhancing sectors of the economy as we do either. At least not the ones who don't want to be as stupid as we are. Unfortunately, when they get rich enough, they usually 'jump the shark' like Japan did with its real estate bubble in the 90s.

So, again...this is my THIRD TRY. I will try to make this as plain as I can:

ECONOMIC FACT #1: The economic root of all rises in living standards comes from increases in worker productivity in the things we make/services we provide. This is Econ 101. To put it in your lingo: Any economist who doesn't know this is just a moron or a fraud, salt-worthiness doesn't even come into play.

ECONOMIC FACT #2: Therefore, the more capital a society directs into productivity-enhancing investments, the more gains in living standards said society will realize versus investing in other things...NO MATTER HOW WORTHY those other things are. What you just detailed as the benefits of home ownership vs renting for me or anyone else reading it falls under the 'other' category, if that is what is unclear to you. Any economist worth his salt KNOWS THIS. Even Karl Marx knew it.

Conceptual Comparison: Even saving a child trapped in a sinking car that drove off a bridge is in the 'other' category. It is definitely something worthy to do and 'invest' in (emergency services, for example), yes. But it doesn't do a damn thing for how we make better widgets or haircuts. Harsh, but true.

Furthermore, it is from the productivity enhancements derived from capital investments we put into them that we get the wealth to fund said emergency services...or homes. Capital investment is the 'seed corn' of all living standards increases.

Regarding economic fact #2, housing in all of its related capital hogging activities -- building and financing and even brokering -- does NOT provide productivity-enhancing returns for the capital forgone in investment compared to investments that do. It does not do anything for finding a cure for cancer or improving agricultural yields or in making cheaper & better iPods, does it? No. And, even worse, the home-building industry has been really slow compared to other sectors to aggressively push for more efficient means of building. And why should it sicne it is so heavily subsidized? That is why the Contour Crafting construction process I provided a link to can be so disruptively radical.

And since most home sales are for used homes, whatever productivity gains that might have miraculously transpired in the construction of them have long since been realized and won't be 'recreated' again.

Economists have studied this for years. While the average American has been led to believe that real estate is the sure way to 'wealth', true wealth isn't about money, but purchasing power and -- more importantly -- what that PP can give you. Regarding perceptions of the 'big picture', the average American is also led to believe -- particularly those with careers in the housing sector -- that housing is 'thus an important and vital part of our economy'. But in reality, the whole housing sector is just one big consumption pig with a lot of lipstick on it as far as economists are concerned.

Don't believe me? Here is a summation of what I just said from an economist. In his article, he talks about 'bubbles' and differentiates between the Good, the Bad, and the Ugly. Guess which one is the 'Ugly'?

"The ugly bubble is the housing bubble. Housing bubbles last much longer than other bubbles, and the amount of malinvestment is many times larger. Housing-related malinvestment does not stop at the initial construction cost of a house - an excessively large house also implies excessively large maintenance, heating and tax costs during the whole lifespan of that house. Malinvested capital in housing is totally lost for productive purposes. Furthermore, during the housing bubble, a false sense of wealth may imply even further malinvestment (marble tops) and overconsumption (SUVs). A housing bubble thus significantly reduces capital available for productive purposes and severely limits future economic growth. The only good thing in a housing bubble is that the accompanying wealth redistribution is relatively small - losses are spread equally." -- From http://www.economicreason.com/index.php/international/bubbles-the-good-the-bad-and-the-ugly/

Regarding that last point about the wealth redistribution losses being spread equally -- apparently he couldn't conceive of a socialistic Congress. Or, maybe he did and meant 'equal' as being reliant on just such bailouts. (Imagine someone more cynical than I?). He wrote this in March of this year.

So, yes. I need to get out of renting. No s--- sherlocks! But we as a society need to stop burning so much precious capital on housing and put it into productive investments. Our tax code with its absolutely economically insane mortgage interest deduction needs to be eliminated, for starters.

If we invested far more into more real productivity, having enough money to buy more and better housing for ourselves will come on its own...like magic, folks.

