This morning I discovered the above referenced article, I thought you might
find it interesting.
Peter Wallison was a member of the congressionally appointed Financial
Crisis Inquiry Commission (FCIC). The Commission was charged with the
responsibility of studying and reporting on the causes of the current financial
crisis, which began in late 2006 with the significant deterioration of home
prices and mortgage investments.
* "The Dodd-Frank Wall Street Reform and Consumer
Protection Act" was signed into law on July 21, 2010 – five months and
six days before the FCIC issued its “Majority Opinion”. Please draw your own
conclusions as to why The Dodd-Frank Act was ‘crafted’ before the FCIC issued
Housing on a Sugar
High? In an April 8, 2013 MSN video interview with former Fannie Mae
Chief Credit Officer, Ed Pinto, Mr. Pinto explains the fundamentals of the
housing market and how the "wealth effect" fueled by artificially low interest
rates and abundant borrowed money, rather than increasing incomes, is effecting
housing prices (and other asset prices).
In a February 12, 2012 video interview,
Warren Buffett, “The Oracle of Omaha” comments on The Institutional Home Buying Bubble,
‘bulk’ single family home property management, record low interest rates, home
price values and risks, and suggests that buying a home is a good way to
[Note: The small red cross, above 2012
on the horizontal axis on the graph below is approximately February of 2012, the time that Warren
Buffett made his comments in the above linked interview.]
April 30, 2013 - A few days ago I was watching a video-clip of former
Fannie Mae Chief Credit Officer, Ed Pinto, discussing the Fed’s artificially
induced low interest rates, his views on their effect on home prices, and his
views on their effect on what many are calling the current housing market ‘recovery”.
At approximately two-minutes-and-thirty-seconds into the video interview,
Mr. Pinto says, ‘These low interest rates are starting to make people buy houses
the way they buy automobiles.’ “They don’t ask what’s the price? They ask what’s
the monthly payment?*.
Mr. Pinto’s comparison of the economics of home buying, to economics to
automobile buying, ignited my curiosity. I began to wonder . . . how are automobile
prices, auto financing, and auto sales reacting to this artificially low
interest rate environment? This morning I did a key words search on: ‘low
interest rates auto sales’.
My search yielded several good and informative articles, one of the
articles seemed to survey current conditions more broadly than the other articles. I’ve copied and pasted
that article below:
March 2013 Car
Sales: Juiced By Low-Interest Loans?*
Spring is finally here, and the
jobs picture is brightening--but the biggest factor in rising car sales could be
March 2013 car sales are being
reported today, and for the most part, all the brands sold in the U.S. are
posting moderate gains over the same period a year ago. Subaru and BMW are up
strongly at 13 percent each, while the domestics are showing single-digit gains.
Only the South Korean brands so far are down, with Kia posting the least
encouraging numbers of the news cycle.
In all, the seasonally adjusted
annual rate (SAAR) in March is expected to reach 15.3 million units, according
to a joint survey from J.D. Power and Associates and LMC Automotive. That would
be flat against February's numbers, despite the average retail price of a new
car going up 3 percent, to $28,504.
The retail sales SAAR of 12.1
million units should remain unchanged as well.
What's at the root of continued
healthy sales? J.D. Power and Associates senior vice president of global
automotive operations John Humphrey says that the steady upward pressure of
price has pushed buyers into longer-term loans, but says shoppers also are
leasing more, as well as capitalizing on low interest
Bankrate.com's average for new 48-month
auto loans currently sits at
2.44 percent, near historic lows.
"While longer loan terms have
traditionally been a cause for concern to the industry due to the risk of
purchase cycle extension, it is not necessarily as daunting as it may seem."
said Humphrey. "The longer loans are being offset by more leasing and the low
interest environment, which means that consumers are able to put more of their
monthly payment towards their loan principal rather than interest
The financial climate's led Power partners LMC
Automotive to hold its forecast for total 2013 light vehicle sales in the U.S. to 15.3 million units, with the
retail sales forecast holding at 12.5 million units.
"We expect the economic
environment to improve throughout 2013, as the likelihood of a dark cloud
slowing the recovery pace diminishes," said Jeff Schuster, senior vice president
of forecasting at LMC Automotive. "Consumers do not appear phased by headwinds
The automakers themselves are
upbeat about prospects for the remainder of the year. GM predicts a SAAR of
between 15 and 15.5 million units for the year; Chrysler estimates the March
SAAR at 15.6 million vehicles, including retail and
Do you think lessors are actually increasing their up-front lease contract payments? At what point - in a 48 month purchase or lease contract - does the obligor / purchaser have positive equity in the auto? Are those buyers who are using these methods to finance rapidly depreciating assets (automobiles) economically sophisticated enough to make decisions without close supervision?
