Blackstone's Stephen Schwarzman was commenting on The Horror of wealth destruction. So one should rightly ask: How much "wealth" has been obliterated? Ashamedly, I often seek the path of least resistance, though I've been more recently preoccupied, both of which are excuses for taking the easy route and referring to the FT quoting the Asian Development Bank's number suggesting $50 trillion has been smoked, vaporized, hacked-off,roto-rootered or otherwise removed from the mark-to-market asset side of the global balance sheet.I was actually quite pleased to see this number - not because of schaudenfraude or a sadistic desire to inflict ill-will upon others, but rather because it confirmed the number I had (of my own lazy accord) roughly estimated of what Americans had seen their net asset values diminish which was twenty-trillion (20,000,000,000,000). This, relative to the ADBs estimate, also roughly jives with America's share of global GDP, (not wanting to quibble over a trillion here or a trillion there). This still leaves Americans with $20 to $25 trillion of net asset value by my very rough back-of-the-envelope calculations (though please don't ask me to show my work).
There are those who adopt a glass-half-full view of this, and hope we'll return back soon to the warm and fuzzy place of high asset values. Or one might take a glass-half-empty view and dismiss peak values and more!!) as never having actually existed or, been realizable, and see where we are presently as being still enroute to where Global NAV will ultimately bottom. For the moment, I'll take the middle ground and venture that having shed an awful lot of aggregate value (an entire year of global GDP according to the ADB!), we're a lot closer to where we're going than we were. Some limb, I've climbed out on, huh? But it in fact matters. It matters to the inflation vs. deflation debate. It matters to the keeping of one's head in regards to the scale of the problem and the potential resources that can rallied, marshaled (or sequestered and confiscated for the more authoritarian amongst us).
I know this is a facile way to look at it. I know it is not a matter of simply passing the hat to each and every for their contributions since the assets are mal-distributed beyond mosts' comprehension. But it seems fair to ask the question: Precisely how big is the problem (the eventual total hole in financial system's balance sheet) in relation to everything, in the US and globally. A further two trillion? three trillion? perhaps five trillion in the USA?? Mind boggle-ingly large numbers indeed. What is this as a percent of GDP? What is it as a percent of GDP spread over 10 years? What is it as a percent of Aggregate Net Worth? Ten percent? Fifteen percent? Can we translate this into a facile figure that allows us to contemplate how much poorer it makes America, in aggregate? Would it be another ten (or fifteen? or five?) percent poorer than it currently believes and, if so, is it possible we can apply our credit accordingly, and start again?? Would you trade 10% of what you thought you had (savings, pension, net home equity) for an end to the uncertainty, and a reasonable assurance it shan't happen again (in addition to warrants on the excised pot of shite)? IF the answer is categorically no, does this mean we are in for the mother of all political battles while the real economy burns? Will this battle be generational? Does it pit the ends of the mal-distribution against each other? How else can we parse the question?
I am not dismissing the validity of the debate over official action, and it's reasoned moral implications and differences over optimal implementation. But it seems such is the vehemence and vitriol of the debate over the mechanics - however valid - that it has run roughshod over the very broad and simple questions that include phrases such as The Long-Term Public Interest, sustainability, and fairness.
Needless to say, I don't have the answers. But I wonder if the descent into technical jabberwocky hasn't prevented public buy-in, instead, fracturing the polity into factions defending parochial interest, rather than asking, and attempting to non-partisanly answer the question: What is best for the vast majority of American people - not simply this month, or this tax-year, but in the context a generation, and their children. The risk, is the image conjured by that of Pontius Pilate arguing and accusing his legion,in the life of Brian, while Brian, ostensibly held prisoner, escapes due to the recrimination. If not apt, perhaps it should nonetheless replenish diminishing reservoirs of amusement.
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34 comments:
Cassandra,
Well, one clue is that we live in a world with less than 2 trillion actual dollars (M0).
