StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Tyler Cowen Is So Right It Hurts

24 Aug 2008
Posted by Stan Collender

Tyler Cowen took all of the emotion out of the current economic situation in a brilliant piece in yesterday's New York Times and in so doing set up the discussion in a way that few others have done.

For me, this was the money quote:

The fundamental problem in the American economy is that, for years, people treated rising asset prices as a substitute for personal savings. The thinking went something like this: As long as your home’s value rose every year, you didn’t have to set aside so much from your paycheck. If your stocks went up, too, so much the better; don’t forget that the Dow Jones industrial average stood in the 800 range in 1982 and seemed to rise almost nonstop for many years.

I've said this same thing somewhat differently and far less eloquently: buying a home isn't the American dream; making a great deal of money from selling a home is what most people really want. The homeowner anger is not because they will be living on the street; it's because they won't earn the same profits they saw others make.

Couple with this what has become an almost undeniable entitlement mentality, that is, the very clear sentiment that a homeowner somehow is entitled to having their home appreciate by ridiculous amounts and that someone else is to blame when that doesn't happen, and it's not hard to see why the policy choices have all turned to bailouts.  No one is suggesting, for example, that the government build more rental housing or provide Katrina-like trailers for homeowners who lose their homes.  Instead, it's all about finding ways for them to stay in their home that they can't afford.



Cowen piece

Good grief, where have you been? This so-called
"money quote" from Cowen was made at least 12
years ago by Stephen Roach of Morgan Stanley

Asset Values are Variable, Debt is not

Long before even that -- understand where this discussion comes from:

Whenever an asset class runs up -- often is some form of a bubble, a fool will invariably bring forth a chart showing that the rsatio of assets to debt is low, and therefore everything is fine.

The problem every time someone trots out that chart is that after the bubble pops, or the assets' price deflates, you are still left with all that debt.

Suddenly, the Asset to Debt ratio looks much less attractive.

We saw this in 99 and 2000 with stocks, and then again in 2005-06 regarding housing.

Cowen Piece

This piece would be a lot more "on money" if it had been written in 2003-2004 when Alan Greenspan and so many conservative economists said "there was no natinoal housing bubble." Second, the housing bill, and most of the steps taken the last year is not about saving home owners, but is about saving the banks and the banks managers who earned all those delightful bonuses and fees on what turned out to be bogus profits based on an asset bubble.

Where was all this hand-wringing about the national debt when the current administration cut taxes twice, structured the tax cuts to favor the elite, and then started two wars paid for on credit? It seems to arise whenever the prospect of a Democrat in the White House becomes likely. I expect no conservative economist will oppose John McCain's tax cuts, debt or no debt, if he is elected. So much for "national savings."

What Everyone Else Said

Where was Tyler Cowen over the past several years, when PGL at AngryBear was saying exactly that in response to the idiocies of David Malpass (who is probably now Chief Economist at JPMCBear--several of their other transitions were of the "couldn't do sh*tE for an investment bank, so will probably be a superstar here" variety)?

Where was Tyler Cowen (or Greg Mankiw or Glenn Hubbard) when, in the wake of the 2001 and 2003 "savings incentive" packages, savings went to and below zero?? Was he telling the truth--that those were "incentives to save" in the same way that those grapefruit/vodka drinks are "incentives to avoid teen pregnancy and drunkenness"?? Or was he getting into minutiae about "marginal tax rates should" while the forest collapses around him?

Just because Tyler (and, by association, Stan Collender) just discovered the evidence doesn't mean it's new.

For Me, THIS is the Money Quote

"Excessive bank regulation is another danger. To be sure, the regulatory structure for financial institutions failed in the current crisis, and change is in order. But we shouldn’t reform in a way that will discourage bank lending and weaken the tie between savings and investment. Banks are already allergic to very risky mortgages — probably excessively so — and we shouldn’t overreact by punishing them for past mistakes."

You buy this sh*tE? And here I thought Cowen was an economist, or at least someone who believes that people respond to incentives.

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