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THE CREDIT CRISIS
Terry R. Rudd
At this writing, the Treasury and Fed just convinced Congress to grant a $700 billion capital
infusion to prevent a run on the investment banks. As a member of the Appraisal Institute,
touted the most prestigious appraisal organization in the world, and with 50 years of experience
valuing all categories of property … I should have known the extent of the real estate component
of this problem. But except for some key personal insights, I did not become aware, even after
attending seminars on this subject, of the incredible magnitude of this financial crisis. Even as a
commodity trader for 30 years, I’m ashamed that I and most of us did not have a clue either.
We didn’t know that a Titanic ghost ship 10 times the size of our exchange markets was running
alongside - in the dark! What iceberg?
John Hill and George Pruitt, of Future’s Truth Magazine, suggested I research this subject and
report back. I accepted … concerned about my own future, as well as helping other commodity
traders. So, I spent the last six weeks trying to make sense of what sounded like non-sensical
problems in the mortgage and investment banking industry. What I discovered is that, on one
hand the problems have become extremely complex, but on the other hand remain …
unbelievably simple. To my amazement, we appear to be in surprisingly good shape in regards
to the down cycle in residential real estate. We could afford to pay off every institutional home
mortgage if given a few years. Though such is many times the $700 billion now requested to
salvage the banks, it’s several times less than what our country makes as a whole - $15 trillion
per year.
But, while we’ve been busy trading markets that continuously display prices and our financial
positions, the investment banks trekked far beyond their simple lending beginning, like the
movie “It’s a Wonderful World” loaning on houses and Joe the Plumber businesses - to a
celestial array of pyramiding schemes in the search for profits without limits and no oversight.
Evolving from 20% risky business 30 years ago, these aggressive banks increased to 80% jungle
warfare gaming of unknown magnitude.
In a no-holds-barred predator environment, bank traders preyed on investors, pension funds,
hedge funds, and other countries around the world. This feeding frenzy was brought on by
excessive profits extracted by the seller banks. This brought on ruinous competition and in the
scramble to outdo one another, everything was gambled on in the name of investment from
interest rates and currencies to bonds, equities and mortgages, even weather. The stakes were
also excessively large, but unbelievably no market prices or party positions were reliably
reported - just ledgerdemained figures presented to fleece buyers. By skirting the exchanges,
bank traders became an overly aggressive lot - lying and stealing, even from themselves. Both
sides of the equations both won and lost figures of unimaginable amounts … often not having a
clue where they stood financially, while employing the most scientific and complex
mathematical formulas ever augured.
This mishmash of tangled webs ensnared our entire world banking system. Many citizens have
been calling for retribution, but most of the retrievable cash is gone. Not just the zeros (so easily
erased off the world’s balance sheets), the rapacious traders exacted their horrendous due at the
inception of every deal … a giant ponzi scheme eclipsing every multi-level game ever
conceived. Coupled with the desire of almost every player in these games to keep the
transactions off the books to avoid taxes and various laws of many countries ensnared, it’s been
like a giant commodity exchange allowing selling parties to quote fictitious prices with no one
announcing true acquisitions or positions. They circumvented the futures, options, and security
exchanges that were set up to prevent this … and yet now we’re expected to bail them out!
My assignment was to simply find out what went wrong with mortgages and the real estate
market. After I pulled myself up off the floor, I found that foreclosures were only the latest in a
whole mountain of problems. Mortgages were simply the latest play in the derivatives theatre.
After the Nasdaq crash March of 2000 and 9-11, housing looked like it could pick up the
economy. World interest rates and the Fed accommodated. Soon values took off for the moon
and bank traders came running. Simple house mortgages were leveraged into securitized debt
instruments of every kind and variety. Derivatives had been used for almost 30 years, but never
to this degree. The shadow banking “shearer and sheep” games, that had become obscenely
profitable, began turning ordinary house mortgages into traunches (multi-million dollar bundles
of loans) which flooded the world.