Dollars are not gold. Uncle Sam can print them. But ponder, for a moment, what your reaction would be if you boarded a spaceship, traveled to an alien planet, and found that their productive sector, with all balance sheets aggregated, had a market capitalization of 50 billion ounces of gold - but the planet itself had only 2 billion ounces of gold. Would you buy?
Dollars are not gold. USG can print them. Which is the only way we could achieve these insane capitalizations - this giant pyramid of paper, in which it is considered perfectly normal for the balance sheet to expand year after year, taking on debt, debt, and more debt.
Unfortunately, it seems that USG is not quite so good at printing money as some of us of the Austrian persuasion had thought. The Fed can issue 50 trillion dollars and solve the problem, effortlessly socializing "The Tab," with a snap of its fingers.
But will it? I'm starting to think it won't. In fact, I'm starting to think it can in theory, but not in practice...
Moldy,
You're coming around to the realpolitik of deflationary overshoot. The - how shall we call them - Moral Libertarians (along with the merely outraged) - will prevent The State doing what seems to many to be clearly necessary under the circumstances. Their motivations appear (at least partially motivated) by decently intended reasons, but the fact remains that the outrage will probably lead to sub-optimal aggregate outcomes (i.e. those that create less aggregate wealth in real terms and more human misery) for the sake of what they believe is justice, but what may actually be a bastardized form of revenge.
This exposed Political nerve is the crux of something very serious - more serious, I believe than the important but arcane details of TALF TSLF or technical manner of equity injection.
Perhaps supplementary package IV three years hence begins to get some traction. Until then, one would surmise velocity stays subdued as effective deleveraging straitjackets any and all recoveries. This is not a forecast, just a scenario.
MM,
What specifically do you find insane about the market capitalization on the proposed alien planet?
Market cap is based on the net present value of future cash flows, emphasis on future. Since a typical piece of money can and will exchange hands many, many times over the span of, say, twenty years, there's no reason in principle why $2B in hard money can't provide enough cash flow over the course of twenty years to justify a $50B market cap.
Anon,
Excellent question. Exactly the right question, in fact.
The answer is that the market capitalization is the future cashflow stream of the planet's government, considered as a gold-producing firm in a galaxy which is, of course, on a hard metallic standard.
Let's call our planet Centauri. Essentially, from the point of view of the rest of the galaxy, Centauri might as well be a giant gold mine. All internal flows cancel. The planet has a single balance sheet denominated in gold.
Therefore, we note two things. One is that if all Centauri's securities are held off-planet, a "typical piece of money" will not in fact recirculate. Once it is paid out as part of the future revenue stream, it is gone. Cassandra will bring it to Earth, where she will ship it to India and make it into the galaxy's tackiest jewelry.
Then, we note that the planetary firm cannot possibly increase its own market capitalization by issuing shares to its own natives. Since we have consolidated Centauri's entire balance sheet, internal obligations cancel.
Thus, Centauri as a whole cannot produce more gold than it will actually produce. And thus its obligations are overpriced.
Now: there is an important difference between Earth and Centauri. None of Earth's obligations are held off-planet. So far as we know!
So we have to ask: in practice, to what extent are Earth obligations actually running money through this full cycle, from dividend to wallet to cash-register to manufacturer to dividend?
Well, I'm sure it has happened at least once or twice in the last few months. It's certainly not impossible. There must be some of it. But really, what percentage of consumer spending can this full cycle supply?
On the other hand: we see exactly what we would see in an overpriced Centauri, namely continuous expansion of the planetary balance sheet to support a bogus market cap. Not the continuous circulation of money, but the continuous creation of credit.
So I'd say we're certainly pretty lucky that dollars aren't gold. Perhaps I am wrong and some informal way to print them will be found soon, and then it will be off to the boom again. Whee!
This exposed Political nerve is the crux of something very serious - more serious, I believe than the important but arcane details of TALF TSLF or technical manner of equity injection.
