Who Opened The Gates To Dumbass Ranch?
Readers responed to a question I put out, using one poster’s famous line, “‘Who opened the gates to Dumbass Ranch?’ I am working on the housing bubble problem and the solution (making sure it never happens again). IMO, the source of the problem must be clearly identified, which is why I hope you guys will take up this question and help me out.”
“This was in the W&W post yesterday: ‘In the wake of the financial market turmoil that arose over the summer, there has been a remarkable lack of finger-pointing so far over the cause of the crisis. But one observer, Tom Schlesinger, the founder and executive director of a think tank that has followed the Federal Reserve closely for the past decade, believes the blame for the crisis falls squarely on the Fed and accuses the central bank of ‘regulatory foot-dragging’ that has harmed the public.’”
“I have come to believe the root cause of this financial mania can be traced to the unaccountability of three groups: the US congress, the Wall Street investment banks and the Federal Reserve. So I ask you, who did open the gates?”
One said, “U.S. Congress gets voted in by popular election. If financial mania can be traced to the U.S. Congress failing to keep accountability, then it can be traced further to the U.S. public for failing to keep accountability on the people it elected.”
“As an ex-political science major, let me tell you incumbancy is a big issue. 97% re-election rate in the House.”
One points at the Street. “I lay it entirely at the feet of IBs, hedge funds and other assorted greedy pigs of that ilk. Of course, the Fed accommodates them but the masterminds of this money grab are on WS.”
Another singles out economics, “The irresponsibility in housing finance is merely a symptom of a greater, more sinister problem. It goes hand in hand with ‘deregulation,’ the ‘laffer curve,’ ’supply side,’ etc.”
One sees a human element, “The root is Greed (…the love of money…), normally held somewhat in check by Capitalism, ie greedy crooks keeping each other in check through competing self-interest. But lack of transparency has subverted checks and balances. The housing bubble has been a classic pump-n-dump. To assign blame, just ascertain who got the vig.”
I replied, “Yeah, but we can really fix the human nature stuff. What I am searching for are the players and institutions that we could take action on to prevent a housing bubble in the future.”
One looks at a bigger picture, “If there has been a remarkable lack of finger pointing it’s because they are all co-conspirators. The very magnitude of corruption from the lowest levels of private sector extending through the government all the way to the highest levels, along with other national events, should awake all freemen to a sense of our awful situation.”
So did this poster, “The housing bubble is just an asset bubble by any other name, so the answer to ensure that a new housing bubble doesn’t blow is to ensure no more asset bubbles. What inspires bubbles? 1) Mania - human nature, unchangeable. 2) Fraud - human nature as well. 3) Unwise investing. People follow the mania and make it more manic. But unless they’re fraudsters, then it’s just stupidity.”
“Let the market hand them their lumps. If we force stupid money to lose value for investing in mania, and control fraud future bubbles will inherently be small.”
One saw a political angle, “I think this scam has been more political than anything. I believe it was all about gun’s & butter.”
And another take, “My answer is more in the category of ‘what’ opened the ranch gate, not ‘who.’ In the past, it was generally accepted that certain people probably should not be lent large sums of money. That principle got replaced with the idea that home-ownership was a universally- desirable, universally- attainable goal. Politicians pandered, lenders grew greedy, and our gatekeepers, the federal regulators and local property appraisers, especially, capitulated.”
One saw a chain of events, “I think the roots go back decades. In 1987, the stock market collapse and the Federal Reserve dropped Fed Funds to 0%. This caused the markets to rebound and did not impact the dollar. Federal Reserve intervention in routine markets became the rule.”
“In 1994, the Federal Reserve in its March, 1994 meeting even questioned whether their policies would lead to asset bubble growth. In 1995 all reserve requirements were lifted on bank lending on houses for loan amounts less than $1.4MM. In 1999, the Glass-Steagall act was rescinded, allowing banks and financial institutions to take unprecedented risk. Et voila.”
“This housing bubble is just one aspect of an enormous credit bubble. I blame the Federal Reserve.”
One looked at a societal trend, “I think a demographic factor has been at work. When Boomers were young, the focus was on competition for good jobs. When Boomers reached mid-career, they became more interested in speculative investing and less interested in working. Couple that with the tendency of people over 50 to become ’self-employed’ and you have a huge increase in the number of realtors AND in the number of investor/fixer/flippers.”
“An astute observer (Grantham?) has pointed out that Boomers cannot all cash out simultaneously, they are just trying to sell their assets to one another, or to each other’s children. It can’t work out.”
“How to prevent another housing bubble? Easy. This one will not be repeated until forgotten. I’d say two generations or maybe two and a half. Sixty years or more.”
Another blames securitization, “When banks lent out their own money they had to be careful to be sure that the borrowers could pay it back. When investors started to buy the loans from the banks (and later the non-bank loan originators), the banks didn’t have to be careful.”
“Add together no risk assement by the loan originators and desperately inadequate risk assessment by the securitizers and investors, no regulation to fill in the gap and innumerate borrowers and you have a recipe for total disaster.”
One asked, “Ben: I’m confused by your comments on who is responsible. Ultimately, isn’t it the individual players? No has put a gun to anyone’s head and forced them to invest or buy houses. The minute blame is shifted to banks, government or Fed, doesn’t that allow all the individuals to become victims?”
One posted this from the Times, “Henry Paulson, the US Treasury Secretary, is seeking to persuade the White House to offer financial compensation to American mortgage lenders that try to help troubled homeowners by renegotiating the terms of their loans.”
“It is understood that Mr Paulson’s proposals are meeting significant resistance within Washington, where it is perceived that such a move would be a bank bail-out scheme.”
The Associated Press. “If you want to see a congressman squirm, mention a multibillion-dollar bailout for the housing market crisis. The apparent discomfort contrasts with reality: most risky home loans made near the end of the housing boom can’t be salvaged.”
“The unfolding crisis in the $10.8 trillion U.S. home loan market is so widespread and so complex that many experts question whether the government can do much to fix it — especially if a bailout isn’t on the table.”
“‘Some people are just in houses that are just way out of reach for them,’ said Douglas Elmendorf, a senior economics fellow at the Brookings Institution, noting that politicians do not like ‘explicitly appropriating funds for this.’”
“Congress, the White House and bank regulators have little ability to prevent defaults and foreclosures, said Karen Weaver, global head of securitization research at Deutsche Bank.”
“‘It’s unfortunate, but it has to play out… We need home prices to come back to reality,’ she adds.”
“”IF”" I remember correctly, at least one US Senator, referred to Federal Reserve Chairman Allan Greenspan, as a “”POLITICAL HACK”"..
From that comment, I’d guess you can draw your own conculsions
http://www.dollarsandsense.org/archives/2005/0705miller.html
99% of everything done in the world, good or bad, is done to pay a mortgage. Perhaps the world would be a better place if everyone rented.
– Nick Nailer, “Thank you for Not Smoking”
“Thank You For Smoking”
A fun read. Haven’t seen the movie.
I love that movie. My ex always commented on how I loved how that guy could sell anything and was my hero. People get really mad at me when I say how the Enron guys would have been the smartest people in the world if they didn’t get caught.
If I didn’t have some morals I would probably create another version of Countrywide/Enron/Drexel in a different industry and just walk away after making millions. But something just seems very soul less to make lots of money that way.
When will lenders resort to this for the holders of all those mortgages?
http://tinyurl.com/yvtz3n
Greenspan will go down in history as the worst Chairman of the Federal Reserve ever. And yes, he is the culprit. The decades of depreciating the dollar led to a mindset that one would be punished if he saved and would be rewarded if he borrowed. And that is exactly what happened. Practically no one saves anymore. And practically everyone is in debt. Although the Fed is the culprit, there are an army of enablers. Congress should have repealed the Federal Reserve Act long ago. It is unconstitutional and nonsensical. Why is our government borrowing from a private bank when it is expected by the Constitution to issue currency directly, thereby avoiding the need to borrow. If that were done, we wouldn’t have a 9 trillion dollar national debt. Other enablers are the media for never reporting the reality of the Fed. Our educational system is guilty as well as no one learns what the Fed really is there. Sure there is greed in such an environment. All the front line players were driven by greed…mortgage brokers, banks, Wall Street syndicators and the poor guy who bought the overpriced home without the ability to pay for it. But none of that would have happened had not the Fed consistently and egregiously cheapened our dollar.
Sweet post!
Sweet times 10.
And let’s not forget the greed of your local “professional” realtor.
We must not ignore the effects of fractional reserve banking either. Our money supply expands through the direct action of the Fed but also through the lending process at the banks. Just think if a bank only has 10 million it can loan 100 million. That extra 90 is out of thin air, folks.
Honest question: so why all the CDOs?
I think the truly wealthy people are keeping a lot of us in the dark, while enabling us all to consume ourselves into indentured servitude.
Rising home values helped a lot of people stay in denial. They have been able to Home Equity Line of Credit themselves into the illusion/Delusion that they really can afford to live a nice home, have two or three nice new cars, kids in “The Best Schools”, Plasmas in every room, Pool/Pool boy, Landscaping/landscaper and Tiffany and Joshua in every extra curricular activity known to mankind.
This country has been grabbing one vine after another, just like Tarzan, trying to keep above the jungle floor for the past three decades. But it seems as though many others across the world are sick of working day and night to put the next vine in place for all of the non-saving, over-consuming, ignorant Americans.
I admire what Ben is trying to do on this post, but I think it is a bit short-sighted. We have been swinging from one vine to another in this country for so long that we have forgotten where it is from which we came.
This is America, a country that was/is strong, independent, generous and prosporous. Well, without the artificial glow of the tech boom of the 90’s and the housing boom of the 2000’s, what do we really have to tip our hat to?
I think more desperate times call for bigger bubbles, and I don’t think there is another vine waiting for us to cling onto. I just can’t see a bubble bigger than the housing bubble popping up, at least not a bubble that will put anywhere near as many Joe6Packs to work.(I don’t see this bubble as being something that took anyone in power or banking by surprise, this was just another way to keep the good times rolling for as long as possible. It is not surprising that everyone in the housing arena instituted a sell arrangement during the bubble period was it? This was not an accidental bubble. This was a concerted effort to transfer wealth. Believe it or not, a lot was transferred back to the US, but how much was lost?
When I say we are all to blame, I go back 30 years whenever I was just a kid, and heard a lot of older guys proclaiming that shipping the manufacturing jobs overseas or to Mexico was the beginning of the downfall of this country. I think we are finally starting to see the evidence of this on a broader scale. We have fooled ourselves through one bubble or another, but the people that are footing our bill aren’t as stupid/willing as before.
I think the country as a whole is going to soon bump up with the same issue as an underwater FBer. People aren’t willing to lend on a losing cause, and more importantly they don’t have to lend to a losing cause. But they will buy your assets at a very good price.
