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The Real (Easy Credit) Debacle: A Hard Lesson Learnt!

Updated on January 20, 2012

What will economics teach us about this chapter in our lives? I think the prevailing mantra will be: “don’t toy with real estate, don’t toy with real estate.” Fact is, you shouldn’t toy with real estate, because it’s a “no joke” investment. Not only does a house serves as a kind of metaphor for economic independence, status, wealth, manhood, womanhood, etc. a house also represents—within the parameters of economic doctrine—a tangible asset and habitable living space that has a proverbial macroeconomic price tag. This same price tag became a very important objective measure within the dogmas of the “speculation nation.” In the arena of speculation, a price on a home isn’t left to human conjecture: it is inherently tied to the forces of supply and demand in the marketplace.

Real Estate Investment...Symbol of Virility

Traditionally, real estate has always been that sector of the U.S. economy Americans came to respect because of the status that came along with its ownership. Whenever stocks were bearish, most savvy investors rode down real estate for the long-term. Also, for the average American, a house wasn’t only an excellent tax sheltered investment, it was a place they genuinely called home. My “grandpaw” bought real estate property all through-out the neighborhood because he use to say, “it was like money in the bank.” “Grandpaw,” the savvy investor he was, may have been on to something: real estate being a very liquid asset meant that in hard times you could convert it into cash. But this recent real estate bubble—fueled by extraordinary low-interest rates—a house became everything other than “money in the bank:” it began a vehicle to get “rich quick” and an implicit way to exploit the economic system.

Real (Easy Credit) Residue--bka, Real Deal!

Unlike the dot.com bubble, when the real estate bubble finally burst, it left a “nasty residue” everywhere, and you want to who got the price tag to clean up this mess: The American Taxpayers. Everyone, including the Fed, knew we created a major folly in the real estate sector, but by then, it was entirely too late to be contrite. Congratulations, we now have a housing sector that’s dead! What does the Fed has to say about all this? “Well, we messed up!” Okay, I’m glad you guys, at least, have the voracity to admit guilt but that still doesn’t erase the fact that it’s going to take sometime to undo the mess you’ve created. Under the assumptions that 1) Housing prices couldn’t fall dramatically; and 2) Free and open financial markets supported by sophisticated financial engineering would most effectively support market stability, I think it’s safe to assume that, the Fed overreached the U.S. economy’s general expectations.

Have Phd Will Forecast....

It doesn’t take a PhD economist from The University of Chicago to predict what should have happened to the economy, if interest rate weren’t tampered with: the dot.com era created a mild recessionary economic engine cooling off period; this same period would’ve come and gone like many of the past recession and our engine probably would’ve started a slow and steady growth period. Instead, what we have now is the constant pressure that our economy could be heading for an even bigger breakdown—aka, an engine stall. When a used car breaks down on you, there’s a chance that it can be fixed; change a few things “here & there” and it’s back on the road. But when a car stalls on you, that’s it, it’s time to get a new car. Should we even be in breakdown mode? Probably not, at best, we should just be making a few repairs (changing the oil, spark plugs, battery cables, etc.) But when the Fed heavily intervened in the frenzy we now call The Real (Easy Credit) Debacle, they may have placed a tremendous amount of external pressure on our engine to the point of forcing it to be rebuilt.

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