May We Live In Interesting Times

A fellow alum friend of mine who works for a custom builder on the east coast presented a very interesting idea in a recent email exchange.

what I don't understand is why the talk of a $1T stimulus package doesn't get evenly divided by the 305M Americans to send a tax-free check for $3k to every man, woman and child? then a typical family of 4 gets $12k

then tell the banks they can't foreclose in Jan/Feb so people have time to get current on their mortgage and debts, but in March the banks have 30 days to get it done

we will quickly find out who really wants to stay in their homes and who doesn't and all the uncertainty is resolved in 90 days to know what debt is good or bad and all the middle-men get taken out of the process so the funds go directly to those who need it
maybe I'm too cynical, but I doubt Congress will come up with any plan half as good, simple or effective

Now that's interesting. And creative. So I replied with what you've read about here, to see how he might fit it all together:

Honestly I think it's because housing is no longer the biggest problem, but rather the $45 TRILLION derivatives market in unregulated legal "betting" in a shadow market of CDS's -- like $45 trillion in bets with no bookie -- and mostly on the balance sheets of major financial institutions. Honestly I think that's why, because you're right, the housing problem alone would be solvable.

And bear in mind that the Alt-A's have yet to ramp up in resets, which will rise in '09 and '10 and could rival the subprime mess. With declining tax revenue & credit downgrades, muni's could be in trouble as well, then watch out all over again........

But with all the side bets representing multiple payouts on the same debt including houses, muni bonds, corporate bonds, etc...... well that's a much bigger problem and one that's very hard to explain to the public, much less congress and even CEOs wrapped up in it.

Add to that the liquidity trap and a growing deflationary environment and it gets really messy really fast.

All I know is that I think that deflationary pressures require inflationary responses. But that could trigger a currency war with China and petrocurrency. At least, however, we know how to kill inflation I think. Ain't nothin gonna be easy for a while.................... [Omitting gratuitous dig at Larry Summers]

So his reply? Fitting, insightful, pithy.

at least we're living in interesting times, right?
here's to a better 09

And then I laughed out loud.

And then I sighed. Interesting times indeed.

Funny How You Always Find Your Car Keys...

A friend of mine pointed out recently:

Funny how you always find your car keys in the last place you look.

True that.

But the same cannot be said of looking for homes. I've never heard anyone say after finding their car keys, "Well maybe I should keep looking, just to be sure."

Occasionally people know it when they see it, but for most, it's not that easy. Or romantic.

Repeat: Houston is the Exception

Okay, another press release, another frightening headline. But repeat and repeat again: "Houston is the exception." Let me cut to the chase, which is the last line in this Reuters article:

"The bear market continues; home prices are back to their March, 2004 levels," David M. Blitzer, chairman of the Index Committee at Standard & Poor's, said in a statement.

Okay, now as anyone can remember who was in the market in 2004 as a seller: those were not hard times in Houston.

So while other economic metrics mentioned in the article are at multi-decade lows, home prices in Houston remained relatively stable in comparison, down year-over-year in November by about 7%, but that's on much much lighter activity overall. Basically, sellers are afraid to sell, and buyers are afraid to buy, and so we mustn't be too serious about the price figures, which only reflect a small set of data due to the overall inactivity in the Houston market. (Note an important corollary: many would-be area sellers are also would-be area buyers. They are coupled, and so are the market effects.)

In other news, while the article says that a turnaround in housing is required for an overall economic turnaround (true enough), it also reports an important jobs figure:

Chief among consumers' woes has been spiraling job losses in recent months.

U.S. employers axed 533,000 jobs from payrolls in November alone, the most in 34 years, according to Labor Department data released earlier this month.

The Conference Board data reflected this, with its "jobs hard to get" index rising to 42.0 in December -- the highest since December 1992. That was up from 37.1 in November.

As we've discussed on this site again and again, the real indicator of an economic turnaround will be a stabilization of job losses. Without jobs, the economy can go nowhere for 99% of Americans. If you want a good housing market, you must have a good jobs market.

Repeat ad nauseum.

New Home Buyers Beware & Be Aware

Often when we brokers get the chance to work with new home buyers who buy a house to be built for them by a production builder, we see a standard set of issues arise. The most important mistake we see in the market, over and over again, is that buyers do not realize that if they do not use a licensed agent or broker to represent their sole interests, they are on their own essentially because everyone on the builder side, sales counselors included (who are not licensed in the state of Texas), they all work for the builder and in the builder's interest.

That is not to say that buyers cannot have a wonderful and satisfying experience with home builders, however the process is fraught with complexities and potential problems that an experienced agent or broker can help avoid.

Sometimes potential buyers who do their homework may find complaints about a builder somewhere online. While this is important information, it should not be conclusive.

I like to take a look at the buyer complaints on record and analyze them. It doesn't entirely surprise me to find online complaints about any major builder because one of two things might be happening, or both, particularly with production builders who cater to first-time or inexperienced buyers:

i) the builder may be a bum builder and perhaps takes advantage of its mostly first-time buyers, and/or

ii) I've found that many first-time buyers are not accustomed to the process, and if they are not properly advised by an independent agent or broker representing the buyer's sole interests, then buyers can be disillusioned by basically standard operating procedures by builders. Most new buyers do not use an agent to represent them, only because they don't know to do so, and the sales counselors work exclusively for the builders. So any conflicts are generally settled in favor of the builder, much to the frustration of the buyers.

New buyers therefore can easily be misled. A common example is during the build process, the buyers may make a request of the sales counselor, such as to change their carpet choice for instance, and the sales counselor will tell them "no problem." The clients think there's no charge but then later come to find out that there could be a "change fee" or a charge for removing existing carpet and/or an upgrade charge.

This is standard procedure in general, but the mismatched expectations and poor communication on the part of the sales counselor / superintendent can leave many people raw. Sometimes weather delays also incense people.

Structural problems however are always inexcusable, such as faulty workmanship, plumbing problems, etc. But most of those things are covered under the standard builder warranty, headaches though they are. (An independent inspection prior to closing can help alleviate any major problems - something else a buyer agent/broker can facilitate.)

Another important part of buyer due diligence is to drive the new neighborhood and see how many homes are already being lived in by former buyers. The more there are, and the longer the neighborhood has been under development, the better the indications are.

Also, it's always advisable for potential buyers to stop and talk with residents in any neighborhood they're considering while being careful not to put too much importance on any particular resident with whom they speak.

But bottom line: a) buyers should not do anything that makes them uncomfortable, but b) remember that an experienced agent or broker can represent buyer interests exclusively and will be the buyer representative with the builder, and that agent or broker, if experienced and reliable, should be able to interfere with most potential problems when building a new home.

Klein Collins Drill Team to Inauguration

North Houston area Klein Collins High School's Junior ROTC drill team is on its way to partake in the Inaugural Parade in Washington D.C. on January 20th. They were in the top only 7% of applicants from all over the nation to be accepted for the high honor.

From The Houston Chronicle:

“We were very fortunate to be one of two groups selected for our state,” said retired Col. Daniel Crum, senior aerospace science instructor for Klein Collin’s Jr. ROTC program.

The team, which is part of the school’s Junior ROTC program, will be sending 36 students to the parade.

“It’s a privilege, and I also look at it as a responsibility,” Crum said. “We’re privileged to have some of America’s finest young men and women right here. It’s a responsibility because they represent what a lot of people don’t think we have: a bright future.”

What an historic and tremendous opportunity for the 36 kids who will attend. All of Houston should be proud.

