With Swiss-watch precision, Friday night to Sunday morning now comes in like a global financial tsunami and leaves a changed economic landscape in its wake. Amazingly, even toward the end of September, smart people swept up in Wall Street's financial firestorm talked as if it were a question of whether or not all the hacking and sneezing going on among the incredible shrinking world of investment banks would cause Main Street to get a cold.
Borrowing, lending, making money and losing it, making new jobs or making new unemployment claims, page 1 and Chapter 11... all of it comes down to whether people are or are not seeing their home values go down as the weeks go by. Good or bad, we still have a long way to go for home prices to near their historical relationship to household incomes and the cost to rent. All the central banks in the world can get together and stoke liquidity all they want, but they can not change that inexorable reality.
So–just what none of us want–unless we're one of the vaunted handful of fellows who are rewriting global financial history with each tens-of-billions-of-dollars sweep of their signatures, we're relegated to roles as spectators in a drama whose cost of admission we'll learn only later. We're built to act. We're impatient to do something, but how can one make a smart move when no one who has a view of what's going on vis à vis the toxicity created by questionable mortgages going bad will fess up?
Junk with dollar sign price tags on it is junk nonetheless. To believe there's still someone out there who'll buy it, however poisonous it might be, might have made sense two years ago when everybody was buying everything. But the greater-fool theory is now inverted, and all those who irrationally bought are now the ones clamoring to irrationally sell.
Clearly, free market dynamics have failed to mark mortgage-backed assets to a market bottom. Now, as economists of all stripes map the algorithms of consequence across to Joe Consumer's hand on his household purse strings, some of them suggest that consumers may dodge the bullet of the deleveraging of our entire financial system and keep pumping the gross domestic product at their usual 70-percent clip.
The problem is home prices. Home prices are both a statistical factor and a sentiment factor. They're both math and psychology, which is why they add up to a perpetuating spiral, either up or down.
Re-enter an era that has become somewhat romanticized among home builders, one that truly reflects the opportunities that lie ahead for those who can keep themselves in the game. It's the Resolution Trust Corporation, and we're about to see it come back to life. Many of the big home builders' greatest successes trace to toiling through the RTC days of the early 1990s. Perhaps it's fitting that we come full circle back to where pain and triumph converge, when "GoodCo" and "BadCo" evolve into "NewCo," and we'll end up seeing a lot of our longtime friends still in the game.
When free markets don't get us to a bottom soon enough, people tend to say "Uncle," as in Uncle Sam. No bottom, no problem. Welcome to the floor.
Setting a floor when the marketplace has not set a bottom has its risks. It necessarily will slow down the eventual pace of recovery. Without a doubt, all of the government paperwork and approvals and caps on who gets what as things start selling again takes a lot of time.
Maybe it's right for us to take it slower for a while.