Housing, Leverage & the Recession

Combustible Mix

The severity of this economic downturn is rooted in the household leverage crisis, which in turn is closely related to the housing market. If the housing market continues to deteriorate, then further de-leveraging of the household sector will likely keep a lid on any rebound in consumption. In other words, the future of consumptionand house prices are closely linked.

--"Housing Bubble Fueled Consumer Spending"; The Wall Street Journal (6/25/09)

Quick summary of a nice piece in today's WSJ:

--If you borrow a lot against an asset that then falls in value . . . you're in trouble.
--If lots of people do that . . . the economy's in trouble.

Read the piece, though; the authors’ methodology is quite clever (and their logic is compelling).

Warren Buffett, Revisited

Swimsuits and Tides

Today's recession-slash-financial crisis may not have a name yet, but it clearly has a signature parable: Warren Buffett's now-infamous observation that "you don't know who's swimming naked until the tide goes out."

If you're looking for a bookend, it would be Buffet's equally famous pronouncement that credit derivatives are "financial weapons of mass destruction." [Full disclosure: Buffett is Chairman of Berkshire Hathaway, which is the corporate "great-grandparent" of Edina Realty.]

Well, the tide's definitely gone out . . . and by now, we (pretty much) know who's been swimming naked.

In light of these events, you'd think that policymakers' focus would be to round up some swimsuits. Instead, my read is that they've been trying to get the tide to come back in.*

The former task is limited in scope, has a finite cost, and is actually achievable.

The latter?

We're in the process of finding out . . .

*I suggest a corollary to "a high tide raises all ships": 'first, they have to be floating.'