The Bailout- Take your head out of the sand

So the economy is in crisis. We're all going to hell in a hand basket. The market's down; home prices are down, and that's the good news- because it effects the people who still actually own homes and the businesses that are still actually in business.

The market has run out of options, and the Fed has come to the end of its rope and is essentially giving away free money to banks who are still refusing to spend it. The treasury is the last bulwark, then, between civilization and total planetary financial meltdown. The treasury, of course is billions of dollars in debt, so it's really the communist Chinese that are holding the world together with both hands, as it were. So whether or not you believe socialism has hit the US, there's no denying it's the socialists who've got our backs.

But we're happy to put our faith in the government, since there would appear to be no other option. We're looking for our leaders to lead us, and we will essentially do whatever they say. How far we've come from the days of King George.

One of the folks we're looking to is the Fed Chair, Ben Bernanke. Highly touted these days, almost as an ocd-style mantra, is that Mr. Bernanke is an expert on the great depression and therefore is especially well suited to lead us through the financial crisis. And if we look at the policies being dictated by the officials, they mirror the New Deal solutions almost exactly, with the spigots of national debt thrown open to all and sundry.

This approach is incredibly stupid.

It's not that you shouldn't spend money in a recession. It's that you shouldn't base your decision making on precedent. History may repeat itself, yes, but it never repeats itself in the same way. History is too smart for people, and our childish attempts to pull an end-run on the story of mankind are futile. Because it is us, finally who are desiring the story to unfold as it does. We want the financial meltdown, we want the tech bubble, because these are the stories that animate time and give motion to our lives. The intellectual notion that we can somehow "stop" history by outsmarting it is preposterous. History will simply find another way to do what it's going to do. Because as we stand in our one position and regulate all around us, we fail to see that we ourselves remain unregulated, and so the weak link through which history will pass has already been written- by ourselves!

The endless attempts to "meta"-regulate ourselves all end in failure, because whichever Archimedian point you choose to stand on to view a situation creates a blind spot where you are standing. It is inevitable that as you look in one direction you fail to look in another. That is the story of life, and it behooves us to embrace it and enjoy the ups and downs rather than try to control absolutely everything and grind it to a halt. This is where the new age admonition to "let go" becomes more than an annoying slogan. It becomes a valuable life practice, economically, socially, and environmentally. This is the holistic view. The non-holistic view practiced by really smart people is to simply write off the remainder, what they don't know, "where they're standing," and say that it is not important and that they know enough.

If one were to postulate a god at this point, now would be when it would start laughing at us. The inevitable product of our belief that something, anything, in the universe "doesn't matter" is that that thing, which is as much a part of the universe as anything else, will swell in importance in direct proportion to our ignorance of it. And then that missing element, in order to reclaim its rightful place in the universal order will exact revenge on us. The revenge will inevitably come "out of nowhere" since we ourselves have taken the thing off of our map by saying it doesn't matter.

My concern, from a practical point of view, from an economics point of view, is that we *never* know everything. Never. And when we decide that certain economic factors "don't matter" simply because we are intellectually incapable of factoring them in, those factors will become the source of our problems. Inevitably.


There used to be an ostrich bubble in this country. Ostrich meat was going to be the next big thing. Ostrich was to farmers in the 80s what wasteofmoney.com was to techies in the 90s- the ticket to big bucks. Well ostriches eventually collapsed (I'm sure you're shocked), and many farmers were left holding the bag.

Well the regulators took care of that, and you know what- there hasn't been an ostrich bubble since. The system worked!

Well.

Those of us still holding 200 shares of wasteofmoney.com at 2 cents a share are feeling the same way. We're not expecting another tech bubble very soon either.

Why?

Because while history repeats itself, it never repeats itself in the same way. The regulators will have at with the evil bankers and neuter them all. Fine. But does anyone really think there's going to be another finance bubble? No one alive would throw the dice on a half million dollar, no interest, adjustable rate mortgage if they knew they were pulling 50k a year, gross household. Nobody. And yet the feds will be tightening the screws like it's the Spanish Inquisition, not realizing that the they're stretching a corpse.

