Fun Interview with Simon

I know Simon very well, so I’m not particularly impressed very often, but I think his interview with Andrew Leonard of Salon is a fun read, even if you’re already familiar with his positions.

My favorite line?

What do we get out of the meta-financial crap? It’s not so clear that we got useful things. Did our ATM fees come down? No.

By James Kwak

23 thoughts on “Fun Interview with Simon

  1. The “meta-financial crap” arguably led to over-building/investment in housing. Is this such a completely bad thing? Like Simon’s infrastructure or internet, the extra housing development isn’t going away. And, in fact, many first time buyers are now able to enter markets they wouldn’t have otherwise. This seems a clearly “useful thing.”

  2. I beg to differ. Sprawling suburbs with cheaply-made homes is not the kind of infrastructure that supports future growth – quite the opposite. If those resources would have been focused on reviving the decrepit urban centers all around the country, that would have served a much more constructive aim (in terms of growth and capacity to compete in the global economy).

  3. I agree with Steve F. The infrastructure in this case is hundreds of thousands of houses and condos. And they’re useful.

    In the dot com bubble, we got thousands of Sun Sparc servers, Aeron chairs, hubs and routers, DSL and Broadband connections to homes, PCs with network cards, server colocation facilities, T1 and T3 lines, remodeled warehouses, etc. And that stuff was useful too.

    In both cases, the residual infrastructure came down in price and was sold at auction for a fraction of original cost.

    But the critical difference is: after the dot com bubble, the government did not come in and bail out Kleiner Perkins, or Idealabs, or the creditors and individual shareholders of

  4. Doesn’t this look like the two largest bank heists in history? The fist time billions were pulled out in bonuses, fat cat salaries, and dividends, and the second time with the bailouts?

    I guess the American oligarchs are slicker and more accomplished than the Russian oligarchs having been at it for decades.

  5. How is it good to have whole neighborhoods sold at a fraction of the original price? As opposed to Aeron chairs, those houses require maintenance and utility payments that are probably in correlation to the original price, and those who buy it cheaply might not be able to afford it.

    If it were embedded in an urban tissue, then one could imagine how demand would soon rise again, and keep it from turning to slums, but as it stands, most of these new developments could be ignored now just like they were when they were just an open field…

  6. “What do we get out of the meta-financial crap?”

    Simple: We got massive, concentrated risk, backed by a taxpayer put.

  7. From the buyers’ perspective, selling neighborhoods at a fraction of the original price seems like nothing but a good thing. To be sure, developers or sellers may not realize their intended gains, but to claim, as Simon and Tom Erez do, that nothing useful comes from the investment is to ignore the millions people that are now able to afford a level of housing comfort that would have been unattainable only a few years ago.

    I think Tom Erez is also misguided – or at least naively urban-centric – in his claim that suburban development doesn’t support economic growth. Not everyone prefers to live in urban centers. Many families simply can’t afford to raise families there. Moreover, many start-up businesses are unable to afford urban office/manufacturing space. Hence, suburban development is arguably a better place to invest in housing and infrastructure to promote future economic growth. Consider Palo Alto – a thriving suburban area that supports incredible economic growth through thousands of start-up businesses.

  8. For folks who think housing is now cheaper (because of overbuilding driven by overly easy mortgage money), check house prices now versus 1995, or 1985, or 1975, or…

    Most houses today are still overpriced when measured against our history, except in a few extremely hard-hit areas, often not very desirable.

  9. Steve,

    I don’t agree. Palo Alto is an established neighborhood which saw almost no growth in the recent build out craze. Where things were built out was out in Tracy and in the central valley. A lot of these sub-divisions are owned by investors and banks, are poorly constructed with slap-up materials, and will rot wholesale. Also consider the demographic angle: the number of two-parent multi-child households is in relative and tipping into absolute decline. From “Demographics and Depression” by David Goldman:

    The Virginia Tech economist Arthur C. Nelson has noted that households with children would fall from half to a quarter of all households by 2025. The demand of Americans will then be urban apartments for empty nesters. Demand for large-lot single family homes, Nelson calculated, will slump from 56 million today to 34 million in 2025—a reduction of 40 percent. There never will be a housing price recovery in many parts of the country. Huge tracts will become uninhabited except by vandals and rodents.

