Mark McHugh

Fun with Dick and Jane’s Addiction

In Open Thread on Thursday, July 21, 2011 at 8:56 pm

Here’s the most useful bit of folk wisdom I can pass along:

Do it once, you’ll like it.  Do it twice, you’re hooked.

It was imparted to me regarding heroin, and it shriveled any curiosity I might have ever had regarding the stuff.  No rush is worth the kind of self-inflicted slavery that that addiction brings.  An addict’s life quickly spirals into a series of twisted rationalizations, trying in vain to recapture the euphoria once felt.  There is never an exit strategy, just soulless renditions of  Perry Farrell’s refrain ( I’m gonna kick tomorrow!!!).  Darwin eventually provides one, but not before the addict’s selfishness has done permanent damage to everyone they once cared about.

The easy money endlessly pumped out by the Fed and squandered by the government has been compared to a heroin addiction.  It’s an appropriate metaphor.  Sure  it makes pain vanish in the short-term, but after a while it’s no longer a question of achieving some desired effect, it’s something we need to survive.  And although no one actually believes this, America seems powerless to stop this monster.  Why?   Meet America’s closeted heroin addicts:

See Dick.  See Jane,  See the chart.  See the recession.  Bad recession Bad.  See the Fed.  See the Fed cut.  Cut Fed cut!  See Dick and Jane refi.  See the next recession…..

What I’m getting at here is that the Fed has responded to every recession in the last thirty years exactly the same way…cutting rates.  Nothing’s shocking about that, but here’s the really important part:   In every case, the thirty year fixed mortgage pre-recession lowest rate, was higher than the post recession highest rate (these are quarterly averages).   So what was an unbelievably low rate before a recession became an unthinkably high rate thereafter, again and again and again. 

See Dick and Jane think houses are great investments.  Little do they realize that 65% of the price appreciation of houses over the last thirty years came from the heroin provided by the Fed and congress.  That $2000/mo. McMansion payment that gets a buyer a $400,000 mortgage at 4.41%, would only fetch a $137.000 mortgage at 17.5% (click here if you don’t believe me). 

If you’re thinking, “That can’t happen!” guess what?  You’re hooked too. 

See Dick and Jane TEA party?  May I suggest the slogan, “Give me Liberty, but don’t let my house go any further underwater!”  Apparently no one has explained to Dick and Jane that  they are the biggest beneficiaries of this “nanny state” thing they detest.  97% of all US mortgages are either written or guaranteed by the government.  While the debate over the debt ceiling rages on with all the substance of a “Tastes great! – Less Filling” commercial, the stash that keeps house prices propped up isn’t even on the table.   Fannie and Freddie are not subject to the debt ceiling and have unlimited credit lines.  Maybe that’s why you’ll never catch the dragon.

See Dick and Jane rob Grandma.  Anyone even vaguely familiar with the behavior of  junkies knew this was coming.  Fannie and Freddie are unfunded liabilities, social security is not, but good luck explaining that to a strung out whore.   Social security has been overfunded to the tune of $2.5 T.  In 2010, the US government collected 4.5 times as much revenue from social security than it did from corporations (both data points can be verified here). 

You can’t fix the housing market, you can only give the housing market another fix.   After that it’s just a matter of learning to tolerate abominations.Darwin’s coming.

  1. “In every case, the thirty year fixed mortgage pre-recession lowest rate, was higher than the post recession highest rate.”

    Wonderful observation. I recently watched a Jim Grant interview, and one thing he pointed out was that this generation of business leaders and financiers have lived in a world where interest rates have continuously been going down. I wonder what it will do to our economic psyche when they go up year after year for a prolonged period of time.

    Nominal interest rates can only go to zero, which means a bull market it bonds has a definite limit. There is no set limit on nominal interest rates’ upward potential, meaning a bear market theoretically has no limit. I never understood why bonds were considered a safe investment.

  2. “In every case, the thirty year fixed mortgage pre-recession lowest rate, was higher than the post recession highest rate” – except for that early eighties one, it looks like it was lower than 14.5% briefly before the recession (or it may be an issue with the blue crayola it is drawn with)… perhaps that was the point at which we mentally tethered ourselves to the dragon.

    Nice post.

  3. Indeed it was.

    I did not count the recession that we were in at the beginning of 1980, because it began more than thirty years ago.

    1980 was also when the 401(k) laws went into effect, if you want to talk about tethering to the dragon.

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