Weak dollar, makes all of our most coveted assets even cheaper, and unlike past times we aren’t in the situation to deny them.
“I dont think there is another vine waiting for us to cling to”
I think you are right - can ther really be a bigger potential bubble out there to fix this ?
I thnk the owners of the Federal Reserve have all moved to China - the next solution.
Excellent posts, Ken and dawnal! Agree 100%.
This credit bubble was created intentionally to transfer wealth from the working class to the wealthy. All the “players” (Fed, politicians, wealthy investors, and the regulators they own) are at the top of the food chain. Why would they have done anything to stop it?
We (middle class) are the fools for believing that “housing equity” is equal to cash in your pocket — that debt is wealth. Other than a handful of bloggers like Ben, nobody was out to inform the masses of their folly.
“I am working on the housing bubble problem and the solution (making sure it never happens again).”
I don’t buy it. I think that worrying about “how we must fix this and never let it happen again” is a waste of time and a red herring. Bubbles like this are just always going to happen in a free market world. It’s kind of like forest fires in the western US. The more you try to prevent them, the bigger they will become in the future.
Robert Shiller, in his book Irrational Exuberance discusses generalized economic bubbles at length. One big point he tries to make is that increased regulation of markets is not the correct solution. In fact, he advocates just letting the bubbles play themselves out. If you want to do people a favor, you can increase education and awareness, but trying to control the markets with laws is a mistake.
Nobody said anything about more regulation. Maybe some of the regulators need to be eliminated for not doing their job, or even making things worse. As for wasting time, you didn’t mind wasting mine with your post.
IMO, this is going to be possibly the biggest financial event of the century, so please allow me to continue.
This housing bubble is so much bigger than anything heretofore…
It’s easy to lose sight that it’s indeed worldwide, and virtually every industrial nation has lost their minds in a similar fashion, to us.
really makes one think that this time a depression can not be postponed anymore.
I dunno, the following quotes all sound like a call for regulation:
“…making sure it never happens again”
“[the bubble] It goes hand in hand with ‘deregulation,’ the ‘laffer curve,’ ’supply side,’ etc.”
“What I am searching for are the players and institutions that we could take action on to prevent a housing bubble in the future.”
But I would agree with this quote:
“Let the market hand them their lumps. If we force stupid money to lose value for investing in mania, and control fraud future bubbles will inherently be small.”
My point was not that discussing such things on this blog is a waste of time, it was that “trying to solve and never let happen again, etc” is a waste of time.
Bubbles are just bubbles. They’re always going to happen. Let them inflate and pop and let everyone move on with life. Always, the smart people will avoid the bubbles (or maybe capitalize on the early phases of said bubbles) and dumb ones will be losing their shirts. Well, surprise, laissez-faire capitalism absolutely depends on some people losing their shirts, especially dumb ones.
There is very little laissez-faire capitalism in the US housing market. And if you didn’t notice, there is a link in this post with the head of the Treasury trying to make the taxpayer take the lumps.
‘Bubbles are just bubbles. They’re always going to happen. Let them inflate and pop and let everyone move on with life.’
I’m sorry, but that is just doesn’t make sense. You can say that now in October 2007, but I suspect the lay of the land will be considerably different in the coming months and years. Are you aware of how many lives have been turned upside down for years because of this? Yeah, I’m looking for what ultimately caused this to happen and how it can be prevented, and I think millions of others will be thinking about that topic very soon.
If I hadn’t loaned out my copy of Irrational Exuberance I would pull some quotes out of it.
So tell me, if the US housing market is not currently laissez-faire, how is making it less laissez-faire going to make it better?
Why doesn’t it make sense to let the asset bubbles blow up and pop? Stock bubbles, land bubbles, credit bubbles, gold bubbles, they are just bubbles that will always come and go. Lives being turned upside down is one of the many consequences of the free market. Just let it happen. Fraud and other crimes should be pursued, sure, but bubbles can’t really be prevented.
You are looking for the causes and all that. That’s fine. So are other people, like Robert Shiller. But not everyone is pretending it should be prevented by regulations and such.
Ben: I agree about the capitalism, and not just for the US …
when the housing bubble was growing, banking and politics did everything they could to hype housing, feed the bubble with new regulations and taxpayer money and didn’t want to see the bad consequences. Not plain market action at all. On the way down they suddenly start talking about government action but it seems mostly meant to help the crooks that benefited the most when the bubble was growing (Wall Street, the banks, the RE mob etc.).
I think in my country manipulation of the market is still worse (huge taxpayer support for developers, RE mob and homeowners on the way up, and without a doubt there will be huge support for the RE mob AND homeowners on the way down), but the US sounds not too much different.
‘How is making it less laissez-faire going to make it better?’
I didn’t say it was, although some of the posters did and I included what they said. I personally would like to get the government out of the housing and loan business; and the Fed. But given the laws that we are stuck with, is wanting them to be enforced asking too much?
Greenspan is running full time now on the ‘we didn’t make this mess’ line. Well, I am going to question that, even if 60 Minutes won’t.
BTW, this is what I said about it in August, 2005. The producer was paraphrasing me from a phone conversation:
‘The Fed did what a lot of central banks did. Their response to one bust is to start another boom. They did it in ‘87 with Black Monday…They respond to each crash with more money creation. I think this particular movement in housing price started with opening the flood gates after the stock crash, then after Sept 11. We all remember when car loans went down to zero percent.’
‘I do fault them [the Fed] [for this housing bubble]. We have the system we have. It’s outside the question of whether we should have a central bank. But in the system we have, they’re in charge of interest rates in the short term.’
‘Recession is a natural way of an economy working out bad investments. You can’t do it without them. They’re regrettable, but that is how an economy handles it. So was it a good idea to create this bubble to fix the other one?’
‘What I’m saying and others are saying, is no, we should have just taken our lumps. (Be)cause now we’ve got housing, something that’s an essential need, likely to fall just at the time we don’t want it to. I think it was a colossal mistake.’
Ben, I like your anger. Keep it up. Anybody that isn’t angered by this beast is a fool. And this bubble is different because it is so obviously spurred by the government. In ‘98 they remove the capital gains on house sales. They create monsters such as FHA and HUD. They overtly back monsters such as Fannie and Freddie. How many mechanisms did the Federal Government put in play to help this abortion along? I didn’t see that with the Beanie Baby or Tickle Me Elmo bubbles.
Ben, I agree. The USG needs to get its fingers out of the housing industry, amongst many other industries.
As much as I agree, I fear it will never happen. The desire for social engineering through taxation and regulation is huge in this country, and it’s growing huger. Amongst many of my pet peeves:
HMI tax deduction
401k programs
College savings programs
FSA accounts
Childcare spending accounts
Dependent care/bonding disability payments
FHA programs
Farming subsidies
Defense subsidies
Welfare subsidies
“Jobs” programs
City taxes that go to stadiums and whatnot
These and much more are the monstrosity that we are creating of government getting into our lives and making life much more complicated than they need to be.
We always seem to end up, for every problem we can think of (or imagine), we want a government-sponsored solution. As far as environmental regulation is concerned, I’m all for it. The environment is a public resource that needs to be protected from gross abuse. But almost everything else is just us lousy peons looking up to Mommy government for a handout. A handout that we hope not everybody will get, because we want to be special and get more handouts than anyone else.
Lower interest rates and individual fear of higher home prices (inflation), together with outsized specuvestor returns, were the catalysts for greater than normal home buying behavior. Securitization, together with the originate and distribute model, funded the whole process. It was the perfect speculative storm.
If you want to learn how to create a mania for a product/service, study housing industry history. Manias do not just happen. It takes a massive confluence of environmental stimulus to create manic behavior on this scale.
Actually, manias do just happen. They’ve always been just happening. For one, Shiller discusses this at length.
Less regulation, less government involvement! Why that sounds almost Un-American in this day and age.
“Actually, manias do just happen. They’ve always been just happening.”
That’s just an excuse for someone who cannot or is unwilling to explain the stimuli and assumptions that support manic behavior. People buy into a pattern of behavior with expectations and these expectations are supported by a set of assumptions. Assumptions are shaped and reshaped by a combination of internal beliefs and external stimuli. Behavior is simply a byproduct.
A lot of people assumed and expected increasing home prices. Although many could not afford fully amortizing loans, they assumed and expected additional financing would be available before resets. These assumptions and expectations led these people to believe they could become homeowners. So, they bought homes.
On the other hand, with abnormal price increases and people camping outside of subdivisions as evidence, many of us on this blog assumed we were witnessing manic behavior and expected it would end badly. Some of us even sold our homes and became renters. We did not believe it was a good time to buy or own a home. As a result, we actively limited our exposure to the mania.
Manias do not just happen. Asssumptions, expectations, and beliefs need to be shaped; in fact, expectations need to be juiced up a bit for manias to occur. If the opposite were true, advertisers would not be spending billions of dollars trying to shape our expectations.
I disagree that Greenspan and interest rate cuts are the main problem. The two main problems are. The government that did not exercise any oversite on lending institutions , and that rating agencies were allowed to profit by giving good ratings to crap CDO’s ect.
If the loans had been rated correctly they would not have been as profitable for banks and mortgage companies. Pension funds and others would not have purchased them at high rates and the lending houses would not have pushed bad loans that they couldn’t unload.
The root of the problem is our electoral system where those with money buy our government officials and push through deregulation or defang regulators. Was it that our elected officials couldn’t recognize the risks of a system where rating agencies were paid by the very companies they rated, or was it that our elected officials campaign contributions came from companies like Citibank and Countrywide and so they looked the other way. Did the SEC sample these CDO’s to verify their value? Did they prosecute banks for non disclosure to borrowers? Did they go after borrowers and lenders who falsified info?
If these things had been done I don’t think we’d have the mess that we have. The cheap dollar didn’t help but greed crime and lac of accountability are the main culprits.
Ben,
Good luck w/ this one. I think a big part of the ‘fix’ is to actually enforce the banking/credit regulations. There is nothing wrong with ARMs, 80/20s, IOs, etc - as a consumer I’ll always want these options available to me b/c they could be very beneficial in the proper circumstances. I don’t want the Fed or St telling me that all I can have is a 30 yr fixed w/ 20% down.
However, IMO, the most important thing missing here was a correct valuation that was ultimately assigned to the mortgage products. Banks are heavily regulated to ensure proper reserves/lending standards - how was it possible for banks to maintain such a large % of subprime loans and still ‘pass’ all of the reserve/capital/loan standards? My guess is that the standards weren’t enforced and everyone gave a wink and a nod at Moody’s or S&Ps ‘AAA’ ratings. Imagine if the lenders had to truly maintain an overall safe level in their lending portfolio (i.e. only be able to lend out some small % of any risky loans)? This situation would never have developed. Of course, then millions of people, many in a protected class one way or another, could never have ‘bought’ homes in many high-priced areas so everyone would be crying foul (although it’s a chicken-egg problem here b/c odds are w/o the shoddy lending the prices wouldn’t have been that high to start w/).
