On September 14, 2012, Don Lee writes in the Los Angeles Times that the Fed will start buying billions of dollars of mortgage-backed securities to push historically low mortgage rates down further, spurring refinancing activity and home sales.
The central bank said it would immediately start buying billions of dollars of mortgage-backed securities — essentially bonds that are made up of a bunch of home loans, packaged and then sold to investors.
Under the plan, the Fed would begin buying $40 billion worth of mortgage-backed securities a month. Combining the new bond buying with previously existing programs, the Fed said it would increase the central bank’s holdings of longer-term securities about $85 billion a month through the end of the year.
The main problem for people who want to buy a house is coming up with the down payment, and lower mortgage rates don’t directly help that, Richard K. Green, Director of the USC Lusk Center for Real Estate, said.
“The constraint is not anymore whether people can afford to buy a house,” Green added. “House prices are down so much and rates are so low. It’s the down payment.” And analysts say that will depend to a large extent on stronger job and income growth.
Of course, the banks will be the real beneficiaries and further concentrated ownership and income inequality will result.
The question, as posed by Green, is how do people afford the “down payment?” Without stronger job and income growth, especially through broadened private, individual ownership of income-producing productive capital assets resulting from stimulus that balances production and consumption, the majority of Americans, even those college-educated, will continue to experience the impact of job destroying and degrading tectonic shits in the technologies of production.
The Federal Reserve and monetary policy makers need to embrace the idea of transforming “public debt backed currency” into “productive value backed assets.”
A colleague at the Center For Economic and Social Justice (www.cesj.org) responds:
As I see it, the “demand siders” and the “supply siders” are both making the same mistake: cutting out half of Say’s Law of Markets. Demand siders redefine Say’s Law and reject it, while supply siders redefine Say’s Law and accept it. As Milton Friedman himself acknowledged — within a past savings framework — “We are all Keynesians now.” What Friedman didn’t say was that this is probably due to everyone accepting Keynes’s redefinition of Say’s Law as the near tautology of “Production equals income, therefore supply generates its own demand, and demand its own supply.”
True — but until we understand the full reasoning behind that summary, we will tend to go with the Democrats and assume that generating demand (deficit spending, artificial job creation and redistribution) and ignoring production will fix things, or with the Republicans and assume that increasing production (cutting costs and increasing capital investment) and ignoring demand will make the economy run properly.
The task, as Harold Moulton pointed out in The Formation Of Capital (1935) is to increase both production and consumption concurrently. You cannot increase one and ignore the other; they are codependent. Since (as Say explained), we cannot exchange what we produce for what others produce without ourselves first producing or making a negotiable promise to produce, our production (supply) generates the wherewithal — income (demand) — that encourages others to produce something that they can exchange for what we produce. We cannot consume more than we produce, thus, we cannot consume unless we or others produce, nor produce unless either we or someone else consume it.
By ignoring either supply or demand — including the assumption that either will follow automatically as “ignoring” — the system is thrown out of kilter. Each person’s capacity to produce with labor and capital determines that person’s capacity to consume (which is why Moulton’s two previous books in the series that included The Formation Of Capital were America’s Capacity To Produce (1934) and America’s Capacity To Consume (1934)), and in accounting terms builds internal controls into the system.
When we disconnect the capacity to produce from the capacity to consume through lack of access to the means of acquiring and possessing capital as technology advances and displaces human labor, thereby inhibiting or preventing propertyless people from producing, the internal controls of the system described by Say’s Law fall apart. At that point government steps in to try and control the economy externally, imposing desired results through manipulation of the currency, deficit spending, and redistribution through the tax system instead of equality of opportunity, rather than maintain its role of regulator and policing abuses of the internal controls.
Simply cutting costs does nothing to reverse this trend. Relying on new investment to create enough jobs when the tendency of advancing technology is to reduce or eliminate human labor also does nothing at this point. In the 1930s Moulton noted that the rate of technological advance means that fewer jobs are created than are eliminated by advancing technology — for example, between 1919 and 1929, at a time when millions of new jobs were being created and production was going through the roof, the number of jobs in direct manufacturing decreased dramatically. The new jobs were in admin, sales and support — “service” jobs that are now disappearing as computers take over.
Moulton assumed that increasing consumer demand as lifestyles were enhanced and the standard of living rose would take up the slack for a while. He estimated, though, that the turning point would come in the early 1980s, when technological advance would mean that the total new jobs created by technology began to be less than those eliminated. All we could do in the meantime (as he hinted in Income And Economic Progress (1935), the fourth book in the series that contained The Formation Of Capital) was get to work and figure out some way for people to get income other than by the New Deal expedients.
The turning point actually came much sooner. The “Great Society” was, in part, a response to the problem of advancing technology in conflict with human labor. There was, unfortunately, no fundamental difference between the Great Society and the New Deal. The basic assumptions remained that the only way for most people to gain income is by wages supplemented by State welfare, and that the only way to finance new capital formation is by cutting consumption and accumulating savings before investing.
Almost unnoticed — at least as far as economists and politicians were concerned — was the work of Louis Kelso. His 1958 book with Mortimer Adler, The Capitalist Manifesto, in combination with the second book, The New Capitalists (1961) can (with a great deal of justification) be regarded as being the book that Moulton’s Income And Economic Progress really should have been.
To Moulton’s explanation of the optimal way to finance new capital formation through “pure credit” (i.e., credit that does not rely on existing accumulations of savings), thereby generating mass production, Kelso added the necessity of people who own no capital can supplement or replace income from selling their labor, with income from capital — thereby generating the mass purchasing or consumption power to maintain mass production power.
The solution is simple once it’s pointed out. If people who currently own no capital are empowered through access to capital credit to purchase the very capital that is displacing them from their jobs, supply and demand will once again be in balance. The ineffectual deficit spending of the Democrats and the inadequate cost cutting of the Republicans can be relegated to the Museum of Bad Economic and Political Ideas. This is why the subtitle of Kelso and Adlers 1961 book is so important: “A Proposal To Free Economic Growth From The Slavery Of [Past] Savings.”
Capital Homesteading (http://www.cesj.org/homestead/index.htm) is a way of applying these concepts to benefit every child, woman and man in the United States and, eventually, the world.
