Personal Story by a Lawyer from a Previous Asset Bubble. Can we Learn from the Past and How will the Housing Decline Impact You?

August 2nd, 2007

Personal Story by a Lawyer from a Previous Asset Bubble. Can we Learn from the Past and How will the Housing Decline Impact You?

When you think of the credit bubble, what comes to mind? Overpriced Homes? The subprime implosion? Massive credit? Or are you simply indifferent to it? The housing and credit bubble will have a long lasting impact on an entire generation of people living through it. When we see that a certain company has self-destructed or foreclosures are skyrocketing, what does this mean on a personal level for society? In the case study of a couple making $130,000 a year and going into foreclosure, we see that this bubble will impact the rich and the poor including the farmer making $14,000 a year and buying a $720,000 home. These stories drive the point home and make the credit bubble discernable to people from all sectors of society. It is easy for most people that understand housing to assume everyone can read a 30 year mortgage statement or has substantial knowledge regarding investing in the stock market. However, we have examined that the majority of the population is not affluent or what we consider to be really rich.

Very rarely do I come across a personal account that encompasses the entire scope of what a bursting bubble can do to an economy and the people living in it. Bubbles, as examined from the past, have a very similar pattern in the stages they progress. Mass euphoria leads to a case of mass resentment and depression both economically and personally for many families. I came across a letter written from a lawyer from Mason City, Iowa in the Corn Belt recounting the impact of the Great Depression on his town. It is a poignant and somewhat eerie story to read considering the date of writing is 1933. The similarities of what happens in the past raises many questions that I hope to discuss at length and how it will influence our future as a nation. These are things that as a society we will face. Foreclosures, larger numbers of families facing economic problems, and the repercussions of another bubble bursting. Since I found this letter in a very old file, I have decided to type up the large part of the letter since it is a necessary read for anyone trying to diagnosis potential issues we will face. Of course, times are different. We are not in the late 1920s or early 1930s, but human nature, bubble psychology, and the essence of being a person are timeless. Below are paragraphs of the entire letter:

“The boom period of the last years of the World War and the extremely inflationary period of 1919 and 1920 were like the Mississippi Bubble and the Tulip Craze in Holland in their effect upon the general public. Farm prices shot sky high almost over night. The town barber and the small-town merchant bought and sold options until every town square was a real estate exchange. Bankers and lawyers, doctors and ministers left their offices and clients and drove pell mell over the country to procure options and contracts upon this farm and that, paying a few hundred dollars down and expecting to sell the rights before the following March brought settlement day. Not to be in the game marked one as an old fogy, while paper profits were pyramided and Cadillac cars and pleasure trips to the cities took the place of Fords and Sunday afternoon picnics. Everyone then maintained that there was only a little land as fertile as the fields of Iowa, Illinois, and Minnesota, and everyone sought to get his part before it was all gone. Like gold, it was limited in extent and of great potential value. Prices skyrocketed from $100 to $250 and $400 per acre without regard to the producing power of the land.”

Real estate speculation is not a new subject. As noted by the lawyer, people from all segments of the economy were playing the real estate speculation game. If you didn’t play the game, you were considered old school and lacked the intelligence to be financially savvy. Bringing this to the current market, we can see how someone driving a Mercedes may hold a view of someone driving a Honda Civic. Clearly, the person driving the Civic isn’t playing the real estate game or has an understanding of how to manage their finances. Sadly, a large percentage of those in the Civic will perceive the person driving the Mercedes as wealthier even though they have an $800 a month lease and in fact may have a net worth in the negative territory. So many people decided to jump into the game and this is noted by the large increase of employment related to the housing complex in the past decade. The letter continues:

“During this period insurance companies were bidding against one another for the privilege of making loans on Iowa farms at $90 or $100 or $150 per acre. Prices of products were soaring. Everyone was on the highroad not only to comfort, but to wealth and luxury. Second, third, and fourth mortgages were considered just as good as government bonds. Money was easy, and every bank was ready and anxious to loan money to any Tom, Dick, or Harry on the possibility that he would make enough in these trades to repay the loans almost before the day was over. Every country bank and every county-seat town was a replica in miniature of brisk day on the board of trade.”