Investment banks found it easy to convince pension fund managers globally that in no way could
they lose on these mortgages. Every one knows that very few people ever default on their home
loan. These loans were risk free - AAA. U.S. pension funds, then the Europeans and finally
the Asians were sucked into accepting multi-leveled math-modeled mortgage-backed securities,
credit default swaps and multitudes of other financial instruments that transferred credit risk
from the banks to those who actually financed the housing mortgages to begin with! It was
Nirvana to the investment banks (which by this time included just about every large bank in the
world) … being able to regain the very money they lent the buyer - yet passing them the risk, and
still taking obscene profits up front and in high interest fees. No, not just obscene profits, the
traders absconded with most of the money brought to the deal. Bank traders by this point had
become so, so successful.
Now, depending on whose opinion one accepts, this leveraged disaster we’re caught in could
amount to something near $154 trillion in the U.S. alone … and over $500 trillion world wide
(so bad it looks like a typographical error). This is nearly 10 times the world’s $55 trillion GDP.
Those who lost out in this game of musical chairs would like to be compensated. But, it’s not
possible. It would take the world’s entire output for 10 years at no interest and without eating or
sleeping - just chained to our jobs night and day. Plus most of the recoverable profits are gone.
Paulsen and others, even Greenspan loved derivatives (though he once said if we understood
what he said - we got it wrong) contend the U.S. taxpayer will make a profit in the long run.
Sure, like they made well known that the $250,000 FDIC insurance runs out December 31,
2009… Still, were told, we have to save certain banks to keep our economy alive… these same
people said the world was fine just a few months ago. Aren’t we just rolling cars in front of train
wreck in the making??
But the credit and real estate market disasters may not be our only problems. Other calamities
may be in the making. Though we survived “J” curve tsunami bubbles before - like the Nasdaq
crash of March 2000, the rural real estate crash of the 1980’s, Japanese Nikkei “cliff dive”… and
further back, the 1929 Depression … the looming stock market and economic collapses could
present us with the mother of all perfect storms. Experts question whether throwing money at
the current banking dilemma is like throwing coal on a fire - slows it, but then it resumes …
Commodity traders know that trends run their course despite all efforts otherwise. So, maybe
we’re using our ‘powder’ too soon?
We still have to worry about the world’s perception of the dollar’s strength, lest they tire of our
ability to print our way out of debt (being the world’s trade currency) … and thank you China
and others for building us mansions while you clawed your way out of poverty. Hey, at least
we pay (well service) our debt. But if we shoot all our bullets now - what will we have when the
real wolves show up. Oh, and don’t forget that our production could easily fall from $15 trillion
per year to where these burdens would become unimaginable.
The current real estate down turn stems from the meteoric rise of the residential market from
2000 to 2006. What was supposed to be a down cycle following the 1990’s up cycle (real estate
cycles are an average of 9.3 years both ways) may have been this final blow-off peak. Faced
with the Nasdaq crash from its J curve tsunami peak in March of 2000, 9/11, and an economic
downturn - it appears the Fed was only too happy to help the explosion in the housing market.
And yes I, along with all other appraisers who wanted to eat, had to support this ultimate tsunami
with flowing reports bereft of the big picture view. With all the attendant construction and
development - the value of residential housing leaped from $11 trillion in 2000 to $22 trillion in
2006. Optimism and greed went berserk. Hey … don’t look away; you were part of this too.
Fannie and Freddie, the main financiers pulled out all the stops to increase profits for their
management and stock holders using fuzzy accounting procedures, lobbying Congress, and
greatly increased risk taking. Coupled with every sort of banking scheme, this great elevator
full of balance sheet zeros from every corner of the planet reached the weight capacity of the
cables and they began to fail. Human greed is necessary to the free enterprise system and it
brought us material goods and wealth the planet has never seen before. However, human greed
knows no bounds and stretches as far as it can go. Then the “rubber band” breaks and springs
back. Nothing rises forever. Now $11 trillion, or maybe much more, will need to be erased by
probability in balancing its books. Yet, the government refuses to admit this. But commodity
traders can. We cut our teeth on the pig cycle graph of supply/demand.
The problem would not have been so great - except that we monetized the balloon in house
prices from 2000 to 2006 by way of the mortgage market. This caused lenders to be drawn into
the payback. And during the meantime, lenders weren’t just holding these mortgages; they were
busy leveraging their payback. That’s just good old-fashioned capitalistic ingenuity… but
again to the extremes? Could anyone manage this juggernaut of off-sheet asset growth,
multiplication of underlying capital UP TO 45 FOLD (Merrill Lynch)… debt begetting debt…
shadow banking… all sorts of Collateralized Debt Obligations... Structured Investment
Vehicles… hedge funds - on and on. It appears there were plenty of officials in Washington
ignoring their duty for profit as well.