You can see that on the Discovery Channel
It was part of their extreme or mega engineering series.

http://dsc.discovery.com/convergence/engineering/skycity/interactive/interactive.html

IPODs vs a house?
I don't disagree that productivity is what grows wealth.
To assert that housing has less value that an IPOD is silly.
People need a place to live. They don't need an IPOD.
I do agree there are too many government agencies involved inhibiting efficient and productive housing. I would love to have a monolithic dome.
It is your personal choice to rent and stay liquid. Others want to own and have a marble counter top or poke holes in the wall to hang pictures or....
I don't support government subsidies for housing, but it is a significant, necessary economic activity.

Why are costs so high?
I don't think it is the cost of labor or materials.

While land is a significant cost, nothing has been done at the government regulatory side to reduce costs.
Zoning boards restrict designs and construction techniques that could reduce the costs of construction and improve energy efficiency.
Neighbors restrict what can be done on a lot.

I think the most efficient and safe housing design is a concrete monolithic dome. Here is an example: http://www.domeofahome.com/, and another: http://www.i-domehouse.com/

For many reasons, mostly regulatory and socialist (sorry, that is redundant), you probably won't see houses like this in any US neighborhood soon.

The $64 question
This explains quite a lot about you, marjon. So you think we should all be living in concrete yurts, for greater ease and efficiency in containerizing the human population...

I'm trying hard to square that with your sentiments about central planning, and the socialist state. Doesn't that picture on the website you proffered, with little uniform domes stretching out to the horizon, make you think of a society of human ants? How do you make one look like some individual lives there? Put a flower pot in the window, so you can tell it from all the neighbors?

The place looks like a Bug's Life version of Levittown.

At any rate, to your question. Why are the costs so high?

Housing must always be seen to appreciate because people have been encouraged to put their life savings in there, on the assurance that there the nest egg will appreciate at a faster rate than inflation. When home sale prices don't beat inflation, the paradigm no longer works, and people no longer buy houses at the prices being offered. So the following categories of people are out of work: developers, trades people, materials suppliers, providers of financing, sales agents, insurance people, title attorneys and all the people who make a living selling their products and services to the above.

It's called a recession. And to avoid that dire fate, the financial markets and the government ALWAYS collude in trying to bring the desired state back into being, where housing prices inflate faster than any other sector of society.

What central planning?
It is government entities which are preventing people from building what they want to build on their property.

"Housing must always be seen to appreciate because people have been encouraged to put their life savings in there, on the assurance that there the nest egg will appreciate at a faster rate than inflation."

What assurance? Encouraged by whom? This is just another example of how government meddling distorts markets.

As for people being out of work, it is called creative destructionism.

We must return to horse buggies to so buggy whip makers will have a job?

The US Constitution does not guarantee you will make a living. Only to provide you the same opportunity for all.

What are incentives to reduce costs?
With strict, antiquated government building codes, new materials and process are not quickly adopted.

The dome designs I referred to are now approved by FEMA and should be mandated by insurance companies for any house in a hurricane or earthquake zone.

The Japanese domes are pre-fabricated and assembled on site with little labor. Governments have too many lobbyists for the old ways to quickly adopt new and approved methods.

There is no free market in housing which will keep the prices inflated.

You guys are unbelievable
"It is your personal choice to rent and stay liquid."

That has nothing to do with the economic affects of malinvestment in the housing sector. Furthermore, it also has nothing to do with my personal situation. I only answered Joanie about that because of her 'mow the lawn' jibe. Context, people! Context!

Why can't people make that distinction? No wonder we are doomed to have a populace that can't think straight on economics.

"To assert that housing has less value that an IPOD is silly."

I never said it does, Marjon. Again, you need to READ and COMPREHEND. You're pulling a total Roy here. Seriously, you are.

"People need a place to live. They don't need an IPOD."

Yeah, and rescuing a child trapped in a sinking car is also more important than saving an evacuated house burning to the ground, also. But expending the resources necessary towards saving either of them do nothing towards furthering economic productivity as investing in more efficient energy distribution or mass production or basic R & D does.

