I have watched, listened to and spoken to more senators and representatives in the last two weeks than I care to. The fact that they are all willing to get on TV and tell us why they think we desperately need a $700 billion bailout, or why we need it somewhat, or why the plan is ridiculous tells me that they know less than you or me.
The way I understand this is that the loose lending practices over the better part of the last 20 years or so is the foundation for a disastrous house of cards. Congress, the
and various administrations' acceptance of the "affordable housing" push was the first floor. There is plenty of blame to go around, but without this basic premise, the subprime lending boom-turned-explosion couldn't have taken place.
were encouraged to lend more and therefore generate more fees. Under the very populist "affordable housing" facade lurked shaky mortgages. Let's not forget the refinancing frenzy during the last few years of the real estate boom. Scrupulous (and some not-so-scrupulous) lenders got together with scrupulous (and some not-so-scrupulous) appraisers to help pump up the value of homes. This enabled homeowners to draw on the "equity" in their home like an ATM. And if times got tough, they were able to refinance the house and get money for other things ... all too often to buy another house they couldn't afford. After all, this house-turned-cash-machine thing was pretty enticing.
Then came the realization en masse that their homes were investments, and that investments go up
, and that the ability to live off the pumped-up "appraised value" of their homes was running out. As the free equity dried up and was no longer available to draw on, foreclosures began -- first as a trickle and then as a levee break.
The second level of the house of cards? Fast-forward to Wall Street. These geniuses were busy doing what they do -- trading. They were trading products based on the same principles that Main Street was "investing" on. The Wall Street banks and hedge funds were so intent on developing new and more exotic products to trade, they too lost sight of the fact that a home can and will go up
in value. People have short memories. For homeowners -- subprime and not -- appraisers, lenders and Wall Street honchos, it had been years since a home actually went down in value. (When was the last time one of these investment bankers saw an acre in Greenwich, Conn., sell below $2 million?)
The irony of this tragedy is that the Wall Street bankers are the ones caught without a chair when the music ended. The smartest minds in investing got caught with the toxic waste at the end of the party.
The bookies (lenders) were thrilled that they had someone who would take the risk off their hands. They were happy to make the vig -- the fees -- on a loan to Main Street. The gamblers were seeing everyone hitting the daily double, so they were easy targets for the bookies of all flavors. But the casino got caught. Wall Street was so intent on competition between casinos that they let down their guard. They kept extending credit to the bookies even as the house of cards began to tumble -- all in the name of being the biggest, the fastest-growing casino on the Street.
Made in America -- A Silver Lining
Built anywhere else, we might be worried about a global recession ... or worse. I am in the camp that says we will pay a high price for this mistake, but we have a solid foundation for recovery. This may take a few quarters, but I think the massive and rapid deleveraging of the housing and credit extension bubbles is a healthy thing for future growth.
I expect there is more to come, but we are almost two years into this real estate correction, and recent history shows that they rarely last four. Three years is possible (and my expectation), but four seems too extreme. It may be over sooner than that -- events and circumstances will draw Americans to buy homes again. I believe there are real estate opportunities around the corner, but be very wary of the deleveraging sword. It can slice value quickly.
And let's hope the next house is built on stronger principles. No more houses of cards. Card games should be left in the casinos in Las Vegas and Atlantic City, not at the corner of Main Street and Wall Street.
As always (this seems obvious, but so hard to do):
"Trade (and invest) with your head, not over it."
At time of publication, Bolling had no positions in the stocks mentioned, although holdings can change at any time.
Eric Bolling is a host on the new Fox Business Network. Bolling was one of the developers and original panelists (nicknamed "The Admiral") on CNBC's "Fast Money."
Bolling is an active trader specializing in commodities, resource trades and ETFs.
Bolling is a member of several exchanges including The New York Mercantile Exchange (NMX), The Intercontinental Exchange (ICE) and The Commodity Exchange of New York.
After spending 5 years on the Board of Directors at the NYMEX, he became a strategic adviser to that Board of Directors where he assisted in bringing the company (NMX) public. He has been included in Trader Monthly Top 100 in 2005 and 2006. Bolling was the recipient of the Maybach Man of the Year Award in 2007 for his contribution of philanthropy and willingness to de-mystify investing to Main Street.
Bolling graduated from Rollins College in Winter Park, Florida and was awarded a fellowship to Duke University. Bolling was an accomplished baseball player. He was drafted by the Pittsburgh Pirates where he played before his career was cut short due to injuries. He honors his baseball past by sporting the NYMEX trader badge, R.B.I.