The Capital Commerce Debate


Over at US News & World Report, the debate on the state of the Economy with Don Luskin continues. It is running all this week, with fresh posts and rebuttals each evening.

Round 3: Bears Can’t Explain Why Housing Hasn’t Tanked the Economy vs The Numbers Are Clear, and the Economy Has Slowed

Round 2: Don’t Worry–Be Happy vs Worry a Lot–Housing Will Hurt the Economy>

Round 1: The Bullish versus Bearish Economic View


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  1. Josh commented on Apr 12

    “In my previous post, I showed that as housing has cooled, the rest of the economy has not declined along with housing but instead has accelerated. I don’t think Barry has an explanation for that fact.”

    The old tactic of displaying an opinion as a fact, then rather than support the fact, he refutes your argument.

    In tracking the economy, the only thing I see accelerating is inflation.

  2. J. Bridges commented on Apr 12

    Excellent third salvo, Barry.

    Couldn’t US News find someone with a bit more MB of RAM for you to debate?

    Luskin, by denying any future impact or damage from the housing/MBS debacle, implies that the economy and capital markets are in the clear– which is preposterous. You don’t have to be Nuriel Roubini to see that the housing drag (or recession) is a long way from any neat resolution. Nay, any honest, statistical analysis will show this: odds are we haven’t even hit bottom yet.

    Luskin needs to find far safer ground from which to shout the bullish case; private equity; Chinese growth, etc. Who knows, maybe tomorrow he’ll choose the high levels of margin debt to make his case. Crazy.

    PS. thanks for the update on MOS, Barry. I look forward to your pending macro analysis.

  3. MarkTX commented on Apr 12

    The lead question stated…

    Will the housing slowdown tank the rest of the economy, or will job and income growth continue to support and eventually strengthen the current expansion?

    It is my perception that there was little income growth(for most people) and significant inflation in the past several years AND THAT is why MEW was so important to the people/economy.

    Futhermore, one would have to define what type of job growth the US experienced in the same time frame.

    All in all if the housing slowdown deflates the economy-less MEW and thus lower GDP, what asset(s) will have to inflate the economy to compensate and by how much and at what price?

  4. wnsrfr commented on Apr 12

    Luskin brings a spoon to a swordfight, but this obvious habit of his, conflating opinion with fact, should be politely called-out.

    Barry continues to provide links to back-up his statements, while Luskin provides his opinions only.

    While he will probably ignore a “difficult” question, at least it could be asked?

  5. MarkTX commented on Apr 12



    I pretty much agree with what you are saying in all 3 articles…

    You were VERY ACCURATE when you said



    or in Soup Nazi lingo,

    NO SOUP FOR YOU!!! ;)

  6. johntron commented on Apr 12

    I hate feeling like a paranoid, conspiracy nutcase every time I see *rosy* government statistics.

    However given the silent but noticeable impact of Bush appointees at DoJ and EPA (in particular the chiefs of staff and undersecretaries…, ie the hardcore politicos), am I crazy to think that Bush sympathizers at Treasury/Labor conveniently alter enough assumptions so that the economy looks fine?

    Will historians look back at the Bush presidency and call it the Age of Wikiality/Truthiness?

    Naturally, YMMV.

  7. Mike M commented on Apr 12

    According to GS, 68% of MEW translated to consumer spending. Where else would it go? I have never met anyone who increased their morgtgage debt and put it to productive use. What, did John Doe take out $100,000 and build a factory? Of course MEW increased consumer spending substantially. At best, some of the money was used to pay off credit cards and auto loans. In the end though, the increased debt levels will remain and most likely credit card balances will rise too.

  8. lewis commented on Apr 12

    Gotta say it looks like Barry is losing the debate in part 3. And I really have to go with Luskin on that day. All this MEW stuff is interesting theory, but I know from years of observation that you should never underestimate the ability of the American consumer to go into debt to get what he wants. And with interest rates still at very low levels thanks to our foreign investment subsidy, that consumer is gonna borrow till hell freezes over to get what he wants, which totally backs up Luskins argument.

    (From Marketwatch today
    “In the fourth quarter of 2006, 84% of borrowers who refinanced their prime conventional loans increased their loan balance by more than 5%, totaling more than $70 billion in equity extracted. We expect similar numbers for the first quarter of this year,” Nothaft said. )

    And if MEW weren’t available, they’ll get their credit any old way they can. Negative savings rate? You betcha, and if interest rates go up, that negative savings rate will just get redder and redder.

