“Housing prices would never have risen so high without multiple Washington mistakes.”

Russell Roberts opines on the housing bubble and its causes.

I’d describe the op-ed as sublime.

You lost me at hello

R. Glenn Hubbard and Chris Mayer, via WSJ (emphasis mine):

We propose that the Bush administration and Congress allow all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25% (matching the lowest mortgage rate in the past 30 years), and place those mortgages with Fannie Mae and Freddie Mac.

What a novel approach (notwithstanding the fact that Fannie and Freddie were recently nationalized because they were spiraling down the rabbit hole).

(h/t Calculated Risk)

Inflation is a nasty bug:

To reiterate, the last time Producer prices were this high, the Fed had rates up in the double digits — not at 2%…

Here’s a chart of the prime lending rate (as published by the WSJ) during “modern economic times” (each color change represents a rate change - click for larger view)…

I’ll bet few running around today remember how ugly things were in the midsts of that mountain-in-the-middle. But Paul Volcker was scrambling (and let’s note that he has been more vocal as of late too).

Producer prices have been rising for a while, but they held off passing on costs to consumers. That game is over. So, the highly leveraged are getting killed by plummeting home prices and the savers are getting killed by just about everything else.

And you can thank your Federal Reserve for that.

Nobody got the memo, and I got all this in my feed reader simultaneously

• The Obvious, to everyone other than the NAR - Home Prices Fall 12.7% (The Big Picture)
• The Cheers, from Walmart shareholders - Consumer confidence drops in April on inflation, job worries (Associated Press)
• The Quandary, from the Taxpayer Defamation League - Bottom Falls Out of California Budget (Paul Kedrosky)
• The Expected, from those watching a little more closely - ‘Underwater’ Subprime, Alt-A Mortgages to Swell by Midyear (Bloomberg, with “expectation” here)

I’m closing my browser for the rest of the day.

UPDATE: Hearing Wal-mart cheers.

Case-Shiller and Commerce Department reports in sync:

Property values fell 6.1 percent from October 2006, more than forecast, after dropping 4.9 percent in September, according to the S&P/Case-Shiller home-price index. The decrease was the biggest since the group started keeping year-over-year records in 2001. The index has fallen every month this year…

Figures this week from the Commerce Department may show new homes sold at an annual rate of 718,000 in November, down from October’s 728,000 rate, based on the median estimate of economists surveyed by Bloomberg News.

My guess is the next National Association of Realtors propaganda release will dispute this, noting something along the lines of “homes were the most popular holiday gift this year”.

UPDATE: November fares worse.

UPDATE 2: My guess was correct - the NAR “propa-gates” - the “market is now stabilizing.”

Cheer and good tidings first; light reading last

• Charlie Crist calls for an investigation of “Florida’s subprime-tainted fund.” It’s really a SIV tainted fund and a sub-prime tainted SIV, but I’ll spare you the details. More on the Florida Fund fiasco here, here, and here.
• Research In Motion: no slowdown. Is it a consumer thing? Personally, I’m very happy with my Blackberry, although I consider it a business tool.
• Myspace. Facebook. Go Wordpress!? This may sound a little outlandish now, but the open source blogging application has the install base and the development community to really put a hurting on the “traditional” fare.
• A Home Price Heat Map, compliments of Stephen Heise. Data runs from 1975 to Q3-2007. Very interesting - hit the pause button along the way.
• A reminder: next time you look into that camera someone might be recording the color of your eyes, among other things.

Again, happy holidays!

I was having dinner a few weeks back with an old friend, and the subject turned to the US economic situation. I’ve known this guy for roughly two decades and trust him like a brother; he is a very smart character who doesn’t pull punches. I was inclined to listen - the fact that he analyzes high-yield bonds for a big investment bank’s private client group certainly didn’t hurt his cause either.

I’ve believed that indebtedness at every level of our society, from federal, state and local government, right down to consumers’ credit cards, home equity lines and first mortgages, has reached epic proportions. But when this fellow said he thought we were headed for another depression, my sceptical nature reared its ugly head. I have a predilection for looking at the downside, as I started my career in restructuring situations, but I relish that downside for its opportunity and I also know that nobody likes a doomsayer. It wasn’t until I read about our nation’s savings rate hitting zero that I began to rethink his claim.

Yes, the nation’s savings rate has hit zero, not that anyone should be surprised. We are a consumer society. Our economy is driven by consumer spending. The savings rate has been on decline for some time. And it is now at a level not seen since the Great Depression.

We used to be a manufacturing economy. Then the talk was service economy. Now its consumer economy. What is wrong with this scenario? I heard someone say the other day that the US’s largest export is dollars. With the current account deficit continuing ever upward in mobility, that doesn’t surprise me.

What left me stumped was what anyone can do about it. Seeking bankruptcy protection used to be a way for consumers to clean up their balance sheets, and they have in droves, with the rate of filing more than doubling in the past decade. Many blame skyrocketing health care cost for tipping them over the edge, and I have to agree that a big medical bill can certainly be a “tipping point.” Unfortunately for many, that option is going to disappear very soon. And it is not an option for a global economy like ours.

I’ve also heard chatter about restructuring the tax code to incent savings. I believe that would be a good start, at least for individuals. And rising interest rates are certainly another incentive to save, albeit at the expense of stock market valuations and (potentially) home prices. And there are some economists crying out for accelerated rate increases, and they say that might very well stem the potential of an out and out real estate debacle.

Me…I see a lot of conflicting forces at work. Can you really cut off the finger to save the hand, or are we going to suffer some extreme pain, somewhere, or order to set things right? I simply don’t know, but I would love to hear some ideas.