Many housing pundits would like you to believe that modern real estate products are somehow superior to past products. Either way, you are securing a note onto an asset and the basic concepts still apply. As you can read from the letter, second, third, and even forth mortgages were common in the 1920s. The perception, just like in better housing days, that housing was an absolute secure investment was something held very near to the heart during the lead up to the Great Depression. We also notice that lending institutions were just as eager then as they are today to loan money out to anyone with a pulse. How quickly did the tide turn after the Crash of 1929? It did not happen overnight:

“The drastic deflation of Iowa loans under the orders from the Federal Reserve Board, upon which Smith Wildman Brookhart, depression Senator from Iowa, poured forth his venom, definitely marked the downward turn in the mythical prosperity of boom days. Despite our hopes for the better, conditions have grown steadily worse.”

“During the year after the great debacle of 1929 the flood of foreclosure actions did not reach any great peak, but in the years 1931 and 1932 the tidal wave was upon us. Insurance companies and large investors had not as yet realized (and in some instances do not yet realize) that, with the low price of farm commodities and the gradual exhaustion of savings and reserves, the formerly safe and sane investments in farm mortgages could not be worked out, taxes and interest could not be paid, and liquidation could not be made. With an utter disregard of the possibilities of payment or refinancing, the large loan companies plunged ahead to make the Iowa farmer pay his loans in full or turn over the real estate to the mortgage holder. Deficiency judgments and the resultant receivership were the clubs they used to make the honest but indigent farm owners yield immediate possession of the farms.”

So we realize after the “great debacle” that foreclosures did not peak until 1931 or 1932. So it took 2 to 3 years for the pent up excess credit to hit the market. With our 24/7 media coverage and online to the nanosecond updates, most people think the bubble burst or later recovery will happen tomorrow. Unfortunately, it will occur over a long and drawn out period while people silently scream. The denial of the current credit bubble is extremely similar. By looking at the numbers conservatively, we see that we are going to have much of the same in 2008 and 2009. Not only will it be the same, but we are eliminating the “safety” feel of real estate and compounding it with growing foreclosures and declining prices. We recently had a first national housing median price decline since - guess when - The Great Depression. And it is not uncommon for people to start taking sides at this point. Some want to call bottom and those financially conservative realize we have a long way down before we hit bottom. The letter also highlights the sucking dry of savings and reserves of many families. Well, we already know that we have a negative savings rate so I’m not sure how long a family could stay afloat without using credit cards or blowing through their retirement funds (if they have any). How did this impact society’s view on real estate?:

“Men who had sunk every dollar they possessed in the purchase, upkeep, and improvement of their home places were turned out with small amounts of personal property as their only assets. Landowners who regarded farm land as the ultimate in safety, after using their outside resources in vain attempts to hold their lands, saw these assets go under the sheriff’s hammer on the courthouse steps.”

We have this mentality in the current market place. The majority of folks that invest heavily into renovating their homes are looking to flip the property for a larger profit. Not everyone, but with shows like Flip This House you begin to realize that home is a temporary pit stop for many in our society. And then we have the generational psychology shift that housing isn’t a safe investment in every circumstance. Foreclosures started going through the roof shortly after the psychological shift:

“During the two-year period of 1931-32, in this formerly prosperous Iowa county, twelve and a half per cent of farms went under the hammer, and almost twenty-five per cent of the mortgaged farm real estate was foreclosed. And the conditions in my home county have been substantially duplicated in every one of the ninety-nine counties of Iowa and in those of the surrounding states.”

Growing foreclosures start to hit multiple counties in Iowa during the tidal wave period of 1931-32. Currently we are facing incredibly large foreclosure jumps in California, Colorado, Arizona, Florida, and Michigan to name a few states. This is something that has only started. It has moved from the center of wealth in the 20s of the farm and industrial cities, to the urban metro centers of the 2000s. Like the previous bust, it took about 3 years for the general market to realize there were major issues. When times change they change quickly:

”We lawyers of the Corn Belt have had to develop a new type of practice, for in pre-war days foreclosure litigation amounted to but a small part of the general practice. In these years of the depression almost one-third of the cases filed have to do with the situation. Our courts are clogged with such matters.”

“Gone, too, is that pride of ownership which made possible the development of stock and dairy farms with their herds of fat cattle and hogs, their Jersey cows, their well-kept groves and buildings which beautified and developed the countryside. The former owners were willing to use a large part of receipts from a farm’s income to increase its value and appearance but the present absentee owner regards it only as a source of possible dividends.”

“From a lawyer’s point of view, one of the most serious effects of the economics crisis lies in the rapid and permanent disintegration of established estates throughout the Corn Belt. Families of moderate means as well as those of considerable fortunes who have been clients of my particular office for three to four generations in many instances have lost their savings, their investments, and their homes; while their business, which for many years has been a continuous source of income, has become merely an additional responsibility as we strive to protect them from foreclosures, judicial receivership, deficiency judgments, and probably bankruptcy.”

