My take on the ABCT

[edward_1313]

@Daniel J. Sanchez

@krazy kaju

In Austrian terms, durable consumer goods and capital goods are called “higher order goods.”

Consumer goods are, by definition, not higher order, at least not according to Rothbard in MES…

*The means to satisfy man’s wants are called goods. These goods are all the objects of economizing action.*Such goods may all be classified in either of two categories: (a) they are immediately and directly serviceable in the satisfaction of the actor’s wants, or (b) they may be transformable into directly serviceable goods only at some point in the future—i.e., are indirectly serviceable means. The former are called consumption goods or consumers’ goods or goods of the first order. The latter are called producers’ goods or factors of production or goods of higher order.

… and Mises in Human Action…

Economic goods which in themselves are fitted to satisfy human wants directly and whose serviceableness does not depend on the cooperation of other economic goods, are called consumers’ goods or goods of the first order. Means which can satisfy wants only indirectly when complemented by cooperation of other goods are called producers’ goods or factors of production or goods of a remoter or higher order.

Since the structure-of-production-only take on the theory doesn’t involve consumer goods, it doesn’t seem to explain housing bubbles.

Durable Consumer good = part immediately serviceable good + part indirectly serviceable good

The latter requires additional time, the complementary good. A TV, a house, car, etc. are goods that continuously mature into present goods. Their future services are, subjectively speaking, capital goods. Often the more a durable a consumer good, the farther into the future its services will acrue, so that for all intents and purposes it may be called an increasingly higher order good.

De Soto treats this in his book and Hayek spends a lot of time on it in “The Pure Theory of Capital”.

Houses, etc., are all explained by the ABCT.

And BTW, none of the above quotes by M & R contradict this. They would certainly agree.

[Daniel_J_Sanchez]

@edward_1313

Durable Consumer good = part immediately serviceable good + part indirectly serviceable good

The latter requires additional time, the complementary good. A TV, a house, car, etc. are goods that continuously mature into present goods. Their future services are, subjectively speaking, capital goods. Often the more a durable a consumer good, the farther into the future its services will acrue, so that for all intents and purposes it may be called an increasingly higher order good.

Ah, that makes sense. Thank you.

However, it’s hard to imagine the housing bubble fitting the picture of producers investing heavily in higher order goods, only to have factors of production bid away from them later. This would mean home owners invested too heavily in the capital good of “house-which-will-mature-into-a-house-in-the-future”. Were the factors of production of this process bid away from homeowners, thereby reducing their profits and making the production process non-viable? But once the house is built, the only complementary factors of production necessary for turning the house into a future-house are time and maintenance expenses. Obviously time can’t be “bid away”, so did housing prices collapse because the homeowners suddenly couldn’t afford the basic upkeep of their homes anymore (minimal roofing requirements, etc)? That seems extremely unlikely.

[wilderness]

@Daniel J. Sanchez

@wilderness

These firms sold CD’s and insurance (credit-swaps) on these CD’s (mortgage investments) and as long as the prices of houses went up, then people made virtual money on these virtual investments. They look good for a portfolio to show worth of a company, but if they were actually paid out in currency, a run on these investments to have them cashed in, the firms promised more than they actually had to give back if investors wanted currency instead of CD’s, their credit-swap, etc…

AIG was the one buying, not selling, mortgage-backed securities. Buying an MBS is basically taking over as lender for portions of a bunch of home loans. So as an owner of MBSs, AIG was basically in the home loan business. MBS’s aren’t bank notes, so the only thing analogous to a run on them would be if everybody started wanting to sell them, and stopped wanting to buy them on the market. This would drive down the value of AIG’s MBSs. But that wouldn’t really matter if home borrowers continued making their payments. AIG would still be getting a steady stream of principal and interest payments. In fact, they would gleefully buy up even more of the underpriced MBSs. So it’s not a problem of people “cashing out”, per se. The problem is that the MBSs stopped giving AIG a steady stream of principal and interest payments, because home borrowers weren’t making their mortgage payments.

Right. That’s what I was getting to. And homeowners are not just people that will live in the houses. Also contractors build homes without a buyer to move in. Houses by were I live have been built in a housing development by contractors. They have been for sale for well over 6 months now without buyers. These are also houses kin to those seen torn down in California in that one thread here in the forum. I don’t know if the contractors or banks own those houses that are up for sale still. One would think contractors couldn’t possibly make monthly mortgage payments on numerous houses they built for months at a time.

@Daniel J. Sanchez

Of course if the rest of the market cashes out before AIG does (as really happened), then AIG has a problem, because they’ll be forced to sell at a loss, or we’ll be forced to bail them out (as really happened).