Estimates of an unbelievable $500 trillion in derivatives is now unwinding - a mad game of
musical chairs could now be the lynch-pin of a perfect storm... an unending deluge coming from
concurrent imploding bubbles. We commodity traders know about Dewey’s cycles which
explained the Great Depression (the U.S. paid for after this debacle but ignored when the upcycle
kicked in) Wheeler’s war cycles (which we follow in spite of all efforts otherwise) and
Kondratieff’s 55 year economic cycle (for which he died in a Russian Gulag)… are long
overdue. Still, many don’t believe in cycles because Probability’s bell curve disperses these
cycles - keeping them from being perfectly predictable. Still, they show up, usually when
we’ve made other plans. Though we are slaved to them, we consider ourselves immune to the
movements of the universe - until it’s too late. We love to ride up in the balloon, but seem
shocked when the bubble implodes.
There are several reasons why we do not understand what causes bubbles to form. First, price is
not value ... It is only one point of value. Real value is a whole range of prices - both over time
and at the same time. Appraisers typically don’t mention this fact and simply report the last
price as value. Secondly, though we know prices change over time, we are rarely asked to
predict future value - a very critical consideration to the payback. The lending industry is locked
into single present value - assuming the future will remain static.
We appraisers have developed very few forecasting technicians. Commodity markets abound
with them. Though the bell curve spreads performance - at least commodity traders know prices
vary cyclically, and most importantly - say so! And while we are often disappointed in a
forecast - we are not dumbfounded.
Another reason that house prices cycle over time is that everything, including ourselves, is
composed of sub-atomic particles. But they are only up and down cycles of energy …
displaying points only like prices. We inherited the propensity. So why are home owners so
shocked - both psychologically and economically? It’s because mortgages are not tied to
changes in the economic cycles. They are usually fixed over long periods of time…15…20…30
years with no allowance for problems … Borrowers from 2000 to 2006 expected the
government to continue bailing everyone out with inflation and counted on higher resale from
rising home prices to be an outlet if mortgages became burdensome. Few worried about taking
on a loan (me too) several loans… no problem… until the bubble popped.
We appraisers are generally not commodity traders. We were told by our industry, as well as
lenders, that current price was a dependable basis for mortgage loans. Nothing could be further
from the truth- as was pointed out in both the 1980’s as well as the Great Depression. Those
who warned otherwise couldn’t get any business. We can’t blame appraisers any more than
investment bank traders. We worked as best we could within the system. House prices aren’t
exchange listed or borrowings balanced with lending either. It’s assumed the free enterprise
system will balance itself and take care of excesses… except we don’t want the corrections.
Well, no one ever did - but they came anyway… with the territory.
If only the public understood the much larger range of reason, we could at least explain many
perplexing problems in addition to where we are financially. There are usually many
contributing factors creating a problem- not just the most obvious one we blame. Of course there
are single “bullets” which can pierce a vital organ, but generally… many other causes are
involved. Cutting out the supposed bad part, like cancer, is great for headlines, but doesn’t really
explain the cause. Please allow me to use this probabilistic range of explanation as to why
results vary- so we can get to the essence of things rather than spitting out the watermelon
because of the seeds.
Those who did not mortgage their homes (an estimated 34% according to NAR) did not multiply
the numbers payback problem. Those that did - agreed to pay compounding interest rates which
easily double or triple the total payback. Lender banks counted on and played games with both
the rates and paybacks. But being lent long and borrowed short, their pyramidal cash flow game
- when turned over… became an anvil creating the current money shortage.
I have a client who is in the thick of things, but so far won’t say a word. On the other hand, an
expert on credit derivatives who designed exotic instruments himself, Satyajit Das has stepped
forth with numerous publications from which I gleaned most of my knowledge about the subject.
