A weekend topic starting with Reason. “In 2010 Thomas Hoenig, then the president of the Federal Reserve Bank of Kansas City and a member of the central bank’s Federal Open Market Committee, thought he was seeing history repeat itself. In the early 1980s, when he was a vice president at the Kansas City Fed overseeing bank examiners, he had a front-row seat to a boom and bust in land and oil asset values, which gutted the Midwest’s economy. That painful experience stemmed largely from the Fed’s loose money policy in the 1970s, followed by that policy’s sudden reversal. Hundreds of banks had loans that depended on soaring asset prices, and hundreds of banks failed. Hoenig was responsible for helping decide which banks would live and which would die. He saw ‘lives were destroyed in this environment’ and ‘people lost everything.’”
“Remembering that experience a few decades later, Hoenig did something the collegial structure of the Federal Open Market Committee was designed to discourage: He dissented. He began voting against the Fed’s ongoing policy of quantitative easing (Q.E.), because he foresaw another ultimately unsupportable rise in asset values along with increasingly risky behavior by privileged market players awash in easy money.”
“The Fed’s allegedly crisis-ameliorating methods were complex, but the essential animating idea was simple: Create more money. From 2008 to 2011, the central bank conjured up as much new money as had entered the U.S. economy in the previous century, a 96,000 percent increase. From 2007 to 2017, the Fed nearly quintupled its balance sheet. In The Lords of Easy Money, business reporter Christopher Leonard relies on Hoenig’s heretical perspective as a narrative spine for his detailed reporting on the Fed’s thought and action before, during, and after the 2008 financial crisis.”
“In March 2020, Leonard relates, Jerome Powell’s Fed did ‘virtually everything that Ben Bernanke’s had done in 2008 and 2009, but this time did it in one weekend, rather than over several months.’ The Fed ‘pushed as much money into the banking system in forty-eight hours as it had done in the span of a month during earlier rounds of QE.’ The Fed began ensuring that ever-wider swaths of assets would not suffer any downturn in nominal value on its watch.”
Patch California. “A global drop in home prices has hit Silicon Valley particularly hard. San Mateo County homes lost a third of their value in 2022 in year that saw prices for single-family homes fall precipitously throughout Silicon Valley, according to newly released data from the California Association of Realtors. San Mateo County’s single-family median homes lost $750,000 in value last year, plunging from an all-time high of $2,250,000 in April to $1,500,000 in December.”
The Dallas Morning News. “‘What’s happening in Dallas-Fort Worth is unprecedented,’ said Texas economist Mark Dotzour. ‘It’s really a boomtown.’ Despite what he described as blunders with government spending and actions by the Federal Reserve, Dotzour predicts continued growth in Texas and a return to commercial property investment in the state. ‘I’m bullish on Texas and I’m bullish on commercial real estate,’ Dotzour said. ‘It appears that buyers are just putting their pencil down for a while.’”
“Dotzour said the current slowdown in commercial property investment will allow repricing of real estate to reflect the higher borrowing costs. Commercial brokers say that bid prices on some properties have fallen by between 15% and 20% from previous peaks. ‘Prices dropped overnight and the sellers are slow to respond,’ he said. ‘It’s not because there is less demand for real estate — it’s responding to the shock of the cost of money.’”
The Real Deal. “Glenn Kelman has at least one regret from a tumultuous 2022: keeping his company’s iBuyer going as long as he did. ‘I probably should have closed the iBuying business earlier,’ Kelman said. ‘It shouldn’t have taken a housing market correction to realize how capital-intensive and risky that was.’ Redfin’s exit from the business placed it alongside Zillow, which shuttered iBuying one year earlier. The shift in the housing market throughout 2022 ramped up scrutiny over other players like Offerpad and Opendoor, the company that pioneered the model and said in November it lost $928 million in the third quarter.”
