Miami housing market crash and collective avoidance by gimleteye

The Dow Jones Industrial Average hovers near historic highs. More than one million American households are at risk of losing their homes because of problems in the mortgage sector.

Wars in Iraq and Afghanistan consume the federal treasury at the same time the trade deficit in hollowing out the manufacturing sector. If we are to believe government statistics, inflation is still low and the economy is growing. What gives?

A weak dollar is good for America? Congress needs to tighten lending standards? All is well?

There is a sense of unreality to both the national debate about the crisis in the mortgage industry, the implications for the economy, and reporting by the mainstream media.

The media relies on statistical “evidence” and calculations by economists: it only reports what qualifies as fact.

Today’s front page news in the Miami Herald reports on the fact that the condo conversion markets have collapsed (although not using that incendiary word), causing rental markets to strengthen. Population growth remains “strong”.

This will give heart to powerful developers who refuse to cede an iota of dominance of local legislatures on matters relating to zoning and permitting.

During the housing boom, the business of facilitating growth and development became the obsession of government operations to the exclusion of public health, welfare and safety, reinforced by a campaign finance system and its virtuous circle from the development lobby, to big engineering companies, to government agencies and elected officials—shutting out the needs of people in sustainable communities.

How to put a “governor”—in the sense of an limit or dimmer switch—on governmental malfeasance has been an enduring failure, doubly frustrating by the refusal of the mainstream media to calibrate a response.

From certain quarters, there is an insistent clamor that all the mainstream media needs to do is to support economic growth by talking up nervous markets—in particular, the housing markets.

In South Florida, for instance, realtors and the development lobby pressures the Miami Herald and its reporters to just “tell the facts”, and not just the sensational facts of the housing market crash.

Let’s see: population growth remains very strong. Net migration from the north or from Latin America supports the claim of builders that land has to be made available, now, for more building and construction—land that in the case of Miami-Dade County is outside the Urban Development Boundary.

What is missed, entirely in the conversation, is the extent to which the underlying financial system—built on a massive market for financial derivatives—enables inaccuracies to proliferate.

It is astonishing that the rising focus by the mainstream media on threats to the subprime mortgage industry—that have already caused the bankruptcy of dozens of major financial institutions and the retrenchment and strategic retreat of quasi governmental agencies like Fannie Mae and Freddie Mac—is omitting entirely the matter of how these mortgage threats have multiplied exponentially through trillions of dollars in financial derivatives that retain their value only by the grace of bond rating agencies.

Their own lax standards for performance allow them (bond rating agencies) to cower in the shadows.

Who owns these derivatives, scrounged from the subprime or Alt-A mortgage business and sold off to distant investors? To what extent has financial liquidity in hedge funds, pension plans, insurance companies and the nation’s largest investment firms multiplied on a foundation as secure as a beachfront in a storm?

We don’t have any of the answers to these questions. We don’t have the facts for a simple reason: the financial industries strong-armed Congress and the Bush White House to “free” the derivatives markets from regulation—regulation that would strengthen both the risk analyses and reporting of the performance of a market that is at least four times the size of the public equity market, $150 trillion in total.

Compared to the requirements of reporting for public corporations, the nature of debt tied to financial derivatives is a literal black hole.

And because it is a black hole, the mainstream media has a perfect excuse to avoid the story, which is probably going to emerge as the biggest economic story since the Great Depression.

The net result, in places like Miami, is that the development lobby—even in the teeth of a housing market crash—continues to exert its dominance of local legislatures: anything they want to finance, in terms of building and construction, can be financed because the ultimate investors can gain a percentage point or two advantage in interest rate yield by purchasing financial derivatives—whether as “long” positions to hold or as hedges against other liquid investments.

The mainstream media reports this equation as the normal course of economic opportunity.

We suppose that it will not be called unfettered greed until some part of the business equation collapses, sending the economy into some kind of tailspin.

In South Florida, it is turning out that water supply is the biggest throttle or “governor” of building and construction. We don’t doubt that the builder lobby will work to make fresh water materialize out of thin air, or the sea.

Billions of dollars of bonds will be issued, as they always are, to facilitate growth—whether tunnels to enhance real estate values above ground, or, massive desalination water plants.

We are not smart enough to know how to bring the exploding markets for financial derivatives under control of government regulation, but we are smart enough to ask the question and to provide a small place for readers, so that a historical record will exist for people to know that at least some were willing to ask the question.