I picked the iPod example because (a) there is a helluva lot more demand for iPods than housing and (b) iPods wouldn't even exist if we hadn't been invested in the things that led to their invention, whereas housing always does and (c) people have a place to both live AND can buy iPods. You don't have to be denied being a homeowner just because you bought an iPod. Also, I notice how you are not objecting to the other examples like curing cancer.

People are so sensitive to any 'assault' on the idea of home ownership they lose all ability to think critically, it seems. Sorry, but that is what I am seeing on these threads. Seeing it from Marjon...well, that tops them all.

And NO. I can't believe I have to even say this, but NO. I do not RENT because I believe I should sacrifice homeownership myself because of the malinvestment problem. I never said that, I repeatedly disavowed it and yet it seems to completely go over your heads.

Amazing.

I wasn't upset by what YOU said
What is annoying is how people who otherwise are quite logical on TCS seem to check their comprehension skills at the door whenever their cherished 'investment' shibboleths about home ownership is even questioned at the macroeconomic level. I did expect some of that but not this bad.

I am glad that I am not a professional economist by trade or I'd probably would have slit my wrists a long time ago. Knowing just how truly insane society is is not for anyone by the iron willed, that is for sure.

It is the cost in labor and materials, mostly
Your dome links prove that. The contour crafting process is supposed to bring improvements of 10x the speed and 1/5 the cost as well.

Productivity improvements in the use of materials and labor have been quite lacking in the housing industry compared to the economy as a whole. Instead, most of such improvements that I have personally witnessed has been in the 'deconstruction' industry -- when old buildings are torn down and pounded into base materials for recycling. Another area as been in commercial building construction -- how many of you have heard the ads for General Steel? [http://www.gensteel.com]

Notice also how the demand for commercial buildings is a lot less driven by emotion than home buildings are? Hmmm...think there is a linkage?

Even well-established pre-fabrication and final assembly on-site techniques (like general steel does) aren't rigorously pursued for residential home building. It has been proven that quality control is far superior in addition to it being way less expensive.

Regulation (building codes and zoning for example) reinforce this 'stuck in time' mentality, as you yourself mention later on in the threads below.

However, the main culprit is the funding, in my view. Instead of demanding productivity innovations and changes in building codes/zoning in order to get more house (or ANY house) for their buck, the buying public has been taking on more and more debt instead. There's a reason why the word 'mortgage' means 'grip of death' or 'death grip', folks. It's the same reason why they weren't heavily adopted as they are now until the late 1940s or so. And that funding has been financed by investors...at the expense of investing in other, PRODUCTIVE sectors of the economy.

And as long as that keeps up...and our government rigs the rules to encourage more 'death grip' enthrallment, why should there be any incentive to severely reduce the costs of building homes for people?

Thus the regulations are as much of a symptom as much as it can be argued that they are a cause.

Hehehehe
Where I agree with Roy:

"The place looks like a Bug's Life version of Levittown."

"the financial markets and the government ALWAYS collude in trying to bring the desired state back into being, where housing prices inflate faster than any other sector of society."

Where I take exception with Roy (in whole or part):

Even the domes look better than the crap the Levittowns turned out to be, you have to admit. I do confess to not knowing how well the improved aesthetics will hold up to those 20-30 years from now, though.

Marjon clearly was talking about letting people have the choice of buying into the Bug's Life version of Levittown and was not talking about mandating that everyone have to have only the domes available to live in and YOU ROY CLEARLY UNDERSTOOD THAT. So your cheap shot at accusing Marjon of central planning has thus been called.

Who invested in IPODs?
Private enterprise or government?

I agree the government has too much vested interest in the housing market since it taxes property values.

If the government taxed IPODs....

Housing is a basic necessity for existence therefore investment in housing does add value to an economy.

If your argument is that the government should not direct investment, including housing, I agree.

"But expending the resources necessary towards saving either of them do nothing towards furthering economic productivity as investing in more efficient energy distribution or mass production or basic R & D does."