Anyway, my 2 cents. Thanks for my favorite blog by far. Good luck.
You blame our electoral system, but would you rather have a dictatorship? Even that doesn’t help as China is also experiencing a housing bubble. Our housing bubble is but one among dozens across the globe. It is fueled by greed, which is a common trait among mankind.
Not all the FB’s I know are moronic and/or greedy wretches who deserve what’s coming to them. (Although it’ll come, and hurt just as bad when it does.)
Some are just ignorant, they wanted a house, were hopeful/delusional, believed the ‘experts’, etc. Basically normal human idjit behavior. It’s the unusual human that ISN’T a moron, in my observation.
By your terms, I estimate that about 90 percent of the race would be shirtless. Just because someone’s dumb/ignorant, that’s not an adequate excuse to take advantage of them, or to see them being taken advantage of and say ‘They deserve it, the dummy.’
Maybe you just dont know them.
I agree with Olympiagal.
We need to decide if we value moral and ethical behavior. The less intelligent will ALWAYS be on the losing end of things if we refuse to regulate the actions of the intelligent, wealthy and powerful interests.
Also, free-market capitalism is impossible to achieve. The wealthy and powerful will always work in concert with one another, creating laws which funnel money from the workers to the wealthy. They will try to be as opaque as possible, encouraging the myths about wealthy people knowing mystical things that “regular Joes” can’t possibly understand — and that’s why they are **entitled** to make and keep more money.
IMO, great wealth disparities and the concentration of too much money/power into too few hands is what will be behind every single bubble.
A regulatory body that is **strictly prohibited** from working with or for wealthy/business interests (MUST be controlled by the public majority) is the only way to prevent these financial distortions.
what about bundling and selling securities rated AAA which are actually C or below. What about adjusting borrowers incomes to fit the necessary amount required for the loan.
What about adjusting the ‘fed rate’ to accomodate the geniuses that helped to get everyone into this mess in the first place. this ain’t no lazy faire.
Ben;
I think you are spot on with this. The required regulation and oversight mechanisms are/were in place, but they they either ignored or shunted off to the side as too much money and too much greed combined to make this quite possibly the worst financial bubble in history. No one seemed to consider that indefintely increasing real estate prices and cheap money was going to last forever. Sound business and lending practices were essentially gutted by folks who should have known better than to lend out gobs of money to folks who never had any real chance at paying it back. Banks, Mortgage Brokers, Real Estate agents, Politicians of every stripe and most especially my fellow citizens (er, escuse me…comsumers) all bought into the greatest Ponzi scheme since Tulips. I feel awful about all that wasted money wasted on the mother of all scams, but I feel worse about the effect it’s going to have on our future as a country.
SubKommander Dred
You have to throw into this discussion market cycles and the drive on the part of the powers that be to convince us that this time it’s different! Peoplekind are above the laws of economics and market cycles. In essence the Soviet machine collapsed and we absorbed some of the worse parts of thier system- Central bankers are bigger than markets!
There is just too much to refute in this argument, but I will give it a shot. First, this is not a “free economy”. It is highly controlled.
Interest rates are not set by the market, but controlled by the FED, at least short-term.
Many government reg’s have changed recently that contributed to this madness. One was letting banks say that loans sold off did not need to have any reserve requirement. They essentially have no reserve, until loans get sent back. This made way too much additional cash available for lending.
But the biggest problem here is this “bubble” was not created with people speculating with their money, but with MARGINAL LOANS. You could buy $500,000 house with almost no money.
If credit standards had been maintained, so that you needed to put up some of your own money, this stampede to purchase Real Estate would have stopped in it’s track for LACK OF FUNDS. I had been a saver and was working to increase my downpayment when this whole pile of crap started.
When I had $20,000 to use as a down payment, i began to shop.
This was 2002. Within a year, all the houses around here had increased in price, on average, $30,000. I lost $10,000 for working all year. I got outbid by “Flippers” and “investors”.
What do you mean “investor”? They didn’t put up any money.
Where is there investment? They borrowed it all, and even got a 125% LTV on the house.
Then the fraud really started. False appraisals, fake buyers, phoney transactions. All this to rake money out of houses.
NONE OF THIS, NONE, Could have happened if regulators had investigated and arrested the fraudsters. And the whole mess would not have started if lending standards were not thrown out for the sake of higher commissions and profits of the lenders.
It was the job of the various government agencies to REGULATE and ENFORCE lending practices. They did not.
Nor will they. The Bush administration cares about other countries borders, not ours, and their “rule of law”, while completely abdicating any rule of law here.
They have destroyed our money and created mass inflation to mask the fact the real incomes are going nowhere.
They needed everyone to believe they were richer in their houses so we would keep the economy chugging along on borrowed time.
I can’t say enough about this, but I blame the current administration’s “free economy” philosophy as the main culprit.
You can’t just let criminals run free and look for ways to fix it later.
Think Enron and WorldCom. Where was the oversight?
The whole stinking mess is one big pack of lies stacked on another.
(out of breath………….will continue rant later).
Enron and WorldCom actually occurred in the 1990’s and the ponzi schemes fell apart in 2001-2002.
Enron began creating the offshore shell companies in 1995. WorldCom started the accounting scams in 1998.
Just FYI
Anyway, the worst part about the bush Admin is that nobody is held accountable. From “Good job Brownie” to Rumsfeld’s failed policies. Fraudsters and criminals are trashing our economy while the regulators are sleeping or taking bribes to look the other way.
Accountable for what? I think many people who did not get out of the way of a Cat 5 hurricane, living 15 feet below sea level, were held accountable. I think people who foster and support the philosophy behind the 9-11 attacks are being held accountable. And I think the person making $2200/mo having to pay a $3300 mortgage is going to be held accountable.
“One said, ‘U.S. Congress gets voted in by popular election. If financial mania can be traced to the U.S. Congress failing to keep accountability, then it can be traced further to the U.S. public for failing to keep accountability on the people it elected.’”
If we the people need this much shepherding, then we will always see the government as the knight on the white horse coming to save the day. We can continue to walk through life as zombies, until the day comes when we finally realize that the elected representation that is supposed to save us from ourselves is no smarter than we are because they ARE us.
FYI - Clinton presided over the scandalls you referenced, as well as the dot com bubble. The only folks who cared about his scandalls back then were called Republicans.
Accountable for leaving people stranded for a week before bringing in food and water. Did they really expect that 1,000,000 people would be able to leave the New Orleans area on 3 days notice? Where were they supposed to stay? How about old and sick people without cars?
I do hold many of the people responsible for not leaving, but I am also realistic enough to know that you cannot evacuate an entire metropolitan region in 3 days without massive government aid.
Yes, and the Mayor of New Orleans and Governor of Louisana did absolutely nothing. Nothing. The Feds could not intervene without their consent (especially the Governor’s), and they wouldn’t give it, till after the disaster. And yet the locals, most living elsewhere, voted the idiot Mayor back into office.
New Orleans has always had corrupt politics, so one shouldn’t be surprised by anything that happens there, inless it’s something that actually makes sense.
Many people, incidentally, didn’t leave because they had no place to take their animals, so stayed home with them, unlike the selfish twits who fled leaving their pets behind to suffer. People who stayed behind for good reasons should be commended, and people who stayed behind because they couldn’t afford to leave should not be criticized. The Mayor and Governor, however, should have been arrested and put on trial.
“If credit standards had been maintained, so that you needed to put up some of your own money, this stampede to purchase Real Estate would have stopped in it’s track for LACK OF FUNDS.”
You cannot force standards on those who loan the money. If I chose to loan you money, the government can’t tell me the terms of the loan (aside from usury concerns or fraud).
You saved your money and you were smart. The people who bid up the home prices at the time didn’t commit a crime in doing so per se. It’s up to the individual to see that prices are to high and to refuse to pay them. This is what you did, and now you are being rewarded. Simple as that.
You cannot force standards on those who loan the money.
———————-
WRONG!!!
If we are expected to save those lenders (through inflation, taxation, or otherwise)…AND if we will have to deal with the ramifications of the economic collapse, you bet your a$$ we have the right to force standards on whomever we please.
If the lenders are the only ones taking the risks, you have a point. Problem is, most large-scale financial events are not experienced by only a few players. We will ALL have to pay for this; therefore, we ALL have the right to try to prevent it in the first place.
Democrats are no better - probably worse.
Both parties are owned by the Federal Reserve.
Some comments are hilarious. To suggest that there was any regulation associated with subprime and Alt-A lending is a downright LIE. The entire finance end of housing grew out of control by virtue of the fact there are NO CONSUMER PROTECTION standards. none… So please spare me of the ideological scare tactics of how regulation is bad. It doesn’t work anymore.
Excellent, succinct synopsis. From greed to hubris to lawlessness to our home-grown version of magical thinking.
Fact is, from the Fed to Goldman Sachs et al, we’ll never really know whether this debacle was a calculated rip off of the masses, or a breathtaking excursion into believing their own convoluted crap.
Old Hank could care less about the citizenry, however you characterize it. But boy does critical risk to his baby, G.S., motivate him to try for another round of screw the taxpayer.
I’m staring retirement in the face, and see no reasonable way to survive the economic farce these neo-nuts have sold the gullible. Seriously contemplating relocating to Argentina.
Going to be a riveting 3 years or so. Buy gold - and popcorn.
Oh oh, let me at this guy. Yes, there have always been asset bubbles and forrest fires, but it takes intervention on the scale of a goverment to build up enough bad investment and dead brush to make a REAL disaster. On their own, the asset bubbles and forrest fires would be smaller albeit more frequent and scattered across the financial and geographic landscape. The distributed and minimized nature of these corrections cause far less harm than the infrequent but catastrophic adjustments we have today.
It always kills me to hear people say, “see what your free market has wrought!?!??” and use this as an excuse for yet more intervention when in reality it was the intervention that caused the earlier malinvestment. People like HomeaLoan think that the way it is now is the way its always been because its been constant as long as he’s known about it.
The more government regulation we impose, the more we make these regulators the target of business seeking favorable treatment. These regulator people are easly co-opted by the sheer amount of money they are controlling, and the system is perverted for the special advantage these businesses.
As I understand it, in Europe, there is no such thing as “insider trading”. The investor must make his bets knowing full well that there are people that work in the company that know more than them and will act on this information. Its only when people are given a false sense of security that they do stupid thinks like ivensting pensions in subprime mortgages.
puleez…
WTF does that mean?
