“If it is too complicated for most of us to understand in 10 to 15 minutes, then we probably shouldn’t be doing it.”

It applies to software as much as it applies to banking, but with the sharp distinction that software, by and large, doesn't "require" a taxpayer bailout.

And I mean those quotes to sting.

Because I... oh, never mind.

In the long run we aren't all dead, but Bear Sterns sure is:



(from http://www.wallstreetbear.com/image/bsc.png)

Serial asset bubbles are no way to run an economy.

And they won't occur if (when?) we have sound money that isn't controlled by a Wall Street front organization.

I was, oh, about six years early to the housing-bubble party. It's a lesson learned (along with google's stock price): don't underestimate how long the market can stay irrational because it will make you look very, very stupid. But it seems that now most people are coming around and some people are even talking about *gasp* income-price ratios and rent-vs-buy calculations.

One of the hard things in the rent-vs-buy calculation is that to do the calculation correctly, you have to make an assumption about the long-term appreciation of the home that you buy. This is why housing booms are self-reinforcing, even without a feckless central bank: as expected future returns increase, the NPV of houses increase, creating a self-fulfilling cycle. That, of course, is now being thrown into reverse: why would anyone throw a $50,000 deposit at housing when houses are going down in price? So a bank can eat that 50K while you ride the down cycle? Thanks, but no thanks.

Putting even further (and perhaps devestating) pressure on house prices will be Baby Boom demographics, as outlined here. The boomers have done a pretty good job of forward-shifting benefits (prescriptions, etc.) and back-shifting costs, but they are going to find that they are selling homes (and stocks) into a smaller market as they finance their retirement.

Over sixty percent of San Francisco homes bought last year were purchased with interest-only loans:

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2005/04/15/HOMES.TMP quote:

"Economists worry, however, that the second part of Gabriel's adage may apply to uber-expensive markets like the Bay Area. Specifically, they cite the large percentage of risky interest-only loans in the market -- 62 percent of total loans in San Francisco last year, according to market researcher LoanPerformance."

Lunacy. Stark, utter lunacy.

What's infuriating about the current absurd housing bubble is that all of us will be responsible for bailing it out when everything goes pear-shaped. The mortgage market has gotten "too big to fail" and all the major players fully expect the Federal Government (read: us, the taxpayers) to bail them out, as with the S&L crisis.

It is lunacy that someone who avoids the run-up, saves diligently and does sane, if rudimentary, financial analysis will end up as much on the hook as the people over-extending themselves with interest only loans to squeeze into a 1m+ two bedroom, or, worse, flipping their way to unearned wealth.

But then, one must constantly remind oneself, life isn't fair.

I have been beating the housing-bubble drum for, ahem, upwards of four years now. I'm a strong believer in "common sense" economics: I didn't buy the internet hype in the late 90's (although I had a few "maybe I'm wrong" moments), and similarly I don't believe the "its a different housing market" arguments now. At some level, housing prices must be tied to incomes. Clearly that relationship has become unhinged. It's my opinion that the reason that it has become unhinged because of historically low interest rates and the fact that people have moved into increasingly leveraged mortgages. Also lurking in the background is my favorite quasi-federal bugaboo: Fannie Mae. Mortgage backed securities have leveraged the perceived stability of housing mortgages into a lucrative securities market which seems Federally backed. This market has the unfortunate effect of reducing or outright eliminating incentives to lenders to find qualified borrowers: if you are just going to sell the mortgage off as a security, who cares?

There is a secondary issue as well: at a fundamental economic level, I believe that economic progress is made when people produce things that other people desire. (Of course I think this. I'm an engineer.) Money generated from housing appreciation doesn't really contribute to the overall economy. Rather it works as an inflationary wealth transfer from non-home owners to home owners. In the long run (and in the long run my children are very alive, Mr. Keynes), it is the production of goods that creates a wealthy society, not the trading of those goods.

At this point in the game, regardless of if I'm right (Ed: seems unlikely) or wrong, it has gotten to the point that my financial calculations show a clear financial advantage to renting, on the order of tens of thousands of dollars a year, before one takes into account the convenience of not having to care for a property. Lunacy. The only way to win this game is... not to play.

UPDATE: Well, someone agrees with me.