What I REALLY Don’t Know


Ok, I’m going to break from my usual pattern and talk about something I DON’T know for a while.  This is almost pure intuition I’m going on here.  Take it for what it’s worth.

There is a CRISIS!!!, right? “Worst since the Great Depression!!!!” right? Everyone seems to agree:  Dems, Reps, all the mainstream media.

When was the last time they all unanimously agreed on something so broad, sweeping, and impossible for the ordinary person to assess?

Recall the words of a character in Guys and Dolls:

One of these days, a guy is going to show you a brand-new deck of cards on which the seal is not yet broken.

Then this guy is going to offer to bet you that he can make the jack of spades jump out of this brand-new deck of cards and squirt cider in your ear.

But, son, you do not accept this bet because, as sure as you stand there, you’re going to wind up with an ear full of cider.

The point is:  What seems really, really obvious may not be true precisely because someone wants it to be obviously true.

Described above is a sucker bet, a deception to take advantage of your greed.  There’s also the deception to take advantage of fear.  We’re all familiar with that one, right? Let’s review:

“Weapons of mass destruction”

“They hate our way of life.”

“Anthrax came from Iraq.”

“A worldwide network of terrorism”

To fight all these “threats”, some of which were real, but blown far out of proportion, we were expected to sign over all our rights as citizens and mortgage our economy unto the seventh generation.  Seven years ago, there was almost no dissent at all from this in the mass media.

So what does this have to do with our current crisis?

I’ll try to review what little I know of the nature of the crisis, mainly from a cui bono point of view.

I. THE BUBBLE

Up until a year ago, real estate prices in the U.S. had been skyrocketing through most of my lifetime, and especially for the last fifteen years or so.  They’d never gone down, only leveled off for a while, before continuing up.

Who Benefits?

Theoretically, anyone owning real estate benefits, since that asset can be sold for a better price.  This would naturally include a developer who has owned the land for a while and can build things on it, selling both the land and the building for far more than was paid.  So we can put a “check” next to:

√ Developers

Homeowners could benefit too, if they’ve owned their homes for a while and are looking to sell.  The problem is that they have to live somewhere, and the home they would buy after selling the current one is also going up in price.   The only way they would benefit is if they move their money completely out of real estate into some other investment that appreciates more, or generates more income.

So I’m NOT putting a “check” next to homeowners.  They might benefit, or might lose, depending on individual conditions.

If you’re in the business of real estate, especially one that takes a commission, you’re making out like a bandit, right?  There’s a difference between a 2% commission on a $100,000 house and a $300,000 house. Duh.

So we can check:

√ Real Estate agents and brokers, and associated folks in the business

Then there are the banks, who are in the business of giving loans for real estate purchases.  They can lend more money, and see the collateral backing those loans go up in value.

√ Banks, and anyone else who gives real estate loans

Who Loses?

How about the cost of housing, which most of us think of as a necessity?  Relative to wages & salaries, it’s been going up rapidly, as I said, for most of my lifetime, and I’m not young.

So lets’s put a “√” next to:

√ Anyone who wants to live in a dwelling, or is an end user of land for any other purpose

Another check is for that small number of speculators who might have been betting the other way.  They’ve been keeping their money in other kinds of assets, waiting for real estate to go down in value.

√ Speculators invested in other assets


II. THE BURSTING, OR CONTRACTION, OF THE BUBBLE

Somehow, we are all taught to believe that lower prices are a good thing at Wal Mart, but not in the stock market, or other places where the big players play.  Why?

Simply reverse the “winners” and “losers” in the groups above, for the results of the bubble bursting.

Why is this a bad thing?   Why should the taxpayers pay for a massive bailout to soften its effects?

Comments welcome.

Explanatory Postscript, October of 2009:

Notice that the above entry dates from early October, 2008.  A year later, it might look like I was way off-base.  We’ve certainly had a severe recession, and it may actually be the “worst since the Great Depression”, though I remember the recessions of the mid-1970’s and early 1980’s, and they were no fun either.

My scepticism at the time was more for the panic being encouraged as a massive bailout for speculators was going through Congress.  Rumors were encouraged about civil disorder and martial law, all to get this last looting of the treasury passed before the Bushies left office for good.

(Note that both McCain and Obama voted for it.)

The plan was for the Feds to buy up toxic “assets”, artificially raising their prices, to support the balance statements of major banks.  In other words, print more funny money to add funny value to funny paper.

My writing at the time was an expression of faith that the rulers of our financial system can take care of themselves one way or another, and maybe the taxpayers don’t need to back them up. I’ll stand by that.

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One Response to What I REALLY Don’t Know

  1. Tom says:

    The current system is based on debt. The feds loan money to the government at interest so right from the get-go we are in debt. Not all of the bankers will go under. The survivors will reap the benefits of a restructured system and it will cycle through until we again asked to bail out those that made risky financial deals. We should have said no to the bail out and placed a moratorium on home forclosures. Those loans at threat of default should be restructured to 5% or lower so the owners do not lose their home and the bank gets their piece. The Federal Reserve should be abolished and we should go to a system that is not based on loans with interest. That is a whole other matter.

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