Sunday, August 5, 2007

Where to Start?

This is such an enormous subject, it's difficult to know where to begin. I'm going to start with the prevalence and destructiveness of excessive debt. The best illustration of that so far is in the housing market. The symptoms there are more obvious and advanced than elsewhere. So let's go to the stats.

According to the Federal Reserve mortgage lending grew from $153.8 bil in 1995 to $1,051.8 bil in 2005 - a mere 584% in 10 years.

The results were amazingly predictable: housing prices rising rapidly, with a speculative frenzy at the end. It's axiomatic that bubbles can only last as long as there is more money coming in. I'll freely admit that I expected a top in housing in 2004 as the pool of qualified buyers was drained. The lenders fooled us by making further loans to unqualified buyers to keep things going for another 15-18 months. In the end, this has only made things worse naturally.

We are at the front end of the suffering now. It was easy to see it coming when new houses were adding 2% or more to the existing supply for years and the population was growing at half that rate or less. The Census Bureau confirms that the number of empty houses has never been higher. Until 1999, homeowner vacancy rates were almost never above 1.7%. That number has been 2.5% or higher for 4 straight quarters now - suggesting over 1 million empty and unneeded houses.

The consequences are popping up in the form of falling home sales and prices, rising delinquencies and foreclosures, with collapsing lenders following quickly behind them. For detailed coverage and discussion of all these trends, check

Unfortunately, the madness of the lenders was not confined to housing - far from it. There was similar Crazy Eddie lending in commercial real estate, corporate lending, foreign government bonds and the various forms of consumer credit. I'll examine each of these separately but the bottom line is that these practices have erected a house of (credit) cards that now threatens to collapse - taking much that I hold dear with it.

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