Friday, October 24, 2008

Is the Cure Worse Than the Disease?

KatyinLBC made a comment that I want to explore. She shared her frustration with the idiots paying way more than properties are worth, thereby propping up LBC home prices. She also noted her concern about government bailouts perpetuating this nonsense for years.

As far as stupid people overpaying for houses go, there is nothing to be done about that. It's going to happen, and that's their misinformed, idiotic prerogative. And there are plenty of foolish people convincing themselves this is the bottom, and stupidly buying properties at prices that reinforce horseshit valuations and prolong the inevitable return to fundamentals us responsible buyers are waiting for.

HOWEVER, it's also important to acknowledge that not everyone buying a house right now--even if they are overpaying--is necessarily stupid. If an individual or family really wants to live in a detached home and avoid HOA fines, noisy neighbors, thin walls, street parking and community laundry that apartment living has to offer--and the rent vs. buy calculation is within a few hundred bucks a month--then I would say that's a smart move from a quality of life viewpoint. From a financial perspective, as long as those buyers can afford their house, it's also a good move in the long run.

Houses and condos are selling every day, and as bearish as I am about the ramifications of the housing bubble, I think we have to recognize there are some consumers making smart decisions.

Regarding Katy's fears of government intervention propping up prices: That is precisely what they are trying to do, and it makes me nervous as well.

I've been reading more and more about The Great Depression and what's most interesting to me is that many believe the stock market crash of 1929 caused the depression. Hell, I thought that too. But it turns out it was in fact government intervention and attempts to provide liquidity to insolvent banks and force them to lend (sound familiar?) that caused the Depression.

As Mish from Global Economic Analysis (some over-my-head economic discussions, but I think it's essential reading) said:

Here is the deal in even simpler terms. In order to prevent the "Great Depression II", the Fed and the Treasury have embarked on a series of measures similar in nature to those that caused the great depression.

The root cause of the great depression was the unsound lending patterns leading up to it. Those same unsound lending practices, now carried to the very limits of legality via Bernanke's alphabet soup of facilities, cannot possibly be the cure.

The only reason housing prices haven't completely collapsed is because the federal government is essentially the only game in town for low down payment loans. And strapped consumers (especially those who had money in the stock market) don't have 20% down payments. So the feds are subsidizing mortgages, which allows people to get into homes they would not be qualified to buy under normal lending standards. This, in turn, creates false competition and props up house prices--much to the frustration of potential buyers like Katy, myself, and many of you out there.

I am furious at the government's use of our tax money to avoid the inevitable, but I am more concerned that their efforts are actually going to make our current economic troubles much, much worse.

The only way we will survive this is to let insolvent banks to fail, embrace a return to common sense lending practices, and allow prices to return to affordability. But that's going to be painful. And it's going to get ugly for a while. But, tantamount to ripping a band aid off quickly to get it over with, versus slowly, tortuously pulling it off and prolonging the pain, both result in misery, but the former allows you to start feeling better much sooner.

I'll have a normal post with humor and foul language very soon...laughter is the best cure for what ails us.


  1. It seems like they (Hank Paulson, Bernanke, et al) are steering from a short sharp decline to a prolonged but less intense deflating. By doing that, they can allow companies to delever over time, without getting into panics that create greater damage than necessary. These companies levered in order to continue to compete with their peers, as much as 40 to 1. It will just be a period of massive deflation, in my anonymous opinion.

    Of course this extends the duration of the pain, but mitigates the intensity.

    I'm not saying this is right to do, just that this seems to be what they are aiming for.

    As for those buying residential now, there's a name for them: bagholders. This way the banks aren't taking the hit for the second leg down, it gets put to those with equity.

  2. Anonymous,

    I think that's their aim too, and it's important to recognize they're not (intentionally) trying to ruin this country with deficit spending--they are trying to ensure we come out in one piece the best way they know how.

    And I would certainly not claim to know more than Hank and Ben in this arena (the jury is still out on Chris Cox). Although it IS strange that Bernanke, as a student of The Great Depression, does not seem to recognize the historical parallels of his rope-pushing actions.

    I also have noticed that the realtors are popping up again, spouting their "once in a lifetime opportunity" horsecrap now that they see an uptick in sales. And there is some truth to their pitch: interest rates are still very low, prices have come down substantially, and sales are picking up.

    However, those observations are then manipulated to create that same, tired "buy now or be priced out forever" panic. But the idea that prices are going anywhere but down--let alone suddenly shooting up again--is utterly preposterous.

    Plus, it's odd how current bagholders fail to notice these so-called "once in a lifetime deals" are still around every month and the deals are only getting sweeter. Think about the bag-holding fools that bought in 2007!

    I don't have the answers, but I love discussing the issues. Thanks for providing some perspective on the reasons behind the gov's actions.