Tuesday February 20 2018

I tried to post the following in response to a comment about speculation on:
https://mainlymacro.blogspot.co.uk/2018/02/house-prices-and-rents-in-uk.html#comment-form but I was unable to post it.

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Yes, when Wren-Lewis says "house prices depend on current and future rents" he is ignoring finance.

Mortgage-backed securities bundle up mortgages and tranche them and sell the high-rated tranches for more than the summed value of the underlying mortgages, because the high tranches can be used as collateral for bank borrowing. The MBS asset becomes bid up by market mechanisms to many more times the price value of the underlying mortgages. It is good for the bank, who may even self-deal in MBS to bid up the booked asset value.

Housing prices can be seen to inflate as buyers get more and more created money from the world finance sector, as their investments appreciate thanks to financial instruments that are multiplying any real underlying assets such as mortgages or student loans, or whatever.

The size of the financial market outweighs the size of world GDP by a factor of ten. Yet Wren-Lewis blithely ignores the potential influence of finance, by talking only of pedestrian rents. I think he assumes the same rules that apply to rentals apply in the world financial sector, but I hold that finance has figured out how to relax constraints on budgets (by expanding their balance sheets) and how to create money from promises that won't be decided until later but circulate as money today. And those promises can be paid by insurance if they default, and the insurance itself is paying based on still future promises that are circulating as money today ...

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