Nevada has the highest percentage of upside down homeowners at 67%.  And while I don’t know for sure, based on stories from people in the real estate business in Las Vegas, there are likely thousands of homeowners in that city who not only are not current on their mortgage payments, but haven’t made a payment in many months.

Zillow has this very cool interactive negative equity map showing a large percentage of homes in Clark County Nevada are underwater more than double the value of the home..  Arizona’s Maricopa Country and Ventura County in California also have sizable populations of homeowners in the same predicament.

Alejandro Lazo writes for the LA Times,

In roughly 10% of Southern California cities, 1 of every 5 homeowners with a mortgage owes double the value of the house, according to the data, released Wednesday. As sales and prices improve, some economists expect homeowners who have been stuck in underwater properties to try to sell their homes, muting any significant price appreciation.

While people aren’t walking away in droves, people are stuck where they are and not able to take advantage of job opportunities.

“People don’t like to walk away from something they have put money into,”Richard Green, director of the USC Lusk Center for Real Estate, told the Times. “People seem to hate realizing losses.”  Yes, indeed.  In Chapter 9 of Walk Away I point out,

Underwater homeowners aren’t walking away because they feel a duty to satisfy their lenders. It’s because they don’t wish to feel the regret of buying at the top of the housing market using too much debt.  And instead of doing the financially rational thing and walking away,  some keep paying, rationalizing that they are duty-bound to pay the note until the bitter end, but secretly hoping their financial acumen will be resurrected by a rally in home prices. A prospect that in many
cities is hopeless.

Experts have been calling for the bottom of the housing market each year since the crash, and prices continue to tumble because of this overhang in negative equity.   This year is no different.  Even investor savant Warren Buffett told CNBC he’d buy a couple hundred thousand houses if he could.

If Mr. Buffett comes calling, and the bank will approve the short-sale, take him up on it.

I have one small but obtrusive nit to pick with Bob, however.  Bob links to a blog post by Steve Horwitz, which he praises as “a good job explaining why Krugman’s understanding of US banking history is flawed, because we didn’t have laissez-faire banking in the late 1800s.”  Clicking on the link I found that Horwitz started out promisingly enough, arguing, contra Krugman, that late 19th-century America “was emphatically not a land of minimal government in banking” and that “the federal and state governments played a huge role in the banking industry and it was those regulations that  were responsible for the pre-Fed panics.”  I was excited to read more, but then my heart sank when Horwitz listed the two “most relevant regulations” in generating these panics as:

 1) the prohibition on interstate banking, which created overly small and undiversified banks that were highly prone to failure; and 2) the requirement that federally chartered banks back their currency with purchases of US government bonds, which made it prohibitively expensive to issue more currency when the demand rose, leading to the currency shortages and resulting panics that culminated in the Panic of 1907.

Huh?  These regulations were of almost no significance in causing the cyclical booms that culminated in the Panics of 1873, 1884 1893, and 1907.  Horwitz never mentions the underlying cause of these cyclical fluctuations: the establishment of a quasi-central banking cartel among seven privileged New York banks resulting in the almost complete centralization of U.S. gold reserves in their vaults by the National Bank acts of 1863-1864.  This New York City banking cartel was able to expand willy nilly the monetary base and the overall money supply by expanding their own  notes and deposits on top of gold reserves.   Their notes and deposits were then used as reserves by lower tier banks (Reserve City Banks and Country Banks) on which  to  pyramid their own notes and deposits. This is well understood even by mainstream monetary historians.  For example,  John J. Klein (Money and the Economy, 2nd ed., 1970, pp. 145-46) pointed out:

The financial panics of 1873, 1884, 1893, and 1907 were in large part an outgrowth of . . . reserve pyramiding and excessive deposit creation by reserve city and central city [New York City] banks.  These panics were triggered by the currency drains that took place in periods of relative prosperity when banks were loaned up.