    We’ve wasted a huge number of resources, mental and physical, on depreciating and ultimately unnecessary product.

    And, to top it all off, due to the echos of the credit boom and our attempts to save both the banks and the people who thought their home had replaced their need to save, we’ve still managed to keep housing unaffordable by historical measures. Further, we’ve virtually guaranteed that anyone buying now (at historically low rates) will realize far less appreciation on their homes than what they’ve been able to count on in the past, as they will be selling into what is almost certain to be a less friendly interest rate environment.


  10. But I think you have to be careful when comparing housing prices across periods in history. In most cases, I don’t think that you can compare only on price.

    For example, modern, “middle-class” housing is a much different product than it was twenty years ago. A modern three-bedroom “McMansion” offers a standard of living/material comfort/prestige (in terms of space, amenities, fixtures, etc) that arguably exceeds that of a typical three-bedroom house from 1975.

    So while the prices may seem higher when measured against historical averages, the higher price might also reflect the enhanced comfort and amenities of contemporary housing.

    Also, historical housing price data may not be as accurate as many would believe. There’s a great article on this in WSJ today that leads me to question housing price data:

  11. To my mind, Steve, your point merely demonstrates something I have said for some time: It is foolish to buy into an insupportable standard of living with borrowed money.
    Why are these “amenity filled” neighborhoods available? Because people could get inflated loans for them.
    Why were people willing to get loans they knew (at some level, most of these borrowers had to know) were beyond their means? Because aggressive marketing and advertising convinced them they “deserved” more than they could afford.
    The sad truth is that real wages have been declining since the 1980s, and people have been making up the difference with borrowed money while the advertising industry has convinced them they need more and more.

    Without the unsupportable lending boom, perhaps middle class people would have realized some time ago (before it was too late) that they could not even afford what their parents had in terms of a home and car, and that this was because they were historically underpaid for the work they were doing.

    The sad truth is the oligarchy has managed to convince the middle class that the top 1% should pay no taxes, and has the inalienable right to threaten their security by forcing them to work more for less pay and benefits, because we live in a “global economy” and that was the reality of the thing. It is unfashionable to talk in this way, I know, but some of us DOWN HERE are angry, and we are not fools. Court that anger at your own risk.

  12. Carson,

    You’re right, Palo Alto is certainly a well-developed suburb. My point wasn’t that the recent investment in real estate led to this development, but that previous suburban investment did.

    Everything south of San Francisco was farmland not more than 40 years ago – including San Jose. At some point, it made sense to develop these into suburban areas – perhaps, I would bet, even with “shoddy construction” and “slap-up materials” by “greedy bankers.” But today these areas are thriving economic centers. Hardly an argument against investment in suburban development.

    The experiment may not always work out, as may be the case in the central valley and Tracy. But only time will tell, and I think it a little too early to make the call.


  13. James,

    I don’t think it necessarily foolish to subsidize a higher standard of living with credit. In some cases this can be a rational move, especially if you can reasonably expect increased future earnings. And I think that, in ordinary times, most people have an optimistic outlook on their future earnings.

    Fact: In 2007, the top 1% paid more federal income tax than the bottom 90%.


  14. I’m sorry to disagree with you Steve. There was an extreme demand for building materials during this “over-building” period. A shortage for materials like drywall. So what did they do??? They bought toxic/dangerous drywall from China to use in the new homes. Because of this, they will have to rip apart many buildings in Florida, Louisiana, and other parts of the country. It’s toxic and eventually it smells like rotten eggs. You want to smell rotten eggs all day long or try to see what the market price is on a house that smells like rotten eggs??? Good luck Steve. Here’s a link if you don’t believe me.

  15. There seems to be a total misunderstanding of what ails our economy in comments here, starting with Steve F’s “the extra housing development isn’t going away. And, in fact, many first time buyers are now able to enter markets they wouldn’t have otherwise. This seems a clearly “useful thing.”

    The U.S. economy is fundamentally unsound. The Housing Bubble showed that we are a “one trick pony” — this is the notion that you can run an economy based on building and trading real estate.