There will be no more housing bubbles. But will there be a solar energy widget bubble? Maybe an implantable cell phone chip bubble? A global warming protection ozone converter bubble? Maybe it'll be goji berries- they're from the Himalayas!

All these things are possible if not inevitable, and yet the public stoning that the feds are administering will do nothing to prevent them.

Back to ostrich farming*-

At the height of the boom, ostrich farming became full of greedy morons who had no business being ostrich farmers. They never belonged there in the first place. And when the bust came, all those people went back to where they belonged and the only ones left farming ostrich were the ones who wanted to be farming ostrich- real ostrich farmers. The whole industry needed to be cleared out from the dross - not just because it was an insult to the 3 or 4 people in the world who really love farming ostrich, but because the resources represented by all those poseur ostrich-wranglers were required elsewhere- in tech, in nursing, in grocery, wherever. The system that includes all people, like all systems in nature, is efficient. It demands people be in the right place so that all the bases are covered for collective survival.

During the tech boom I was in the non-profit sector, and I couldn't find *anybody* to work for me. Why? Because every jackass who could read was running a website and making mid-six-figures. Well a system can't run when everybody is doing only one thing, so the system righted itself. In markets we call it "correcting." In bubbles we call it "bursting." In life we call it getting back to reality. (And in Farming it's called soil depletion.) It's nice to take a trip now and again, but to thrive, we really need everybody doing what they do best, and not everybody was built to code javascript 16 hours a day.

Another example: since 2000 it seemed like everyone and her sister in New York was a real estate agent. It was the ticket for anybody with a blackberry to strike it rich. "Concrete Gold," it could have been dubbed. While pricing my own bit of real estate I met dozens of realtors- all of them terrible. Why? Because they weren't realtors. They were computer programmers and bishops and school teachers and musicians who were just trying to make a buck off the rising tide. Fair enough, nothing wrong with taking an opportunity. But the larger system still requires school teachers and firemen and mechanics. And with all those resources wrapped up in selling overpriced apartments, the system threatened to become too imbalanced. So the system burst itself.

That's what systems do- they self correct, because it is in everybody's interest to do so. Those firefighters in realtor's clothing were, in the end, harming the system and making survival and prosperity less likely for the whole group, so the tidal wave comes by and washes them back to shore. No harm done.

Not a bad way to look at things, really.

Lets take a look at the real estate bubble and its sister bubble, the finance bubble. What caused it? The easy answer is greedy financiers and lax regulators. Well bully. And bull too. These guys were just doing their thing just like you and me, trying to make a buck. If we look a little deeper, though, we have to ask- why were these loans being pushed so hard? Why wasn't credit card debt the new bubble or car loans?

Well mortgage rates are structured in a peculiar way: First of all the life of the loan is usually 30 years. The payments are structured so that for the first 15 of those 30 years, almost all of your payments go to pay interest instead of principle. So for the first 15 years you're basically just paying rent- you're not paying 'back' the loan and gaining equity in your home. The last peculiarity of a mortgage is that you get a special tax break for taking one out. Why is it set up this way? The government *wants* you to take out mortgages. They *want* you to buy homes, and they want you to *stay* in them. And when they're all paid off they want you to hold on to them.

But why? Why does the government want you to buy a home and stay put? Yes there's the bit about the American Dream of Homeownership, but that's mainly hype. If it really was a dream, they wouldn't have to try to control whether you buy or not or how long you live there. The real reason seems fairly sane: homeownership encourages stable communities. It's good for the country to have people locked down in one place, according to the government. The kids grow up together, people care about their neighborhoods, keep the lawns trimmed, the potholes fixed, etc. The "pride of ownership" insures it.