Okay I read your other comments and no I understand that you feel that a never ending series of regulations enacted after each disaster will save us from the next disaster, but it never works and it just getting more and more convoluted which provides ever more obfuscation in which fraud can be hid.
Its like putting a break away railing at the edge of the grand canyon. People think they can lean against it to get a great picture but then watchout, away it goes and into the chasm. Wouldn’t be better to have no railing than a one that has a hidden fault. This way the people know that they should beware and not step too close to the edge of financial distaster. Its like all these people that don’t understand the paper they are signing. They figure since its official they must be safe.
“Congress, the White House and bank regulators have little ability to prevent defaults and foreclosures, said Karen Weaver, global head of securitization research at Deutsche Bank.”
Everybody, soon or late, sits down to a banquet of consequences…
Robert Louis Stevenson
they cannot prevent defaults, but they have a HUGE influence on who is going to pay for this mess.
That is the part we whould be concerned about, because the way they handle this is rewarding greed and stupidity (at least for the big players) and laying the fundaments for another bubble with all its bad consequences. Make the culprits pay, starting with Wall Street and termination of central banking (at least in its current flawed incarnation).
“Who opened the gates to dumbass ranch?”
Ahh, one of TXCHIC’s best lines ever!
They closed the barn door after the horses escaped from dumbass ranch. It’s too late.
Great title for a book!
Agree! She is a natural at coming up with the appropriate homespun perspective on the bubble lunacy (et al).
~Misstrial
Here’s why the bubble is ultimately a good thing. Pain is memorable. People will be unlikely to make such a massive gamble on their financial future again for at least a generation.
We’re going to see massive regulation in response to this mess but it will be completely unnecessary because no borrower or lender in their right mind will want to touch a subprime or option arm loan ever again.
A modified Thomas Jefferson quote:
One posted this from the Times, “Henry Paulson, the US Treasury Secretary, is seeking to persuade the White House to offer financial compensation to American mortgage lenders that try to help troubled homeowners by renegotiating the terms of their loans.”
So this is how our tax dollars are used? Instead of giving it to the homeowners, they want to give it to the lenders? Geez, why doesn’t Paulson go work for the mob? Oh he did, he was working for Goldman Sachs.
I said this already in Bits and Buckets today, but I seriously don’t believe Bush will go for this. He believes in the business cycle - oil and private equity do very well in a world with a business cycle and that is his “philosophical” heritage if he has one. When things bust people with access to capital buy up assets and then when things look up they make a killing.
Secretary Paulson is a banker. He probably has a much greater grasp of just how bad this thing can get - though he may still think it is still contained to subprime. I’m not sure if the president really gets it.
A story leaked out that when treasury was hosting the “lets make a super-SIV” meeting that the bankers asked if the government would put in any money, the under secretary said that they had provided the food for the meeting and that was all that was coming. THAT is the party line, and I’m thinking that is where it will stay.
Yet more proof of the adage that there really is no such thing as a free lunch.
Paulson has proven to be pure evil.
yes,he needs immediate extraction
Planning anything?
as if!
best we can hope for is a lewd sex scandal or something…
How about we create our own SIV?….
“You and I will go into business, see, and each of us will (believe it or not) sell dog turds back and forth to each other, priced at the same per-ounce price as gold! Hour after hour, we will busily sell them back and forth between us, you buying mine and me buying yours, thus proving that there really IS a market for dog turds, and they are provably worth their weight in gold! We, like these banks, will both make a fortune! Whee! Hahahaha!
Reuters decided not to report on my fabulous new Mogambo Business Venture (MBV) or my new Mogambo Dog Turd ETF, but they did report essentially the same thing when they wrote, “The fund that is being contemplated would bail out funds known as ’structured investment vehicles’, or SIVs.”
http://www.atimes.com/atimes/Global_Economy/IJ25Dj01.html
Paulson didn’t *used* to work for Goldman. He’s *still working for Goldman. Much like our veep is still working for Haliburton.
Paulson doesn’t care about anything but his banker buddies.
when answering the question please keep in mind that:
- the EU housing market was already surging long before the most recent US housing bubble started, e.g. in Netherlands price growth was already near double digits in 1990/1991 and prices have keept climbing ever since. When the US bubble started for real, many EU countries already had huge housing bubbles. So, unlike the perception of many on this blog, it is not strictly a US event.
- as far as I know all housing bubbles are in anglo-saxon countries, or in countries with a banking system with anglo-saxon dominance.
- the oldes bubbles started in/near the financial capitals of the world (I’m not sure if it applies to all, but it is quite opvious).
- housing bubbles exist in countries with very low (e.g. Netherlands, effectively 2-3%) and high (e.g. New Zealand, effectively 9-11%) interest rates, in countries with very high and very low population density, in countries with over- and underbuilding, in countries with very much and very little speculators. These factors influence the dynamics of the boom but are not the cause.
My vote for factor number one is excess money printing by central banks, and without a doubt the major culprit is the Greenspan FED from 1987. Of course the other central banks (BOJ, BOE and ECB) played along right away and are just as guilty as the FED.
Loose lending, crazy mortgages, unresponsible and downright criminal behaviour (from the RE mob, Wall Street, and many of the FB’s themselves), playing with other peoples money: they are all part of the game, but without the flood of free money it would not work.
Alan Greenspan said the same thing this past week; if there are even bigger bubbles elsewhere, how can this be the Feds fault? I would point out that there are central banks in all of the bubble countries, and that these banks do cooperate.
Mutually assured fiat currency destruction is a given, as far as i’m concerned…
Domino factor comes into play here, bigtime
Mutually assured fiat currency destruction is a given, as far as i’m concerned…
Domino factor comes into play here, bigtime
Delay, delay ………………..
…………………………
……………..
de ……….
lay
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We humans seem to struggle with it. AIDS that takes 5 years to kill you. Mad Cow Disease that takes 20 years? We don’t even know. All forms of cancer may prove to be virus that takes 40 years (dependent on the virus).
Maybe the introduction of Fiat currency is the cause… and more to come. And nobody will ‘realize’ what caused it (1970’s fiat)
also, I think if one could make a sort of timetable for all the worlds most recent housing bubbles, it would be quite clear that 1987, the first year of the Greenspan put, is when it all started.
“as far as I know all housing bubbles are in anglo-saxon countries, or in countries with a banking system with anglo-saxon dominance.”
And there is the crux of the matter. The world socialists are working to make sure their is no Anglo-Saxon dominance.
You get the Muslim hoards from the East, we get the Latinos from the South. It all costs a lot of money to provide for them.
The banks are just accommodating the New World take-over.
“One asked, “Ben: I’m confused by your comments on who is responsible. Ultimately, isn’t it the individual players? No has put a gun to anyone’s head and forced them to invest or buy houses. The minute blame is shifted to banks, government or Fed, doesn’t that allow all the individuals to become victims?”
I agree that all players should bear their share of responsibility, however, players only come to play if their is a game, rigged by Alan Greenspan when he lowered interest rate down to near 0%.
Cinch
The bust will probably school all the individual speculators, and as KirkH said above, and that will go a long way to preventing future housing bubbles. But to me, there must have been an underlying groundwork that allowed things to go as far as they did. Or do financial manis this large just happen?
easy money is the root of almost all historic bubbles that I know of; there are some variations on the theme but they all look very similar.
e.g. tulipmania in Netherlands happened shortly after the invention of the stockmarket, which made it possible for the general public to speculate with borrowed money. And money was flowing into the Netherlands on a huge scale in those times because of new overseas colonies, inventions etc.
“Or do financial manis this large just happen?”
No, there has to be causation of some sort. But manias do happen. What started the South Seas Bubble or the Tulip bubble? I’ve never researched these, so I don’t know how they started. But it would be interesting to see what, if any, common elements there are. What, for that matter, touched off the Florida RE mania of old? Seems like something akin to shouting “Fire” in a crowded theater and then the mob goes nuts.
You’ve taken on a big task here, Ben. Ultimately, I think bubbles or manias wouldn’t happen if people were, in general, sane enough as a group, better educated and better able to recognize the motives of others. And in this way, less susceptible to being hypnotized by hype. Study the posters. What sets them apart from the herd? Although not all agree on everything, the posters here, for the most part, seem to be rugged individualists, willing to stick to their guns and willing to do the right thing and not go along with the crowd.
The possibility to speculate with borrowed money or with other peoples money is a central element in nearly all the big historic financial manias. The other side of the story is that there are usually people who organise these manias for their own benefit. That is a part that is hardly discussed but very important. Greed and crowd behavior is a given, but I don’t think manias just fall out of the sky from time to time.
As to the benefit of education and group sanity I don’t think it will help. Isaac Newton, an excellent mathematician and scientist (he should understand compounding, parabolic trajectories etc.) and one certainly of the very brightest minds in history, lost most of his family fortune by speculating in the South Sea Bubble.
You might enjoy Anna Pavord’s book, “The Tulip.” It covers the mania in depth, among other things.
It may prevent near term bubbles – but we’ve gone from one to the next for decades now and no one seems to be learning anything. How many of us sat, scratching our heads as all this was going on the last few years wondering what the heck people were thinking? As this blog apparently got told over and over that they were crazy (I only found it a few months back when I went looking for unrelated info for investing) so the rest of us were told the same by anyone we tried to talk to about the hype and lunacy of thinking they could pull off half million dollar mortgages. It’s like none of them even considered what kind of income it takes to pay for such a thing – I know what we make, & I know we are closer to being able to actually make such payments then most others I know – yet somehow we never felt doing that would be even remotely wise…
All of which leads me to suspect it was the mostly financially stupid that fed it and drove it. And that includes recent MBA’s – they are turning them out faster then ever…. And they are becoming dumber and dumber every year. What exactly does a highly educated but no experience in actual business mid 20 something actually know about anything? There is a reason most in the past didn’t go straight to MBA – they went to work and learned how businesses actually operate and then went back (taking what they had learned in “the field” and adding additional information – they already had some idea what worked and what didn’t…). Our education system is truly broken – we might start there.
“… they went to work and learned how business actually operate…”
I agree completely with that sentiment. Another great mind put it this way:
“you must appreciate the question before you can value the answer…But in practice, people almost always demand the solution before grasping the problem; the medicine before understanding the disease. Here is the problem, the disease.”
- Lewis Carrol Epstein, Thinking Physics
He has a great rant at the end of this book about what is wrong with the world, he basically says that the kids who grow up, not interested in how the world ACTUALLY works, are the ones interested in deciding how it should work.
I freely admit I don’t have my brain wrapped around this issue as well as others here. Still, to me this is just the most recent bubble of many that have come down the pike over the last few centuries. I think it was NYCityBoy who said the other day this is just another asset bubble. This time it’s houses. Last time it was stocks. Who knows what it will be next time, but I’d bet paychecks the boys on Wall Street are already working on that one.