(1) Actually, I don’t believe this is a
recent phenomenon. I think, when buying a home, most people consider how much
they can afford. or are willing to spend on their mortgage payment, then they
buy as much house as that payment will allow. Every real estate sales person
I’ve ever met encourages this approach to home buying and home
In an April 16, 2013 Wall Street Journal video
interview, Mark Hulbert mentions that a recent academic study places
gold’s fundamental value at approximately $800.00 per ounce.(1)
I did some key-words-searches to verify such a study
exists, and I found the study to which Mr. Hulbert is referring. The study was
conducted by a former commodities trader for Trust Company of the West, Claude
Erb and a Finance Professor at Duke University, Campbell Harvey.(2)
The study is based upon a time series of rates of inflation as compared to the
fluctuations in value of the hedge against inflation (gold). The study puts the
mean value of gold, over a long historical time series, at approximately $800.00
It’s also interesting to note, recent industry estimates
for the average costs-of-production for one ounce of gold are approximately
$600.00.(3) Which raises the question, what premium should a gold
buyer pay, to buy the next ounce produced, of a commodity which costs $600.00
per ounce to produce? Or, expressed another way, what is the fair-market
(competitive) profit one should expect for producing an ounce of
In November of 2012, immediately after U.S. Federal Reserve Bank Chairman, Ben Bernanke announced the implementation of Quantitative Easing II, Professor. Nassim Taleb contacted Bloomberg News interviewer Erik Schatzker to say, “Something has to be done about Ben Bernanke".
Mr. Schatzker invited Prof. Taleb to discuss his feelings on Bloomberg Television’s “Inside Track” program. The video-clip below contains two brief 'slices' from that interview.
In an April 8, 2013 MSN video interview with former Fannie Mae Chief Credit Officer, Ed Pinto, Mr. Pinto explains the fundamentals of the housing market and how the "wealth effect" fueled by artificially low interest rates and abundant borrowed money, rather than increasing incomes, is effecting housing prices (and other asset prices).
To see the Wall Street Journal article, Is The Fed Blowing a New Housing Bubble - click:
A couple of years ago I was reading Treasury Secretary, Timothy Geithner’s Wikipedia Bio.(1) I was surprised to read that Mr. Geithner served as a Treasury Department Attaché in the U.S. Embassy in Tokyo, Japan during the early years of what has become known as “Japan’s Lost Decade” (A “Lost Decade” which is now approaching its second decade anniversary).(2)
It’s widely recognized that Japan’s “Lost Decade” was a consequence of the deflation of an asset bubble.* Since reading how Geithner was in a unique position to witness the formation and the consequences of a severe asset bubble, and because I believe he has no doubt followed the efforts of the Japanese Government to stimulate its way out of its economic doldrums, I’ve found Mr. Geithner’s policy positions a little strange.
For me, the strangeness of Treasury Secretary Geithner’s policies took on an even more strange dimension this morning.
This morning I was watching a video of a May 11, 2009 New Yorker Summit presentation of a conversation between Nassim Taleb, Robert Shiller(3) and Nick Paumgarten. At about 4.5 minutes into the video Robert Shiller describes how, after being on the New York Federal Reserve Bank’s “Academic Advisory Panel” for 14 years, Timothy Geithner ‘fired’ him (presumably for Shillers presentation to the panel on asset bubbles). Shiller’s ‘firing’ took place shortly after the first meeting of the "Academic Advisory Panel" after Geithner’s appointment as President of the New York Fed.
* As much as most economists agree on anything, most economist’s attribute Japan’s “Lost Decade” to the [changed] wealth effect and loss of confidence which followed the late 80’s early ‘90’s bursting of the Japanese commercial real estate bubble, which had inflated excessively during the early-to-mid 1980’s.
I copied the portion of the longer video in which Professor Shiller describes what he interpreted as being fired by Timothy Geithner. If you are interested, you can see the video clip here:
The complete video of the May 11, 2009 New Yorker Summit discussion between Nassim Taleb, Robert Shiller and Nick Paumgarten can be found here:
(3) Robert Shiller is an economics professor at Yale University. He is the author of a book Irrational Exuberance (published in 2000) which describes the role of excessive confidence in the development of economic bubbles. Professor Shiller expressed concern about the stock market bubble before that bubble burst bubble, and he was one of the earliest, if not the earliest, to warn us of the real estate bubble. He is co-developer of the S&P Case-Shiller Real Estate Price Indeces. [see, http://www.irrationalexuberance.com/definition.htm ]