It seems to me that any free market provides an opportunity to increase productivity. Since everyone needs a place to live, keep warm/cool, etc., and they must pay for such things, a huge opportunity exists to provide such services at a lower cost as long as the government stays out of the way.

Z, you work in the computer industry, right? What have computers done for the economy? In general they have enabled all of us to be more efficient and productive, but they have also led to a considerable waste of time, like World of Warcraft among other distractions.

Taking your comments about housing to food production, investing in food production does not expand productivity?

What a productive investment IS and why housing is NOT it
A productive investment is investing in something that will give more 'produce' or 'productives' back relative to the investment made. Either through more efficiency or more outright expansion of existing productivity to generate more output. Or, in the provision of something new and groundbreaking that provides productive improvements elsewhere in the economy (like electricity, steam and computers).

Regarding housing, it is not productive unless you buy a house to rent to some other sucker like me and you can do so with at least a gross profit being generated. Otherwise, it is a lost cause with regards to any measure of economic output. And, even in that case, it still doesn't do much for productivity output EXCEPT provide more funds to invest in such things.

That other economist I mention thus wrote:

"Malinvested capital in housing is totally lost for productive purposes..significantly reduces capital available for productive purposes and severely limits future economic growth."

Investments that lead to the expansion of actual food production is a productive investment. Investments that lead to the productive increases into cheaper/better housing or how we provide likewise is a productive investment.

But building a house per se is no different than building a monument in a park, as far as further productivity output is concerned. It is a resource sink of investment resources compared to productive investments. That 'monument' might increase in value as an asset, but that isn't true economic growth any more than a capital gain on a stock certificate is. It won't lead to better and cheaper goods/services and it sure as hell won't lead to a cure for cancer..or even future 'iPods' or Whoopee Cushions or Even Better Than Granite Kitchen Tops.

And, here is the real zinger people don't seem to grasp or want to grasp: Productive investments is what makes it possible for you to live better in many ways (whether you 'own' or 'rent') than the best off kings of Europe even a hundred years ago. It is why outsourced workers in India can still compete (more or less) against workers here then go home after work to houses we would consider to be 'primitive' but also have the realistic expectation that someday they will be able to live in houses comparable to our own, since their economic growth is higher than ours...DING! DING! DING!...due to higher rates of productive investment.

Meanwhile, we've blown trillions on malinvestment in housing and don't have a helluva lot to show for it except financial emergencies, bailouts and the expectation of more of both of the same. Hence why it is called 'malinvestment'.

"Housing is a basic necessity for existence therefore investment in housing does add value to an economy"

Yes, and if we had a free market that determined just how much of such investment is necessary -- and no more than that -- and just how it should be invested...and NOT invested..then you'd have me pinned to the wall, Marjon. But we have both long established that that isn't the case. Or rather, it sure as hell isn't the case with regards to housing as it is for iPods, which as you correctly observed are not vital to human existence as housing is.

Why is it that we allocate investment resources for iPods and Worlds of Warcraft far more logically and efficiently than we do for housing or medical care or (back to your example) even food production (even if not as badly as the Soviets screwed the pooch on that)?

Folks! Your attitudes about housing with regards to true economic prosperity are also part of the problem. You think otherwise (as per Marjon's quote in the above), but you are wrong. Sorry to be an elitist and professorial snob of the Obama variety, but there you have it. (I am also at the end of my rope, so I might as well let you have it raw as I have nothing to lose)

Many of you reading the above might react 'that is CRAZY' and 'this guy is an idiot for not BUYING, so why should I listen to him?' (even though this ISN'T about me individually, as I've said like FIVE times now) but it is TRUE. Not my prob if you don't get reality just because it trashes your ego or even sense of financial security or 'conventional wisdom as you've known it because you've been programmed to 'know' it that way'. It does explain why folks don't grasp even the simplest of economic concepts, however. Very demonstrative of that this has been, these threads.

Sorry to be so harsh, folks. Maybe I am the worst messenger of this with me being the 'the renter', after all. But that is also due to YOUR biases that conflict with reality, not mine.