Yes.
Moreover, as a child of Washington I can tell you that the problem is quite a bit more serious than you think.
You are perceiving its effect at a democratic level. Your perception is accurate, but it is only a reflection of what I think is the real bureaucratic problem.
The problem is a complete absence of any semblance of executive authority in Washington. This is not an accident, and it is certainly not new with Barack Obama, although he has perhaps deepened the slide. The Presidency is now firmly founded in our unwritten, continuously evolving constitution as a ceremonial office, like the British monarchy.
People compare Obama to FDR all the time. What they miss is that, although FDR was not an effective manager, he had absolute executive authority and he had the best executives in the world, possibly in history, working for him.
If a guy like Harry Hopkins wanted something done, it got done. If he wanted to start a project with 100,000 laborers, he would hire them and be turning dirt in a month. And a crisis of similar proportions to our own gave even these people trouble.
Washington today has a tremendous phobia of executive authority. Nothing can be a mere personal decision. It all must be the foreordained consequence of either (a) Science, or (b) The Law. Ideally, Science and the Law will be in perfect agreement.
In practice, what that means is that you cannot move a chair from one office to another without going through some tremendous bureaucratic process. (I speak metaphorically. I don't work for USG and I'm unsure of its actual policies on furniture movement.)
The basic problem USG faces with the financial crisis is that some agency or process is going to have to accept the responsibility for a decision which will be painted in an extremely ugly light. No one wants to take this hot potato, so it can be passed around indefinitely as the country burns.
Specifically: what has to happen is that the liabilities of the big banks must be assumed by USG. To me this is actually only fair. Because USG told those banks who to lend to and why, and USG winked and nodded to the creditors of those banks, telling them that Lehman could never possibly fail. So: they were operating as a Department of Finance, that's all. Just change the business cards and you're good to go.
But in terms of the American public discourse, USG has a certain process for talking about its balance sheet. And every single effective action carries a huge political price in this terminology, which no agency will ever want to pay.
If the loans are bought, that is X trillion dollars of taxpayer money. If the loans are guaranteed, what we see is this continuous drip, drip, drip news flow of mere tens of billions, as in the case of AIG.
Even if some fraudulent "insurance" scheme is constructed, as in the case of Great Britain - it doesn't bear thinking about, though I fully expect to see it - there is at least potential political liability from the continuing spiral.
So: moral libertarianism is not the direct cause of the problem, although it surely doesn't help. The real problem is bureaucratic imperative. Which will neither change, nor "change."
And unfortunately, the bureaucrats involved have put themselves far beyond the reach of any conceivable exercise of democratic sovereignty...
MM,
I'm slightly confused. At first it seemed like you were implying that a market cap is overpriced simply by being greater than the monetary base. But then it seemed like what you were actually saying was that, in practice, our market cap is overpriced given the present circumstances and the like. I find the latter somewhat persuading.
The current model of government as saviour, and the sacrosanct status of the economics profession, is heavily indebted for its existence to the succesfully made claim that the FDR administration brought the U.S., if not the entire world, out of the depression. There are various opinons as to whether it is true, or not, but what is certain is that the claim assumes that the big one might never have ended were it not for the given intervention. The fact that this latter is likely false, if not actually provably so, has to call into question the claim itself - at least to some degree. All the presumed proofs are phrased in the negative pluperfect subjunctive, so to say, which is the polar opposite of the scientific method.
One of the costs of this belief is the evident current situation of virtually everybody waiting for intervention to start taking effect before stepping out of the bunker, a condition under which it can't and won't.
Expect, dearest Cass, trade routes that do not cross the American black hole to start developing themselves.
CB:
"Expect, dearest Cass, trade routes that do not cross the American black hole to start developing themselves."
Quite a few people seem to be up in arms over China's aggressive expansion of trade into Africa.