“The old maxim of three generations between shirt sleeves and shirt sleeves is finding a new meaning out here in the Corn Belt, when return to very limited means in a formerly prosperous population is the result not of high living and spending, but of high taxes, high dollars, and radically reduced income from the sale of basic products.”

A few things to note. The impact on a societal level is time and productivity will shift into protecting faltering estates. Folks will try to save their homes, try to avoid bankruptcy, and we will have collectors focusing on bringing accounts current (if they can). This is time spent from other economically productive activities. However, it is an unavoidable evil of any bubble to wash out the excess liquidity. The letter also discusses the loss of homeownership pride. I’ve thought about this many times here in Southern California. Most of the time, I hear folks saying, “do you know I have $300,000 in equity and if I upgrade the bathroom, it’ll be worth an additional $25,000?” I ask them if they are upgrading for their family but normally it is to sell it off to the next highest bidder. We are starting to see dents in this mentality. Why invest so much in your home if appreciation is stagnant or declining? If you really wanted to be a proud homeowner, you would do these things simply for improving your home. Many did upgrade via mortgage equity withdrawals and second mortgages. However, when the market bottoms out you realize that many did it as a ploy to inflate the value of their home for a future time to market and not for the betterment of their families’ well being. Either way, folks can do whatever they want with their home and money but clearly, homeownership pride for many in Southern California and other large metro areas is based on how much equity you have amassed. The lawyer recounts a sad story of a client:

“George Warner, aged seventy-four, who had for years operated one hundred and sixty acres in the northeast corner of the county and in the early boom days had purchased an additional quarter section, is typical of hundreds in the Corn Belt. He had retired and with his wife was living comfortably in his square white house in town a few blocks from my home. Sober, industrious, pillars of the church and active in good works, he and his wife may well be considered typical retired farmers. Their three boys wanted to get started in business after they were graduated from high school, and George, to finance their endeavors, put a mortgage, reasonable in amount, on his two places. Last fall a son out of a job brought his family and came home to live with the old people. The tenants on the farms could not pay their rent, and George could not pay interest and taxes. George’s land was sold at tax sale and a foreclosure action was brought against the farms by the insurance company which held the mortgage. I did the best I could for him in the settlement, but to escape a deficiency judgment he surrendered the places beginning in March 1^st of this year, and a few days ago I saw a mortgage recorded on his home in town. As he told me of it, the next day, tears came to his eyes and his lips trembled and he and I both thought of the years he had spent in building up the estate and making those acres bear fruit abundantly. Like another Job, he murmured “The Lord gave and the Lord hath taken away”; but I wondered if it was proper to place the responsibility for the breakdown of a faulty human economic system on the shoulders of the Lord.”

“When my friend George passes over the Jordan and I have to turn over to his wife the little that is left in accordance with the terms of his will drawn in more prosperous days, I presume I shall send his widow a receipted bill for services rendered during many years, and gaze again on the wreckage of a ruined estate.”

“I have represented bankrupt farmers and holders of claims for rent, notes, and mortgages against such farmers in dozens of bankruptcy hearings and court actions, and the most discouraging, disheartening experiences of my legal life have occurred when men of middle age, with families, go out of the bankruptcy court with furniture, team of horses and wagon, and a little stock as all that is left from twenty-five years of work, to try once more – not to build an estate – for that is usually impossible – but to provide clothing and food and shelter for the wife and children. And the powers that be seem to demand that these not only accept this situation but shall like it.”

Powerful writing isn’t it? Hard to believe and even conceptualize a time when prudence and financial discipline were esteemed. This is the sad account of many folks being demoralized and unable to recuperate a substantial nest egg to retire. Their main concern shifted to providing the basic necessities for their family. Keep in mind that the majority of Americans store their wealth in home equity. Many people that grew up during the depression seem frugal and downright strict with their budgets and lifestyles. It left a visual scar on their psyche. How could it not? We look at our current culture and hear prominent financial gurus telling people to walk away from their home if they have no equity. Just leave. Don’t try to fight to keep it. Default and declare bankruptcy if necessary. My main question is who will pay the eventual bill? If you say the government then that means you will be paying back for the mass irresponsibility of financial institutions, imprudent government policy, and the mass greed of many. Unfortunately, this bubble will affect everyone in some form since all of us need shelter and this credit bubble was built on the over appraisal of a shingled laden roof over your head.