For five consecutive years, the Flying Tigers have been named best Air Force Unit in the American Legion-Coca Cola National championship drill meet in Montgomery, Ala.

The team also has been a winner at the Air Force Academy’s National Invitation Drill Meet, which draws both high school and college drill teams.

Most recently, the team won its second Armed Sweepstakes Award in three years, and the Unarmed Sweepstakes Award at the event.

Crum attributes much of the team’s success to retired Master Sgt. Ray Watson, the drill team instructor. “He puts his whole heart and soul into it,” Crum said. “He’s out there with the kids every step of the way.”

Sounds like Klein Collins ROTC is accustomed to success and very high praise. Still, I think this takes the cake.

As an Alumnus of the Klein School District myself, congratulations team!

Everyone Thinks Real Estate Agents Are Stupid

Even other real estate agents.

Sometimes I don't know whether to laugh or cry at the crooked stuff we see in the market. The lowest of the low operate completely under the radar... until you're unfortunate enough to find yourself or your clients up against them (luckily we're well prepared to deal with them).

But others just like to spam email and prey on amateur, part-time, ill-informed, or just plain "dim" agents across the nation, many of whom really need a break right now.

One example from our Spam Box (75% of our email volume is spam), from recessionproofwebinars@gmail.com entitled "Big Costly Realtor Mistake" (I can already smell the money):

Hi Nicholas,
This drives me crazy. And I see it all the time.
And if you do this, it's costing you a freakin'
fortune in opportunities that's slipped through
your fingers.

You can cut to the chase and click here to hear me out:

https://www2.gotomeeting...

But, if not, here's what I'm so frustrated with:

People get a dent or two in their credit ... maybe
even a big one ... and they start to believe they
can't run with the pack.

Or they run out of money. And believe that they can't
do a thing as a Realtor or a real estate investor
without a decent bankroll.

I've heard it enough times to make me sick at heart:
"I can't do anything without enough for marketing,
or at least a small down payment. And my credit's
shot!"

So they take themselves out of the game. They get
in a downer. Especially if they get one or two
doors closed in their face.

They feel that they can't compete with other Realtors
and Investors who are finding a flipping pre-foreclosures
for big time money.

Pardon me while I blast through that pile of crap.

Here's the facts:

*You don't need to do ANY marketing if you do what
we've been doing. And it works. We get enough business
to turn it away or refer it out ... without a dime
in advertising

*Bankers, etc. almost EXPECT credit issues today. If
anything, they are realistic. And they've lowered
their demands considerably in this climate.

*That said, there are still a few overly conservative
money people with a board up their butt. (If you've got
a door slammed in your face, you've met one.) But for
every one of those, there are two more who will welcome
you in, IF you know the "secret code."

And that's one of the things we've been showing in our
fr'ee wildly popular webinar held this Saturday at 2 PM:

https://www2.gotomeeting...

Look, it don't mean Jack if your credit score is 300,
your car's being repo'd, your house is being auctioned,
and you're moving back home with mom and dad.

We've had students beyond count who've gotten moving,
without a nickle to their name, and credit that would
embarrass a 3rd world refugee.

You need to know this - they've used our secrets to start
generating an income fast.

And if you think you can't do that, like they are somehow
"special," then you sure as heck didn't meet them
when we did ;-)

It's actually kind of funny ... every time we see another
one start cranking out the sales, they become more than
students. They actually become fans.

My biggest job then becomes to make sure they know that
all it took was the right knowledge, and the ability for
THEM to decide to take action.

Decide to take action now, and see what they learned ...
it won't cost you a cent this Saturday at 2 PM EST:

https://www2.gotomeeting...

Sincerely,

Chris

P.S.: Have you seen the latest ShortSalesRiches fan? Check
it out after you register for the webinar!

http://www.youtube...

And here's the great part. If you click the register link, you get this message (I know, I know, I clicked, but I was curious and cautious):

Chris McLaughlin, the 6th largest broker in Florida, and Nathan Jurewicz, a street savvy real estate investor, will discuss how you can make more money now than ever before ... in this economy! And we'll show you why a recession is actually GOOD for real estate investors!

Really! Recessions are GOOD for real estate! [/snark]

It's sad, but I bet these guys make a small fortune off people down on their luck before they get forced out of the industry. Is it any wonder how real estate got so out of control with freaks like this still out looking for prey?

Merry Christmas!

On the Credit Crunch Deniers

Yesterday, Hale "Bonddad" Stewart takes the Minneapolis Fed to task for a paper issued recently that seemed to minimize the reality of the existing credit crunch. Stewart notes that the Boston Fed took the unusual move of issuing a rebuttal paper to its sister Fed -- very unusual. Stewart suspects the Minneapolis Fed paper is result of a) the astoundingly bungled TARP program ($700 billion "rescue"), and b) the anti-Wall St zeitgeist. Proponents of the Minneapolis argument suggest that the credit crisis, to some extent, might have been artificially created in order to trigger a sweet-heart government pay-out to Wall St banks. Don't worry -- Stewart puts this argument firmly to rest.

Some of Stewart's more interesting tidbits:

As we've recently discussed here, Treasury rates have fallen in some cases to 0% and even to negative rates. Says Stewart:

What the Minneapolis Fed report fails to take into account is inflation [is] one reason for investors to purchase Treasury bonds. Another is safety. Because US Treasury bonds are considered the safest in the world, people are buying them at a high [price], meaning Treasuries are yielding an incredibly low rate right now.

Some T-Bills have recently been issued at 0% interest! That in and of itself tells us the level of concern is abnormally high and a credit crunch is indeed going on - people don't want any return; they simply want their money back! In short, inflation expectations are one reason why people buy Treasury bonds. But another very important reason is safety. And investors are clearly concerned mostly with safety right now if they don't even want a return on their investment.

I love his next paragraph because it highlights another theme mentioned here before -- never look at just the "headline" numbers to draw conclusions about something, because it's the underlying character of the data that tells the most complete and insightful story. To wit:

The Bank of Boston adds other extremely credible explanations for the lack of decline in lending. They note that in a credit crunch companies rely more on their existing lines of credit as other sources of funds (the stock market, commercial paper and new lines of credit) dry up. In addition, banks are unable to securitize loans in the current environment and are therefore forced to keep more loans on their books, thereby increasing lending. The paper also shows that lower grade corporate issuers (single A) have seriously cut back on their commercial paper issuance, indicating that only the very best credit quality issuers are able to obtain short-term funding in the commercial paper market.

In short, because companies can no longer find success raising money from investors, they have to tap their "credit cards" for cash. This causes an increase therefore in loan balances (to substitute what otherwise would be investor cash and not loans in normal times), which causes a "headline" appearance that lending is increasing, which is a completely inaccurate read of what's really going on. New credit is not being issued, and banks can't sell their "old credit" loans so they have to keep them - because there is a crunch.

But then there's this tantalizing nugget regarding the currency issues we've discussed here, from a Stewart reader, Jonathryn:

Jonathryn said...
Okay, yes, very well. There's a bubble in Treasuries. Under what circumstances or in what manner could that bubble blow up? What would be the consequences?

If Paulson, Bernanke, and their successors tried to inflate the hell out of the currency to avoid deflation, would this not precipitate some sort of currency devaluation trade war with China? Isn't that why Paulson went over there?