Well this whole ideal of planting down roots in a subdivision for at least half of your adult life probably made sense 50, 60, or 80 years ago. After all, you'd graduate from high school, get a job in a factory, or graduate from college and get a job with a corporation, and work and work and work and work until you died or retired. It must have seemed perfectly sensible to lock people into their homes since they would be locked into their jobs too, and these twin lock-downs created the stability that those in charge decided was best for the country and those not-in charge went along with.

Well how does that sound today? Is there a single business in the world that you are positive will be around in 30 years? How about 20 years? How about 5 years? Bear Stearns, maybe? Enron? WorldCom? If it were me I'd put my money on Coke and Pepsi, but beyond that I can't think of much that's a sure bet in 30 years. And young people today are cynical about the prospects of "job security" anyway. The recent stats come to something like the average college graduate today having 7 different employers before she is 30. Do you think all of those employers are going to be in the same neighborhood? Do you think that person is going to want to go through the hassle of the mortgage process with a 30 year commitment when they have no idea where they're going to be in 3 years?

The answer is no. Obviously. People these days, especially people with enough money to afford a home are not going to experience themselves locally. As the world "flattens" a US architect getting a job in Dubai will be taken for granted as normal. An actor will easily split his or her time between New York, Toronto, and LA. Remember, these mortgage arrangements were set down before there were ever regular trans-atlantic flights. And when the airlines deregulate internationally, the prices for such flights will begin to go down and down.**

The point of this is that the mortgage system as stands is past its sell-by date. Nobody likes it, nobody wants it. It's not fair, and it artificially affects the price of real estate in unpredictable yet manipulable ways.

I live in the exact same apartment I did 9 years ago. Didn't spend a dime to improve it. The demand to live in my cushy neighborhood is exactly what it was when I moved in. And yet the price of the apartment doubled in the intervening years- not the value of the apartment, which if anything has deteriorated as the appliances started to wear out, but the price. Why? Because when mortgage rates are low, people can "afford" more house, so the price of the house goes up to accommodate the fact that there are more eligible buyers for the same home. But it's not that these people can afford to buy more house, it's that they can afford to pay the same amount of "rent" as they would have if the mortgage rates were higher. As the rates go lower, the monthly payments for the same amount of house goes down, so it seems like you're getting more for less. But it's still the same house in the same neighborhood- we just don't value it as such. So this gives the government incredible latitude (by adjusting interest rates) in causing and un-causing housing bubbles.

The more short term reason for our current housing bubble is that the fed already tried this artificial market propping after the dot com bust. After that first 21st century recession, the market needed to clear, people needed to feel the ouch so they would learn not to touch the hot stove again. (You better believe the ostrich people will think twice before they'll be convinced that llama meat is the new bacon.)

But nobody felt the pinch, because the fed, in their "wisdom" took the edge off for us a bit by dropping interest rates into the basement. This made money "cheaper" and with it everything else you wanted too. This extra low rate actually created the real estate bubble by making real estate *appear* so cheap. With prices this low, everybody got in the game, and we found ourselves in the same position from our systems point of view- all of the farmers, all of the ambulance drivers, all of the theater critics were selling homes. Unsustainable. Wash it away.

But in the larger sense, more had to go than a few inadequate real estate hawkers. It's time in our collective psyche to be more mobile, and it's time for the mortgage death-grip on our freedom to let go. Imagine a world with PDAs, lap tops, iPods, cheap cars, but you still had to go home to make a phone call. Ridiculous. Well it's time for us to start looking at real estate and career the same way. That is why this recession will be so long. Because it will not relent until we have adequately rethought our attitude towards fixed real estate and reimagined our relationship with our careers.

This will be a huge revolution in the way we think and do business. The entire value of a home will have to be rethought. It will have to do more with the cost of building than any sort of price flexibility that we are used to now. Leases will have to be shorter term, and there will need to be much more in the way of 'hotel-like' temporary residences, now the province of business jst-setters primarily.