What do you think of the lawyer’s letter in relation to our current economic situation?

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41 comments »

Comment by Ms. Chambers

August 2nd, 2007 at 9:24 am

Can you verify the authenticity of the lawyer letter? You didn’t provide information about the author to verify on my own; otherwise a very good read.

Thanks

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Comment by Steve

August 2nd, 2007 at 9:29 am

The letter is spooky and will most likely be a very accurate account of 2008/9/10. The end of this bubble is very near and my primary indicator is the psychological value of money.

Here is my test.. Think of a friend or family member. Now imagine mailing them $2000 in cash anonymously, no strings attached and no way for them to know where it came from.

Now consider the person and imagine what happens next… Do they even mention it when you see them next? Do they just deposit it in the checking account and 2 weeks later have it spent 4 times over and have no idea where it went? Did the husband find it and hide it from the wife or vice versa?

Do they buy a CD and 10 years later explain to little Johnny that his first car was paid for by an anonymous person and that he needs to return the favor somehow.

Money has been effectively free for many years and this has confused people’s perceptions of being rich versus being wealthy…

Michael Vick is (soon to be “was”) rich but didn’t value the money very much so he pissed it away… The owner of the Atlanta Falcons is (and will be for a long time) wealthy.

Here is a another brain teaser… Has the entire hip-hop sub-culture simply been an expression of free money?

Bling - Bling!

Pop Goes the Bubble!

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Comment by bearmaster

August 2nd, 2007 at 9:43 am

What a fantastic piece of writing. Having been an economic grizzly for some years now, this writing reflects my worst fears about what major economic collapse would do to us psychologically and as a society. Even though it’s 70+ years later people are the same.

When major turns like the Great Depression occur, there are many undeserving victims, as well as the deserving ones that go from screwing people on Wall Street to washing dishes in a restaurant.

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Comment by Nate

August 2nd, 2007 at 11:01 am

Of course all the folks who left the farmland due to the debt crisis and dustbowl caused by overfarming became like the okies the basis of the whole californian migration, now the whole cycle revisits their progeny in the OC. Of course some became reverse okies and moved bake to OK, KC, and TX californicating the real estate markets there as well

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Comment by Steve

August 2nd, 2007 at 1:06 pm

@Nate

Actually the real estate markets in TX and OK seem to be doing pretty well. Very good values in the $80-$100 per square ft range throughout both states and across the board on the housing stock from 800-4000 sq ft. homes.

From what I can tell, people in general get a bit nuts whenever the right mixture of greed and opportunity is presented. Cheap money is just a key enabler of the opportunity side.

Just check out any Wal-Mart at 4AM on the day after Thanksgiving. Greed is drives them to the store for the “Fantastic Deal!!!” Now that they are in the store, if they had a limit of say $100 in cash, the opportunity side of the equation would kick in and stop the madness.

Then out come the credit cards and opportunity becomes nearly infinite.. Now you’ve got a bubble on your hands…

Pop Goes the Bubble!

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Comment by mikey

August 2nd, 2007 at 3:59 pm

Excellent, Doc. Thanks for exposing the raw shimmer of life’s tawdry neon as it beckons our souls with stick and carrot.

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Comment by Jim

August 2nd, 2007 at 4:29 pm

I have a news paper from 1933 discussing the high level of foreclosures, credit, spending, speculation, etc. just as this cited letter recounts. I have been considering an article on the folly of humans to learn from the past. After all, aren’t we the enlightened generation with superior knowledge and vastly superior communication tools capable of performing comprehensive research? Right.

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Comment by Tyrone

August 2nd, 2007 at 6:52 pm

Off-topic, but related. Guy at work tells me he bought a house. I didn’t press for the price, but he said he “got a good deal.” I asked him if he was familiar with mortgage-backed securties or CDOs. Answer: no. I asked him if he was aware of foreclosure statistics, hedge funds, or subprime lender going under. Answer: no. I even asked him if he ever heard of New Century Financial. Answer: no.

He is what I would consider an average person. Frightening.

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Comment by Dr Housing Bubble

August 2nd, 2007 at 7:01 pm

@ms. chambers,

I’ll post more details of the letter.

@steve,

What you describe is the difference between being wealthy and earning a high income. The two don’t necessarily correlate. Of course if you have a higher income the easier it is for you to become wealthy. I know many people making six figures yet have very little in what we would consider wealth. They have the artifacts of wealth, (i.e., fancy cars and expensive homes) but a very low net worth.

