A Wall Street Journal op-ed from Martin Feldstein is receiving a certain amount of notice. In the op-ed Dr. Feldstein makes the fairly ordinary observation that fiscal policy and Fed policy are complementary. Dr. Krugman is astonished that a conservative like Feldstein would dare to propose tax reform and even tax increases as an alternative to monetary policy.
The paragraph that caught my attention was this:
In the United States, QE reduced long-term interest rates and raised the prices of equities and real estate. The resulting increase in household wealth stimulated consumer spending and raised overall economic activity.
As should be obvious to anyone not blinkered the main beneficiaries of quantitative easing have been the wealthy. The mechanism for this has been by increasing the value of financial assets, which the wealthy hold to a far greater degree than the rest of us do. While I’m glad to see more acknowledgement of that, I’m still unhappy that the implications of the policy haven’t been fully realized, i.e. that the Fed’s policy has been to increase income disparities in favor of the rich.
You can figure out for yourself whether the policy has been successful at least as far as real estate is concerned. There’s a handy graph of the Case-Shiller index here and a chart of the change in the DJIA here. Judging by the Case-Shiller chart, if the purpose of QE is to make banks with a lot of real estate or real estate-backed assets on their books solvent again, there’s a long way to go.
There’s a big difference between equities and houses. As the price of a house increases, the number of qualified buyers decreases. The same is not true for equities.
There’s another question that’s almost too embarrassing to ask. Should the value of houses and the number of houses being built always increase? It seems to me that as the proportion of Americans who will never be wealthy enough to purchase a house increases, it would be a limiting factor on how many houses will be built.
I think I’ve made my disdain for QE quite obvious. I truly believe it is immoral in spades, not just increasing income inequality, but actually penalizing those who played by the rules and saved. And yet look at who touts it. Our President and like minded pols. The Presidents supporters. I pointed out this to the OTB crowd and to Dr Taylor and our former friend Reynolds, but they don’t want to hear it. In my opinion they just gave up their moral authority to complain about income inequality.
As for homes….. No, there is no reason homes must go up in value, it’s just been an empirical fact for about a century. But it’s more due to various economic considerations that do not always have to pertain (like a baby boom) rather than a law of physics. And it’s very location driven.
For example, you should see what QE has done to home prices down here in Naples, FL. What housing crisis? Stock market gains, retiring baby boomers, climate and limited desirable land stock have created a monster in premium homes. (See Port Royal, or Olde Naples, aqualane Shores or my community – Grey Oaks). But even here, econobox condos…..not so much. It’s very specific. Look at high end areas in NY, SF, The Cliffs NC, Scottsdale etc. The dynamics are nothing like, say, even the far western Chicago suburbs where increases are modest and have not caught up to pre-2007 levels. The Fed has created, along with the other dynamics, these premium housing islands. As Dave points out, it is also probably creating a permanent renting class or over-priced mid to upper price points that have a difficult levitating act to maintain.
I’m OK with economics being economics, but we don’t need no stinking Fed rigging the game.
My sources tell me that most of those sales are cash sales and many are to foreigners—Chinese on the West Coast, Russians or Saudis on the East. That’s something that’s not sustainable, either. Those are folks who are taking the money and running.
“My sources tell me that most of those sales are cash sales and many are to foreigners—Chinese on the West Coast, Russians or Saudis on the East. “
Your “sources” are saying the same thing my sources are saying. High end homes are being sold more frequently now for cash by foreign buyers who have no place to put their money but in America.
BTW, Drew, that was a good post written by you 🙂
Drew’s comment, “I’m OK with economics being economics” reminds me of a conversation between Michael & Stanley on The Office.
Michael has everyone learning CPR in case Stanley has another heart attack, and Stanley isn’t paying attention.
Michael:”We are not always going to be there to coddle your heart back when it disappears to be working. What are you gonna do if you’re by yourself and your heart stops?”
Stanley: “I would die.”
Michael: “And you’re OK with that?”
Stanley: “I’m OK with the logic of it.”
I can’t speak to the West or East coasts, but I can Naples, The Cliffs and Scottsdale. Mostly American and residents, not cash pay investors. Here in Naples the Germans do have a presence. Lufthansa even has their own gate. The Cliffs had some Saudi money as developers but I don’t see residents in flowing robes.
Interestingly, I bought my mothers house a few years ago to provide some liquidity. She needed to move to a small place so I put the lace up for sale. I got $500 over ask and probably $5k over market in 2 days by a REIT. At the close I talked to the REITs local captive broker. They had carpet bombed the three town arc just north of Indianapolis with offers. All wil be rented.
ICE
I can’t bend economics or poor policy to my will, I can only recognize and acknowledge it, and adapt. I’m not GM or Citi, and only have one vote.
Drew, you’ve got $20,000,000+ by prior statements, and you’re a partner in a PE firm, which is going to give the group of you more collective pull. You might not be GM or Bain, but let’s not pretend that you are limited to one measly vote, influence-wise.
@Icepick
While $20,000,000+ makes living comfy, one is still the hired help. The truth is that it is not even chump change to the big boys. That much money might get you a handshake and a photo op with the president, but you are still a slob like the rest of us.
Ice
Your cynicism is trumping your judgment. Did Romney beat Obama? Is Il overwhelmingly Democratic? We buy manufacturing companies; have we been able to influence legislation vis-a-vis China? Were we able to change the tax premium in Obamacare on cap gains? Did we beat back Dodd Frank which got passed to the great detriment of small PE firms? Do you think PE firms endorse QE??
I could go on. But the answer is not one bit. You need to focus. Big Banks, Big Ag, Big Education, Big Medicine……now there is influence.
Nice of Drew to make the argument against supply side economics so eloquently. Will have to quote this when it comes time to cut taxes that favor the wealthy. ” I truly believe it is immoral in spades, not just increasing income inequality, but actually penalizing those who played by the rules and saved.”
Steve
I refuse to believe, Steve, that your understanding of the issues is so shallow that you actually believe what you just wrote.
In my area of Florida the upper half of the market has recovered, though not to pre-recession values. I’m not seeing a lot of foreign money in this area, but I haven’t been following closely. Becoming a renter made me less interested in monitoring the market.
Andy, in my neighborhood prices are still far beneath prior values. Homes that went for $150,000 eight years ago still only sell for $35,000. So yeah, bifurcated market!
…
TB, Drew has got about a million times my financial resources. (I’ve got twenty dollars in my sock drawer.) Are you seriously expecting me to believe that he’s got no more influence than I do?
@Icepick
The truth is that he is the hired help. I know it, and he knows it. He is playing a mind game with you for his benefit. It keeps you in your place, but the truth is that he uses the back door just like you. He just wears a more expensive suit, but he says, “yes sir, and how much, and can I fetch you another one, and by your leave.”
The people who have real influence do not whine about things. They do something about them. Warren Buffett, Jon Corzine, Hank Paulson, Jamie Dimon, etc. do not give a shit about their taxes.
People like him do not influence the Republican or Democratic parties, but they would like you to think they do. They spout the party line and send the party money, and the party gives them a few perks to feel important. They are like the little girl in the back seat with the plastic steering wheel. She thinks she is steering the car, and she is happy.
Kim Kardashian is worth more and has more stroke, and all she did was shake her ass. When she wants to put her money to work, guess who she hires?
The people who have real influence do not whine about things. They do something about them.
Demonstrably untrue. In this year alone we’ve had whining from Sheldon Adelson, Steve Wynn, and Thomas Perkins, to name three. All are men worth at least ten figures.