December 19, 2008 11:40 AM

I love it. I've been arguing here in favor of inflationary measures to combat a deflationary environment. Inflation of the US dollar would cause our exports to become cheaper internationally, which could therefore increase the value of our exports and help combat the national debt -- thereby "giving back" some of the inflation and decline in dollar value dynamic.

Jonathryn points out that China, which is deeply dependent upon its exports to the US and other western nations, might economically "retaliate" by inflating its own currency to support its exports (it's been doing this to an extent for decades already, and we've let them). I don't know enough to say. But it's terribly interesting, terribly.

Are we looking at the prospect of a new "currency cold war"? If so, it could make the War on Terror look quaint.

[I'll get back to writing about real estate shortly.]

"A Whiff of Inflationary Grapeshot"

Paul Krugman, NY Times columnist, Professor of Economics at Princeton University, and winner of the 2008 Nobel Prize in Economics, posted an article a couple of hours ago reiterating the approach featured and advocated on this blog a number of times: that deflationary ("liquidity trap") situations require inflationary responses.

Dr. Krugman's post this morning goes into an interesting theoretical detail we should be watching out for -- namely, how the Fed and Treasury are not limited in their response to the crisis with 0% interest rates. They can do more by credibly promising inflation.

Actually, Greg [Mankiw, a Harvard economist] has arrived at the same conclusion I did more than a decade ago, when I tried to model the problems then facing Japan, and now facing us. As I pointed out back then, the essence of a liquidity trap is that the real interest rate is too high, even when the nominal rate is zero. So the theoretically “correct” answer, if you can swing it, is to create expected inflation, pushing the real rate down.

Professor Krugman was roundly criticized for his analysis in the 1990's, however he has of course been vindicated since. A perfect market example of his argument can be found right now in government bonds, "treasuries" -- the recent issue of bonds by the government actually have negative interest rates when traded in the open market between investors. This means investors are willing to guarantee they lose money invested in exchange for the perceived safeness of their investment. Thus, the implication is that the real rate is too high, thereby depressing the economy. (High interest rates depress the economy.)

What we should be most cautious and vigilant about right now are people who are arguing moralism over pragmatism. In other words, let's not cut our noses off to spite our face. Doing so in this case will cause more American children to go hungry, Americans to go without health care, and American families to lose their homes and/or their incomes, which generally undermines family dynamics. We're in the gray here.

Krugman warns:

[Moralists argued that] Japan was supposed to suffer for its sins, not inflate its way out of them. I wonder if similar proposals for the United States will receive the same reception.

If you've heard Tim Pawlenty lately and others seeking a false and cynical "moral high ground" on federal spending (on the heels of our bipartisan government doubling the national debt in the last 8 years, and at the same time governors like him and municipalities plan for more debt and more spending in the face of the crisis), we need to "remember Japan." Let's not make this crisis a decade-long phenomenon.

Sunday Followup: The Culture of Corruption

Here's another pathetic example of what fuels the current cynicism about "American" culture that has been undermining everything from our neighborhood lives to our national politics. It's not all because of politicians, political parties, or fatheads on Wall St:

An insurance company with a potential $25 million liability from a 2007 Houston office fire is claiming smoke that killed three people was "pollution" and surviving families shouldn't be compensated for their losses since the deaths were not caused directly by the actual flames.

And so here's the even more hideous part that makes my point for me. The name of that insurance company? Great American Insurance Company.

That's right, ISYN.

So does this make you think of our great nation, our "Great America"? Or does this make you think of cruel, inhumane, greedy corporate money-grubbers who are exploiting the foundational ideals of our truly great nation in order to get away with their unconscionable business practices?

Lest you think I make mountains of molehills, check out these choice 'graphs:

Seth Chandler, a University of Houston Law Center professor who teaches insurance law, said while the insurance company's maneuver wasn't out of bounds, it will test the limits of the law.

"This is pushing the boundaries of the absolute pollution exclusion," Chandler said. "We're going to have a battle between the literal language of the policy and the way people speak of pollution."

Really? The "insurance company's ["Great American's"] 'maneuver' wasn't out of bounds?" Really? So they're only "pushing the boundaries" of a technical contract exclusion? Just semantics? Ugh. This is why it hurts sometimes to think of what some people call "American."

Like I said Sunday, until this stuff gets exposed clearly for what it is, until we as a nation vilify the corrupt un-American perpetrators of these crimes against our nation, we will not have a sufficient base on which to stand in order to turn things around culturally and economically. Sickening. I think we all know who caused pollution in this story.

From the most popular reader comments online:

miesque wrote:
...The name of this insurance company, Great American, is a insult to America. They should call themselves "Traitors Insurance Company," and the management should be thrown in jail. If the courts let them get away with this swindle, then there is NO JUSTICE IN AMERICA anymore!
12/17/2008 1:15:50 AM

joseplummer wrote:
unbelievable. I'm not sure what the latest statistic is, but it is a well known fact that MOST deaths in a fire are from smoke inhalation. Even I know that.
12/17/2008 1:26:25 AM

bullwhip wrote:
What the ...? They need to rename themselves. It is against the law reguarding truth in advertising. #1. they are far from great. #2. They are unAmerican...
12/17/2008 1:10:36 AM

getrealfollks wrote:
All insurance companies pull this... When insurance was started, the concept was that you paid a premium and they took on the chance that something might happen, in which case they would lose and pay off. Now the concept is that they charge high premiums and they exclude any situation where they stand a chance of losing... Insurance was meant to be a gamble. sometimes they win, sometimes, they lose. NOT anymore. The courts need to slap this company with a fine...
12/17/2008 2:59:46 AM

And my personal favorite because of its ending:

johncoby wrote:
Please people, what do you expect? you live in Texas where the state is run by the insurance industry.

I mean seriously, have you even notice how much you are paying for insurance? And that Texas has the highest rates in the nation? And that our supreme court has ruled in their favor 85% of the time?

And you are SHOCKED that this is happening? Gosh.

I wish you guys would for once take this shock and awe into the voting booth.
12/17/2008 5:35:03 AM

We still live in a democracy, and as far as I can tell, the ultimate check on corruption -- and those who allow it -- are good common-sense citizens in elections. We don't get change until and unless we demand it. One of America's most beautiful attributes, however, is that we can achieve this by stepping no farther than into the voting booth. We're America. Unlike other nations, we control our own destiny. It's why we're the land of the free, and democracy is why we're the home of the brave.

If You Can Boil A Frog, Can You Freeze One?

It is a truism that frogs left in lukewarm water on a stove top with slowly rising heat will remain in the water until they eventually boil to death. (This rings true because frogs are cold-blooded, meaning that their blood adjusts to varying temperatures, unlike warm-blooded mammals like humans.) It appears from history that this can actually happen, however the rate of increase was .002 degrees Celsius per second, which left the frog dead in 2 1/2 hours. However the experiment failed at just .019 Celsius per second.

But it's a truism because it rings true in experience of human behavior at a transcendent level. From Wikipedia:

Al Gore uses the analogy in his presentations and the movie An Inconvenient Truth to describe people's ignorance towards the issue of global warming. It is extremely common in books about business, economics, and marketing to illustrate the idea that change needs to be gradual if it is to be accepted, and as a warning against being slowly "boiled" in one's job.

Well, I was just listening to a major cable station as I read email and was struck by a number of commercials that resembled those that used to only air in the middle of night -- the cheap cheap stuff that nobody ever needed or ever will that makes you think, "Darnit why didn't I think of that," at 3AM in the morning, but makes you think, "How pathetic are people that actually buy that junk, " the next afternoon.

