The California housing bubble caught a lot of people, including me, by surprise. I knew that housing prices in California were insane. But that had been true for years. I knew that some really smart people said the bubble could burst, but it was hard to imagine. There were times when prices had dropped in the past, for about 15 minutes, but soon they soon came back even stronger. In addition, I didn’t personally know anyone who really believed the bubble was about to burst. We were all afraid that if we didn’t buy a house now, we would never be able to buy a house in the future. For a long time that was accurate. If you didn’t buy a house when you could, the next year it would be 15% higher but your income sure wouldn’t be 15% higher. Houses seemed to move farther out of reach with no end in sight.
Of course now we all know that the collapse of the housing bubble was inevitable. The numbers weren’t adding up and in hindsight, this is really obvious. I did some research about an upscale community in Northern California in 2007. This area had a median household income of about $118,000, which is near the top. The average price of a home was $535,000. That means that even in this extremely affluent community the average family could not afford the average house. How on earth did we expect that to continue?
Now we are looking at an international financial bubble that makes the housing bubble pale in comparison. Once again the numbers just don’t add up. Supposedly smart people are trying to get out of debt by borrowing more money. Other supposed smart people are trying to help by loaning them more money. When, exactly, has this ever worked? Our fed chairman thinks that if we just keep interest rates near zero that everything will be just fine. If he keeps in up, we will eventually be paying people to borrow money. This reminds me of the kid who tried to skate across a pond on thin ice. As long as he went really fast, it was ok, but the minute he started to slow down he was in serious trouble. Well things are slowing down all over the world and it sure looks like trouble.
The latest and greatest bailout deal in Cyprus is astonishing. The EU is going to give Cyprus banks 10 billion euros, but only if the banks first take (steal) 4.8 billion from their largest depositors. Senior bondholders will be unceremoniously wiped out. The Laiki Bank will be shut down and the “insured” depositors will be moved to the Bank of Cyprus. In the meantime banks will not reopen until at least Thursday and the government is going to limit the amount of capital that can be withdrawn. I suspect people all over the world are looking for an exit strategy. It won’t take much to trigger a mad dash for the exits.
Perhaps, just perhaps, the EU will pour enough water (actually watered down currency) on the financial fire in Cyprus to stave off the inevitable. But at best, this will not solve the problem; it will just kick it further down the road. Then another fire will erupt somewhere and there will be even fewer options for containing the results. The only real solution would be a booming world economy, but all of Europe is run by socialists who have never succeeded in creating a strong economy. The former economic engine of the world, the United States, is following Europe down the path toward economic stagnation.
In an interview today Charles Krauthammer made an interesting comment comparing the situation in Cyprus to the assassination of Archduke Ferdinand. Following is a link to a Daily Caller article about that interview:
The problem with Krauthammer’s comment is that it has the ugly odor of truth. The collapse of the housing bubble was bad enough. This time the entire world could experience a bubble bath.
TDM