The housing crash, dissent, and the next president of the US, by gimleteye

“Everybody just standing round ‘neath the tree shooting pigeons on the limb,
But when Quinn the Eskimo gets here, them pigeons will go to him.”

The Mighty Quinn, by Bob Dylan 1967


A thousand and one bearish pundits have thrown their lances at the staggering bull market. The bull rises to shake them off, nostrils flaring. The infusion of hundreds of billions by the world’s central banks lubricates its joints.

This is what taxpayers must want, for the world central banks to be commanding liquidity and the printing presses forward, faster, harder. It is a great bull that can summon such resources.

But is there a plan? Is there an end in sight? Is there a presidential candidate who can seize the moment and wring victory, not from the fate of the stock market but from home values that are bound to fall?

It is a seeming paradox: federal regulators are fanning across Wall Street like NIH teams sniffing for bird flu, while financial executives egg on the bull: “confidence is returning to credit markets”.

Still, losses in hedge funds and investment banks around the world dwarf the last great financial debacle, nearly a decade ago, when Wall Street and the Federal Reserve came to the multi-billion dollar rescue of one of their own, Long Term Capital Management.

Today, investment banks and mortgage firms are announcing big layoffs. What Wall Street knows, and the presidential candidates, too, is that it will months even quarters before the extent of damage is revealed. In other words, in the midst of the presidential campaign in 2008.

So far, candidates for president are reluctant to engage in addressing the deep stresses underlying the world’s largest economy, transformed by the force of globalization, and how these reflect in housing markets under sharp duress.

Here is the simple version: as jobs and manufacturing poured from the American heartland to low-labor cost nations like the tide ebbing at the Bay of Fundy. (click here, for a visual representation:, the US economy became increasingly reliant on growth generated by housing and construction: a stool built on two legs.

Keeping the two-legged stool balanced was the genius of Republican gains in Congress and control of the White House: the growth machine provided political contributions through the funnel of construction and development, primed by historic low interest rates and marginal, ineffective supervision of lending practices and financial derivatives.

That the two-legged stool has been sold as stable is no less remarkable than the conversion of an ordinary mortgage by Wall Street bankers and fresh-faced MBA graduates into structured financial derivatives worth ten or a hundred times the original value.

The deacons of Wall Street argue that derivatives like mortgage backed securities or CDO's are critical to the smooth functioning of the global economy, by dispersing risk. This is only true if risk is clearly priced. But today the pricing of risk in financial derivatives is the realm of computer geeks, tied to reality by the thinnest threads of trust.

What do presidential candidates know about financial derivatives, other than what their closest advisors and contributors from Wall Street tell them?

Forget about the two-legged stool, Wall Street argues. In the US economy, technology and productivity gains represent important fuel for economic growth: a sturdy third leg.

But it doesn't take a rocket scientist to observe that technology gains serve consumers whose purchases are determined, mostly, by preferences in housing and construction.

The epitome of these preferences, suburban sprawl, is described by advocates as “what the market wants”.

Patterns of construction and development in the US act in the same way as chutes for cattle: steering, herding, moving Americans into strip malls, platted cul de sacs, and cities serving the purposes of automobile executives and not ordinary people who haven’t been blessed by sales training programs, seminars, and other techniques to market features as benefits and wants as needs.

“An unstoppable force!” is how then WCI Communities, Inc. CEO Al Hoffman, described Florida's growth machine to the Washington Post in 2003.

Hoffman was campaign finance chair for both Bush brothers: Jeb, the former two-term governor, and President Bush. Only four years later, the engine of growth in Florida is sputtering.

While Al Hoffman is ensconced in a sinecure ambassadorship in Portugal, (recently, WCI Communities staggered into an ignominious agreement with corporate raider, Carl Icahn, even though another sinecure ambassador, from the era of George HW Bush, Charles E Cobb Jr., is vice-chairman at WCI) the era of easy financing in Florida turns out to have a hang-over as big as sniffing glue from a paper bag.

From the governor’s mansion to the state legislature, straight down to the scurrying and scratching of local city and county commissions, the thrall of the latest and greatest real estate bubble in Florida history has most people and media casting a wistful glance backwards in time.

Would it be any surprise if the presidential candidates surveyed the crashing housing markets through the lens of Florida--through the piles of stinking, red algae washed ashore, the anger of environmentalists, citizens, and people who just want common sense to prevail in land use decisions, and decide to sidle over to the Chamber of Commerce and its aw-shucks pleading; can’t we just get the machines, and the graders, and the nail guns going again?

It will take a very sharp economic contraction for a debate to emerge about the forms of economic growth that can sustain and nurture a democracy wobbling on its knees. We may be there, right now.

Wall Street is nervously shifting from one foot to the other: first the credit crisis was a problem of "subprime" borrowers, now it is a matter of lowering the key interest rate of the Federal Reserve in order to re-prime the pump of deflating housing markets.

But the presidential candidates know, in November 2008 who will count more than Wall Street billionaires are America’s paper millionaires, numbering according to Marketwatch in 2005, 8.9 million people.

Whether these paper millionaires value their wealth as real estate or stocks in Home Depot or Countrywide Financial or Thornburgh Mortgage: the pain is already running deep.

Today the reading public is only getting half the story as world-wide financial markets pulse with uncertainty. We know as much as the public knew about Jekyll Island in 1910 or Quinn the Eskimo in 1967.

True, no one became king, recently, by arguing as prince that something is rotten in the heart of Denmark.

But incipient anger is rising in America, and such a prince may yet become president.