Oh my, the Senators have lost their shirts gambling again, are we going to save their Biggus Dickus' and will they confiscate what little the peasants possess to erect their fortunes. It is for certain that taxation without representation is once again in vogue as the houses of Congress now represent a foreign nation, Biggus Dickistan, populated by the best and brightest in Washington D.C. and Manhattan. Schooled at our phallic institutions, Yale and Harvard for example, these financial types and lawyers have little to contribute to our society beyond maintaining the status quo, a sustainable society, sustainably wealthy for themselves and sustainably poor for their indentured and indebted slaves.
Many, many little dicki make one really, really big dickus. Will we see more bread and circuses. Will we send the residents of Dickistan down the Cloaca Maximus or will the little dickuses rise in an orgiastic climax. Stay tuned.
Mencius-
If the government can't figure out how to work the printing press, and the $50 trillion remains vaporized, how bad do you think it gets? 15% unemployment? 20%?
When we think of a person's savings, what we mean is the ratio between total net worth and yearly expenditures. So if net worth drops by half, that means balance sheets won't be restored until expenditures are reduced by half. Of course, that reduced corporate income and thus asset prices even more. Eventually total wealth floors based on some multiplier of all Fed guaranteed assets. But how low will it go? Do we get a Stock Market Insurance Corporation when the Dow dips below 5,000?
The basic problem USG faces with the financial crisis is that some agency or process is going to have to accept the responsibility for a decision which will be painted in an extremely ugly light.
Really? There are ways of doing the bailout in a politically popular way. You could just give the money directly to the asset owners ( ie the American people), rather than bailing out the banks. Or you could let the bank officially "fail", but then insure all the main street American people and companies who depended on the bank, and then rehire organization structure of the bank to manage the insured assets. IE - nationalization and assumption of liabilities, but its spun as bailing out Main St, not Wall St ( which it is). Politically, the present course seems to be worst of all. Officially the USG is bailing out Wall St, but its not even giving enough money to actually solve the problem.
Thus, I think the problem is really that the economists at the top do not understand the problem and the solution. They do not understand that a crash in every class of assets in 2009 is the equivalent to the meltdown in savings accounts in 1931. In 1931, most of the pyramided dollars were in savings accounts. Insure the banks, stop the depression. Bernanke learned that lesson. But today, the pyramided dollars are spread out among dozens of assets, from housing and stocks, to bonds and SIV's. Monetary policy needs to prevent a contraction not just in M1 or even M3, but in MX - the total market price of all assets. Outside of you and Winterspeak, I don't think I've heard a single journalist, official, or blogger propose that. Thus the bleeding continues.
"Would you trade 10% of what you thought you had (savings, pension, net home equity) for an end to the uncertainty, and a reasonable assurance it shan't happen again (in addition to warrants on the excised pot of shite)?"
You have a false premise in your question. There is no assurance the wall street bankers won't do the same thing again if the wall street banks are bailed out. The only way to deter the wall street bankers from doing the same thing again is to badly haircut the bondholders and counterparties to their banks. That -- and that alone -- is the only thing that will force the market to control these people.
The regulators are lazy, incompetent, and/or corrupt. And they cannot be trusted to control the bankers.
So no deal on this. And hopefully this backlash against bankers sparks a backlash against so-called free trade and the "washington consensus" of rubin / summers. All nonsense on stilts. Adam Smith supported retaliatory tarrifs; as if he'd support free trade with avowed mercantilist protectionists like China.
Mencius-
If the government can't figure out how to work the printing press, and the $50 trillion remains vaporized, how bad do you think it gets? 15% unemployment? 20%?
When we think of a person's savings, what we mean is the ratio between total net worth and yearly expenditures. So if net worth drops by half, that means balance sheets won't be restored until expenditures are reduced by half. Of course, that reduced corporate income and thus asset prices even more. Eventually total wealth floors based on some multiplier of all Fed guaranteed assets. But how low will it go? Do we get a Stock Market Insurance Corporation when the Dow dips below 5,000?
