Creeping to collapse

The stock market keeps gyrating as news of the obvious slowly percolates into the public consciousness: a) too many Americans have borrowed money, b) too many Americans wrongly believed real estate prices can only go up and c) too many Americans depend on the real-estate commercial complex for their livelyhoods.

The implications of these three facts spiral outward to cast a chilly shadow over broad swaths of the American economy — banks, builders, realtors, fund managers, department stores. Though commentators can focus on any one sector, banking for example, and weave convincing arguments that “things aren’t too bad, this is only one part of a fundamentally sound sector and things will soon return to normal,” the total picture is bleak.

The odds are far higher that a chain with 10 weak links will bust than a chain with just one weak link.

Fly over the outermost suburbs of most American cities and you inevitably discover physical evidence of our national ponzi scheme: a new subdivision filled with homes whose buyers plan to make their money building/selling/financing homes in the next subdivision. Once that chain reaction reverses, a lot of dominoes will fall backwards.

What can be done to keep 20 years of momentum moving forward? The Fed can lend money, but that won’t force banks to lend it on to home buyers. And home-buyers losing money on one house won’t rush to pay through the nose for another house. And people with too much furniture won’t need more furniture as they downsize into a more affordable home.

The real-estate merry-go-round, which has powered an estimated 40% of the economy as interest rates tumbled over the last 20 years — has stopped. Twenty years of eager habits have to be unlearned and twenty years of excess La-Z-Boys need to be dumped on the curb.

The fact that the merry-go-round still whirls on in so many commentators’ minds suggests just how ugly things may get in coming months. And years?

Update: In Sunday’s NYT, Ben Stein takes a look at depression-anxious hysterics like me. Beneath the headline “It’s Time to Take a Deep Breath,” he pens what could be a parody of the denial party line: “Yes, there are real problems: housing, mortgage defaults, losses at financial firms, rot in hedge funds. But over all, things will be fine. Unless there is a genuine dollar crisis or a devastating recession (very unlikely), things will work out. This economy is very big and very solid. It cannot be derailed for long by anything we have seen lately. If I were the editor of the business section for just one day, I would run one immense headline: ‘Everything Is Going to Be Fine. Go Back to Work.'”

A sidenote on rhetoric. Stein indulges in a few classic polemical tricks in making his case that everything will be fine.

First, he spends 85% of his article reciting the bad news. So if he is wrong that “everything’s OK,” most readers won’t notice.

Second, though the Pollyannaists are still vastly in the majority, Stein imagines a massive, monolithic straw-man of depression-mongers, then bravely takes exception to their landslide consensus. In a market that’s up 20% versus a year ago and just 10% of historic highs, this “everyone’s bearish and I’m being a brave contrarian” position is silly.

Finally, just in case he is wrong, Stein slips in this absurd hedge: “unless there is a geniune dollar crisis or a devastating recession (very unlikely) things will work out.” Take sober note, jittery ignoramuses, Unless the Patient Dies, the Patient Will Live, So There’s Nothing to Worry About.

It will be fun to watch what Stein writes when the Dow is plumetting towards 8,000, rather than 13,000.