Seattle residents have found their homes becoming unaffordable faster than anywhere else in the nation. Puget Sound Business Journal:

Seattle leads the nation, according to Radar Logic, in the category of five-year annualized percentage change with an increase of 6.5 percent, besting New York at 4.9 percent and Philadelphia at 4.6 percent.

The good news from my perspective is that San Francisco and New York are becoming affordable very quickly. SF’s prices improved the fastest in the nation, becoming 34.4% cheaper in October than the year prior.

Not according to the Seattle Times. They like unaffordable housing:

The silver lining? Median sales prices for single family homes in King County crept back above $400,000 for the first time since September

The Puget Sound Business Journal said the same thing yesterday. Neither must read Naked Capitalism:

the Federal budget deficit will come in just shy of $1.2 trillion, and that before any stimulus related deficits are added in, which are now expected to be $775 billion.
[...]
The market-watching crowd that corresponds with me expects unemployment to peak at 10-12% even with a stimulus program

Do you agree with the Seattle Times reporter that higher prices help the many people in Seattle who are about to lose their job and fall deeper into debt?

The Puget Sound Business Journal notes that homes are becoming more expensive again:

The good news in King County is that the average home sale price increased to $484,494 in December from November’s average sale of $440,062

How is this good news? When unemployment is rising, wages are frozen or falling and the state is running a mutli-billion dollar deficit this means a person must slave away more hours at work in order to repay his home.

I am reading a (fictional) book set during the middle ages. A home was built on 10 days labor. Wouldn’t that be great? Now homes are so unaffordable many lack means to repay, even when given 30 years! I fail to find the present situation desirable.

From the Seattle Times:

Backers of Seattle’s convention center say the time is right for a $766 million expansion to lure more free-spending conventioneers downtown.

Despite the state’s $5 billion deficit, they’re asking the Legislature to give a quick go-ahead to the project, which would double the exhibit space at the Washington State Convention & Trade Center (WSCTC). A coalition of downtown business interests and Seattle Mayor Greg Nickels are solidly behind the idea.

Business is declining everywhere. Business profits are declining, requiring lower costs to survive. Commercial Real Estate is crashing.

Now sounds like the worst time to make business centers more expensive. What is Mayor Nickels thinking?

More from the same article:

Seattle’s Convention and Visitors Bureau estimates the city has lost $1.7 billion in potential visitor spending since 2004 because the convention center was booked or too small.

This means Seattle has mismanaged the property since 2004, keeping usage fees too low. Why reward their failure with nearly a billion dollars?

the expansion would be paid for entirely out of an existing tax on hotel rooms in King County — money already dedicated to the center — so it wouldn’t add to the state’s budget worries.

Hotels are struggling. What about helping them lower prices by removing the tax? The more travelers pay on the room, the less they have to spend on other activities like sight-seeing, shopping and eating.

In other words Washington State has three choices:

1. Solve part of its $5 billion deficit by directing this tax to reduce the deficit.
2. Rescind the tax to make hotel more affordable for increasingly frugal travelers.
3. Spend the money to double convention center floor when CRE construction costs are at their peak.

The first two options make a lot more sense to me. How about you?

Deflation makes a night at the theatre more affordable:

The nonprofit operator of Seattle’s Moore and Paramount theaters is dropping Ticketmaster and signing with Tickets.com [...] the switch will reduce ticket surcharges an average of 20 percent and give buyers more options such as using their mobile phones as tickets and printing from home for free.

A 20% lower surcharge is great news for people struggling to pay the bills and still buy theatre tickets.

On the other hand, have you noticed gas prices at the pump increasing again? Did you notice restaurants — like Claim Jumper — remove many of their recently reduced menu items?

This is because the Federal Reserve and US Treasury are fighting hard to making things more expensive:

The Federal Reserve Bank of New York today [started] purchasing fixed-rate mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae.
[...]
Q: How will purchases under the agency MBS program [to buy Fannie/Freddie debt] be financed?
A: Purchases will be financed through the creation of additional bank reserves.

This means that prices are higher than people can afford to buy or repay. The logical solution is to lower prices to what people can.