The basic problem USG faces with the financial crisis is that some agency or process is going to have to accept the responsibility for a decision which will be painted in an extremely ugly light.
Really? There are ways of doing the bailout in a politically popular way. You could just give the money directly to the asset owners ( ie the American people), rather than bailing out the banks. Or you could let the bank officially "fail", but then insure all the main street American people and companies who depended on the bank, and then rehire organization structure of the bank to manage the insured assets. IE - nationalization and assumption of liabilities, but its spun as bailing out Main St, not Wall St ( which it is). Politically, the present course seems to be worst of all. Officially the USG is bailing out Wall St, but its not even giving enough money to actually solve the problem.
Thus, I think the problem is really that the economists at the top do not understand the problem and the solution. They do not understand that a crash in every class of assets in 2009 is the equivalent to the meltdown in savings accounts in 1931. In 1931, most of the pyramided dollars were in savings accounts. Insure the banks, stop the depression. Bernanke learned that lesson. But today, the pyramided dollars are spread out among dozens of assets, from housing and stocks, to bonds and SIV's. Monetary policy needs to prevent a contraction not just in M1 or even M3, but in MX - the total market price of all assets. Outside of you and Winterspeak, I don't think I've heard a single journalist, official, or blogger propose that. Thus the bleeding continues.
Oops, sorry for the double post.
"IE - nationalization and assumption of liabilities, but its spun as bailing out Main St, not Wall St ( which it is)."
Assuming liabilities of banks is bailing out BONDHOLDERS, not main street. The wealthiest 1% of householders own something like 60% of the world's stocks and securities. Bailing out bonholders is a bailout of the RICH, at the expense of the poor, the middle class, and the young.
One thing I know is that nobody knows the end result of all this mess. That said, an exchange of debt for equity in a big way will likely occur. Markets expand or contract to match the amount of liquidity present in the system. So now there's less. 92% of the people go to work every day, and the smart people all over the world are finding new ways to solve problems more effectively than ever before, because they can communicate better and faster. All it takes is one really good invention to spark the next wave of growth.
That state of affairs makes the rant about gold simply laughable. Imagine tying the entire growth of money and the economy to the output of one of the least efficient and effective industries in the world. Talk about insanity!
Johnny Abacus --
Precisely. The growth model based on American or western European consumption is way deep into the zone of diminishing returns. Thus, the optimal solution to the crisis is to get buying power into the hands of Africans, say, and not in the direct salvation of western homeowners/corporations.
In this, the Chinese and others have a tremendous advantage, not having colonial baggage and the ensuing complex of guilt and resentment entering into and tainting every transaction.
RichL --
The technological revolution argument is a touch stale. The one and only invention that counts is that of generating and transmitting electricity - now pushing two centuries old and possibly also suffering from diminishing returns. The travails of the PC business should be a hint.
"What is best for the vast majority of American people - not simply this month, or this tax-year, but in the context a generation, and their children."
Forcing the recognition of prior economic losses on bondholders. They are the richest and most able to bear the loss; they participated in the bubbles by earning outsize returns; they have a lower propensity to spend than the rest of us, so their losses reduce consumption less than taxes and inflation on other groups; imposing pain on bondholders increases banks cost of funding and supervision by bondholders/counterparties to make it more difficult for them to engage in imprudent speculation.
people often ignore the fact that before this PAPER wealth was destroyed, it was created (falsely).
people often ignore the fact that before this PAPER wealth was destroyed, it was created (falsely).
---
Yup, the banks incurred losses when they advanced cash for loans/securities worth less than the cash. Now it is just a question of who bears the economic losses from the prior years.
