Mea Culpa. Sorta.

Another story on The Big Money about where house prices are going . (You don't have to ask.) In an earlier version of the story, I made a mistake and misquoted the prices of the house I cite in Riverside, Calif. that had gone down in price by 75 percent. I immediately heard from not one but three local appraisers, who pointed out--absolutely correctly--that the price I'd quote of $586,000 for a little two bedroom starter house in Riverside was impossibly high. They were absolutely right.

But ... it turned out that the recent sales price I'd quoted was also too high. The local folks had trouble believing this until they checked themselves. It turned out that all the prices I'd seen were doubled, because of a quirk in Riverside County tax records (unlike, say, New York City, California doesn't put its real estate records online for free, so you need to rely on a network of more or less expensive and more or less reliable private sources). Two years ago, the house sold for $293,000, not $586,000. But guess what? It now went for $73,500, not $147,000. Still that same three quarter drop.

A number of people wrote in to me after the story appeared and accused me of being irresponsible with a story that could lead borrowers to walk away from their mortgages. What can I say? Yes, knowing how much their houses have gone down in price and how much further they have to go may lead some to walk away from their mortgages. Yes, it might, but moralizing doesn't really fall into my job description. Those looking for lectures on why should pay their debts I have to refer to their local religious authorities. Or the Treasury Department.

Two Sick Men, One Cane

Talk of a GM and Chrysler merger is heating up, the premise being that somehow two companies gasping for breath will be able to keep going a little longer if they hold on tightly to each other. Still no thoughts out there about what the industrial Midwest will look like as the US automotive industry keeps shrinking. As in every election cycle, the troubled Midwest is at center stage for about three months. A story I wrote for The Big Money a couple of weeks ago seems even more relevant now. I wrote then:

Courted by both parties at election time, it is the union voters in these states who, in cycle after cycle, have found themselves ignored once the vote is over. Their situation becomes increasingly untenable. The average pay of a man 45 to 54 years old with an hourly wage job is $2 an hour higher than the pay of a 25- to 34-year-old was 20 years ago. And it is the same man: In 20 years, he has had a raise of $2 an hour. And if his son has a similar job, he makes less than the father did two decades back.

Underlying the culture gap between the coasts and the center is an increasing economic gap. As the economic climate in places like Michigan, Ohio, and Pennsylvania becomes increasingly moribund, it makes companies ever less willing to locate there, creating a vicious cycle of economic decline. The question isn't how to bail out GM, Ford, and Chrysler. It's how to bail out the entire mid-20th century industrial economy they used to support.

Live Blogging The Live Blog

Okay, so Floyd Norris at the New York Times is firing away on all cylinders live blogging the market. The wisdom of the day is that today is the big one, the real deal. Or maybe that's just the wisdom of the morning. Why today? How is this day different from any other day? No one knows. A few days ago the conventional wisdom was, "Buffett's buying, maybe we're close to the bottom," and if you haven't sold yet, don't try to time the market. New day, new conventional wisdom. And let's all live blog the bouncing ball. A risky enterprise: right now the headlines talk about a rout, while the stock charts beneath them show the market climbing up out of the opening faint. Still, Nouriel Roubini's call of 7,000 for the Dow is looking pretty good.

Seashells in the Trobriands, Fish in Prison, and Fiscal Insanities

You all know the old cliche about how after some point the money's "just a way of keeping score." Honestly, I just don't know how people who have more money than they know what to do with feel about it, but the thought has occurred to everyone that it's pretty weird that everyone from the dude buying the half million dollar house with $40,000 a year in income to the bankers funding the mortgage seems to have thought the the laws of arithmetic had been repealed.

I'm starting to think that just talking about bubbles isn't enough, and you have to start looking for the explanation of these things somewhere outside the laws of supply and demand. This weekend I picked up a copy of Bronislaw Malinowski's study of the exchange rituals of the Trobriand islanders, Argonauts of the Western Pacific. The Trobriand islanders engage in two trading rituals. One exchange is called "gimwali," a barter of useful and necessary objects. The one that Malinowski spends most of his attention on is the "kula" a ritual trade in valuables. The kula is a trade in objects of symbolic significance central to traditional Trobriand status hierarchies. The kula is governed by traditional rules requiring that kula gifts be reciprocrated with ones of equal value, but there is no way to mandate this and no hard and fast rules to determine how much any kula object is worth. Success in the kula is determined by the perception of how much you've gotten and the perception of how much you've paid.

This may all sound impossibly premodern, but the Wall Street Journal recently reported on an equally abstract system of exchange: the use of packages of mackerel as currency in prisons . (This WSJ link doesn't seem to require a subscription.) The mackerel economy apparently started with cans of mackerel, and switched to sealed pouches (ick) as the prison system moved to food items that could not be used to make shanks. The value of the mackerel as currency is that basically no one actually wants to eat it, so the packets can be hoarded more or less indefinitely, and traded for things like haircuts and cigarettes. The thing that's really weird is that the mackerel has to bought for real money in the prison commissary, but obviously can't be sold back. When the owner, umm, let's say "graduates," the mackerel just gets passed on to someone else. So basically the mackerel economy is one in which people exchange real money for prison scrip, which everybody agrees is valuable mainly because someone paid actual US cash for it somewhere along the line.

