Crisis in US Housing Market Worsens As Finance Industry Booms

“Just sitting here watching the wheels go round and round…”

Mondo Money keeps spinning and turning.

In the West at least, “them that has, gits.” Lehman (NYSE:LEH) announced that its profits are up 27% in the last quarter. The whole financial industry is enjoying its moment of glory. No business is more profitable. And no business is more a la mode. More than a third of Harvard Business School graduates, Class of ’07, are going into hedge funds or private equity funds. These Willie Sutton Memorial Scholars are following the money; and the money is not in creating wealth…it is in redistributing it.

Meanwhile, Bill Gross, who runs the world’s largest bond fund – Pimco – sold his stamp collection for US$9.1 million. He bought the stamps – including rare “Penny Blacks,” Britain’s first postage stamps – over the last 10 years. At auction this week, the stamps sold for four to ten times what he paid for them. Gross doesn’t need the money, so he donated the proceeds to Doctors Without Borders, a French charity that sends volunteer doctors to wherever they are needed.
Lower down on the socio-economic ladder, “them that hasn’t, gitteth not.” People on the lower rungs of society don’t own shares in financial companies, they don’t go to Harvard Business School, and they don’t have million-dollar stamp collections. What they do have is debt – and they have a lot of it.

As long as house prices were rising and interest rates were going down, debt was no problem. The lumpen could refinance at lower rates and end up with more money to spend. But now, house prices are going down and interest rates are moving up.

The latest study, reported in the San Diego paper, tells us that the housing slump will last well into 2008. Even these guys are overly optimistic, in our opinion. “The force of a correction is equal and opposite to the delusion the preceded it,” we recall saying. The biggest housing boom in a hundred years is likely to be followed by more than a couple years of bust and more than a 2% or 3% decline, we think.

And the papers seem to agree. The latest news from Bloomberg tells us that “Mortgage default rates rose 90% in May.” Of course, June, July, August, September and all the rest are still ahead… And yesterday, bonds fell again, pushing up the yield on a 10-year Treasury note to 5.24% – bad news for debtors, homeowners, and the housing industry.

Another couple of reports hint that Booboisie Americanus is feeling the pressure. For the first time ever, the species is expected to drive fewer miles this year than the last, for example. And now we hear, from the Houston Chronicle, that “Boomers [are] delaying retirement.”

Here at Markets and Money, we don’t approve of retirement or vacations. Stop showing up for work and your employers are likely to realise that you weren’t really doing anything anyway. Besides, once you stop doing whatever it was you were doing, you go into a decline. It’s easier by far to pretend you are doing something useful at work than to pretend you are enjoying not doing anything at all.

Nevertheless, we doubt that America’s boomers are delaying retirement just to participate in the work force longer; more likely, they are working longer hours because they have to, not because they want to. Nor are they driving less because to protect the environment from CO2 emissions; more likely, they are reacting to the price of gasoline.

This bifurcation of the US population – with the rich gittin’ richer and the poor gittin’ poorer – bothers a lot of people. Bill Gates says he expects to devote much of his time and fortune to solving the problem. And the New York Times came out with a predictable squawk on the subject. It says we need more “equality” in the United States. Why do we need more equality? The NYT doesn’t seem to think it needs to explain. And it admits that it doesn’t know how you get equality either. So, it falls back on a “solution,” which even it knows is half humbug and half soothing lie. What we need, it says, is for “more Americans to enroll in and complete college.”

Well, that’s the beauty of being a NYT newsman. You rarely have to think. Take a look at the people who actually create wealth. Bill Gates, for example. He didn’t complete college. Nor did many other people who come up with new inventions and new businesses. For them, college is often irrelevant – unless you are deep into the sciences. Besides, the Times seems not have to noticed that the gap between the rich and poor opened up only after the 1970s – that is, after more people began going to college.

Still, on one thing the paper is right. Harvard B-school grads do know where the money is. The money, today, is made by people who have assets that are going up in price…or the hustlers who hustle them – contemporary artists, fancy restaurants, and hedge fund maestros…the money-shifters. Like the NYT, they too are all for equalising and redistributing wealth. Yes, by offering rich people ways to get rid of their spare change, they redistribute it – to themselves.
Come the day when all of us go off to HBS and learn how to shuffle money. We can hardly wait.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

Bill Bonner

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