Why do I think Soros is behind this and the $ falling????

Billfold emptying?

Sandy - I agree - the fall in oil with no significant supply/demand changes implies something was up before the election.

Soros did it with Sterling and he's trying it here.

The longer the housing boom continues, the louder the crash will be. A lot of uncreditworthy people are buying houses with little to no equity involved. A two to three point jump in interest rates and this could get real ugly real fast, as people's payments go up by 25-30%.

Oh Bart.

Life is just a bowl of cherries which is constantly being eaten up and replenished. Translation, life in our free market, capitalistic society has ups and downs, i.e., if you don't buy a ticket, you can't get on the gravy train.

If you want a life of uniformity, security and mediocrity, check out the socialist countries where life is uniformly dull and drab. I hear Alec Baldwin may be leading a movement to relocate to a place where George W Bush and his evil puppeteer can't get their evil claws on you.

Bon voyage.

What are you babbling about?

This is the third housing boom I've seen and they all end the same way. Interest rates go up and a lot of really stupid people who bought houses with no money down or with adjustable rate or balloon mortgages get crushed.

As a professional bottom-feeder I shouldn't complain but seeing people get dispossessed because of their own gullibility just sets my teeth on edge.

Bart:

None of the houses cost less than they did at the peak of the other booms.

Sure, but during the down cycle prices can really drop. This is where you get situations like the S & L crisis of the late 80s and early 90s.

Foreclosures and bankruptcies are both at record levels today. There is a lot of poor decision making out there.

The more of something you have the more failures--big deal. People still need houses.

The S&L crisis was a very particular circumstance and can't reoccur. Whatever happens next time, and of course there will be a next time, will be entirely different.

David,

The fundamental problem was unwise lending. S & L's were involved in commercial projects way beyond their level of expertise for example.

Today, it's risky types of residential loan products. Negative amortization products are back. There are people buying balloon mortgages and adjustables, and putting nothing down. G-d help us all.

Bart: Sort of. The S&Ls got whipsawed by their regulators. With banks offering higher interest savings accounts and CDs, along with all the "free" checking plans, the S&Ls couldn't attract depositers in high interest rate environments. They lobbied for a relaxation of the regulations. Then, set free, they started lending in a booming real estate market to earn more interest to pay more interest, etc. Then they started getting the smart idea to convert to stock form from mutual form, which was just astonishingly stupid. For various reasons, including naivete, faith in the boom, lack of experience, magical thinking, need to keep earnings growth, etc., they failed to recognize non-performing loans (after the bust, the FDIC estimated that a third of thrift loans should have been categorized as nonperforming). They then made loans to cover the interest payments on their loans, so they could argue that the loan wasn't nonperforming. When everything went south, it all went south at once.

" For various reasons, including naivete, faith in the boom, lack of experience, magical thinking, need to keep earnings growth, etc., they failed to recognize non-performing loans "

David, these same conditions are in place today with mortgage lenders. The sentiment on this board, espacially OJ, indicates that magical thinking is alive and well. The high growth products are at the low end, lower credit quality. Low income borrowers are being shoe-horned into homes using variable rate ARMS and 40 year maturities. It's a feeding frenzy, companies are doing what they can to get business today, and worry about the consequences later. Investors are using derivatives to hedge the credit risk in their portfolios. You are right that it isn't like the S&L situation, it is a lot bigger.

Robert: Leaving the rest of the economy aside, post-FIRREA financial institutions are much better protected from a crash than pre-FIRREA financial institutions ("FIs"). (Did you know that FIRREA was almost called the Depository Institutions Reform, Recovery and Enforcement Act, until someone thought about it? Too bad, says I.) Regulatory capital is a real-world number, coverage ratios are higher and file control and auditing is much tougher. FIs are much quicker to rate a loan as non-performing and take a reserve against it.

Yes, but they are much more willing to acquire assets that are at risk to non-perform. Like I said, it is a feeding frenzy. This is the downside to loose credit, investors will pursue yield where they can find it. Remember junk bonds? We're creating junk mortgages by the trillions of dollars worth.

What do you think about the massive trade in derivatives, and the excessive use of leverage to increase yields? What do you think about the proliferation of unregulated hedge funds? Have you read "When Genius Failed", about the LTCM debacle? Our financial economy is so overleveraged that a major shock can send it crashing down. The problem with reforms like FIRREA is that they feed a false sense of security that makes it easier to take risks.

The geniuses at LTCM thought that they had figured out the perfect risk-free model, so they used massive leverage, 20 to 1 or more, to generate massive returns. The problem is, you can't model the real world. Unexpected shocks will occur. Our financial system cannot absorb them.

Robert:

Junk bonds were a good investment if you just held them, instead of selling when folks like you stsarted shrieking.

We absorbed 9-11 rather easily.

Ditto what OJ says about junk bonds, plus they opened up a whole new source of lending for businesses that now make a lot of money and employ a lot of people.

As for bottom-fishing bad loans, it's a great way to make money, or lose money. So long as people are setting rational reserves, no investors will be taken by surprise.

As for leverage, if you're going to argue with Modigliani-Miller, you've come to the wrong shop.