What all this means for the anthropology of financial bubbles, I'm not really sure. But I think it does mean something, because there's a point, in the California real estate market of 2006 or the mortgage backed securities market of 2007, when prices diverge so far from any value the underlying strings of shells or cans of fish may have that they feel like they're in some antimatter parallel economy. Academics take note. This is sociology heaven, and safer than running with crack dealers. As long as you stay away from the stock market.

Press To The Little Guy: Why Quit Now?

When markets are rising everybody has an opinion about what to buy. When they fall, however, the advice columnists invariably tell their readers not to sell. As the people in the luxe cabins on the upper decks are climbing into the lifeboats, the word goes out down below: sit tight, ocean liners float. The New York Times tells you that if you missed the top 10 days of gains over the last decade or whatever, you'd have missed out on a huge part of the rising tide.

But what would have happened if you'd missed the days with the 10 biggest losses? I don't pretend to know, but it's hard not to wonder about this advice when Dealbreaker tells you that Steven Cohen is roaring at his trading room that he's going to cash. Yeah, yeah, maybe it's one of those Steve Cohen throw chaff in the air and mess with the mind of the market rumors. Hey, he's actually buying up all the hot bargains. Uh, huh.. As per usual the hedge funds (and I mean the ones that aren't already going under) are selling everything and the little guys are there grabbing oars and offering to help row. It is totally true that most investors are miserable market timers, but maybe that's partly because they spend months listening to advice to hang in there and only throw up their hands in disgust long after the professionals have gone home.

Crash Scoreboard: Times Thumps Journal

Add one more potential winner to the short list of beneficiaries of the apocalypse. The New York Times today absolutely clobbers the Wall Street Journal with an inside-the-negotiations story of the kind the Journal has always owned. I'd link to the Journal story so you can compare, but you need a subscription. The Times story you can get free. So now the Journal costs money, the new print paper looks more like the Bergen Record than the stately old Journal, and it's losing its insider baseball monopoly. As yet, at least no plans by Rupert Murdoch to merge it with MySpace.

Read the story carefully and note which bankers seem to love the plan most: JP Morgan's Jamie Dimon and Bank of America's Ken Lewis. The guy who seem to have been counting on a bailout since long before the government suspected it would be giving it to them.

A Prediction About Predictions

Nouriel Roubini, probably the economist of the moment (for good reason) predicted a few days ago that the Dow would bottom out at 7,000 by the middle of next year. Well, it sure looks like it's headed that way now, and it's looking like it'll get there sooner rather than later.

I won't claim to have any opinion on a natural or reasonable value for the market. The thing about Roubini's prediction is that it feels like one of those numbers that the crowd consensus converges on, and when that happens markets tend to get to the number pretty fast. You can think of Goldman analyst Arjun Murti's 2004 projection that oil would hit $100 a barrel, the super-spike. Or Henry Blodget's prediction that Amazon.com's stock would go to $400.

These kinds of predictions don't create the underlying moves--sorry, it's not Roubini who's causing the crash, don't shoot the messenger, we'll need him later. But they get the market to where it wants to go faster. And this kind of market, like the pit bull that's broken its leash, is going to go where it wants.

The History Of Misplaced Concerns

From Countrywide CEO Angelo Mozilo, speaking to the Mortgage Bankers Association, a year and a half ago:

You've got to be careful here about blaming ourselves too much.

Actually, It's Worse

The Wall Street Journal reports that, yes, things are really bad in the California real estate market. An article today goes to Stockton, a poster child for the foreclosure boom and reports:

Stockton, a bedroom community to the Bay Area known for its asparagus festival, saw a boom in home-building and subprime loans this decade. Now, median home values are down nearly 50% from the market's peak, according to real-estate information service Zillow.com.

Well, these days Stockton is known a lot more for foreclosures than for its asparagus festival. The really bad news if you happen to own a house in California is that you can bet with great confidence that Zillow.com's estimate of a 50 percent drop is too low. Zillow price estimates have consistently badly trailed the market.

One story that has barely been reported and that is truly scandalous is that as recently as a few months ago hopeful buyers, many of them financially unsophisticated, were purchasing foreclosed houses at auctions such as those run by REDC, paying inflated prices, and getting steered to mortgages from IndyMac and Countrywide--the very same mortgage companies that brought us the crash. Now many of them are stuck with rapidly depreciating homes in places like Stockton--and we will see a whole new set of mortgages that will fail.

Duh, Who Else Did I Forget?

