I was listening to Russ Roberts and George Selgin talk this morning about what bad policy bailouts are. It hurts my brain to hear such nice and intelligent men go on about something so wrong.
They aren't wrong, conceptually. Some sorts of bailouts are bad policy.
But, if we had only had more of the right kind of bailouts, then we wouldn't have needed the wrong kinds of bailouts, and Roberts and Selgin both treat firms like Bear Stearns and Lehman in 2007 and 2008 as if they were just recklessly taking advantage of the bad kind of bailouts, when in fact the defining truth of that period is that what they desperately needed were the good kind of bailouts.
Good bailouts = universal stability
Bad bailouts = targeted arrangements made in a panic
One of the unfortunate results of the recent crisis is that many observers seem to disfavor both types of policies because they see the collapse as confirmation of excess. A disappointingly low number of people looks back on this misery and says, "Huh, we probably should have tried to stabilize prices, including home prices." Instead, they take the collapse as confirmation of the necessity of collapse. Even though a dozen other countries stand as examples of how preferable avoiding the collapse would have been.
Here is a graph of Total real estate value for the Closed Access cities and for the US excluding the Closed Access cities (this still includes Contagion cities, like Phoenix, Las Vegas, Miami). I have expressed it as a proportion of total personal consumption expenditures to normalize it with the nominal economy.
Next is the annual growth rate of real estate values in these areas. This includes both new building and capital appreciation. Keep in mind, there is little new building in Closed Access cities, proportional to their existing stock, but new building in the other areas is healthy.
From 1998 to the end of 2005, the non-Closed housing stock had risen by 20%, relative to personal consumption expenditures. Given the drop in real long term interest rates over that period from about 4% to about 2%, this is a mild rise in values. Rates first stabilized at just over 2% from 2004 to 2009, and have fallen farther since then. They have never sustainably moved up from those levels back toward 4%.
Yet, non-Closed real estate began to fall in early 2006. By the time Bear Stearns fell, non-Closed real estate values had fallen by 11%, relative to personal consumption expenditures. By the time Lehman fell, they had fallen another 5%. They would eventually fall an additional 20% from that level, before finally leveling out in 2012. They remain, to this day, nearly 20% below the levels of 1998 while real long term interest rates are now close to 1%. Really, was it craven and irresponsible for investment banks to expect that 21st century public institutions charged with maintaining economic stability would prevent home prices in places like Topeka and Omaha from falling more than 30% relative to personal consumption?
Maybe before the next crisis we should settle, once and for all, exactly what banks can expect from our consensus policy, because as far as I can tell, unless they are just piling gold in the vault and lying in the fetal position in a pool of their own flop sweat, there is literally nothing they can expect from federal policymakers in terms of stability that won't lead to unanimous finger pointing at them when the bottom falls out.
PS. I think we might be able to look at the second graph here for a clue regarding economic trends. When the Closed Access real estate prices are rising more quickly than in other areas, this is a sign of the Closed Access migration pattern. This tends to correlate with general economic growth, and it is the reason why it seems like our economy is addicted to debt and can't grow organically without creating asset inflation. In 2005, when Closed Access real estate appreciation fell back to more general levels, that was the brief time where mortgage growth and new building were still strong enough to be sustainable. When prices in all areas began to move in concert in late 2005, falling sharply along with housing starts, that is a sign that national, not local, factors were at work.
Note, that is the period where all the accusations of fraudulent securities are made. That is when CDO squared and synthetic CDO's were being constructed. Those were the securities that blew up when systemic defaults started happening. Those securities were insignificant before 2005. They had nothing to do with the "bubble". The reason that there was such a demand for AAA securities wasn't because of banking excess. It is because we had been systematically undermining the market for normal AAA securities. By 2006, the yield curve was inverted, Fannie & Freddie had gone through a series of steps of removing liquidity from mortgage markets. The Fed was starving the economy of cash. What we needed was cash and credit. What we needed was an institution that could support the mortgage market, so that normal, non-exotic AAA securities could be created. Synthetic CDO's, falling housing starts, universally falling prices, bankrupt mortgage originators were all screaming for stability as early as 2006.
And, men as clear headed and upstanding as Russ Roberts and George Selgin are complaining in 2016 about how dangerous it is to have policies that lead to bankers expecting stability. Like that's the problem.
PPS. When 30 year tips yields are back to 2%-3% and home prices in flyover country have risen by 30% relative to personal consumption expenditures, that is when you will know we have returned to some sense of normalcy. There is an angry, unified consensus in this country to literally, actively, prevent that from happening. The policies that prevent it from happening will continue to pin interest rates at near zero levels, and, thus, the roars will continue that the Fed is just propping up asset prices with low interest rates, when in fact we are doing the opposite.