Well those products are now appearing -- albeit in smaller segments -- in prime time major cable, which used to be out of reach to low-budget plastic and metal electrical widgets.

And so it hit me: if you can boil a frog by gradually warming the water temperature, can you freeze a frog by gradually lowering the water temperature?

What struck me was this: The economy slows not in one day or in one month, sometimes it slows over years. To wit, we have been in an economic slowdown, even in an official recession for over an entire year now. How much of our economic slump will arrive so slowly that while we're aware of hard times, we'll completely miss the many signs of the slowdown that would have been unthinkable even a few years ago?

Ironically, this is an optimistic view. The implications if true are that the worsening economy, stretched out over sufficient time, will lessen the full burden of economic change and deterioration.

It's just a theory. But now I've burned my dinner while blogging and need to figure something else out. Apparently broccoli burns no matter how slowly you heat it. Maybe I do need one of Ron Popeil's amazing min-chicken counter-top rotisseries.

More on Why Your Home Equity is Cratered: The Culture of Corruption

Some on the conservative right don't appreciate Frank Rich's heavy well-deserved criticism of the Bush Administration over the years, however this morning he is showcasing his equal-opportunity criticism, which we should see more and more as we transition into a new administration.

Parts of this morning's column is a helpful read for any lay person trying to understand why their home equity has cratered. First and foremost, I blame the new American culture of corruption. And until it is stopped, and I don't know how yet, or turned around, we won't be seeing the economic turn-around that America needs. And so we turn perhaps to America's leading cultural critic:

Warren Buffett’s warning in 2003 that derivatives were “financial weapons of mass destruction” was politely ignored. Much larger companies than Enron figured out how to place even bigger and more impenetrable gambles on derivatives, all the while piling up unseen debt. They built castles of air on a far grander scale than Kenny Boy could have imagined, doing so with sheer stupidity and cavalier, greed-fueled carelessness rather than fraud.

"[C]arelessness rather than fraud." Interesting because so many would immediately point to fraud as a major driver of our economic morass. But Rich is pointing to "greed-fueled carelessness." That's striking because it's worse than fraud. It implies a systemic lack of basic human empathy, and that is sociopathic. Has our culture of corruption fallen that far? Scary.

The most stupendous example as measured in dollars is Citigroup, now the recipient of potentially the biggest taxpayer bailout to date. The price tag could be some $300 billion — 20 times the proposed first installment of the scuttled Detroit bailout. Citigroup’s toxic derivatives, often tied to subprime mortgages, metastasized without appearing on the balance sheet. Both the company’s former chief executive, Charles O. Prince III, and his senior adviser, Robert Rubin, the former Clinton Treasury secretary, have said they didn’t know the size of the worthless holdings until they’d spiraled into the tens of billions of dollars.

Notice the denial of any responsibility whatsoever on the part of these top executives. (Earlier in the column Rich makes the same observation of Bush.) It seems now the standard MO for America's executives to deny all personal responsibility for failure. How American is that? If you say "very," then you're talking recent history and not the American ideal.

Once again, regulators slept. Once again, credit-rating agencies, typified this time by Moody’s, kept giving a thumbs-up to worthless paper until it was too late. There was just so much easy money to be made, and no one wanted to be left out. As Michael Lewis concludes in his brilliant account of “the end” of Wall Street in Portfolio magazine: “Something for nothing. It never loses its charm.”

But if all bubbles and panics are alike, this one, the worst since the Great Depression, also carried the DNA of our own time. Enron had been a Citigroup client. In a now-forgotten footnote to that scandal, Rubin was discovered to have made a phone call to a former colleague in the Treasury Department to float the idea of asking credit-rating agencies to delay downgrading Enron’s debt. This inappropriate lobbying never went anywhere, but Rubin neither apologized nor learned any lessons. “I can see why that call might be questioned,” he wrote in his 2003 memoir, “but I would make it again.” He would say the same this year about his performance at Citigroup during its collapse.

The Republican side of the same tarnished coin is Phil Gramm, the former senator from Texas. Like Rubin, he helped push through banking deregulation when in government in the 1990s, then cashed in on the relaxed rules by joining the banking industry once he left Washington. Gramm is at UBS, which also binged on credit-default swaps and is now receiving a $60 billion bailout from the Swiss government.

We have discussed the 2000 Commodities Futures Modernization Act, which legalized gambling on Wall Street, but we've said less about the equally destructive 1999 repeal of the depression-era "Glass-Steagal" act called the "Gramm-Leach-Bliley" act, which was enacted with Democratic support, championed by Gramm, and like the CFMA in 2000, was signed into law by a Democratic president.

It’s a sad snapshot of our century’s establishment that Rubin has been an economic adviser to Barack Obama and Gramm to John McCain. And that both captains of finance remain unapologetic, unaccountable and still at their banks, which have each lost more than 70 percent of their shareholders’ value this year and have collectively announced more than 90,000 layoffs so far.

The Times calls its chilling investigative series on the financial failures “The Reckoning,” but the reckoning is largely for the rest of us — taxpayers, shareholders, the countless laid-off employees — not the corporate and political leaders who led us into the quagmire. It’s a replay of the Iraq equation...

We can't just say that now is not the time for accountability. There has never been a more important time. The excesses that led to the tech bubble repeated themselves in the real estate bubble, and the corruption began in the 1990's continued unabated to today, even accelerating under the protection and encouragement of a corrupt and ignorant congress.

If you want to understand why your home equity is taking a hit, you can't fully understand without also understanding the crisis that is the modern American culture of corruption. And that culture has omni-partisan enablers at its roots.

And the Losers Are.....

This morning brings the frightening news that the U.S. Senate defeated the auto "rescue" bill passed handily by the House and negotiated with the White House. Make no mistake, this was pure political posturing on multiple levels.

And let's be clear also that Washington's politicians are gambling with the jobs of an estimated three million American middle class JOBS. And we've already discussed that there will be no economic turn-around without a turn-around in J-O-B-S. So what gives?

First, the pure politicking. Senate Republicans are taking credit for defeating the bill, and Minority Leader Mitch McConnell was quoted this morning on The Today Show blaming the unions' refusal to lower their wages by about $4/hr (from $27 to $23) immediately as a condition for the loan. Let's take a moment to appreciate how hypocritical and destructive this posturing really is.

American auto unions, despite their politics, are all about American working middle-class jobs. Period. And that is all you need to know in this current economic crisis. That means those jobs must be protected. Period. Period. And that doesn't include the other 2.5 million American jobs threatened by Congress's abject failure to lead.

Seriously, is congress going to destroy, or even threaten right now, 3 million jobs over $4/hour after the obsceneties of greed being subsidized by congress already? (Think AIG.) Really?

Furthermore, surely I'm not the only one who sees the hypocrisy of "small government" Republicans in the Senate trying to micro-manage private enterprises whose biggest political sin was to get "too big to fail," but who have been aided and abetted by congress for decades. This is crass partisan opportunism, and I don't care who does it, it is unAmerican and it is wrong, and it is a threat to us all.

Now is not the time to put the American auto manufacturers under a political microscope to try and diagnose and force change that has not occurred in the last 30 years. Now we are in an overall economic crisis, and we need every job we can keep. It is far more efficient to keep jobs than to create new ones. We are shooting ourselves in the thigh if we let any industry in America fail right now. Once the crisis is under control, then I have no problems with Congress revisiting its regulatory posture in any industry it chooses.