From Bloomberg. “Job cuts at Amazon and Microsoft are the latest blow for the Seattle region in the US state of Washington, which is still struggling to recover from the pandemic-era destruction of the commuter economy that, as in many cities, is the lifeblood of America’s second-largest tech hub. Now a growing glut of empty office space in the city centre suggests things are likely to get worse before they get better.”
“‘This downturn in tech is going to be devastating for Washington, and the long-term effects will be quite profound,’ said Jeff Schulman, a marketing professor at the University of Washington. ‘Tech companies have fuelled so much growth and change that when they tap on the brakes and go in reverse, it puts everything else in peril.’”
“Amazon’s Seattle campus is a quieter place these days, with echoes of a similarly afflicted San Francisco in California. Pavements and restaurants are empty. The first Amazon Go, a cashier-less store that opened in 2018 with lines stretching up the block, is now resorting to tired convenience-store marketing tactics, including 79-cent sodas and $1 coffee Mondays.”
From Geek Wire. “As his city tries to emerge from the pandemic, Seattle Mayor Bruce Harrell is thinking about how to revitalize downtown amid long-term changes in work habits that pull people away from the urban core. Harrell highlighted endeavors to reduce blight, such as programs to pay for window repair and efforts to bring businesses into vacant storefronts and unused areas. ‘Plywood is my enemy,’ he said. Public safety and addressing homelessness are also priorities. ‘Every major city seems to be grappling with the issue of a subclass of poverty when we’ve also created a subclass of wealth,’ he added.”
“‘We have to be bold enough and creative enough to realize that the nine-to-five downtown is no longer going to take place,’ said Harrell. Positive change, he said, ‘starts by saying that the good old days are gone.’”
From Mises.org. “In 2011, the Federal Reserve invented new accounting methods for itself so that it could never legally go bankrupt. It was all academic at the time. But in 2023, the Fed really is insolvent, although its fake post-2011 account doesn’t show this. Nevertheless, the reality is that the Fed’s assets are losing value at the same time that the Fed is paying out more in interest than it is making in interest income. This became clear last week, when the Fed released a new report showing that its interest payments on bank reserves skyrocketed in 2022.”
“For the year overall, the Fed still managed to achieve a positive net income, thanks to positive inflows in the first half of the year. But since September, the Fed began recording what’s called a deferred asset, which tallies up the Fed’s loss; the deferred asset stood at $18.8 billion at the end of the year. The ‘deferred asset’ phrase basically means ‘losing money’ in Fedspeak: the Fed is supposed to make remittances to the US Treasury out of its surplus, but when it has no surplus, the Fed “defers” its payments. We can see how these remittances plummeted into negative territory beginning in September.”
“A sizable part of the reason that the Fed has become insolvent in recent months (and almost certainly will be in 2023 overall) stems from the fact that since 2008, the Fed has bought up trillions of dollars in Treasury debt and mortgage-backed securities (MBSs). The Fed has done this to prop up the prices of real estate and government bonds (i.e., to subsidize Wall Street, banks, and the real estate industry.)”
“Yet it bought these fixed-rate assets when interest rates were very low, and most of those assets have a maturity of over a year. That means that even as interest rates have risen in the past year, the Fed’s income from these assets has not risen sizably. Yet the Fed is also paying banks interest on reserves and reverse repos. That interest rate is not fixed and changes rapidly. So although total reserves at the Fed have fallen by 25 percent in recent months, that won’t bring interest payments down to 2021 levels because interest rates have increased 4,300 percent, from 0.1 percent to 4.4 percent. Another complicating factor driving the Fed deeper into the red is the fact that its portfolio is also losing value.”
“For a normal financial institution, this situation leads to bankruptcy. But the Fed will bail itself out by printing money. In the end, that means price inflation, either in assets like stocks and real estate or in consumer goods like eggs and auto parts. Ordinary people will see their cost of living go up and their real wages fall, and they’ll get poorer. It’s all a great scam for the parasitical class. For the productive classes? Not so much.”