Economics

PART ONE

The Housing Bubble of 2003 -2008

The Rosetta Stone and House of Cards

In 1799 a stone tablet carved in 196 BC, which came to be known as the Rosetta Stone, was discovered in Egypt. The stone had the same message written in ancient Egyptian hieroglyphics and in Greek. This enabled scholars to translate the language of that ancient era so that its history could be understood by those living in a very different world two thousand years later.

In 2008, CNBC created a similarly important documentary that allows people living in the aftermath of a burst housing bubble to understand the very different life that existed during the bubble. Although spanning only a time period of three or four years, the lack of comprehension of the people living in the two time periods is every bit as great as that of the two millennia that the Rosetta Stone helped resolve.

The translation of the Rosetta Stone took twenty five years of scholarly work before the clues of the Stone were useful. Similarly, the CNBC documentary, House of Cards, cannot be absorbed in the 90 minutes it takes to watch it. In fact, the editors and producers of the epic achievement completely missed the importance and significance of what they had created.

Nonetheless, the documentary includes graphic images of people suffering the consequences of the housing bubble alongside equally graphic images of people living the giddy life of apparent sudden wealth during the bubble. It includes comprehensive interviews with all of the participants in the phenomenon including buyers, lenders, loan brokers, Wall Street bankers, regulators, rating agency personnel, and Fed Chairman Alan Greenspan, as well as news clips of politicians, and the media.

From this carefully assembled evidence, it is possible to determine exactly what happened and why, and to understand what must be done to prevent such financial disaster from ever occurring again.

The CNBC documentary, entitled House of Cards, opens with scenes depicting the physical and emotional devastation wrought by a real estate bubble in which the price of houses rose far above the value of those houses.




That is the world that has existed since the housing bubble collapsed early in 2008, and the world in which measures are being taken by the government and the private sector to deal with the results of the occurrence of the bubble, and its collapse.

The documentary also contains, though, an equally compelling presentation of the world as it was during the bubble.






The person who was being given a tour of the foreclosed properties in the first clip above is David Faber, who, to the producers of the documentary, is the Reporter. To the people being interviewed about life during the bubble, he is the The Man From The Future. He is from a time when all is known about when the bubble ended, and what the consequences of the creation and collapse of the bubble were. To the people that he interviews in the production, at the time that they are being interviewed about, none of that is known to them or to anyone else.

It is necessary to keep that constantly in mind in order to gain any understanding of the reasons that the bubble existed, what it was, and why everybody behaved as they did.

David Faber was asking his questions from this world

The people he was interviewing were answering them from this world

The questions that David Faber asked skillfully elicited information which resulted in a full presentation of life during the housing bubble, but there was one persistent and recurring theme that he returned to time and again. That theme was, “Who caused this tragic event to occur?”

This is because those who are living in the post bubble world tend to think of those who lived in the world during the bubble as having caused the bubble.

That is not true. The housing bubble was something that happened to those who were living at that time. The bubble didn’t happen because of the way people behaved. People behaved the way they did because of the existence of the bubble.

The simple fact is that people living during the bubble were not less smart or more venal than people living in the world after the bubble. They were not more or less capable or able than people living after the bubble to cope with the existence of a real estate bubble, and they reacted and coped exactly the same way that post bubble people would have reacted and coped.

Listen and watch Bill Dallas explain the reality of life inside the bubble. Bill Dallas was a mortgage broker, and he is speaking of the conditions as they existed at the height of the bubble frenzy.

Remember, the Herculean effort is not the effort that one lender would make to control his own actions. It is the Herculean effort that would have had to have been made to convince all lenders to act in concert, without exception. Without that being true, as Bill Dallas says, if there are lenders that are not willing to exercise restraint in their lending policies during a bubble, the loans will continue to be made.