Das is warning everyone, including his mutual fund clients that the jig is up. He blames
regulators who looked aside as U.S. banks designed ways to shift trillions of dollars credit risk
off their balance sheets into the hands of unsuspecting foreign investors, hedge and pension fund
managers on high-yield debt instruments they trusted us about and financial engineers who built
mountains of securitized debt based on flawed math models. He confirms that defaulting
homeowners are only the latest blame. The majority of the range of reason belongs to the
previous inventions which ultimately allowed hedge funds to have high-yield debt for
acquisition. Looks like a multi-level scheme to me - and most of us, whether we realized it or
not, gained or suffered as a result.
Das confirmed estimates that $1 now supports as much as $30 of “blue sky” loans. The upward
spiraling of a nearly infinite variety of these ballooned derivatives totaled $485 trillion earlier
this year according to Das. Now this figure, according to the Bank of International Settlements
in Basel Switzerland is $516 trillion - or $540 trillion according to Warren Buffett. This pile
stands 10 times taller than the world’s productive output of $55 trillion. What began as a major
problem appears now to be a hopeless quagmire.
I should have been more suspicious when lenders from Fannie and Freddie, on down to our local
banks, accelerated their criticism of appraisals… things that had little to do with value. They
claimed the tranches (bundles of loans) that were assembled and sold - changed millions of
dollars just based on how reviewers perceived the written reports. There seemed to be no
concern about how ballooned the market was or how crummy the house. We just said “go
figure” - which we should have.
How the investment banks managed to bundle up these grenades they called tranches and paint
them gold so they could be sold Triple A rated from S&P and Moody’s is yet to be unraveled.
But they needed to in order to sell them to pension funds and other conservative entities. These
MBS’s (mortgaged backed securities) were then traded for other debt, like baseball cards, for
more debt in a giant Ponzi scheme. At each level the traders were taking most of the profit up
front. There was no concern about logic, laws, or lies. Even appraisers were caught up in this
feeding frenzy. Lenders were dragging bodies off the street for home loans. Castles were being
built everywhere for people who were living in bungalows just months before. Even a
handsome horse could obtain a loan for a new barn.
Then, one day the “termite mound” reached its top where not one more deposit of defecation,
spit and mud could be piled any higher. When even borrowers without jobs or even wanting to
get one could buy homes with no down ---- there was simply no one left to push the cart up the
hill… and down it came. Those triple A ratings began to fall - forcing the pension funds and
others (who could only hold triple A paper) to sell their positions. Now the tables were turned -
supply outstripped demand … and the rest is history. Wall Street now wants us to bail those who
didn’t get out in time plus the collateral damage; those left with empty sacks. How can we? We
aren’t at the bottom yet… and the well could be dry by then.
My original assignment was to determine how much mortgage money might come off the
ledgers. I did this as follows: The U.S. Census Bureau indicated there were 126,311,823
dwelling units in 2006. To find out how many were homes vs. apartments, etc. I used the Census
Bureau’s 2000 breakdown as follows:
Single Family Residences’ 60.3% = 76,166,000 units
Attached SFR’s 5.6% = 7,073,000 units
Multi Family 24.4% = 33,346,000 units
Manufactured Housing 7.5% = 9,473,000 units
Other 0.2% = 26,000 units
TOTAL 126,311,823 units
Next to determine how much mortgage money we’re talking about, I contacted NAR, National
Association of Realtors, Zillow, and OFHEO, Office of Federal Housing Enterprise Oversight.
Estimates of the average home price in 2000 were correlated at $120,000 and at the peak in
2006, $235,000. This indicated an inflated/growth rate of $115,000 per home, nearly double
the price over this period. S&P Case-Schiller Home Price Indices also indicated a price rise in
the major cities from 100 to 200 over the same period. This doubling supports the numbers
concluded.
Next I used the $115,000 price increase to multiply by the number of homes. I estimated the
other unit prices from figures from our files multiplied by a factor 1.424 which is the difference
between our market and the national average. These figures were then multiplied by the number
of units as follows:
$/UNIT TOTAL $ / Trillions
Single Family Residences’ 60.3% = 76,166,000 x 115,000 = 8.759
Attached SFR’s 5.6% = 7,073,000 x 90,000 = 637
Multi Family 24.4% = 33,346,000 x 40,000 = 1.334
Manufactured Housing 7.5% = 9,473,000 x 70,000 = 663
Other 0.2% = 26,000 x 50,000 = 13
TOTALS 126,311,823 units = 11.442
This figure correlates closely with TFS Derivatives, Zillow, and OFHEO that current housing is
worth $22 trillion, and that half of this figure is close to the $11.442 trillion above.
