Friday, May 01, 2009

Signs of the End of the Crisis? House prices vs. toxic assets

At a lecture that I was asked to give last week, someone asked (again!) how long I expect the crisis to continue.

The answer depends on the criteria one uses.

If one takes the restoration of speculation as the sign that the crisis is over (after all it was speculation which lifted oil to $140 and commodity prices to a high with them - and that is what caused poor people to be unable to meet their mortgage payments, a phenomenon now known as the "sub-prime crisis") then I hope that the economy never recovers. At least, I hope that that particular feature of the economy never comes back. Who wants speculation to push oil and commodity prices to those levels again?

If you take equity prices as your criterion of recovery, then by the sorts of stock price movements we are seeing you could say that the crisis is at least nearing the end of the fall (a fool's position).

But if you use house prices as your simple criterion of when the economy will recover (after all the sub-prime crisis consisted of the consequences of the fall in house prices), then it is worth noting that by February this year, average home prices were at similar levels to what they were in the third quarter of 2003. How far will house prices fall? Well, the house price cycle in the USA is roughly 12 "normal" times, and we are not in normal times!

Let me not depress you further: the crisis can be easily resolved if society and politicians have the guts to take the right actions (such as those outlined in my Open Letter to President Obama). Fortunately, many people ARE now beginning to at least contemplate taking those sorts of actions (as my Blogs have been documenting).

However, as long as those sorts of actions are not actually taken, Chancellor Merkel and President Obama will continue to be false prophets. A broad-based recovery can be expected, not within 18-24 months from now anyway, as most pundits opine, but in something like half a year of the right sorts of actions being taken.

The most important of such actions relate to toxic assets. So if you want to know how long the crisis will last, ignore all the noise about everything else (including so-called “stimulus packages”) that is coming from politicians, economists or businesspeople. Instead, focus on whatever is being discussed (and done!) in terms of the clearing up of toxic assets. Sphere: Related Content

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