The Fed’s solution? Create labor and credit shortages to support higher prices for favored firms:

propping up failed banks and extending them huge amounts of credit has made business more difficult for the people and companies that had nothing to do with creating the mess. Perfectly solvent companies are being squeezed out of business by their creditors precisely because they are not in the Treasury’s fold. With so much lending effectively federally guaranteed, lenders are fleeing anything that is not.

Do the Fed’s actions help JPMorgan and Goldman Sachs? Yes, but precious few others.

Abolish the Federal Reserve.

Calculated Risk makes the following observations about past recessions:

Usually New Home sales bottom during the recession and start to increase 3 to 6 months before the recession ends. Therefore New Home sales are usually a good leading indicator of an economic recovery.

This is interesting information. It is important for speculators to find and use such data to speculate on the future more effectively.

Speculate where risk is isolated, but do not place speculators at the helm of the global economy. Bernanke, Paulson, Krugman and many, many others all believe that they can reduce emotional, irrational human behavior down to a formula. They then try to optimize society around this speculative information.

The formula for this data: get housing prices to rise. As soon as they believe ending the recession happens after housing prices to rise, they do not care how many variables they destroy in order to achieve that result. If sending 25% of people to unemployment, gas to $5 per gallon and duplicating away the value of your life savings happens to be the most efficient way to get there? So be it.

Society should reject these types of “solutions” to our problems. Half baked solutions run rampant in today’s economy:

Summary of [Federal Reserve Bank of San Francisco President] Yellen’s Proposal

1)Yellen wants to “pull out all the stops to ensure an extended period of stagnation does not occur”

2)Yellen wants to do this even though the “approaches are experimental, and there is a great deal of uncertainty concerning their likely effects.”

3)To top it off, Yellen admits that an extended period of stagnation will occur anyway: “Even with vigorous Fed action to restore credit flows, an extended period of economic weakness is likely

People who want to command the value of variables to a more satisfactory answer are misguided. Those variables are our lives, our jobs, our hopes and dreams, our retirement. How can they decide whether or not it is worth ruining one person’s business and another’s marriage in order to save a third person’s mortgage and a fourth’s income?

They cannot even promise the ideas will work. They cannot even measure the risks:

mathematician Benoit Mandelbrot learned that cotton had an unusually long price history (100 years of daily prices). Mandelbrot cut the data, and no matter what time period one used, the results were NOT normally distributed. His findings were initially pooh-poohed, but they have been confirmed repeatedly. Yet the math on which risk management and portfolio construction rests assumes a normal distribution!
[...]
Rather than attempting to develop sufficient competence to enable them to have a better understanding of the issues and techniques involved in risk management and measurement (which would clearly require some staffers to have high-level math skills), regulators instead take false comfort in a single number that greatly understates the risk they should be most worried about, that of a major blow-up.

Life is complicated enough without needing to discount the risk that some economist decides to destroy hundreds of millions of people’s retirement planning in order to test the validity of his untested, unproven doctoral thesis.

Time magazine made up a list of 12 things contributing to the financial crisis. The article tries to remove culpability from the Federal Reserve:

There are some — like 2008 presidential candidate Ron Paul — who argue that the lesson here is that we’d be better off without the Fed. A more palatable interpretation is that if the Fed is going to step in to prevent panics, it needs to do more to deflate the bubbles that inevitably precede those panics.

Since when should we avoid searching for truths in case they are unpalatable? The easiest way to prevent bubbles is to not inflate them. The Federal Reserve inflates bubbles to prevent falling prices. I argued before that falling prices are a sign of prosperity and should be celebrated. I continue to believe this.

The Austrian school of economics — Rothbard, Mises, Hayek and others — promote a philosophy to support this. Since the author is afraid to engage these scholars it is little surprise that the Austrian school causes Justin Fox so much confusion.

Does your gut tell you the United States has too much or too little low quality food? Too little says the federal government:

milk powder is the only commodity that has sunk low enough to trigger the flow of government dollars. Some expect that taxpayers will soon be buying blocks of cheese, too, given the plunging price.

Most would probably make the opposite conclusion. We need more healthy food for more affordable prices.