The next figure we need is the amount of price that was mortgaged. An almost impossible task
was helped out by NAR which indicates approximately 74% of existing homes were mortgaged.
This fits with our sampling. The other major factor needed is the average loan amount
estimated at about 85%. This is balanced by the unsold developed lots estimated at 15%.
Multiplying the blue sky/inflation figure of 11.442 trillion by the 74% mortgaged - arrives at the
playground for the lenders of… $8.5 trillion.
Now, the hard part. Not the multiplication of MBSs leveraged to the “moon” (which probably
makes the rest of this moot) but the true underlying debt which normal banks like “Jimmie
Stewart’s” held. There are estimates currently of $1.2 trillion in arrears. Eventual estimates
range on up to 25%, or $2.1 trillion. Who knows, because it’s the borrowers that will ultimately
decide and there is no clearing house to provide us with this kind of information.
Or we could have an “Ollie Ollie Oxen Free” like the ancient Jewish Jubilees (they recognized
economic cycles of 7x7+1 =50 years)---- wherein all debt was forgiven. Even at that, with the
$15 trillion we make a year --- we could probably survive paying off everyone’s mortgage of
$8.5 trillion, if done over time and our GNP stays up… but levered by the banks up to a factor of
30 would indicate a credit derivative total near $255 trillion!!!
Back to the base mortgages, the greatest default rate could be somewhere around 50% worst case
(hopefully, but no guarantees). This spells out a hit of $4.25 trillion. James Lockhart, Director
of newly formed FHFA, thinks there is $5.3 trillion in MBS’s. This could soften the blow, but
not if we have to deal with the leveraged debt pyramid. Over 5 years we could pay for all the
housing default itself at $850 billion per year, just slightly more than the current bailout (but for
5 years). However, this doesn’t address the whole housing pyramid - or a world of other product
derivatives.
Before this all happened I thought we were in bad shape because of my government work
experience (where employees miss the opportunity of financial failure whether they’ve done a
good job, bad job or no job at all) - but things weren’t really that bad. I just hadn’t looked at the
big picture until now. If you’re in the same boat, look at these figures: our government is
spending about 3 trillion per year; including about 1 trillion on present and past military; 0.5
trillion on interest of the national debt of about 10 trillion. Even the 700 billion for the bailout
doesn’t sound so bad since we’re making (GDP) $15 trillion per year. And, we have quite a few
assets: $22 trillion in housing; industry $16 trillion; business stocks and bonds $25 trillion. The
world has more than $175 trillion in real estate, stocks, bonds, and $55 trillion in production
(GDP). We appeared ok - before all this….
What about my “close encounter” with Fannie? In 2004 Fannie tried to terminate my appraisal
license. They requested the Dept of Licensing in the State of Washington to take disciplinary
action because they took a bath on a house I appraised. It sold for $70,000 several years after I
first appraised it for about $135,000. Bewildered because the market was still strong, I visited
the house, but no one was home... only sheets over the windows. I left my card and received a
call a few days later from the couple who were buying it. They said the house had been trashed
by the previous owners when they “fell off the wagon” and began making crack… chemical
spills in the basement; swimming pool used as a garbage dump; patches of grass that looked like
UFO landings. No loan payments made. Still their bad loan was passed around like a hot potato,
apparently in a bundled loan package (tranche). Bargain seekers couldn’t locate anyone to buy
the house from.
No realtor or appraiser was ever hired to see what was going on. Even the title company could
not locate the ownership of the loan, though numerous interested purchasers chased the
opportunity. The couple, who never gave up, followed the trail for a year and a half before
mortgage ownership could be located. The couple said the strangest reaction was received from
the last loan holder. First, they didn’t even know they owned the loan because it was buried so
deep in a sack of mortgages. Second, the couple made a low-ball offer and the lender agreed
instantly with no counter though the couple was ready to pay an additional $15,000. On learning
this, the State agreed to drop the case against me - but only after saying they were doing me a
favor.
