Saturday, August 11, 2007

Housing Crisis

So let's quickly review the current financial crisis.

First, the yield curve got crushed because (a) the Chinese appetite for ten year paper, and (b) the positive carry trade (borrowing money short term and lending it long term, borrowing money at the prime right and lending it at a consumer rate).

Second, Congress changed the bankruptcy laws to make it difficult for people to ever really get rid of their debts.

Third, the Federal Reserve used the housing boom to keep the total economy happy while some sectors were in recession.

Fourth, because people looked at their mortgage payments as a percentage of income, they were willing to pay twice as much for a house if they were paying half as much interest.

Fifth, because of the artificially flattened yield curve feeding into a speculative frenzy, the cost of housing in the entire continental united states roughly doubled (the logic of which went something like, "when long-term interest rates went from ten to five, and the short-term rate went from eight to two, housing prices doubled; if long-term rates go from five to zero, and short-term rates go from two to minus six, they should double again").

Sixth, we are on the brink of several technological innovations that will radically reduce the cost of housing (Japanese customizeable modular homes, built by robots).

So we now have roughly a trillion dollars of debt in excess of value on real estate, to be serviced by a shrinking middle class who won't be able to make their payments and won't be able to discharge the debt either. Even if they are able to make their payments, mortgages at double the value of their assets will decrease workforce mobility. If this doesn't sound like an opportunity for the Democrats, I don't know what an opportunity for the Democrats would look like. All they would have to say is, "ya know, America is an exciting place and the land of second chances. The Bush Bankruptcy reform was unAmerican. Let's wipe out those silly mortgages and get on with our lives."

What will happen, though, is we will probably have a massive federal bailout for the banks, and an underclass that is still servicing debts from this binge in twenty years. The good news, though is that housing will be cheap....

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