Brakes, Ben! Brakes!!!

September 26th, 2012
in contributors

US House Prices Have Bottomed Where BubbleomiX Predicted: Time for Ben To Put On The Brakes!

by Andrew Butter

It looks like US house prices have bottomed; this is the S&P Case-Shiller 20-City Index up to June 2012:

Click on graph for larger image.


Follow up:

That’s pretty much how BubbleomiX predicted it would go, three years ago (dotted red line).

OK there was one sucker-rally and two dead-cat bounces and the bottom was at 134; BubbleomiX said there would be two sucker rallies and one dead cat bounce and the bottom would be 120.

Personally, I reckon that the difference between 134 and 120 is a measure of how successful the combined efforts of the Fed and the Federal Government were at turning back the tide of the inevitable.

Of course one has to question whether all the money that was printed to be thrown at the problem as a pain-relief, was what Hayek would call a mal-investment. The danger now is that the Fed, egged on by the politicians, creates another bubble. It’s happened before.

For example, after the pop of the bubble, Alan Greenspan eased to take away the pain and reward the speculators who had paid too much at the top of the bubble, or more precisely to give a Get-Out-Of-Jail card to the bankers who had extended credit to speculators doing that on margin.

Granted, Greenspan’s big mistake was to accelerate the easing after 9/11 as part of his personal contribution to winning The War on Terror (I’m not kidding; he says that’s why he did it in his book). That contributed to the housing bubble.

Not that I am convinced that was the prime driver of that bubble.  In my opinion, what drove the mal-investments in the housing bubble was securitization, which is where all the money for the flipper-speculators came from, although theoretically Greenspan was supposed to be keeping an eye on that, just he fell asleep at the wheel.

Here we are in the end of 2012, and it looks like Ben might actually break-even on the $1.5 trillion or so of toxic assets he bought as part of TALF to prop up the system, which goes to show, you should never fight the insider-trader of last resort, although it’s still not clear what he paid for that junk, certainly it was more than anyone else wanted to pay at the time.

So why on earth is Ben going back into the market to buy legacy RMBS which is what QE-3 is all about?

There again at “only” $40 billion a month, he will need to keep going for about three years to print what he printed to fund TALF.

Anyway, without doubt we can say that’s Mission Accomplished one more time!!!

Starting 2005 all the poor and struggling middle-class people in USA were persuaded to buy houses on credit at silly prices…for the greater good of America.

Now a good number of them have been bankrupted and kicked out of the houses they bought, and so anyone with a good credit score can borrow money at the lowest interest rate possible, as engineered by the Fed, and can buy those houses at 20% to 30% less than they would be worth if the market was not in disequilibrium, and then rent the houses to the people who got kicked out, who can’t go back in because their credit scores are all shot to pieces.

Nice to see the policies of the Fed are rewarding the 1% and screwing the 99%, nothing changes.

Leaving aside how much money can be made by the 1% capitalizing on the misfortune of others the danger now, in a larger sense, is another Monetarism Fuelled Bubble.

Ben says he’s staying the course with his “easing” (read printing), because he wants to create jobs in America. Forgive me for being a little slow here, but regardless of what Mitt Romney says, I never saw any evidence that handing out money to the 1% of the population that is super-rich, created jobs for the remaining 99%, or certainly not jobs that create sustainable economic growth.

I mean how many times does Mitt need to have his shoes polished every day?

Right now long-term interest rates in America are half what they should be for this stage of the business cycle, in other words US Treasuries are a mega-bubble, sustained by the actions of the Fed. That rewards the rich, who have got good credit scores and can borrow at super-low interest rates, and penalizes everyone else.

Whether TALF and her little-sister TARP did anything more than provide pain relief for the super-rich, is something that will be debated for years.

If America is to get back on track, Ben needs to start pulling back the election-candy, right now.

And the politicians need to start making the changes to…the tax code, the “rights” of public sector unionized workers to milk the system, the way it makes more sense to build things outside America than inside…thanks to the way taxes are calculated, the subsidies on gasoline that pump up the current account deficit, plus the really stupid subsidies on making ethanol from corn…there is more.

If progress is made on those fronts, then America has a chance, the danger is that Ben will print money to give the politicians weapons of mass-pain-relief so they don’t have to push through unpopular medicine.

Then the bubble in US Treasuries which rewards the 1% and penalizes the 99% will keep inflated, and then one day that bubble will burst which will have consequences…for the 99%.

Just don’t say those consequences, when they happen, were, “Unintended”.


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Opinion Articles by Andrew Butter


About the Author

Andrew Butter started off in construction in UAE and Saudi Arabia; after the invasion of Kuwait opened Dryland Consultants in partnership with an economist doing primary and secondary research and building econometric models, clients included Bechtel, Unilever, BP, Honda, Emirates Airlines, and Dubai Government.
Split up with partner in 1995 and re-started the firm as ABMC mainly doing strategy, business plans, and valuations of businesses and commercial real estate, initially as a subcontractor for Cushman & Wakefield and later for Moore Stephens. Set up a capability to manage real estate development in Dubai and Abu Dhabi in 2000, typically advised / directed from bare-land to tendering the main construction contract.
Put the unit on ice in 2007 in anticipation of the popping of the Dubai bubble,defensive investment strategies relating to the credit crunch; spent most of 2008 trying to figure out how bubbles work, writing a book called BubbleOmics. Andrew has an MA Cambridge University (Natural Science), and Diploma (Fine Art) Leeds Art College.

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