It is also why most economists don't mention any of this at cocktail parties but keep it 'hidden' in their insular journals and published papers, instead. At the cocktail parties that are 'economist only', then after they've had a few they go into nasty diatribes at how truly stupid they think non-economists all are because of this, as well. Its a good thing for them that reporters don't care to cover 'Happy Hour for Economists.' They are anything BUT boring. :)

Infrastructure
Infrastructure is required to support product investments.

No food, no people. No housing, no people. No power, no people, no factories.

If you don't have the infrastructure in place, that must be your FIRST productive investment.

I would suggest a 'wasteful' housing market is no different than any other 'wasteful' investment like TVs, Hollywood, music, Disneyland, Las Vegas....
These markets suggests productivity has improved so much so fast that people have significant more leisure time than even 50 years ago.

But who are you, or anyone to decide what will be wasteful or 'non-productive'?

Research in flat screen TVs is leading to significant breakthroughs in many technologies, including bright LEDs which will provide efficient lighting for your apartment.

Higher tech products require more infrastructure, more educated people, high quality clean rooms and precision measuring and manufacturing tools.

My favorite movie is Disclosure. Demi's character tried to cut infrastructure costs in Malaysia leading to failing products.

Many companies in the USA have tried to move off-shore and discovered how much infrastructure they had to invest in before they could begin to be productive.

And I repeat, I don't support government inference or subsidy for any market.

Luddite
What is wrong with yurts? http://yurts.com/products/custom-features.aspx?gclid=CLrInOOAj5YCFQVxFQodARryFQ

But it attitudes like yours that inhibit efficiency and growth.

Like Walter Cronkite and Ted Kennedy opposing windmills on their horizon. A hurricane or tornado wipes out your house or your neighbor's house and he wants to rebuild with a design that will nearly guarantee it will never happen again, and it will use significantly less energy and you complain because of you don't like the looks?

What a Luddite!

Start building these in PI?
http://www.i-domehouse.com/

I am with you through and through Zyndryl. But, MOST don't get it.
Many have a very strong emotional/psychological need for owning a house.

But then, they think that they are thereby having a great positive "productive" effect on the "economy" by merely owning their home.

As an aside, I keep wondering why there aren't too many Single Family homes for rent for longer durations (say 3 to 5 years) of leasing.

Is it there at all anywhere?

Owning a house in some markets like gold
If you own property in some markets like Manhattan, SF, Boston, Santa Barbara, San Diego, etc, more than likely you won't loose money on your 'investment'.

In real estate, it's location, location, location.

For others who WANT to own a house (in a FREE market), it may not be an investment, but since everyone needs a place to live, owning will cost less under the current rules.

To change such a dynamic, end the income tax, cut capital gains taxes and start the FAIR tax.

Also, local property taxes will have to be changed somehow.

And I will say it again, get the government out of subsidizing housing, agriculture, etc, and only then will capital flow to what investors believe to be truly productive investments.

There will always be housing
...and food and clothing. And when shortages do occur, more will be made or, at least, there will be strong motivation to make more.

Those are all OUTPUTS for consumption. Generally speaking, they are not the means for production themselves.

People used to live in caves. No mortgages, too! They had 'housing' didn't they? Why is it we don't live in caves any more? It wasn't because they invested so much in 'caves' and declared 'caves are a vital part of our economy...invest in more!' There were no Fred Flintstone Mae to buy up bundles of cave mortgage paper. The cavemen were too focused on making investments into more productive hunting, animal husbandry and agricultural improvements, I do believe.

Real wage gains come from productivity improvements, not 'better housing'. The housing comes later and REFLECTS the wealth generated from previously made productive investments. Just like improvements in diet and clothing and studly hot rods to pick up chicks with.

They are nothing more than a consumptive drain on our economy, though. Its a simple grasshopper and the ants comparison. It is THAT easy to conceptualize.