Should unions be scrutinized? Yes. Are American unions part of the car companies' problems? Probably. But they're not all of it. And to think that forcing a drastic wage cut -- in this economic crisis -- is somehow smart politics or smart business, without forcing a comprehensive change plan that is impossible to create in any reasonable amount of time in this crisis (GM says it may be out of cash by the end of the month), it is just the height of political stupidity or opportunism or both. And it disgusts me, not as a partisan, but as an American.

Without a turnaround in jobs, there will be no turnaround in the economy, and that includes housing.

The ironic part of this is that the failure of the bill may put political pressure for the president to use TARP funds (the $750 billion authorized in October with oversight required but still not yet enacted) for the auto companies. With AIG executives fighting for multi-million dollar "retention" incentives (aka "bonuses") all with taxpayer money, I don't see the problem giving the car companies $15 billion of the $750 billion for a bridge loan to keep them in business and 3 million Americans at work. And ironically, a Republican president may use those funds to cover the failure of congress to respond, over the objections of Republican senators, which will result in virtually no restrictions at all on the auto-makers in exchange for the government funds.

And frankly, that's the correct way to go..... if Wall St needed $750 billion with no questions asked and no restrictions, as the Treasury argued in September, then why in the world does it not make sense for the auto-makers to need $15 billion to maintain America's manufacturing base that underpins 3 million American jobs? Bottom line: the government can and should put the auto-makers under a microscope when the economy has stabilized again. It is the failure of congress that they haven't cared about American manufacturing for 30 years now. And now is not the time to put 3 million American jobs in that political crucible.

To even posture that it is that time is obscene, unAmerican, crass, opportunistic, partisan, and downright spiteful toward the dwindling and suffering American middle class.

If the auto-makers fail from political malpractice and economic treason, nobody should be surprised when Wall Street is flooded with 3 million unemployed Americans bearing pitchforks and torches.

"If Your Income Goes Up, Will You Watch TV in the Bathroom?"

Author of the popular book Freakonomics Daniel Hamermesh writes a regular column for The New York Times online featuring his witty log of counterintuitive economic observations.

In his book, for instance, he tells of a daycare center that, when faced with parents habitually late for picking up their kids, implemented a "punishment" fee policy to keep parents on time. Instead, however, parent pick-up tardiness actually increased, and the authors speculate that the "fee" actually served as an incentive for parents to be late because a) it ridded them of any guilt they felt for being late (since they were paying the fee), and b) the fee wasn't high enough, evidently.

Well this weekend Hamermesh recounted a recent trip to a nice hotel where he was stunned to find television screens in front of the urinals in the bathroom. I'm frankly stunned that he was stunned. Anyway, he mused in his column that perhaps as personal income goes up, so does a person's likelihood of installing media in their bathroom.

Color me unimpressed. I don't think it has to do with incomes rising so much as it has to do with technology prices falling. It's just not expensive anymore to put a television or any media anywhere one wants. The city of Shenendoah outside The Woodlands north of Houston has free Wi-Fi for all its residents. Soon they won't be exceptional for that at all.

Home builders now wire homes for surround sound -- basic homes -- because it costs them next to nothing. Production builders in recent years have been building niches for televisions in master bathrooms regularly, complete with cable hook-ups. A client recently told me of a friend in an older home who installed a television screen behind their master bathroom mirror (it shows through when the TV is on).

This isn't because people are getting rich. It's because technology is becoming ever more affordable. Cell phones used to be exotic, the idea of PC's on every desk used to be outrageous, and now we're entering an age where the desktop itself may go extinct and all software will be hosted and operated on the Internet. Check out live.com or google.com -- it's already started.

The idea is that technology is not an amenity like a swimming pool or wine cellar to be found in exclusive or more expensive homes. Instead, technology is like an amenity that starts out exclusive but then becomes a standard in short order. When my 2001 car was brand new, its navigation system was pioneering. I'm still grateful to have it, but nowadays it's far behind navigation systems that one can get inexpensively in a cell phone.

So rich or not, the day is fast coming when we'll all be watching television and surfing the Internet in our bathrooms -- and frankly anywhere else we can catch a signal. It's not a sign of wealth. It's a sign of the times.

Bonddad: Now is the Time to Spend

If you are not already familiar with famed online financial commentator Hale "Bonddad" Stewart, I'm glad to introduce you. Hale Stewart is a Houstonian and bond trader. He is also an attorney specializing in estate, international tax, M&A and business issues. He is a frequently recommended luminary for lay people at Daily Kos, which features his latest post in support of the Keynesian "spend now and spend big" arguments such as those featured on this blog.

The technical arguments against spending are obvious and reasonable under normal circumstances. However these are anything but normal times. Stewart takes a moment to address why threading this needle has a better chance of working at this point in time than other options (such as Hooverism).

The thrust of his arguments are this:

1. The US Dollar has, after a 20% run up in recent months, room to give up value in the wake of new spending;
2. 10-Year Treasury interest rates are at multi-year lows, indicating a continued strong demand for US debt; and
3. Nothing is certain and there are no sure-fire solutions

I couldn't agree more, except I think he's too cautionary, as if we have any other option. Like I've said previously, when a nation is in a deflationary spiral, the only sensible action is to apply inflationary pressures. If the inflationary demons start to rear their little heads, then deflationary controls must be put in place. Rinse and repeat until things stabilize. This is no time for nibbling around the edges or quibbling around theory.

Another Bottom? Not In Housing & Not Without Housing.

Oh my. Just Friday night the financial media started schooling Wall St on its trading day lunacy. A few items the markets seemed to ignore or discard without reason:

On Thursday, the U.S. Labor Department is likely to say first-time claims for unemployment benefits held above the 500,000 level for a fourth straight week. Then on Friday, the Commerce Department is expected to report that retail sales fell in November for the fifth month in a row, the longest streak of monthly declines since the government started tracking the data in 1992.

So who really thinks that Wall St knows something that the general public doesn't? No, we can be assured by now that it's truly the other way around. Now how's this to build certainty and confidence, from the same article:

"I keep hearing conference call after conference call -- we can't provide any more forecasts," Kuby said. "You're going to hear more of them say it's worse than we thought or we can't stick by our guidance anymore."

Fun. But that doesn't stop the die-hard bulls from declaring yet another "bottom" in sight. Why? Because the news is so so very bad. By their logic, when the news gets unbelievably bad, then there must be a turnaround near. After all, things always turn around after things go as low as they're going to go, right? It's like a good friend recently told me, "Funny how you always find your keys in the last place you look."

File this under "YHGTBSM":

Few expect the results to be heartening, although after Wall Street shrugged off Friday's dismal employment report, some are starting to sense that the market is beginning to etch out a bottom.

"The market has this horrible news this morning, it didn't collapse," Kuby said.

No. Just no. There will be no bottom if there is no bottom in housing, and there is no bottom in housing. The following article was posted about an hour before the market closed in a froth on Friday:

Late mortgage payments and foreclosures hit record

Late mortgage payments and the rate of home loans in foreclosure rose to record highs in the third quarter, threatening to escalate as the recession erases jobs and further strains homeowners, the Mortgage Bankers Association said on Friday.

Moreover, the number of foreclosures would have been higher if several states and others had not implemented moratoriums on foreclosures... which will expire in coming months. Does this sound like a bottom? Not likely.

The number of loans entering the foreclosure process would have been even higher without various programs halting them in favor of loan modifications.

