... no wonder the banks are in a mess.
Canvassed by the BBC about his Reaction to falling house prices, James Knightly, Economist at ING had this to say:
This wealth destruction, coupled with growing concerns about negative equity, is likely to keep consumer confidence very weak. This, combined with plunging business surveys and the third-quarter negative GDP rate, should ensure another Bank of England interest rate cut on Thursday of at least 50 basis points, with further large cuts likely in the next few months.
Dude, WTF?
Changes in house prices are neither wealth destruction nor wealth creation. Allowing houses to deteriorate is probably wealth destruction; burning one down almost certainly is; but allowing prices to return to their long run average (about 60% of today's value) certainly is not.
And he works for a bank, so as far as rate cuts go, he would say that, wouldn't he?
Thursday, 30 October 2008
With economists like this ...
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3 comments:
It's all in perception isn't it? To a home owner the drop in the resale value of his home is a destruction of "wealth": his personal wealth. Accordingly, the wealth effect will have a negative impact on his expenditure. However, lowering the rate of interest will (as you point out at frequent interval) have all the effect of pushing on a piece of string. All it does is produce a piece of news for Brown that can be positively spun and, as a beneficial side-effect for Brown and Darling, screws the savers in the economy by lowering their incomes and, through the collapse in sterling, creating inflation.
If the house owner had borrowed lots of money to buy the house and then ran away from the debt once the house had gone negative equity and then the bank couldn't sell it for enough to cover the mortgage surely 'wealth' would have been destroyed?
in other words if houses are bought with wealth generated from trade and those houses fall in price that wealth will have been destroyed. Or better the wealth will have been destroyed if the house is sold for less than it was bought for.
But of course just letting 'prices' slip does not destroy wealth just as sliding share prices do not destroy wealth. Price is the opinion of the market. It is a signal. Just because shares have a low price does not mean the value of the underlying business has changed, just what someone is prepared to pay for it.
Or have I got all that completely wrong?
L, you've got the last bit right, but (ignoring transaction costs) if borrower goes bankrupt and banks sells at a loss, that is not really 'wealth destruction' it is just a transfer from lender to borrower, in the same way as there were transfers of wealth from recent buyers to those who sold out. If those who sold out invested in bank shares, the money has gone full circle.
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