    The real issues are

    1. the destruction of the middle class
    2. stagnant real wages over a long period
    3. the decline & fall of manufacturing, which provides good paying jobs
    4. the concomitant enormous run-up of private debt both in businesses and households
    5. the inability to grow real GDP without that ever greater debt

    Etc. Glib talk about low house prices attracting new buyers misses the point entirely. You can not run what Eric Janszen calls a FIRE economy (Finance, Insurance and Real Estate). It doesn’t work, it can’t work and no amount of tinkering is going to fix it. We need to go back to making things, investing in productive works, not inventing new financial instruments. Irving Fisher understood this after he lost all his money in the crash.

    If we keep trying to ride that one Real Estate horse we have, there will be no recovery worth having.

  16. Mish wrote about this today, and I quote from Bloomberg —

    “Fannie Mae and Freddie Mac mortgage delinquencies among the most creditworthy homeowners rose 50 percent in a month as borrowers said drops in income or too much debt caused them to fall behind, according to data from federal regulators.”

    Get it?

  17. Please tell me how the middle class has been destroyed. I look around this country and see a broad and vibrant middle class constituency.

    Wages may be stagnant, but is total compensation? Haven’t increased access to health care and other non-wage compensation offset some of this? I don’t think wages reveal the entire picture.

    Manufacturing. I strongly disagree that there’s been a decline and fall in U.S. manufacturing or that the U.S. is a one trick economy. U.S. total manufacturing output continues to dominate in total dollar amounts. 2007 statistics here:

    Sure, the trends are that we’re losing a lot of lower end manufacturing jobs to China and other developing countries. However, this can be expected as the developing world advances in their manufacturing capacity and U.S. manufacturing becomes more efficient and less labor intensive. But look at the statistics – the U.S. is certainly still producing stuff of all sorts and arguably of higher value – we ARE making things.


  18. SIMON —–

    I am glad to see you getting recognition. I attribute it to your brilliance, but also to the new *America loves a fight* mentality that ended with the election of Obama – and now the only Prize Fighters are negative political commentators.

    My point here is to ask you to get more SERIOUS. Honestly, you and Krugman are getting caught up in the celebrity culture. More enamoured with: How many eyeballs, how many hits, how many interviews. Real global leadership voices have a tone and a demeanor that they are fighting for their lives. That they are DEAD SERIOUS, not that they are paid entertainers. Get with it my friend. You are making a lot of noise, like a dog barking are car tires. But you are getting nothing done – you are leading no movement, you are affecting no poilcy. In a word,… boring! Like Paula Abdul on American Idol.

    Ps –

    Just saw your interview on CNN with the (rather sadly ignorant) Tony Harris. My request here is for you to become more articulate in your conversational skills. I think it has again become a faux status symbol for intellectuals to make all kinds of gutteral, repitious noices while talking or answering a question, lots of verbal ticks and rapidly repeated predicates. PLEASE STOP. It makes you very difficult to listen to. It is not cute, it is not intelligent, it is flat annoying….. You are supposed to be an MIT genius. Can you please formulate and articulate a coherent sentence. Maybe you could start a new trend, showing it is actually COOL to speak in complete sentences, instead of Parkinsons induced, tourettes mockery. Just think of how hard it is for a foreigner who barelyt speaks English to listen to you and understand what you are saying when you mumble and repeat and use pause-words ummm, ahhh, well, ummmm, ridiculous .

    Thank you sir. I hope you will take these suggestions in the spirit in which they were intended. We have sone real serious times at hand and I need you to step up to it.

  19. What do we get out of the meta-financial crap? It’s not so clear that we got useful things.

    We got the following:

    1. We learned that securitization is a terrifically efficient way to create credit.
    2. We need to structure it differently in the future so incentives for proper underwriting are maintained. This will likely make it less efficient, but still more efficient than a banker sitting in front of every borrower on a one-off basis.

  20. Simon,
    Being a national of Pakistan I strongly protest on your derogatory remarks(in FT OP-ED) about our country.You may be a genius from MIT but it does not entitled you to ridicule other nations. Plebeianswillrevolt is right to say that you are caught up in the “Celebrity Culture”.Don’t spoil your good work by being insensitive and reckless towards common people feelings.Try to remain focus on the misdeeds/misadventures of Bankers & Politicians.

  21. That smell of “rotten eggs” should be taken very seriously, in chemistry its Hydrogen sulfide and now you know where we get Hydrochloric(ous) acid. No wonder it caused electrical problems. It reacted with the metal.

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