The blame rests on so many willing participants, all the way from worldwide investors trying to make an extra half point on an investment to Wall Street to the Fed to FB’s, just to name a few. Maybe the underlying groundwork was pure, simple greed on a scale unmatched in human history. IMHO though it starts with Wall Street.
Sorry. Posted this above but it belongs here.
If you want to learn how to create a mania for a product/service, study housing industry history. Manias do not just happen. It takes a massive confluence of environmental stimulus to create manic behavior on this scale.
Does anyone here see the US Stock market in the same way as housing? Speculation, greed, lies, and fudging of quarterly numbers. i.e. CFC and it’s optimism. The same bankers that caused housing problem still have their hands in our market funds.
I don’t want to play this game anymore. How can you win in this market (housing & stock) if it’s played by a bunch of crooks who will line their pockets before you get yours.
Again, by the time I retire (in another 25 years) I will be one of many Joe Shmoes left holding the bag…….my luck in life.
It’s all fun for everyone until the music stops and there is not enough chairs for everyone to sit on.
Absolutely. In “the old days”, the value investors (the Buffet theory) held that a PE of 9 was ’bout as high as you wanted to risk. Take a look at todays front runners. PEs of 100+, as in, you pay $100 for every $1 of earnings.
I’ve read theories about why, ahem, “it’s different this time,” but not one satisfies as much as old Ben Graham et al. The market is manipulated, gazillions get dumped into it, seeking gain, from institutionals all over the planet…. No mystery money seeks a home, but I cannot reconcile hugely overpriced stocks (by traditional standards) with more conservative evaluations.
I see the credit/subprime evolution to drag stocks with it, due not just to fundamentals, but from the desperate borrowing from 401Ks. Next bubble? Definitely gold, tho by definition it cannot reach the height/breadth of something so primal and central as housing. Still, it’s going to be an entertaining ride…
Ben & all: My confusion came from what I perceived as a change in attitude here from “stupid FB” to “what institution is to blame.” If all of us could see it was insane to buy homes at the unsustainable prices, why did so many others fall for the sham? Unless the public in general takes up the mantra “we won’t be fooled again,” what’s to stop the next bubble in whatever form it takes? I think it was more denial than stupidity. It’s amazing to me how millions of people could have suspended logic at the hopes of making a buck. You could simply say to people housing can’t possibly continue to go up and the answer would be “so instead of a 20% gain, maybe I’ll only get a 19% gain. I think it’s laziness - people saying I don’t have time to (fill in the blank), yet they have time to park in front of a TV, video game or other forms of entertainment for hours at a time. If people would just be honest with themselves and use the proper language it would help. It’s not that they don’t have the time to be educated and conduct themselves properly, they don’t want to use the time that way. It effects every element of life in this society from parenting to being financially responsible.
We’re in the post mortem phase.
But to me, there must have been an underlying groundwork that allowed things to go as far as they did.
The forces behind this have been building since before the Great Depression:
* The formation of the Federal Reserve
* The rise of petroleum products as the pre-eminent energy source
* The New Deal
* Bretton Woods, the USD as reserve currency, the “petrodollar”
* The rise of the boomers(!!!)
* The abandonment of the gold standard (1971)
* The Greenspan Put
* Globalization
The 20th Century — especially the latter half — was the American Century, wherein citizens came to believe that all trees grew to the sky.
Or do financial manias this large just happen?
In a manner of speaking, yes. Human nature simply doesn’t change. At some point we simply get far enough removed from the last occurrence that we forget and/or allow our collective arrogance to convince ourselves that it won’t happen again.
do financial manias like this just happen?…no, they build out of expectations for a better life, after “crisis management”. Pull the levers, push the buttons, .presto…
everythings different this time. kinda like “its different here”…bubble boy will live again, when? Who the hell knows.
Rust belt will be reborn, in something like self sustaing, low impact habitation units that drive around with salt water combustion perpetuation…
Ben, it was a confluence of many unfortunate factors - however, if I had to assign blame to one specific source, it would have to be the merchant banks and ratings agencies assigning “AAA” to packaged ABS/CDO’s.
Without this factor, there would not have been a world-wide market for the securities sewerage. In my view, the bubble would have been considerably smaller, absent the repackaging.
Follow the money!!
“I have come to believe the root cause of this financial mania can be traced to…”
Ah, a Quality Assurance term: Root Cause
Charlie Brown: “Linus…my kite is tangled up in the stupid tree again… arrrrrrrgh!”…my kite is getting severly damaged and the kite string is a complete entangled knotted mess, …how can I prevent this in the future?”
Linus: Well, Charlie Brown…you can not fly a kite at all or you can find a place to fly your kite where there aren’t any trees or bushes.
Charlie Brown: Oh, and where might be such a place Linus?”
Linus: “Mongolia” …I hear it quite beautiful in the fall and very windy too.
I have a business proposal for Ben. He could bundle the comments in here, then sell them Wall Street investors as “reality-backed wisdom” worth their weight in gold (as opposed to the crap Wall Street bundled in their MBSs). He could also arrange drive-by trout-slappings of particularly obnoxious NARsters, which could then be accessed in a pay-per-view section of the blog.
As I said before, some of these clowns who are saying now that there was no way to anticipate the amount of fraud that would happen could have saved themselves big bucks by hiring college students to monitor Craigslist. It was everywhere! Still is in some places.
I was explaining some of this stuff to a new lawyer in my office (he has the cube across from mine). You know, as I laid out the problems, he had no problem figuring things out. And as soon as I reminded him that 72% of the US economy is based on consumer spending, he started anticipating my comments.
He is a new law school graduate. 27 would be a high guess on his age.
By the way, how is our “service” based economy supposed to take advantage of the falling dollar? A personal trainer can’t “ship” his product to Europe.
I heard that Lexis and Westlaw had tried outsourcing their case law summaries and taxonomy projects to India but that didn’t work. I read that these Indian lawyers were being paid $10-15 per hour.
I once looked into a job a little bit like that but at a tax publishing house. Since it was a specialty area, they didn’t even worry about whether people were lawyers. They wanted really smart people who could write. I think they had a bunch of Phd’s who had washed out of the professor market. Fortunately I am a lawyer and could command a higher salary elsewhere, but you can’t do that sort of work with anyone who doesn’t know or at least want to know the micro-culture for which they are writing. It is essential.
Computers, on the other hand, aren’t so fussy about that.
‘that there was no way to anticipate the amount of fraud that would happen could’
- I read a report on FEMA’s performance concerning hurricane Katrina.
The most amazing section to me was that FEMA never considered the publics reaction to a disaster-
“Civil Disobedience”
Guys in the hood ‘Whacking’ other homies, cops helping themselves to new Cadillac’s etc.
Obviously, Wall Street could care less if JoeJuanSixpack can make a payment on a fully amortized loan. They can not be excused at any level.
There we have the book to go with the great title…
Follow the money! I know that sounds so simple but the greatest Ponzi scheme - asset bubble of our time - was enabled by corruption on a scale previously unimaginable.
I’ve been a Housing Bubble blogger for over 2 years now but unfortunately I’m also becoming a bit of a cynic in the process. When you see the scale of corruption by the politicians, special interest groups, financial entities and average citizens you begin to realize that we have some serious problems coming our way.
In the past 2+ years that I have been following this, I have wanted to puke every time I have heard someone say that this whole housing and credit mess has nothing to do with them, on any level of the means by which it has fed into this ponzi scheme.
“It’s not my problem…”
If someone wants to buy a house or houses through me they can’t realistically afford.
If someone comes to me wanting stated financing without the means of actually making the payments.
If investors want to buy up all these fraud filled securities.
These parties claim that they were just offering what everyone wanted.
I more than understand the idea of informed consent, but at every stage of this game, the players have tried to wash their hands of any accountability and look the other way, while the facilitators have been collecting exorbitant fees and divesting themselves of the product to someone else as quickly as possible. Facts and the larger implications of these decisions have been largely ignored or buried in thick piles of paper.
“That’s their problem, not mine.”
“If I don’t sell it to them, someone else will.”
No snowflake in an avalanche ever feels responsible.
Responsibility and consequences in this whole matter have become a joke. Even more ridiculous, as ChillintheOC pointed out, are those who have vested interests in keeping the party going and all the fraud associated with it.
“I more than understand the idea of informed consent…”
——————-
And therein lies the problem. While many consented (FBs, originators, appraisers, realtors, lenders, Wall Streeters, etc.) very few were informed. Coincidentally, those who were most informed were the ones making the money while passing off the risk…interesting.
it’s an old game: pass the potato
I would like to add another point that a few posters have mentioned in the past, but bears repeating. Some form of basic financial education is required if people are going to function effectively in an advanced society like ours. We have actually been slipping backward on this in the educational system - everyone has seen the high school math test scores, and a few people have read _Innumeracy_ by John Allen Paulos. Other posters on this blog have recounted anecdotal stories about cashiers that cannot add, multiply, or make change. I think that this is actually a big problem.
If people cannot handle basic math, (and incidentally cannot read above a sixth grade level) they are perfect marks for even marginally sophisticated schemes and frauds, particularly those that are conducted under color of authority - by players such as bank, brokers, builders, etc.
I keep reading postings here about FBs who did not understand the loan documents that they were signing, didn’t know the difference between an interest rate and a percentage increase in a payment amount, etc. While we have our fun here ridiculing these fools, I contend that many of them simply did not have the necessary education to understand what they were getting themselves in to, nor even enough knowledge of financial history to recognize the same old scam in a sexy new package.
So the education system and certain cultural influences should come in for some blame as well.
As my commie lib husband pointed out this a.m., Faux News ran continuous coverage of Paris Hilton going in and out of the LA County jail while the brouhaha over the Attorney General and fired U.S. attorneys was front and center in the news. Coincidence? They know their audience!
Chick, are you married to James Carville?
Hahah. No, I”m not into blonde guys.
James Carville has no hair. He sat at the table next to me not long ago. He’s very tall and speaks in the same cadence that you see him speak in on t.v. in regular conversation. It’s like firing bullets from and automatic weapon or a sting of firecrackers going off.
I was laughing the entire time. He totally knew I was listening to every word and got a kick out of it.
How he and Mary Matalin make a marriage I’ll never know. That should be a book some day.
Additionally, there was a certain faith in the system that helped the ignorance along. People didn’t read the loan docs because they thought the bank would look out for its own interest and give them a loan they could pay off.
So often when I’m reading the anecdotes about FB’s, I’m thinking, “If only they knew about sunk cost /compound interest/arithmetic /budgeting /bubbles /commissions / ….”
But as you mentioned cultural influences, I’ve seen many highly-educated people leap blindly into the housing mania and get severely burned. Emotions often trump rationality.
