My New Blog

Today Obama blamed the Bush Administration for the housing crisis and ultimately the demise of some financial institutions. That tells us just how little Obama knows about economics. The fact is that the mortgage crisis is something that is occurring world wide because of an unsustainable bubble in the housing market fueled by low interest rates in the past decade. Bubbles in markets occur throughout history and this is not unlike the bubble in the late part of the Clinton Administration when many people lost a fortune in the crash of the stock market because of the over valuation of dot.com stocks.

A bubble occurs when people expect prices to rise even further and there is a kind of feeding frenzy going on. People just thought real estate values were going to continue to rise as in the past and they never thought the opposite could occur. I remember telling people in real estate in about 2003 that we were pricing ourselves into oblivion.

This continual rise in prices simply could not sustain itself. But many just scoffed at me and told me I was just being negative. Many were sounding the alarm in the financial markets, but it was going so good that people just didn’t listen. But the history of economics teaches us that all hyper-inflationary trends end in a crash. Remember the stock market crash before the Great Depression? It was the same thing. Sooner or later the market goes out of balance and the opposite affect occurs.

A good example of this is oil. There was a feeding frenzy of speculation with oil. It was fueled by an unrealistic expectation that oil would simply go higher and higher and higher. It hit $147 a barrel. It has now dropped to under $100 as of today. It was a commodity bubble. Those people that bought on the futures at $147 have lost a lot of money. People in the industry were sounding a warning signal that this could not be sustained. Few listened. Sure enough demand began to drop and that caused the oil markets to decline more rapidly than they went up. This is an example of what occurred in the housing market. The difference is that in real estate it takes longer for balance to occur because of the imperfect nature of the market.

This should be a good economic lesson to all. A period of hyper-inflation in any sector of the economy will end with a crash of that sector at some point in time. Some people will ride the bubble for awhile and make money, but many will end up on the scrap heap of economic ruin. And just remember that greed which often fuels these bubbles is one of the seven deadly sins. It wasn’t Bush, it was greed; pure and simple greed.

This leads to the next problem:  ethics.  It seems like in the past decade the ethics of too many leaders have been focused on selfishly making money for themselves and not looking out for their workers, consumers, and the good of society as a whole.  This ethical demise has been a problem in the mortgage industry with lenders getting people into mortgages that simply were not good for them and very risky.  They were cheap at the time, but the downside would put the home owner under.  It also came down to dishonest appraisers that worked to hit numbers irrespective of what the home is worth.  I have seen that so often in doing reviews it is very scary.  I wonder how many people have had their homes grossly over valued; by that I mean 20 to 40%.  Yes, that's right I have seen homes over valued by nearly 40% on a regular basis.

My son, also an appraiser, was at a party some time ago and was approached by a mortgage broker that promised 30,000 in business if we hit the numbers.  This is the kind of dishonesty that has led to demise.  This occurred on a small scale.  What we are witnessing today on a larger scale is the same kind of ethical lapses when financial institutions falsely represented the mortgages they were selling on the market.  The fact is that someone really needs to be held accountable.  But all this is very hard to prove.  And how does one show culpability?

Will more regulation help?  Maybe.  But human behavior is one of the most difficult things to control.  If it was so easy we wouldn't have so many in prison.  In my opinion it is a result of the secularization of society where  "God" has become the dollar.  Values cannot be legislated.  It comes down to core personal values that are taught at a very young age.  The old adage is "I learned most of what I know before I was five years old" is very true.