The Mighty Morphin Mortgage Meltdown
The poster for 2008’s zeitgeist-defining comic book movie The Dark Night invited us to “imagine a world without rules.” Its box office was second only to the 1997 blockbuster, Titanic. At the time, the Dow Jones (DJIA) averages were over 11,000.
And then there’s Dr. Doom. No, not the Fantastic Four comic book character, but a mild-mannered economics professor at New York University named Nouriel Roubini. Roubini, aka Dr. Doom, gets credit for predicting how the mortgage meltdown would morph and ripple into multiple economic catastrophes. A New York Times article describes how Dr. Doom stood before an audience on Sept. 6, 2006 and predicted that, in the coming months and years, “the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession.”
The article continues, “He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide with the global financial system shuddering to a halt.” These developments, Dr. Doom concluded, “could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.”
Pretty much on target. Rouhini’s reputation went from “madman” to “prophet.” Prophet pays better than madman (ask CNBC’s Jim Cramer), and these days pessimism is very hot if you’re going to earn a living predicting the future. In the memetic marketplace, the more pessimistic you can be while still seeming logical and fact-centric (or just not seeming like a madman), the more attention you can attract.
Search the web for information on the 100-year bear market and you’ll end up with a link to Robert Prechter, the so-called “Guru of the decade in the 80s.” Prechter predicted as early as 1978 the beginning of the "raging bull market” of the 1980s. In 1995 he predicted that a 100-year bear market would start in the year 2000. According to MarketWatch columnist Paul B. Farrell, “Prechter is now looking like a genius who simply arrived ahead of his time. In 1978 he was four years early. In 1995 he was five years ahead of his time”. Farrell says that Prechter recently told him, “One thing I’ve repeated consistently is that the great bear market will take the DJIA at least below 1,000 and likely to below 400. Precedents for this severe a decline are the English stock prices in 1720-1722 and American stock prices in 1929-1932."
Pessimism is the new black in America today. But should we all be expecting gloom and doom? Well, no, not really. Victor Frankel’s famous book, Man’s Search for Meaning, offers another perspective. We can choose how we see things: "We who lived in concentration camps can remember the men who walked through the huts comforting others, giving away their last piece of bread.” He continues, “They may have been few in number, but they offer sufficient proof that everything can be taken from a man but one thing: the last of the human freedoms – to choose one’s attitude in any given set of circumstances, to choose one’s own way.”
Lightman’s Top Ten: Top Ten Good Things that will Result from the Mortgage Meltdown
You won’t find this list in David Letterman’s Top Ten Archive, but I challenge you to see if you – like Victor Frankel – can choose how to see things a little differently.
- Schadenfreude – “People feel better when things seem to be getting worse”
Many people, perhaps most, feel better when things seem to be getting worse on a broad scale. Very few people make money like Warren Buffet (three decades of 35% returns), and we all scold ourselves for not keeping up. However, when Warren Buffet loses money we feel vindicated. The Germans have a word for this: Schadenfreude, joy in another’s misery. In an economic crisis, we who evolved in tribes for millions of years — a hundred thousand years as Homo Sapiens — have an increased sense of tribal coherence in the midst of shared adversity. It makes us feel part of something challenging that will require us to look out for one another so we can fix it.
- Subsidies Revealed – “Now the true subsidies to American industry become clear”
Industries that have been subsidized for a hundred years are suddenly seen for the subsidy addicts that they are. In the 1890s, a resident of Manhattan could get a taxi powered by steam, by electric batteries (yes, electric cars 110 years ago), by horse drawn carriage, and by stinky, dangerous internal combustion engines. The American auto industry has been subsidized to the tune of hundreds of billions of dollars. Now, like a novice entrepreneur seeking a round of seed capital from family and friends, automobile executives have had to prepare business plans, and tens of millions of Americans are debating subsidies. Over 90% of the US population, when they have a voice, seem to be philosophically against subsidies and bailouts. The will of the people can be as transformative as any other movement.