Naked Capitalism reports that economists Reinhart and Rogoff “parsed out financial crises in advanced economies versus those in developing countries, and were surprised to find their trajectories were remarkably similar”. Their conclusion? Flexibility to lower prices helped economies recover from financial crisis:

the emerging markets, particularly those in Asia, seem to do better in terms of unemployment than do the advanced economies. While there are well-known data issues in comparing unemployment rates across countries, 3 the relatively poor performance in advanced countries suggests the possibility that greater (downward) wage flexibility in emerging markets may help cushion employment during periods of severe economic distress

Austrian economists like Hayek, Rothbard and Mises have promoted this line of thinking for decades.

So why is the federal government preventing the price of milk and cheese from falling to affordable levels?

The Federal Reserve and US Treasury fear deflation. They help banks arrest the decline of home prices by giving them credit below market rates (TARP). They help automobile manufacturers sell cars above market prices by extending them credit. Their counter-intuitive decisions are designed to prevent affordable prices.

Krugman, like Bernanke and Paulson, want to elevate spending and prices. This makes no sense. Wealth comes from producing the things we want at prices people can afford. The Keynesian school of economics needs to go.

The Keynesian school of economics relies on subjective assumptions of which activities count towards output capacity: things that increase GDP. Road building? Yes. Tickling your children? No.

Why should others accept such assumptions?

It is more realistic to acknowledge that 100% of every person’s day is used at full capacity. A person can only increase plum or road production by decreasing free-time production.

Time a person spends growing plums is time he does not spend growing apples or inventing more delicious plum dishes. Time a person spends building roads is time he does not spend satisfying the emotional needs of his domestic partner.

How does the Keynesian decide the value of another person’s production of free time?

Society does not build roads when the demand curve at which people are willing to pay for roads — the amount of production and deferred consumption people will exchange for roads — does not intersect with the supply curve at which people are willing to produce roads — the amount of time building roads a person is willing to spend before consuming something.

In other words, one or both of the potential road buyer with income and savings and the potential road supplier with wants and needs decide that they would rather take their alternatives; the alternative may be writing software or watching TV or anything else.

If someone really wants a road he can pay more for it. If someone really wants to build a road he can produce it for a cheaper price. Neither option requires government intervention.

Keynes’ call for government intervention changes nothing to address people’s subjective needs and wants. It simply takes decisions out of the hands of the producers and consumers. When a buyer and seller cannot come to an agreement on their own, Keynes asks government to either confiscate the savings and income of the buyer or take away alternative activities available to the seller. The former resembles robbery; the latter resembles slavery.

Keynesian economics is popular because it provides justification for road builders to force society to pay more for their roads than they want. It also provides justification for road consumers to force society to subsidize their use. In other words, it provides philosophical justification for private gain and social loss. Another name for this philosophy is fascism.

Not only is this immoral, the subsidies misallocate resources. Those misallocated resources pile up and eventually turn into crashes like we are presently experiencing.

In contrast to the Austrian school, Keynesianism says nothing of how bubbles start because its philosophy encourages government to create them.

Keynesianism does say what to do once a credit collapse begins — lower taxes and increase government spending. The problem? Its answers do not work. Keynesianism failed during the Great Depression and has failed for twenty years in Japan.

The Keynesian school is the enemy of freedom, a disgrace to economics and a stain on humanity.

Throw Keynesianism into the dust bin of history where it belongs!

When you or I lower our expectations about our future earnings, what is the rational response? Is buying a new wardrobe on a credit card, taking out a second mortgage to remodel the bathroom, taking a mortgage out on a summer home a rational response? It is not.

The rational response is to cut back, tighten the belts and work harder.

What everyone agrees is true for individuals somehow becomes false for Krugman when those individuals are aggregated into a group. That sounds rather counter-intuitive. The following is Krugman’s “common sense”:

is America — not state governments, but the nation as a whole — less able to afford help to troubled teens, medical care for families, or repairs to decaying roads and bridges than it was one or two years ago?

Anyone with a pulse knows the US’ growing and unfunded social security and medicare liabilities are likely to drive the country into bankruptcy. Despite this, Krugman thinks now is a great time to do further damage to our balance sheets:

Of course not. [... The] true cost of government programs, especially public investment, is much lower now than in more prosperous times.