And of course at the heart of all this? As we've discussed before: J-O-B-S. So please keep shoveling and tell me if you can find the pony, er... bottom, in here:

A spiking unemployment rate in the midst of what many economists fear to be a deep recession, however, points to rising mortgage delinquency and foreclosure rates next year, the trade group said.

"We haven't gone into past recessions with a housing market in as bad of a shape," Jay Brinkmann, chief economist and senior vice president for research and economics, told Reuters in an interview.

Okay. But there has to be a pony in there somewhere...

"The bigger issue is going to be the underlying economy," Brinkmann said. "As much as any of the overbuilding issues, poor lending or speculative issues, as these job losses spread to some of the rest of the economy ... That certainly doesn't speak to a foreclosure rate coming down."

Um. Okay, maybe not. I think we're back to living in a world where up is up again, and unfortunately, down is down.

Oh, About That Deficit...

Some people think I've become too cavalier about the nation's budget deficits and overall debt in recent posts. Anyone who knows me knows that I'm one of the most fervent deficit hawks that exist. However in recent months it has become clear to me that we have no choice as a nation but to spend whatever is necessary to restart the economy, or we risk losing a whole lot more than we stand to spend and invest.

Warren Buffett and other luminaries are in clear agreement. Only the US government has the strength to spend what is needed to jump start the economy back to sustainable growth. I look at it this way: when you're in a deflationary spiral, you have to react by applying inflationary pressures.

Inflationary pressures mean: lower interest rates, higher spending. Period. Some on the right have taken to calling Ben Bernanke "Helicopter Ben." That's a fair nickname, I think, because right now it does appear that Bernanke and Treasury are dropping tonnes of cash from helicopters over the American landscape. Actually, it's not a terrible idea. Instead, though, it's more like they're building pipelines to pump that cash directly into banks, and frankly to little effect. (Spending for spending sake also makes no sense. Investment is the only best spending strategy.)

But the bottom line, no matter what we do, is that as long as government spending is backed by loans, then the government is not "printing money." This is how the U.S. is avoiding the inflationary effects of massively higher spending -- by adding that spending to the national debt instead of just "printing the money," which would dilute the dollar and could lead to inflation. However ironically, inflation is exactly what we need, which is why this approach is so wrong-headed and to date so ineffective.

So right now, the untold story is that the U.S. government is betting, along with our international investors who buy our U.S. debt in the form of government bonds, that all of today's massive spending will be repaid with interest at some point in the future when the economy turns around. Do you have faith in that? As long as the world does, we're okay. But if the world starts to doubt our ability to pay off probably $15-18 trillion in national debt, then nobody will want to buy the government bonds anymore, which means the government will have to raise the interest rates offered to its bond investors, which will drive up interest rates to our economic peril. Or, conversely, the government can throw up its hands and just print whatever money it needs to pay off its debts, but that will have equal peril in the form of massive over-inflation. But that's not the concern today.

Right now, to head off falling prices and falling credit as the values of American assets fall, the government is spending, spending, spending by borrowing, borrowing, borrowing -- and I think they are making a fundamental mistake by using all loans to get around inflation. The whole idea right now should be to put inflation into the market. Once the market regains traction and the pendulum swings, then the Fed and Treasury can tighten up policy and reign in the inflation. This is just as clear as night is to day.

Unless you're an economics PhD egg-head or Wall St banker.

If you know nothing else about the condition of the economy and its impact on increasing demand for housing, know this: nothing will happen until the masses of Americans are confident in their jobs. J-O-B-S. As long as Americans are insecure about their jobs, be they manufacturing, service, or civil, Americans will not feel comfortable making major purchases and will not have confidence in their long term ability to sustain major purchases -- such as homes.

So watch the unemployment numbers, both nationally and especially locally. Regardless of what's going on on Wall Street, without confidence in our jobs as Americans, we cannot and will not have the confidence required to do business with one another -- and that includes buying and selling each other's homes.

The Dumbest Day in the Dow...

Ever?

Has there ever been a more important story than today's news about September job losses being more than previously reported, October job losses being more than previously reported, and now November job losses at 533,000, the worst month since this month in 1974? At least in modern times?

Wall St could care less. In fact, it added +259 points to the Dow today, over 3% in a day, today, the day we learned that America lost over 1.25 MILLION JOBS in the last 3 months.

Unbefreakinlievable.

I used to think that the professionals on Wall St, who do this stuff every day and have billions of dollars under management, probably knew more than I do about markets, stocks, and macro outlooks. Then the subprime crisis hit last year, and the truth started coming out. I don't know why I made such a bad assumption, but now... I... know... better. And so should we all.

This article from Reuters says that investors cited a decline in gas prices for such optimism on a day like today, because consumers will find so much more money in their pockets and so will boost spending. I hope I'm proven wrong, but for now I am stunned, when I thought Wall St could never stun me again. Unbelievable. Let's dissect this "logic": a) gas prices move lower, because b) consumer demand has been eviscerated by a deteriorating job market and lower spending, therefore c) consumers will start spending more and the economy will benefit. What?

If there are no jobs, there is nothing to spend. If there is no credit, it's worse. If all the American economy produced were enough jobs to keep up with the growth of our population, we would need 11 million more jobs today than we have, just to keep pace.

These people on Wall St think there is a Santa Claus, a Tooth Fairy, and an Easter Bunny all on a select committee to save the economy with their magical powers. They're like junkies in withdrawal, needing one more fix of irrational exuberance. They think Obama (Santa?) is suddenly going to come to their rescue, as if the damage done isn't really as bad as it is, as if the whole solution to our problem only requires a simple plan, but every person in the world just hasn't seen it yet -- except Obama's inner circle? I have tremendous respect for the capabilities of the President-Elect and his new team, and I even have guarded optimism about it, but today's market action is sad and frightening for what it reveals about the big Wall St players, even today. They still do not get it. And that is frankly breathtaking.

That doesn't mean that you and I have to fall into the same trap. Look folks, the economy is in the tank. Yes, it will turn around, but not next month, and probably not next year.

This kind of infantile fantasy on display today on Wall St is shameful, pathetic, and frightening. We are Americans. And if we have learned nothing else in this crisis, it's that we need now to grow up and sober up, and stop living on the empty fantasies and promises peddled by Wall St.

OK, Today is Scary

Unemployment rose to an "official" level of 6.7% today as DOL reports 533,000 jobs lost just last month. This is the worst jobs report in 34 years, since 1974. Merry Christmas indeed.

The name of the game in any recovery is not the Dow, it is not financial stocks, it is not even rising house prices (which are a lagging indicator).

By far the most important leading indicator of a possible turnaround in the overall economy is J-O-B-S. Without jobs, and without confidence in jobs and employment overall, there can be no confidence in the economy, no confidence in one's personal income, and no confidence therefore in new personal or business spending. And that means no quick turnaround.

This means houses will continue to be difficult to sell, although by no means impossible.

On CNBC just now, a trader referred to the jobs report as a "lagging indicator." This may be a technical point, but for most people not on the floor in Chicago or New York, the employment statistics are a tremendous insight into the true state of the economy and the longer term trend.

And when we are measuring economic statistics by the decades in terms of new lows, and not month-to-month, the jobs reports becomes an important forward indicator.

Employers do not like to get rid of experienced employees out of short term pessimism. When employers let employees go, you can be assured that executives believe the company will not be replacing those jobs in the short-term.

