On Great Manias

Tyler Durden's picture


From Martin Conrad, excerpted from Barron's

The Great Mania

Reinflating the collapsed housing bubble, as many desire, would likely yield the same disastrous result. What's needed are lower, fairer prices, and more investment in more productive sectors of the economy.

Manias occur for many reasons, but great manias are made possible and sustained by errant government policies that may seem to have good reasons, none of them with any long-term economic value. Housing, despite high leverage, high transaction costs, and poor liquidity, was promoted as a dream investment for everyone. Massive intervention in this market by populist government policies and agencies fostering affordability exacerbated these normal defects and disastrously distorted the market. It was a "dream," in the sense of confused, wishful thinking. But to think and act this way with many trillions of dollars, most of it borrowed, was irresponsible on an historic scale.

There is now much media commentary that no sustained and robust recovery is possible until the housing sector recovers (that is, until house prices rise again). This desire to simply reinflate the collapsed bubble would likely yield the same disastrous result again. Another course would likely be more effective: restructuring away from so much dependence on leveraged, expensive, and speculative housing values. We should no more regret the demise of expensive housing than we should the decline of expensive oil, both of which are poorly correlated with productive, sustainable economic growth, but strongly correlated with damaging inflation.

Disciplined buyers -- too long unfairly disadvantaged by government policies -- are now sitting on trillions in savings that are earning, doing, and financing nothing. This money could clear the housing market, but only at lower, fairer prices. That would finally be "affordable housing."

Manias begin in obscurity and pessimism, rise with confidence and imitation, reach a state of euphoria and finally end in tragedy. They often change history in ways that are not foreseeable.

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Tue, 02/12/2013 - 09:17 | 3236234 GetZeeGold
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Because we like tulips?

Tue, 02/12/2013 - 09:18 | 3236236 Big Slick
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Long Semper Augustus bitchez

Tue, 02/12/2013 - 09:22 | 3236239 SafelyGraze
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my greatgrandmaw (she's 97 years old) puts on lipstick and eye make-up and perfume and so forth every day. she says boys find it attractive.

she thinks she's still a teenager. 

my fed (it's 100 years old) pumps out money and inflates housing and levitates equities and so forth. it says it makes people feel wealthy.

it thinks this is 1927


Tue, 02/12/2013 - 09:27 | 3236243 idea_hamster
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"fairer prices"

Spoken like a true crypto-Stalinist.  Nothing says "I secretly hate the free market" like medieval sturm-und-drang about how "unfair" prices are.

The sharp rise in housing prices was simply due to low interest rates.  Buyers too often base their purchase on the monthly payment they can afford, which is a combination of principal and interest.  As the interest portion fell, the principal portion was bid up.

Tue, 02/12/2013 - 09:43 | 3236267 fomcy
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"The sharp rise in housing prices was simply due to low interest rates." False. Now interest rates even lower and house prices are lowest.. The main driver is "Credit Availability", not the Interest rate. When you start given away mortgages without Income and ZERO down payment, that's when you get people on welfare buying houses left and right.. :) Then when they unable to pay, give then another loan "Sub prime" then give them bunch of Credit Cards, and so on.
Like US.gov is operating now. Print and Spend, no worries. Everything else could be and will be
manipulated as they wish.

Tue, 02/12/2013 - 10:00 | 3236333 eclectic syncretist
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Working under the table planting tulips?

Tue, 02/12/2013 - 10:28 | 3236441 idea_hamster
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OK -- it's similar to the stock/flow issue, so let me be more specific (and thank you for pointing this out, since semantics are important):  the rise in home prices was due to the decline in interest rates.

As I said, most buyers guage their home purchase on the monthly payment.  When mortgage rates are 7%, a seller cannot demand the same prinicpal price as when rates are 4%.  The beneficiaries of the decline in rates were those who owned homes prior to the rate decline, because their buyers were willing to pay more in principal and less in interest for the same monthly payment.

The collapse in underwriting standards was driven by the demand for loans to package into RMBS.  That's in part why we are now finding out that single mortgages were actually listed as pledged to multiple RMBS trusts.  The "winner" so far, as I understand it, was a NYC condo that appeared in 5 different RMBS deals over the course of 6 months in late 2008.

Tue, 02/12/2013 - 11:09 | 3236570 tango
tango's picture

I'll be honest.  I never met ANYONE during this period who gave a flip about interest rates or even price.  The ONLY thing they cared about was the constant appreciatioin so that they could soon unload it on the next idiot. Yes, there is a correlation between demand and interest rates but emotion and momentum are far more influential. Girls didn't buy cabbage patch dolls or guys didn't get the newets version of WOW because they were inexpensive - they are caught in the emotion of the moment, which is exactly what FED actions lead to.  