So again, the appearance of wealth can be very deceiving.

@bearmaster,

It seems as a society we have a collective short-term memory. Even the last housing downturn in Southern California seems a century ago and it only happened in the last decade. So something like the Great Depression seems so far away from our consciousness; in most cases, it almost seems improbable to most that we will ever see a bear market in real estate.

@nate,

That was an interesting phenomenon during the time. Those in cities left to rural areas to try to make a living and those from the farms tried to make it in urban areas. Heck, even 100,000 people applied to Russia for jobs! Interesting times.

@steve,

I agree that many parts of the South and Midwest are fairly priced in terms of housing. But cost of living is still going up. That is, food, education, and healthcare all have gone up. And credit card debt is universally maxed out across the nation. Everyone wants a plasma right? And I’ve been to many Southern states and I’ve seen the exact $40,000 SUVs and Mercedes hugging the highways.

All,

Be cautious about the housing rhetoric. Take a look at some select quotes prior to the Great Depression:

1927-1933 Chart of Pompous Prognosticators

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Comment by tpir

August 2nd, 2007 at 10:57 pm

American Home Mortgage is the latest casualty.

This is on their website…

“American Home Mortgage is no longer taking mortgage loan applications.”

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Comment by Gaudia Ray

August 2nd, 2007 at 10:57 pm

Thirty-five years ago, I purchased a Notice of Foreclosure Sale taking place in a midwest state. The year was 1934.

My point is that while the lawyer stopped observing in 1931-32, the debacle continued well into 1934. A prior poster, above, indicates he has record of it being extant in 1933.

IMO, the populace are unwilling to accept the change which has occurred. We are in an increasing state of fear and consequential loss of jobs, income, properties and a spiral based on fear which has no end but for exhaustion accompanied by minimal levels of purchase and sale as the majority will be too frightened to act either way.

Few will have resources with which to purchase. Many will have acted way too soon. We’ll all know when it’s all over. Most will be frozen in fear, unable economically and unwilling emotionally to “gamble” any of their then scarce resources.

Without a firm belief in the repetitiveness of human behavior, one cannot see the opportunities as they will evolve.

Bernard Baruch wrote two things I will never forget (in “My Private Years” and in “My Public Years”):
2 + 2 = 4; and, human behavior changes ever so slightly every few thousand years. Baruch is the man responsible for the reprinting and distribution in the 1930’s (now available free, online) of Mackay, C. 1852. Memoirs of Extraordinary Popular Delusions and the Madness of Crowds Volume 2. London: Office of the National Illustrated Library. Baruch “knew”, and he taught all those who would read and listen, as long ago have I, patience and cautious denial to participate in irrational risk will yield the best opportunities for reward.

The feast table is being set. Passage of time, more patience, and the desserts will go to the wise and long waiting.

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Comment by planobcl

August 2nd, 2007 at 11:19 pm

Just saw the scariest and most disturbing movie/documentary ever in my life. It is call Maxed Out. I now lost all faith in our government. It is about our addiction to credit. I cannot relate in any remote ways to the tragic stories feature in this doc, but I can definitely sympathize.

Lesson learn: If you are a narcissist, you are in for a rude awaking.

Poor Montanan,

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Comment by R

August 3rd, 2007 at 2:16 am

Yes, this is a housing bubble. We’ve survived housing crashes before and I see no reason why we couldn’t survive this one.

It’s fashionable to label every bubble crash as the next Depression. The Internet bubble was supposed to bring a depression, so was Black Friday in Oct 87, the OPEC problems before then.

Just b/c this is a bubble, doesn’t mean the country will go to “hell in a henbasket”. The U.S. will survive this like it survives everything else.

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Comment by ooloo

August 3rd, 2007 at 6:47 am

doc, thanks for the enlightening articles. been lurking for months and i think your site is one of the best source for bubble info. very good mix of humor and sobering information.

“The U.S. will survive this like it survives everything else.”

famous last words? i remember in my social studies class that all great empires fall. romans, mongols, chinese, russian…i find it hard to believe that the US can withstand everything and remain a world leader forever. perhaps the US will survive this bubble, but what about the next? even if we don’t go into depression, a series of bubbles will probably be as devastating if not more. buckle up people and remember to keep your ass-ets inside the rollercoaster cart unless you want to be spanked hard before it comes to a complete stop.

