Been There, Done That

I thought I'd written on this subject before, but as I look back, the last time I quoted George Santayana ("those who cannot remember the past are condemned to repeat it") had to do with Prohibition and the war on drugs, not real estate. However, it's real estate - specifically the current melt-down in the so-called "sub-prime market" - that brings the quote to mind now. I guess when you're right, you're right all the time.

Everyone is now freaking big-time over the fact that the housing market has flattened out, and you can no longer buy a house for a mortgage you can't afford, wait 4 months, and sell it for enough to cover the outrageous amount of money you borrowed and put a little extra loot in the bank for yourself. Apparently everyone thought the housing market was going to continue heading skyward indefinitely. Let me repeat another old saying that's still true: what goes up must come down. Isaac Newton only dealt with physical objects; but this also applied to skyrocketing markets. In fact, to date in human history there has never been a skyrocketing market in anything in which the bubble hasn't eventually popped, causing a large number of investors to lose their shirts and everything else. But every time a new bubble comes around, everybody convinces himself that "it's different, this time." No, it isn't.

The infuriating thing about the looming massive defaults on sub-prime home loans, which have already taken down a number of

• Lenders who specialized in sub-prime loans because they're so profitable
• Investors who bought "securitized" sub-prime loans because the interest rates are so high

is that we have been here before. Recently. In fact, we were here in my adult lifetime, in the late 1980's, when that iteration of the housing bubble popped, doing exactly the sort of damage this one is doing, and incidentally bringing down the entire savings and loan industry in the U.S., which had to be bailed out at great expense to the taxpayer. That would be you, and me. I wonder who we'll be bailing out this time.

Yes, I remember all of this from the '80's: the negative amortization loans. The low-to-no down payment terms. The adjustable rate mortgages where nobody bothered to ask if they could afford the payment after the adjustment. The desperate scramble to buy a house on any terms, for any price, just to get "into the housing market." I even think I remember "no doc" loans, where the lender just asks how much you make and writes it down; I understand these are called "liar loans."

The real tragedy is that the loan companies, investors, possibly the U.S. economy itself if things get really bad, are all secondary victims. The primary victims are the people who took out these loans, which they couldn't possibly afford, which a rational lender would never have offered to make to them, in order to buy a house to live in, which they assumed would be an investment to protect them in retirement. These people will now lose the house, ruin their credit rating and their personal financial position, and probably never be able to retire in comfort at all. And all because of the bubble madness.

You can say, they should have read the fine print; and they should have. But if you aren't very well educated (and there's a whole generation or two of Americans who aren't), the fine print may or may not have made it clear to you that you were not going to be able to make the payments on this loan. The lender certainly did not. And the housing market is now going down and sideways, and you can't refinance, because you owe more than the house is now worth; and besides, interest rates have gone up, although not as much as your adjusted rate has. In short, you the borrower are screwed, and you're going into foreclosure Real Soon Now. And it's only poetic justice that the lender who loaned you more money than you could rationally expect to be able to repay is also screwed.

166 years ago, in 1841, Charles Mackay wrote a book called Extraordinary Popular Delusions and the Madness of Crowds. It's still in print; it is regularly reissued with new material. The latest edition I see on Amazon was reissued sometime in the mid-90s. It should be mandatory reading in every school in America. Assuming American schools still teach students how to read; but that's another rant.