Tue, 02/12/2013 - 15:05 | 3237368 idea_hamster
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Right, but there is a difference between price and cost for something that is almost always financed in large part by debt.

Even people buying houses based on "stated income" paperwork, NINJA and liar loans and all that, had a limit on the house price that they could "afford" because their theoretical ability to pay had to correlate with the monthly payments.  Yes, they didn't care about rates or prices, but you didn't see these people doing stated income paperwork for $50M mansions -- and for them, it's really all the same risk level.

The underlying issue is that the cost of a home is part asking price and part financing cost.  If the bank asks for less in financing costs, then the owner can capture a greater portion of the buyer's total ability to pay.

Believe me -- if mortgage rates go to 11%, the asking prices of home are going down.  Not because they are worth less or because they aren't a good inflation hedge, but because with an 11% mortgage, the monthly payment your buyer can swing just got crushed, and the seller loses that.

Also, "cabbage patch doll"?  Really?  Haven't seen one of the those since Kajagoogoo was hot....  ;-)

Tue, 02/12/2013 - 15:42 | 3237527 Thisson
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You've completely missed the point of the author, who is arguing that there can be no recovery so long as government/fed intervention continues to artificially prop up housing prices.  With housing prices artificially held higher than the market-clearing prices, there can be no recovery.  Your point about how we got to higher prices through decreasing interest rates simply points back to the source of the problem to begin with: the Fed.

Wed, 02/13/2013 - 23:36 | 3242039 idea_hamster
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I don't disagree -- the rates commend was more of a side note.

My original point was that as soon as I hear someone claim that prices are unfair, my totalitarianism antennae stand up....

Tue, 02/12/2013 - 10:44 | 3236471 NidStyles
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Fair Price is Market Price. Rothbard said it that same way. Don't go running around shooting at everyone.

Tue, 02/12/2013 - 09:29 | 3236256 fomcy
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"The Great Mania"

Latest few month Greatest Mania is to sell Gold at 8:30 AM EST.. Looks like Stores open

in exactly this hour and poor people lineup with Gold to Sell as fast as possible.. :))

Seriously look at the chart NOW! WTF? Every f* day same shit.. No manipulation, of course.

Tue, 02/12/2013 - 09:41 | 3236280 GetZeeGold
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Latest few month Greatest Mania is to sell Gold at 8:30 AM EST


Your tax dollars at work.

Tue, 02/12/2013 - 09:42 | 3236287 Confundido
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They need to break the $1,625 level. They're only $20/oz away.

Tue, 02/12/2013 - 09:47 | 3236300 GetZeeGold
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Twill be a great day for Mother Russia.

Tue, 02/12/2013 - 11:17 | 3236595 tango
tango's picture

I hope you're not serious.   Russia is doomed - demographics being the prime culprit.  In 25 years time it is doubtful that a nation smaller than Turkey can hold onto its vast expanse of territory, especially with an army of majority Muslims with little allegiance to Moscow.  But worse is the type of heavy handed statism that destroys the pricing mechanism.   Economies fail when true price is determined by fiat rather than markets (why socialism always fails).  Russia has broken free of her one defining quality - authoritarianism - only for short stretches.  She seems incapable of sustaining personal and economic liberty.

Tue, 02/12/2013 - 09:41 | 3236282 Winston Churchill
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The Federal South Sea Tulip Trading Co.

Who could have known ?

Tue, 02/12/2013 - 10:16 | 3236404 Groundhog Day
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If these idiots spent 40 billion a month in funding new technologies in energy, science, engineering the jobs derived would take care of the housing problem....oh who am i kidding....85 billion to the banks then...carry on

Tue, 02/12/2013 - 11:20 | 3236602 tango
tango's picture

You are absolutely right.   Basic research in science would yield incredible rewards but we're too busy preserving a bankrupt system of debt, worshipping athletes and "stars" and living for today.  You could spend 5 blllion a month (less than 2 days of debt) and almost certainly increase the efficiency of alternative energy systems to economic stabiliy.

Tue, 02/12/2013 - 14:35 | 3237277 Clayton Bigsby
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Student loans up next!

Tue, 02/12/2013 - 09:21 | 3236238 duo
duo's picture

A house is not a productive investment, unless you are running a sweatshop in the basement, and therefore should not be bought using debt.  Housing is one giant sinkhole of capital (maintenance, taxes, utilities), though it can appreciate at a rate faster than everything else in the Ponzi does.

Tue, 02/12/2013 - 10:21 | 3236414 Groundhog Day
Groundhog Day's picture


be careful about this type of message. Repeat after me, a house is a great investment, a house is a great investment.