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Comment by Abrey

August 3rd, 2007 at 8:29 am

Dear Dr. Housing Bubble:

The Book is by Dr. Charles L. MacKay, ‘Extraordinary Popular Delusions and the Madness of Crowds’, published in 1841 and revised in the 1850s. Still in print and still essential reading. In the original introduction, Dr. MacKay quotes a local wit (Pourson?) who said that if he ever wanted to write a history of human folly, it would require 500 volumes! I think that number now needs to be revised upward.

I have been waiting online not only for someone to start making the connection between now and The Great Depression, but to discuss the lessons of the past in terms of human cost and the intergenerational conflicts, and whether we will be learning those lessons now. Kudos to you. If we are so lucky, I think those lessons shall be learned for a short while. If this unprecedented bubble causes enough people to lose enough money and suffer enough misery then perhaps those lessons shall be retained for a while longer. For how long, though, nobody knows.

You should consider that during the Great Depression, the United States had far more positive fundamentals than it does now. We were a vigorous, manufacturing nation, oil was cheap and plentiful, we still were largely a rural country, we had savings, such as it was, and thrift, prudence and hard work were prized values; yet there was ‘poverty in the midst of plenty’. Can’t recall who said it, (president Hoover?) as this appears to be attributed to several people. This is how our national food stamp program got started, for one thing. Various other Government assistance programs were started and many of them were middling at best.

Thanks again for a very enlightening post.

Abrey

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Comment by Peppermint Hippo

August 3rd, 2007 at 9:02 am

One issue we have to address is the interconnectiveness of the global economy now compared to the 1930s. IMO, a US Depression in the near future will not be as severe because the rest of the world will keep things chugging along. Yes, the US is the world’s largest and flagship economy. Yes, we consume more than any other country. But you have to acknowledge that other countries are catching up (China, India, EU, etc.) and will pick up much of the slack. I agree that we are due for a major recession/depression in the next few years, but all you need to do is travel to some of these rapidly growing economies to see that there’s real growth going on outside our borders. This growth may temporarily stall with a US led recession, but there is too much momentum and human need for it to completely derail.

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Comment by chopcut

August 3rd, 2007 at 10:07 am

Um, that “letter” is a fake. Anybody else catch that the author used the verb SKYROCKET???!!!! There were no skyrockets in 1933! Doh!!

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Comment by John

August 3rd, 2007 at 11:43 am

Chopcut, I beg to differ.
Aren’t the words “rockets red glare” used in one of the oldest songs of our Country?

Anyhoo….that was a very moving story. You just have to wonder how it could be any worse this time.

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Comment by John

August 3rd, 2007 at 11:47 am

On being wealthy vs. being rich.

Wealthy means you don’t have to work; a condition where your assets earn enough interest/dividends to cover your living expenses.

Being Rich, on the other hand, is only somebody else’s perception of your wealth.

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Comment by tpir

August 3rd, 2007 at 12:30 pm

Interesting: There is also an article from 1933 that’s titled “the wall street debt machine: A study of the stock exchange”

http://www.harpers.org/archive/1933/07/0018534

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Comment by Ms. Chambers

August 3rd, 2007 at 1:42 pm

Thank you for the reference; people pay more attention to the original source.

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Comment by Liberal

August 3rd, 2007 at 4:52 pm

Two years ago in the Arizona Republic one of the headlines:
Juanita Lopez and Shawanda Brown, single mothers no husband in sight are left out of owning a house because the prices increased so much. After reading the article I wanted to throw up. Both worked minimum wage jobs, had no savings, credit card debt up to their ears, no man around taking responsibility for the kids. BUT, the only issue liberal press was concerned about was that these “pillars” of society couldn’t own a house.
I think they must have finally got “their” house, it foreclosed last week, together with other low life’s, shysters, gamblers (they call them investors)and other trash who couldn’t keep a tent if they had to.
You want to know what I really think…just ask me…

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Comment by Robert

August 3rd, 2007 at 5:12 pm

I never heard of anyone borrowing himself into wealth and prosperity.

Flipping overpriced houses isn’t “wealth creation.” It’s INFLATION.

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Comment by Dr Housing Bubble

August 3rd, 2007 at 6:33 pm

You have to watch this video:

Cramer: Bernanke, Wake Up

Oh boy. Here we go with the blame game. Think about the nature of subprime mortgages; you are giving people with a demonstrated inability of managing finances a large amount of money. And you are surprised when they don’t pay?

Even if rates are lowered, subprime loans will always carry a higher rate simply because of the risk. So lowering the rate will only encourage more frivolous spending. That is what got us in this mess.

