Tuesday, December 06, 2005

The Reason

No, not "The Reason Why." That's redundant. I realize email, blogs, rap, and general stupidity and sloth have effectively eradicated spelling, capitalization, punctuation, grammar, syntax, sense, and meaning from the English language, but the rules are still in force in MY little world. Just ask my kids after I smack them alongside the head when they say, "My bad," and admonish them, "In my house, 'bad' has not mutated from an adjective into a noun."


You may wonder why I wax vitriolic over the explosion of sub-prime real estate paper, the "We'll Buy your House" scammers, the growing role of speculators in the real estate market, and the...well, whatever it is The Fed thinks it's doing. After all, it doesn't affect me, right? Quatsch. Here's the reality check: All these things are costing us (i.e. you, me, and all ordinary folks) money and will keep on costing us money for years.

Let's start with The Fed. There has been one thing that has kept the economy above water since the Dot Com Bomb, and that is the real estate market. That market has been made possible by low interest rates. The Fed decided the market was getting a little too hot and that long term rates were not reflecting reality (which frankly was true) and raised rates.

What has happened since? First, let me note that there are two kinds of growth: healthy growth, which should be left alone so it can continue; and speculation growth, which makes bubbles and needs stopped before it pops. The Fed maintains there are no bubbles, so what we must have is healthy growth. Yet it keeps raising rates, which is something you don't want to do to a healthy growth cycle. Why is The Fed engaging in such seemingly counterproductive behavior? To stop inflation, it claims, and that inflation is the run-up in oil prices.

Will someone please tell The Fed that an increase in the price of oil is not inflationary. Oh, oil-related prices make short term spikes after an increase, but when oil increases to a new plateau, the economy ends up deflating correspondingly. By the time The Fed acts to head off the "inflation," the spiking prices are already heading back down in a general contraction, and the higher interest rates just exacerbate things. And you and I end up with more expensive financing for everything.

Next, the speculators. I can't really take issue with what they themselves are doing, namely squeezing the last few bucks out of a rising market before it stagnates or heads back down, which really is what speculators do. I just wish people would admit that this is a speculation market instead of continuing to pretend that it's a healthy, growth market. Instead, we keep pretending, and prices keep getting run up, and increasingly costly capital gets even costlier because piles of it get siphoned off to finance speculation moves. That costs us now, it will cost us still more when prices fall farther than they should simply because of the extra momentum of falling from speculation-fueled levels, and it will cost us even more when things should rebound but investors keep their capital locked up because of the snake bite they received this time.

Scammers? Easy. Where scammers go, regulators follow. Regulations cost money, not just for the con men but for the rest of us as well. Think that, because the Republicans control DC, we have entered into some magical era where regulations are cheap? I have one hyphen for you: Sarbanes-Oxley.

Sub-prime paper? It's life blood is an expanding market. When the economy contracts, that paper turns instantaneously from negotiable instruments into foreclosures and bankruptcies and work-outs. These make capital more expensive. The more such paper there is, the worse the fall-out. As capital becomes more expensive, the economy contracts. As the economy contracts...well, you get the picture.

Why do I rail? Because I see these things taking money out of my pocket just as surely as taxes.


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