Tuesday, May 29, 2012

Sumner's Take

Scott Sumner, who always does his own thinking, offers up a platter full of non-conventional wisdom on banking, housing and macro.  I won't comment on his macro point; it's an  which I could only reduce the sum of human knowledge and BTW is there any other field of human endeavor with such an unfavorable signal-to-noise ratio?  But let me offer a word about his comments on banks and  housing.

One: I expect he is more right than wrong in saying that the big bank bailouts aren't costing the taxpayers a ton of money--a lot is indeed being paid back.  But that isn't quite the point.   Rather, "payback" is hindsight. The  Feds took huge risk in ladling out all that cash in '08 and if it worked out well, why then it was, as my mother so often said "more good luck than good planning."  We did it, of course, to protect ourselves from catastrophe-- but a catastrophe being inflicted by a banking system that seems less and less to perform any useful public service.

He's also right that depositors (as distinct from owners) got a ton of money from the FDIC--much more, that is, than most people notice.   Still, the fact is that 100s and 100s of small banks went broke in the crisis, with more to come.  Dick Fuld would tell us that he knows a thing or two about going broke and I suppose he does.  Still I think the record support the view that stakeholders in big banks mostly got ring-fenced while stakeholders elsewhere were just left to fend for themselves.

Re housing: partly right again--housing probably is not quite the mess we perceive it to be.  There sure are some green shoot in the desert--even the notoriously parched Las Vegas desert, as credit starts to loose up, and as rent-veruss-own ratios get ever more skewed.   Scott says the "oversupply" of housing (if any) will be soaked up in a heartbeat, and that "houses often last for 100 years."  Do they in fact?  I guess the President still lives in the White House but we've done a bit of upgrading since the British torched the place in the War of 1812.    In California, people do love those old Craftsman treasures, but I suspect that very few have the original bathroom.   How many people, think you, really want to live in a 1946 Levittowner without, at least, a humongous refit? I may be skewed by my own experience: Mr. and Mrs. Buce live happily in a 55-year-old house which we bought 30 years ago--but we've paid almost twice as much for various remodelings as we paid for the deed.  If it is around in 2057, I suspect it will look rather different than it does today.

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