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Monday, September 15, 2008

Better not call it a home-price bubble

I've been wondering how much more drama there would be in the economy right now if ordinary people on Main Street were cognizing this as the end of a decades-long bubble in home prices, instead of as something brought on by improvident lending practices, creation of and speculation in esoteric and opaque derivatives by elites, overuse of leverage and what-have-you. The master narrative—greedy elites getting carried away—seems to me a symptom masquerading as the cause. The cause is that everyone thought (thinks) that the next fellow would (will) pay more for the house. If any other kind of asset were involved—internet stocks, tulip bulbs—the illusion would have burst by now and everyone would be picturing the last day, but our time horizons for selling homes are long, homes have an intrinsic value and everyone needs a place to live.

This sure isn't a subprime mortgage crisis. Subprime mortgages are like the crap companies that came on the market near the end of the tech bubble: especially ugly pigs with thick, sloppy lipstick (to choose a random metaphor). They didn't cause the problem, they were just the only way to continue the game once the cute pigs, M.A.C. and Chanel ran out.

All the esoteric instruments and excesses of leverage are at bottom just clever ways of monetizing bubble expectations about home prices that remain more or less intact on Main Street. Blaming Wall Street elites for what's going on right now might be like plugging in 50 blow dryers and deciding you have a fuse problem. It's too metaphorically cute not to wonder whether we're watching the financial system slipping pennies into the fusebox to keep the lights on and the blow dryers running. I guess we may find out.

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posted at 10:11 PM

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