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3 housing charts show we’re heading for an echo bubble

Know what echo bubbles and housing bubbles both do? They pop

June 19, 2014
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Charles Hugh Smith’s Of Two Minds blog is required reading, and in his post Thursday he details how after six years of central planning by the Federal Reserve – and let’s be honest, that’s exactly what it’s been – the economy is more fragile than it was before.

There’s strong evidence he’s not exaggerating.

“The central bank/state intervene in the economy in a dominant fashion, controlling functions such as interest rates by order of central authorities that were once set by decentralized, self-organizing markets,” he writes. “The central bank/state pick winners and losers: for example, the Too Big To Fail Banks (TBTF) were selected to win, as the central bank/state bailed out their private losses with public-taxpayer money. In effect, the central bank/state enrich cronies at the expense of everyone else.

“The central bank/state manipulate the nominally ‘free’ market to boost asset valuations as a way of enriching cronies who own most of the financial assets and as a public-relations charade to mask the failure of their picking winners and losers,” Smith says.

“In other words, in centrally planned economies, markets are not allowed to discover price--they exist only to reflect positively on central planners,” he says.

One of the many current drags on housing has been the more than 30 years of stagnant income growth, especially for the middle class – the bulk of homebuyers.

Smith argues the Fed’s policies are what are causing that stagnation.

“How about real median income? Central planning has greatly boosted the wealth and income of the financier winners picked by the Planners, but sadly this does not include wage earners, who have seen their inflation-adjusted earnings plummet,” Smith writes.

Click the image to read the chart.

Chart: Of Two Minds

It’s hard not to see this playing out, and evidence of the housing echo bubble being caused by central bank policies, especially from the perspective of the housing finance space.

In fact, we’re seeing it right now, and Smith warns of the growing echo bubble.

Click the image to read the chart.

Chart: Of Two Minds

“One predictable result of central planning is more asset bubbles--or in the case of housing, an echo bubble of the housing bubble created by central planners in the early 2000s. Alas, an echo bubble is still a bubble, and so it will pop just like every other financial bubble throughout history,” Smith writes.

Meme: 4Chan

Some may argue that the Fed’s policies here aren’t what most think of as traditional “central planning” in the worst sense of the expression.

But Smith raises a good point: “If the Fed buying $2 trillion of home mortgages (more than 20% of the entire market) isn't Central Planning, then what is it?”

 Click the image to read the chart.

Chart: Of Two Minds

“The damage done by central planning has yet to come home to roost,” Smith writes. “Six years into the Grand Experiment – that central planners can pick winners who just happen to be their cronies – the chickens of consequence are still making their way home.

“And when they finally come home to roost, we will all discover that the economy is much more fragile than advertised by the central planners and their media toadies,” he says.

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