“many highly-educated people leap blindly into the housing mania”
I would echo this…and I’m thinking of 2 friends, one a doctor with an 1/0 and a corporate lawyer, who used an inheritance as a downpayment on his apt. in NY and a nice 2 bed house in the Berkshires. My doctor friend now realizes she’s pretty screwed, but my lawyer pal…on the drive home from Christmas last December, I mentioned that maybe he should refinance his apt. mortgage into a fixed. He reluctantly agreed. Has he? Not. Inertia.
If you’re not watching this on the blogosphere, it doesn’t really appear to be catastrophic yet.
I guess my point is people who spend the time to follow baseball stats could easily follow the RE numbers, but somehow they have no interest, and do not make the larger connection to their financial and political futures.
“Other posters on this blog have recounted anecdotal stories about cashiers that cannot add, multiply, or make change. I think that this is actually a big problem.”
How is US education going to help when the cashiers are illegals? I asked a cashier at a restaurant where their shrimp came from. Innocently enough, I was curious whether or not it came from China (you know, non-FDA approved antibiotics and stuff). The cashier couldn’t speak English, and had no idea what my question was, after repeating it twice. OK, fine, I said “De quel pais los camarones.” Ah, now she understands. “No se” was the answer.
So how again does math in the US help her be a better cashier?
F’ck that. I have met unliited hegrown americans that get frazzled when I hand them $20.12 if my bill is $16.62. Basic education in this country is screwed. My 10 yr old daughter was asked to get a calulator and I told her if I catch her using it at home she is grounded. My daughter in 3rd grade knows her tables till 12. It is not such a major hardship.
The *new* *modern* “perfect world” : 6 billion people…. all with a college degree.
I disagree…even if people are educated on economic fundamentals, that gets thrown out the windows when the psychology of greed and fear take over…the “buy now or be priced out forever” and the “hop on the gravy train and flip houses before the train leaves the station” effects. Even smart people WHO SHOULD HAVE KNOWN BETTER got caught up in the tech stock bubble and the housing bubble.
Education might go a ways to moderate bubbles, but I seriously doubt it will eliminate them.
I am surrounded by business people, many with CPAs, MBAs from Ivy League schools and the such. They were completely clueless on this Mania and were amongst those that laughed the loudest when I painted the picture for them for the past 2 years. Marthafocker, if they can’t get it, how do you expect the little guy to understand it?
“Marthafocker, if they can’t get it, how do you expect the little guy to understand it?”
And I would submit that the only people who really can understand it, ARE the little guys. yeah, the joe sixpack we like to dump on. You’d be surprised how many “joe sixpacks” do get it.
Hells Bells, bro, that Ricciardi guy at Merrill was educated at the foremost business school in the country, Wharton. And here he was, clueless what he was doing with the securities, but doing it anyway. But he was a good salesman. People should never produce what they sell. Someone should do the producing, and hand it off to the salesperson, with some product education.
Never get high on your own supply.
In all fairness Palmetto, I have found the little guy and the MBAs to be equally clueless.
My best friend, who I love dearly but is a real financial idiot, has a Wharton MBA. He also has a Florida condo he could have sold for a double two years ago and which he is now underwater on.
My mom finally realized how bad the economy is and now agree with me that many consumers have been living on credit way too long. She’s witnessing more and more people trying to purchase groceries with credit cards……people in line pulling out one card at a time until a “good” one works. It’s bad when it’s at a suburban Aldi’s.
The woman in line ahead of me at our little village store asked the owner if she could have a pack of cigarettes on credit, just until her disability check arrived. He said no (they used to give credit to everybody, but have been repeatedly stiffed and, this summer, wised up), then looked through her until she finally went away.
Intelligence doesn’t have as much to do with it as you would expect.
Lots of studies show that emotions rule decisions, and that reasoning is only used to justify (i.e., rationalize) those decisions afterward.
Groupthink has a huge impact, too. Most humans desperately want to “belong” and will follow the crowd even when they *know* their wrong. I suspect — hell, I know — most HBBers exhibit strong independent streaks.
Actually, alot of J6P I know got it right and knew something was wrong with the ridiculous housing prices. The ones who denied there was a problem were the PhD’s, MBA’s and CEO’s.
I would bet that 99% of the people who got “scammed” didn’t really get scammed. They just wanted a piece of the action and thought they could sell for a 100% profit in two years just as the 2/28 adjusted.
“I suspect — hell, I know — most HBBers exhibit strong independent streaks.”
——————–
Most definitely. However, I’d wager that most on this blog have an IQ that is significantly above the median. Just a guess…
indeed, as mentioned above: Isaac Newton, one of the brightest minds in history, lost a fortune speculating in the South Sea Bubble. And alongside the general uneducated public, during tulipomania many well-educated people lost a fortune (and probably didn’t understand what was wrong until after the crash). At least tulipmania had some ‘investment’ fundamentals to support it, because even rare tulip bulbs multiply underground so you have a lot more of them next year if you are lucky. Can’t say the same for houses.
“Education might go a ways to moderate bubbles, but I seriously doubt it will eliminate them.”
It depends on what you teach the subjects. A lot of educated sheeple don’t understand the basic nature of markets. Markets are either expanding or contracting. As a result, participant behavior needs to adjust accordingly. However, most sheeple look at temporal trends and think the trend will last forever.
In housing and many other markets, there is a measurable number of entities ‘willing and able’ to buy, a limit. As such, there is a measurable limit of units that can be absorbed. Most market participants were either unaware of this number OR chose to ignore, and in some cases, chose to defy it.
When I run the planet, no one will graduate high school without aceing my Lifeskills class, which includes the functions of compound interest, basic banking, financial products like credit cards, mortgages, IRAs……..just for starters.
I work in an emergency communications center. A recent mail scam involves receiving a letter, with a large check made out to the recipient. Of course the check is phony, and of course dozens of our local citizens rushed to the bank to cash theirs….so they could send money to the source, ostensibly to qualify for tens of thousands of dollars they’d mysteriously won.
There is no hope for a large-ish portion of the populace. And they likely vote. Democracy, such as it is, is doomed.
I do reserve some blame for national and even local financial media. Should have sounded the warning alarm when price levels and income began to diverge, along with the end of lending discipline. Should have been easy to see that no money down and qualifying with low initial payments would artificially inflate the market, and also encourage even reasonably qualified buyers to stretch and/or overpay, as well.
On the other hand — everyone except a few lone voices of sanity went along with it. I expected prices to eventually peak and stay flat for a long period in Northern Virginia (the only market I know well) - but I didn’t realize things would slide as they have.
“Yeah, but we can really fix the human nature stuff. What I am searching for are the players and institutions that we could take action on to prevent a housing bubble in the future.”
We Georgists think we have both the philosophical and practical answer. There is nothing new under the sun; Georgism came in response to the boom/bust and economic injustice present in the late 19th century.
SF Gate article that I could have written.
it is the fear of getting left behind that drives the bubble nature. I have felt the urge repeadtedly and finally invested in emerging markets because my partner who is nt very finanncially savy is making a killing. I have millions and dont need t take the chance but fell stupid looking at his retuurns while i get 4.5% in a treausury. Wait till the bubble bursts there in China and India. It is going t be a big party. I only invested a few hundred thusand so i can also gloat about my returns at parties. The real money is still in cash to buy when the market corrects 50% and boy will it in the BRIC countries
How does the blame game transpire in regards to the 3 horsemen of the apocalypse?
Newspapers, TV and Radio are all contemptible in not doing any due diligence, whatsoever.
Newspapers are toast, that’s easy.
What about the other 2?
“How to prevent another housing bubble? Easy. This one will not be repeated until forgotten. I’d say two generations or maybe two and a half. Sixty years or more.”
Nope, stupid is as stupid does…at LEAST once a generation, if not more (times). Each generation thinks it’s found the secret (technology, magic, dead horse trading, whatever) that every generation before it failed to see or capitalize on (”It’s different this time…we can all get rich with very little effort!”)
Remember, the last housing run-up (at least in Cali) peaked in the late 80’s…only about 17 years ago. Tulips, south seas, railroads, beanie babies, stocks, housing, it happens over and over and over…memory is short where greed is involved (especially if it seems that you don’t have to work very hard to get what you want, and it’s a ’sure thing’).
I remember the late 80’s el lay bubble, one a few different small bubbles that were going on, at the time across the land…
SMALL bubbles, 1/1000th the size of this godzilla
No comparison whatsoever.
I think the worst crashes (like the Great Depression) are remembered for more than a generation, but most of the bubbles (even big ones) are only remembered by the people that were hit by them. Of course the people that organise these pyramid games play a big role in selective presentation of historic facts.
The Netherlands is again a clear example: in the seventies there was a housing bubble that caused prices to rise by about 100% within five years. In 1979 this bubble popped out of the blue (no clear cause) and the average Dutch home price crashed by 40% in 1.5 years (with most of the damage in the first three months). The remaining 10% gains from the preceding bubble were wiped out by inflation. After the crash, RE prices went nowhere for the next 10 years. Dutch realtor statistics always start around 1985 or later.
Fast forward by 25 years: the next generation is playing, price gains are 5-10 times bigger now, the bubble has been building for more than 15 years and probably 95% of the people, including banksters and politicians, are convinced that real estate in the Netherlands will always go up (by at least 3% yoy and probably a lot more). Erasing the gains of the current bubble would totally wipe out the Dutch economy and then some.
My part of the Netherlands already had some housing bubbles in the 17th and 18th century … people never learn
The problem is the wrong lessons are learned from past crashes. How did the great depression really end? Not as you might learn in a college history class. In U.S. the “Resession of 1937″ effectivly stopped the “New Deal” . World War Two began, which allowed several things occure. The Republicans and Southern Democrats dismantled a large number of “New Deal” agencies. There was rationing which limited consumer spending resulting in forced saving, putting a large amount of liquidy back into the banking system. And major industrial competetors i.e. Germany were distroyed. If you fast forward to the 1970’s, when stagflation was the problem, the initial thinking was to look back at the Great Depression do things that should of worked back then, like inflating money supply, with price controls, and more regulation. This made the problem of stagflation worse.
(Since I was the one who wrote the comment you’re responding to, I’m going to try to defend it!)
The 1980’s run up was nothing like this one. I agree with you that OTHER bubbles will happen … I just don’t agree that another housing bubble will happen until the current generation of young adults are very old, or dead. I wouldn’t count the 1980’s run-up, because it was not national, and as you well know, the US population is quite mobile in a geographic sense. I think it is clear from Shiller’s chart that whatever happened in the 1980’s was nothing like the recent housing bubble. Maybe Calif got overbuilt; there was an East Coast correction in the early 90’s too. But these cycles are “normal” in some sense. The recent situation, where buying was twice as expensive as renting, was not normal, nor will it be quickly forgotten.