Its because they've been 'brainwashed', I am afraid
Oh, and don't have this conversation with those involved in the housing industry -- particularly realtors. They REALLY have big heads and think that their industry is VITAL to the economic prosperity of our nation.

I'm convinced now that one will far more successful in convincing a gay person that he/she is really straight, that an Obamaton really needs to vote for McCain and that feminists should love Sarah Palin than one ever be able to 'de-program' people out of their fallacies about 'homeownership' and the economy.

And that is the real reason why we have these bailouts and will have more. It isn't because of the 'greed' on Wall Street. It is because of Joe Sixpack's irrational belief that his house is 'wealth' and that he deserves it to only to go up in value, too.

Consumptive drains
That is most of our economy.

Electronics, computers, games, TV, movies, restaurants, .....

One thing about land, they ain't making anymore.

The 'means of production', people, need maintenance
I think you perspective is a bit narrow.

A third world worker can live in dirt floor hut and go to work in a bright clean factory turning screws, but a robot can turn screws.

I don't know about you, but many of my best ideas occur while I am at home, relaxing and NOT thinking much about work. Innovators, problems solvers, those that need to think to be productive need places to think that are secure and provide the environment they want.

Homes contribute to that productivity.



None of which requires "owning" the house one resides in
I mean, innovators, problems solvers, those that need to think to be productive need places to stay, they don't HAVE to "own" them.

The "environment" and "security" can be provided by a renting company (which owns the Single Family Homes or Apartments or Condos that are rented out).

In fact, I would go so far as to argue that "real thinking types" will actually be better off reniting than owning, as they will be relieved of the mundane jobs of "maintaining" their dwelling units. I would prefer it that way ANYTIME.

You are just rationalizing your emotional/psychological need for owning (the place you live in) as benefiting the larger economy.

Tell me, in what way productivity gains are achieved if all those who live in rental units now suddenly become owners of those units, by shelling down lots of money?

Last time I checked people are emotional.
"The five needs
*Physiological needs are to do with the maintenance of the human body. If we are unwell, then little else matters until we recover.
*Safety needs are about putting a roof over our heads and keeping us from harm. If we are rich, strong and powerful, or have good friends, we can make ourselves safe.
*Belonging needs introduce our tribal nature. If we are helpful and kind to others they will want us as friends.
*Esteem needs are for a higher position within a group. If people respect us, we have greater power.
*Self-actualization needs are to 'become what we are capable of becoming', which would our greatest achievement. "

Note that safety, housing is second on the list.

When you own (if the government permits) YOU can decide how long you will stay and YOU can decide how it will look and YOU can decide to change it to meet your needs.

As for mundane maintenance many like such activity, for whatever reason. What a snob to judge them so!

How is wealth created? Energy is expended to meet the needs and wants of consumers. Consumers need and want houses and all the stuff that goes into them creating wealth generating activity.

So, you have decided NOT to give a straight answer YET again; have you Marjon?
You made the statement that owning the place we dwell in contributes to productivity improvement.

So, give reasons for your position.

Spare us your emotional/psychological mumbo jumbo.

I did.

No you didn't. As is your wont, you just ASSERTed without providing any proof
Explain the link between more people owning their homes (as opposed to the SAME number of homes being owned by corporate entities who rent them out) and general productivity gains for the "society" as a whole.

You are yet to do that.

It satisfies the consumer.
What good is an economy that doesn't meet the needs and wants of its customers?

You and Z are sounding very socialistic presuming you know better than the customer.

So, now Zyndryl and I sound socialistic, do we Marjon? Your desperation is amusing
Consumers want all KINDs of things. I don't have to go into details. You know them as well as I do.

Care to argue that ALL KINDs of wants lead to productivity increases?

Specifically, how does more people wanting to own their dwelling units contribute to productivity increases for the "society" as a whole?

One thing about the wealth from of productive investments...
...is that no matter how static the total land mass is, more and more of it becomes available to 'settle' on.

Ever hear of skyscrapers?

Yeah, and ferris wheels at the amusement park do to, then
...I once came up with a solution to an intractable programming problem while stuck up on a ferris wheel at the local county fair, too.

