Keynes vs. Hayek, Round 2

I like how at the end Keynes is pulled up to his feet and declared the victor (no matter how obvious a failure, the corrupt system keeps applying his theories). Then the Washington mandarins, Wall Street bigwigs and press all gather around him while the nerds come to congratulate Hayek. The press often implies that the Wall Street crowd loves Hayek and laissez-faire (“unrestrained markets” and all that), when in reality the moneyed political players support intervention since they are successful rent seekers and bailout recipients.

The key point that well-intentioned supporters of government (like most everyone in Europe) often miss is summed up in this phrase from Hayek:

“With political incentives, discretion’s a joke.
Those dials they’re twisting, just mirrors and smoke.”


For those who haven’t seen it, this is the first video:


And the real Hayek on Keynes:

Econ prof: Was there really a housing bubble?

Just when you thought your respect for economics PhDs couldn’t get any lower,  a professor at the top-ranked University of Chicago, Casey Mulligan, is making the case in the New York Times that there was no bubble in housing:

Adjusted for inflation, residential property values were still higher at the end of 2009 than 10 years ago.  This fact raises the possibility that at least part of the housing boom was an efficient response to market fundamentals.

Inflation-adjusted housing prices and housing construction boomed from 2000 to 2006 and crashed thereafter.  Commentators ranging fromPresident Obama to Federal Reserve Chairman Ben S. Bernanke have described that cycle as a “bubble,” by which they mean that, at least in hindsight, the housing price boom was divorced from market fundamentals.

But maybe there was a good, rational reason for housing prices to increase over the last decade.

Let’s consider first what it means to believe that the spike in prices since the late 1990s was unwarranted — the so-called “bubble theory.”

According to the bubble theory, for a while the market was overcome with exuberance, meaning that people were paying much more for housing than changes in incomes, demographics, technology and other basic factors would suggest.

Now that the bubble is behind us, people today should be no more willing to pay to own a house than they were in the late 1990s. (It’s true that population has grown since the 1990s, but population growth is nothing new and should not by itself increase real housing prices.  Don’t forget that greater population also means more people available to do construction work.)

Yet, the professor points out, house prices are still well above 1990s levels:

Ok, so his basic point is that because housing prices haven’t yet declined to 1990s levels, there was no bubble. He doesn’t consider the obvious alternative: maybe prices don’t move in straight lines and that the sideways action in 2009 was the result of an $8000 tax credit and general upswing in market optimism (as seen in stocks and commodities).

Maybe, just maybe, as in Japan after 1989 and the US after 1929, housing prices will decline in a herky-jerky fashion for many years after the peak.

Mama, don’t let your babies grow up to be economists. They’ll never stay smart and they’re always confused.


In other bizarre housing news via, some real California estate foreclosure prevention scammers were tied up and tortured after they ripped off another team of real estate rip-off artists.

Video: Public employee of the year awards (SNL)

Mish put this up a few days ago. If you haven’t seen it, it’s a must-watch.


This version may play better in the US:

This is why your state and local governments are bankrupt, as well as the national governments of Greece, Portugal, Spain, Italy and probably soon France.

Selling munis today is like selling Greek bonds six months ago — the numbers guarantee default. The only question is whether or not there are bailouts, but like with the GIPSI states, there will be a lot of uncertainty leading to higher rates in the interim, and in the end they can’t all be bailed out.

Look at these rates. Considering the risks, that’s a pretty skimpy premium over Treasuries, even considering the tax advantage.


SEC intends to ban short selling. Government boxcars reported in Greenwich.

Hedge fund managers said to pack dirt under fingernails, roughen hands on bricks to avoid suspicion and possible shipment to North Dakota re-education camps.

These days it seems like we are living in an Onion article (1 , 2). It would be funny if it were not the end of the world as we know it.

I’ve been a bear since spring of 2006, preparing for a depression since early 2007, and have had no illusions about the death of the idea that was America. I saw these events coming a mile away, but the speed with which they have arrived is shocking.

By edict of the Duma…

I figured that the shorting ban (WSJ article) would pop up somewhere near the midpoint of the bear market, maybe Dow 8000, but this train to Animal Farm is an express. When will they ban international money transfers? Unapproved foreign travel? Gold?

The speed with which our leaders are dropping any pretense of respect for markets just makes me that much more bearish. 8000 could be next month, not next year as I had figured. And I have to rethink my bottom target of 3500. Really, that would not be the end of the world — this market started at 800 back in 1982, and you have to remember that equity values go POOF after an economy gets as leveraged as ours is. 75% stock market drops are not black swans. They follow credit bubbles like day follows night.

Markets are so bourgeois, anyway.

The possibility of Dow zero just ticked up a standard deviation or two. What happened to the Moscow stock exchange after 1917 anyway?

The end of the stock market? Impossible, right? Well, if our Bolsheviks enact their desires to use government funds to buy all manner of securities (as the Russians are now doing), they could eventually own everything, not just the mortgage market and a huge insurer.

Buyout mania, with a twist.

If a security’s market price is $10 and the government offers $20, that is not ‘market support’, that is a buyout. Of course, there are limits to this sort of nationalization, namely the difference in scale between the Fed’s $900 billion balance sheet and the many tens of trillions of dollars in US private equity and debt instruments, so at first they will be very selective (ahem), but they do have two tools to help them work around those limits: printing presses and guns. In a few short years, when the former lose their potency, the latter can be brought to the fore.

PS — Of course, my opinion is that this rally (futures are up 2% on top of today’s dramatic close) is just a short squeeze and dead cat bounce. The air pocket under stocks just got a whole lot bigger. 90-day T-bills last traded at 0.07%. The stall warning light is still on.

SEC planning re-education camps for short-sellers

Also, LEH is has agreed to sell all of its level III assets to the Tooth Fairy, but is providing 90% non-recourse financing:

If Tinkerbell defaults, Lehman’s successor entity will stick its hand down the crocodile’s throat and attempt to get it to regurgitate. The firm’s historical value-at-risk analysis shows that sticking your hand down a crocodile’s throat is completely safe.

Treasury Secretary Hank Paulson issued a statement: “I am delighted that SWFs (Sovereign Wealth Fairies) continue to express confidence in the terrific values represented by American financial institutions. As I have been saying since August of 2007, this shows that the crisis is now over.”

Get the rest of the story here.