Since the late 1990’s we have been living in a bubble economy. To be more precise, we have gone from one asset bubble to another. In 1999 and early 2000 taxi drivers were buying dot.com companies with no earnings, no business plan, no prospects and projecting nothing but losses as far as the eye could see. Hey, no problem. The stocks of these “companies” shot up as much as 700% on the first day of trading. The brighter you were and the more you knew about the stock market, the less likely you were to have participated in that madness. Unfortunately, most of the “players” bought a round trip ticket and rode their stocks right back down towards zero when the bubble inevitably burst. Many are still waiting in Grand Central in the same trains they boarded in the 1990’s which stubbornly refuse to leave the station. Some of the aforementioned gamblers got lucky and got out by the seat of their pants before the infamous “tech wreck.” They are the proud survivors who haven’t a clue that they represent living proof of the dumbing down of the new investor class in America.
When bubbles burst, Federal Reserve chairmen suddenly see the dreaded “D” word on their radar screens. Deflation is to be avoided by any and all means, and Sir Alan, a.k.a. Allan Greenspan, hit the old panic button with both hands and dropped interest rates to 1% (keeping a little bit of his powder dry in case our economy did a perfect imitation of the Japanese nation). In so doing, Greenspan was in effect begging the gullible public to borrow and spend. Suddenly, the object of everyone’s affection was real estate. At first it was simply a matter of obtaining a low interest loan and buying a house or condominium. So far, so good. Then, as the real estate started to appreciate in value, the loans became more unusual: no money down, interest only loans, adjustable rate products, home equity loans. As prices continued to rise, a pandemic of insane speculation broke out across the nation. Once again the proverbial taxi driver was buying a condo before the concrete was even poured and selling it before a nail had been hammered. The second taxi driver, who had bought from the first, sold the condo yet again to a third cabbie before the joint had a roof. Enter the fourth Yellow Cab driver etc. etc. By the time the building was remotely livable it had had four owners and the price had doubled or tripled. People who knew nothing about real estate were flipping condos “on paper.” Welcome to the new bubble: the housing market. And welcome to the “greater fool” theory which began with “Tulip Mania” back in the 17th century and keeps reinventing itself like a flu virus in never ending mutation.
As prices climbed ever higher the astute investors, otherwise known as gamblers, began to use their homes as ATM machines in order to buy things they didn’t need with money they really didn’t have. After all, the material lust of the American consumer is a thing of beauty. But not to worry because remember there is always a greater fool waiting in the wings to give everyone a higher price for his/her condo. But have you ever played musical chairs? Suddenly the music stops, and someone has no chair to sit in. The same thing happens when the music stops in real estate. The greatest fool is the last one to have bought the house.
Sir Alan, having averted deflation, now begins to worry about what he has wrought. Inflation becomes his new concern, and the Maestro commences a prolonged grinding higher of interest rates. Twelve times he pulls the trigger and assures us that he still has more ammunition in his potential weapons of mass economic destruction. The supply of houses for sale begins to rise. And once on the market they don’t seem to sell as well as in the past. And as we speak, the supply has tripled and the prices are softening. Where are the buyers? They’re in debt, that’s where they are. The interest payments on all those creative adjustable rate mortgages and home equity loans are getting increasingly painful. And with housing prices starting to fall and the equity in many of those houses having already been spent on consumables by their insatiable owners, the household balance sheet doesn’t look all that good.
Asset bubbles are temporary phenomena which owe their existence to credit otherwise known as debt. The bubbles burst and thus disappear, but the debt remains firmly in place. Out of nowhere, it seems, the gamblers’ equity disappears and then becomes negative. Welcome to the world of foreclosure.
But the world’s most desperate consumers still have another arrow in their quiver: multiple credit cards which were force fed to them by the likes of Citibank, Capital One, MBNA, Advanta, Chase etc. These companies have enticed our society of “wanters” to get what they want when they want it (which is right away) and worry about paying for it later. Buying with plastic should be Webster’s definition of the word, “miracle,” until the day of reckoning makes its appearance. If the truth be known, it is the Government who wants consumers to go ever deeper into debt in order to keep the economy going. Saving money instead of spending the bank’s money or the equity in your home is considered positively unpatriotic. Yet, should you overdo it and get yourself into a fiscal dilemma, the Bush administration, which is firmly on the side of the credit card companies, has made it much more difficult for individuals to file for bankruptcy. And the credit card companies will be doubling their minimum payment requirements starting in January.
But, you say, I was only following the example of our Government which has taken a surplus and converted it into the greatest deficit in the history of the world. But blaming your mentor, your role model, will get you nowhere. Always remember the fundamental difference between you and the Federal Government: the Feds can print money. And that’s a story for another day (and quite a story it is). But in the meantime, you need to overcome your addiction to debt. The withdrawal symptoms will be unpleasant, even severe, but the alternative is certain to be far worse. Stock bubbles and housing bubbles come and go; but if the debt bubble bursts, your illusion of personal wealth will quickly disappear.
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