What you are engaging now is a 'total stretch' to justify your cherished biases, I am afraid. Very Roy-ian of you.

There are all kinds of INDIRECT contributions to productivity one can point to. But it is the DIRECT ones that can only be targeted for investment. And investment is what we are talking about here.

And no, my perspective is not 'narrow'. Focused, yes. Narrow not.

This is not rocket science.

And the Dutch said the same thing about Tulips
"How is wealth created? Energy is expended to meet the needs and wants of consumers. Consumers need and want houses and all the stuff that goes into them creating wealth generating activity."

Not with housing. It is generated by the expansion of debt, which increases asset inflation. That is not 'wealth'.

Its nothing more than the Tulip Mania all over again. Yes...houses are just that, more solid tulips.

At least with a stock market bubble, real means of production are created. Others might benefit from them other than the investors, but the means of production is usually maintained.

Again, I never said that housing should not be built nor that people should not spend THEIR money on it if they so choose. All I have been saying is that the rules are rigged so much -- especially in how people are increasingly spending OTHER PEOPLES' MONEY on 'homeownership' -- that gross malinvestment in that sector occurs that starves other sectors. It is just a distortion if it only competes against other consumables, like iPods. It is outright STUPID when it consumes the 'seed corn' of capitalism -- capital that could be invested in productivity.

Despite what you might think, we don't invest enough in productivity. Our GDP would be higher if we did. Our real wages would be greater if we did. What investment we do get in that area is from foreigners or from foreign investment abroad that 'filters' to us.

http://en.wikipedia.org/wiki/Tulip_Mania

NeaRNoaD beat me to it, but here I go anyway
"You and Z are sounding very socialistic presuming you know better than the customer."

I never said that. But, people keep THINKING I did/keep doing so in one way or another. I don't know if it is just ****-poor comprehension skills or economic illiteracy or just stubborn delusion. Probably, all three are at work.

If the customer wants a house, OF COURSE he's knows better than I or (especially) the government does 'for him'.

But if the customer thinks his decision contributes to real wealth building for our economy that contributes to any appreciation for future living standards increases, he's an ignoramus at best (because he doesn't know economics) or is being a total idiot at worse (because, when educated about economics, he still refuses to acknowledge the reality of the situation -- mostly because of ego and other base emotional 'reasons').

It's like the difference between people who thought the tax rebate checks earlier this year would do anything meaningful for economic growth vs those who knew better. Well, how well did that 'pump priming' work out, eh?

The issue is not...nor has ever been declared as by me in my arguments...how 'good' an economy is by how well it 'meets the needs of and wants of its customers'. That is a given that has nothing to do with this issue. So, either you are using it as a straw man or just are ignorant that you are inadvertently doing so.

The issue is: What investments and their attendant forgone consumption sacrifices are made to make the future economy DO EVEN BETTER in meeting the needs and wants of its consumers?

Generally speaking, it's not growing tulips in a pot, making more iPods at a fab plant in Asia, erecting monuments in the park or building houses in a subdivision.

ONLY PRODUCTIVE INVESTMENTS do so. You can characterize that as being 'narrow' all you want. You can claim it is merely a 'perspective' all you want. In other words, you can be a ROY all you want.

But it doesn't change the aforementioned hard core facts that have been PROVEN to be true, regardless of whether or not you accept them.

As for my PERSPECTIVE in all of this: Since I have no problems whatsoever in seeing the 'big' picture, I have ascertained that I would rather live in a world where we don't deny ourselves the fruits of our full productive potential and, especially, do so by engaging in fallacious thinking that building houses and extending 'home ownership' is ANY substitute for the Real Deal.

As for HOW we do that, you know that I prefer the free market overwhelmingly to socialism, so in case you might be thinking otherwise, don't.

And, yes. I'd still want to own a house. Who doesn't? I just think it more likely that will happen if our GDP growth rates were to 'turbocharge' to around 5%-7% per year and unemployment to be so low that anyone who can fog a mirror can get a job and that both phenomenons produce significantly real wage increases that will enable me to save more for a down payment and/or allow me to further meet monthly payments for said desired house. But, that is just a 'narrow perspective' on my part. Feel free to disagree with me on that one. It's just an opinion.

