Sunday, August 19, 2007

Are we on a financial precipice?


On Monday, Oct. 19, 1987, I took a flight from Las Vegas to San Francisco, and when a friend picked me up at the airport, he pulled over on the shoulder of a feeder interstate and said, “The stock market crashed today.”

We all know now that the 1987 crash was an aberration, a technical failure where programmed trading, governed by 80s technology, took over as part of portfolio insurance. On Aug. 31, 1998, a coworker came to my cubicle and said, “the stock market crashed today” and then the percentage was much less, although the numerical drop was about the same, as the Russian and Asian financial crisis developed. Walter Russell Mead wrote a famous piece about that in the October 1998 issue of Esquire, as noted in Robert Hahnel’s book “Panic Rules! Everything You Need to Know About the Global Economy” (1999) (check Amazon).

Much worse has happened since. I saw a company that I worked for lose 20% in one day in 1999 just because of some misconstrued off-hand remarks in a shareholder meeting about reinsurance.

Edward Chancellor has an article “How Depressing: Look Out: This Crunch Is Serious”, with a yellow diamond sign with a down arrow, in the Outlook section of The Washington Post today, Aug. 19, 2007, p B1 print, here.
He doesn't see the Fed's action Friday Aug 16 as more than a quick fix.

He refers to a Breaking Reviews website for news on the very latest trends.

Nelson D. Schwartz and Vikas Bajaj have an article on page A1 of The New York Times, today, p A1, “Credit Time Bomb Ticked, But Few Heard: How Missed Signals Contributed to Mortgage Meltdown”

The articles talk about hedge funds and bond funds for subprime loans, but the underlying issues are the behaviors of consumers. For a couple years, unbelievably, lenders have given out zero-down-payment loans with no questions asked, not even a job. That sounds like schizophrenic behavior in a post 9/11 world where you wonder if the person moving in next door could attract harm.

The mandate for personal home ownership is a result of complex interaction of many social factors, some of them having to do with the way the individual has modified the original idea of the male provider and protector of the family. Extreme capitalism, noted by David Callahan (“The Cheating Culture”) may result as a certain kind of expression of hyper-individualism. Yet, male competitive behaviors continue, resulting in behavior on Wall Street that seems more appropriate in Las Vegas (where they don’t allow card counting if they catch it). Home ownership has also been driven by racial factors, by the idea of getting rich quick, and the tenuous situations of many rental tenants, who get driven out by conversions, often regarded as “second class citizens” compared to “homeowners” who may be laden with ballooning debt in order to provide home ownership for their “families”. Some of it doesn’t make rational sense, as I discussed back in 1999 in this enclosure. It's easy for a lot of aggressive "families" and individuals to wind up in foreclosure with deficiency debts, a horrible situation that I recall from the real estate crash in Texas at the end of the 1980s. Long memories are necessary. Yep, I know there are entrepreneurs who will follow sheriffs and visit court house steps to flip foreclosures. Not for me.

Ultimately economic stability depends on the ability of the global economy to create real wealth and raising living standards, issues challenges by uneven demographics, global warming, declining oil production, and so on – and political instability (the haves and have nots). This is what really matters.

As for Monday morning, Yahoo! represents Wall Street as expecting maybe another Fed fix, as it awaits housing data. (Story.) Everybody says you have to buy real estate to get rich. Donald Trump did, but don't believe it. What goes up can come down, no matter what it is.

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