u2018Policy' Means Mistake or Fraud


A report in yesterday’s Financial Times tells us that Japan is considering radical action to get its economy and its people moving. A proposal is on the table to cut working hours — to encourage young families to have more children.

We do not like to criticize, but we notice some problems with the concept. First, it is not going to take a couple very long to conceive a child. It can normally be accomplished during regular leisure time, on lunch breaks, or even on a holiday. Even if a man worked 10 or 12 hours a day, he’d still have at least another 12 hours to get the job done. Maybe we’re missing something, but if he couldn’t get around to it in 12 hours, we doubt that giving him another 15 minutes is going to make that much difference.

The other weak point we notice is that the program would be confined to government employees. There’s the real rub. The last thing a society needs is to encourage bureaucrats to replicate. There are far too many of them already

This little news item set us to thinking about the way almost all policy initiatives are flawed, mistaken or frauds.

Here in Baltimore the talk is real estate, real estate, real estate. Everyone wants real estate. We’re only a few miles from the hottest market in the nation — Washington, D.C. There is a photo in the latest issue of Time showing what a half-million dollars will buy you in Washington. It is a brick, two-story 1,900 square ft. row house with a plain front porch that looks like it was designed by Stalin’s plumber. The thing is relentlessly charm-free. The photo shows not the slightest hint of grace or beauty. No moldings. No shutters. The roof is flat. The porch columns are square. And the windows are lopsided. Who would want to live in such a place — even if it were free? Only someone who cares more for money than for style. Properties in the area rose 22% in price last year. If the buyer paid 20% in down payment he stands to double his money in one year — if the bubble keeps expanding at the present rate.

We looked at a building for sale near us in the heart of Baltimore. We own the one next door to it…for which we paid about $400,000. But our building was in good shape. The one we saw yesterday is a dump. Much of it would have to be torn down. The asking price: $2 million.

“We offered $700,000,” explained a colleague.

“Did they take it?”

“No, they laughed.”

It’s “America’s House Party,” says Time. What is amazing is that people are not even more “gaga” than they seem. If you can make $100,000 a year — doubling your money — buying ugly houses in the nation’s capitol, why not buy two of them?

Real incomes in America are flat or falling. GM lays off well-paid workers. Many of them end up as badly paid workers at Wal-Mart or some other retail outlet. A few go into home speculation. In a macro-economic sense, they are replacing real wages with phony ones. GM makes money by producing things that people wanted, and selling them at a profit. Whatever money you make by speculating in houses is money that must come from some fool who is even more benighted that you are. You buy the dumpy house for $500,000. You don’t make any money unless someone else comes up with more money to take it off your hands. You make money. The finance company makes money. The real estate agent makes money. The guys who put in your granite countertop make money. But, apart from the new granite countertop, not one bit of real wealth has been created.

You see, dear reader, it was Alan Greenspan’s policy initiative that created the present real estate fandango. He sent out the invitations. He ordered the drinks and chips. He lined up the band.

But who’s picking up the tab?

Ah…there’s the swindle. The Fed chairman is leaving office next January. Whether he leaves before the party is over or not, we don’t know. But we are sure he will leave the bill behind. It is likely to be a large one.

• Everyone believes the euro is finished. But the euro rose yesterday, to over $1.21. Gold rose too — over $430. Both the euro and the dollar are sinking against gold.

• “This is just like any other bubble,” began a friend yesterday. “People have come to believe something that is not true. And they’re acting on it. They think property only goes up. So they’re paying outrageous prices, because they’re sure they can’t lose. Young couples buy bigger houses than they need — thinking they should get it now, before it becomes too expensive. Plus, they think they’re making money on it. And they can always take out the money — using an equity line of credit. And middle-aged couples are buying second homes and retirement homes. They’re not really ready for them, but they too believe the train is about to leave the station. They hop on board now…also sure that even if they change their retirement plans, their house in Florida or at the beach or in the mountains will be worth a lot more in the future than it is today.

“But what does the smart man do when there is a bubble? He sells it. You should tell your readers to dump the homebuilding stocks. And dump the finance companies. And dump the Home Depot and all the companies that have made a lot of money on this bubble. Sell now. You might be early. But better early than late. And oh yes, sell any house you don’t expect to live in for the next 10 years. This is a bubble. Get out.”

June 18, 2005

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century.

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