May the cycle be unbroken.
Boom bust boom two three four.
Money, or what passed for money, was the only cheap thing to be had...Credit was a thing of course...and no other showing was asked of the applicant for the loan than an authentication of his great distress for money...Under this stimulating process, prices rose like smoke...the new era had set in...the era, namely, of credit without capital, and enterprise without honesty...
No, this wasn't in today's newspaper. The quote comes from W.J. Cash's landmark The Mind of the South, published in 1941, but the words, which predate the book by almost one hundred years, are those of a nineteenth-century chronicler of the opening of the Southern frontier in the 1830s.
Now Cash's own words, describing another boom, one he saw first-hand: "Every man who fancied himself a trader...and who could command the easy credit of the time rushed to get in on the ground floor and lay hands on something, anything, that might be of value in the megalopolises of tomorrow...realty and business values shot up at an incredible rate. Business lots that had been worth $2000 in 1910 came to be worth $50,000 or $100,000...And residential property hastened to follow the lead of commercial values."
Real estate booms aren't anything new for us. The one that just ended won't be our last.
Sharp deals on attractive properties "in the path of progress" have a long history in these parts. In 1626 Manhattan was supposedly bought for $24 in glass beads, and while recent scholarship casts doubt on both the amount and means of payment, it's still the screaming real estate deal by which all screaming real estate deals are measured.
We've been there before. We'll be there again. Not to get all Faulknerian about it, but it's in the blood.
Call it residual Southern fatalism—or maybe just a working knowledge of human nature—but I'm inclined to accept Jack Guttentag's assessment of the role of regulation in preventing the excesses of the late boom from happening again. Guttentag, "The Mortgage Professor", is a curmudgeon but an equal-opportunity curmudgeon. He's also a realist, a quality unusual and rather attractive in an academic. So I listen when Guttentag asserts that "regulation in itself is a weak defense against financial crises". "One major reason", he explains in his October 27, 2008 article for Inman News, "is that it tends to look backwards, similar to generals fighting the last war". "The wrong things" are regulated, he says, with the result that systemic problems aren't corrected, just re-arranged like deck chairs on the Titanic.
"Regulators have no better foresight than the firms they regulate. The statistical models used by both are based on past experience. A change in the underlying structure of the economy can make such past history irrelevant, which is exactly what has happened. Nobody anticipated the severity of the current crisis because, relative to past history, it is off the chart."
But if regulatory response to market excesses invariably falls short, shouldn't regulators go even farther, to "err on the side of caution"—if the patient fails to respond to treatment, shouldn't the dosage be increased? "To a degree, yes" agrees Guttentag, but overzealous watchdogs who match the market excess for excess harm the people and institutions they're charged to protect. Especially when their responses come from textbooks, or from politically-driven grandstanding aimed at pleasing special interests and the reporters in the peanut gallery.
When I see, for example, the hash the Department of Justice has made of prodding the supposedly uncompetitive real estate industry into being "more competitive" (maybe agents competing for the same listing should be allowed to shoot it out at the O.K. Corral), urged on by an unholy alliance of big banks trying to break into real estate brokerage and wooly academics with a better idea of how to advance their careers than the public good, I find myself edging—no, make that bolting—toward the free-market camp. "Hands off the marketplace!"
Because, as Guttentag implies, this year's bullet-proof fix is next year's fatal flaw. A quick patch-and-paint job here always leaves a gaping hole over there. The fast money boys are always one step ahead of the bureaucrats, always probing the bounds of safe and sane business practice, relentlessly nibbling, like an underground river against its channel, at the limits of ethical behavior, always working up new hustles or dusting off old ones, whether it's 1626 or 1830 or 2005 or next time. Then enough of us pile in to generate momentum, and we're off and climbing that glorious upward cyclical slope again.
That's how we're built and, because of that, that's how markets work. Sooner or later but inevitably the boom goes bust, some of us go down with it, but most get through okay and enough come out ahead to make it look worthwhile doing the next time.
As a theory of market behavior, history backs me up that boom bust boom isn't particularly daring or original. Nor is the theory cynical; it is what it is. The only novelty it offers these days is the idea that good times follow bad—in the panic of the moment, many have overlooked this, as they often do. I'll go out on a limb and say that the cycle will stay unbroken, which means another boom is on the horizon, or maybe it's around the corner, or maybe it's just down the road. Not to get all Faulknerian about it, but it's in the blood.