That kind of misinformation will lead to suited men with shades packing heat from the NAR and banking cartel sitting outside your house.  Maybe even worse, drone monitering.

Tue, 02/12/2013 - 09:21 | 3236240 Confundido
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The 8:20am take down of the price of gold, in full effect....would the SEC not intervene if this happened to a particular stock?

Tue, 02/12/2013 - 09:21 | 3236241 zorba THE GREEK
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The U.S. economy has been dependent on one bubble after another for over 25 years,

because it no longer has a manufacturing base.

Tue, 02/12/2013 - 09:57 | 3236319 francis_sawyer
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but we DO have paper & derivative trading [insert noun here]... so it's all good... 

Tue, 02/12/2013 - 15:06 | 3237376 steve from virginia
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"The U.S. economy has been dependent on one bubble after another for over 25 years, because it no longer has a manufacturing base."


Manufacturing does not pay its own way, returns must be borrowed. There is more manufacturing 'bang' for the borrowed buck in China ... however, the Chinese economy is underwater and sinking fast because its lender is the US consumer (who's broke, btw).


Manufacturing is a thermodynamic sink, it cannot repay anything. The alternative to anti-productive industry is asset price bubbles, there is nothing else that doesn't require a lot of hard physical labor.



Tue, 02/12/2013 - 09:25 | 3236245 surfsup
surfsup's picture

So this is basically saying tv is a half century long mania?  Shit, I still watch as much Alex Jones as I did any tv show as a kid only its closer to REAL than the spittle excreting itself from the tubular orafice of fear, illness and doom.   

Tue, 02/12/2013 - 09:26 | 3236247 edb5s
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Long tulips!

Tue, 02/12/2013 - 09:30 | 3236261 Dr. Engali
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If there were "disciplined buyers" out there they wouldn't be buying bonds for "safety" right now...yet they are..sounds like a mania to me.

Tue, 02/12/2013 - 09:37 | 3236275 Vlad Tepid
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This writer is clearly a terrorist and must be Dorner/Droned for the safety of The Children.

Tue, 02/12/2013 - 09:48 | 3236290 Peter Pan
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The problem with manias is that they cause imbalances in everything that comes into contact with them. So for example the housing boom was accompanied by an explosion in mortgage brokers, office space, kitchens, spas, furnishings etc which in turn spawned factories and retail outlets of every kind. This in turn led to an explosion in advertising, in the number of agents, car leasing for agents etc etc etc.

The euphoria spreads and feeds itself whilst it is in its growth and spread phase, but when the "building Phase" is over the euphoria collapses in the absence of cash flows to sustain it.

Tue, 02/12/2013 - 09:55 | 3236308 GetZeeGold
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That's when you call on TARP. Hope they've got a couple more where that came from.

Tue, 02/12/2013 - 10:01 | 3236335 Lucius Corneliu...
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The only factories that were spawned are located in China.

Tue, 02/12/2013 - 10:05 | 3236344 Quinvarius
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What is weird is that both Tulip Bulbs and the South Seas bubbles had government promotion/intervention involved in pumping them up.  Much like the paper beanie baby dollar/debt complex, the government is usually at the root of all financial stupidity and crisis.

Tue, 02/12/2013 - 11:46 | 3236695 lynnybee
lynnybee's picture

let me tell you how much money i lost on a condo in Michigan.   almost 1/2 .   this was the top of the housing market in 2005 that i purchased, all cash deal.    this was when i was stupid re markets & finances & banking.    i lost a lifetime of wages.    & the man down the street, a professor at the local college ..... well he lost double what i lost.   how the hell did i know Michigan was a dying, depopulating state !    THIS IS WHY I AM HERE ON ZEROHEDGE.   I FINALLY GOT MY EDUCATION !   bless everyone's heart here for waking me up.    i can't believe how stupid i was, but, i'm not stupid now.

Tue, 02/12/2013 - 14:07 | 3237166 Zwelgje
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+1 camel

Tue, 02/12/2013 - 14:56 | 3237341 steve from virginia
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I agree w/ Philip Conrad 100%. That's why he writes for Barron's instead of some obscure blog like Economic Undertow.


One small fly in the ointment ... the US's (world's) banks are leveraged 30+ times to current high price levels. If house prices decline another 3% the (remaining) banks are insolvent (because of the recent declines many banks including the biggest ones are already insolvent). If prices decline to market clearing levels the banks are destroyed and depositors are wiped out (junior AND senior creditors + equity).


That's why 'market clearing' are dirty words Barron's or no Barron's: we are Cyprus!




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