Real Estate and The Stock Market Crash: How and = Why?

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The experts are confused. Bank presidents, University economics = professors,=20 CEO's running multi-billion dollar International companies, large fund = managers,=20 execs of the federal reserve banks, and even our politicians are totally = stumped=20 by the chaos in the markets. Exactly what is happening and why? A brief=20 chronological review of the fundamental facts actually helps to answer = the=20 why.

The mortgage market crumbled, the result of greed, lax standards for = income=20 verification, and sub-prime lending. Partly because of that, but also = being=20 steered by it's own forces, the real estate market hit the biggest speed = bump in=20 decades. Foreclosures overwhelmed the capacity of institutions to handle = the=20 administrative nightmare. FHA was tasked with the responsibility to = handle=20 foreclosure workouts but congress has refused to provide the $65 million = FHA=20 needs to hire staff. Could it be congress is preoccupied with bigger = problems at=20 the moment?

In a parallel universe, but intimately connected to the mortgage = market and=20 the real estate industry, the banking industry started cracking under = the=20 pressure of massive miscalculations and mismanagement. A small crack in = the damn=20 started to get wider=96let's call it the credit crunch.

Inevitably the financial markets began to feel the crunch. Support = for 70% of=20 the entire home mortgage business collapsed as the feds took over Fannie = Mae and=20 Freddie Mac, unprecedented government intervention. Large banks began to = fail,=20 red flags of a pending disaster. Major corporations unrelated to the = banking=20 industry, like Caterpillar, are unable to tap into their large = commercial lines=20 of credit. In crisis mode, these companies seek direct financial help = from the=20 feds, which is rapidly buying up more and more of private industry as = fast as=20 money can be printed. (In high finance, ownership is often clothed in = the form=20 of lending with tight security provisions and killer remedies.)

The credit crunch deepened in the U.S. as the average Joe began to = panic, and=20 collectively Americans withdrew over $81 billion dollars from their = banks as of=20 this writing. Some are told they cannot get their funds. These people = tell 20=20 other people. Some are saying, "I'm not worried. This too shall pass." = But at=20 home, they don't believe that.

It is no leap of logic to connect the dots from the U.S. to = International=20 financial markets. The credit crunch deepened as banks' cash reserves = dwindled=20 from withdrawals and as banks throughout the chain of electronic = transactions=20 began to put holds on their available cash reserves, fearing that if = they let go=20 of those precious funds, they would never see them again. Strong = borrowers=20 cannot get loans, and the text book economics phrase "self-fulfilling = prophesy"=20 has meaning once again.

Fear spreads and the stock market tells the whole story as it = mathematically=20 maps technical charts clearly showing what everyone is thinking.

Why don't the experts know what to do? First, we have moved from a = simple to=20 an exceedingly complex economic system, comprised of thousands of = interdependent=20 variables, controlled by a multitude of individual, corporate, and = government=20 influences. Since the great depression, we have created millions of = laws, rules,=20 regulations, and systems at the city, county, state, and federal levels. = On the=20 bench judges have created millions of interpretations, each finely tuned = to the=20 specific facts of the case. Politicians have added millions of nuances = to=20 economic controls of private industry, and have steadily replaced the = power of=20 the federal government over private market forces. Between the "fine = tuning" of=20 the federal reserve system with it's monetary policies and the power of = fiscal=20 policy (government spending and taxation), virtually no one has the = ability to=20 comprehend all of the interdependent forces at work. It would take a = super=20 computer to compile and assimilate all the variables, and then you would = need a=20 human to interpret, which we already know they cannot do.

Go beyond the borders of the U.S. and add to the mix the European = Community.=20 You think there is chaos on the American financial scene? You haven't = seen=20 anything until you've tried to figure out how European countries = function on a=20 cooperative economic level. Yet, our economic system is no longer just=20 national=96it is International. We do not function in a vacuum. The = entire world=20 economic system is intimately interconnected. If you understand = statistics, you=20 understand how increasing the variables dramatically increases the = complexity of=20 a given outcome. In simpler times our economy could be explained. Now = the=20 variables have exceeded our capacity to control and comprehend our = current=20 condition.

This answers the question of what is happening, at least = superficially. As to=20 the question why is all this happening, know we know why no one knows = the why.=20 Since causation cannot be mapped, the route to a quick recovery is not = apparent.=20 How does a severe wound heal when you have no miraculous medicine?=20 Slowly.

Posted by at October 10, 2008 5:46=20 p.m.
Categories: Market Watch, Real estate opinion

Comments

#195576

Posted by davelosh=20 at 10/10/08 8:27 p.m.

What wound?

Things are fine. The markets are doing what they = are=20 supposed to do. Value is returning to the market place. Cash as king is=20 everywhere.

There are tons of cash in the system and the world=20 governments have dumped in billions of dollars and euros more into the=20 system.

What we fear is socialism. There again many of the things = that=20 need fixing with six billion people on the planet need some = socialism.

Report=20 violation

#195599

Posted by Leanne=20 Finlay at 10/10/08 9:40 p.m.

Chuck, there are a lot of things going on these days, that is=20 certain.

But, one thing that hasn't had a lot of discussion is = that we=20 have a new ability to have our news, worldwide, given to us 24/7. We can = get up=20 at 2 in the morning, and go online and have immediate information as to = how the=20 world stock markets are performing RIGHT NOW. We can get up again at 4 = in the=20 morning (not that we've actually slept) and look again.

It's no = wonder=20 panic and fear are king. We haven't learned yet to be able to moderate = the=20 constant flow of instant information. Do we look at it all the time, so = we know=20 where things are going? Or, do we shut it off a day, or a week at a = time, and=20 don't look?

The middle ground will come about, probably = differently for=20 each person, but we have to realize that the constant viewing in the = disaster=20 window isn't healthy.

We are destructive when we panic.

Report=20 violation

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