Yesterday the Dow dropped 777 points, and to make a point about our lack of value
understanding, CNBC declared $1.2 trillion dollars were lost from the nation’s wealth. Nothing
could be further from the truth. After half a century of appraising, I’ve come to realize most of
us don’t understand price or the marketplace it plays in. Price, as most commodity traders
know, is only the latest indication of market supply and demand. For example, when a house
sells for $200,000, it doesn’t really mean that that house is worth $200,000. This figure is only
the traded figure at that moment based on a number of fluctuating factors. Current price is not
the whole value of anything... though we say it is for convenience.
Value is also a range of prices which looks like a normal distribution curve. Prices pop up at
various points depending on the circumstances surrounding the sale. Essentially, price can be
any figure within its bell curve range of value. We err in thinking that an appraisal sets value ---
just because it says it does. Again, it’s a major misunderstanding promulgated by everyone in
the business. If our house is said to be worth $200,000… it only applies to some price within its
bell range at that moment. We think of the sales level in the market as value but it is only the
price extension of what similar items, like stocks, and commodities are selling for - at that
moment. The next moment - changed circumstances - changed prices.
When there are more buyers than sellers, the price tends to rise, of course. But when there are
more sellers, many more sellers - the price can drop significantly. In fact, according to Law of
Diminishing Economic Returns, if all the $200,000 houses in the market were up for sale at one
time, the price would head towards zero. This why it’s ridiculous to state that any indexed price
level - is that value. For instance, a Dow level of 12,000 only means that a few paid at that
level. Most of the other buyers paid different prices - in fact, most lower, but accordingly many
higher as well. Some still have stock purchased when the Dow was at 1,200. That’s why it’s
dangerous for any mortgage purchaser to acquire debt thinking they have value protection over
term, without understanding that term. Again, there’s no perfect prognostication - only best
estimates. But at least the enlightened mortgage holder won’t jump off a bridge when they find
their future projection wrong. Futures traders expect their projections to vary and shoot
themselves instead.
If you are a trader, tell one your stock holding and “bank deposit” friends that they aren’t
investing - just gambling like you - but with one arm tied behind their back. The price/value of
everything on earth changes up and down. Even what appears as sideways movements are still
small up and down cycles. When you only buy - you are handicapping yourself. I hear that the
radio and TV networks won’t allow commentators to talk about shorting the stock market. So, a
major misconception must exist in the public. This is germane to the current credit crunch
because it’s why so many buyers of the latest derivatives are so shocked about the normal, but
very large DOWN cycles that occur to match the upside.
You should feel free to short the stock market, or any other market with out feeling un-
American!!! Feel free to mortgage anything and diversify the proceeds for a rainy day. It’s all
gambling and advantage seeking - and it’s definitely snowing right now. We’ve been to this
barbeque before. It’s where character gets broken or molded. It happens to investment banks
too much of the time.
The 1980’s put many, like me, on notice that down cycles can be devastating and brought on by
a number of reasons, few of which can be fixed by man. Rural lands of all types, timberland,
grazing, mining, oil drilling, agricultural and all the small communities associated therewith took
a massive hit of approximately 62% in value from which only a few contract buyers survived.
Unfortunately, those, like me, who purchased at the top of the market in 1979-80, were trashed
during the 1980’s. Others like a developer in Spokane and a farmer in Hermiston that I’ve done
considerable appraisal work for - became so indebted that they never did escape the compound
interest “hammer”.
In the early 1980’s I lost $400,000 on a ranch I speculated on. These were hard earned dollars,
not just zeros off some balance sheet. I thought the ranch would bring me a million dollars
ultimately. But the down cycle drained me financially, and mentally as well. I came to
understand why some jump. It’s nothing to take personal, but took me 2 years to convince
myself and get my animal spirits back.
After nine years of the down cycle of the 1980’s, the market turned around in 1990, right on cue.
Again, the government took credit as they did after the economy turned up in the latter 1930’s.
After the cycle turned up in the early 1990’s - it was supposed to culminate in the year 2000.
But at that time, the crash of the Nasdaq in March of 2000, 9/11, plus recessionary tendencies,
caused the world and thus the “following” Fed to reduce interest rates. And reduce they did!
What ensued was the biggest real estate bubble the planet had ever experienced. And the Fed
had no clue? That’s really scary…
During this tsunami of 2000 to 2006, those who treated their home as a bank, and there were tens
of millions, spent heartily their fictitious equity - thinking nothing about the payback. Why
haven’t we taught our citizenry about cycle market action, so they won’t be totally upended
during disastrous changes when they occur? Oh, we haven’t even done that for our leaders. It
appears that neither academic nor government sectors understand or appreciate the problems of
free enterprise business. How the public could be expected to fix what our government can’t…
is a sign we could be in serious trouble. Just wait till the panic hits everybody’s paycheck.
