1 Boring Old Man

Since the Stock Market fell on September 15th, I’ve been kind of obsessed with what happened. I knew about the Internet bubble back in the early Bush Years. I assumed that people were so excited about the possibilities of the Internet, that they just got carried away and ran the Market up. It reminded me of the condo building boom in Atlanta that crashed when developers so overbuilt that the joke "how is a condo like herpes?" wasn’t even funny anymore. But I thought both were about people and how they acted when something "hot" comes along.

^{Figure 1
The DJI compared to specific Industries}

Then house prices started going up. We lived in an in-town neighborhood and had an old house [by Atlanta Standards – 1920’s] that we’d restored. It’s value rose and I was plenty glad to see that. We had moved into the neighborhood just as its downward spiral hit bottom, [1974] and it began to be a very desirable place to live. We thought the price was going up because the old neighborhood had been saved from ruin by people like us. We sold the house in 2004 when I retired for a fine profit and moved to our little "weekend cabin." I didn’t know what an economic bubble was. I thought our house had become super-valuable for rational reasons.

What I didn’t know was that banks the had been deregulated [as well as everything else] and that the reason house values were soaring was something else entirely – easy money. I didn’t know that lending institutions had stopped worrying about risk when they made loans, because they could sell the mortgages and their risk. Instead of assessing peoples ability to pay, they were churning loans. The more they loaned, the better off they were. I knew nothing of packaging loans, or credit default swaps, or how they were being traded internationally. You didn’t either. I thought my house had become more valuable for the reasons I personally valued it.

^{Figure 2}

About the time I retired, being that I now lived in the "country," I bought a new truck – a Dodge RAM. It’s a great truck – really great. It has a real back seat and a fine truck bed for a "gentleman redneck." But shortly thereafter, the price of gas started going up, and I wondered if I should’ve bought such a gas-guzzler. Like everyone, I thought gas prices were rising because of true things: oil reserves were being used up, Arabs were mad at us, the Oil Companies were price gouging. I noticed those dips in 2004 and thought that the Republicans had some way to do that to get Bush re-elected.

Even though maybe everything I thought was true, that was not the reason the gas prices soared. They soared because speculators on the Commodities Market found a way to make money and flocked to the Oil Futures Markets. It was another bubble, missed by the economists for a variety of reasons. Even before we experienced the fall, this should’ve alerted us to the presence of another economic bubble:

^{Figure 3}

Even if all the things we thought were true, this kind of price escalation isn’t natural. There were other forces at work – big forces with offices in places like New York City – near Wall Street [see a wise man spoke…].

Like most of us, I didn’t think a lot about this next graph. It’s the Dow Jones Index corrected by dividing it by the Consumer Price Index [corrects for inflation etc]:

^{Figure 4}

But looking at it now, it is absurd. The upturn in 1982 looks sort of like a natural thing [though I would doubt that now]. But the soaring values in the last fifteen years sure don’t even slightly approximate anything natural – not even close. It’s mostly an illusion created by the "bubbles" shown in Figure 1.

President Obama is going to try to nip the deflationary spiral that has already started in the bud, and it’s going to take radical deficit spending to do it. However, it’s the only rational course of action. Already, the Talk Radio/Fox News/RNC pundits are on the loose – Communism, Socialism, FDR "prolonged" the Depression, it’s not that bad, Big Spending Democrats, etc. etc. Doing the right thing is going to be like swimming upstream in a river of molasses – against an army of critics allied with the people who got us here in the first place.