Editor’s note: The Center for Economic and Policy Research in Washington, D.C., held an essay contest to find out whether anyone could challenge the center’s housing bubble theory. The winner was Hilary Croke, a Federal Reserve Board employee, whose four-page essay argued against a collapse in house prices. This story is a response to Croke’s essay.

Is all this bubble babble just gibber jabber? Does it go beyond a Dr. Seuss story or Chicken Little saying, “The sky is falling, the sky is falling?” Those who dismiss the bubble argument as a modern day fairy tale with limited risks to the American dream have grown carelessly unrealistic in their assessment of what is strikingly evident.

So, what is strikingly evident?

What is strikingly evident is that millions of Americans are hooked on the most ferocious of the reality-avoiding addictions, the credit habit. This insatiable dependence has resulted in the largest accumulation of debt in the history of our country. This debt is the disease; the swelling bubble is merely a symptom.

What is strikingly evident is that too many financiers have been quick and easy to provide accommodation and short-term relief for the country’s burgeoning credit addiction. All financing segments of the economy have participated for short-term profits. Millions of consumers have fallen prey to all the wild credit pitches and unsound lending practices. This financial malpractice is the wrong prescription. The bulging bubble is a forewarning.

What is strikingly evident is the escalating social structuring of mortgages to homeowners who really cannot afford the high cost of homeownership. Everyone is entitled to homeownership, but not everyone can afford the rising costs of utilities, property taxes and home insurance, not to mention the increasing cost of home maintenance. These are unrealistic lending practices. The inflating bubble is only an omen of things to come.

What is strikingly evident is that many balloons coming due in the commercial real estate mortgage arena in the next few years may be classified as “troubled loans” for they will no longer be able to be supported by fabricated values. Truth in lending takes on a new meaning. The financial fabric of these commercial balloons will soon begin to tear apart.

What is strikingly evident is that the money supply and monetary policy have been manipulated to support the quick credit fix. The motivating impulse has been a methodical lowering of interest rates to refinance debt, but not to create wealth. Most of the real estate values are a fabrication, not real wealth. This compromises the soundness of the credit system and the financial markets. The bloated bubble can take only so much strain before it begins to rupture.

This entire hubbub about the bubble babble is more than hullabaloo. At what point do the economic and monetary system’s quick credit fix engines begin to sputter and backfire? At what period in the careless financial cycle will the creation of capital not be sufficient to satisfy all the ominous credit obligations? At what point does the bubble burst and, like the tremors of an earthquake, send shockwaves across the economy?

All the volatile ingredients are currently present for the bubble to burst. Current market conditions are deceiving. While most economic barometers show near normality on the surface, the fault lines lying beneath the financial markets are beginning to show movement. Just an slight upward movement of interest rates with the interest groups not having any resources to refinance their debt will send the shockwaves across the financial markets and spew over into all sectors of the economy. This may happen late in 2004, but if not, surely in the first quarter 2005.

Can a change in monetary policy hold back the impending surge? We must be reminded of what the historians have already said about reckless money and credit expansion of the 1920s. W.E. Woodward wrote, “No man, or group of men, can hold back the movement of collective social and economic forces.” Lawrence Reed said, “the economy was having a party, the Federal Reserve was spiking the punch, and a good time was had has by almost all. Few could read the handwriting on the wall.”

History tells us there will be a momentous consequence or a day of reckoning for almost a decade of financial greediness and credit overindulgence. This babble we constantly hear on the bubble will be the inevitability of property value decline, the inescapability of people going about their daily routines unruffled and unscathed by all the financial folly. One will not be able to retreat from its realities for the consequences will be much more than the sound of popping bubbles, a gurgle or fizz. It goes much deeper, further and wider than a bubble bounced around by easy credit terms and changing interest rates.

We have heard all the shop-worn clichés on this day of reckoning. “The chickens will come home to roost,” “an economic house of cards,” “the handwriting is on the wall,” “what goes around, comes around,” “the domino effect” and “a short-fused time bomb.” All these sayings may be trite and cute, but they are certainly fitting.

Does this perspective advocate doom and gloom? Not at all. The facts simply recognize the objective truth. A truth that is so strikingly evident.

Tom Fryer is president of Fryer Appraisal Service in Midland, Mich.


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