The real estate bubble

Tuesday, September 23, 2008 by Dave Winer.

I wonder if a lot of people understand how the financial crisis came to be. I'm not sure I would understand it if I hadn't gone to visit a friend who in the Sierra foothills last year.  

She had inherited a house at a resort 10 years ago and had been living there ever since. It's a big house, but the construction wasn't finished. There were fixtures to be installed upstairs, and the driveway wasn't paved, but for the most part it was done.  

She didn't have a job, but she had been taking out loans on the property every couple of years, and at first I didn't understand how she could do that, until I realized that the property value had kept increasing so even though she was spending most of the money she borrowed on living expenses and improvements to the property, she always had equity she could borrow against. Every two years she'd take out another loan, max out her equity, but in a couple of years the value would go up and she'd be able to take out another loan.  

Until the value stopped going up, then the party was over. She still had to make payments, but now she didn't have the means to. She defaulted, left the house, and the bank took over. If they could sell it, it would be at a considerable loss.  

I think a lot of people were doing that.  

And I think that's where the trouble started. Making those loans was a profitable business, and a lot of people wanted some of the action. At one point I even wondered how I could, but I never (thankfully) figured it out. As long as real estate kept going up, everyone kept making money. There was even a way to rationalize it. The United States is where everyone in the world wanted to live. So property would keep increasing in value as long as there was growth somewhere in the world. But it turns out that China and India, Russia and Brazil are pouring their new money into their own countries, reproducing the infrastructure we already have, building their own highways, hospitals and universities.  

When real estate started going down, the value of all those mortgages went down, in some cases way way down. Then the house of cards built on the ever-increasing value of real estated collapsed. That's the part you've been reading about. Banks need to have a certain dollar value of assets to back loans they get from other banks. When the value of the assets go down, their loans get called, they have to sell these assets to pay back their creditors, but no one wants to buy them. That's when you hold up the big Fail sign and hope someone thinks you're too big to Fail.  

But really, this is probably the shit hitting the fan, it's probably not a liquidity crisis as Paulson says. It's our laziness, our thinking that our superior military and nukes would guarantee us a permanent position at the top of the pyramid. We don't make enough of the things people want these days, and instead of investing in building better education, health and infrastructure, and solving the energy problem, we've been lying to ourselves.  

We also fucked up by electing idiots to lead us, and letting the press get away with providing entertainment instead of keeping us informed on what the rest of the world was doing. This led us to elect ever more dishonest idiots to lead us, and they didn't like what little oversight the press provided leading to the ridiculous situation where the candidates won't even sit down for an interview, and you can hardly blame them, the reporters are such incompetent jerks. 

I heard someone say that the real estate bubble isn't the problem it's the canary in the coalmine, the first financial crisis of a series of crises. I believe this is probably true. I thought we had time to solve these problems, what Obama was saying and certainly still is saying are the right things: education, health care, infrastructure, energy. And pull back from the short cuts. We can't afford boondoggles like the war in Iraq, but it may already be too late.  

No matter what, as a country we have to stop looking for the quick fixes, and start thinking about our future and doing the things we need to do to have one.  

Of course all this comes at an opportune moment. We can change direction on November 4. That's not actually very far away and another opportunity like that won't come for a long time. Something to think about.