Moreover, banks, especially the larger ones, were encouraged in their inflationary credit creation by the firmly entrenched expectation that they would be freed from fulfilling their contractual obligations in times of difficulty by the legal suspensions of cash payments to their depositors and note-holders that recurred during panics throughout the 19th century.  In addition, under the National Banking system,  the New York banking cartel had formed the New York Clearing House which was empowered to issue euphemistically designated “clearing house certificates.”  These were in essence extra bank reserves that were created out of thin air to bail out errant banks during panics.  Ludwig von Mises identified these cartel certificates as an inspiration for the formation of the later Federal Reserve System as a lender of last resort to over-expanded banks, a function that introduced moral hazard into the banking system.  Commenting on the intentions of the advocates of a central bank for the U.S., Mises wrote (p. 126)  in 1928:

Among the reasons leading to the significant revision of the American banking system [i.e., the Federal Reserve Act of 1913], the most important was the belief that provisions must be made for times of crisis.  In other words, just as the  emergency institution of Clearing House Certificates was able to save expanding banks so should technical expedients be used to prevent the breakdown of the banks and bankers whose conduct had led to the crisis.  It was usually considered especially important to shield the banks which expanded circulation credit from the consequences of their conduct.

Horwitz seems to imply that the panics were  isolated events that were somehow caused by sudden monetary stringency when in fact the very opposite was true.  As Rothbard shows in his masterful discussion of the National Banking era in A History of Money and Banking in the United States (pp. 132-79), every panic was preceded by an expansion of the money supply. And during the panic of 1873, there was no contraction of the money supply, while there was a very mild one in 1884.   As a free banker, I would have expected Horwitz to  counter Krugman’s nonsense by pointing to the inflationary, quasi-central  banking cartel that existed during the Gilded Age, rather than carping about minor regulations that may have curbed the ability of banks to inflate their way out of difficulties caused by previous inflation.  And why no mention of the banking cartel’s “clearing house certificates” as fostering systemic moral hazard and undue credit expansion among banks?  Doesn’t Horwitz ascribe to the oft-repeated free banker doctrine, “Every bank on its own bottom.” Finally, how does Horwitz square his idiosyncratic financial-regulation theory of panics and recessions with the Austrian Theory of the Business Cycle?  He sounds like a supply-sider to me.

Getting back to  to Bob,  I would suggest that for a complete refutation of Krugman’s disingenuous claim that laissez faire banking reigned supreme during the 19th-century, he should  direct readers to Rothbard’s discussion mentioned above.

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Pierre Lemieux in Somebody in Charge: A Solution to Recessions? provides a detailed and enlightening discussion of how the issues Peter raises in his post played out in the recent crisis. Policy failure, not market failure generated the malinvestments and crisis. The rush to do something slowed recovery.

From my review essay (pdf available on request), in The Independent Review “A Crisis of Authority: Pierre Lemieux’s Somebody in Charge: A Solution to Recessions?, the SUMMARY”

“The roots of the recent financial crisis, according to economist Pierre Lemieux, lay not in greed and self-interest running amuck in unhampered markets, but in the policy and regulatory structure that created and enabled excessive leverage and risk taking. If Lemieux’s latest book were widely read, more people would believe that financial regulators and central banks are not needed to avoid financial crises and economic recessions.

And the conclusion:

“Lemieux’s conclusion that “The causes and legacy of the economic crisis of 2007-2009 reveal a deeper underlying crisis, which is a crisis of authority” (p. 162). If this book was widely read and widely used in classrooms, it could be very useful in awaking more of the public that we do not need somebody in charge. What we need is ‘Wicksteed’s car of collectivism’ to ‘be stored on a sidetrack” (p. 163).”

Robert Wenzel has a great analysis of this:

“Warren Buffett’s Father Tried to Teach Warren About Austrian Business Cycle Theory: I wonder what went wrong…  Note the second to last paragraph where Howard Buffet writes:

‘Somewhere I had read that you wrote a book on the “Panic of 1819″. If this is correct, I would like to know where I can buy a copy of it. I have a son who is a particularly avid reader of books about panics and similar phenomenon. I would like to present him with the book referred to.’”

