Sunday, October 25, 2009

Bubble, Bubble, Toil and Trouble!

Do you remember, just a few years ago, when we kept hearing the constant drumbeat of, “The housing bubble is going to burst!”? As demand for housing escalated, prices soared, causing investors to enter the picture, which caused higher demand, resulting in more price increases. As government pushed lenders to make loans to people who would normally not qualify, more demand was created and more upward pressure on prices again resulted.

This picture of the national housing situation, beginning in late 2004 and lasting into 2006, is what was referred to as the “housing bubble”. By a bubble, they were referring to home prices inflating at unsustainable rates. The chorus was loud and the warning came in the form of surround sound. Every direction you turned, someone was echoing the dire prediction of a burst to the bubble.

Well, one way or another, the prediction came true. We are still suffering the effects of the “burst”. In my area, housing prices are about at the level they were in 2004, prior to the run-up in home values. The consequences have been devastating to the national economy, state and local economies, and personal and family financial situations. Many families have lost their homes. Many have lost life savings that were invested in the homes, and the fallout is not over, yet.

The housing bubble and its eventual burst were not the only things that have led us to our present economical mess. Along the same time as the housing bubble, Wall Street experienced its own bubble and burst. Some of this was tied to the housing collapse and some was not. Some was tied to crooked companies and business leaders. Some was tied to Washington and the things they did and things they did not do. The result of the combination of these various acts was the Dow falling by around 50%. So, the people who did not have their savings tied up in their homes, but were invested in the stock market, were not exempt from the effects of a bursting bubble. Whether investments were in basic plans or in large retirement plans, such as IRA’s and 401k’s; they basically all suffered tremendous losses.

In some areas of the country, the real estate market has begun to stabilize. We have all watched the Dow climb back part of the way and even surpass the magic 10,000 level. All is well!!! We are back, baby!!!

Whoa! Hold on partner! Not so fast! Just when you thought is was safe to go back into the water, I believe I see another bubble. “What”, you ask, “are you talking about? We have not heard warnings about another bubble to watch out for?”

What caused the housing bubble? It was housing prices propped up by unrealistic, unsustainable and artificial stimulus. What burst bubble is on the horizon? It is an economic bubble, a bubble in the economy that is temporarily giving a false sense of security. You say that you have no false sense of security. What I see is an economy that is being propped up by unrealistic, unsustainable and artificial stimulus.

Our government has been busy, for the past 18 months, providing rescue packages to one company after another corporation. Why, because they were deemed to be “too big to fail.” We have been fed a constant line of pending, total, economic collapse if the government does not come to the rescue over and over again.

So what have we got for a couple trillion dollars in stimulus? We have propped up failing corporations. Many of these are still in financial trouble. We have opened the door for one business after another to come to Washington with their hands out. We have rewarded bad business policy, some criminal practices, many very bad investment decisions and reckless spending. We still have failing banks and now have a failing FDIC. Fannie Mae and Freddie Mac were taken over by the government and now FHA is looking like it will also need a bailout.

Washington keeps pumping billions into deep and dark holes, hoping that it will provide the light needed for them to see their way out of trouble. (This is if you believe that the money is actually going to save businesses. It is very possible that much of the money that we, the taxpayers, are being forced to come up with, is buying votes and allegiances from Democratic cronies so that the Democrats in power will remain there.) We had TARP (troubled asset relief program) which after being passed, had the money diverted away from actually buying troubled assets. We had the immediate crisis that gave us Stimulus 1 within the first few days of Obama’s administration. With little to show for the $780 billion dollars (plus the cost of the 9,000 earmarks added to the bill), we now hear of the need for Stimulus 2. We have the government taking over banks, left and right. Our government now owns major shares in GM and Chrysler. We have a vested interest in numerous financial institutions. They are trying to take control of our health care industry.

Still, the economy is in the tank and unemployment continues to rise each month. Thousands continue to lose their homes each month and/or face bankruptcy. We are being fed the talking points that the economy is turning around, the recession is over, it is a jobless recovery (whatever that is supposed to be), etc. To the government and media, more bad news is always “unexpected” and there is no good news.

Our frail economy and likewise the stock market, are not only vulnerable to the next “unexpected” event to take place, but are only as good as they are due to government stimulus infusions. They can only keep pumping more and more into the bubble for a limited amount of time. As weak as the bubble is, it is still an artificial bubble. It must and will pop at some point. When that happens, our fragile economy will take another major blow and collapse to some degree.

We hear that the housing market is beginning to improve – maybe the beginning of the end of their major troubles. But, I also read that the commercial real estate market is collapsing just as the residential market did. As this unfolds over the next year, more misery will hit the banks, investors and Wall Street. This is just one of the situations facing us that can trigger the bursting of the economy bubble.

Folks, we are not out of the woods, yet. This economy is on life-support. Wall Street has a pace maker with a weak battery. The banks are dropping like autumn leaves. Something, soon, will trigger the bursting of this bubble. It is inevitable because the hot air causing the bright horizon is fake. It is not dependable, lasting or sturdy. Get ready to take another hit!

Until we as a nation, businesses and individually face the music and let the “too big to fail”, fail; we will not get past these problems. Investment involves risk. We cannot continue to reward and prop up those who made horrible investment decisions. They must be left to face the consequences of their actions. If we will not allow failure, there will be no avenue for success. Investment risk must involve the chance for loss. Bankaids will only cover the sore for so long. At some point, the infection will cause permanent damage if not properly treated.

1 comment:

  1. Never thought I'd feel this way, but wish we had just rented a home instead of buying one when we did.