    When I was young, I used to think my fellow Americans were rational economic consumers. Kept me from making lots of money basing my decisions on that kind of stupid thinking. Then I realized, rational NOT! and economic NOT!, but Consumers, HELL YES! That’s when I started making a lot more money, because my investment decisions were far, far, better.

    And I think that same thinking is where Barry’s case falls apart. Luskin may think as I do too, but has to put it in different terms because calling all American consumers moronic debt junkies, while accurate, just isn’t politically correct. Wouldn’t be an Imus case, but just isn’t likely to be said out loud, despite 90% of the 20-30 age bracket being walking talking examples.

    So, I am siding with Luskin, but I like Barry’s blog a lot better than Luskin’s.


  9. Geoff commented on Apr 12

    let me save you all a lot of typing :

    Luskin is an idiot, in total denial, and basically full of hot air opinions. In simpler terms, he is known as a BS artist. He should just get a job in the administration – he’s as out of touch with reality as the best of them.

    And furthermore, the effects of housing are already hitting the economy hard, they operate with a lag, and the direct hits are still coming.

    I swear, you shouldnt justify this moron’s point of view by debating him. He has no legitimacy in my opinion and should be accorded none.

  10. michael schumacher commented on Apr 12

    Pretty ironic that Luskin’s position is our economy is going to saved by the very things HE has said, in the past, that will hurt the market-from a U.S. perspective-going forward: China, private equity, credit limitations.

    You could’nt ask for a better flip-flopper…

    greg…you could’nt have put that any better.


  11. MAS (San Diego) commented on Apr 12

    Luskin doesn’t allow comments on his blog. What’s he afraid of?

  12. Mike M commented on Apr 12

    (From Marketwatch today
    “In the fourth quarter of 2006, 84% of borrowers who refinanced their prime conventional loans increased their loan balance by more than 5%, totaling more than $70 billion in equity extracted. We expect similar numbers for the first quarter of this year,” Nothaft said. )

    Thank you Lewis for posting this. This is all anyone needs to know about the current state of the economy and markets. In the short run, a spending boom. But in the long run? Burning the furniture to keep warm.

  13. Barry Ritholtz commented on Apr 12


    Don’s statement was dead wrong. Pick your source of three authoritative statistics from “reliable agencies” – either the Fed, CBO, or Goldman Sachs – as to the issue of just how much MEW gets converted to consumer spending

    Its between 51-68%, depending upon which source you choose.

    How anyone in their right mind can fail to see how much spending was driven by HELOCs and 2nd mortgages is simply beyond me — and Greenspan, Goldman Sachs, and the CBO.

    Pray tell me, just where did that 861 Billion in MEW money in 2006 go otherwise?

  14. theroxylandr commented on Apr 12

    Barry, you missed one powerful point in your defense (offense).

    The credit standard was very loose up the end of February – 100% cash out, no doc, no score, no income. Those who had to cash out back in February successfully did.

    Just few weeks ago those requirements changed dramatically. Now you can do 95% CLTV only with good score and all bank statements. 100% is practically gone, unless you prove that you have enormous income.

    You should point the guy in that direction and ask what he knows about Ponzi financing.

  15. theroxylandr commented on Apr 12

    I think most of MEW was non cash, but in form of moving up into bigger home and taking bigger mortgage.

    Do you know anyone who purchased a house cheaper than the one he just sold? Nobody. Millions of people live in homes they can’t afford. Many of them don’t know that yet, because they still enjoy teaser rates.

    At the end this debt expansion went into pockets of homebuilders or fixer-uppers. The residential construction was record.


    BR: MEW = Mortgage Equity Withdrawal; Its pulling cash out of an existing home via HELOC (Home Equity Line of Credits) or 2nd mortgages.

    If you sell one home and buy a larger one, MEW is not involved.

  16. Alex Khenkin commented on Apr 12

    Barry, you’re debating an incompetent charlatan and ideologue, which is always a losing proposition. You need facts, all he needs is make-belief.
    P.S. Is there such a thing as a “competent charlatan”?..

  17. km4 commented on Apr 12

    What to Do When the Dollar Crashes ?

    Last Thursday, the IMF warned that further substantial declines in the value of the dollar are needed to bring the American current account deficit — currently running at 6.5% of GDP — into balance. There are fixes to this, mainly revolving around raising American savings rates and decreasing government spending, but the most likely path is the further debasement of the dollar.

  18. Eclectic commented on Apr 12

    I’m afraid I’ll have to give the nod to Luskin for a combo of parts 2 and 3 of the debate.