It makes no sense to add to the problem by cutting public spending

Is Krugman interested in placing social security and medicare benefits on more solvent grounds? Common sense suggests now is the ideal time to fund those unfunded liabilities when credit is the cheapest it has been in decades. It sounds like he just wants the US federal government to issue massive amounts of new debt in order to build bridges to nowhere:

right now many of the workers employed on infrastructure projects would otherwise be unemployed, and the money borrowed to pay for these projects would otherwise sit idle

We need to access credit to meet our social security and medicare obligations. Credit we use to build bridges to nowhere — bridges that were unaffordable when the US had to borrow money at 4-5% interest — is unavailable for social security and medicare. The more we use for bridges, the more insolvent our other liabilities like medicare become.

Krugman wants a US government debt bubble. We may get one, and it think its inevitable rupture will be far worse than the present problems. I fail to see how this is common sense.

Many people in Seattle believed property prices become increasingly unaffordable; the limited flat land and strong job market are often cited as reasons. This contradicts common sense so long as we produce buildings faster than we destroy them.

News from the Puget Sound Business Journal suggests commercial property may become more accessible in 2009:

Commercial mortgages are repaid over five-, seven- or 10-year terms, with balloon payments at the end of the term. If refinancing is unavailable, an owner would be faced with a distress sale or losing the property in foreclosure.
[...]
Many of the CMBS loans issued at the height of the CMBS market in 2004 are five-year, interest-only loans that will come due in 2009, just as 10-year loans issued in 1999 are expiring.
[...]
At least 85 commercial properties — representing $3.1 billion in investment — are classified as either “distressed” or “potentially troubled” in the Seattle area, according to Real Capital Analytics.

Banks will refuse to refinance a property if the owner needs to lease the property at prices no business can afford. The solution is to sell to someone else who can afford lease the property at a lower price.

Property owners will only foreclose on a property when no buyers can afford to pay the price they want. Foreclosure clears the debt and brings the property and money back into commerce at affordable prices (Bankruptcy is good for the same reason).

The core problem today is that prices are unaffordably high for today’s market. Companies cannot stay in business paying them. That is why JPMorgan selectively defaulted on their Seattle leases, why Weyerhaeuser recently froze wages, and why the state government froze wages and cut a few sectors’ budgets.

Businesses need lower prices to stay solvent and avoid laying people off. Lower lease and purchase prices for commercial real estate will make it much easier for someone to grow a current or start a new business and employ people looking for a job.

Many already want a job now, and many more will soon. Unemployment is at a 26 year high and Christmas sales numbers look dismal. Even with enough cash to run for 2 years with no revenue, Microsoft may lay off people next month:

Is the following a list of head-count cuts or expected percent cuts?

3 in omps
9 in stb
12 in msd
7 in devdiv
18 in UA
5 in MSX
Beyond product groups:

Finance is cutting 10% of work force.

Some CRE speculators want the US Treasury and Federal Reserve to bail them out with free credit. Every dollar Bernanke and Paulson direct to an insolvent, over-leveraged Seattle commercial real estate speculator is a dollar out of the pocket of someone who anticipated and prepared for this scenario by saving.

Why should Bernanke, Bush, Paulson, Obama and Murray punish men who wisely saved their income for more affordable prices? Extending a life-line to foolish speculators keeps prices at unaffordable levels. Misallocated resources results.

Let prices fall.

Another bit of silliness amid this deflation is Olympia’s decision to raise the minimum wage:

The minimum wage in Washington will rise to $8.55 an hour on Jan. 1, up from the current $8.07 and it will remain the highest state minimum wage rate in the country.

Raising the minimum wage only protects the living standards of some workers because it forces other workers out of a job. Employers who may have been able to reduces wages to control costs now must lay people off. How did Olympia decide it is better to force employers to lay off workers than pay them a lower wage?

One way or another the number of saved hours of labor required to own these properties will fall. The only difference between Bernanke’s inflationary default and an Austrian’s deflationary one is that: a.) banks profit from inflation since they spend the new money first and b.) inflationary default punishes everyone who uses the currency. Deflationary default punishes only those involved in the poor decisions.