The wall street / high street bankers have been using their TBTF franchise as a license to counterfeit money in the form of being able to use their reputations to sell trash securities as high quality stock/securities. The only way to break their counterfeiting franchise is to haircut bondholders/counterparties by forcibly converting their debt / claims to equity. Then and only then will bondholders and their indenture trustees actually monitor and control the bankers reckless tendencies.
Sorry, but how is it a bloodbath or a horror if rapidly inflated, unsold assets return to more realistically valued, unsold assets? Personally, I've not lost anything because I didn't sell anything, regardless what the market did before and after September. Is it not possible that many of those rolled into these $20 - $50T pool are in a similar boat?
Moldy - I see your point, and will defer to your better knowledge of Washington. I would naively suggest that while organizational culpability may be an impediment, it is a tad easier to deploy money within an existing system that while moth-eaten is reasonably "efficient" at doing what it does when focused (witness securitisation!) than it is to deploy 200,000 employees on physical projects.
Charles, I am sympathetic to your view(s).
Anonymous 6:27 The perils of bond haircuts are articulated well by Ed Harrison in his guest post a Naked Capitalism here. While I, too, am highly skeptical of the virtue many pursuits of Money Men, (not just Wall St., but the City, and in Tokyo, Zurich, Geneva etc.) one must try their level best to be dispassionate about playing "financial truth or consequence". Much of the ordinary infrastructure and pursuits of the financial system are reasonably sound and while almost certainly sub-optimal, we (collectively) depend upon its continued functioning. I am believe Ed's discussion is cogent and relevant on the consequences of failing to consider the practical and behavioural cascade that follows actions, that while perhaps morally justified, lead to a meaningful worsening of an already bad situation.
Anonymous 4:33 Again, I urge you to read Ed Harrison's post. And it is also the case that "the bond holders" are "us", if not directly, then indirectly through pensions, money-market funds, insurance co's, and so forth. Some inflation, taxes precisely these bondholders (and other real asset holders) in real terms, without pulling the rug out from the core of the financial system. The future will implicitly see (for a time - until the next cycle) imposition such constraints as you suggest. The practical question, is, What is the Impact of the explicit morally-based actions on The Public Interest in the present immediate future. It is worth contemplating the evolution several moves forward of the Financial System's chess game, in evaluating the impact of one's dogmatic moral stance.
Anonymous 10:12 - It is a bloodbath insofar as massive investment and future return extrapolation has been predicated upon those elevated asset values and their continuation. This will impact employment, consumption, savings ratios as well as capital investment going forward. Before, it benefitted from a positively reinforced feedback loop, which is now unraveling in similar fashion albeit with a negative trajectory. Of course for someone who didn't lever-up, extract equity from fixed assets at elevated prices for consumption, and was suspect of past elevated values, so discounted them in assessing a margin of safety with respect to their future requirements, you are correct. But those people (you & I?!?) are in the minority methinks (writing without hard evidence to back this up).
"Again, I urge you to read Ed Harrison's post. And it is also the case that "the bond holders" are "us", if not directly, then indirectly through pensions, money-market funds, insurance co's, and so forth. Some inflation, taxes precisely these bondholders (and other real asset holders) in real terms, without pulling the rug out from the core of the financial system."
I read it. I don't agree that the bondholders are the public or that small holders can't be protected while haircutting the wealthy holders. First, small holders don't own the bulk of the bonds. Second, individual and corporate insurance contracts and annuities are protected because those are issued by regulated entities and so have priority over debt issued by the regulated entity or affiliates. Third, the small holders can be protected with FDIC type guarantees for bondholdings of less than say 250k (or some other arbitrary number). Fourth, if case by case haircuts / forcible equity conversions are not administrable for entities that the "public" feels are worth saving (some entities ought to be killed), there could be some arbitrary level of haircut combined with providing an FDIC guarantee for the remaining debt.
Additionally, I think Barney Frank and Don Kohn are completely wrong in saying we don't want counterparties and bondholders to be reluctant to deal with the wall street whiz kids. We absolutely do want people to be nervous about them and demand a premium for giving them funding. Skepticism and a high cost of capital are key ways of controlling these people.
