Yesterday was the last Tuesday of the month, so it’s time for our monthly update from the good folks at S&P who bring us the only home price index worth watching, the Standard & Poor’s/Case Shiller Index. This time ‘round the media coverage of the event was light, which I suppose I could spin as a good sign. Perhaps things are looking up and we are just not that worried about home prices any more.
But readers of this blog know I am a glass-half-empty kinda guy. My view is that the media doesn’t consider the release of some data on house prices to be all that interesting, however important it might be. Also, the release coincided with the release of some surprisingly strong consumer confidence numbers and a few other stories of the trivial type that the media likes to report on, like a Supreme Court nominee and some North Korean missile tests.
House prices are down. That’s not exactly news. The Case Shiller 20 City Composite was down 2.2% in March from February, 18.7% from the previous March, and 32.2% from the July 2006 peak.
There is another video on the Big Subprime Mess making its way around the personal finance blogosphere. It doesn’t really compare to the now legendary Crisis of Credit Visualized, and in fact most of what it has to do with subprime mortgages is that it is called “Subprime”. But it has appeared on (at least) two blogs, Clever Dude and MoneyNing.
It’s a clever bit of animation. But it’s not exactly a cogent argument that, in the words of MoneyNing “sums up what everyone was doing during the last decade but it also brings up a good point – When is enough really enough?”
Until just a little while ago a fear of deflation was all the rage. In-the-know types nodded their heads gravely and showed erudition by expressing a fear of something that hasn’t been a problem in this country for 75 years. And they were right to fear it. Deflation is a really nasty thing. More than anything else, it is what made the Great Depression great. But as it happens, our guy at the monetary controls, Ben Bernanke, is a particular expert on deflation and the Great Depression. He may or may not succeed in steering our economic ship clear of the shoals, but deflation is one particular rock he is sure not to hit.
Prices did decline in the fourth quarter of 2008, down –3.3% as measured by the Consumer Price Index. Annualized out, that’s a very scary –12.4%. But, knock on wood, that was a brief episode that is now over. The Fed has been working furiously to pump as much money into the economy as possible, doing everything short of handing out bags of the stuff on street corners. Prices were up in both January and February, totaling +0.7%, which is a +4.3% annual rate.
So the Informed Consensus Fear has shifted from being focused on deflation to an uncertain fear of both deflation and inflation. Personally, I predict inflation. Maybe not in 2009, but in 2010 and beyond.
As any reader of this blog knows, I enjoy nothing more than tweaking the nose of personal finance conventional wisdom. Well, joy of joys, yesterday’s New York Times had an article, in the science section no less, that spits in conventional wisdom’s face, knees it in the groin and then kicks it as it rolls on the ground.
The piece discussed the work of Ran Kivetz and Anat Keinan, two professors of marketing from Columbia and Harvard Business Schools respectively. (Marketing professor is, incidentally, the same line of work as the authors of The Millionaire Next Door.) They have discovered a new malady to avoid: saver’s remorse. It’s just what it sounds like: that sad feeling you get with money in your pocket that you could have spent in some enjoyable way but, in a moment of weakness, chose to save.
This is just so awesome.
The sober professors don’t call it saver’s remorse. I think John Tierney, The Times’ science guy, came up with that. They use the term hyperopia, literally excessive farsightedness. Sufferers of hyperopia “deprive themselves of indulgence and instead overly focus on acquiring and consuming utilitarian necessities, acting responsibly, and doing ‘the right thing.’” (K&K 2006 p.274)
AIG is (was?) one of the largest insurance companies in the world, with a finger in nearly every line of business that could be called insurance, including, fatally, credit default swaps, or CDSs. A CDS is a form of insurance in which the issuer (AIG) guarantees that a bond will be paid off even if the borrower defaults. AIG wrote massive amounts of this insurance on bonds backed by American residential mortgages, allowing holders of these bonds to treat them as very safe and stable AAA rated investments. In the clarity of hindsight, AIG was amazingly foolish. They apparently did not consider that if the real estate market went south then all those mortgage bonds would be in trouble at the same time.
Of course it did go south, and AIG had hundreds of billions of dollars of insurance claims that it could not pay. This being one of the most extreme examples of Too Big To Fail that could be imagined, the US Government stepped in, took AIG over, and proceeded to pump in enough money to make good on its debts. There may have been, at first, a hope that AIG could be saved as a going concern, but it soon became clear that the only practical game plan was to stabilize the situation long enough to sell off the many sound operations that AIG owns and wind down, in as orderly and cheaply a way as possible, the CDS business. The money thus raised and saved won’t be enough to make the taxpayer whole, but it’s a lot better than nothing.
All advice in this blog is guaranteed to be worth at least what you paid for it, or double your money back. All persons dealing with matters of personal finance are advised to gather information from blogs, books, radio and TV, consult with professionals, discuss the matter with anybody who will listen, and then make their own decision. Because it’s their money.
good sign. Perhaps things are looking up and we are just not that worried about home prices any more.
Economics, Housing, Robert Shiller | Frank Curmudgeon | 
May 27, 2009 8:00 am | 
Comments (83) 
AIG was amazingly foolish. They apparently did not consider that if the real estate market went south then all those mortgage bonds would be in trouble at the same time.
Subscribe