    Reason: Luskin is effectively disclaiming MEW as being an absolute necessity for continued growth in the economy. He’s generally right for two reasons. First, we don’t know what the eventual outcome of the widespread use of excessive MEW, to date, will be; second, employment has not been hit yet, and until it is (if ever) we have to assume it might continue to off-set any ill effects of a housing downturn so far limited essentially to subprime in any real consequences for the present economy.

    Still, Luskin carried a weak point, even in the win of rounds 2 and 3. Why?…

    Because he’s attempted to f-u-l-l-y disclaim MEW also as a very substantial substitute for discretionary liquidity otherwise derived through aggregate wages and saving (real net saving, not just any type of collateralized equity).

    In other words: It’s not just MEW that has contributed to a negative saving rate in the U.S. but also the irresponsible uses of other types of credit (essentially some lender’s ultimate “EW,” lent to borrowers who have no savings on hand).

    Consequently, the question I would ask Luskin is this: Where do you think the a-l-r-e-a-d-y negative saving rate in the U.S. would be w-i-t-h-o-u-t MEW?… and if you are so confident that employment alone will always carry U.S. consumerism forward, then WHY-is-the-saving-rate-negative?

    The analogy would be: A city with its citizens all having bank accounts but either no jobs or limited jobs, and some credit liquidity either in the form of MEW or other collateralized debt. As they spend down their bank accounts and credit, they do not change their consumer behavior.

    Luskin’s argument about MEW will hold the day, until all other liquidity sources of credit, plus any limited amounts that do come from MEW, run out. Then what?… Still confident our fair citizens will continue to spend?… What credit will be available to them then?… and what will they do when there is no more credit?

    The answer to the question about the saving rate in the U.S. economy without regard to the MEW that Luskin has disclaimed is: The saving rate would be even more dramatically negative than it a-l-r-e-a-d-y is… and the ultimate outcome of that very precarious situation (never worse from just after the Great Depression until now) is what the great worry is of rational economic observers.

  19. m3 commented on Apr 12

    Luskin’s argument about MEW will hold the day, until all other liquidity sources of credit, plus any limited amounts that do come from MEW, run out. Then what?… Still confident our fair citizens will continue to spend?… What credit will be available to them then?… and what will they do when there is no more credit?

    there will always be credit. the financial industry *exists* to extend credit.

    and in the end, yes. we will continue to spend.


    simply because that has been the trend over the last decades. “the trend is your friend,” remember? credit may contract a little, but that’s about it. the trend, as always, will remain intact.

    americans have always spent money like idiots, and will continue to spend like idiots. not even a 80% drop in the nasdaq put a serious dent in consumer spending.

    the real question isn’t *where* the money will come from. banks and creditors will always find a way to make money off of loans; that’s why they exist.

    no, the real question is what happens when americans can’t *service* the debt, vis-a-vis interest charges. sub-prime is the perfect example of that.

    remember, debt only becomes an problem when you can’t make the minimum payment. it’s that simple.

    but we are loooooooooooooong way from that becoming a large scale problem for the average household.

  20. ac commented on Apr 12

    We are a long way? Please. That way isn’t so long and consumers are the last thing to go.

    If anything, Capex collapse and another 2001 collapse in fixed non-res investment will cause the recession. The decline in consumption will dwarf the Nas bust by far, thus MEW will be the final knockout to a major recession.

  21. lewis commented on Apr 13


    I think we are in violent agreement of MEW being a major source of consumer spending the last ten years, we just depart on whether or not it matters. Eclectic spells it out in some detail, that the American consumer junkie is gonna spend no matter where the money comes from, ie., if MEW disappeared tommorrow, they would be borrowing to spend by whatever means available.

    In my global view of the unrational, uneconomic American consumption junkie, I see the U.S. as a collective junkie nation, doing whatever it takes to get our foreign goods, epitomized by China as the biggest “dealer”. As individuals, negative savings rate, no problem because we are getting our fixes at Walmart. As a nation, a mind boggling trade deficit, no problem because we are consuming away. And China, as our main “dealer”, is going to keep the junkie happy as long as they can suck us dry, which given our economic power, is going to be a LONG time.

    In short, your concept that the American consumer is going to consume less now that MEW is less available assumes some rational intelligence out there amongst the our nations consumers. Not our view, we fail to perceive any intelligence, we believe that like a junkie, the irrational American consumer will do whatever it takes to get his fix. And to date, that is correct and supports Luskin’s view.

    But again, I still like your blog a WHOLE LOT more than his.


  22. Barry Ritholtz commented on Apr 13

    We are likely to find out very soon — certainly in less than 24 months, and probably in less than 12

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