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Main Street’s Bonanza I: The Real Estate Debacle

Updated on December 28, 2011

After the dot.com bubble implosion and the apparent Wall Street fallout that ensued, deep pocket investors were itching for the “next big thing” to throw monies at. Low and behold the answer would come in the form of real estate: between 2001 and 2005, by most economist estimates, the U.S. economy was about as dead as one could imagine; the very idea of being placed on life support by the previous dot.com episode meant our economic engine was bracing for the worse.

Any good boxing trainer will tell you that you must first go to the body to get to the head—namely, the dot.com era threw so many body punches that it was only a matter of time before the head would follow; the one thing we couldn’t afford was more punches thrown at the body. Fact is, what we saw in the real estate debacle was just a carbon copy of the dotlcom era. To elaborate a bit further, between 2001 and 2005, the government created on an aggregate level was a mirage economy: it was an imposter, a fake and a mimicker of its predecessor. Whatever you want to call it, this period wasn’t real—the money that waw being used to fund the real estate bubble was indeed “funny money.”

If the late 90s gave us “wanna-be” overnight millionaires/billionaires, then the beginning of the 21stcentury kicked off a slightly different version of it— namely, the preconceived investment business model went from being “thin-aired” to something that could be touched. Most investors were thinking: “if all investments contain some form of inherent risk, then why not throw monies at something tangible, like real estate?” This way of thinking wasn’t completely wrong, after all, tycoons like Donald Trump, Merv Griffin and Conrad Hilton, to name a few, made their fortunes from it. This preconceived notion permeated the business environment during the height of the real estate bubble. And what we found out in the economic engine breakdown of 2008 was that this model was the final stage of kamikaze economics before things went from really bad to really sour.

Without question, Americans, during this period, was living in a virtual fantasy land—our engine wasn’t driven by any forces of rational economic thought. Simply put, if modern conventional economic theory had an antithesis, it “showed-up” in the real estate debacle of 2001-2005; this four year span could, in theory, be responsible for a decade long period of economic hardship. As an avid reader of the real estate section, it really became puzzling as to the extent of the irrational, illogical and unsound economic environment that existed during this time period. It appeared that everything rational about economics suddenly came to a halt.

This said, between 2001 and 2005, a very bizarre and sinister form of economics emerged: we had very high job creation, a burgeoning economy with star bucks on every corner, consumers walking around with $50,000 credit limit gold cards, and to top it all off, real estate prices were astronomically high. Shaking my head in disbelief, I often said to myself: “this appears to be another government inflationary boom. But we just had a boom in the dot.com era. What, two booms now?” In the Theory of the Business Cycle, what goes up must “come down,” not “stay up.” This alone should have let Americans know something was very abnormal about this situation. If a poor street kid walks inside a candy store and comes out with his pocket filled with candy, you might raise some suspicion, but if another kid does the same thing, “something’s wrong with that picture.” Again, something was vastly wrong with our economy during this brief period, and the American public didn’t raise an eyebrow—they allowed everyone to just continue stealing candy from the store.

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