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May 05, 2005

Destroying the American Dream...
by David Taffi

... or How I Woke Up to Wailing in LA's Housing Nightmare

Well he's done it. I didn't want to believe it, but it's true. Greenspan of course has transmorgified attractive interest rates of recent years into outrageously negative real interest for so long that he has nursed into being a virtual Godzilla of real estate speculation the likes we have not seen since Og traded a club and a mammoth skin for his friend's cave. Welcome to LA's housing nightmare.

Well, what exactly did he do? Only destroy the American Dream for many, that's all. Yes, I know, I can always afford a house in Oklahoma, provided I can find a job that's one step above the Quickie-Mart. (No offense to Oklahoma, as you have lots of land, or to Quickie-Mart workers for that matter as your work is more respectable than counterfeiting.) What I'm talking about are places on the coasts where a lot of people have no choice but to live and work.

When Alan and his merry band of counterfeiters pursued a policy of "making the world safe for speculators" at the expense of working, middle class, and yes, even upper middle class people (100k a year is not sufficient income for a first time homebuyer in LA) he destroyed the value of their savings and returns on their labor.

The new rules of the game are simply this; "He who speculates first wins". And those who have assets to begin with are in the best position to speculate first when the conditions for speculation are risk free as opposed to those who are just getting started in life and are scrimping and saving for that 20% down payment, as in the old days.

So the rich get richer, and you can finish the sentence. When budding LA real estate tycoons in the making rapidly piece together, 3, 5, 10 residential houses at inflated prices, and then raise the rental rates, as what can happen in a difficult supply-demand situation in LA, not only does the entire cost structure of the rental market increase to the detriment of working people, but there are now fewer available homes for people who just need a place to raise their families. Result; rewarding speculators at the expense of everyone else. Great, just great.

Yes, life is unfair, but for Alan's gang of monetary inflationists, it's OK as long as it's unfair in your favor. Of course he had lots of help from his friends. With unlimited amounts of credit, lax lending standards, and with the loan originators having no moral hazard to contend with as they dump their real estate paper onto the back of Alan's credit inflation Godzilla monster, Fannie Mae, the rich do indeed get richer, as this credit machine moves into hyperspace. Question: was Fannie Mae created to help lower income households obtain credit? Just checking.

Oh, did I forget to mention that easy Al tells us it's very difficult to know when you have a bubble?

Well, I can tell you Al, when you have a bubble. You have a bubble, when you destroy the value of a currency, and subsequently the rate of return on investment assets goes to zero when your money becomes worthless. Seems fairly basic. Economics is the science of allocation of scarce resources. When one commodity, such as a currency, is unlimited and free, the price of everything else priced in that currency skyrockets. Hence a bubble.

Of course, if the goal is to destroy a currency with inflation, then perhaps there is no bubble, as the asset has simply been re-priced to reflect its value relative to the depreciated currency. One person's bubble is another's fair price. The chumps are the ones on the outside looking in. Yes, it all makes sense to me now. Thick skulled Og had it right all along. If all my assets were in caves and clubs and skins as opposed to abundant currency seashells washing up free for the taking on the seashore, there would be no inflation or bubble. I'd simply trade one cave for another and I'd be no worse off for it. In a barter economy, rarely is anyone cheated by the counterfeiters. A cave is a cave; even our friend Og can spot a fake cave.

Did I mention something about changing the rules of the game? No matter. No matter that the central banker has decided to pick winners and create losers by changing the rules of the game on an inherently uneven playing field. No matter that he has destroyed the rates of return on investment through excess liquidity (monetary inflation) and destroyed the value of savers money in the process.

So, thanks Alan for another quarter point rate hike. Maybe someday we'll get to a real interest rate above zero, where the inflation rate is fairly calculated and not one where it has been hedonically suppressed downward. Yes, Alan, congratulations by making the world safe for speculators and enriching the few at the expense of many, by encouraging the misallocation of capital and punishing savers, by destroying the returns of labor in relation to the returns of financial speculation. Yes, Alan, for many, you have destroyed the American Dream. Go east young man, go east young woman, but not too far. Be sure to stop somewhere in the middle!

David J. Taffi, MBA

Copyright © 2005-2006 David J. Taffi

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