Why the Housing Bubble Matters

Essentially what caused the economic recession was the real estate bubble burst. (Yes, you could take into account many other variables but this was the BIG one). The big banks and investment firms, which have a worldwide presence but are headquartered here in the US, were knee deep in these "toxic assets" when the real estate bubble burst.
These "toxic assets" refer to the variable interest rate home loans (or sub-prime mortgages, if you will) which were being handed out to anyone who showed even the slightest interest in buying a home. By late 2006, people were finally coming to the realization that real estate everywhere was overvalued, and the people who bought those sub-prime mortgages came to the harsh realization that they were in over their heads. This of course led to a depreciation in people's assets, their homes, arguably their greatest asset... and it left a lot of folks behind on their mortgage payments when that variable interest rate, well, varied. (The Federal Reserve sets the interest rate nationwide and this does and will change).
In the big picture, people were being foreclosed on in huge numbers; once those people left their houses, other people were stuck next to the ugly, foreclosed house next door further devaluing their own property values. And those same banks and investment firms were left holding these "toxic assets."
But by 2007, the main story in every major newspaper and news network was the 2008 Presidential election. Theoretically speaking, this may have delayed the recession by as much as a year...

The Housing Bubble

The economic recession we're now in, didn't simply happen. As far I can tell it all started with a market bubble, a helluva alotta deregulation, and a perverse incentive for investors and banks to find money schemes instead of making solid financial decisions.
So here are my three points:

1. A housing craze hit the country in mid-2000s. People who couldn't afford houses wanted to buy them, because it would be the "best investment they could make." And those that already did put way too much stock into them, literally. Overvalued house prices and increased home ownership progressively made the real-estate bubble bigger, and yes eventually the bubble did burst.

2. Ever since the Reagan administration came up with the concept of "Reaganomics," every single presidential administration has implemented some form or another of deregulation, including the Clinton administration. Essentially Reaganomics is a very laissez-faire concept; it states that the markets work better if they are unfettered by government intervention and regulation. This implementation of deregulation gave banks and businesses much more leeway on what they could do.

3. So if a bank wanted to finance a mortgage for a person who wasn't really qualified to buy a house, it could. If that same bank wanted to give that person a mortgage with a variable interest rate, i.e. a sub-prime mortgage, it could. And if that bank wanted to basically masquerade that mortgage as a reliable source of capital, since it had no damned government regulation in its way, it could.

Journalist in me has something to say

I guess I, like a lot people, had an almost childish notion that the people in charge of things, whether it be a CEO, a bank manager, or a high government official, are there for a reason. They'd have to be smart, logical individuals to be in such a position of power in the first place. They know what's best for us all.
Then I became a journalism major at UGA. Here's what I've learned so far:

1. The media serves a very important role in any democracy. The media serves as a watchdog for the public and holds those individuals in positions of power accountable to the public he/she serves.

2. A variety of different voices must be heard for a democracy to work and for journalism to truly thrive.

3. You cannot simply trust those people in positions of power, whether you voted for him or not. It is a citizen's right and duty to actively seek information on the issues and the state of the country and world.

So, go out and do some research of your own if you don't agree with what I write here; and even if you do, go out and do it anyways.

Irrational behavior and money

One of the first concepts Malkiel brings up in his book, A Random Walk Down Wall Street, is the concept of the economic bubble and the inevitable bubble burst. I distinctly remember reading this section and some of the lessons I got outta of it were:

1. Economic bubbles basically occur when people put too much stock into one thing or one market; this thing and/or market is usually new and exciting and sparks tremendous speculative interest and investment. Note "Tulip Mania" in the 1600s. For more info on bubbles: http://en.wikipedia.org/wiki/Economic_bubble

2. Sometimes it is important for a market bubble to occur; the tech bubble sparked tremendous interest and investment in the Internet, and without it, the Internet wouldn't be what it is today. (Unfortunately for the speculative investors, they're SOL. Remember the market is amoral, it doesn't care that you just lost your entire savings on speculative investment).

And finally, one of the more unrefined points I got out of Random Walk was that people can be very irrational and very stupid when it comes to handling their money. If people think they can make easy money out of simply investing in something without putting in some good hard work in, they usually will give in, no matter how irrational that may seem. Pyramid schemes work for one simple reason people can become very irrational when the opportunity for quick, easy money comes along.

My Econ Foundation

I was first introduced to Economics in High School. I was fortunate enough to take an Advancement Placement (AP) Economics course with one of the best teachers of my academic career so far. Indeed, there is a direct correlation between Mr. Jameson and my score of 4/5 on the AP test. To say his class sparked an interest in economics is an understatement; Mr. Jameson's class continues to serve as my foundation for econ and has led me to actively seek information on economics.

A mandatory read for Mr. Jameson's econ class was Charles Wheelan's Naked Economics: Undressing the Dismal Science (and quite frankly this should be a mandatory read for all). Wheelan's witty insights into macroeconomics are very moderate and very well written. Unless, you are so conservative as to be blind to simple, straightforward facts, you too will find this an interesting and enjoyable read. I might add this book had 110 consumer reviews of 5/5 and only 3 reviews of 1/5... those that didn't like it labeled it "strongly influenced by liberal left ideas."
http://www.amazon.com/Naked-Economics-Undressing-Dismal-Science/dp/0393324869/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1237512728&sr=8-1

In hindsight, the three main points I got out of this book are that:

1. Markets are amoral; the markets do not care if a person makes money selling Coca-Cola or selling cocaine. The markets also does not care about the "losers" in a capitalist system. Did you just go outta business because the Wal-Mart down the street took all your customers with their smiley face man and their "Always Low Prices"? Tough, that's capitalism at work.

2. Incentives matter. Growing up poor (relatively speaking) was a helluva good incentive for me to go to school and make something of myself. An unattended $100 laying around is also a perverse incentive for me to steal. (Hey, I have bills to pay...)

3. Finally, no matter what anyone may say, there must always be government regulation in place for any market to properly function period. However, government regulations should be there to help the markets run smoothly, not hinder them.

When I reread the book, a little over a year after Mr. Jameson's class, these points were again drilled into my head; the thought of reading Burton Malkiel's A Random Walk Down Wall Street was also revisited and this time I had a much bigger University library at my disposal...

A New Blogger is Born

I am by no means an expert in economics; nor do I pretend to be one in this blog (or anywhere else for that matter). I am however, as we all are, an expert at being myself; I, like everyone else, formulate my own thoughts and opinions, and I, like any other rational human being, try to find the proper evidence to support those arguments. As I try to mold my abstract inner monologue into concrete, succinct passages for the world wide web to see, I will officially become a blogger.

For the purposes of this blog, I must say that I am very much a Liberal. If you know me this is fairly obvious, and if you don't know me this will become obvious as you start reading this particular blog. I can't say that this blog is anything but "liberal propaganda" (as conservatives so humorously put it), but mind you I do at least try to be logical. This blog like any other is highly opinionated, and hopefully well supported. So conservatives beware, liberals get your lattes ready, and everyone else take note. This is Econ 101, Perez style.