For those buying a home, they will have to use something more akin to a high balance credit card than the bizarre, highly controlled mortgage system. This would make buying and selling a lot easier, it would make paying off the home a more flexible proposition where more can be paid during the fat years and less during the lean years depending on *your* income, not the arbitrary fed rate. Or you could pay nothing at all for a period. If different loan companies could compete for different pricing structures (not just "interest only" loans but different principle to interest ratios) the consumer would benefit, there would be greater market predictability, and the real estate industry as a whole become more lean and efficient. Good for everyone.

Systematically speaking, this is what "wants" to happen. This is where this recession is going in terms of transforming the way we think and act as a collective.
The stagnation in the "air" is the space needed to disintegrate the old models in our collective mind and begin to dream up the new ones that will allow for a more flexible future vis a vis real estate, banking, and career "stability."

The great wise men who have "seen this before" have not. The concept of precedent is something that allows us to feel we have some control over something over which we have none. The New Deal-based bail-outs, masterminded by "smart people" will be a failure, because they address what people think is the problem rather than seeing the seed of transformation inherent in what foolish smart people call a crisis.

The tide in the psyche has turned, and mobility will become key for the next generation of global citizens. That global generation has already been born and we as a culture will need to be ready for them when it comes time for them to buy houses - for their way of life, not our grandparents'.***

So it's not just about real estate, it's about the career/work-structure that underpins real estate. The top-down corporate model will not remain reliable in its current form. It will need to be restructured. The 'housing' crisis is really a mortgage crisis, but housing and career patterns are part of a hidden axis in the psyche, and one can not transform one without the other. Right now we're seeing one end of that axis fail so that it can become more flexible. Before we're done with crises we will need to see the complementary shoe fall as well.


Post Script and Political Caveat:

Now I am no fool. The government can not be seen to be doing nothing. The great swarming masses, reared on the value of "hard work and responsibility," will not tolerate idleness. Whether the Treasury Secretary be Tim Geithner, Hank Paulson, or my Aunt Miriam, the policy would be the same: spend and spend and spend.

But ironically, it is idleness which in fact holds the most promise for saving civilization- once the notion of saving civilization is dispensed with. For what we are experiencing now is not maintaining an undesirable status quo but a joyous unraveling of same. And the less we do to interfere with that, the less painful the transition will be and the sooner we will enjoy the fruits of the new order of things.

If the government must act, it should make every effort to alleviate the inevitable suffering of the most vulnerable, and make every attempt to keep the slightly less vulnerable from losing ground. Bailouts directly to taxpayers would be the best way to do this, either through checks, mortgage re-negotiations, mortgage subsidies, or a combination of all three. Such action would not be economic but humanitarian and would be just in the minds of the people. This would encourage them to ease up and not fight the process as much.

Would chaos ensue if the financial system were left to collapse. Absolutely. But it is chaos out of which all new worlds are formed, and we should therefore embrace it. We, of course, will not. And so we will watch this crisis unfold for longer than is really necessary, just as the Depression did.

Fair enough. It reflects the universe's great sense of humor that Mr. Bernanke & Co., who studied history in order to prevent it from happening again are watching that very same history repeating itself all over again- right under their noses. Perhaps this will set a precedent for mistrust in precedent and instigate a trust in the future- which has never let us down. I certainly hope so.


*I have omitted the preamble from this piece which details my version of systems theory, referenced below. I will be posting it in another context soon.

**You may say that's just as well for the rich people who go to Columbia and were going to be international citizens of the world anyway, but what about the grunts? Their jobs aren't moving all over the place. Don't be so sure. Within 10 years, everything that can be outsourced will. There will be fewer grunt jobs available in America anyway- we will be forced to raise our class status relative to the rest of the world if we are to survive. But for those jobs that are guaranteed to be stuck in one place for 50 years (and if you can name one I'll buy you a donut), those folks can have their homes, or they can just rent.

***This by the way is one more point in favor of youth suffrage. Children born today who are fluent in mobile technology will be born expecting more mobile living. If they had a voice in the discussion, they would be showing us the way we are needing to head, while we are still stuck thinking like our parents.