October 28, 2006

The late great housing bubble ponzi scheme: Ah, it all seems so obvious now, doesn't it?

The housing crash will in the end be the biggest economic story of the past 200 years. We'll be studying this thing for the rest of our lives. Then future generations will pick up the ball and study and dissect it even more.

Here's Kunstler's take, which to me reads like a history book written five years from now. Very insightful read:

The basic insanity of a system that presumes vastly increased wealth where none will occur, has led to further distortions in finance. The most obvious one is the so-called housing bubble.

The misplaced extreme expectation in the ever-increasing value of paper wealth, led to the hijacking of mortgages by financial playas who bundled them into odd lots of tradable debt (promises to pay) and used them to leverage abstruse bets (hedges) on the behavior of other kinds of paper markers (currencies, interest rate differentials, commodity prices) -- very profitably as long as all playas believed that industrial societies that run all oil would continue to grow, to produce more wealth.

The level of abstraction in these rackets -- their distance from the reality of productive activity --is self-evident. But they were so successful that the profligate creation of ever more mortgages became an increasingly reckless and irresponsible enterprise.

Contracts were made with house-buyers who had no record of credit worthiness and often no real proof of income. Contracts were made on terms (interest payments) that were deceptive, even ruinously false, for the house-buyers.

The reckless reassignment of lending risk into ever more abstract layers of deferred obligation, and the ease of credit that ensued, allowed millions of ordinary people to acquire real property on unrealistic terms, which had the affect of bidding up the price of houses that these owners will eventually have to surrender for nonpayment.

That process is now underway.

The reckless creation of mortgages had the further effect of stealing demand for house-building from the future. So many new houses were built and then sold to people who will probably have to surrender them, and then so many more beyond that were built in the expectation and hope that reckless mortgage creation would continue forever, that there is now a massive over-supply of total existing houses while the pool of suckers for new ruinous mortgages has shrunk to zero.

16 comments:

Anonymous said...

keith:

you're right. i think the future generation will use the 2005/06 housing bust as a case study or perhaps a thesis in the business school program.

let me ask you then, keith; if you were to write a thesis, what title will you give?

Anonymous said...

How about a thesis of who was most to blaim for the housing bubble collapse of 2007?
--- real estate agents
--- corrupt contracters
--- main stream media
--- mortgage lenders
--- federal reserve
--- ignorant buyers
--- gambling buyers/speculators
--- other

My winning choice is real estate agents. yours?
Also a good second question--who is going to get most blaimed/who is going to take the fall?
Answer: Everyone will suffer with those who bought a home after 2002 taking the biggest hit.

Also could someone please enlighten me. Who is securing all this money that mortgage lenders have given out to buyers soon to be in default? Is it government secured? Bank secured? Will the mortgage company take the loss? Is it in bonds? If so can you give me some examples and maybe a site where I could look at who is holding what debt and in what percents.
Thank you.

J said...

Kunstler is one of the internets hidden gems.

http://www.kunstler.com/

.. just like HP.

The insightful work being done here, and there may actually have a chance of changing the worlds mindset back to reality.

It's gonna take time.. but it has to get done.

Anonymous said...

Kunstler is one of the internets hidden gems.

Good grief, get a life!

trailer trash said...

"The late great housing bubble Ponzi scheme: Ah, it all seems so obvious now, doesn't it?"

Obvious to most normal people. But not so obvious to at least one person who obtained a Ph.D. in Economics, Dr. David A. Lereah (pronounced La-ray-aah). Dr. Lereah is Senior Vice President and Chief Economist of the National Ass. of Realtors (NAR) and he has repeatedly affirmed that the current real estate market is healthy -- even now, as the greatest Ponzi Scheme of all time is collapsing. His seemingly-impressive CREDENTIALS are repeatedly used to substantiate the validity of his increasingly-asinine statements. The title of Dr. Lereah's latest book, Why the Real Estate BOOM Will Not Bust is a perfect example of the propaganda this NAR pimp distributes.

Dr. Lereah's NAR duties include mixing lies and truth together and then spinning this sewage into press releases which will encourage "greater fools" to keep taking out risky loans to finance overpriced debt boxes. Like a sideshow geek, Dr. Lereah encourages skeptical people to jump onto the real estate bandwagon, so that Realtors everywhere can continue to fleece the gullible public.

It has become painfully-obvious that Dr. Lereah takes the truth and then reverses it. He has become a contrary indicator, because most of what he says is exactly the opposite of the truth. For example, Dr. Lereah recently said, "When consumers recognize that home sales are stabilizing, we’ll see the buyers who’ve been on the sidelines get back into the market, and sales will be at more normal levels in the wake of the unsustainable boom that we saw last year.” Notice that Dr. Lereah has deviated from the title of his 2006 book, Why the Real Estate BOOM Will Not Bust and is now referring to the original "boom" as an "unsustainable boom."

Keeping this in mind, it is possible to remove the positive spin from Dr. Lereah's latest false prophesy and obtain a very accurate statement of fact: "When consumers recognize that home sales are crashing, we’ll see the buyers who’ve been on the sidelines flee the market in terror, and sales will be at greatly reduced levels in the wake of the unsustainable boom that we saw last year.”

So there you go. When Dr. Lereah says "correction", he means "crash." When he says "soft landing", he means "crash." When he says "market stability", he means "crash." Dr. Lereah has become so notorious that he has earned himself the honor of having a DAVID LEREAH WATCH website devoted exclusively to reporting on his shady activities and absurd proclamations.

Now that's my definition of success!

Anonymous said...

Its not whos to blame but whats to blame and that answer is and always will be GREED!

Anonymous said...

HP is 100% Sucker Free.

Metroplexual said...

Keith I hope you don't buy Kunstler. He is a whacko who hates suburbia and has grabbed on to peak oil to say that the American lifestyle is doomed. We are better than that and I hate anyone who roots for the US to go down in flames. Don't get me wrong there are plenty of things wrong in America but they will be fixed eventually.

Concerned said...


t's a new paradigm, and everybody who doesn't buy, now, will be priced out forever. Anybody who does buy will be rewarded with a lifetime of riches, as their property will continue its 30% yearly price increase.

Renters, and anybody born in a future generation, will not be able to afford a £15,000,000 starter flat in 15 years. They will live in tent cities, and Hondas.

This asset bubble is different than all of the others - it will never slow down, or pop. The gains are permanent.


You gotta be kidding right ?

If this happens then a carton of milk will cost 10,000 pounds a litre.

Dream on buddy. The asset deflation is on its way, and it's global......the UK and Ireland are worse off than the US.

AMIGAUSER said...

Kunstler the Hustler
is just a suburb hating, fear monger who has embraced peak oil as his next gloom and doom book sales pitch.

Kunstler was one of the main gloom and doom merchants behind that great none event - the year 2000 computer bug

Keith,if Kunstler is now saying we are in a housing bubble, maybe its time to load up on real estate.

Anonymous said...

Great comment trailer trash!!

Disgorge! said...

Kunstler is one of the internets hidden gems.

Kunstler is a whack job who said all the same things about the Y2K "disaster" that wasn't.

Disgorge! said...

Yeah, Kweefster, once Kuntsler starts in on a topic, you know it's jumped the shark big time.

Alan P. said...

Keith, you can't be serious with this Kunstler thing, can you? The man is a whack job. Do you have any idea how many times he's been wrong? To my knoweledge he has never been right on anything. Yeah, listen to squirrel nuts, you'll go far. :P

Anonymous said...

you're right. i think the future generation will use the 2005/06 housing bust as a case study or perhaps a thesis in the business school program.

if you are studying "business" you probably were not paying attention to *history*.

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