Your diagnosis–that people will always go for a ’sure thing’ and a quick buck, is of course correct. Think how the stock crash of 1929 has not been repeated since, and you have my picture of housing’s future.
The seeds of a bubble:
1. (Perceived) limited supply of something (tulips, stocks, houses, beanie babies, whatever).
2. Growing demand for that something.
3. Easy access to credit to speculate on that something.
4. News spreading (media, word of mouth, etc.)about 1, 2, and 3.
That seed germinates and grows into a full bubble when people start using the easy credit to buy more of that “something” than they really want or can use for their personal consumption…ie they start speculating (instead of buying for personal consumption, or for long term investment) because “it’s easy money”, and “how can you lose?”
That drives asset prices up, making it seem like even more of a sure bet, and making credit suppliers even more willing to lend money (even if it’s just mom and dad loaning money to their kid to buy yet one more beanie baby). Which drives the speculation and prices even higher, and so on and so on.
Until the price gets so high that most speculators refuse to buy, and some actually start selling en masse (so as to not be caught holding the bag). Then the whole process goes into reverse.
Positive and negative feedback loops. Set them up and watch them go.
Beanie babies were a nice little collectible bubble and the “right” one got up to a few hundred Dollars…
When the realization that they were just cheap Chinese made stuffed toys dawned on people, they went to nothing.
How could that ever compare to a $500k house, in a country full of em’?
You needed more cash up front to invest in beanie babies than your typical sob-story single-welfare-mom needed to get into her 600K house!
The answer is the Federal Reserve. We do not have a free market in money and credit. Money and credit is “regulated” in order to push the economy in certain directions by a small group of central planners who either 1) have no idea what is in the interest of the people, 2) work only in their own interest, or 3) both.
Lenders, investors, and banks must be punished for their mistakes by the free market, not bailed out with artificially low interest rates at the expense of all who are dependent on the value of the dollar. When I make a bad investment and it causes my own personal “liquidity crisis”, I don’t see anyone putting together a bailout for me.
There. I’ve just saved everyone a lot of time.
Every 35 to 40 years there is a major financial crisis, were the system breaks down. From now, back to the stagflaition of the 1970’s, The 1970’s to the Great Depresion of 1930’s. From the 1930’s to the panic’s of the 1890’s. These episode were all with 35-40 years apart. All of them had some sort of bubble before them. In the 1880’s it’s was railroad building. In the 1920 it was real estate and stock market. In the 1960’s it was conglomerts and the expanding welfare state. !n the 1990’s it was the tech boom and the housing bubble. There is some generational thing that causes bubbles.
Yes. A great book to read along this line is called “Generations”. Very well documented, and the author goes all the way back to the Pilgrim generation that started America. It was written in the 1990s and is spot on about predicting the future (our present). I understand he has written a recent update to this book, but I haven’t read it yet.
The real problem is the irresponsible borrowers.
How you want to control that, in a free society, is another story.
One thing for sure, any attempt at regulating social behavior fails. So attempts for “affordable housing” including Mortgage Interest deduction (and now the obscene PMI deduction) only make things worse.
I think if we had a better tax structure, where every person were simply charged 25% and there were no deductions for anything ever (I know this is hard to implement, in practice, because what constitutes “income”, etc) then we’d be less prone to bubbles, whether stock, housing, etc.
I doubt that it would work, as many Eastern European countries have a flat tax and their RE bubble is bigger than ours.
The best way to limit something is to tax it.
Georgists argue that gummint should not tax labor or capital, but site values. Essentially lots are auctioned to those who are willing to pay the highest tax on them.
This “Single Tax” idea really kicks land speculators (those acquiring and then holding land out of productive use) in the nads.
Taxing real property would be an essential element of any Utopian libertarian arrangement, since history has shown that there cannot be freedom without free & egalitarian access to land.
I think the situation in Eastern Europe proves what reuven says. In Eastern Europe and the Baltic states most of the speculative RE money is coming from Old Europe, both from individuals spending their equity gains or trying to lower their tax base, and large companies that invest ‘cheap money’ from old Europe and have a huge advantage over local companies. The biggest share comes from countries like UK and Netherlands where the tax system is wrong just like reuven says (all kinds of tax deductions for high incomes, especially for RE related expenses, no tax on assets except savings accounts, no tax on RE related gains). The local people with their flat taxes are hardly participating and even if they did, they would probably be hit by a huge asset tax (unlike the foreign specuvestors).
Beautiful Greedeurs, here’s your song…
All their bags are packed and they’re ready to go
Their standing in society, for rich men-is poor
They hate to wake you up and say goodbye
And the dawn is breakin, it’s early morn
The limo’s waitin’, the sheeple have been shorn
They’re so loansum, gotta fly
So kiss us goodbye, and smile as you leave
Tell us that you’ll pay your debt to society
Holding on tight to all their dirty dough
Cause they’re leavin’ on a Gulfstream V jet plane
Don’t know if they’ll be back again
As to where they are going, extradition is a no-go
There’s so many times they let us down
So many times they played around
But I tell you now they don’t mean a thing
Every place you go, i’ll think of you
Every song i’ll sing, i’ll sing for you
And you’ll never come back, and do time in Sing-Sing?
http://www.youtube.com/watch?v=4LvtDb0ZPwQ
http://www.youtube.com/watch?v=SJ_qK4g6ntM
Quite a hoot. Wry British humour explaining the subprime mess. The subprime part starts at about 3:00 min. into it.
The way I look at the housing bubble is that Wall Street had alot of money to invest and they were looking for a way to beat the bank yields (because of the low interest rates on CD’s ,ect.) The money suppy was huge ,in part because of global markets . So Wall Street came up with a way to attract investors by investing in MBS’s that payed good yields because of the way they set these investment packages up. Get a rating system to rate the loans as being sound because they were tied to real estate without any regard to the truely high risk the loans were ,was what they did . So, this Wall Street money, looking for yield, pushed the industry into making faulty loans by lack of regulations as well as loan designs that were faulty anyway (like no down ,no doc loans ).
So ,greater regulations have to be made so a source of funds ,like Wall Street, does not determine the lending standards by faulty self-serving risk models .
We know that one of the problems with the 1929 bust was the use of leverage in speculation on stock . This housing bust has alot of the same problems regarding the use of leverage that was used in real estate .Firstly ,no down ,no doc., liar loans should not be allowed . Second , lenders should have more of a penalty if a loan defaults in the first three years of a loan. Third, changes need to be made in the way that appraisals are assigned and perhaps real estate agents and loan agents should be barred from that process .Last, borrowers need more disclosures ,and commissioned salespeople need to be held to higher liability for their acts regarding such a huge purchase such as a house .
I’m sorry that the human race needs to be controled ,but the nature of the beast is such that the dumb sheep and greedy money men will screw it up for everyone if they are allowed to practice pure capitalism .
Also ,Greenspan could of raised the rates alot quicker and higher and that would of put a damper on the frenzy that was developing .
Also ,more regulation is needed to put more duty on lenders to prevent fraud .Apparently because lenders could pass on loans to the secondary market ,the lenders breached their duty to prevent fraud or even underwrite the loans .
Alot of the people on this blog will not agree with my call for more regulations ,but I see no other way to prevent another 1929 event .If a person or Company is on the up and up ,regulations will not prevent them from their goals and would only result in a little more red tape . The stupid ,greedy ,or fearful people always screw it up for the rest of us .
You assume that those in control of regulating have altruistic motivations. Each time government seems to fail us, we seek out more government oversight. I feel like a rabbit in a python’s coil; every wiggle of struggle tightens the snake’s grip.
Please be warned, this posting is a tirade against the American way of life as it is packaged and sold these days. It applies to more than just housing. I ask for 60 seconds of your time to understand how to fix America.
The middle class is getting squeezed by … the middle class. They have engaged in an arms debt race with each other. They are all desperate to measure their self-worth by how much stuff they own. Their houses, their cars, their boats, their kids colleges, they must show they can afford all this stuff. They all want to be the next billionaire.
This is symptomatic of the culture for the last 30 years. We view rich people as somehow morally superior, more intelligent, or more important than poor people. We certainly see them on TV all the time. The yardstick for determining how “interesting” or “good” you are is the money you make and show.
If people sat down and thought about it they would realise that this a beggar thy neighbour approach to living. I have friend who has an expression that describes this phenomenon. He likes to say that we have become, “A do it to yourself country.”
So how do we fix this problem? Surprisingly enough the answer is really quite simple. You, my reader, are already working on fixing the problem just by reading blogs like this. Spread the word that money is a bad yardstick to measure life by.
Don’t send your kids to $50K a year private colleges, send them to local community or state colleges, so they and you don’t need to take on debt. Does your kid want to study art? Send them to Paris for a year, which is much cheaper than paying for some private art college.
Instead of that new Toyota Camry, try a used Hyundai Sonata. If you have a little cash left over, you could buy a piece of art or funiture from a local artisan.
With a little creativity you can avoid most of the middle class trap in this country. The only price you pay for this, is that people will think you are a little weird. But when they see how much happier you are, they will start to wonder if they are making the correct choices.
Now I noted that you can avoid most of the middle class trap. The one notable exception is health care. I have asked my cat’s vet if he would treat me, but apparently the nanny state has deemed that illegal. It’s a shame as he offers much better service than any doctor I have seen at a fraction of the cost. If you have a suggestion on this one, I would love to hear it.
To conclude, just refuse to keep paying the ridiculous price of admission that the system keeps extracting, and society will change for the better.
Oliver
Great rant - I totally agree. I’ve been scratching my head for a long time trying to figure out what is so great about stuff the middle class seems to value so highly.
Now I noted that you can avoid most of the middle class trap. The one notable exception is health care. I have asked my cat’s vet if he would treat me, but apparently the nanny state has deemed that illegal. It’s a shame as he offers much better service than any doctor I have seen at a fraction of the cost. If you have a suggestion on this one, I would love to hear it.
This is one of my pet peeves. The government has created a monopoly on health care and then helped to raise it’s cost to insane levels.
To get around it, first and foremost protect your own health. Get regular exercise and sunshine. Find a diet that works with your body. That may mean completely and totally ignoring mainstream advise. I personally didn’t find a diet that restored my health until I went on Atkins. Medical science does back me up, but you’ll find few doctors who even know that low-carb lowers cholestrol levels. I actually recommend Eat Right 4 Your Type as a starting point to finding a diet that works for you.
The other thing is to seek out providers in disciplines other than Western medicine. Traditional chinese medicine works - I have used it very sucessfully. Chiropractors may also be on to something, I’ve just never seen one personally. Women can use midwives instead of OB/GYNs.