- Dead Dinosaurs – “Unprofitable companies get out of the way so that innovation can thrive”
With the collapse of companies including banks, brokers, and auto manufacturers that, to paraphrase Shakespeare on Julius Caesar, bestrode the last century like a Colossus on steroids, we will have a dinosaur die-off. These devo monsters, like some Jurassic bohemiths, will be replaced by smarter, more agile mammal-like companies. Wouldn’t it be wonderful to have dozens of high technology car companies that differentiated themselves by using less oil, or even no oil? I drove GM’s infamous EV1 electric car, chronicalled in the movie Who Killed the Electric Car? There was nothing at all wrong with it. GM simply tried to kill off the future, bowing to oil industry and government pressure. The future fought back. Electric cars are coming, and they will arrive unless market manipulation and lobbying stop them.
- Fresh Blood – “New space for the creation of new companies to solve new problems”
The crisis makes space for the creation of new companies that work to solve the new problems. LoanCheck (www.loancheck.eu), a company I work with, went public this summer with a market cap of roughly $100 million. The company uses a web-based calculator to determine the likelihood of a problem with a mortgage. If they take your case, they don’t charge you anything to seek to modify your loan and fix the problems.
- Making Nice – “The US will need to be nicer and more cooperative than ever”
A kinder, gentler America is coming. With US financial stability in the hands of foreign governments who hold our debt, the US will need to be nicer and more cooperative than ever. As someone who travels abroad for business, I’m relieved to have an Obama election grace period. For the first time in this decade, I am not uncomfortable when the conversation turns to politics and business in London, Dubai, or Beijing. Reducing our trade deficit also makes for greater stability in US relations.
- Stop Building Houses – “There are over ten million unoccupied residences in the US”
Housing is no longer seen as a safe investment, and therefore less money will be consumed on housing. Decades ago, Buckminster Fuller warned that housing was consumption, and that the US was spending too much on housing that could and should be manufactured — and then relentlessly and exponentially improved — like we do with computers and aircraft. There are over 10 million unoccupied residences in the US. Unless America is going to massively increase immigration, the US doesn’t need to keep building houses at such a pace while foolishly expecting prices to recover.
- Less is More – “Reduced consumption buys time to transition to new energy sources”
People are driving less and consuming less. For all the buzz about being green and fighting global warming, very few people seem to be celebrating and partying, as Prince once sang, like it’s 1999. The global drop in fuel consumption is occurring despite lower prices. If we aren’t increasing energy consumption (mostly oil and natural gas) at this time, we will have bought ourselves time to transition to cleaner and more renewable energy sources.
- Trade Balance – “Reduced consumption of foreign goods means a lower trade deficit”
US consumers are buying fewer foreign goods, so we can expect our trade balance to be reduced (although the US exports Treasury securities to make up for the shortfall). Reducing the trade imbalance allows for more sustainable economic relations — the US can’t continue to expand its trade deficit forever, just as trees do not grow out of the atmosphere.
- Fewer Investment Bankers – “Applying economic talent to new, more socially constructive jobs”
Smart people are going to get fired by the hundreds of thousands from investment banking. They might wind up doing something more socially constructive with their time and talents than securitizing subprime loans provided by independent loan brokers with minimal documentation, or credit default swaps. This was called “legalized gambling” by earlier (and smarter) US government administrations.
- Time To Think – “The next Isaac Newton may rise from the ranks of the underemployed”
During periods of economic adversity, brilliant, underemployed people have time to contemplate. One of them might come back from a mental hero’s journey with an elixir that will change the world. Isaac Newton, fearing the plague, hid from all the sick people by working at home. He wrote Principia Mathematica, the work that set the stage for three hundred years of scientific progress.
And, there you have it: Lightman’s Top Ten. A classic way to describe an optimist is “one who sees the glass as half full.” A pessimist, of course, is “one who sees the glass as half empty”. Futurists and techno-progressives might see themselves as objective and driven by facts, but they visualize the future with an overdose of either excitement or fear depending on whether they’re optimists or pessimists. With the end of the decade approaching, we inevitably reflect on the decade that started on January 1, 2000. We’ll make fun of those whose predictions were absurdly wrong, and lionize those, like Dr. Doom, who predicted the future with relative accuracy.
As for me, I say, the worse it gets now, the better the future will be. What do you think?