The only "silver lining" (I know, I know...) is that oil prices just fell over $1 per barrel, to lows not seen since 2004. It's not 1984, but it's relief. But of course, if you don't have a job to commute to, the price of gas becomes highly irrelevant. Who wouldn't pay 3x per gallon just to keep their job?

And who knew six months ago that it would feel gloomy to fill up my V8 with premium gas under $2 per gallon?

The only true good news is that Europe is in worse shape than we are, which means that although we're not doing well, investors should not be pulling money out of the U.S. any time soon. If another region in the world starts to pull away ahead of the U.S., then... well let's not talk about it unless we have to. So far, so "good."

Indeed.

What I Want to Know Is...

Here's what I want to know: Why in the world is congress giving American car makers such a hard time over a $35 billion loan, when the government has already allocated about $1 trillion for financial companies including American banks?

For instance, about $20 billion last week was allocated to Citigroup to prevent the failure of that massive bank. There was no public debate, no congressional approval... just an announcement. And make no mistake, Wall Street rallied, and it was the right thing for the government to do for the sake of America, and not for Citigroup's executives (jail them for all I care).

So why are the American car companies being publicly flogged for requesting a combined $35 billion -- less than 5% of the federal bailout law -- to get through this historical economic crisis?

Well, here's part of the answer, I think. Why does America only have 3 car companies to begin with, and all of them headquartered in the same failed midwestern city of Detroit? Isn't that odd for these modern times? There are no auto headquarters in California, or Texas, or Ohio, or Missouri? I could make a strong case for each.

If the Japanese and Koreans are going to force our industry out of business, and if we're going to let them do so, and largely with manufacturing plants even on our own soil, then why in the world can't America produce American competitors to beat the Japanese and Koreans? Maybe there's not enough competition within America and between American firms. Why would that be?

The thrust of the problem, I think, is that America has become hostile, even prejudiced, against American manufacturing. That's why it's held on in the city of Detroit, no innovation, no expansion, just old... thinking... and old... organizations.

Our primary concern as Americans right now needs to be American jobs. Without confidence in our jobs, America can never recover from this economic morass. Frankly, I don't know anyone right now who does not fear their job security at some level or another.

A rule of thumb is that a tenth of a percent of the unemployment rate equals about 100,000 jobs. Analysts suggest that a failure of "Detroit" could lead to a total loss of 2 million American jobs. That means unemployment would skyrocket by 2 entire points -- to maybe 8% (bear in mind that new calculation methods of unemployment make 8% equal to maybe twice that several decades ago).

So why is there a debate? I think Americans are tired of being ashamed of their auto industry. The truth is that Detroit has been making good cars in recent years, actually. Most people blame the unions. However if the unions did not exist at all, then Detroit would have to face the fact that their "failures" are really due to executive failures and a collective lack of imagination in design and understanding of market demand more than anything. To wit: GM and Ford decided just a couple of years ago that their best strategy was to create the big gas guzzling line of bland SUV's that had been so profitable for them. (There's not much room for a profit margin in a small, entry-level car.) Well, that was just the wrong decision and terribly short-sighted.

Global players such as Japanese and Korean firms have long marketed to European and Asian markets, of course, where highly dense metro areas require small, small cars. Even Mercedes produces the "Smart" car that is exotic in these parts but common on the streets of any major European city.

Maybe we need more than just 3 American auto companies. Maybe we need more competition. Maybe a California start-up will take a chunk of the market with advanced hybrid and electric technologies. Whatever happens, now is a time not for destroying our auto industry, but for paving the way for serious American innovation. History shows that when America innovates, the world has no choice but to follow.

I think it's time that America realizes that it's just as serious and worthy to have leading manufacturing sectors as it is to have leading technology and professional service sectors.

And congress should stop playing games with millions of jobs that underpin America's challenged middle class.

Best Explanation of the Crisis We Face

While I know DailyKos has become somewhat of a progressive bogeyman among the partisan right, not entirely unreasonably, some of its editors (authorized regular columnists) have extraordinary credentials who I find worth the read despite the partisan orientation. Frankly, the real polemics can be found in the largely unregulated "Diaries" posted by registered users in the right column. That can take a lot of sifting to find quality content.

That aside, on a technical basis both in accuracy and writing skill, this is the best post I've seen yet explaining the current state of the crisis that has been unfolding over a year now. It's critical to understand that what started as a "subprime mortgage" crisis last year has now expanded to reveal certain "shadow" financial instruments that Warren Buffett himself famously called "Financial Weapons of Mass Destruction" in a 2002 memo to his shareholders. The post I'm highlighting was written by a blogger named "Devilstower," however don't be fooled: this is no teenager proverbially blogging from his mother's basement in his pajamas.

In his November 16th post, the author reviews the biggest threat to our financial system currently, and that's the fallout over the failure of the "Credit Default Swap," a derivative that is essentially unregulated "insurance" at best, and worse, outright "gambling with no bookie." From his intro:

In essence, credit default swaps are (or were) nothing but insurance policies for loans. And yet in 2007 the total number of credit default swaps traded far exceeded the value of all loans. In fact, it may have touched $70 trillion dollars, which puts it above the gross domestic product of the entire planet.

Yes, $70 TRILLION. That doesn't mean the money exists, it just represents the value of all the "bets" outstanding. It's easy to see now what Buffett was talking about way back in 2002 when the government, regulators, and certainly investors had no clue what these things were really about.

If a person goes bankrupt and cannot pay back a loan, and the person insuring the loan for the lender cannot pay the insurance payout that was obligated, then the lender must bear the entire cost of the loan failure. In turn, the lender either a) cannot lend more money because of the loss it must now cover, or b) the lender may also be an insurer on another failed loan to another institution and now itself cannot pay out. This is over-simplified, but it's easy to see how multiple failures like this set off an extraordinarily dangerous chain reaction of radioactive proportions. That is what the nation is dealing with in large part right now.

I do not believe that now is not the time to begin diagnosing how we got into this mess. If we wait until we are out of this mess, history shows we are far less likely to bother with an accurate diagnosis that could lead to effective future protections. 2008 Nobel winner Krugman:

Why did almost everyone believe in the omnipotence of the Federal Reserve when its counterpart, the Bank of Japan, spent a decade trying and failing to jump-start a stalled economy?

One answer ... is that nobody likes a party pooper. While the housing bubble was still inflating, lenders[, investment banks, and money managers] were making lots of money... Who wanted to hear from dismal economists warning that the whole thing was, in effect, a giant Ponzi scheme?

There’s also another reason the economic policy establishment failed to see the current crisis coming. ... [T]he crisis of 1997-98... showed that the modern financial system, with its deregulated markets, highly leveraged players and global capital flows, was becoming dangerously fragile. But when the crisis abated, the order of the day was triumphalism, not soul-searching.

Time magazine famously named Mr. Greenspan, Robert Rubin and Lawrence Summers “The Committee to Save the World”... who “prevented a global meltdown.” In effect, everyone declared ... victory..., while forgetting to ask how we got so close to the brink in the first place.

So now, following is Devilstower's very important point to build on Krugman: the current crisis can largely be traced back to a piece of legislation passed in 2000 and signed into law by President Clinton with bipartisan support, clearly before anyone except a few really understood what they were doing:

In 2000 Republican economic hero, Phil Gramm, with the assistance of a small legion of lobbyists [and Democrats], created the Commodity Futures Modernization Act [signed into law by then President Clinton]. Along with ushering in the Enron disaster, this bill provided the one thing that credit default swaps needed to grow and mutate -- invisibility. Thanks to the CFMA, not only were credit default swaps unregulated, they were impossible to observe directly. Like black holes in deep space, you could only spot swaps by looking at how other things acted nearby.

