Wednesday, December 19, 2007

The Housing Market Tsunami

This is a fairly good diagnosis of the disease the U.S. housing markets suffers from. It is not a head cold or even a bout of flu, by the way, but something far more serious. And the disease is contagious, spreading fairly rapidly into the whole banking system, the general financial markets and skipping from one country to another.

As the linked article points out, the major cause of the current housing market woes is in the lack of regulatory oversight. The market invented a new game and then played it. Nobody looked at the rules of the game or at the possible harmful consequences of the game being played. The people in power simply assumed that anything the market gets up to will be good, almost by definition. This is reprehensible, given that the 1929 stock market crash had a lot to do with the market introducing "innovations" while the government looked elsewhere. Not all innovations are good ones, especially in a market where the buyers and sellers possess very different amounts of information, and all games, including the market ones, need externally set rules.