Interesting times…

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Comment by Samuel Adams

August 3rd, 2007 at 6:43 pm

The naysayers are hilarious. They must think that the country never had a depression. My great grandmother weathered it on the farm. She was born in 1899, so she was an adult with quite a few children in those days. I asked a lot of questions when I was a kid about the Great Depression and I remember well her stories.

We live in a society where people are more concerned about who got kicked off the island than world events or even national ones. People buy cigarettes on their credit card and do lots of other stupid things. There will be a day of reckoning and it has begun. Those doing the stupid things are the same kinds of people who keep just enough food in the pantry to make it through the week and just enough gas in their car to get to the mall.

I don’t feel sorry for them. They have no survival instinct. There is enough inverse Darwinism in the country right now.

America needs an enema.

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Comment by Dr Housing Bubble

August 3rd, 2007 at 7:52 pm

All,

This letter seems to strike a chord with many people. Here is the information should you wish to dig up the entire old article:

“Gentlemen, the Corn Belt!” Harper’s, July 1933 pp. 200-206

I know most people find it hard to believe that this is actually real. Again, denial is something that runs very deep in the human psyche. Most people have never lived through a real estate down turn and the Great Depression seems like such a far off event.

Will something like this happen again? I sure hope not. But we are in a massive credit bubble and the bursting of this bubble will have seismic repercussions throughout the economy.

11:46 AM, August 03, 2007

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Comment by The North Coast

August 3rd, 2007 at 8:09 pm

The letter you published is very moving, and very instructive. What it ought to teach us is that humans do not change.

I have witnessed a number of spates of financial hysteria over tha past 30 years, and every damn time it’s “this time things are different” or a “new parameter”.

It’s never long after the “new parameter” stage that things start ratcheting down the other side of the slope.

Spates of financial euphoria have played out the same way for thousands of years, clear back to the Roman times, when financial markets first formed.

We have seen more of this in the past 30 years than in the tame,stable 50s and 60s for two reasons, I believe.

The first is that we ceased to be a productive economy about 30 years ago, and instead of making our livings by producing goods and delivering valuable services, we are living by generating financial chuck-and-jive games.

The second is that, after 1970 or thereabouts, we lost our collective memory of the chaos and misery wrought by the financial irrationality and malfeasance of the 20s. We lost it when we lost the leadership of my grandparents’ generation, that came of age about 1928 or so, and who were quickly handed very hard lessons in what happens to people who evade reality and live on fantasy. It was people like my grandparents who sat in brokerage firms on that dreadful day in 1929, till 1 AM , trying to clear all the trades that were never going to clear because the money to settle them just wasn’t there. It was they who lost 10 years out of their lives for the next decade, during which you had no chance of advancement and were damn glad you were even employed.

These were the people who ran things in the 40s, 50s, and 60s, and they never lost sight of what could happen as a result of lunacy and dishonesty, and as long as they were in charge, we were in good hands. They were extremely conservative and very caring, because they knew the consequences, which were not paper losses, but lost lives and an entire generation of people growing up in poverty and another spending their old age in deeper poverty.

You can’t read this letter and contemplate our current situation without a sense of forboding that not only will the careless, the greedy, and the delusional suffer, but the prudent and honest will suffer with them. We all dwell downstream from the people, and forces, that created this debacle. We might not lose over-levereged homes, but we could see our jobs wiped out as the credit crisis cascades throughout every industry in the country.

It’s great to see good places dropping back into my price range, but when the moment to buy arrives, will I still be employed? Will you?

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Comment by Jim in San Marcos

August 3rd, 2007 at 9:21 pm

Here’s a link to a similar article written in the 30’s
Link

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Comment by formul8

August 4th, 2007 at 10:51 am

Notice a theme here and a similar theme in the current bubble?

No one wants to see their neighbor make an easy fortune while they sit on the sidelines and watch.

Same in the 1920’s and 30’s and the same today.

I had a client when I was an insurance agent who had 200+ rental homes that I insured. He lived in a modest home worth about $300K and drove a 10yr old Jeep Grand Cherokee. Worth at least $20m if he liquidated.

I learned alot from that guy. You would NEVER know he was worth that kind of dough by looking at or talking to him.

Too many people these days are “All hat, no cattle.”

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Comment by maq

August 4th, 2007 at 5:41 pm

I seem to remember stories from my Father that the Second World War solved the problem of the Great Depression.

Maybe this Iraq and Afghanistan War is the economic engine which will power the national economy out of the Housing Bubble/depression.