Do you recall the courtroom classic in which the prosecutor says to the person in the box: “Just yes or no please, have you or have you not  stopped beating your wife?” Yes of course means that you were beating her. No means you are still beating her.

Debaters and politicians know that if you can control the terms of the debate, you will have won it. Sometimes the effort by politicians to insinuate their own loaded  language into the dialogue becomes ridiculous.

Here’s a recent case in point. The new French President, Francois Hollande,  campaigned on a theme of less “austerity” and more   “growth.” On being elected, he promised both France and Greece more “growth.” President Obama and other leaders at the G-8 meeting liked this terminology and agreed that less “austerity” and more “growth” is needed.

But what do these terms actually mean? Translated, “austerity” refers to a reduction in government deficit spending, which the Europeans are attempting to accomplish almost entirely through tax increases, with little or no reduction in government spending. “Growth” means an increase in government deficit spending.

So an increase in government deficit spending is synonymous with “growth.” The two terms are identical and either term may be used interchangeably without explanation. President Obama will no doubt use this formula extensively in the campaign. He will say he is  for “growth” and his opponent is against “growth.”

Of course, as any student of economics knows, there is little logic and no empirical evidence to support the idea that government borrowing to spend promotes growth, especially when so much borrowing has already taken place. There is plenty of reason to think that government money printing and deficit spending lead instead  to bubble and bust, and  therefore prevent economic growth.

Still you have to hand it to M. Hollande and now President Obama. Calling an increase in borrowing to fund government deficits ” growth” is a lot smoother than calling money printing ” quantitative easing.” QE has the merit, like “growth,” of obscuring the real terms of the debate. But “growth” rolls off the tongue so much more easily and will sound good to the average person.

Meanwhile it is not just the politicians of the left  who are trying to do something about the current revulsion against soaring government debt. Creative Keynesian minds are at work. Robert Shiller, leading Yale economist, would like to increase government deficit spending even further, but recognizing that the political climate is against it,  has a fallback idea. Why not just increase taxes on the wealthy and immediately  spend every dime of the revenue. That way, the deficit won’t go up and the economy will still  be stimulated by the spending.

Shiller is a very smart man. There is no doubt about that. But isn’t it remarkable that he apparently believes the government spending will help the economy even more than  the private spending or investment which has been precluded by the new taxes. In effect, we are to take money from experienced and successful investors, people who really know how to create jobs and are motivated by the profit system to do so, and give that money to politician spenders and investors, and lo, it will help the economy recover.

Maybe Shiller thinks these politician spenders and investors, in Keynes’s words, decide matters based on ” long views,…[ the] general social advantage,…[and] collective wisdom.” This idea defies history and experience, but even if politicians did decide matters that way, they still wouldn’t be able to run an economy.

Shiller’s new idea is almost as bad as the earlier brainstorm of leading Keynesian academics that the Fed needs to gin up inflation so that interests rates would be come even more negative than they are. The originator of this idea, Harvard economist Greg Mankiw, who in addition to being a former George W. Bush CEA chair, also happens to be one of two named economic advisors to George Romney, has been coy about how much extra CPI inflation he would like to see. But his Harvard colleague and co-author of This Time is Different, Ken Rogoff, has explained that they are thinking of about 6%.

Even Keynes never advocated giving away money to that degree. He did advocate zero % interest rates, but not -6% interest rates. That really raises the art of giving away money, generally to government cronies, to a new level. Of course it also assumes that the bond market will just go along with it and keep buying debt securities offering  such a return.

The one thing  that all these Keynesian remedies have in common is a desire to control prices. Unfortunately it is this very lust to control prices that is giving us the “austerity” and ” lack of growth” that M. Hollande, President Obama, and the other members of the G-8 so deplore.