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« Build
your own Tree House | Main

Real Estate and The Stock Market Crash: How and Why?

The experts are confused. Bank presidents, University economics professors,
CEO's running multi-billion dollar International companies, large fund managers,
execs of the federal reserve banks, and even our politicians are totally stumped
by the chaos in the markets. Exactly what is happening and why? A brief
chronological review of the fundamental facts actually helps to answer the
why.

The mortgage market crumbled, the result of greed, lax standards for income
verification, and sub-prime lending. Partly because of that, but also being
steered by it's own forces, the real estate market hit the biggest speed bump in
decades. Foreclosures overwhelmed the capacity of institutions to handle the
administrative nightmare. FHA was tasked with the responsibility to handle
foreclosure workouts but congress has refused to provide the $65 million FHA
needs to hire staff. Could it be congress is preoccupied with bigger problems at
the moment?

In a parallel universe, but intimately connected to the mortgage market and
the real estate industry, the banking industry started cracking under the
pressure of massive miscalculations and mismanagement. A small crack in the damn
started to get wider–let's call it the credit crunch.

Inevitably the financial markets began to feel the crunch. Support for 70% of
the entire home mortgage business collapsed as the feds took over Fannie Mae and
Freddie Mac, unprecedented government intervention. Large banks began to fail,
red flags of a pending disaster. Major corporations unrelated to the banking
industry, like Caterpillar, are unable to tap into their large commercial lines
of credit. In crisis mode, these companies seek direct financial help from the
feds, which is rapidly buying up more and more of private industry as fast as
money can be printed. (In high finance, ownership is often clothed in the form
of lending with tight security provisions and killer remedies.)

The credit crunch deepened in the U.S. as the average Joe began to panic, and
collectively Americans withdrew over $81 billion dollars from their banks as of
this writing. Some are told they cannot get their funds. These people tell 20
other people. Some are saying, "I'm not worried. This too shall pass." But at
home, they don't believe that.

It is no leap of logic to connect the dots from the U.S. to International
financial markets. The credit crunch deepened as banks' cash reserves dwindled
from withdrawals and as banks throughout the chain of electronic transactions
began to put holds on their available cash reserves, fearing that if they let go
of those precious funds, they would never see them again. Strong borrowers
cannot get loans, and the text book economics phrase "self-fulfilling prophesy"
has meaning once again.

Fear spreads and the stock market tells the whole story as it mathematically
maps technical charts clearly showing what everyone is thinking.

Why don't the experts know what to do? First, we have moved from a simple to
an exceedingly complex economic system, comprised of thousands of interdependent
variables, controlled by a multitude of individual, corporate, and government
influences. Since the great depression, we have created millions of laws, rules,
regulations, and systems at the city, county, state, and federal levels. On the
bench judges have created millions of interpretations, each finely tuned to the
specific facts of the case. Politicians have added millions of nuances to
economic controls of private industry, and have steadily replaced the power of
the federal government over private market forces. Between the "fine tuning" of
the federal reserve system with it's monetary policies and the power of fiscal
policy (government spending and taxation), virtually no one has the ability to
comprehend all of the interdependent forces at work. It would take a super
computer to compile and assimilate all the variables, and then you would need a
human to interpret, which we already know they cannot do.

Go beyond the borders of the U.S. and add to the mix the European Community.
You think there is chaos on the American financial scene? You haven't seen
anything until you've tried to figure out how European countries function on a
cooperative economic level. Yet, our economic system is no longer just
national–it is International. We do not function in a vacuum. The entire world
economic system is intimately interconnected. If you understand statistics, you
understand how increasing the variables dramatically increases the complexity of
a given outcome. In simpler times our economy could be explained. Now the
variables have exceeded our capacity to control and comprehend our current
condition.

This answers the question of what is happening, at least superficially. As to
the question why is all this happening, know we know why no one knows the why.
Since causation cannot be mapped, the route to a quick recovery is not apparent.
How does a severe wound heal when you have no miraculous medicine?
Slowly.

Posted by

at October 10, 2008 5:46
p.m.
Categories: Market Watch, Real estate opinion

Comments

#195576

Posted by davelosh
at 10/10/08 8:27 p.m.

What wound?

Things are fine. The markets are doing what they are
supposed to do. Value is returning to the market place. Cash as king is
everywhere.

There are tons of cash in the system and the world
governments have dumped in billions of dollars and euros more into the
system.

What we fear is socialism. There again many of the things that
need fixing with six billion people on the planet need some socialism.

Report
violation

#195599

Posted by Leanne
Finlay at 10/10/08 9:40 p.m.

Chuck, there are a lot of things going on these days, that is
certain.

But, one thing that hasn't had a lot of discussion is that we
have a new ability to have our news, worldwide, given to us 24/7. We can get up
at 2 in the morning, and go online and have immediate information as to how the
world stock markets are performing RIGHT NOW. We can get up again at 4 in the
morning (not that we've actually slept) and look again.

It's no wonder
panic and fear are king. We haven't learned yet to be able to moderate the
constant flow of instant information. Do we look at it all the time, so we know
where things are going? Or, do we shut it off a day, or a week at a time, and
don't look?

The middle ground will come about, probably differently for
each person, but we have to realize that the constant viewing in the disaster
window isn't healthy.

We are destructive when we panic.

Report
violation

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