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Comment by Regina

August 4th, 2007 at 10:37 pm

Steve why are you so jealous of black people. Why is it any concern of yours what black people buy. What in world does Michael Vick have to do with what is going on in the world today. He is just a media diversion. Why are you so concerned that black people buy jewelery with thier money. Maybe they don’t buy stock and bonds perhaps jewelery is more tangible than money. I see enough white folks telling everyone to buy gold. What is the difference. You probably sit around watching pimp my ride, or the shows on MTV about living in a big house and while you are drinking a brewski lament that you don’t understand how the nggrs got so much and you don’t have it and you can’t stand that f’n rap music nothin but noise although I agree with Simon Cowell Country music is horrid. So what makes you so right and black people so wrong and you can’t understand why muslims want to blow your white asses up. Because you base everyone elses standards like you know everything and they know nothing. You need to get over yourself call the white way a antiquated way and the way of the world and joining in is the new way. Your ways are over. You are truly the pot calling the kettle black. As long as you were doing it (as white america) it was okay but when others did it their way it wasn’t the American way (the white way). Well 9-11 showed a whole bunch of people those other people weren’t having it and it’s people like you who are going to be the last one to learn that lesson. It has been forever whites have locked blacks out of the housing market and job market. Kept them in ghettos and always the custodian or the garbage man but never the CEO or the head of a department. Hell you go into a bank or up scale boutique you never see black faces but now given an opportunity to buy a house to get away from the ghetto they were lied to and another hope for a better life dashed (don’t we hear mexicans say that all the time and it gets you white folks weeping) but for black people we don’t know our place and that is in the ghetto and that is where we will return. What about our better life. What about a hope for our kids future. Isn’t that what Mexicans say all the time. Oh yeah black people are ignorant they don’t know what a better life is. We thought they like living in those nasty, violent ghetto’s. Dreams taken away by greedy white folks. Why white people are so persistant in ruining black people I do not know. But perhaps you all are beginning to get your comeupance because your dirty deeds are rotting and now the whole world can smell the stink. Steve you are a racist asshole and I hope you have a Alt-A, a disposable company and a wife who is screwing the gardener JOSE and a crook for a business partner. If you aren’t one yourself. When your world starts crashing around you I hope you understand how out of control some peoples lives are and it is all because of others and in black people cases the others are white people. Now KMA a big fat nasty smelly black one.

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Comment by Liberal

August 5th, 2007 at 6:14 am

Regina…. reading Steve’s and your post clearly tells me that you are the racist and your liberal self serving, ignorant drivel is exactly what is making this country so bad!!!!
Just this one sentence:
What in world does Michael Vick have to do with what is going on in the world today…..
tells me that you are either completely stupid or to put it simple, you are exactly one of these self-victimizing NIGGERS who ruin everything for descent black people.

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Comment by Vern Wichers

August 5th, 2007 at 7:09 am

Doc, thanks for the excellent posts. You are a very good writer.
You might find this article interesting, concerning the Dutch tulip bubble of the 1630s. There are also many similarities to the current bubble. http://bloggersbubble.blogspot.com/2007/04/lessons-from-another-bubble.html

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Comment by Jim in San Marcos

August 5th, 2007 at 8:25 pm

Regina, you might want to know that Ghetto is a Jewish word. Hitler wiped out the Warsaw Ghetto.

A lot of us in this country are Americans, race doesn’t matter to us. In order to be successful, you have to help other people become successful and there is no room for bigotry.

There are a lot of people in jail that drank a 6 pack, had a hand gun and were mad at the world. Try calming down.

Remember one thing “Life is not fair.” Once you figure that out things get simpler

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Comment by Mike

August 6th, 2007 at 10:15 am

In-Line text ads? How obseen.

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Comment by MRLEND

August 10th, 2007 at 7:45 am

My mother owned a home in the middle of Los Angeles, just south of Hollywood. It was nothing fancy remodled at that time, Single family 3 beds 2.0 bath 2,125 sqft Lot 7,500 sqft Built in 1920.

She sold this home in the late 1980’s for $465,000 which was a record at that time when the Japanese were buying anything they could in Los Angeles.

When the market tanked in the mid 1990’s this same house sold for $238,000. The guy lost money.

Today the Zillow estimate is for $970,000.

The market, especially in that neighborhood, can’t sustain such a drastic price increase. The prices need to come back down to afforable prices. Many of the price increases over the last few years has happened strictly because of the