Monday, March 10, 2008


When I was last posting, the housing market was beginning to slow, and there were slight tremors in the financial markets.

Things have changed.

According to Case-Shiller, home prices are down about 4-5% nationwide with more declines to come (estimates range from 10% to 30%). These numbers do not seem large in % terms, and the havoc they seem to be wreaking on financial markets is a testament, I think, to how bad the current system is at reducing the amount of debt it runs on (de-leveraging). I have thoughts on what it says about a system that can pile on debt to take riskier bets, but cannot reduce debt to become more conservative--more on this later.

Various plans have been bandied about that all focus on propping up house prices. This writer feels that house prices in the US are too high and need to fall, and has thought this since 2002 (which was too early, aka wrong, but it certainly seems to be true now). Harvard's Marty Feldstein has one proposal which Megan likes, but Tanta thinks is ridiculous. I never took Ec 10 and tremble at disagreeing with Marty, but I tremble at disagreeing with Tanta more.

Given the financial and political unwillingness to let house prices fall back to their historical ratios with salaries and rents, the only alternative is to raise the price of everything else, via good old-fashioned inflation. GLD has enjoyed a spectacular run-up, and I'll be interested to see where it heads if it breaches $1000 the way oil has well and truly breached $100.


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