Greenspan's paradigm shift

We can't say we didn't see this economic crisis barreling down the tracks, especially in Southern California. I remember visiting my cousin in Orange County in the summer of 2004 and learning that the property values for a two-bedroom ranch house in Laguna Beach or Mission Viejo were running from half a million to 750,000 dollars. A house of a similar square footage and age in Iowa or Ohio would be worth no more than 200,000 dollars.

Now, maybe living that close to the ocean and mountains has some market premium, but I doubted then and I still doubt that it's worth more than what some people make in a lifetime. The rest of the world doesn't own gigantic tracts of land and live in houses with square footages that rival football fields. Why did we ever think that this was rational?

Sadly, if the US Congress and president going back to George H. Bush and Bill Clinton had been taxing oil at two or three dollars a gallon like the Europeans, this credit bubble would've been much slower to develop, since no one would've wanted to live a two-hour drive from urban areas, land values in urban areas would have been much higher, and there would have been less of an economic incentive for developers to develop with abandon and for consumers to invest in the overrated American Dream of owning a house.

It was bad enough that the Europeans and Asians were throwing their savings at us for the last two decades, begging us to give them ridiculous rates of return. This still doesn't absolve us of our choice to structure this dirt-cheap financing (the I-banks) without having developed the necessary tools for understanding the underlying risk and to accept the terms of these contracts (the homeowners) without taking the time to read and understand what "variable interest" means and having no realistic ability to repay what we borrowed.

For starters, I would like to stop being treated like I'm American scum by our tax code and politicians because I choose to rent versus own. Why are people who own their homes better than the people who rent? It makes no sense, but then again, the people who created these wrongheaded public policies grew up during the greatest housing boom the world has ever seen post-WWII so they probably could see no other alternative. If they had spent time living in the Soviet Union, China or Iran where people consume a fraction of living space that we do in the US, they might have.

Once again, American parochialism bites us where it hurts the most -- our lives and livelihoods.