In this story about bubble economics for The Big Money I say that folks like Morgan Stanley's Stephen Roach, economist Nouriel Roubini, and MIT professor Andy Lo had been talking about a coming crash for a long time. One reader wrote in to call me on this, saying this was after the fact wisdom. Not so. In fact, I should have listed many other names, with George Soros and Warren Buffett heading the list--two reasonably well people, and not by any means "perma-bears". On the contrary, it's the idea that a crash was a huge surprise that I think is a rewriting of the record by folks who rode the wave despite knowing there was a bad end to come (though I will not claim that everybody, or anybody, saw just how it would play out).

The Fuld Curve

Somehow a few days ago I missed the chance to mention Lehman chief Richard Fuld's congressional testimony. The congressional inquisition has become something of a ritual. We've seen it with Fannie and Freddie, and with failed telecom chiefs, and will see it played out again and again. The big show of political concern tends to hide that when all is said and done, the vast majority of executives brush off their suits and wind up just fine. To some extent that is as it should be: I am reluctant to say that every failed CEO, no matter how overpaid, should be sent off to priso, banana republic style.

Still, it's hard to keep your stomach from turning when somebody like Fuld whines about how he still had millions of shares of Lehman's stock and so "lost" some great fortune. Of all the corporate chiefs who never missed an opportunity to cash out, Fuld falls near the top of the list. So far, unfortunately, no one has taken up my proposal to name the equation by which CEO paychecks rise as their companies sink "the Fuld Curve."

Classic Headline Watch

On Yahoo finance today:

Bernanke Speaks, Dow Falls 300

End The Crash Right Now!

Since we've all gotten pretty comfortable with the idea that the government will have a big role to play in all this, and our world is getting turned upside down anyway, why not some really immediate action: start daylight savings time now. Like, right now. Now now. This second. That'll make it just about 4:20--a famously good time to take a break--and will give the market just ten more minutes of freefall for the day.

PS: Oh, duh. The market closes at 4:00, not 4:30. So my plea to start daylight savings time was already late.

Another Silly Theory About Dumb Traders

I find this story from mathematician Jordan Ellenberg on Slate, a publication I write for perplexing, but ththat goes for an awful lot of the explanations that have been floated for what's going on in the market. Ellenberg compares Wall Street's investment strategies to an old (and delusional) gambler's system called the martingale, which involves increasing your bet after every loss. I think that the point Ellenberg wants to make is that banks and fund managers took the risk of a catastrophic loss in the pursuit of smaller gains.

That much is true. But it has very little--well, nothing--to do with the martingale. Andrew Lo, a professor at MIT and one of my favorite writers on these subjects discusses options strategies that take these kinds of risks. In one article--no longer available online but you can read about it here he creates a model fund, Capital Decimation Partners that keeps reinvesting what look like fantastic returns until it suddenly blows up. But Capital Decimation Partners' strategy doesn't look anything like the martingale; CDP increases its bet when it wins, not when it loses. That's a lot closer to how actual hedge funds and trading desks work.

Everybody has their pet theory of what went wrong, and many of the theories oversimplify Wall Street to the point of absurdity. Nobody can doubt that all the risk management ideas went horribly awry. Hedging strategies that work in ordinary times can blow up when the system is pushed to the breaking point and investments that seem to have little to do with each other suddenly all fall apart simultaneously. Beware, however, of the temptation to believe that all those idiots on Wall Street just made obvious investing mistakes. Every generation of investors has started out with this assumption, and each one has been proved wrong in some new and spectacular way.

Uncle Sam, Foreclosure Specialist?

So, how much of the $700 billion that the federal government pours into the bailout can the taxpayers expect to recoup? The $700 billion number after all, is what the government expects to pay to buy bad loans. The hope is that there's some residual value there. Not everybody will default. Not every house will be worthless. Right. Right?

In yesterday's story for The Big Money I wondered what it means for the bailout and the economy if the credit markets are right in the dismal value that assign to the loans going bad in the credit crisis and the derivatives built on them. (If you want some interesting estimates on the total loss, you can see this paper from Goldman Sachs's Jon Hatzius—he puts total bad losses at $636 billion if home prices keep dropping, which they will.) One of the discussions going on in the econ blogs is whether the government has to overpay for the loans. Can't they just pay financial institutions what they're worth? Well, my sense is, no—or it's not much of a bailout, is it? But there are a lot of people vastly more qualified than me to have an opinion on this.

From a non-economist's standpoint, however, it seems worthwhile to point out that what shape the unwinding (is that a suitably bloodless term?) takes matters a lot. If a government takeover of troubled assets translates to restructuring mortgages actually keeping people in their homes, that is both an end in itself and I would suspect a good thing for the downward spiral of the housing market. We have to assume that the endgame of the bailout plan does not have Hank Paulson, or whoever replaces him as treasury secretary, knocking on homeowner's doors to deliver foreclosure papers. If people don't like the bailout plan now, they sure won't like it more if that happens.