How to write off a mega-giga-tera-peta-ton of bad private debt in the USA quickly, to the roar of the crowd?
Void all naked CDSs! Expropriate the speculators!
Give the mob speculator blood, then break up the zombies!
We have got to write off a lot of bad private debt, and quickly.
There's an anecdote that Joseph Kennedy remarked early in the Depression that he would give up 50% of his wealth if he could be sure of keeping the remainder. Since Marx has been discredited and the dying echoes of populism faded away in the 70's, your 10% looks like a good estimate for what we might call a wealth default swap.
«people often ignore the fact that before this PAPER wealth was destroyed, it was created (falsely).»
Those who ignore this do so rather deliberately and disingenuosly.
The paper capital gains that were "created" in the past 15 years of extraordinary loose monetary policy have been a colossal transfer of spending power from those with few assets to those with more assets.
E.g. if the economy stays as it is, but suddendly houses triple in price, those with houses that can be sold to those without suddendly can turn those houses into a lot more other stuff (cars, holidays, large TVs) than those without.
http://www.economist.com/world/britain/displaystory.cfm?story_id=9267826
«what has looked for a decade like the closest thing yet seen to a mass lottery win.»
A lottery win, where the payers of the lottery are the owners of no or less property. Because in the end what matters is realizable purchasing power, whether earned or stored as an asset.
And when asset prices increase without an increase in output, a larger share of income has gone to asset owners. And non asset owners often are too stupid toi realize that means their living standards have been cut.
The asset owners then perceive any decrease of those nominal asset prices as an attack on their living standards.
This is the purpose of the reminders about the loss in paper "wealth": that by driving asset prices up, the propertied winners were able to increase their living standards at the expense of the unpropertied suckers, and the *viceversa*.
well said, blissex.
it is worth noting that as with tech bubble, it never ceases to amaze me how many people believed their own BS and rode it up and back down with little but cyclical cheer and some in-between good-times to show for it. Some of course did (intentionally) cash out due to price and lack of value. Some made the profitable trade (like Sam Zell). But more believed it was not luck of the draw, but some destiny or parochial cleverness and borrowed more to expand enroute towards the top, only to be deep-sixed courtesy of leverage. And for hubris, I shed no tears.
«But more believed it was not luck of the draw, but some destiny or parochial cleverness and borrowed more to expand enroute towards the top, only to be deep-sixed courtesy of leverage. And for hubris, I shed no tears.»
But I think it was not just hubris (or dumb greed), I think it was also deliberate policy.
One thing was about simple electoral politics: about 60-70% of voters in both UK and USA are property owners (and essentially all USA campaign donors are). Surely seeing their properties treble (in the UK) in "value" (that is, paper spending power) will have made them really happy and to vote for the usual faces.
But I am convinced that governments intended the trebling of real estate prices to "solve" the huge pension problem: most property owners are older and near to retirement, and if property prices trebled, then their comfortable retirement would be assured by the "market".
Sure, at the expense of the working young, the poor, in particular immigrants.
The overall plan might have been to drive up the price of assets owned mostly by voting older affluent UK citizens, suck in a large number of immigrants, pay them low wages to serve the propertied class, while selling or renting to them at high prices that real estate.
In other words tax heavily the working young and poor, often immigrant, but indirectly by fostering property appreciation.
Unfortunately the bubble burst well before the older, voting propertied class could cash in.
BTW, years ago Mankiw wrote a paper predicting a huge house price crash in the USA because of a collapse in first time buyers because of the "baby bust":
http://www.nber.org/papers/w2794
Then years later he wrote a paper to explain why this bust had not happened, and he ascribed it mostly to a surge in first time buyer numbers thanks to surging immigration.