Productivity drops due to current events
The WSJ radio this morning discussed how managers should take care to reassure employees, if they can, in order to keep productivity up.
People are worried about current events and spend time worrying about whether they will have a job or keep their house or can retire in 10 years.

Productivity "for the society as a whole" (sounds socialist) suffers.

If people WANT the security of owning a house to satisfy their need for security, that contributes to their productivity.

What I said..
is that I DO NOT support government subsidies for ANY part of the economy.

Bottom line is that people, the engines of productivity, and the REASON an economy exists in the first place, NEED a place to live AND to feel secure in that place to maintain and increase their productivity.

Grasping at straws
"If people WANT the security of owning a house to satisfy their need for security, that contributes to their productivity."

Sure...and so does having daily knowledge that a reasonably clean toilet is accessible when you need one, too.

No one is denying that there are indirect productivity gains to be had from infrastructure and institutions.

It's just that they don't pack as much punch as investing in defined productivity investment does. That is why lowering or outright abolishing the corporate income tax will always increase productive investment. And, productive investments have to be concentrated in order to be most effective or effective at all.

Drawing prettier pictures on the cave walls didn't improve the cavemen tribe's productivity much. It made them happier campers and THAT might have led to better productivity, but the effect was not easily measurable nor as powerful as designing a better bow and arrow was, eh?

The subsidies are only the symptom, Marjon
And you've demonstrated quite clearly that you yourself maintain belief in the economic fallacies that almost all homeowners and even most non-homeowners in this country have regarding housing and its economic effects.

And yet it is exactly those fallacies that the public holds that led us to this situation that you don't like, in the first place.

"NEED a place to live AND to feel secure in that place to maintain and increase their productivity"

Uh-huh. As a renter, I feel MORE secure because if I lose my job, I know I won't lose my place of residence. My co-workers who are 'death grippers' are worried sick, in comparison. Some feeling of security, huh?


They aren't making more land....another straw man
"They aren't making any more land.
TRUE, but sales volume has fallen 40% in the last year alone. It seems they aren't making any more buyers, either.

Japan has a severe land shortage, but that hasn't stopped prices from falling for 14 years straight. Prices in Japan are now at the same level they were 23 years ago. If we really had a housing shortage, there would not be so many vacant rentals."

From: http://patrick.net/housing/crash3.html

Do you disagree?
"the whole housing sector is just one big consumption pig with a lot of lipstick on it as far as economists are concerned. "

This is what you said earlier.

"No one is denying that there are indirect productivity gains to be had from infrastructure and institutions. "

Which is it?

BTW, it has been suggested that cave paintings were an aid to hunting, which would increase productivity.


Gains in productivity may not require direct monetary investment. Better management can have a tremendous impact on productivity. Kaizen is one way and if you have read "It's Your Ship" you will find that when managers can get over their ego, their workers, can and will find better ways (increased productivity) to get the job done.
And maybe just hanging a few pretty pictures on the wall could help.

"The author proceeds to offer a solution to the Idea Inertia syndrome, Bureaucracy Busting:

* Encouraging and correctly evaluating suggestions.

* Evaluating one's boss.

* Using outside experts for their unique perspectives.

* Proving a stimulating environment.

Blohowiak develops and explains how controlled and focused conflict in organizations can unlock the creativity of its workers. He feels that constant agreement among employees yields a lack of energy, creativity and life, and that this homogeneity of thought prevents progress. Hence, the need to create some positive, goal-oriented friction among workers. Maverick managers use this friction to give employees the chance to be innovative, creative and flexible."

http://findarticles.com/p/articles/mi_m3495/is_/ai_13604246

Mavericks! How To Lead Your Staff To Think Like Einstein, Create Like da Vinci and Invent Like Edison.

This is a good book. Too bad so many managers can't get over themselves.

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