So, now you've made a loan to someone, and you're worried about it. I want to offer you a credit default swap so I can collect the fee. Trouble is, I don't have the assets to cover your loan. So how can I... hold on, credit default swaps are so unregulated that no one says I actually have to be able to deliver on my promise. Hey, over here! Have I got a swap for you, and it's a bargain.

So now the CDS is a means of moving the risk, but the risk is still as high (or higher, since the original lender might have been better able to cover the loss). In fact, credit default swaps have gone from being a risk mitigator, to a risk magnifier.

A risk magnifier indeed. And most of this, along with most of the activity of private hedge funds (extraordinarily aggressive investment funds using massive amounts of loans with very little cash reserves), went completely unregulated and unmonitored. So a big part of the current problem is that nobody can really figure out just how much of this stuff is really out there in the market and in what form.

Contrast this with the heavy regulation, for the public and investor good, required of public securities overseen by the SEC and also required of insurance products. The regulatory requirements for these classic instruments are legion, but they are designed to increase the availability and accuracy of information in the marketplace so that both investors and regulators can make the most informed decisions about their market choices.

It should go without saying that $70 trillion in undisclosed "positions" (bets) in the marketplace is not immaterial to the decisions that investors and regulators were making in the last 8 years before this crisis. But congress, through the 2000 CFMA, let all of this go under the radar, unregistered, unregulated.

Here's the crux of how things went so wrong and got so out of control. Again from Devilstower:

Swaps are unregulated. No one says I have to have enough resources to cover the swap, and even better, no one says I have to offer the swap to the person who actually made the loan! Hey buddy, see that loan over there? You may think it's iffy, but I think it'll hold up. In fact, I'm so sure it will, I'll sell you a credit default swap on it that pays off if it fails. You don't make the loan, you don't have to pay off on the loan, you don't have anything to do with the loan. You just pay me the fee. And if that guy loses his money, you collect. How sweet is that!

This mutation is enormous(...) At this point, credit default swaps [became] completely divorced from the original function. A single loan can be covered by multiple swaps. There's a complicated fiscal term for this. It's called gambling, and at this stage, that's all that remains of those little "insurance" policies. They no longer protect anyone from anything, they just offer a chance to place enormous overlapping side bets on everything.

So there it is. An instrument sold to congressional accomplices on both sides of the aisle and an unknowing, unsuspecting market as a "risk mitigator" actually mushroomed in a cloud of unregulated, invisible massive $70 TRILLION side bets with no bookie.

Financial weapons of mass destruction indeed.

The Dynamics of Real Estate Pricing

There are far too many dynamics that affect real estate pricing to discuss in one post of course. But one important one, time and again that we see, relates to price adjustments, how to make them, and when to make them.

Our experience shows that price adjustments are most effective:

• early in the listing period; in other words, get the price right up front and price for the market you are in, not for the market you want to be in, and

• in fewer, more dramatic increments to get a "bang" in the market, especially since any interested parties will be watching the property for significant movement, and also it takes a dramatic incremental move to expose the property to new price-point buyers in the market. $5,000 increments over time will accomplish little more than a slow ineffective leak in the price with little to no impact... resulting in a lower sale price and longer time on market.

This is of particular interest right now because of parallels with the larger discussion about the best size and scope of government responses to a slowing economy. While it is natural and correct to be concerned about future deficits, most economists seem to agree at this point that doing too little right now is a far greater risk than doing too much.

From the recent Nobel-winning economist Professor Paul Krugman this
morning:

The idea that tight fiscal policy when the economy is depressed actually reduces private investment isn’t just a hypothetical argument: it’s exactly what happened in two important episodes in history.

The first took place in 1937, when Franklin Roosevelt mistakenly heeded the advice of his own era’s deficit worriers. He sharply reduced government spending, among other things cutting the Works Progress Administration in half, and also raised taxes. The result was a severe recession, and a steep fall in private investment.

The second episode took place 60 years later, in Japan. In 1996-97 the Japanese government tried to balance its budget, cutting spending and raising taxes. And again the recession that followed led to a steep fall in private investment.

This is remarkably parallel on a macro level to what happens when a property is on the real estate market. Incremental adjustments are fine when the market is on solid footing - sometimes small moves can be effective -- in tight markets. But as Joe Kernen on CNBC Squawk Box this morning keeps mentioning a very instructive quote from Barrons over the weekend: "Now is not the time for the Fed to act like a blushing virgin." Adds Kernen, "This is the time to be a big ol' hooker..." (See 1:40 mark for discussion of rescue size, 1:51 for quotes, and don't miss discussion of oil price impact/non-impact at 1:15 mark in video.)

In other words, in extraordinary market challenges, the markets require bold action, bold responses. This is a time to pull out all the stops, and leave everything on the road, including mixed metaphors.

Success in the market right now requires bold action, and it requires a recognition by sellers of the true nature of this market right now. Sellers who can adapt to current market conditions and offer appropriate market incentives, including price, will be today's winners in the market. Ironically, they will sell for more and they will sell faster, both of which bring the optimal financial outcome.

It is what it is right now. And no amount of clapping is going to make this a different market. Sellers ignore this at their own financial cost.

Pay No Attention to Averages

Okay, seriously, this is getting way out of hand. The national media keep reporting national numbers related both to commercial and especially the housing market that are averages.

First, let's review the difference between an "average" and a "median," because you'll see both terms thrown about.

• An average is a generalized number meant to represent any particular instance as a generic example. So, if there are 3 houses on a street worth i) $100,000, ii) $200,000, and iii) 400,000, then the average is $100k + $200k + $400k divided by 3 = $233,333 is the average price. But how useful is that if you're trying to figure out what your house is worth one street over? (Hint: Not very useful at all.) So averages are generic. And they're fine when the set of numbers being averaged fall into a close range.

• A median is the number for which 1/2 of all things are above, and the other 1/2 are below. So in any neighborhood, if the median price of a home is $200,000, then that means that half of the homes in the neighborhood are priced above $200,000 and half of the homes are priced below $200,000. This is more helpful, but still does not tell the whole story.

So an average is really just a melting pot of statistics, and the bigger the pot, and the more things thrown in all melted together -- well how much does that average number really tell you? Not a lot, especially in real estate.

An "average" would be okay when talking about the national housing crisis if all parts of the country were experiencing basically the same problems and had the same history and outlook. But that's not at all the situation. There are parts of the country where the housing bubble absolutely exploded like Dutch tulips, beyond all reason. In other parts of the country, such as in Houston, housing prices never really accelerated all that much as new supply kept up with new demand.

Consequently, Houston is not seeing the same downturn that many other parts of the country are seeing -- because Houston never really saw the run-up that other parts of the country were seeing in the past 5 to 10 years. So Houstonians really need to look at their own local data to get a better grip on the local housing market and should really disregard the national reports when thinking about the local market.

The story in Houston right now is that while the number of sales are down over 20% year-over-year right now (last year there were about 20%+ more sales happening), the prices of those sales are actually holding firm within a couple percentage points, in stark contrast to the national statistics and especially the national averages.

In the future, we should discuss What Really Drives Real Estate Values of What You Own, and also what's behind the statistic "Average Months of Inventory." Both are confusing, even to people in the industry.

Update November 25, 2008: Here's another story with a big "price plunge" headline that Houstonians should ignore.