Note that it was not just immigrants; I think that government policy (in the UK, USA, Oz, ...) was to pay for the retirements of affluent voters via property price increases hitting *all* first time buyers (typically the working young and poor), but immigrants are just a particularly convenient target subgroup.
The overall idea is that instead of raising massively overt taxes on the working young and poor to fund the retirement of older affluent voters, it was much easier politically to "create" a "market" solution via rising asset prices.
The "market" solution also having the advantage that it would be dramatically less egalitarian, as the property price "tax" would hit also older non affluent residents, and not hit young affluent inheritors, and bring the biggest benefits to the wealthiest owners.
Just to state it explicitly: I think that the asset price bubble policies pursued with relentless zeal by the USA and UK governments were intended to result in a huge redistribution of spending power.
blissex: "The paper capital gains that were "created" in the past 15 years of extraordinary loose monetary policy have been a colossal transfer of spending power from those with few assets to those with more assets."
Yup, and we need to reverse that through forcible conversion of insolvent banks debt to equity, and wiping out existing shareholders. Reinhart and Rogoff estimates the big financial institutions have 3 or 4 trillion dollar holes in their balance sheets. It is generational theft from the young, the future generations, and immigrants to have the US government bailout the bondholders and counterparties owed that 3 or 4 trillion dollars, and then burn them with taxes, inflation, and inflated asset prices.
What I find truly shocking is that the MSM pundits -- democrat and republican -- seem to favor bailing out the wealthy and the transactional class that supports them.
Andrew "Old Hickory" Jackson knew how to deal with the banks: "Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out, and by the grace of the Eternal God, will rout you out."
Idle policy speculation: Use the tax system to issue refunds to bondholders of lower means after the haircut. It's just the usual social engineering machine, used on a new asset class.
Not that that will ever happen...nor will TPTB figure out the 1930s policy of inserting public agents behind bank lending desks.
Without those two fixes, we are quite simply in Japanese mode with lesser macroeconomic prospects.
Cassandra, with your special knowledge of Japan, just a couple of questions if you see this:
1. What is the likely or possibly optimal household investment response? If real returns on all asset classes are essentially zero or worse for say 15-20 years, isn't the 'bury cash at the Post Office' solution the correct one a la the 'Japanese housewives'?
2. What pretzels of logic and buffoonery can we expect from the banking sector and its government stooges as the capital injections (woah, actually typed 'capital infections' there) continue year in and year out? Any favorite or despised examples of the Japanese banks' PR exercises?
TIA, best of luck to all
«Note that it was not just immigrants; I think that government policy (in the UK, USA, Oz, ...) was to pay for the retirements of affluent voters via property price increases hitting *all* first time buyers (typically the working young and poor),»
Further note: consider also the very different distribution of skin colors in the two groups, young, working, poor, immigrants, and old, propertied, retired, voting.
Another note: subprime and Alt-A were the strategy used to inveigle the young, working, poor, immigrants, colored group into predatory lending traps with the mirage of letting them join the MAKE MONEY FAST class, to support the asset appreciation and cashing in of the older, retired, propertied, voting ones.
And not surprisingly Greenspan was shilling those subprime loans to the rapidly disappearing first time buyers (the young, etc...).
«What I find truly shocking is that the MSM pundits -- democrat and republican -- seem to favor bailing out the wealthy and the transactional class that supports them.»
In part because like the Serious Economists they know very very well which way their bread is buttered; no overt threats or corruption are needed, just an understanding that winners do whatever it takes.
But in part because the asset owning classes have put themselves in a nice position: by creating megabanks that sit at the core of the financial system, cashing them out, they now can well claim that they have less skin in the game than ordinary citizens.
And the lesson has been learned: the best way to make a lot of money is to create financial companies too big to fail, systemically critical, and to make them deeply insolvent.
Losers who have created companies that are not big enough or that have remained solvent are not getting bailed out.
Only those who have created monsters and then busted out as much as they could into insolvency are being rewarded massively.
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