In short, try to avoid “the system” as much as possible. Western medicine excels at surgery and public health. So go to Emergency room when you break your leg and get those kids vaccinated. Other than that don’t hesitate to research outside the orthodox when you have an issue - your wallet and your body will thank you.
I couldn’t agree more with your health stuff. I haven’t seen a doctor for anything other than broken bones and to have pieces of the body sewn back on in 30+ years. Doctors and hospitals, along with prescription drugs, are bad for your health.
You are quite correct there are alternatives to modern health care. The advice to avoid getting sick in the first place is also very valid. Definitely taking ownership of your health is critical as the industry is really not that interest in your well being.
I argue that modern health care offers many life enhancement treatments. The trouble is they come with an insane price tag. The cost should actually get less each year but it always goes up.
What we have now is neither socialised medicine nor free market medicine but some weird regulated monster with the worst of all possible characteristics.
To see the free market, just look at elective surgery. Many procedures have been dropping in nominal prices over recent years let alone real prices. Lasik and plastic surgery are all now much cheaper than 20 years ago because they are a free market.
On the other hand the socialised medicine proponents have a very valid point that we as a country come up short on almost every measure of health care in comparison to other developed countries.
So I think either exposing the system to more competition, or socialising it, would probably improve it. The bright side is that in less than 30 years the current system will collapse under its own weight because it will then be consuming more than 100% GDP. Sooner or later it will have to change.
Oliver
“get those kids vaccinated.” Ah, no. ASK if the vaccination has mercury. Autism used to be rare; today 1 child in 500 will get autism, and vaccinations just could be the problem. There is a homeopathic vaccination or a less invasive vaccinations you can try, and both are NOT problematic. If you get a flu shot, please ask if it has mercury. Unless, of course, you are looking forward to early onset dementia.
“Women can use midwives instead of OB/GYNs.”
I agree with you in general, but the above statement needs more examination. What was the death rate of women and infants in childbirth before modern medicine? What did it become after the advent of modern medicine? If you want to risk your life and give birth without a doctor, I guess that is your business, call it thinning of the herd. I’m surprised you advocate vaccination, usually people who are that phobic about medicine avoid vaccinations (becoming free riders on the system where most everyone else is vaccinated.)
I don’t know where you live, but on the coasts there is a relatively new phenomenon called Concierge Medicine:
http://en.wikipedia.org/wiki/Concierge_medicine
But I don’t see this as a case of the middle class squeezing itself. It’s more a reaction to the squeezing of the middle class by big business, Wall Street, and government. The constant pressure for high and ever-rising earnings reported by public companies, coupled with the government incentives for employer-paid health care and restrictions on medical practice, plus the lawyers and liability industry, have just about destroyed primary care medicine in this country.
Your cat’s vet would get sued into oblivion for practicing medicine without a license if he treated human patients, but he could arguably render better primary care than the typical neighborhood clinic for humans.
Oliver - check out Solari.com
This talk of boomers “cashing out” or “selling to each other’s children” is built on a false premise. “Boomers” are not a class, it’s just a made-up term for a section of a continuum.
“Couple that with the tendency of people over 50 to become ’self-employed’ and you have a huge increase in the number of realtors AND in the number of investor/fixer/flippers.”
Is there any evidence of this, or this just the writer’s hunch? Scapegoating “boomers” might be an appealing notion for many, but it’s too simplistic. Perhaps it’s more true to suggest that younger adults tend to resent and envy the accumulated wealth of their parents, with every generation.
The tendency of those over 50 to become “self employed” probably has a lot to do with their being laid off and then unable to find work due to age discrimination.
I’ve heard the numbers 80 million for baby boomers and 44 million for generation x’ers, so there does seem to be the spectre of a glut of homes coming to market from folks who will be downsizing or passing on. I don’t think the huge numbers of imigrants will achieve standards of living comperable to the native born and thus sustain demand, but I could be wrong.
There’s that impulse to package people into labeled groups again; it’s seems tidy, but why do it? “Boomers” won’t retire en masse, anymore than a new generation will be born on a single day.
Prices have outpaced incomes, but is there really a “glut” of homes relative to the population? Is anyone predicting an drop in population?
I’m not sure why immigrants should be considered separately. They are capable of achieving their goals by the same means as anyone else.
That’s just it, it’s not total population, it’s the distribution of the population by age and relative earning strength. A country that has been dominated by workers in their peak earning years will now be overwhelmed by retirees instead.
It’s not a continuum. There is a distinct demographic bulge that has hugely affected every aspect of the last 50 years — politics, economics, etc. The effect on the downside will be even more pronounced.
What’s starting to happen here happened in Japan around 1990, and they’ve been backpedalling ever since.
Do any of you guys ever consider “monetary inflation”??? You do realize the “Federal” Reserve Bank is not “Federal” at all but rather 10 member banks. Our money is backed by nothing other than some very large guns. It is just paper! The days of stable value money are over. The days of gold-backed dollars are over. I have had $10k in a Utah bank since 2001. IT NOW BUYS ROUGHLY 1/2 OF WHAT IT DID WHEN I PUT IT THERE!!! And it has only earned $2k in interest.
Everything is now a rip-off, it just so happens homes are in there to. Do you really think “the good old days” of affordable housing are coming back? Come on! Be honest with yourselves…
So here’s the question, will higher interest rates drive down home prices or will it be monetary inflation??? Because historically monetary inflation always wins. And “monetary inflation” is a nice way of saying “the banking overlords who make your money ever more worthless by printing more and more money when they feel like it!”
http://www.themoneymasters.com/
“Our money is backed by nothing other than some very large guns.”
… and the guns are backed by other peoples money, people from outside the US …
I agree - the current system is a rip-off (not just in the US, but central banking everywhere around the globe).
There is a chance a bridge could collapse under us and kill us.
If, for some reason, our faith in the stability of bridges were shaken, bridges would become worthless. Nobody would dare venture across one. Bridges would have zero value.
So, ultimately, what gives the bridge true value? Is it’s mechanical structure any more or less important than our maintaining faith in it’s stability?
Likewise, money of any sort is actually backed by something very subtle .. it’s so subtle we don’t even notice it. It’s backed by our trust and faith in it. Without faith money is worthless.
Willingness to overlook lending standards coupled with lower interest rates kept the scheme going.
Hopefully a return to lending standards along with the lack of wage inflation will keep a check on any effect brought on by interest rates held low.
I agree with this:
One asked, “Ben: I’m confused by your comments on who is responsible. Ultimately, isn’t it the individual players? No has put a gun to anyone’s head and forced them to invest or buy houses. The minute blame is shifted to banks, government or Fed, doesn’t that allow all the individuals to become victims?”
http://www.youtube.com/watch?v=10qQyq8NXYs
Who opened the gates of dumbass ranch? Not sure, but given our national march toward IDIOCRACY, I doubt that many lessons will be learned.
LOL!!!!!!!!!!!
You should have included a warning with that one!
Had two co-workers sell their houses with price reductions last week. They had been on the market over two years. They said both were sold with 100% financing to the buyers…. and the beat goes on.
Even FHA is doing 100% financing these days on the taxpayers’ dime.
Bubbles are not caused by particular banking systems, fiat money or gold, not due to credit or capitalism, nor to stock markets or anything of the sort..
They are caused by the basic human inclination to speculate.. to gamble.. in hopes of making an easy profit.
How to do it: Convince someone that an asset you hold is undervalued and is certainly a profitable investment. If you present a good enough argument, a bubble could erupt in that asset type.
More often bubbles are not due to a deliberate act.. Instead, some farmer notices a particularly beautiful tulip, never before seen in a field.. a genetic “sport” of such beauty it is fit for a King. The King pays handsomly for it and begs for more.. and the farmer’s field is suddenly paved with gold.
Bubbles have happened throughout human history under all sorts of governments and monetary systems, and always will.
It is quite clear that the housing market crash is not as bad as it was made out to be until this week (
) CFC showed only two weeks earlier …”
But CFC is a better “estimator” of its losses than Merril, right?
AAA is now Single A territory, in retrospect.
The lowest level of the financial minor leagues…
We never hear of a “rental bubble.” Why? because rental rates adjust up and down to the market almost immediately. Renters can walk away. Owners on the other hand, are essentially bag-holders on the hook for up to 30 years. That’s not so bad in itself, especially if the market goes up, but along the way, a whole lot of slick operators have their hands out for a cut of the take. The agent gets 6%, the insurance vultures get their share, the county gets a cut, and of course the mortgage company gets a cut. None of these people are on the hook if things go south, except the mortgage company if values really plummet. Re-packagers and re-re-packagers of these mortgages all get their cuts. All these slick operators generally come out OK when the homeowner is left holding the bag. It’s like a rigged game of musical chairs with only the dumbass FB not knowing the fix is in.
Leverage and ALL investors- banks that used too much leverage then wanted more products to lever up even higher. Lack of new product made it impossible to meet obligations; once a few could not be paid then every thing everywhere has or will come apart if there not any new believers in making more things to lever. So if it is one thing you are looking for that caused this mess it is LEVERAGE and the expected returns on it. The reason the stock market MUST GO UP is hedge funds, if the market goes down hedge funds cannot meet the obligations and will crash. The Fed is in on it because they depend on the market to bring them money so they can leverage out in bonds, t-bills and such. It’s symbiotic and like parasitism with out one both die.
” What I am searching for are the players and institutions that we could take action on to prevent a housing bubble in the future.””
The fallout from this bubble will be such that there will be no need to take any action to prevent another one for at least 50 years, or until most of the people who experienced this one are dead.
I guess Greenspan opened the gates and Countrywide passed out the koolaid.
Super-easy credit fueled the housing bubble. Securitization, together with historically low interest rates, created the conditions for super easy credit.
Risk dispersion, securitization, and the originate and distribute model of lending made it super-easy for lenders of all stripe to lend and for borrowers of all stripe to borrow. Securitization and the originate and distribute model, made it super-easy for the homeless guy in Central Florida to buy several homes. In addition, risk dispersion made it super easy for some people to buy their first homes, for some people to buy more home, and for speculators to buy more than one home. Without the ability to easily distribute these loans onto other entities, these loans would not have been made.
What’s more, historically low interest rates created another role for securitization. Historically low interest rates punished savers and other prudent investors. It drove their yields to the floor and in some cases below the floor when adjusted for inflation. As a result, these investors began searching for higher yields. After the NASDAQ dotcom crash, stocks were not an option. Moreover, these investors needed safety and stability in addition to higher yields. Ironically, securitization fulfilled their needs too, with AAA asset backed bonds.
As they say, wash, rinse, repeat.
If any one institution is to be blamed, I’d say the ratings agencies are up there, along with the central banks.
Too much leverage, too little transparency and everybody thinking that “someone else” was holding the risks.