The government programs in the early 1990’s only locked the barn doors emptied in the 1980’s.
They never saw a horse, only dealt with an already smashed market. Initially, they didn’t even
try to keep the insolvent S&L’s afloat because S&L’s didn’t fit into the Feds safety net for banks.
Banks were given free reign… any business can survive when it’s given free money.
As an appraiser throughout the 2000-2006 bubble, I was as most other appraisers, impotent in
applying any brakes to the runaway train. Those who fretted about buying a home at many times
its inflated price perceived they had nothing to worry about since other purchasers simply sold
their purported mistakes for a profit. But at the peak, after everyone had stepped into the
elevator car, the perceptions began to change and crash they did. Million dollar houses in
Florida began selling for $600,000 and appraisers in California, Arizona and other hot spots in
the country were talking about the reversal in fortunes. I attended a “Meet the Lenders” seminar
Las Vegas and received further gut wrenching news when the leading lenders were discussing
the carving of mortgages and how grammar in our appraisals could affect the value of these
MSB’s by millions of dollars.
What the world doesn’t understand about appraising is that we are simply reporting the current
market activity, not an evaluation of the overall history of the market. We aren’t asked for, nor
give a solid basis of value (for which none exists). Nor do we guarantee in anyway way the
price, we call value will be good for more than that moment in time. Now of course, that’s all
out the window except for the blame game. And society is fixed on last reasoning analysis.
When anything goes wrong, the public through the media, looks for the last single reason to
blame - be it person or event. But, this is only valid in a very few cases. The majority of events
occur as a result of a long chain of reasons, often that cannot be perfectly predicted or changed.
We are now criticizing each others involvement - like counting needles on a burning pine tree.
I would like to be able to offer a perfect solution to the world’s liquidity problem. But I have
too much respect for probability’s demand to balance. Its solution is to wipe fictitious zeros off
the chalk board by any and all means possible. In the Great Depression, experts claim the U.S.
Government did not make an early attempt to avert the various disasters. This time it looks like
we’re going to try, but the pyramided numbers appear too overwhelming? I, like many others,
have not given up on this endeavor. However, but I’ve become much more fearful of trying to
defeat cyclical trends, until they announce their conclusion.
What’s nagging at me still is - did I finish my assignment? I keep hearing about gold derivatives
and gold bullion banks. And how safe is our money??? I’m making that my next assignment.
These are different times than Jimmy Stewart’s movie and yet leverage and confidence are still
the keys. Banks which are normally leveraged 10 to 12 times are now leveraged up to 45 times
and nobody really knows at that. When I bought that ranch (on contract) I didn’t realize until I
backed out that I had inadvertently created over $2 million dollars of the same credit money, and
I was just one person. The seller bought property on contract too... and the next seller did the
same thing… on and on. I believe in the greatest freedom possible, but there still needs to be a
scoreboard somewhere.
I hope we don’t make a witch hunt for problem banks and their rapacious traders. Ironically,
they are the backbone of our free enterprise success which is basically a jungle. The big
predators produce the most because of their voracity. Best if we keep them chained into
competing productively, not robbing the banks. I’m sure they helped spread capital to
industrial markets. But, like a football game wherein powerful men pitted against each other
make wonderful by-products, rules are required now that weapons of mass destruction are
available. Otherwise, football would be nuclear warfare. Also, we need to be able to watch the
game- lest we allow announcers from giving us different action that would put dollars in their
pockets (the whole derivatives industry did that). Instant replay also keeps the refs honest and
accurate, well as good as can be. Yes, football is a wonderful example of free enterprise.
Greed should also be appreciated. We all have it. Without it where would be the competitive
quest which has made our world unbelievably wealthy. Otherwise, we may not have made it
past the lions. And government as referees works fine, but trying to make productive coaches
out of people not tied to their success - won’t cut serious competition. Nor can we pull
spectators out of the stands as referees, unless they are well experienced. Where are the Teddy
Roosevelt’s when you need them?