Frannie and Freddie involvement too.

@Daniel J. Sanchez

You could say the investments and the money were virtual for the economy as a whole. But the MBSs weren’t virtual investments for AIG. And the income they earned and the price they got weren’t virtual either. They were real, but risky. If AIG had cashed out in time, somebody else would have been left holding the bag.

When I say virtual, I mean real, but I’m saying these types of monies are not hard currencies not even U.S. fiat dollars. They are probably even virtual in the sense they are data bits in a computer cause nobody has the actual cash to put in hand or pocket that these investment firms were dealing with.

@Daniel J. Sanchez

Now you’re right that they did sell credit-default swaps, and that these were basically insurance policies. AIG’s counterparties paid them a steady stream of premium’s as long as certain loans (especially home loans) didn’t go into default. But if they did default, AIG would have to pay their counterparties large sums (as really happened). Again, here the problem of the “run” isn’t really the underlying problem; if everyone flocked out of CDSs, but the underlying loans didn’t default, and the counterparties kept paying their premiums, AIG would still be sitting pretty. The underlying problem is not the run: it’s the underlying default.

“Mortgage backed securities can be considered to have been in the tens of trillions, if Credit Default Swaps are taken into account.”

Thus the “run” I’m referring to is the default occurs and now all these people/investors now want their money. But when obligations and promises on payments to investors are in the tens of trillions no investment firm actually had this money. Just like banks don’t actually have all the money they loan out. I’m not saying these are the same type of runs, they are different, but as in all confidence scenarios in economic institutions if they promise to pay more than they have then a run and collapse before all payments to investors is paid out will occur. Thus the government stepped in saying “To big to fail”. Also the money reached into the trillions due to the same pool of houses could be speculated upon numerous times. I don’t know if this was on CDS or MBS or some other form of Wall Street game.

@Daniel J. Sanchez

@wilderness

Well the Wall Street firms did promise more than they actually had in currency to pay out. Once the investors realize that a lot of people invested especially in these virtuals of CD’s and credit-swaps and they also realized these firms could never pay out all the money to all the investors, then there are runs on these virtual accounts (the assets) in the Wall Street firms. No investor wants to be left holding nothing due to a firm going under. It’s the same idea as a run on the bank. The Wall Street investment firms promised more than they had.

Regarding investment banks, they took the savings of other people (not so much their own money, like AIG did) and used them to buy MBSs FOR the investors. Just as with AIG’s MBSs, the real problem is if the mortgage payments stop coming in, and the MBS value falls as a result. MBSs don’t have a face value, like a bank note, so it’s not a matter of the investment clients rushing in to get their money “out” of the investment bank before the investment bank runs out. The investment clients get their money “out” of whoever will buy the MBSs they want to unload, not the investment bank itself. The investment bank is just the middle man.

Ah, I see. So a buyer is needed. But then the CDS come into play. And they reached into the trillions. So if an investor had enough CDS coverage, then they could get their money back that way. But the investment firms themselves would need to unload these or fail. But somebody invested and would lose money. The investment firms being the biggest losers. Yet a big loser like Lehman Brothers brought in big wins for AIG cause AIG bet against Lehman Brothers. I believe Goldman Sachs did the same. Yet AIG swelled so big the government won’t be able to even keep up with providing zombie assistance. Fiat, the Italian car company, gets subsidized from the Italian government and is trying to get billions of subsidies over a 2-3 year period from Berlin too as part of this take-over deal of Chrysler. So through the back door of Chrysler U.S. government will be bailing it out which trickles to Fiat with gets bailouts currently from Italian government and trying to get some from German government.

[meambobbo]

@Daniel J. Sanchez

However, it’s hard to imagine the housing bubble fitting the picture of producers investing heavily in higher order goods, only to have factors of production bid away from them later. This would mean home owners invested too heavily in the capital good of “house-which-will-mature-into-a-house-in-the-future”. Were the factors of production of this process bid away from homeowners, thereby reducing their profits and making the production process non-viable? But once the house is built, the only complementary factors of production necessary for turning the house into a future-house are time and maintenance expenses. Obviously time can’t be “bid away”, so did housing prices collapse because the homeowners suddenly couldn’t afford the basic upkeep of their homes anymore (minimal roofing requirements, etc)? That seems extremely unlikely.

They couldn’t afford the most basic maintenance requirement - paying the note. The price of interest rose, and those with ARM’s could no longer afford them.

The construction companies, and all their beneficiaries, also have a production process that is not in line with consumer desires. Here’s a good explanation by Mish in attempt to call out Krugman’s Keynesian nonsense.

[wilderness]

Speaking of the human action role in this. This in today’s news. Housing permits hitting record low.